In the January 2001 issue of EDT, I wrote about the Electronic Signatures in Global and National Commerce Act (“E-Sign”), which had just taken effect in October 2000. At that point, the legal contours had been shaped, but not developed, and a lot of questions remained for the courts or for the state legislatures to consider. Since that time, almost all 50 states have adopted the Uniform Electronic Transactions Act (the “UTEA”), which is a uniform statute governing electronic signatures and which has many parallels to E-Sign. Between the two statutes, the contours of electronic signatures and the validity of electronic contracts has developed to the point where solid guidance is available for businesses considering how to handle these issues.
The following are the main points of both E-Sign and the UTEA:
- They define and validate “electronic signatures” as an electronic symbol or process attached to or logically associated with an electronic record and executed or adopted by a person with an intent to sign the record.
- They remove the writing and signature requirements that create barriers to electronic transactions: each statute provides a means to effectuate electronic transactions when they are used and limit only a few types of transactions to the age-old requirement of a signed writing (e.g., deeds, negotiable instruments, wills, etc.)
- They ensure that contracts and transactions are not denied enforcement because electronic media are used: signatures, contracts and other electronic records cannot be denied legal effect, validity and/or enforceability solely on the grounds that they are in electronic form.
- They ensure that courts accept electronic records into evidence.
- They avoid the selection of the medium of the transaction (paper v. electronic) governing the outcome of disputes: no party is required to agree to use or accept electronic records or signatures and can employ additional safeguards on how and when they will use or accept electronic records or signatures.
Recent E-Mail Cases Put Flesh on the Bones of E-Sign and UTEA
In a 2006 Arkansas case, the court let the jury decide the issue of whether a series of e-mails, involving the sale of a parcel of land (traditionally required to be in writing by the statute of frauds), could constitute a valid, signed contract, so long as the jury found that the parties’ intent was to electronically sign the underlying series of e-mails between the parties. A 2006 Virginia case supports the Arkansas view, finding that a series of e-mail exchanges can constitute the formation of a valid contract, but only if the parties intend the e-mails to do so. In a 2005 Missouri case, presented with the issue of whether a series of exchanged e-mails constituted a valid, binding contract, the court held that each e-mail constituted a valid e-mail electronic signature because the sender’s name appeared at the top and the sender manifested a then-present intent to authenticate and adopt the contents of the e-mail. Thus, at least under the Missouri UTEA, the court looked not at the intent of the e-mail senders, as did the Arkansas and Virginia courts, but rather at the authenticity of the e-mails. This, however, seems to be a minority position in the law.
In a 2002 federal appellate case involving the maker Hasbro, whose standard form purchase order stated that orders could not be modified without Hasbro’s express written consent, a Hasbro purchasing employee later exchanged e-mails with the subcontractor involved in the transaction, changing the quantities involved. While not directly addressing E-Sign, the court, faced with an expression of intent contrary to the UTEA and the e-mails, found that under E-Sign, the e-mails constituted valid writings that modified the purchase order. Thus, even though the UTEA and E-Sign suggest a party can employ additional safeguards on how and when they will use or accept electronic records or signatures, those did not alter the fact that the e-mail string in question clearly altered the terms of the written Hasbro purchase order.
Click the Box and Electronic Arbitration Provisions
Putting aside the pros and cons of the use of arbitration provisions (as discussed in my May/June 2007 article entitled “Forget Arbitration – Go For A Jury Waiver”), another series of E-Sign and UTEA cases deal with whether arbitration provisions become enforceable when handled electronically. For example, in a 2005 federal appellate case involving General Dynamics, the company changed its at-will employment policy to require that all employee claims under the Americans with Disabilities Act be subject to binding arbitration. General Dynamics communicated this policy to employees via e-mail and conditioned continued employment on the implicit acceptance of the arbitration provision. When challenged, the court found that the e-mail arbitration provision could constitute a binding contract under E-Sign and the Federal Arbitration Act (which requires arbitration provisions to be in writing) depending on the facts and circumstances, but was not so in that case, including because (i) contractual changes to the employment relationship had not, in the past, been communicated by e-mail (thus showing an absence of practice between employees and the company), (ii) the e-mail did not clearly state that the new policy contained an arbitration provision (thus there was no “consumer” type warning), and (iii) the e-mail did not require any response (suggesting that employees could not accept or reject the provision).
In a 2002 federal appellate case involving Netscape, the court found that a software license provided in downloadable electronic form satisfied the written agreement provisions of the Federal Arbitration Act, but questioned whether “clicking” the download box on the computer screen was an electronic signature under E-Sign. Because the download button was not labeled in such a way to indicate the clicking on the license agreement bound the party to arbitration of disputes (particularly because the arbitration provision was located elsewhere on the web-site), the situation did not show proper intent and did not therefore create a valid signature under E-Sign. Similarly, in a 2006 Minnesota federal district court case involving the Amateur Athletic Union of the U.S., the applicant clicked on a box that stated that the applicant agreed to be bound to the terms of the organization’s Codebook, including its binding arbitration provision. The court found that a valid contract had been entered into (including as to the Codebook’s arbitration provision), despite the fact that the applicant’s agent (the applicant’s father) had affixed the signature by clicking on the box.
Lessons Learned Now That UTEA and E-Sign Have Been Tested In Courts
Several considerations come into play for businesses, like distributors, engaged in electronic transactions under the UTEA and E-Sign:
Most courts require the party allegedly signing a document electronically to have the intended to place an electronic signature on the document (e.g., to enter into or modify a contract or agree to a license agreement or other set of rules). Putting aside the specific degree of intent which any court reviewing the transaction may apply, businesses should consider adding a general disclaimer to the e-mail signature block of those employees, agents, or others who are likely to engage in communications involving contracts. While the language of the disclaimer may vary, depending on the business, the point of the disclaimer would be to remove the intent element from an otherwise unintended or unapproved electronic transmission that becomes an electronic signature under E-Sign or the UTEA.
To avoid the unintended consequences of electronic signatures and contracts under E-Sign and UTEA, parties can expressly decline to utilize electronic signatures or records, and affirmatively specify that any modification of a document (like a purchase order) must be made explicitly and cannot be inferred from circumstances, unless approved in a specific manner which expressly and affirmatively approves the modification. Again, an appropriate disclaimer, much like those concerning tax advice under Circular 230, and confidentiality provisions in standard e-mails, can become essential in limiting exposure for unintended electronic signatures and contracts.
To bind employees, members and mass users of products or software, or those who might register to do business using a secure internet portal, it is prudent to review the content and mechanics of the electronic documents involved, to make sure that documents that alter fundamental legal rights (like arbitration provisions) are clearly spelled out and conspicuous, that there is an appropriate acceptance mechanism clearly and directly connected to and part of the acceptance mechanism, and that if e-mail or a download or other electronic transaction is a new way of doing business between the parties, that it is clearly delineated so that no claim of doing business in a different manner can be made or can question the manner employed.
For those interested in this or related topics, please contact Fred Mendelsohn at email@example.com or 312/840-7004.