Implications of the Electronic Signatures Act.

Business activities and transactions conducted via the Internet are proliferating, whether by for-profit or nonprofit organizations. In recognition and support of this growth in use of new technology, former President Clinton signed into law last year the Electronic Signatures in Global and National Commerce Act, making electronic documents and signatures as valid as their paper and ink counterparts. The act's provisions validating electronic and electronically signed documents went into effect on October 1, 2000; and provisions authorizing use of electronic documents for record keeping took effect on March 1, 2001. In this column, Lauren W. Bright explains the basics of this new law as they pertain to associations.

The Electronic Signatures Act, as it is nicknamed, provides that a contract or digital signature "may not be denied legal effect... solely because it is in electronic form," and permits the completion of business transactions online instead of in person. As such, membership organizations, consumers, and businesses are now able to legally contract for products or services online and via electronic media, thus facilitating the growth of electronic commerce. In addition, transactions can be completed more quickly and efficiently, with parties in many cases no longer burdened by the costs and delays associated with the transmission and exchange of paper documents. The measure also contains preemption provisions designed to ensure a degree of uniformity among laws validating electronic signatures and transactions in order to make it easier to conduct interstate electronic transactions. It does not, however, authorize the use of electronic signatures on checks or investment securities. These and other highlights o f the act are summarized here.

Electronic signatures and records

The key provision of the act provides that any electronic signature, contract, or other record relating to a transaction will be accorded the same legal status as its paper equivalent. An electronic signature is defined in extremely broad terms. It is an "electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record." Subject to the act's consumer consent requirements and specific exceptions (such as prohibitions on using electronic signatures in the creation and execution of wills), states generally cannot prohibit the use of electronic signatures and electronic records in lieu of handwritten signatures and paper records.

The act is technology neutral; that is, it does not prescribe a specific type of electronic signature (for example, digital signatures based on public key infrastructure technology) that must be used. In addition, its provisions eliminate legal barriers to collecting and storing documents in electronic form by providing that contracts or records held in electronic form may satisfy applicable record retention requirements throughout the law (including requirements to keep originals) if the records are accurate and remain accessible in a form capable of being accurately reproduced.

Consumer protections

A primary objective of the act is to provide consumers (and, in certain cases, nonprofit organization members) protection for electronic transactions that are equivalent to those provided for paper transactions. Certain provisions are designed to ensure that consumers electing to receive legally required notices or other records electronically have consented in an informed, explicit manner. Specifically, for electronic records to be valid, the act requires among other things that:

* Consumers affirmatively consent to the use of electronic records;

* Consumers receive a "clear and conspicuous" statement informing them of the right to receive records in paper or in nonelectronic form, the right to withdraw consent regarding electronic transactions, and the process for requesting paper records;

* Consumers receive a statement of the "hardware and software requirements" for access to and retention of electronic records; and

* Consumers consent electronically in a manner that "reasonably demonstrates" that they can access the information.

The Electronic Signatures Act expressly preserves existing consumer protections regarding the timing and content of legally required notices and disclosures. In addition, it provides that the legal effectiveness of a contract will not be denied solely because of the failure to obtain electronic consent or confirmation of consent.

Exceptions to the act

The provisions of the act validating electronic signatures and records specifically excludes the following from coverage by the act:

* statutes or regulations governing the creation and execution of wills, codicils, or testamentary trusts;

* the Uniform Commercial Code--other than sections 1-107 (waiver or renunciation of a claim or right after a breach), 1-206 (statute of frauds for certain kinds of personal property), and Articles 2 (sales) and 2A (leasing); and

* court orders or notices, or official court documents required to be executed in connection with court proceedings.

The validation provisions also do not apply to notices of cancellation or termination of utility services, cancellation or termination of life or health insurance benefits, recall of a product that risks endangering health or safety, or any document required to accompany any transportation or handling of toxic or hazardous materials.

Notwithstanding the exceptions identified in the act, states are free to choose whether to authorize electronic signatures or records in any of the excepted areas. In addition, the act creates a procedure for federal agencies to supercede the exceptions if elimination of the exceptions will not increase the risk of harm to consumers. As a further effort to remain responsive to consumer needs, the measure requires the Commerce Department to conduct a review, over a period of three years, to evaluate whether the exceptions are still needed to protect consumers.

Preemption of state law

The act's preemption provisions are complex and often ambiguous. Specifically, it contains a broad preemption provision authorizing electronic signatures and records "notwithstanding any statute, regulation or other rule of law...." However, it also contains specific exemptions to this provision designed to address the relationship between the act and electronic contract and signature laws already approved in many states and pending in many others. It is likely that there will be uncertainty concerning whether particular provisions in state law are "inconsistent" with the act. In addition, it is not clear whether the act only preempts specific inconsistencies, or an entire state law. Accordingly, issues of interpretation will undoubtedly arise and the impact of the act on specific state laws ultimately may have to be resolved by the courts.

Although the Electronic Signatures Act may not resolve all of the issues surrounding electronic transactions, it is anticipated that the measure will provide significant cost savings to all organizations that engage in business activities and transactions, including nonprofit organizations. More importantly, it is hoped that the legislation will help to ensure the integrity of online activities by providing a greater degree of legitimacy and security for everyone involved.

Lauren W. Bright is an attorney and Jerald A. Jacobs is a partner with the law firm of Shaw Pittman, Washington, D.C. Jacobs edits this column and is general counsel to ASAE.