E-Signatures and Electronic Contracts: Complying With ESIGN and the UETA, Interplay With the UCC

Transcription

1 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 WEDNESDAY, FEBRUARY 15, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Kenneth Chase, Founder, Chase Law, Washington, D.C. Patrick J. Hatfield, Partner, Locke Lord, Austin, Texas The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 20 YEAR REVIEW OF CASE LAW ELECTRONIC SIGNATURES 5

6 Evolution of Case Law Underpinnings of signature requirement 6

7 Evolution of Case Law A Statute for the Prevention of Frauds and Perjuries 7

8 Evolution of Case Law Technology drives shift to electronic signatures 8

9 Evolution of Case Law Technology drives shift to electronic signatures 9

10 Evolution of Case Law Enforceability of s 10

11 Evolution of Case Law Alternative authentication methods 11

12 NEW YORK General Obligations Law 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

13 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

14 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

15 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 is a signed writing under the statute of frauds 15

16 NEW YORK Naldi v. Grunberg, 908 N.Y.S.2d 639 (1 st 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 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, 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 , 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

17 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. 17

18 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 , 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[.] , 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. 18

19 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. 19

20 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

21 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

22 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

23 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 23

24 ESIGN (2000) Electronic Signatures in Global and National Commerce Act (ESIGN) Federal version of UETA 24

25 SUMMARY Electronic signatures, s 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

26 ADDITIONAL QUESTIONS / INFORMATION Litigation Counsel: Kenneth Chase Chase Law, LLC 2001 L Street NW, Suite 500 Washington, DC (202) kchase@chaselaw.com 26

27 E-Signatures and Electronic Contracts: Complying With ESIGN and the UETA, Interplay With the UCC Presented to Strafford February 15, Pat Hatfield Atlanta Austin Boston Chicago Dallas Hartford Hong Kong Houston Istanbul London Los Angeles Miami Morristown New Orleans New York Orange County Providence Sacramento San Francisco Stamford Tokyo Washington DC West Palm Beach 2015 Locke Lord LLP

28 Agenda Opening remarks Overview of laws 6-Point Risk Framework Admissibility Rules What are the courts saying? More Q &A 28

29 Supplemental Materials Please 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 phatfield@lockelord.com 29

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. 30

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? 31

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 32

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 33

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.) 34

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. 35

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. 36

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. 37

38 6-Point Risk Framework Atlanta Austin Boston Chicago Dallas Hartford Hong Kong Houston Istanbul London Los Angeles Miami Morristown New Orleans New York Orange County Providence Sacramento San Francisco Stamford Tokyo Washington DC West Palm Beach 2015 Locke Lord LLP

39 6-Point Framework 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 39

40 6-Point Framework (cont d) This framework applies equally to: Mortgage notes under ESIGN Promissory notes Documents of title e-chattel 40

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 41

42 Authentication Risk That s not my signature on that record Mitigant Use shared secrets or other ways to affirm identity 42

43 Repudiation Risk That s not what I signed Mitigant Tamper seal each document and tamper seal the audit trail 43

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 44

45 Admissibility Risk Objection, your honor! Mitigant Determine who is able and willing to testify upfront (Read Markel) 45

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. 46

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. 47

48 Compliance Risk I never saw that disclosure! Mitigant Varies 48

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. 49

50 Adoption Risk Am I done yet? Mitigant Test, adjust, test, repeat WARNING: Be careful not to overly complicate the process. 50

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 51

52 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. 52

53 Admissibility Rules More Still! Atlanta Austin Boston Chicago Dallas Hartford Hong Kong Houston Istanbul London Los Angeles Miami Morristown New Orleans New York Orange County Providence Sacramento San Francisco Stamford Tokyo Washington DC West Palm Beach 2015 Locke Lord LLP

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 54

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 55

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 56

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. 57

58 What are the courts saying? Atlanta Austin Boston Chicago Dallas Hartford Hong Kong Houston Istanbul London Los Angeles Miami Morristown New Orleans New York Orange County Providence Sacramento San Francisco Stamford Tokyo Washington DC West Palm Beach 2015 Locke Lord LLP

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 1 st Circuit, 2005) 59

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 60

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 61

62 Point of Sale Process Labajo v. Best Buy Stores (Federal Court NY, 2007) Process involved selling subscriptions by including not-soconspicuous 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 62

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 63

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 64

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 65

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 66

67 There are a few bad processes Summary The courts are not struggling to recognize electronic signatures can be enforceable 67

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 68

69 What Assurances Should You Get From Your e-sign Vendor or Internal IT Shop? Atlanta Austin Boston Chicago Dallas Hartford Hong Kong Houston Istanbul London Los Angeles Miami Morristown New Orleans New York Orange County Providence Sacramento San Francisco Stamford Tokyo Washington DC West Palm Beach 2015 Locke Lord LLP

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 70

71 Assurances from e-sign Vendors/IT (cont d) 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. 71

72 Assurances from e-sign Vendors/IT (cont d) 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. 72

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 73

74 Questions? Answers! Pat Hatfield For further information/materials please send your request to 74