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E-signatures for an E-world: states face a thicket of complications born of rapidly changing technology in their quest to regulate electronic commerce.

If Paul Revere lived today, how would he announce the invasion of the Internet? One if by mail, two if by e-mail? Despite the economic downturn and the bust, the Internet is thriving, and electronic commerce continues to grow.

More than 143 million people use the Internet, according to a study by the U.S. Department of Commerce, "A Nation Online: How Americans Are Expanding Their Use of the Internet." Of the people online, 67 percent use the Net for research and to get product information, while 39 percent use it to make purchases.


In order to provide the legal support for electronic commerce, many states have adopted laws that make electronic signatures valid. States such as Arizona, Minnesota, Nevada, New Hampshire, Utah and Washington started with legislation that specifically defined digital signatures. In 1999, the National Conference of Commissioners on Uniform State Laws developed a model act for the use of electronic signatures and records in government or business transactions. The Uniform Electronic Transactions Act (UETA) makes electronic records and signatures as legal as paper and manually signed signatures. Forty states now have some form of the act.

Virginia Delegate Joe T. May says the uniform act is important, because "it makes electronic signatures legal, while forming the legal backbone and providing guidelines for electronic contracting." He says that his state is approaching technology changes with "a measured pace."

Utah Senator Lyle W. Hillyard says the Uniform Electronic Transactions Act was not difficult to pass in his state because there is a lot of legislative interest in electronic commerce. "The technology, especially for the rural population, helps make government more accessible," Hillyard says. "When we did UETA, we knew we were going to nave to adapt it as the technology developed. Our chief challenge at this point is education--getting people to use electronic signatures and electronic commerce.

"We need to be careful to keep the law general enough to allow competition and not favor one type of technology," he says.


There's also federal legislation that supports electronic transactions. The Electronic Signatures in Global and National Commerce Act (E-SIGN) was adopted under President Clinton and became effective October 2000. The law establishes the validity of electronic records and signatures. It also governs in the absence of a state law or where states have made modifications to the uniform act that are inconsistent with E-SIGN. The federal law was passed to encourage the remaining states to adopt the uniform act with few modifications and promote public confidence in the integrity and reliability of electronic commerce.

The federal law, E-SIGN, applies to the sale of goods and leases under the Uniform Commercial Code. Despite its wide applicability, it doesn't cover official court documents, health and life insurance cancellation notices, and notices regarding default, repossession, foreclosure or eviction from an individual's primary residence, among others.

Although laws covering electronic signatures are now in place, people haven't started using them for their on-line shopping, nor have businesses encouraged their use. In a survey of 550 companies, only 10 percent reported that they use electronic signatures, according to GartnerG2, a research and consulting company. But that figure is expected to double in the next 18 to 24 months.


There are two reasons why electronic signatures have not replaced manual signatures--"trust and security," says Thomas Smedinghoff, a partner with Baker & McKenzie in Chicago. "Merely having a law saying electronic signatures are legal is not enough."

Individuals must be able to trust that the message authorized by the signature comes from whom it says it does and that the person had the authority to make the transaction. "Security is a prerequisite of trust," Smedinghoff says. An individual needs to trust that the message has been kept confidential and has not been altered in any way after it was electronically signed.

The uniform state act does lay out some rules for electronic signatures, but there needs to be more, Smedinghoff says. "UETA and ESIGN make it legal to do transactions electronically. Now we need to address the issue of whether we trust electronic transactions and determine what the rules will be that govern how we behave in cyber transactions," he says.

Smedinghoff suggests that states look at the Uniform Commercial Code (UCC) to define additional rules. That's where lawmakers will find out how to deal with security, he says. There are "precise and detailed rules to assign responsibility, define behavioral norms, allocate risks and establish limits on liability," Smedinghoff says. The rules balanced the competing interests of the banks that provide electronic funds transfers, the commercial and financial organizations that use the transfers, and the public interest.

California Senator Debra Bowen says that privacy concerns are preventing people from using electronic signatures. "The one thing UBTA has not touched on is the issue of privacy, which I believe is a huge mistake, I don't think electronic transactions will ever be fully embraced by the vast majority of people until we can ensure that the personal, financial and medical information is private, secure and not going to be auctioned off to the highest bidder."

In an effort to encourage electronic signatures, commerce and financial services companies are developing voluntary rules, the Standards and Procedures for Electronic Records and Signatures (SPeRS). "When UETA and E-SIGN were enacted, the approach was to enact broad statutory provisions without specific technology requirements or specific regulations. Consequently, there is an absence of traditional statutory guidance especially for regulated industries, such as financial service companies," says Jeremiah Buckley, partner in the Washington, D.C., office of Goodwin Procter LLP, who is acting as counsel for the rules project. His group is drafting industry models for the use of electronic records with the hopes of increasing customers' comfort levels with electronic records and signatures.

"These standards are not intended to be an alternative to regulation or best practices for the industry," says Buckley. They will be what he calls "living standards" and will be designed to change as technology changes.


Electronic signatures were barely on the legislative radar screen a decade ago. Today it's anybody's guess what will develop in electronic commerce over the next 10 years. Already the Internet has changed how businesses, governments and individuals communicate, shop and interact with each other. State lawmakers have been passing measures to validate electronic signatures in order to support electronic commerce. In the years ahead, technology will drive them to reexamine and readjust those laws.

As for Paul Revere, if he were alive today, he would probably send his famous warning through an e-mail message to all of his customers via his Web site,, along with a link to items available through his on-line catalog.


Forty states have passed legislation on electronic signatures based model act developed by National Conference of Commissioners on Uniform State Laws They are:

1999--California, Pennsylvania

2000--Arizona, Delaware, Florida, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota, Nebraska, North Carolina, Ohio, Oklahoma, Rhode Island, South Dakota, Utah, Virginia

2001--Alabama, Arkansas, Louisiana, Mississippi, Montana, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Oregon, Tennessee, Texas, West Virginia, Wyoming

2002--Colorado, Connecticut


States without a law on electronic signatures have several options regarding the federal Electronic Signatures in Global and National Commerce Act (E-SIGN) and the Uniform Electronic Transactions Act (UETA), now law in some 40 states. They can:

* Allow the federal law to govern by not enacting the uniform act.

* Enact the uniform act without modification.

* Adopt the uniform act with minimal modifications.

* Enact electronic signature legislation separate from the uniform act being passed in other states as long as the law is consistent with the federal law and specifically supersedes it.

Heather Morton specializes in financial services for NCSL.
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Author:Morton, Heather
Publication:State Legislatures
Geographic Code:1USA
Date:Jan 1, 2003
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