E-Signatures and Electronic Contracts: Complying With...
Transcript of E-Signatures and Electronic Contracts: Complying With...
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Presenting a live 90-minute webinar with interactive Q&A
E-Signatures and Electronic Contracts:
Complying With ESIGN and the UETA,
Interplay With the UCC Navigating Issues of Enforceability, Authentication and Admissibility
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, FEBRUARY 15, 2017
Kenneth Chase, Founder, Chase Law, Washington, D.C.
Patrick J. Hatfield, Partner, Locke Lord, Austin, Texas
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20 YEAR REVIEW OF CASE LAW
ELECTRONIC SIGNATURES
5
Evolution of Case Law
• Underpinnings of signature requirement
6
Evolution of Case Law
• A Statute for the Prevention of Frauds and Perjuries
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Evolution of Case Law
• Technology drives shift to electronic signatures
8
Evolution of Case Law
• Technology drives shift to electronic signatures
9
Evolution of Case Law
• Enforceability of Emails
10
Evolution of Case Law
• Alternative authentication methods
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NEW YORK
• General Obligations Law § 5-701
– Purpose is to facilitate execution of trades on electronic trading platforms
– “Tangible written text” or “any symbol” made with “intent to authenticate” is a signed writing
12
NEW YORK
• Parma Tile v. Short, 640 N.Y.S. 477 (1996)
– Supplier of ceramic tiles sued contractor for payment on invoice
– Held: automatic printing of sender’s name on each page of fax transmission was not a signed writing under the statute of frauds
13
NEW YORK
• Page v. Muze, 705 N.Y.S. 2d 383 (2d Dept. 2000)
– Former employee sued for breach of oral employment agreement
– Held: the existence of a signature block, without more, is not a signed writing
14
NEW YORK
• Rosenfeld v. Zerneck, 776 N.Y.S. 2d 458 (King’s Co. 2004)
– Purchaser of home sued for specific performance
– Held: “signature” on an email is a signed writing under the statute of frauds
15
NEW YORK
• Naldi v. Grunberg, 908 N.Y.S.2d 639 (1st Dept. 2010)
• In 1994, when GOL § 5–701(b) was enacted, electronic communication was still relatively novel. The legislative history of the original amendment indicates that the background of the bill was that, by 1994, institutions entering into certain complex financial agreements (such as foreign exchange contracts, financial and commodity swaps, and other derivatives) had come to rely on e-mail and other electronic means of communication, rather than paper writings, to memorialize those transactions. As noted in one of the relevant legislative memoranda, “[i]n the marketplace, these agreements are considered binding from the moment agreement is reached” (Mem. of Assembly Rules Comm. on L. 1994, ch. 467, 1994 N.Y. Legis. Ann., at 317).
• At that time, however, there was a perceived uncertainty whether such agreements were immediately enforceable under the statute of frauds if the parties entered into them through electronic means of communication. To remove this uncertainty, the Legislature amended GOL § 5–701 to make clear that a “qualified financial contract [as defined] ... is legally binding from the moment agreement is reached” (Senate Introducer Mem. in Support, Bill Jacket, L. 1994, ch. 467, at 10).
• Today, a decade into the twenty-first century, e-mail is no longer a novelty. Although not enacted by New York, the Uniform Electronic Transactions Act (7A [part I] ULA 211 [1999] [UETA] ), which was promulgated in 1999 and has been enacted by 47 states, the District of Columbia, and the Virgin Islands, provides, inter alia, that “[a] contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation” (UETA § 7[b] ) and that “[i]f a law requires a record to be in writing, an electronic record satisfies the law” (UETA § 7[c] ). Moreover, in 2000, Congress enacted the Electronic Signatures in Global and National Commerce Act ( *10 15 USC § 7001 et seq., as added by Pub. L. 106–229, 114 U.S. Stat. 464 [E–SIGN] ), which provides in pertinent part: – “Notwithstanding any statute, regulation, or other rule of law ..., with respect to any transaction in or affecting interstate or foreign
commerce— – “(1) a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely
because it is in electronic form; and – “(2) a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic
signature or electronic record was used in its formation” (15 USC § 7001[a] ).
16
FLORIDA
• Tanenbaum v. Biscayne Osteopathic Hospital, 190 So.2d 777 (Fla. 1966) – Terminated doctor sued to enforce five year employment contract
with hospital that hospital never signed
– Held: dismissal affirmed. The “Statute of Frauds grew out of a purpose to intercept the frequency and success of actions based on nothing more than loose verbal statements and innuendos.”
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FLORIDA
• Kolski v. Kolski, 731 So.2d 169 (3 DCA 1999) – Mother-in-law sued daughter-in-law for breach of oral loan – Held: dismissal reversed. – The statute of frauds, section 725.01, Florida Statutes governs oral promises to repay the debts of another. It provides
that: No action shall be brought whereby to charge ... the defendant upon any special promise to answer for the debt, default or miscarriage of another person ... unless the agreement or promise upon which such action shall be brought, or some note or memorandum thereof shall be in writing and signed by the party to be charged therewith[.] § 725.01, Fla. Stat. (1997) (emphasis added).
– To satisfy the statute, a note or memorandum may take almost any possible form. See Bader Bros. Transfer & Storage,
Inc. v. Campbell, 299 So.2d 114, 115 (Fla. 3d DCA 1974) (holding settlement sheets were sufficient to constitute memorandum under statute of frauds); Rank v. Sullivan, 132 So.2d 32, 36 (Fla. 2d DCA 1961) (holding statement in will of person being charged constituted a sufficient memorandum to satisfy statute of frauds); Heffernan v. Keith, 127 So.2d 903, 904 (Fla. 3d DCA 1961) (finding that telegram constitutes note or memorandum confirming prior agreement). All that the statute requires is written evidence from which the whole contract may be made out. Further, “[f]or purposes of the statute of frauds, several writings, only one of which is signed by the debtor, may be aggregated to satisfy the statute provided that the signed writing expressly or implicitly refers to the unsigned document.” Cook v. Theme Park Ventures, Inc., 633 So.2d 468, 471 (Fla. 5th DCA 1994); see also Middelthon v. Crowder, 563 So.2d 94, 95 (Fla. 3d DCA 1990); Rohlfing v. Tomorrow Realty & Auction Co., Inc., 528 So.2d 463, 465 (Fla. 5th DCA 1988) (holding real estate terms of sale together with buyer's guide and check constituted sufficient writings to satisfy statute).
– We find that the specific reference to the terms of the alleged loan made by Jennie in her
will together with the canceled checks signed by Patricia in the precise amount of the semi-annual interest payments on the $40,000 dollar loan and with notations that they were for “loan interest”, were sufficient writings to take the oral agreement out of the statute of frauds.
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FLORIDA
• Bader Bros. v. Campbell, 299 So.2d 114 (3 DCA 1974) – Former truck drivers sued trucking company for payment on their
accrued trucking accounts
– Held: drivers entitled to payment. A memorandum of a contract required by the Statute of Frauds may consist of several writings containing evidence therein from which the whole contract may be made out. The settlement sheets show the gross amount of each haul made by the respective plaintiffs, the
amount of repairs and other expenses
the amount deducted for the individual
truck funds.
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UETA (1999)
• Uniform Electronic Transactions Act (UETA) • Proposed by the National Conference of Commissioners
on Uniform State Laws (NCCUSL)
• 47 States, DC, Puerto Rico and the U.S. Virgin Islands have adopted UETA
• Its purpose is to harmonize state laws regarding electronic signatures
20
UETA (1999)
• Uniform Electronic Transactions Act (UETA) • Section 2: Definitions
– (7) Electronic record - means a record created, generated, sent, communicated, received, or stored by electronic means
– (8) Electronic signature - means an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record
21
UETA (1999)
• Uniform Electronic Transactions Act (UETA)
• Section 6: Purpose
– “To facilitate and promote commerce and governmental transactions by validating and authorizing the use of electronic records and electronic signatures"
22
UETA (1999)
• Uniform Electronic Transactions Act (UETA) • Section 7 gives legal recognition to electronic signatures,
records and contracts
– (a) A record or signature may not be denied legal effect or enforceability solely because it is in electronic form
– (b) A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation
– (c) If a law requires a record to be in writing, an electronic record satisfies the law
– (d) If a law requires a signature, an electronic signature satisfies the law
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ESIGN (2000)
• Electronic Signatures in Global and National Commerce Act (ESIGN)
– Federal version of UETA
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SUMMARY
• Electronic signatures, emails and digital authentications arguably provide superior evidentiary value and durability than their paper predecessors.
• Courts have correctly recognized that electronic records satisfy the evidentiary component that underpins the statute of frauds.
• The recent statutes and rulings have kept the spirit of the statute of frauds alive while facilitating the business community’s use of new technology.
25
ADDITIONAL QUESTIONS / INFORMATION
• Litigation Counsel: Kenneth Chase Chase Law, LLC
2001 L Street NW, Suite 500
Washington, DC 20036
(202) 365-5130
26
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E-Signatures and Electronic Contracts:
Complying With ESIGN and the UETA,
Interplay With the UCC
Pat Hatfield
512-305-4787
February 15, 2017
683075
Presented to Strafford
28
Agenda
■ Opening remarks ■ Overview of laws ■ 6-Point Risk Framework ■ Admissibility Rules ■ What are the courts saying? ■ More Q &A
29
Supplemental Materials
Please e-mail me if you would like a copy
■ Overview of 6-Point Framework
■ Enhancing the Admissibility and Enforceability of Electronically Signed Documents (Bloomberg Law Reports)
■ send request to [email protected]
30
Preliminary Comments
■ A reasonably well-designed process, supported by solid
technology, can actually reduce risk, relative to traditional
process.
■ In particular, a reasonably well-designed e-process can provide
a company with better evidence to enforce its contracts.
■ It’s more about process and workflow than it is about
technology, but technology plays important role.
31
Preliminary Comments (cont’d)
■ A mistake commonly made by companies building their own
e-process is to overlook how they will enforce the e-signed or
e-delivered documents.
■ For most companies, the litmus test for an e-process is: “Will
our e-signed contracts be as enforceable as our paper
contracts?”
32
Overview of Laws ■ ESIGN – federal law
■ Contracts and other transactions
■ Promissory notes under UCC Article 3 but only if relating to a loan
secured by real property (i.e. mortgage notes)
■ Broad preemption of state law- CA problem
■ UETA – state laws
■ Contracts and other transactions
■ Promissory notes under UCC Article 3
■ Warehouse receipts & bills of lading (documents of title) under UCC
Article 7
33
Overview of Laws (cont’d) ■ Various Insurance Codes now contain safe harbors
■ UCC Article 9 dealing with e-chattel
■ Limited exceptions- outside scope of ESIGN and UETA:
■ wills
■ notices cancelling utilities
■ divorce, family law matters
■ other exclusions
34
Interplay of Laws – Examples ■ A security agreement giving a secured party collateral in e-
chattel (such as a lease) may be signed under UETA using
electronic signatures, but to perfect its actual security interest
in that e-chattel (the lease), the secured party will need to have
control over the authoritative copy under UCC Article 9.
■ A contract to sell a widget where the purchase price is paid via
a negotiable promissory note may be signed under UETA, but
for the negotiable promissory note in electronic form to be
enforceable, it will need to comply with transferable records
terms in UETA, i.e., have protocols for authoritative copy.
(May not work under IL, NY or WA, that have not enacted
UETA.)
35
Interplay of Laws – Examples con’t
■ A contract to sell a widget where the purchase price is paid via
an electronic promissory note that is not a “negotiable” note
under UCC Article 3 is subject to UETA and that promissory
note is not a transferrable record.
36
Basics of e-Sign/UETA
■ Documents required to be provided “in writing” may be in
electronic format and may be e-delivered.
■ Consumer disclosures required to be given “in writing” may
be e-delivered, with an extra step.
■ Electronic signature broader than “digital” signature, may be
as simple as clicking “I agree”, typing a name, or even saying
“I agree”.
37
Consumer Disclosures
■ Can be given via e-delivery
■ May require special consents
■ state law disclosures
■ federal law disclosures
■ states that have included special provision: AK, AL, CO,
CT, GA, MD, MA, NH, NV, NC, NJ, OR, SC, TN, VT,
WV, and WI
■ One must determine whether the underlying law, such as the
applicable insurance code, requires a disclosure to be “in
writing” to determine if the e-process needs to involve this
specific consent step.
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6-Point Risk Framework
39
■ Developed over time from risks identified by clients and
attendees at sessions like this
■ Framework helps distinguish the risk, to match the mitigation
strategy with the right risk
■ Helps multi-disciplinary team communicate
6-Point Framework
40
■ This framework applies equally to:
■ Mortgage notes under ESIGN
■ Promissory notes
■ Documents of title
■ e-chattel
6-Point Framework (cont’d)
41
6-Point Framework (cont’d)
1. Authentication Risk (which includes attributing a signature
to the person signing)
2. Repudiation Risk
3. Admissibility Risk
4. Compliance Risk
5. Adoption Risk
6. Relative Risk
42
Authentication
Risk – “That’s not my signature” on that record
Mitigant – Use “shared secrets” or other ways to affirm identity
43
Repudiation
Risk – “That’s not what I signed”
Mitigant – Tamper seal each document and tamper seal the audit
trail
44
Repudiation (cont’d)
■ Tamper sealing a record creates evidence that the document
was not altered in any way after it was tamper sealed.
■ Having an audit trail creates evidence of each significant step
in the e-process, including:
■ That the person’s identity was verified
■ The IP address of person signing or receiving records
■ Each record that was presented and/or signed, such as
consent to e-delivery and receipt of key disclosures
■ An e-process, unlike traditional paper process, creates the
record of what actually happened, rather than just the “he said,
she said” evidence
45
Admissibility
Risk – “Objection, your honor!”
Mitigant – Determine who is able and willing to testify upfront
(Read Markel)
46
Admissibility (cont’d)
■ Two essential elements of an e-process:
■ Records signed are tamper sealed immediately after signed
by the signing parties, and
■ The audit trail is created and tamper sealed.
■ This evidence (the tamper seal process, the tamper sealed
record(s) and the tamper sealed audit trail) arms a company’s
testifying records custodian to state, under oath, specifically
what happened at each step.
47
Admissibility (cont’d)
■ The records custodian can testify as to:
■ how we know the identity of the person receiving and
signing the records, and
■ that what was signed was not altered after the record was
signed.
■ Other extrinsic evidence will also be available, such as
ongoing payments, failure to object, etc.
■ Consider the credibility of the testifying records custodian.
■ For transferrable records, the custodian will also need to
discuss the process to maintain the “authoritative copy.”
48
Compliance
Risk – “I never saw that disclosure!”
Mitigant – Varies
49
Compliance (cont’d)
■ The audit trail should include a reference to each record
provided during the e-process.
■ For transactions, such as applications for insurance, mortgage,
or bank account, which have statutorily-required disclosures to
be given in writing, the audit trail should include entries for:
■ the consent to e-delivery by the consumer, and
■ the delivery of each such statutorily- required disclosure
■ The audit trail with those entries allows the company to
explain in litigation, settlement conferences and exams by
regulators how the company is sure that it complied with the
statutory disclosure obligations.
50
Adoption
Risk – “Am I done yet?”
Mitigant – Test, adjust, test, repeat
WARNING: Be careful not to overly complicate the process.
51
Relative
Risk – “How does each category of risk for the e-process compare to that in the traditional process?”
Apply the relative risk to each previous point - Authentication - Repudiation - Admissibility - Compliance - Adoption
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Relative (cont’d)
■ An automated e-process can wring out human error risk due to deviating from the approved (compliant and defensible) process.
■ An automated e-process can make the contracting process: ■ Consistently correct; or
■ Consistently wrong if there are defects in the process. ■ The tamper sealing process, the audit trail, automating the
process, and careful review of the process can result in better evidence of what actually happened than relying on testimony of individuals with faded memories.
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Admissibility Rules – More Still!
54
Admissibility of e-Records
■ For companies developing a home grown e-sign process, be
careful not to overlook the admissibility risk.
■ Design your e-sign process, or contract with a vendor who has
designed such a process, to generate admissible records.
■ Identify the custodian who is credible and qualified
55
Role of Custodian
■ Person needs to have knowledge of the process for creating, securing, archiving and retrieving relevant records
■ Person should be able to explain process clearly, simply and credibly
■ If any vendor involved, consider obtaining contractual commitment as to form of affidavit to be signed for “transactional documents”
56
Admissibility - Key Elements
■ Goal is to create admissible/persuasive evidence.
To meet FRE 901(a) authentication requirements
the e-process should:
■ Create audit trail
■ Secure the audit trail and other documents to
render them unalterable without detection
57
Admissibility - Key Elements (cont’d) ■ Goal is to create admissible/persuasive evidence. To meet
FRE 901(a) authentication requirements the e-process
should:
■ A secure retrieval process of the audit trail and final
documents about which custodian can testify
confidently
■ Identify a credible evidence custodian who can testify to
the above
■ The steps described earlier should allow the company to
meet the admissibility standards in the Rules of Evidence.
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What are the courts saying?
59
General Dynamics Line of Cases
■ Kerr v. Dillard (D. Kansas)
■ Verizon Communications v. Pizzirani (Federal Court in PA, 2006)
■ Bell v. Hollywood Entertainment Corp. (Ohio Appeals Court,
2006)
■ Campbell v. General Dynamics (Federal Court of Appeals 1st
Circuit, 2005)
60
General Dynamics Line of Cases
(cont’d) ■ Cases are instructive in designing a process (for employees or
consumers in the new business process).
■ e-Delivery can be effective, regardless of whether the person to be bound actually opens or reads the substantive new terms
■ Critical to the process is masking the significance of the e-Delivered document very clear and requiring an affirmative act to signify acceptance, such as “clicking” I agree
61
General Dynamics Line of Cases
(cont’d) ■ Stankiewicz v. Cisco Systems, 2009 U.S. Dist. LEXIS 91581,
decided September 30, 2009) – “equitable” outcome
■ Reminder that other legal principles still apply
62
Point of Sale Process ■ Labajo v. Best Buy Stores (Federal Court NY, 2007)
■ Process involved selling subscriptions by including not-so-
conspicuous notices on printed receipts, when the consumer used
the electronic signature pad to sign for purchases
■ Case was a class action based on improper charges when plaintiff
did not timely cancel “free” subscription
63
Point of Sale Process (cont’d) ■ The court held the process was flawed because BB did not show the
keypad made clear to the consumer the consequence of signing for
a “free” subscriptions
■ BB compounded by not responding to consumer complaints very
well
■ Case is noteworthy on the process of making the significance of
certain actions very clear and the class action risk
64
Voice Signature ■ Shroyer v. New Cingular Wireless (Federal Appeals Court, 2007)
■ Process involved printed terms and conditions in the box with the phone – to activate the phone, consumer dials a number and electronically accepts the printed terms in the box
■ The court held that the process was just fine
■ The terms in the box can of course be signed in this fashion
65
Voice Signature (cont’d) ■ The court refused to enforce the terms of the contract signed in this
fashion, they were unconscionable
■ Case is instructive because, as we have helped clients do, one can
use an electronic signature (including saying “I agree”) to sign a
document in hard paper
66
Absent Cases ■ The opinions re: the processes used in Time, Bell, Verizon and
Kerr are helpful for the financial services sector broadly
■ We have yet to see the case where the consumer claims he never
signed the application for insurance or the loan (Long in Time may
have come close) – to do so admits no coverage
67
Summary
■ There are a few bad processes
■ The courts are not struggling to recognize electronic signatures can
be enforceable
68
Summary (cont’d)
■ Take-away: Courts continue confirming e-Delivery and e-
Signatures in the employee/consumer settings, as long as it is
made clear to the person the significance of the action
accepting new terms
■ Plan for admissibility, we suspect there will be more disputes
in this area
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What Assurances Should You Get From
Your e-Sign Vendor or Internal IT Shop?
70
Assurances from e-Sign Vendors/IT
■ Avoid surprises – ask now who will be there to testify on critical
points:
■ System creates an Audit Trail
■ Audit Trail is securely archived
■ What is generated and available as evidence
71
■ One credible source reports significantly improved settlement
conferences
■ Audit Trail and each document/record presented, including each
that was signed, are unaltered without detection
■ Who will testify as to the above?
■ Requires specific opt-out mechanisms for customers
■ Consider obtaining, upfront, certification / affidavit from e-sign
solution vendor on key functions and features, e.g., audit trail and
tamper seal.
Assurances from e-Sign Vendors/IT (cont’d)
72
■ In sum, ask for full sample of what would be generated to
prove:
- To a judge, how the company is sure the application
with the misrepresentations is in fact what the
customer signed;
- To a regulator, how you are so sure that each and
every required disclosure was in fact provided to
each person; and
- Prepare Form Affidavit to be signed by your
custodian, include screen shots.
Assurances from e-Sign Vendors/IT (cont’d)
73
The Bottom Line?
■ e-Signatures can be legal
■ Authentication and repudiation risks are manageable,
especially in new business areas
■ Evaluating these risks must be done in context
■ More work flow and process than technology
■ Consider how you’ll prove it
74
For further information/materials please send
your request to [email protected]
Questions? Answers!
Pat Hatfield [email protected]