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ELECTRONIC SIGNATURES:
A Review of the Exceptions to the Electronic Signatures in Global and National Commerce Act

THE IMPACT OF FEDERAL ELECTRONIC SIGNATURE LAW: A VIEW OF STATE AND INDUSTRY PRACTICES

1. Overview of Computer and Internet Usage

Recent reports from the Department of Commerce and private research firms show that Americans increasingly rely on the Internet as an important source of information. In February 2002, the Department of Commerce reported in A Nation Online that the American population's use of the computer increased from 24.1 percent in 1994 to 56.5 percent in 2001.(1) According to the Commerce Department's study, more than half of U.S. households, or 50.5 percent of American homes, had Internet connections.(2) Other recent studies confirm the Department's finding that the American trend toward computer usage is increasing. The June 2001 ESIGN evaluation of the effectiveness of electronic mail versus traditional mail delivery systems also confirmed America's growing reliance on electronic mail.(3)

An independent study conducted by Dr. Jeffrey I. Cole of the University of California at Los Angeles, Center for Communication Policy, Surveying the Digital Future - Year Two, concluded that 72.3 percent of Americans used the Internet for some purpose in the year 2001.(4) According to Dr. Cole's study, the main reasons that Americans use the Internet are to access e-mail and to get information quickly.(5) The report also shows that computer users continue to expand their uses of computers and the Internet. Past studies on Internet usage show that there are common issues that have arisen in the context of electronic commercial transactions: privacy, security, authenticity, and universal access. Although technological advancements have addressed these concerns in part, they remain significant concerns in all contexts regarding access to and transfer of consumer commercial information.(6)

Recent data from the Pew Internet & American Life Project shows that on average, approximately 84 percent of all Americans (which includes 97 percent of Internet users and 64 percent of nonusers) have an expectation of finding information online concerning health care, services from government agencies, news, and commerce.(7) Although the Pew Report shows that consumer expectations regarding access to personal information about someone online is much lower (35 percent of Internet users and 25 percent of nonusers), 58 percent of Internet users expect to contact someone using electronic mail.(8)

The importance of the Internet and computers to Americans is also demonstrated by Department of Commerce data reporting electronic commerce sales. In the year 2000, e-commerce sales represented 0.9 percent ($29 billion) of the total retail sales, and 1.1 percent ($34 billion) of total retail sales in the year 2001.(9) By the year 2002, total e-commerce sales were estimated at $45.6 billion, accounting for 1.4 percent of total sales.(10) E-commerce sales in the first quarter of 2003 totaled $11.921 billion of total retail sales equaling $772.2 billion, accounting for 1.5 percent of all sales.(11) The comments submitted in this evaluation regarding whether the exceptions remain necessary to protect consumers have been considered in light of the information regarding consumer and industry Internet usage and the patterns that have developed over the three-year period.

Transactions are conducted over the Internet by the transmission or exchange of documents that include electronic signatures, and which function to provide authentication, or verification of the identity of users of a computer, and security measures for access. Electronic signatures are attached to or incorporated into the records and documents that form the transaction. These signatures take various forms, including the following technologies:

• password or personal identification number (PIN) -- a set of characters, numbers, or combination thereof, created by the system user and encrypted when transmitted over an open network;
• smart card -- a plastic card (like an ATM or credit card) containing a microprocessor or "chip" that can generate, store, and process data and that has programming capacity for activation when the user enters another identifier such as a PIN;
• biometrics -- technological method that measures and analyzes unique human characteristics, such as fingerprints, eye retinas and irises, voice and facial patterns, and hand measurements. The devices consist of a reader or sensor, and software that converts the received information into a digital form, and a database that stores the individual's known biometric data;
• digitized signature -- a type of biometric, consisting of a graphical image of a handwritten signature, entered using a special digitized pen and pad input device that is automatically compared with a stored copy of the digitized signature of the user and authenticated if the two signatures meet specifications for similarity; and
• digital signature -- a unique signature produced on a message that uses a key (a large, binary number) known only by the signer, and a signature algorithm (mathematical formula) that is publicly known.(12)

1. 2. The ESIGN Exceptions

ESIGN validates electronic signatures in contracts and electronic documents in commercial transactions and places these documents on legal par with documents written in more traditional forms. The law provides that records and signatures relating to transactions in or affecting interstate or foreign commerce may not be denied legal effect, validity, or enforceability solely because they are in an electronic form or because an electronic signature or electronic record is used in their formation.(13) The documents that are expressly excluded from the requirements of the statute are set out in the nine exceptions.

The excepted requirements are for specific contracts and records that are governed by laws and regulations regarding these following substantive legal areas:

• wills, codicils, and testamentary trusts;
• a State statute, regulation, or other rule of law governing adoption, divorce, or other matters of family law;
• the Uniform Commercial Code, as in effect in any State, other than sections 1-107 and 1-206 and Articles 2 and 2A;
• court orders or notices, or official court documents (including briefs, pleadings, and other writings) required to be executed in connection with court proceedings;
• notices for cancellation or termination of utility services (including water, heat, and power);
• notices of default, acceleration, repossession, foreclosure, or eviction, or the right to cure, under a credit agreement secured by, or a rental agreement for, a primary residence of an individual;
• notices for the cancellation or termination of health insurance or benefits or life insurance benefits (excluding annuities);
• recall notices of a product, or material failure of a product that risks endangering health or safety; and

any document required to accompany any transportation or handling of hazardous materials, pesticides, or other toxic and dangerous materials.(14)

The exceptions operate to remove documents, which are executed under laws and statutes that control the relevant substantive area, from the application of section 101 of the ESIGN Act, including the general rule of validity contained in section 101(a) and the consumer consent provisions contained in section 101(c).(15) In essence, where ESIGN is the only law to be applied in the transaction, electronic documents in the nine areas listed are excepted from the Act and are not required to be given legal validity and effect. Unlike transactions covered by the general rule of validity and the consumer consent provision of section 101(c), the areas removed from the operation of the ESIGN Act do not involve traditional commercial transactions between consumer and merchant.

3. State Electronic Transactions Laws

The application of the requirements of ESIGN's section 101 to transactions and contracts that use electronic signatures or electronic documents depends on whether the state that controls the transaction has adopted an electronic transactions law. Section 102 of ESIGN provides an exemption to ESIGN's general preemption of state law. This section allows states to adopt statutes, regulations, and other rules of law to modify, limit, or supersede the provisions of section 101 with respect to state law.(16) The state's law must be consistent with ESIGN and meet one of two conditions. The law must: 1) constitute an enactment or adoption of the Uniform Electronic Transactions Act (UETA) as approved by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1999; or 2) specify alternative procedures or requirements for the use or acceptance of electronic records or electronic signatures, if the alternative requirements are technology neutral and do not accord greater legal status or significance to a specific technology.(17)

At the date this report, 49 states, the District of Columbia, and the Virgin Islands, have adopted a version of an electronic transactions law.(18) Although some state electronic transactions are modeled closely after ESIGN or UETA, others are incorporated into state commercial and business codes and contain language unique to the state and that refer to the underlying substantive law governing the transactions. Where a state has an electronic transactions law that complies with section 102 of ESIGN, the state law controls whether electronic signatures and documents relating to the nine ESIGN exceptions are to be given the same legal validity and effect as paper documents.

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ENDNOTES:

1. See U.S. Department of Commerce, National Telecommunications and Information Administration and Economic and Statistics Administration, A Nation Online: How Americans are Expanding Their Use of the Internet, at 3 (February 2002).

2. Id. The Department of Commerce continuously collects data on the rate of use of computer technologies and expects to complete its survey in October 2003; a report is likely to be issued in February 2004.

3. U.S. Dep't of Commerce, National Telecommunications and Information Administration, ESIGN Section 105 Report, 4-5 (2003).

4. J. Cole, The UCLA Internet Report 2001, Surveying the Digital Future - Year Two (2001), UCLA Center For Communication Policy, at http://www.ccp.ucla.edu/pdf/UCLA-Internet-Report2001.pdf (last visited June 3, 2003).

5. Id. at 19.

6. U.S. Gov. Working Group on Electronic Commerce, U.S. Dep't of Commerce, Leadership for the New Millennium: Delivering on Digital Progress and Prosperity, 3rd Ann. Rep., 35 (2000).

7. John B. Horrigan & Lee Rainie, Counting on the Internet, Pew Internet & American Life Project at http://www.pewinternet.org. (last visited June 3, 2003).

8. Id.

9. See E-Stats, Census Bureau, U.S. Department of Commerce (March 18, 2002 and March 19, 2003) available at www.census.gov/estats. Estimated U.S. retail and retail e-commerce sales for 2000 are from the U.S. Census Bureau, U.S. Department of Commerce release CB-01-83, May 16, 2001.

10. Estimated U.S. retail and retail e-commerce sales for 2001and 2002 are from the U.S. Census Bureau, U.S. Department of Commerce release CB-03-37, February 24, 2003.

11. Estimated U.S. retail and retail e-commerce sales for the first quarter 2003 are from the U.S. Census Bureau, U.S. Department of Commerce release CB-03-81, May 23, 2003.

12. Electronic Signatures: Technology Developments and Legislative Issues, CRS Report, RS20344 (January 19, 2001).

13. 15 U.S.C. § 7001 (2000).

14. 15 U.S.C. § 7003 (2000).

15. It should be noted that ESIGN has an integrated consumer protection mechanism that requires companies to comply with certain procedures designed to protect consumers during electronic transactions. In 2001, approximately one year after ESIGN became law, NTIA conducted a study jointly with the Federal Trade Commission on the consumer consent provisions of section 101(c). That study concluded that the benefits of ESIGN's consumer consent provision outweighed the burdens of implementation on electronic commerce and appeared to be working satisfactorily at that stage of the Act's implementation. See Section 101(c) Report, supra note 4.

16. 15 U.S.C. § 7002(a)(2000).

17. Id.

18. For a list of states that have adopted electronic transactions laws, seeAppendix E of this report. Alaska, California, Illinois, New York, South Carolina, Washington, and Wisconsin have electronic signature laws that were enacted prior to the passage of ESIGN. Massachusetts and Vermont have either introduced or passed draft UETA legislation in 2002-2003. See NCCUSL, Electronic Transactions Act, available at http://www.nccusl.org/nccusl.