Electronic Signatures-Esign Origins, Understanding Laws, and the Affects

On June 30, 2000 President Clinton signed the “Electronic Signatures in Global and National Commerce Act” (ESIGN) using his electronic signature ID, and thereby established the validity of electronic signatures for interstate and international commerce.

In the fours year prior to this Act’s passage a dozen states had passed similar laws and guidance for state specific business purposes, and in the five years since the Act’s passing every other state has passed similar laws and legislation. What does it all mean, and in the end how can it benefit businesses, individuals and the nation or world as a whole?

The best way to answer a question like this is to take a look at the origins of the law, and understand the reasoning behind its passage and the passage of the state specific laws.

The Birth of the Electronic Signature – Faxing

In the 1980’s companies and even some progressive individuals began using fax machines for high priority or time sensitive delivery of paper based documents. Today, the fax machine is a staple of the business world. Most people do not even consider the original hurdles this new medium created, nor do they consider its impact on the speed of communication and the advantages of its use. However in its infancy many of the same issues surrounding electronic communications and electronic signatures had to be resolved when utilizing the facsimile.

When the first contract was signed and faxed it created the basis for the discussion of electronic signature validity. After all it was the first time someone could sign something, place it in a machine, send it from one phone line to another and deliver a digitally reproduced signature. The path this signature took was not controllable or traceable, and in most cases it traversed miles of wire before reaching its destination, so how could it be considered a valid signature? The intentions of the signature were clear to everyone, but businesses wanted to know they could count on the validity of the signature, and if no one actually witnessed the action of one individual or of a corporation how could a business put any faith in it? This of course caused quite a stir and in rapid fashion the courts ruled this signature carried the same validity as if the parties were standing in the room together. With this, the fax became standard operating procedure world-wide.

The courts found validity in this method of signature capturing and businesses also felt secure in this method. Quite a leap of faith considering the complications caused by fax machines early on. Many people didn’t realize that the original fax paper’s ink would vanish after a period of time and you had to make another copy of the fax using a copier if you wanted to store it permanently. Also many times the quality of the image was poor or barely legible, but businesses understood the intention and would consider it signed even if there was only a partially legible signature. So in essence you had a copy of a copy of a digital image, and even with so many loopholes for alteration and criminal malfeasance the fax still worked and business flourished.

The business logic behind this thinking was easily justifiable. Before the fax machine, the contract could have been signed verbally between the sales person and the client, and then somewhere down the road a paper copy would have been signed and mailed. Many sales before the fax machine were consummated with a simple “OK let’s do it” comment over the phone. This drive to get business and make the wheels turn demonstrates the most vital point in an electronic communications based world, or for that matter in a digital world with no physical or direct contact, is most businesses can operate on trust. They provide a service to a customer and the customer trusts they will provide that service in a satisfactory manner, while the service provider trusts that the customer will pay for services rendered.

Trust is not a new thing in business; it was often indicated by a hand-shake or “You have a deal”, and that was all you needed to get a deal done. Has that changed today? I believe the answer is no, but what about the courts, and their opinion on the validity of the electronic signature? After all the courts’ goal is not just to keep the wheels turning and generate revenue, so why did they trust this type of signature and what was the legal question this signature answered? This line of thinking brings us back to Electronic Signatures in Global and National Commerce Act or as it is more commonly known, the (“ESIGN”) Act.

Electronic Signatures, the Courts and the Government

The Government Paperwork Elimination Act (“GPEA”), Uniform Electronic Transactions Act (“UETA”), Electronic Code of Federal Regulations (“e-CFR”), as well as the Electronic Signatures in Global and National Commerce Act (“ESIGN”) are all attempts by Congress, federal departments and the states to define the liability and validity of an electronic signature, and help the courts answer the questions about enforceability. These efforts all center around three primary concepts authentication, integrity and non-repudiation.

Authentication

Authentication is the reasonable basis on which to believe that the entity electronically signing the file is who they say they are. This can be accomplished in many ways. In the traditional world it might be done by checking a driver’s license or other form of identification, but in the electronic world this is not always an option, so other methods must be used.

The most common and popular way of accomplishing this identity check is to use an e-mail based identifier. This is a process most people have experienced at some point while using the Internet. If you signup for a web based service you generally need to create a user name and password. When you create this account many systems will send a verification e-mail to the e-mail address you entered for your record, thus proving that you own this e-mail address. You then copy and paste this verification information into the confirmation system provided by the web site and you become a verified member. That process and most processes that use your e-mail address are known as e-mail based ID systems.

Another way to verify an identity is to use a known third party validation mechanism. In other words, use something that presumably has already verified the entity in question. There are several common methods for achieving this type of authentication. You may have experienced it with a web site requiring you enter in your home zip code, an account number or in some cases a credit card number. Many web sites will have you enter your credit card information into a form, allowing them to cross reference the information you provide them with a credit card merchant. Presumably if you told the credit card company the truth about you, then it will match with the information you provided the website.

The methods available and in use for identifying and authenticating individuals are countless, and presumably the higher the value of the transaction the more authentication methods should be implemented.

Integrity

Integrity simply means providing a reasonable belief that any file electronically signed on a system cannot and has not been tampered with by anyone or anything. The concept is easy to understand and the requirement for it is certainly justified. When you are dealing with paper it is easy to give everyone a copy, and any discrepancies are easily found, but with electronic records it can be difficult to manually or even visually tell if the file has been altered. To demonstrate integrity electronic signature capture services generally use an encryption algorithm to lock a file once it has been signed. Even better services will continually validate a file all the way through the signature process and then create a final version once all signatures are finalized. Most technology used today for identification purposes can be more accurate than human DNA.

Non-repudiation

Think back to the Fax machine illustration. Someone can always say, “That is not my signature” and claim that the signature was forged. After all, someone could have placed an image of a signature on to a document, and faxed it back to you. The point is, under most circumstances you can never be 100% certain the person you are doing business with is who they say they are. Even in-person transactions can be at risk. Identity theft is the fastest-growing crime and criminals are not just buying and signing things online, they are going into banks, opening credit cards and walking into retail establishments. So what can be done to help protect businesses against fraud and abuse if they use electronic signatures?

Just as a notary verifies the intent of the signatory, electronic signatures can use verification methods to insure the signatory understood the purpose and the intent of the signature process. However, the road to a successful electronic signature implementation lies in the careful understanding that the electronic signature super highway has a minimum of three lanes. Each of the signatories has a lane of relationship “traffic” between them and the electronic signature service provider. The lane dedicated to the relationship between the sender and the recipient is just as relevant and important. It is this relationship that will help to legally define the intent of the signatories in various legal matters. Therefore, combining good business practices with a solid electronic signature capturing service will make non-repudiation less of an issue.

How Electronic Signatures Can Help You

In order to fully understand how electronic signatures can help you and your business we need to take a look at why we want to use them in the first place. Electronic signatures offer a wide variety of benefits to everyone involved in a transaction. They reduce costs associated with signing files by cutting overhead. Electronic signatures allow us to cut hard costs like paper, ink, printer wear, staples, pens, shipping and handling, but they also allow us to cut soft costs like storage, copying, filing, retrieval, auditing and tracking. Overall electronic signatures can save hundreds of dollars on a single contract for small contracts and thousands or tens of thousands for large contracts.

Let’s demonstrate how the savings can be realized. A business sends out 100 proposals per year that are approximately 150 pages long. It is primarily black and white ink. The client prints the 150 page proposal on regular stock paper 1 and binds it 2. The proposal is then placed in an overnight delivery envelope and shipped next day air, with a return envelope provided, which is also next day air 3. Once the client receives the proposal, reads it and signs their acceptance, the proposal is then shipped back to the business 4 in the provided overnight envelope. Once the proposal arrives at the business, the sales team and managers need to be notified, so they can engage the client. The proposal then needs to be filed and stored in a safe place. The person working at receiving desk will make three copies of the proposal 5, and distribute them to the required personnel, and subsequently file the original proposal in a filing cabinet 6. So what are the costs?

Total Cost of Using Paper = ($112.50) x (100) = $11,250

(1) 150 + Ink + Paper + Wear and Tear on printer = $3.

(2) Binding = $1.50

(3) Outbound Overnight Shipping = $20

(4) Inbound Overnight Shipping = $20

(5) 3 x 150 + Ink + Paper + Wear and Tear on printer = $9

(6) 150 Pages Storage Using Government Estimate = $19

Labor @ 2 Hours for Total Process = $40

2 Days Opportunity Time for Best Delivery Option = $Unknown

Total Cost of a Paperless Transaction = ($10) x (100) = $1,000

Labor @ 15 Minutes for Total Process = $5

Sending File Electronically = $5

Delivery Is Immediate = No Lost Opportunity Costs

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Total Savings Using Electronic Signature Service vs. Paper = $10,250 Per Year

Having a technology available to your business that will reduce overhead on a single expense by 90% is attractive for any business, especially one that will benefit other areas as well.

Give Electronic Signatures a Chance to Save Your Business Money

Businesses today should look at the logistic benefits of electronic signature technology and contemplate how they might benefit their organization. If you have a fax machine then you should certainly have an electronic signature service as well. Electronic signature services provide unparalleled speed to users. They are faster and more versatile than fax machines, less expensive than overnight shipping options and the soft and hard cost savings are extraordinary. Electronic signature services can be used on any file type, including audio, video, photos, and all text documents. Electronic signatures are also easy to store, track and audit.

In the end electronic signatures will not change your life, but they may change how you operate your business day-to-day. Just like the fax machine did, it will make you more efficient and help you get the job done faster, and that may just be the difference that separates you from the competition.