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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

7

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

11

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.”

17

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.

18

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

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

23

ESIGN (2000)

• Electronic Signatures in Global and National Commerce Act (ESIGN)

– Federal version of UETA

24

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

kchase@chaselaw.com

26

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New York | Orange County | Providence | Sacramento | San Francisco | Stamford | Tokyo | Washington DC | West Palm Beach

© 2015 Locke Lord LLP

E-Signatures and Electronic Contracts:

Complying With ESIGN and the UETA,

Interplay With the UCC

Pat Hatfield

phatfield@lockelord.com

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 phatfield@lockelord.com

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

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.

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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 phatfield@lockelord.com

Questions? Answers!

Pat Hatfield phatfield@lockelord.com