August 2000   

When President Bill Clinton signed the Electronic Signatures in Global and National Commerce Act in June, he used both a pen and a smart card, both symbols of the state of e-commerce today. That is, he used a traditional method along with a newly developing way to sign contracts and documents online.

The law takes effect this October 1, and the requirements related to record retention take effect March 1, 2002. With regard to guaranteed and insured loans, the law takes effect one year after enactment of the bill.

What Do People Think?

"We see it [the new law] as a very important milestone to continue the build-out of electronic commerce and the popular acceptance of doing business online," says Bob Cohen, Senior Vice-President of the Information Technology Association of America. ITAA was one of several industry organizations that lobbied for passage of the bill.

"There will be early adopters and people that are more comfortable with new technology than others," Cohen predicts. "Then it will gradually gain popular acceptance." He doesn't expect this acceptance to take long, noting that the Internet has gained public acceptance in much less time than mass media such as radio and television.

ITAA endorses no particular technology for creating digital signatures. "It's very important that the marketplace and the companies and their customers make those decisions," Cohen says. Some situations, such as those involving medical or financial records, require a rigorous technology to protect information and authenticate the identity of the electronic signer of the document; other situations may not require such a sophisticated level of technology, Cohen predicts.

If identity theft becomes a problem, "it will really cast a chill over the whole use of the technology," Cohen says. "I think the business community, lawmakers, and consumers' rights groups are going to work very carefully to make sure that doesn't happen."

Margot Saunders, managing attorney for the National Consumer Law Center, made great efforts to see that some consumer protection provisions were included in the new bill, but she's still not satisfied. "There are a lot of problems that will result unless people are very, very careful," she says. She identified potential problem areas as security, identity fraud, and integrity of documents.

"Consumers who are not online may be required, for financial reasons, to receive electronic documents, even though they're doing business in the real world," Saunders predicts. "Consumers who are online may find signatures are stolen too easily. They therefore have the burden of proving that they didn't sign a contract."

Saunders feels very strongly indeed about electronic signatures. "I would advise consumers not to sign their name over the Internet," she says. "If they want to do business over the Internet they can continue to use a credit card."

Consumer-protection laws allow consumers to challenge credit-card charges that they did not make, or to challenge charges for merchandise that arrived broken or was not as represented. "Those consumer protections that exist on credit cards are terrific and are the best consumer protection, especially when dealing fairly blindly with Internet providers," Saunders adds.

What's in a Name?

As indicated by its title, the new legislation applies to interstate and foreign commerce. Although the law makes electronic signatures legal and binding, it does not require consumers to sign contracts electronically.

Electronic technology has any of the following capabilities:

• Digital
• Electrical
• Electromagnetic
• Magnetic
• Optical
• Wireless

An electronic signature is defined as an electronic sound, symbol, or process attached to a contract and executed by a person with the intention of signing the contract.

A digital signature is an electronic signature that contains encryption with a high level of security. It authenticates the signer's identity, indicates that the original document has not been changed, and can be time-stamped.

As with any change, some businesses will benefit, and some may suffer as a result of the new legislation.

Which Businesses May Prosper?

• Security companies for e-commerce
• Businesses selling electronic signature technologies and services

Which Businesses May Be Negatively Affected?

• Brokerages, if investors start selling stocks and bonds directly to one another.
• Shipping companies, if an expected decline in the need for delivery of documents occurs.

What Guidelines Does the Law Provide?

When making electronic transactions, consumers must be informed of the following:

• Their right to have the record provided on paper
• Their right to withdraw consent to an electronic record
• How to withdraw consent to an electronic record
• How to obtain a paper copy and the cost of doing so
• The hardware and software required for making and keeping an electronic record

Consumers must consent to the use of an electronic record in a way that shows access to the required hardware and software. Other document-related points to keep in mind are these:

• An oral communication or recording is not an electronic record.
• An electronic record of the front and back of a check satisfies the requirement to retain a check.
• Notarization of documents may be done electronically.

The law does not apply to the following documents or activities:

• Adoptions or divorces
• Cancellation of health or life insurance benefits
• The creation of wills or trusts
• Documents accompanying transportation or handling of hazardous materials
• Official court documents
• Product recalls
• Repossession, foreclosure, or eviction from a person's primary residence
• Termination notices for utility services
• The Uniform Commercial Code, except for Sections 1-107 (waiver or renunciation of claim or right after breach) and 1-206 (statute of frauds for kinds of personal property no otherwise covered) and Articles 2 (sales) and 2A (leases)

Over a three-year period, the Secretary of Commerce is to review these exceptions.

How Will It Work?

Several types of electronic signatures are developing in the marketplace, and the federal bill does not specify which type should be used. Many technologies rely on encrypted mathematical codes. Others generate a voice print or a scan of the consumer's thumb or iris. Some ask for a digitized signature, created when the consumer uses an electronic pen and pad.

When it comes to document alteration, digital signatures may well be more secure than handwritten signatures. If a multi-page document has a signature on the last page, there is no way to prove that the first pages have not been altered after the document was signed. A contract signed digitally, however, will indicate if even so much as a comma is removed after the signature was affixed.

What Are the Advantages of Electronic Signatures?

• More efficient use of time for both businesses and consumers. Today, contracts often have to be signed, then mailed to the other party before they take effect. Electronic signatures should reduce this delay. Until now, a consumer who opened a brokerage account on the Internet or filed a federal tax return electronically still had to send in a handwritten signature on a piece of paper. It's possible that in the future, the consumer will go to a real estate closing, but use an electronic signature for all documents rather than physically signing on numerous dotted lines.

• Increased convenience. Signatures may be done at any time, not just during traditional business hours.

• Reduction of operating expenses. Businesses will be able to file and store documents electronically, saving labor, postage, and storage charges. Eventually, businesses may charge more for paper transactions.

What Are the Disadvantages of Electronic Signatures?

• The consumer is responsible for paying for any charges incurred if an electronic signature is stolen.
• There is no provision for notification if a vendor's email address changes.
• They are not foolproof; they can be stolen. (Note: ATM cards aren't foolproof either.)
• They may cause users to lose their anonymity on the Internet.
• They may create a hardship for persons who cannot afford computers.
• They may make consumers an easier target for spam. (Note: filling out paperwork for a loan at the bank may put the signer on junk-mailing lists, too.)
• They may make the user's movements on the Internet easier to track.
• Too much information could be released if a digital signature includes personal information such as birth date, Social Security number, medical records, and financial records.

Sign Here

If you're going to be involved in e-commerce, either as a vendor or a consumer, you will be learning about and probably using electronic signatures. Will President Clinton's signature on the electronic legislation affect business operations as much as the signatures on the Declaration of Independence affected history 224 years ago? Time will tell, but already John Hancock would be amazed.