From Pen To Paperless

For years we have heard that in the future, life would be paperless. But today, many businesses seem stuffed to overflowing with a myriad of service contracts, equipment leases, invoices and other documents that occupy rows of file cabinets. Our homes may seem equally overrun with papers deemed too important to throw out.

A new federal law, called the Electronic Signatures Act (ESA), may finally change all that. The law validates the use of electronic signatures, known as e-signatures, in place of handwritten signatures on paper. Documents in electronic form, containing a valid e-signature, will have legal effect just as if they are written and signed in ink.

What is an e-signature?

The new law defines an electronic signature to include electronic sounds, symbols or processes. However, the act does not mandate what form the electronic signature must take, and a wide variety of "signing" methods may predominate at first.

Any person would be free to adopt an e-signature consisting of an image of his or her physical signature, which would be inserted in the document to be signed. The brokerage firm Charles Schwab, for example, has announced plans to use a digital signing pad connected to desktop computers. A customer would sign the pad just as if he or she would if writing an ink signature, and the pad will record not only the signature image but also the speed and curvature of the signature.

There are documents to which the ESA will not apply, at least initially. Wills, trusts, court orders, cancellations of health and life insurance are among the documents excluded. These and other exclusions will be reviewed over the next three years in order to determine whether the exclusion remains appropriate. In addition, the law provides some welcome relief for those of you unwilling to adopt this new technology immediately. Anyone may refuse to engage in a transaction based only on an e-signature, and may insist on a handwritten signature.

The ESA seeks to ensure that where consumers are supposed to be provided with certain disclosures in a transaction, they will not be placed at a disadvantage just because the transaction is electronic. For that reason, the consumer must consent to the transaction that is taking place in electronic form. Further safeguards are designed to ensure that consumers have adequate access to the disclosures.

As a result of the use of electronic signatures, paper that used to take up lots of expensive space will be stored in electronic form. Consumer transactions will be transformed as well: mutual funds and insurance can be purchased and bank accounts opened, with the click of a mouse. Previously, these purchases could be started online, but the deal wasn't done until papers were signed and changed hands in the mail.

Technology in this area is so new that there are still a number of kinks to be worked out. In a world of electronic documents, signature notarizations will still be necessary. Although the law provides that notarization is sufficient when it is "logically associated" with the e-signature, there are ease-of-use problems to overcome in appending electronic documents and signatures.

Protecting your identity

Of particular significance are the potential problems of signature authenticity and identity theft. Everyone familiar with a computer knows how easily an electronic file can be copied, but the law provides no procedure for ensuring the authenticity of an e-signature in transactions between parties. In this absence, the parties to significant transactions will need to address this issue contractually. Over time, an accepted standard or practice may evolve.

Identity theft is already a serious problem in todays credit card economy, and it promises to get worse. If a thief e-signs your name to an account withdrawal, how will you prove that the withdrawal was not your doing and get your money back? The new law does not address issues such as this.

Despite these problems, the convenience and cost savings inherent in the use of e-signatures should quickly push the market (and the law) to find solutions. In the meantime, don't throw out that fountain pen!

-Gavin M. Ganzkow serves as Corporate Counsel for IAS, is a graduate of the University of Pennsylvania Law School, and has more than 10 years of experience in commercial law.

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2006 International Administrative Services, Inc.