E-Signatures Act: Companies Doing Business On The Web Will Benefit From Expansion Of E-Commerce Options
 
October 18, 2000
 

Introduction

Congress’ recent enactment of the Electronic Signatures in Global and National Commerce Act, (which has come to be known by its acronym ESIGN), will allow companies that engage in online transactions to more fully realize the significant time and cost-saving efficiencies of e-commerce. Effective in primary part on October 1, 2000, ESIGN provides that electronic signatures, contracts and records shall be as valid and legally enforceable as their written counterparts. Moreover, the Act allows financial service providers and others to provide by electronic means information presently required to be given to customers in writing. Finally, the Act allows companies to retain records in electronic form instead of in writing or original form. While passage of the Act was supported by the business community, many consumer advocacy groups voiced concerns that the Act’s broad scope potentially could endanger existing consumer protections. Therefore, the Act makes certain accommodations to address these concerns.

The Act and Its Principal Provisions

The Act has four principal provisions. Each is discussed separately below.

Validity of Electronic Signatures, Contracts and Records

First, the Act validates the use of electronic signatures and records in interstate or foreign commerce transactions. It states that signatures, contracts or other records created electronically have the same legal effect, validity and enforceability as written signatures and documents. Because the Act defines the terms electronic signature, electronic record and electronic transaction generally, the Act applies to virtually any type of transaction that can be conducted electronically, as well as virtually all of the documents generated electronically in the course of such electronic transactions.

Now able to use electronic signatures to create electronic contracts and complete electronic transactions, companies increasingly will be able to conduct a substantial portion of their business electronically. The most obvious impact of the legislation will be on companies’ e-commerce initiatives, particularly online sales of financial products and services. Businesses will be able to sell their products in a one-step, paperless transaction on the Internet instead of going through a two-step process in which the consumer may submit information electronically but must print and submit signed, written documents to sign in order for their transaction to be legally valid and enforceable. This ability to do business online without the delays resulting from the need to have paper documents and written signatures will likely further increase the number and variety of products purchased online and result in increased revenue and online product offerings.

Electronic Transmission of Information

Second, the Act states that companies, with the requisite customer consent, may now provide electronically information presently required to be furnished in writing to the customer. Specifically, companies may transmit to customers required information electronically if they satisfy the following five requirements.

• Obtain affirmative customer consent (which has not been withdrawn).

• Prior to the customer granting consent, provide the customer with information regarding the scope of his or her consent, the procedures for and consequences of withdrawing such consent and his or her rights to receive information in written form.

• Prior to the customer granting consent, provide the customer with information regarding how to obtain a written record of information previously provided electronically and whether fees will be assessed for doing so.

• Prior to the customer granting consent, provide the customer with the hardware and/or software requirements to access the information provided electronically and confirm that the customer is able to successfully access such information electronically by electronic receipt of the customer’s consent or confirmation of consent.

• If any changes are made to the hardware and/or software required for the customer to receive information electronically and it is possible that the customer may no longer have access to information provided electronically, provide the customer with a statement that contains the revised requirements, as well as information regarding the right to withdraw consent without adverse, undisclosed consequences. Additionally, the company must re-confirm that the customer is able to access information provided electronically under the new hardware and/or software requirements by electronic receipt of the customers consent or confirmation of consent.

The customer consent provisions of the Act are admittedly detailed and potentially burdensome. However, the Act specifically states that failure to comply with the customer consent provisions will not impair the legal validity and enforceability of an electronic signature, contract or record. Also, a customer’s actual or constructive withdrawal of consent will not impair the legal validity and enforceability of an electronic signature, contract or record previously entered into.

Having the option to transmit written documents electronically offers both risk and reward for companies transacting business electronically. On the risk side, customer information transmitted electronically is vulnerable to electronic theft. This leaves companies exposed to potential liability to customers whose information was stolen or misused. However, such risk can be mitigated significantly with the use of Internet security and data protection products, coupled with the implementation of a strict customer information privacy policy.

On the reward side, transmitting customer information electronically significantly reduces the paperwork and costs associated with producing written documents such as labor, supplies and shipping. Additionally, electronic transmission of required information increases the convenience and speed at which business can be conducted and transactions can be completed online. Eliminating the ‘lag-time’ associated with transmitting documents by mail will presumably make doing business online a more attractive proposition.

Electronic Records Retention

Third, the Act states that financial institutions may now retain electronically records which are presently required to be retained in writing or original form if they comply with the following requirements:

• The electronic records must accurately reflect the written records.

• The electronic records must be accessible to the same degree required for written records.

Unlike the consumer consent requirements, failure to comply with the electronic records retention requirements may impair the legal validity and enforceability of the electronic record. Accordingly, companies must ensure strict compliance with the above provisions or risk the possibility of having its electronic records found to be invalid or legally unenforceable.

Although many financial institutions presently utilize electronic data storage technology, the Act’s proscribing of standards for the utilization of such technology will facilitate this trend, thus providing companies with an added incentive to further modernize and streamline their data storage management programs.

Exceptions

Fourth, the Act sets forth two general exceptions to its applicability. The first general exception is that the Act does not apply documents governed by trust and estate law, family law or the UCC (with the exception of Sections 1-107 and 1-206 and Articles 2 and 2a). The second general exception is that the Act does not apply to critical legal documents, which, if not received, could have severe adverse consequences for consumers. Such documents include official court documents, termination of utility service, notices of default of mortgage or termination of lease of primary residence, product recall notices and documents required for the transportation of hazardous materials.

It is unlikely that most companies noticeably will be affected by these exceptions. While financial institutions will be affected most by the trust and estate law and the mortgage default notice exceptions, it is unlikely that these exceptions will have a significant impact, as the matters covered by the exceptions (e.g., estate planning and foreclosure proceedings) are not likely at present to be conducted electronically due numerous complexities.

ESIGN presents compelling opportunities for financial service providers and their affiliates to fully recognize a multitude of e-commerce benefits. However, compliance with ESIGN’s requirements may present challenging legal risks. Such risks should be fully explored and resolved prior to implementation of any e-commerce initiative that utilizes ESIGN’s provisions.