An Introduction to the Law of Electronic Signatures and Electronic Records in North Carolina (Part 1)

Image by Jomphong via freedigitalphotos.net

Among the hottest topics these days are electronic signatures and electronic records. In this series of articles, we will examine the key aspects of the state and federal laws governing their use in the private sector. This series will focus on the salient legal aspects of:

• Electronic Signatures;

• Electronic Records; and

• Electronic Notarizations.

The Benefits of Electronic Signatures and Records

The ever-growing interest in electronic signatures and electronic records is based on potential benefits that can be compelling in some circumstances. Electronic signatures and records offer the promise of convenience – rapid execution, storage, and recall (including by searchable text) – and accessibility – the ability to access records twenty-four hours per day, seven days per week, three hundred sixty-five days per year. There is also a potentially massive cost savings potential, including lower transaction costs and storage costs.

The Legal Landscape

There are several sources of law that apply to electronic signatures and records in North Carolina. The primary state law applicable to electronic signatures and records in North Carolina is our version of the Uniform Electronic Transactions Act ("UETA") (codified at N.C.G.S. Ch. 66, Article 40). Electronic signatures were first given explicit legal recognition by state statutes, beginning with California, in the 1990s. Soon there became a clear need for uniformity among the emerging state laws. The National Conference of Commissioners of Uniform State Laws, the body responsible for the Uniform Commercial Code, took up the task, creating the Uniform Electronic Transactions Act in in 1999. Forty-seven states, the District of Columbia, Puerto Rico, and the Virgin Islands have now adopted the Uniform Electronic Transactions Act. Three states, Illinois, New York and Washington, have not adopted the UETA, but have statutes pertaining to electronic transactions.


Infographic credit: National Conference of State Legislatures

North Carolina's Electronic Commerce in Government Act (N.C.G.S. Ch. 66, Article 11A) applies when a governmental entity is involved. The ECGA allows for use of UETA standards, but also provides for an alternative employing more secure procedures, which involve a “certification authority“—a person authorized by the Secretary of State to vouch for the relationship between a signatory and a public agency. This is a more complex method of electronic contracting.

The UETA acknowledges that an electronically-notarized signature or record is valid. It does not address how an electronic notarization works. For that, we look to North Carolina's Electronic Notary Public Act (N.C.G.S. Ch.10. Article 2). An electronic notarization is an official act (acknowledgement, verification, etc.) performed by an electronic notary public using their electronic seal and electronic signature on electronic documents. Before performing notarial acts electronically, a notary must register with the Secretary of State. (See N.C.G.S. 10B-106). Registration requires a three hour training course, an examination, and $50 fee. An electronic notarization requires the signer be in the notary’s presence, and telephones, computers, videoconferences, etc. do not qualify, so the advantage over manual signature and notarization is minimal in most circumstances. The anecdotal evidence I have seen indicates that the adoption and use of electronic notarization is minimal at this time.

Congress noted the trend of states adopting the UETA and decided that a federal statute was needed to provide for uniformity and to clearly govern this area in the context of interstate commerce, so it enacted the Electronic Signatures in Global and National Commerce Act (better known as the "E-SIGN Act") in mid-2000. Fortunately for us, the E-SIGN Act and the UETA are very similar, and employ much of the same terminology.

The existence of both state and federal laws covering the same issues raises the question whether the UETA or E-SIGN Act applies in any given instance. The answer is more complicated that perhaps we would wish. Because Congress took action on the E-SIGN Act after states had begun adopting the UETA, it included a conditional reverse preemption provision, which effectively says that if a state adopts the UETA and includes provision more protective of consumer than the E-SIGN Act, the UETA controls; otherwise, the E-SIGN Act controls. Therefore, my recommendation usually is to comply with the more strict of the two in any given instances.

Key Terminology

Understanding the terminology is critical to applying the E-SIGN Act and UETA. Under both acts, the term "electronic signature" means “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 term is deliberately made as broad as possible, but the key, just as under the common law of signatures, is an act plus intent. Some common examples help illustrate the breadth of the term:

• Manual signature scanned to an image (e.g. to PDF);
• A name typed into an email message (but not always in NC);
• The click of an “Accept” button;
• a voicemail message (for non-consumers, and even then only if the intent to be bound is clearly shown); and
• a “digital signature” (using algorithms, public keys, and private keys).

The reference to digital signatures raises the oft-repeated question whether digital signatures and electronic signatures are the same. A digital signature is a kind of electronic signature in which technology (encryption and keys) is used to verify the party. Not all electronic signatures are digital signatures in the same way that not all pens are fountain pens.

Another key term is "electronic record", which means "a contract or other record created, generated, sent, communicated, received, or stored by electronic means." Essentially the same definition is used under federal and state law. Again, the term is defined as broadly as possible. Common examples will illustrate the breadth of the term:

• Scanned images of physical (paper) documents
• Electronically-generated documents (e.g., MS Word .doc files)
• Electronic records of actions (e.g., file log, history)
Fundamental Principles
 
The fundamental principles undergirding the E-SIGN Act and the UETA are fairly straightforward, and can be summarized in two very succinct statements:

• A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.

• If a law requires a record to be "in writing", an electronic record satisfies the law provided it complies with the E-SIGN Act or UETA and the other requirements of the applicable law.

Two additional key principles help explain some provisions of the E-SIGN Act and UETA for us. The first is technological neutrality. No format is given preferential treatment by the laws. However, if a format is proprietary, it must be accessible to all who are entitled to access the electronic record. Some formats are better-established, and therefore more "accessible" than others (e.g., Adobe's PDF). The second key principle is flexibility. By avoiding a preference for any particular technology, the UETA and E-SIGN Act facilitate technological innovation and limit the need for updates to the respective laws.


[In Part 2 of this series, we will look at the specific requirements of the state and federal laws.]