A few months after landmark federal legislation gave the green light to ecommerce, some are asking whether state legislatures represent a red light down the road.
Are the years of struggle that preceded the signing into law of S.761- the Electronic Signatures in Global and National Commerce Act, or "E-Sign"- over? I can't imagine the states will go down without a fight," says Larry Zanger, a partner in the Chicago office of McBride Baker & Coles, and chairman of its Information Technology and Electronic Commerce (ITEC) Law department. Ecommerce encompasses online banking, where there have already been turf wars between state- and federal-level regulators, grappling with what jurisdiction means in cyberspace. Traditionally, state law governs the nuts and bolts working of almost all financial transactions, everything from the administration of trusts to mortgage lending. However, it's not at all clear yet what financial business is and is not governed by E-Sign.
Leonard (L.H.) Wilson, associate general counsel for the American Bankers Association, Washington, says E-Sign is "very restrictive" as to what laws the states can pass as an accepted substitute.
Zanger foresees the states reacting in other ways. For instance, he says, the states might sue the federal government in federal court arguing that S.761 is unconstitutional, that the federal government has claimed extraordinary powers under the Commerce Clause and is overreaching.
It's also possible that certain states will simply disregard the new federal law, intending to be brought to court themselves and letting the courts decide the scope of the law on a case by case basis. ABA's Wilson cautions that because E-Sign is a new law, it is too soon to say how it will impact the states' efforts to regulate e-commerce within their borders. E-Sign covers both signatures and legal records.
Much of the detail has yet to be worked out regarding E-Sign, which is intentionally broad, meant to facilitate e-commerce without spelling out how. Most notably, E-Sign does not say what are the technical requirements of an electronic signature. Not only is it open to e-commerce participants to use whatever vendor they like, they can use various forms of electronic "signatures," including biometrics, smart cards and digital signatures/public key infrastructure (PKI).
These technologies have nothing to do with electronically rendering someone's physical signature; rather they are alternative methods of ensuring that the transacting party is who he says he is. The technological neutrality of E-Sign represents an immediate clash with some existing state laws. Before the recently enacted federal bill, many states had passed their own electronic signature laws, and some of them spell out what technology must be used.
Some vendors will be threatened by the technological neutrality of the federal bill, suggests Zanger, i.e. those that catered to particular states' e-signature technology requirements. However, Patty Edfors, director of government operations at Baltimore Technologies Inc., Needham Heights, MA, sees an opportunity-since the best technology will prevail and, in her view, that's PKI, in which Baltimore specializes.
If there is a problem for businesses it will be, Edfors believes, how to "manage all the different technology." She foresees a "shakeout of these technologies" and the safest, mostcomprehensive ones will predominate. Edfors adds that PKI is already embedded in browsers and widely available. Baltimore is greatly encouraged by E-Sign and has received more inquiries from potential users during the recent publicity given to electronic signatures, she says.
The federal government isn't the only entity that has tried to standardize the use of electronic signatures. Last year, 18 states adopted a uniform approach to e-signatures that was drafted by the National Conference of Commissioners on Uniform State Laws, the Chicago organization responsible for earlier creating the Uniform Commercial Code, or UCC. The Uniform Electronic Transactions Act, introduced by NCCUSL, is similar in several important ways to the federal E-Sign act.
Outside of the 18 states that have adopted the NCCUSL legislation, almost all states have addressed electronic signatures and/or records through their legislatures. However, where these 33 other states (including the District of Columbia) have approved the use of electronic signatures, they often mean different things by the term. For example, Alaska recognizes only specified authentication technology as a signature, while Connecticut allows for e-signatures to be used only for the release of medical records, not e-commerce. Massachusetts and Michigan are among the few states that have not yet addressed e-signatures, according to the Web site of McBride Baker & Coles. This useful resource, at www.mbc.com/ecommerce/legis, provides a table of state-level e-signature legislation.
Another approach to unifying the use of e-signatures would have been to adopt a uniform code. The UCC is already used to govern across states a wide range of commercial transactions, including, for example, check- clearing arrangements. The disadvantage of using the UCC for e-signatures would have been the complexity of formulating it. It would have been necessary for each state to have separately raised the issue, held hearings and passed the necessary legislation, with the possibility of changes during the adoption process.
Exceptions to E-Sign act
The general rule of federal preemption dictates that where the federal government has spoken, the states must defer. However the federal rule may elect to carve out exceptions, allowing areas for the states to come up with their own solutions, either in a narrow area prescribed by the federal government or with a state solution consistent with the federal rule and goal-a kind of compromise.
As regards E-Sign, in particular, two sections of the legislation give power back to the states. The main one, section 102, spells out situations in which state law may take precedence. The other, section 103, lists areas of activity not covered by E-Sign. In Sec.102, the federal government limited its own power to preempt state rule by allowing state statute to supersede E-Sign if the state has adopted the Uniform Electronic Transactions Act or if the state has provided for an alternative consistent with E-Sign which is also technology neutral.
In addition, Sec.103 contains a list of particular exceptions to E- Sign. Many of these exceptions are matters not normally considered as transactions and, therefore, fall outside the scope of E-Sign, which focuses on commercial transactions. The exceptions to the federal government's rule include:
(a) Wills, testamentary trusts, adoption, divorce and other family law matters, the states' adoption of UCC sections other than UCC sections 1 to 107 (concerning waiver), section 1 to 206 (concerning Statute of Frauds), and Articles 2 and 2A (concerning sales and leases);
(b) Court orders and documents, utility cancellation notices, default and right to cure notices concerning homes, health and life insurance termination notices, certain product recall notices, and certain hazardous waste documents.
Everette Jobe, general counsel for the Texas Department of Banking, says that these exceptions "should not be overly emphasized; they weren't really exceptions at all, but rather a clarification of scope" of E-Sign. All exceptions under Sec.103 will be reviewed after three years by the Secretary of Commerce to evaluate whether they are necessary for the protection of
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Several sources contacted by BTN either declined to address the implications for the financial industry of E-Sign, or they spoke on condition of anonymity. This unwillingness to talk-on the part of those who, in the past, have been open to media inquiries-expresses how unsure everyone is of what financial transactions will be affected by E-Sign and how.
A few areas that seem unlikely to be affected by E-Sign are the check- processing business, bank filings (such as applications to engage in new lines of business) and consumer disclosures.
Checks are one type of E-Sign exception mentioned by Patricia Fry, a professor at the Missouri School of Law, who also chaired the committee for the Uniform Electronic Transactions Act. In an article published on the UETA Web site, uetaonline.com, Fry writes: "(N)either the UETA nor E-Sign affects the checking system, paper-based negotiable instruments, or rules governing letters of credit or investment securities."
Everette Jobe, general counsel for the Texas Department of Banking, notes that E-Sign leaves in place any filing requirements banks may have with individual states. Jobe explains that, if a state today requires paper filing of banks' applications for business licenses, then that method continues. If a state requires notification of a bank's dormant accounts to come on a particular formatted disk, then that continues. Jobe adds that if the federal government forced a change, the question would arise as to who would pay for the states' changeover to a different technology. The states were able to exert control on the filing issue despite the federal government's interest to the contrary. Sec.104, provides that "nothing in this title limits or supersedes any requirement by a ... state regulatory agency that records be filed with such agency or organization in accordance with specified standards or formats." The states also retained some control as pertains to consumer protection notices. At least for the first three years, consumers must opt-in to accept in electronic form any disclosures they would ordinarily be entitled under state law. The "Consumer Disclosures" section of E-Sign says that disclosure requirement applies where a state statute requires notice to consumers concerning any portion of the transaction.
One thing that changes under E-Sign is the general theory of law that contracts should be in writing. Henceforth, electronic contracts will also will considered legal.
Asked if the states are likely to be concerned by the loosening of standards for record making, storing and reproducing, ABA's Wilson suggested not. Referring to comments in the Congressional Record, he says that, in fact, the standard has been raised from what existed in the "paper world." Whereas the earlier Statute of Frauds usually requires only that the agreement be in writing, E-Sign also requires that the (electronic) contract be "in a form that is capable of being retained and accurately reproduced for later reference by all parties or persons who are entitled...," Sec.101 (e).
E-Sign also made provision in principle for new arrangements in the mortgage industry, which has been required to keep the original paper records of key aspects of the transaction, (such as the mortgage note and title deed). Professor Fry, in her article, notes that E-Sign has provisions to allow those whose possession of such documents carries legal significance to retain them in electronic form, without violating their status as unique documents. The NCCUSL, which drafted E-Sign's predecessor of sorts, the Uniform Electronic Transactions Act, summarizes its objective as "very limited": that an electronic record of a transaction is equivalent to a paper record, and that an electronic signature has the same effect as a manual signature.
In the creation of E-Sign, the Washington-based National Governors Association represented the states' interests. Brett Hester, director of the economic development and commerce group at the NGA, says the association "worked constructively with the House and Senate committees" and was responsible for many changes benefiting the states in the final draft.
Of course, problems may come up as the states and businesses try to figure out if a state law that is not the Uniform Electronic Transactions Act is "consistent" with S.761 and technology neutral. But whether the states generally drag their heels in acceptance of E-Sign-despite the apparent increases in efficiencies for both the states and business-will be, as Zanger says, decided in the marketplace. It depends on how quickly electronic signatures are accepted by the public.
Douglas Houston is an attorney and freelance writer based in New York.
