The Department of Commerce recently proposed that the Electronic Signatures in Global and National Commerce Act be amended to include transactions subject to the Uniform Commercial Code. Currently most of those transactions are excluded.
In this proposed amendment, electronic checks not only would be permitted, but they could not be rejected. As it states, "a signature, contract, or other writing relating to [an interstate transaction] may not be denied legal effect, validity, or enforceability solely because it is in electronic form."
Let's look at what might happen if the E-Sign law were amended, without supplementary rules:
The tech-savvy consumer designs a check by drawing a rectangle on his computer screen and inserting a digital photograph of his face. He then consults a friend in law school about the need to put his address, account number, or routing numbers on the check. He is concerned about this because he knows that there are rules governing the unauthorized use of credit cards but is unsure of any similar protections concerning checks.
His friend tells him that he is right to be concerned and that he need not list this information, because nothing in the Uniform Commercial Code requires this information to appear on a check.
The consumer completes the check by adding his name, the name of his bank, the date, and the amount currently due on his credit card ($46.95). Before he sends the check, however, he once again consults the law-student friend. She tells him that, under the Uniform Commercial Code, the tender of a check suspends the underlying debt. Realizing that it may take his bank a long time to figure out how to debit this check from his account, and that he will be able to save interest charges during this period, she advises him to pay the entire card balance.
He then deletes $46.95 and enters the balance ($2,095). Going to his "Manage Your Account Online" file, he selects "contact us." As this is the only e-mail address he has for his credit card company, he sends an e-mail with his credit card account number - a very minimal risk - to insure proper credit. He attaches the electronic check to the e-mail.
Once the electronic check is received by the credit card company, it causes great consternation. Within a day it finds its way to the company's general counsel. He would like to tell the company to return the check, but he has two problems:
First, his technical advisers tell him that, because it is an electronic image, it cannot be returned. Even if it is deleted, it is always present on the computer's hard drive.
Second, and more serious, the general counsel realizes that a refusal to accept the check would be a violation of the recent amendment to the E-Sign law. The consumer's use of his digital photograph as the background of his check and his typed name on the bottom clearly indicates his intent to authenticate, or electronically sign, the check. Because the check otherwise meets the Uniform Commercial Code's requirements, there is no basis for rejecting it.
While the general counsel is pondering these problems, thousands of other electronic checks are coming in over the Internet from tech-savvy consumers. The general counsel now realizes that, if it doesn't accept these instruments, his company may face a class action.
Not knowing what else to do with all these electronic checks, the general counsel prints them all out and takes the printouts by hand to his bank's account manager for deposit into the company's account. The account manager reads the fine print in his bank's standard account opening agreement and notes that the bank has the right to reject items deposited for collection. The general counsel, however, points out that they share the same problem: Rejecting an electronic check would violate the recent E-Sign revision.
The account manager next insists upon the card company's endorsement on the printouts. The general counsel, however, does not want to add an endorsement. He argues that when his company receives paper checks, normally they are signed by the person whose name is printed on the check. In this case, he has no way of knowing whether the consumer has an account at the bank named on the check.
The general counsel also notes that the E-Sign revision does not say whether a paper printout of an electronic check is subject to the paper-based rules found in the Uniform Commercial Code, including the rules about endorsements.
Meanwhile, the account manager raises another issue. Without an address, account number, or routing number, the consumer's bank will be unable to locate his account to make the appropriate debit. If the consumer's bank guesses wrong, a debit of $2,095 may empty an innocent person's account and subject the bank to consequential damages.
The account manager asks the general counsel to provide sufficient personal information about the consumer to enable his bank to identify the account.
The general counsel then telephones his company and is told that the consumer opted out of information sharing when the company circulated its privacy choices to their customers.
Though this scenario is purely hypothetical, it raises issues that should be seriously considered in the Department of Commerce's deliberative process.
