John M. McCabe
Legislative Director / Legal Counsel
jmmccabe@nccusl.org

Memo to: Interested Parties

Subject: The Electronic Commerce Bills, H.R. 1714 and S. 761, As Enacted in Their Respective Houses

Date: January 25, 2000

Both Houses in the 106th Congress, after much convoluted consideration, adopted electronic commerce bills as the Fall 1999 session terminated. As is typical in Congress in this era, the development of these bills took place in numerous closed meetings in both the House and Senate. Favored interests had access to these proceedings, others did not. The hearing process was perfunctory and did not tell the public much about what was really happening. The bills that emerged from this closed and hidden process do not live up to their highly inflated titles, "Electronic Signatures in Global and National Commerce Act" for H.R. 1714, and "Millennium and Digital Commerce Act" for S. 761. At the same time, they suggest a disturbing trend in state and federal relationships and a further erosion of constitutional separation of powers. These bills essentially impose rules of contract on top of the existing rules of contract found in state statutes and the common law. Since there is no federal common law and no general jurisdiction over the rules of contract, federal imposition of even limited rules of contract is likely to have profound impact on a host of side issues such as court jurisdiction and enforcement of these rules. The most that can be said is that uncertainty of impact is the only impact that may be predicted with any certainty.

The objective of this memo is to compare the two bills from the perspective of impact on state law and state law making functions. This is not a simple matter of looking at the labeled preemption sections in both of these bills. The scope of these bills must be examined. The express exclusions need to be looked at in light of the scope. The express preemption provisions are the last pieces of the analysis, but by no means the most determinative part of it.

There will be frequent references to the Uniform Electronic Transactions Act (UETA) in this memo. It is the major state effort to deal with electronic commerce issues. Both bills confront UETA directly in their express preemption provisions, and try to make room for UETA in state law as part of the impact on state law. Language in both bills is derived in whole or in part from UETA. UETA has become the iconic source for both the supporters of the federal bills and those who advocate state legislation, only, and everybody in between. This is because it represents, so far, the only coherent national effort to address the real needs of electronic commerce. It is also a careful effort to do no harm while furthering electronic commerce. At this stage of electronic commerce and the law relating to it, the principle of doing no harm may be far more important than any rule of law proposed.

SCOPE

Both bills have the objective of making electronic records and signatures the equivalent of writings and manual signatures, when a law requires either a writing or a manual signature or both for enforcement of obligations or giving them legal effect. (H.R. 1714 has other provisions on consumer contracts and record retention requirements. S. 761 and H.R. 1714 address what is called party autonomy. This memo will not address those topics.) The basic writing and signature requirements that may affect commerce are universally known as statute of frauds requirements. For the most part they exist to limit the effectiveness and enforceability of oral contracts. The primary impact of these basic rules in both H.R. 1714 (Section 101(a)) and S. 761 (Section 5(a)) is, therefore, to prevent any transaction that is memorialized by an electronic record and signed by an electronic signature from being treated as if it is based on oral contract or agreement.

There are kinds of writing and signature requirements in state law with other objectives that may be affected by the federal bills. Some states have consumer law that requires a consumer to initial or sign separate provisions in agreements or contracts before they become effective against the signing consumer. These kinds of requirements provide a minimum guarantee that the consumer has the opportunity to view or read a specific contract provision before agreeing to it. There are other notice and disclosure requirements, some relating to consumers, that require a writing before they are effective. Again, there is a kind of statutes of frauds issue, no reliance on oral communications. Also, disclosure requirements involve information that is deemed essential background for entering a contract or agreement, or for performing, enforcing or terminating it. The impact of both bills on these kinds of writing and signature requirements is less clear, but is a matter of the considered scope of both bills.

What is the scope of each of the competing federal bills? H.R. 1714 applies its general rule to "any contract, agreement, or record entered into or provided in, or affecting interstate or foreign commerce" while S. 761 applies its general rule to contract formation in "any commercial transaction affecting interstate commerce." S. 761 appears to be significantly narrower than H.R. 1714, concentrating on formation of contracts in commercial transactions affecting interstate commerce. H.R. 1714 uses broader language, "contract, agreement, or record"... affecting interstate or foreign commerce. It also does not have the limitation to "commercial transaction" or to contract formation.

The insertion of the word "record" in H.R. 1714 adds particular, though unpredictable dimension, to its scope. The definition of record in H.R. 1714 (as it is in S. 761) is from UETA (but is not used in UETA in a similar fashion to H.R. 1714). A personal letter is a record under the definition. So is a Christmas card. There is no implication, therefore, of something fundamentally enforceable, valid or legally effective in the bare term of "record." But its use in H.R. 1714 leaves open some serious questions. Suppose an e-mail that is sent from one person to another contains purposefully untruthful commercial assertions about a third party? In this context is this an oral defamation, which is slander under the common law, or a written defamation? There can be a difference in proof and damages, and does the language of H.R. 1714 intrude into a judge's decision about the character of the untruthful assertions?

There are records that may affect interstate or international commerce, but that are not strictly records of commercial transactions. Health records held by health-care providers, including health maintenance organizations, and health insurance companies come immediately to mind. There are business records, such as corporate or partnership records, for which there are obligations within the entity, that do not have anything to do with transactions. S. 761 appears to leave these kinds of records out. H.R. 1714 seems to include them. The legal impact of including them is uncertain, but leaves serious questions about its use against individuals and entities for which these kinds of records are kept.

H.R. 1714 also creates an anomaly respecting the words "record" and "electronic record." The definition of "record" includes electronic or other form, including a writing on paper. But the definition of "electronic record" is, "a writing, document, or other record created, stored, generated, received, or communicated by electronic means." Electronic record includes writings and documents? What is the difference, then, between "record" and "electronic record?"

H.R. 1714, also does not distinguish records that memorialize the formation of a contract from other records that may be generated later in the transaction, whether by the parties independently or as required by other law. This means that disclosure and notice requirements that are post-formation in character are presumably included within the general scope of H.R. 1714. One thing is clear, the ambition of H.R. 1714 goes well beyond the concern for the impact of traditional statute of frauds requirements in state law upon electronic commerce. Since there is a vast unknown into which this bill advances, there is a great risk of serious unintended, adverse consequences.

The limitation in S. 761 to contract formation in "commercial transactions" looks reasonable in comparison. In the spirit of doing no harm, S. 761 strikes mainly at pure statute of frauds provisions, taking on those writing and signature requirements that foreclose enforcing oral contracts. Its limited objective is to prevent bad statute of fraud decisions in courts of law, the central interest in electronic commerce. The only affected laws are those that preclude legal effect when a writing and signature are required for contract "formation." Post-formation disclosures and notices seem clearly to be outside the scope. Special statutory initialing requirements for certain kinds of provisions are not strictly formation requirements. They have nothing to do with the mutuality between the parties that is necessary to contract formation, but are there to meet a state's assumed obligation to protect consumers from their own inadvertence or lack of interest. The limitations in scope in S. 761 exclude a lot of problem areas of law that do not directly impact electronic transactions and do not impair electronic commerce.

Scope is important as part of the analysis of preemption of state law. What the federal law does not govern, unless there is a specific effort to preempt the entire field, is not preempted. Let no one who reads this draw the conclusion that the NCCUSL favors federal legislation respecting electronic commerce, but the limitation in scope of S. 761 carries the least potential damage for a federal statute.

SPECIFIC EXCLUSIONS

Both bills have a list of excluded categories of law. The exclusion sections are derived from Section 3 of UETA. There are two fundamental problems that arise with these exclusions in both bills. One is that general scope in both bills is framed in terms of the kinds of transactions that are governed. The exclusions are framed in terms of the kinds of law that the federal bill will not impact. There is an automatic disparity in what both ends of these bills are attempting to do, therefore. Nothing totally meshes. The second problem, related to the first, is interpretation of the express exclusions under preemption doctrine.

In UETA, exclusions are a matter of exact identification of state laws in which writing and signature requirements are not affected by the rules of UETA. Exclusions made in state law may preserve paper and manual signature requirements as the only kinds of evidence of transactions. They may preserve electronically friendly provisions that already exist in state law. Specific references make interpretation a minor problem. A state legislature can clearly amend its own laws in any form that it desires, and is able to come back and correct errors, if errors are made.

Congress cannot actually write or amend state law. The exclusions, if they are to have any impact on state law, have that impact in light of preemption doctrine. Even though the exclusions are framed as exclusions from the impact of the federal bill, and not in terms of preemption, they may have effect only because they preempt some state law. It is not possible, therefore, to interpret the exclusions in the federal bills in the same way that they would be interpreted in UETA, and the consequences of enacting them in federal law will not be the same as enacting them in state law. Keeping all of that in mind, we can look at the specific exclusions.

Both of the bills exclude the Uniform Commercial Code (UCC) except for Articles 2 and 2A, Section 1-107 and 1-206. The UCC exclusion appears straightforward on its face. The UCC is not subject to either bill except as expressly made subject. But interpretation is not as simple as it initially appears. These exclusions suggest a dilemma when these UETA rules are dragged verbatim into federal law.

As noted above, federal law depends on preemption doctrine for its impact on state law. Congress cannot directly amend state statutes or insert federal statutes directly into state law. A federal rule of law preempts a state rule of law in-so-far as the state rule is inconsistent with the federal rule.

The dilemma is well illustrated by looking at the exclusion rule for the UCC articles in H.R. 1714. It states that "the legal effect, validity or enforceability" of a contract "shall not be denied (1) on the ground that the contract...is not in writing if the contract...is an electronic record; or (2)" (basically the same for an electronic signature)..." shall not apply to a contract...that is governed by the Uniform Commercial Code, as in effect in any state, other than sections 1-107 and 1-206 and Articles 2 and 2A." The rule in S. 761 operates virtually in the same way as to the UCC. These are the rules in the federal bills that control the UCC, wherever inconsistent with the federal rules.

A literal interpretation of the above language would tell a court that the UCC cannot recognize electronic records or signatures. How else is the UCC to be inconsistent with the federal rule? Congress cannot directly amend state legislation. It cannot amend the UCC. If the intent is to amend the UCC, then Congress has most likely crossed the constitutionally prescribed boundaries of separation of powers. The constitutionally consistent conclusion from the language in H.R. 1714 is that the UCC cannot be made electronically friendly, and it is difficult to think of a way to word an exclusion that can avoid the absurd result. For the constitutionally safe interpretation has an absurd result. Will courts entertain absurd results? That is unpredictable. Courts sometimes do. A court is going to have to work to avoid that result in the case of these bills. Much depends upon how much value a court will put on protecting a federal system of government.

Can the language be fixed to avoid the dilemma? There might be a temptation to preempt all the UCC. But that alternative so distorts federal policy that absurdity multiplies. Most of the UCC has been made electronically friendly in very specific ways. There are also parts of Articles 3, 4 and 7 of the Uniform Commercial Code, governing instruments, that could be thrown into absolute chaos if the UCC rules are governed by one of these federal bills. Otherwise, an overlay statute will simply interfere with existing rules that already incorporate electronic records and signatures and that have made UCC-governed transactions specifically open to electronic form. To include the UCC, then, would set the law backwards about a millennium, and the resulting chaos would be economically costly. Revision of Articles 2 and 2A and Article 1, all of which is taking place, could not address more appropriate and specific rules for electronic commerce. Preemption would force the generic federal rules onto those revisions impairing the revision effort. No overlay statute is any more than a blunt instrument. It will always have adverse unintended consequences. Rules finely tuned for the specific transactional environment will be the first victims, clubbed to death by these bills. The UCC should not be governed by federal legislation, but getting the UCC out of the range of these bills is not a simple matter.

The federal bills also need to leave out the Uniform Computer Information Transactions Act (UCITA). There is a relationship between this uniform act and the UCC. It has specific rules on electronic records and signatures for the kinds of transactions governed under that act. Again, an overlay statute is not nearly as effective as law that is specific to the transactional environment. The dilemma for UCITA is exactly the same as for the UCC.

To keep UCITA within the scope of federal law also obscures the policy grounds for H.R. 1714 and S. 761. Remember that both bills strive to make electronic records and signatures the legal equivalent of paper documents with manual signatures. UCITA provides contract rules for licensing computer information. There is no specific statute of frauds requirement anywhere that mandates paper documents and manual signatures for licensing contracts. UCITA does not "write over" any requirements for writings and signatures that currently exist. Its electronically friendly provisions are sui generis for the new kind of transactions it governs. To impose different electronic transaction rules on the already electronically friendly rules in UCITA makes no sense for federal policy. But to treat UCITA as an express exclusion as attempted for the UCC in these bills will create the same dilemma of interpretation, and may impair UCITA fatally. Like the UCC, UCITA should be left out of these bills, though doing that is difficult.

The same problem of interpretation exists for all the express exclusions in both bills. These exclusions mainly do not relate to transactions in interstate or international commerce. In S. 761 they seem wholly gratuitous. They are less so in H.R. 1714 because of its excessively broad scope.

Both bills try to exclude family law from their reach. Both bills choose the Uniform Health Care Decisions Act as another uniform act excluded. There are a number of express exclusions in one of the bills, but not in the other. H.R. 1714 tries to exclude the Uniform Anatomical Gift Act. S. 761 does not address this issue by express exclusion. H.R. 1714 excludes federal regulatory requirements. S. 761 does not. By adopting this exclusion, Congress would adopt federal law amending other federal law, no different than a state adopting UETA to amend other law of that state. The exclusion, however, assumes that there are statute of fraud requirements in federal law to which Section 101(a) would apply. What those are is not clear, but federal law questions are not within the scope of this memorandum.

S. 761 tries to exclude documents of title filed with a governmental unit, until the "State or subdivision thereof chooses to accept filings electronically." This exclusion includes permission to accept electronic filings when states and municipalities choose to do so. This language is language of permission, suggesting that states could not accept electronic filings without permission, otherwise. It suggests that the drafters understood the preemptive impact of the exclusion. But the filing of documents of title or any other filing for credit purposes are not within the general scope of S. 761, anyway. So the dilemma doubles because the exclusion actually raises a question about the scope of S. 761 that probably whould not be raised without it.

S. 761 excludes residential landlord-tenant relationships. H. R. 1714 excludes state governmental transactions when the contracting state agency is "not acting as a market participant in or affecting interstate commerce;..." H.R. 1714 expressly excludes court orders, notices and documents. H.R. 1714, also, makes an effort to exclude post-formation notice requirements such as utility service cancellation notices, foreclosure notices in credit transactions, and the like. These are the notice and disclosure requirements in the law of many states that are not purely there to limit the enforceability of oral contracts.

Each exclusion, so expressed, raises the same question of interpretation under preemption doctrine. If there is an express exclusion, can the states move to electronic records and signatures? It is not clear that electronic records and signatures are bad policy in these cases. It is clear that the law excluded should not be governed or impacted by federal legislation on electronic commerce. The best way to leave these non-commercial areas of law out of the federal bills is to make sure that they do not fall within the basic scope of the federal legislation. Specific exclusions, as provided in both bills, will not work.

Some of these express exclusions do not make sense. Living wills and advance directives are the subject of the Uniform Health-Care Decisions Act. The Uniform Act governs only a small portion of these kinds of documents in the United States. Those under the Uniform Act get some special, express treatment under the federal bills, but those created under other law are left out in the cold. This is an odd result.

The drafters of the federal bills, particularly H.R. 1714, have created anxiety about writing requirements that are not electronic commerce related simply by not considering the basic scope of the federal bills adequately. S. 761 is closer to confining the impact of the federal legislation exclusively to commercial transactions, but even its drafters add exclusions that are not commerce related. It would be far better if the basic scope were better described and limited than to try to identify specific exclusions. The need to identify specific non-commercial law that must be excluded goes away if the transactions to which the rules of these bills apply are adequately circumscribed in the basic scope of these bills.

But even tailoring scope cannot deal with the specific problem of commercial transactions law that will be within scope of any legislation that tries to apply rules to electronic commerce. The UCC and UCITA remain in a perilous position, no matter how the basic scope of these bills is framed.

EXPRESS PREEMPTION

The preemption impact of these bills is further complicated by their express preemption provisions. S. 761 has the least complicated and least damaging preemption provision. It simply states that "This section does not apply in any State in which the Uniform Electronic Transactions Act is in effect." This would seem to be an all or nothing concept of preemption - a state enacts UETA, no preemption of any state law. Will there be a consistent interpretation of that principle in the courts? If this principle of preemption is taken on its face, assuming Congress enacts it, the most serious problems with preemption disappear. Specifically, the express exclusions in S. 761 may disappear when UETA is adopted. Much still depends upon the position of interpreting courts, however.

One of the most ironic possible influences of a federal bill on electronic records and signatures is its impact on legislation, other than the UCC, that has been enacted in many states pre-UETA on electronic transactions. Included are the numerous so-called "digital signature" statutes. Will a federal bill preempt the existing electronic legislation? This is not a matter of equating existing writing and manual signature requirements with electronic records and signatures. This is a matter of preempting legislation that expressly authorizes electronic records and signatures. The most literal interpretation of the preemption provision in S. 761 avoids preemption of these digital signature statutes.

H.R. 1714 is much more complicated. There is no generic preemption statement in H.R. 1714. Section 102 provides that "a State statute, regulation, or other rule of law may modify, limit, or supersede the provisions of section 101" by meeting certain conditions. The statement suggests a kind of reverse preemption, rather than a standard conflict-resolution kind of preemption. Enactment of UETA is one method of modifying, limiting or superseding H.R. 1714. Other legislation that "specifies the alternative procedures or requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts, agreements, or records" may also meet the standard of modifying, limiting or superseding H.R. 1714, but for legislation subsequent to the effective date of federal legislation, only if it "makes specific reference to this Act."

In addition, H.R. 1714 provides that any legislation modifying, limiting or superseding its provisions, shall not be effective to the extent that "it discriminates in favor of or against a specific technology..., discriminates in favor of or against a specific type or size of entity..., is based on procedures or requirements that are not specific or that are not publically available; or...is otherwise inconsistent with the provisions of this title." Inconsistency is the basic standard for preemption under the normally understood doctrine, but is an expressly set-out supplementary standard in H.R. 1714. There is a further exception from preemption for notices "for the protection of the public health or safety of consumers." It is very difficult to make sense of these requirements.

The express exclusions in H.R. 1714 fall outside that general statement of preemptive effect in Section 102 because it applies only to Section 101. The exclusions are in Section 103. The interpretation of the exclusions is itself excluded from the express statement of preemptive effect, therefore. It is theoretically possible for state law to avoid preemption under Section 102, but to be interpreted under Section 103 as preempted. That this can occur under the same bill is quite amazing. Again, uncertainty is the only certainty.

If preemption is essentially an exercise in conflict resolution between state and federal law, the language of H.R. 1714 is the antithesis of that principle. It invites conflict, litigation and confusion. Even an enactment of UETA does not preclude conflict and litigation.

One interpretation of H.R. 1714 suggests that it encourages states to enact writing and manual signature only statutes, that refer to H.R. 1714. That is not precluded by H.R. 1714, and is the simplest way to avoid conflict with the discrimination language. For discrimination appears only to be forbidden if it is between competing electronic technologies. A state may adopt non-electronic technologies and exclude electronic technologies with impunity. (But is such a statute "inconsistent" with this Section?) It is also possible that a writing only, no electronic signatures provision in state law would avoid conflict with the express exclusions. If this is the impact of this language, it means further barriers to the acceptance of electronic records and signatures and lots of continuing confusion and litigation.

The consumer exception in Section 102 to preemption is very confusing. There is an express exclusion of certain notices from the operation of H.R. 1714 in Section 103. No writing or signature requirements are presumably affected with respect to these kinds of notices. But then Section 102 preempts statutes that violate the general rule of section 101, except those that specify procedures or requirements...for electronic records or signatures" and, if enacted after the effective date of the federal legislation. But then it excepts those consumer notices that are required to be in writing "for the protection of the public health or safety of consumers" from preemption in section 102. A consumer cannot consent to an electronic record in such cases - which is a specific prohibition against the individual consumer (How does such a provision get enforced?), not an issue of preempting state law. Add to this, provisions for consent to electronic records and signatures in consumer transactions in Section 101. Are consumer notices in or out of H.R. 1714? H.R. 1714 does not provide a definitive answer. There are internal conflicts between all of these requirements, and ambiguity enough to fill the courts with litigation for the new millennium - all 1000 years of it.

Is H.R. 1714, in fact, beyond preemption in its effort to control state law making? In the ordinary analysis of conflict between federal and state law, the federal law preempts the existing state law in-so-far as there is conflict between the rules of law. If in doubt, the court takes the federal rule. However, H.R. 1714 appears to be an effort to dictate the course of state law into the future. This is more than preemption, but an effort to dictate what the states shall enact in the future - before there are any enactments to create any conflict. This may be an intrusion into states' powers that is constitutionally beyond the express powers of Congress. It is one thing to enact rules that govern interstate and international commerce. It is another thing to tell the states that they cannot do certain things in the future, even if there is no express federal statute that provides for a conflict. H.R. 1714 strays into treacherous constitutional territory.

And finally, because H.R. 1714 attempts to direct the course of legislation into the future, it probably will inhibit future technologies and the law that will be necessary because of future technologies. In the pursuit of e-commerce now, it may impede e-commerce in the future.

CONCLUSION

Perhaps the largest problem with these bills is their persistent inconsistency. Both bills frame basic scope in terms of kinds of transactions covered. They then list specific kinds of laws that are excluded, and then try to establish preemption standards, also, on the basis of kinds of law preempted. Transactions and specific laws do not come together in a careful analysis of preemptive impact. Reconciliation may not be possible in any real sense. This suggests the difficulty, again, when Congress imposes substantive rules of law upon the body of contract law that is, historically, state statutory and common law. It is one thing to try to govern certain kinds of transactions. It is another thing to identify the conflicting state law that governs those same transactions to resolve conflicts that may exist. Although S. 761 by its minimalist approach and simpler preemption provisions comes closer to avoiding the large pitfalls of this endeavor, it still has its problems. H.R. 1714 simply fails to meet any rational test of good law making, and is a disaster in the making if it is ever adopted.