Viable e-Signature Options

While the Internet continues to replace traditional forms of commerce communication and to help expand e-commerce, the use of contracts to memorialize business agreements remains constant.

To move toward full implementation of Internet commerce communications, businesses are struggling to find an appropriate replacement for traditional authentication procedures.

In short, businesses seek lawful electronic signatures to replace traditional signatures.

This search has resulted in six viable e-signature options.

A Bit Of Background

State and federal law generally require that parties which significant commercial agreements seek to bind sign them for the agreements to be enforceable. For example, the Statute of Frauds provision 2-201 of the Uniform Commercial Code (U.C.C.) requires some writing to be “signed by the party against whom enforcement is sought.” But using the Internet as a communication medium for commercial transactions makes determining the identity of the party to be bound more difficult. Typically, traditional agreements are authenticated with a written signature, but Internet communications are not easily susceptible to transactional authentication.

Just as many versions of the traditional signature exist, so do many versions of the electronic signature. e-Signatures have been composed of a wide variety of letters, characters or symbols sent electronically with the intent of authenticating a particular writing. e-Signatures have been composed of data sent electronically or attached to ' or logically associated with ' an electronic message meant to serve as an authentication method.

Like traditional signatures, electronic signatures can appear in many forms. An e-signature may be a:

• Name typed at the end of an e-mail message;
• Digitized fingerprint;
• Digitized image of a handwritten signature attached to an electronic message;
• Retinal scan;
• Personal identification number; or
• Three-party encryption system called a “digital signature.”

e-Signatures have two elements in common: The signature user executes the e-signature with the intent of that person to sign a record, and the e-signature is logically associated with the record.

e-Signature Law, And Its Impact On e-Commerce

Generally, a signature may not be denied legal effect, validity or enforceability solely because it is in electronic form; and 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. See 15 U.S.C.A. ”7001-7006. Nevertheless, traditional and e-commerce businesses are struggling to find appropriate and binding electronic signatures.

e-Commerce, of course, depends on electronic contracts. Such contracts, in turn, require electronic authentication that must comply with prescribed statutes to make the consequences of using electronic authentication systems the same as those of traditional writings. That means that the objective of any electronic authentication system is to ensure that electronic signatures are accorded appropriate legal recognition. Virtually every jurisdiction has laws that require certain types of documents to be “signed” or “in writing,” or many other formulations that could be construed to require a physical document or a hand-written signature.

Three separate bodies of law should be considered when applying signatures to electronic contracts:

• The Electronic Signatures in Global and National Commerce Act (E-Sign);
• The Uniform Commercial Code (U.C.C.); and
• The common law.

E-Sign (15 U.S.C. ”7001-7006) was enacted to encourage the use of electronic signatures in interstate commerce. As noted above, E-Sign states that electronic signatures cannot be denied effect solely because they are in electronic form. E-Sign applies only to transactional signatures. According to E-Sign, a transaction is “an action or set of actions relating to the conduct of business, consumer, or commercial affairs between two or more persons.” However, there are specific exceptions. E-Sign, for instance, would apply to summer camp contracts between the parents of a summer camper and camp officials, but not to the execution of a will. Under E-Sign, electronic signature is defined as “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.”

The U.C.C. made commercial-transaction laws standard, and U.C.C. Article 2 governs the sale of goods. The U.C.C. also provides substantive contract-law rules.

Because electronic transactions were not considered when Article 2 was enacted, a proposed revision of Article 2 aims to enable such transactions that might otherwise be unenforceable under the article's current language. Unlike the current U.C.C, the proposed revision recognizes electronic contracts, records and signatures. It also states that a “record or signature may not be denied legal effect or enforceability solely because it is in electronic form” and that a “contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.”

State common law applies if a court believes that the U.C.C. doesn't apply. The common law also applies if gaps in the U.C.C. must be supplemented. Because common law varies widely among the states, it provides the least-predictable source of contract law.

It is important to note that U.S. laws dealing with electronic signatures do not state that e-signatures are automatically effective. These laws merely state that electronic signatures should not be treated differently than how written signatures would be treated.

Choice Of e-Signature Laws

Internet commercial transactions often involve more than one jurisdiction. Because jurisdictions might not adhere to a common set of e-signature requirements, conflict-of-laws rules should be considered. The most important conflict-of-laws rules regarding contracts are found in:

• The Uniform Computer Information Transactions Act (UCITA);
• The U.C.C.;
• The Restatement (Second) of Conflict of Laws (1971);
• The Restatement (First) of Conflict of Laws (1934); and
• The common law.

Commercial transactions may also involve more than one country, so take note that all these sources of law are applicable to interstate and international cases.

UCITA provides a straightforward rule. In the absence of a choice-of-law agreement, UCITA section 109(b)(1) states that an Internet transaction for the electronic transfer of information is governed by the law where the licensor is situated. UCITA section 109(c) does, however, provide an exception if the jurisdiction whose law governs is outside the United States. In that case, the foreign law governs only if it allows similar protection and rights afforded under UCITA; otherwise, the regulations of the state that has the most significant relationship to the transaction govern.

And because foreign law can only govern if the licensor is situated outside the United States, this clause inherently protects U.S. customers and licensees; in all other cases, UCITA espouses the rule of the Restatement (Second) of Conflict of Laws.

In the absence of effective choice by the parties, U.C.C. section 105(1) describes how to determine the germane law. This section directs the forum to employ its own law if the transaction bears “an appropriate relation to this state.” In the same situation, section 188(1) of the Restatement (Second) of Conflict of Laws requires that “[t]he rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties.” About half the states have statutes that codify the Restatement (Second) rules.

Normally, laws concerning signatures of the seller's jurisdiction are applied to Internet commercial transactions because it is the seller who normally makes the commercial-transaction contract using his or her jurisdictional law. Also, usually the jurisdiction in which the seller is to be found has the most significant relationship to the transaction. And likewise, due to the seller's performance requirements, an international electronic transaction normally bears an appropriate relation to the seller's state. Therefore, generally under UCITA, the U.C.C. and the Restatement (Second) of Conflict of Laws, in international e-transactions, the law of the country where the seller is located applies.

The circumstances become significantly more convoluted when the Restatement (First) of Conflict of Laws pertains. The Restatement (First) distinguishes between contract-validity and contract-performance issues. If the validity of a contract is in dispute, the law applies where the contract was made. Normally this means that the buyer's national law controls a dispute that refers to the validity of an electronic-transaction contract. If a contract performance is in dispute, then the law of the country where the performance occurs rules. It's likely that in the case of an e-contract, the choice would focus on where the buyer receives the information to form the contract.

Six Viable e-Signature Options

The first viable e-signature option is the hybrid. A hybrid e-signature combines traditional authentication with Internet communication. In particular, the seller mails or faxes a form to the buyer, either before or after completing an Internet commerce transaction, that authorizes the use of the Internet to conduct business or confirms that the business conducted via the Internet is enforceable. The party to whom the electronic contract will be enforced authenticates the transaction with a traditional signature.

The second viable e-signature option is the biotechnology option. This e-signature consists of attaching a digital image of a fingerprint or retinal scan to an Internet communication.

The third viable e-signature possibility is the restricted information option. This e-signature includes information generally restricted to the party to be bound in the content of the Internet commerce transaction. Such information might be credit-card data or a password that the parties had previously agreed to use for transaction authentication.

The fourth viable e-signature option is the third-party. A third-party e-signature consists of using public key/private key encryption technology to prepare the Internet offer and the Internet acceptance of a commercial transaction. Public key/private key technology consists of three parts:

• A public key that recipients of a digitally signed document can access;
• A private key that the document signer uses to encrypt the signature; and
• A digital certificate an intermediate third-party issues that contains the public key, and simultaneously decodes and authenticates the digital signature.

With this option, a seller prepares a contract and sends the buyer an encrypted and unencrypted copy. After the buyer receives the Internet agreement, he or she gets the decryption key from a trusted third party who decrypts the coded contract and compares it to the coded agreement. If the two match, then the agreement is considered e-signed. To accept the agreement, the buyer prepares an acceptance reply, and sends the seller an encrypted and unencrypted copy. After the seller receives the Internet acceptance, he or she gets the decryption key from a trusted third party, who again decrypts the coded contract and compares it to the coded acceptance. If the two match, then the acceptance is considered e-signed.

The fifth viable e-signature option is the per se option. This signature consists of a typed representation of a name. In practice, Internet technology allows easy message tracing that permits the authenticity of the message source and content, and can provide evidence that the person who signed has authenticated the message. It should be noted that Internet-tracing technology may allow attribution of e-documents without a signature, such as e-mails or instant messages, to a particular person.

In fact, state and federal law generally allow almost anything to qualify as a signature. A signature for U.C.C. purposes includes “any symbol made with an intent to authenticate,” according to U.C.C. 1-201(39). U.S. courts have found that a wide variety of marks qualify as authentications. Consider Hillstrom v. Gosnay, 614 P.2d 466 (Mont. 1989), where the court relaxed the signature requirement considerably to accommodate various forms of electronic communication.

The sixth viable e-signature option is known as the combination option, in which two or more of the aforementioned e-signature options are combined.

While the Internet continues to replace traditional forms of commerce communication and to help expand e-commerce, the use of contracts to memorialize business agreements remains constant.

To move toward full implementation of Internet commerce communications, businesses are struggling to find an appropriate replacement for traditional authentication procedures.

In short, businesses seek lawful electronic signatures to replace traditional signatures.

This search has resulted in six viable e-signature options.

A Bit Of Background

State and federal law generally require that parties which significant commercial agreements seek to bind sign them for the agreements to be enforceable. For example, the Statute of Frauds provision 2-201 of the Uniform Commercial Code (U.C.C.) requires some writing to be “signed by the party against whom enforcement is sought.” But using the Internet as a communication medium for commercial transactions makes determining the identity of the party to be bound more difficult. Typically, traditional agreements are authenticated with a written signature, but Internet communications are not easily susceptible to transactional authentication.

Just as many versions of the traditional signature exist, so do many versions of the electronic signature. e-Signatures have been composed of a wide variety of letters, characters or symbols sent electronically with the intent of authenticating a particular writing. e-Signatures have been composed of data sent electronically or attached to ' or logically associated with ' an electronic message meant to serve as an authentication method.

Like traditional signatures, electronic signatures can appear in many forms. An e-signature may be a:

• Name typed at the end of an e-mail message;
• Digitized fingerprint;
• Digitized image of a handwritten signature attached to an electronic message;
• Retinal scan;
• Personal identification number; or
• Three-party encryption system called a “digital signature.”

e-Signatures have two elements in common: The signature user executes the e-signature with the intent of that person to sign a record, and the e-signature is logically associated with the record.

e-Signature Law, And Its Impact On e-Commerce

Generally, a signature may not be denied legal effect, validity or enforceability solely because it is in electronic form; and 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. See 15 U.S.C.A. ”7001-7006. Nevertheless, traditional and e-commerce businesses are struggling to find appropriate and binding electronic signatures.

e-Commerce, of course, depends on electronic contracts. Such contracts, in turn, require electronic authentication that must comply with prescribed statutes to make the consequences of using electronic authentication systems the same as those of traditional writings. That means that the objective of any electronic authentication system is to ensure that electronic signatures are accorded appropriate legal recognition. Virtually every jurisdiction has laws that require certain types of documents to be “signed” or “in writing,” or many other formulations that could be construed to require a physical document or a hand-written signature.

Three separate bodies of law should be considered when applying signatures to electronic contracts:

• The Electronic Signatures in Global and National Commerce Act (E-Sign);
• The Uniform Commercial Code (U.C.C.); and
• The common law.

E-Sign (15 U.S.C. ”7001-7006) was enacted to encourage the use of electronic signatures in interstate commerce. As noted above, E-Sign states that electronic signatures cannot be denied effect solely because they are in electronic form. E-Sign applies only to transactional signatures. According to E-Sign, a transaction is “an action or set of actions relating to the conduct of business, consumer, or commercial affairs between two or more persons.” However, there are specific exceptions. E-Sign, for instance, would apply to summer camp contracts between the parents of a summer camper and camp officials, but not to the execution of a will. Under E-Sign, electronic signature is defined as “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.”

The U.C.C. made commercial-transaction laws standard, and U.C.C. Article 2 governs the sale of goods. The U.C.C. also provides substantive contract-law rules.

Because electronic transactions were not considered when Article 2 was enacted, a proposed revision of Article 2 aims to enable such transactions that might otherwise be unenforceable under the article's current language. Unlike the current U.C.C, the proposed revision recognizes electronic contracts, records and signatures. It also states that a “record or signature may not be denied legal effect or enforceability solely because it is in electronic form” and that a “contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.”

State common law applies if a court believes that the U.C.C. doesn't apply. The common law also applies if gaps in the U.C.C. must be supplemented. Because common law varies widely among the states, it provides the least-predictable source of contract law.

It is important to note that U.S. laws dealing with electronic signatures do not state that e-signatures are automatically effective. These laws merely state that electronic signatures should not be treated differently than how written signatures would be treated.

Choice Of e-Signature Laws

Internet commercial transactions often involve more than one jurisdiction. Because jurisdictions might not adhere to a common set of e-signature requirements, conflict-of-laws rules should be considered. The most important conflict-of-laws rules regarding contracts are found in:

• The Uniform Computer Information Transactions Act (UCITA);
• The U.C.C.;
• The Restatement (Second) of Conflict of Laws (1971);
• The Restatement (First) of Conflict of Laws (1934); and
• The common law.

Commercial transactions may also involve more than one country, so take note that all these sources of law are applicable to interstate and international cases.

UCITA provides a straightforward rule. In the absence of a choice-of-law agreement, UCITA section 109(b)(1) states that an Internet transaction for the electronic transfer of information is governed by the law where the licensor is situated. UCITA section 109(c) does, however, provide an exception if the jurisdiction whose law governs is outside the United States. In that case, the foreign law governs only if it allows similar protection and rights afforded under UCITA; otherwise, the regulations of the state that has the most significant relationship to the transaction govern.

And because foreign law can only govern if the licensor is situated outside the United States, this clause inherently protects U.S. customers and licensees; in all other cases, UCITA espouses the rule of the Restatement (Second) of Conflict of Laws.

In the absence of effective choice by the parties, U.C.C. section 105(1) describes how to determine the germane law. This section directs the forum to employ its own law if the transaction bears “an appropriate relation to this state.” In the same situation, section 188(1) of the Restatement (Second) of Conflict of Laws requires that “[t]he rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties.” About half the states have statutes that codify the Restatement (Second) rules.

Normally, laws concerning signatures of the seller's jurisdiction are applied to Internet commercial transactions because it is the seller who normally makes the commercial-transaction contract using his or her jurisdictional law. Also, usually the jurisdiction in which the seller is to be found has the most significant relationship to the transaction. And likewise, due to the seller's performance requirements, an international electronic transaction normally bears an appropriate relation to the seller's state. Therefore, generally under UCITA, the U.C.C. and the Restatement (Second) of Conflict of Laws, in international e-transactions, the law of the country where the seller is located applies.

The circumstances become significantly more convoluted when the Restatement (First) of Conflict of Laws pertains. The Restatement (First) distinguishes between contract-validity and contract-performance issues. If the validity of a contract is in dispute, the law applies where the contract was made. Normally this means that the buyer's national law controls a dispute that refers to the validity of an electronic-transaction contract. If a contract performance is in dispute, then the law of the country where the performance occurs rules. It's likely that in the case of an e-contract, the choice would focus on where the buyer receives the information to form the contract.

Six Viable e-Signature Options

The first viable e-signature option is the hybrid. A hybrid e-signature combines traditional authentication with Internet communication. In particular, the seller mails or faxes a form to the buyer, either before or after completing an Internet commerce transaction, that authorizes the use of the Internet to conduct business or confirms that the business conducted via the Internet is enforceable. The party to whom the electronic contract will be enforced authenticates the transaction with a traditional signature.

The second viable e-signature option is the biotechnology option. This e-signature consists of attaching a digital image of a fingerprint or retinal scan to an Internet communication.

The third viable e-signature possibility is the restricted information option. This e-signature includes information generally restricted to the party to be bound in the content of the Internet commerce transaction. Such information might be credit-card data or a password that the parties had previously agreed to use for transaction authentication.

The fourth viable e-signature option is the third-party. A third-party e-signature consists of using public key/private key encryption technology to prepare the Internet offer and the Internet acceptance of a commercial transaction. Public key/private key technology consists of three parts:

• A public key that recipients of a digitally signed document can access;
• A private key that the document signer uses to encrypt the signature; and
• A digital certificate an intermediate third-party issues that contains the public key, and simultaneously decodes and authenticates the digital signature.

With this option, a seller prepares a contract and sends the buyer an encrypted and unencrypted copy. After the buyer receives the Internet agreement, he or she gets the decryption key from a trusted third party who decrypts the coded contract and compares it to the coded agreement. If the two match, then the agreement is considered e-signed. To accept the agreement, the buyer prepares an acceptance reply, and sends the seller an encrypted and unencrypted copy. After the seller receives the Internet acceptance, he or she gets the decryption key from a trusted third party, who again decrypts the coded contract and compares it to the coded acceptance. If the two match, then the acceptance is considered e-signed.

The fifth viable e-signature option is the per se option. This signature consists of a typed representation of a name. In practice, Internet technology allows easy message tracing that permits the authenticity of the message source and content, and can provide evidence that the person who signed has authenticated the message. It should be noted that Internet-tracing technology may allow attribution of e-documents without a signature, such as e-mails or instant messages, to a particular person.

In fact, state and federal law generally allow almost anything to qualify as a signature. A signature for U.C.C. purposes includes “any symbol made with an intent to authenticate,” according to U.C.C. 1-201(39). U.S. courts have found that a wide variety of marks qualify as authentications. Consider Hillstrom v. Gosnay , 614 P.2d 466 (Mont. 1989), where the court relaxed the signature requirement considerably to accommodate various forms of electronic communication.

The sixth viable e-signature option is known as the combination option, in which two or more of the aforementioned e-signature options are combined.