SPEAKERS CONTENTS INSERTS
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62–448
2000
ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE (E-SIGN) ACT
HEARING
BEFORE THE
SUBCOMMITTEE ON
COURTS AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
ON
H.R. 1714
SEPTEMBER 30, 1999
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Serial No. 3
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
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MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida
DAVID VITTER, Louisiana
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JON DUDAS, Deputy General Counsel-Staff Director
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
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PERRY APELBAUM, Minority General Counsel
Subcommittee on Courts and Intellectual Property
HOWARD COBLE, North Carolina, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
WILLIAM L. JENKINS, Tennessee
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
MARY BONO, California
HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
MITCH GLAZIER, Chief Counsel
BLAINE MERRITT, Counsel
VINCE GARLOCK, Counsel
DEBBIE K. LAMAN, Counsel
ROBERT RABEN, Minority Counsel
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EUNICE GOLDRING, Staff Assistant
C O N T E N T S
HEARING DATE
September 30, 1999
TEXT OF BILL
H.R. 1714
OPENING STATEMENT
Coble, Hon. Howard, a Representative in Congress from the State of North Carolina, and chairman, Subcommittee on Courts and Intellectual Property
WITNESSES
Cooper, Scott, Manager, Technology Policy, Hewlett-Packard Co.
Fong, Ivan K., Deputy Associate Attorney General, U.S. Department of Justice
Sargent, Pamela Meade, U.S. Magistrate Judge, Western District of Virginia
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Peyton, David, Director, Technology P, National Association of Manufacturers
Pincus, Andrew, General Counsel, U.S. Department of Commerce
Saunders, Margot, Managing Attorney, National Consumer Law Center
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Cooper, Scott, Manager, Technology Policy, Hewlett-Packard Co.: Prepared statement
Fong, Ivan K., Deputy Associate Attorney General, U.S. Department of Justice: Prepared statement
Sargent, Pamela Meade, U.S. Magistrate Judge, Western District of Virginia: Prepared statement
Peyton, David, Director, Technology P, National Association of Manufacturers: Prepared statement
Pincus, Andrew, General Counsel, U.S. Department of Commerce: Prepared statement
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Saunders, Margot, Managing Attorney, National Consumer Law Center
APPENDIX
Material submitted for the record
ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE (E-SIGN) ACT
THURSDAY, SEPTEMBER 30, 1999
House of Representatives,
Subcommittee on Courts and Intellectual Property
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to call, at 10:08 a.m., in Room 2237, Rayburn House Office Building, Hon. Howard Coble [chairman of the subcommittee] Presiding.
Present: Representatives Hon. Howard Coble, James F. Sensenbrenner, Jr., Bob Goodlatte, Howard L. Berman and William D. Delahunt.
Staff Present: Mitch Glazier, Chief Counsel; Debbie Laman, Counsel; Eunice Goldring, Professional Staff Member; Cori Flam, Minority Counsel; and Stacy Baird, Legislative Fellow.
OPENING STATEMENT OF CHAIRMAN HOWARD COBLE
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Mr. COBLE. Good morning, ladies and gentlemen. The subcommittee will come to order.
I am told that Mr. Berman is on his way, and I don't want to penalize those of you who have made the effort to get here on time. Howard will be here imminently, and I am sure others will join us as the morning develops.
Today, we are here to discuss H.R. 1714, the Electronic Signatures in Global and National Commerce Act, known popularly as the E-Sign Act.
[The bill, H.R. 1714, follows:]
106TH CONGRESS
1ST SESSION
H. R. 1714
To facilitate the use of electronic records and signatures in interstate or foreign commerce.
IN THE HOUSE OF REPRESENTATIVES
MAY 6, 1999
Mr. BLILEY (for himself, Mr. DAVIS of Virginia, Mr. TAUZIN, Mr. OXLEY, Mr. TOWNS, and Mr. FOSSELLA) introduced the following bill; which was referred to the Committee on Commerce
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A BILL
To facilitate the use of electronic records and signatures in interstate or foreign commerce.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ''Electronic Signatures in Global and National Commerce Act''.
TITLE I—VALIDITY OF ELECTRONIC RECORDS AND SIGNATURES FOR COMMERCE
SEC. 101. GENERAL RULE OF VALIDITY.
(a) GENERAL RULE.—With respect to any contract or agreement entered into in or affecting interstate or foreign commerce—
(1) no statute, regulation, or other rule of law shall deny the legal effect of such contract or agreement on the ground that the instrument is not in writing if the instrument is an electronic record; and
(2) no statute, regulation, or other rule of law shall deny the legal effect of such contract or agreement on the ground that the contract or agreement is not signed or is not affirmed by a signature if the contract or agreement is signed or affirmed by an electronic signature.
(b) AUTONOMY OF PARTIES IN COMMERCE.—With respect to any contract or agreement entered into in or affecting interstate or foreign commerce, the parties to such contract or agreement may establish reasonable requirements regarding the types of electronic records and electronic signatures acceptable to such parties.
SEC. 102. AUTHORITY TO ALTER OR SUPERSEDE GENERAL RULE.
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(a) IN GENERAL.—Except as provided in subsection (b), a Federal or State statute, regulation, or other rule of law enacted or adopted after the date of enactment of this Act may modify, limit, or supersede the provisions of section 101 if—
(1) such statute, regulation, or rule makes specific reference to the provisions of section 101;
(2) specifies the alternative procedures or requirements for the use of electronic records or electronic signatures to establish the legal validity of contracts or agreements; and
(3) in the case of a State statute, regulation, or other rule of law, is enacted or adopted within 2 years after the date of enactment of this Act.
(b) EFFECT ON OTHER LAWS.—A State statute, regulation, or other rule of law that modifies, limits, or supersedes section 101 shall not be effective to the extent that such statute, regulation, or rule—
(1) discriminates in favor of or against a specific technology, method, or technique of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures;
(2) discriminates in favor of or against a specific type or size of entity engaged in the business of facilitating the use of electronic records or electronic signatures;
(3) is not based on specific and publicly available criteria; or
(4) is otherwise inconsistent with the provisions of section 101.
(c) ACTIONS TO ENJOIN.—Whenever it shall appear to the Secretary of Commerce that a State has enacted or adopted a statute, regulation, or other law that is prohibited by subsection (b), the Secretary may bring an action to enjoin the enforcement of such statute, regulation, or rule, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond.
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SEC. 103. SPECIFIC EXCLUSIONS.
The provisions of section 101 shall not apply to—
(1) a statute, regulation, or other rule of law governing the creation and execution of wills, codicils, or testamentary trusts; or
(2) a statute, regulation, or other rule of law governing adoption, divorce, or other matters of family law.
SEC. 104. DEFINITIONS.
For purposes of this title:
(1) ELECTRONIC RECORD.—The term ''electronic record'' means a writing, document, or other record created, stored, generated, received, or communicated by electronic means.
(2) ELECTRONIC SIGNATURE.—The term ''electronic signature'' means a signature in electronic form, attached to or logically associated with an electronic record, that—
(A) is intended by the parties to signify agreement to a contract or agreement;
(B) is capable of verifying the identity of the person using the signature; and
(C) is linked to the electronic record in a manner that prevents alteration of the record after signature.
(3) ELECTRONIC.—The term ''electronic'' means of or relating to technology having electrical, digital, magnetic, optical, electromagnetic, or similar capabilities regardless of medium.
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TITLE II—DEVELOPMENT AND ADOPTION OF ELECTRONIC SIGNATURE PRODUCTS AND SERVICES
SEC. 201. TREATMENT OF ELECTRONIC SIGNATURES IN INTERSTATE AND FOREIGN COMMERCE.
(a) INQUIRY REGARDING IMPEDIMENTS TO COMMERCE.—
(1) INQUIRIES REQUIRED.—Within 90 days after the date of the enactment of this Act, and annually thereafter, the Secretary of Commerce, acting through the Assistant Secretary for Communications and Information, shall complete an inquiry to—
(A) identify any domestic and foreign impediments to commerce in electronic signature products and services and the manners in which and extent to which such impediments inhibit the development of interstate and foreign commerce;
(B) identify constraints imposed by foreign nations or international organizations that constitute barriers to providers of electronic signature products or services; and
(C) identify the degree to which other nations and international organizations are complying with the principles in subsection (b)(2).
(2) SUBMISSION.—The Secretary shall submit a report to the Congress regarding the results of each such inquiry within 90 days after the conclusion of such inquiry.
(b) PROMOTION OF ELECTRONIC SIGNATURES.—
(1) REQUIRED ACTIONS.—The Secretary of Commerce, acting through the Assistant Secretary for Communications and Information, shall promote the acceptance and use, on an international basis, of electronic signatures in accordance with the principles specified in paragraph (2) and in a manner consistent with section 101 of this Act. The Secretary of Commerce shall take all actions necessary in a manner consistent with such principles to eliminate or reduce, to the maximum extent possible, the impediments to commerce in electronic signatures, including those identified in the inquiries under subsection (a) for the purpose of facilitating the development of interstate and foreign commerce.
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(2) PRINCIPLES.—The principles specified in this paragraph are the following:
(A) Free markets and self-regulation, rather than government standard-setting or rules, should govern the development and use of electronic records and electronic signatures.
(B) Neutrality and nondiscrimination should be observed among providers of and technologies for electronic records and electronic signatures.
(C) Parties to a transaction should be permitted to establish reasonable requirements regarding the types of electronic records and electronic signatures acceptable to such parties.
(D) Electronic records and electronic signatures in a form acceptable to the parties should not be denied legal validity on the ground that they are not in writing.
(E) De jure or de facto imposition of standards on private industry through foreign adoption of regulations or policies with respect to electronic records and electronic signatures should be avoided.
(c) FOLLOWUP STUDY.—Within 3 years after the date of enactment of this Act, the Secretary of Commerce, acting through the Assistant Secretary for Communications and Information, shall conduct an inquiry regarding any State statutes, regulations, or other rules of law enacted or adopted after such date of enactment pursuant to section 102(a), and the extent to which such statutes, regulations, and rules comply with section 102(b). The Secretary shall submit a report to the Congress regarding the results of such inquiry by the conclusion of such 3-year period and such report shall identify any actions taken by the Secretary pursuant to section 102(c) and subsection (b) of this section.
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(d) CONSULTATION.—In conducting the activities required by this section, the Secretary shall consult with users and providers of electronic signature products and services and other interested persons.
TITLE III—USE OF ELECTRONIC RECORDS AND SIGNATURES UNDER FEDERAL SECURITIES LAW
(a) AMENDMENT.—Section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c) is amended by adding at the end the following:
''(h) REQUIREMENTS RELATING TO WRITTEN DOCUMENTS AND SIGNATURES.—
''(1) USE OF ELECTRONIC RECORDS AND SIGNATURES.—Notwithstanding any State statute, regulation, or rule of law, whenever in the securities laws, or in the rules or regulations thereunder (including the rules of any self-regulatory organization)—
''(A) a contract, agreement, or record (as defined in subsection (a)(37)) is required to be in writing, or is required to be authenticated by means of an instrument in writing, the legal effect of such contract, agreement, or record shall not be denied on the ground that the instrument is not in writing if the instrument is an electronic record; and
''(B) a contract, agreement, or record is required to be signed, the legal effect of such contract, agreement, or record shall not be denied on the ground that contract, agreement, or record is not signed or is not affirmed by a signature if the contract, agreement, or record is signed or affirmed by an electronic signature.
''(2) AUTHORITY OF COMMISSION.—Notwithstanding any State statute, regulation, or rule of law, the Commission may, consistent with the public interest and the protection of investors, prescribe regulations to carry out this subsection, but such regulations shall not—
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''(A) discriminate in favor of or against a specific technology, method, or technique of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures; or
''(B) discriminate in favor of or against a specific type or size of entity engaged in the business of facilitating the use of electronic records or electronic signatures.
''(3) DEFINITIONS.—The terms 'electronic record' and 'electronic signature' have the meanings provided such terms by section 104 of the Electronic Signatures In Global and National Commerce Act.''.
Mr. COBLE. In the past few years, the use of the Internet to conduct business, or e-commerce, has exploded beyond prediction. It is expected that the near future will see even more growth in e-commerce as more and more people go on-line to buy, sell, trade, or make other business arrangements. Important to the success of e-commerce is the ability to enter into a contract on-line that is legally binding. Therefore, it has become necessary to update contract laws which require a physical document to be signed by the party to allow for electronic signatures to have the same legal effect as a physically-signed piece of paper, or a tangible instrument.
Many States have enacted laws to give legal effect to electronic signatures. However, these laws are not identical, and some States have not enacted similar legislation. Industry representatives assert that the differences and the lack of legislation between States are an impediment to the growth of e-commerce because parties will be unwilling to risk entering into a contract on-line without nationwide certainty regarding its legality. This has led to widespread discussion on the need for uniform Federal and State laws regarding electronic signatures in order to promote e-commerce in the United States and to provide a model for other countries.
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In order to accomplish this, the National Conference of Commissioners on Uniform State Laws drafted the Uniform Electronic Transactions Act.
H.R. 1714 also intends to accomplish this objective. However, there are some potential problems with H.R. 1714. There is concern about the dramatic effects H.R. 1714 could have on the Federal courts and the Department of Justice. It allows an action in Federal court for an injunction against enforcement of a State statute that the Secretary of Commerce determines does not comply with the Act. Because H.R. 1714 would forever preempt State law, there is a concern that it may well be overly preemptive.
In addition to H.R. 1714, there is a corresponding proposal that addresses electronic signatures, S. 761, the Millenium Digital Commerce Act, introduced by Senator Abraham. The bill only preempts State law in States that have not adopted the UETA. That approach may have fewer consequences on the courts and the States because it incorporates the provisions in UETA regarding admissibility and other aspects.
The subcommittee hearing will focus on the differences in the above three approaches to help determine which approach has the most benign effects on Federal-State relations, the judiciary, the legal effect of contracts, the Department of Justice, and Rules of Procedure and Evidence. The subcommittee should consider all approaches in determining the best method for preserving e-commerce while avoiding unintended consequences on the judicial system.
The ubiquitous Mr. Berman has joined us. He is in many places at one time, I am told.
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Howard, it is good to have you with us.
I recognize the gentleman from California, Mr. Berman.
Mr. BERMAN. Thank you. I am being digitally moved here.
I want to thank the chairman for his effort to bring this legislation before our subcommittee. It is an issue that fully deserves our attention as it pertains directly to the enforceability of contracts and the evidentiary implications of the Internet.
Legislation in this area is extremely important. Electronic signatures are a critical tool in assuring the maintenance of the integrity of our computer systems, the security of the Internet, and of our critical infrastructure from intrusion.
Electronic signatures will facilitate the development of public and personal trust in this new medium for transacting business. Ensuring the legal enforceability of electronic documents is of utmost importance as we move toward a paperless society. Laws effectuating the use of electronic signatures and electronic records will impact on every kind of transaction, from banking to investments to the purchase of insurance. From buying a new TV to complex business-to-business transactions, there are few transactions that will not soon regularly be memorialized solely with electronic documentation.
This is a great and substantial change in the way we are creating legally binding relationships. Federal legislation in this area must be carefully and purposefully crafted. It is for this reason that I express some concerns about H.R. 1714 at the outset.
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H.R. 1714, although clearly well-intentioned, is overly broad and reaches deep into the areas of law that throughout this country's history have successfully been left to the States. Laws governing commercial transactions and contracts are fundamentally successes of our legal system, notably through the adoption of every State of the UCC. I urge continued adherence to this model.
I agree there may be a need for Federal law to fill in where State law has yet to develop, but this legislation goes beyond that. Through circular drafting and contradictory provisions, this bill imposes in perpetuity Federal law on the States, even where they adopt the Uniform Electronic Transaction Act.
Another bill, S. 761, is far less expansive, yields to State law, and accords much greater deference to the drafters of the UETA, who this past summer, after considering the issues for over 2 years, produced a uniform code that has already been adopted by my own State of California and is being considered by several other States for prompt adoption.
I know that the administration looks favorably upon this bill, and I hope this subcommittee will seriously examine it. I want to note, however, that I have concerns that arise in regard to both bills, particularly as to the potential adverse impacts on consumers.
According to the Department of Commerce, in 1998, although approximately 40 percent of households had computers, only 25 percent were connected to the Internet. Although the rate of growth of connectivity is increasing, so is the disparity between who is and who is not connected. Overwhelmingly, the connected are the younger and more wealthy. We cannot legislate in this area without keeping in mind that 90 to 95 percent of families with an annual household income of less than $25,000 do not have Internet access. In 1998, only about 14 percent of households with incomes of between $25,000 and $35,000 had Internet access.
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This legislation reaches into every corner of daily life. Legal obligations and rights, contracts, one's own signature, these are of as great an importance to the elderly, poor, and middle class as they are to the wealthy.
Finally, this legislation is not only about facilitating the growth of the Internet or e-commerce, this legislation is about legal documents. Ultimately, we must answer the question of what will be enforceable in court, what will be admissible into evidence, can we be confident that a document was not altered since the time it was executed, can we identify a date upon which the agreement was entered to determine the applicability of the statute of limitations. These are only some of the questions we must answer as we examine how the law can support a transition from paper to electronic documentation.
I look forward to the testimony of the witnesses on both pieces of legislation.
Mr. COBLE. I thank the gentleman.
Does the gentleman from Massachusetts have a statement?
Mr. DELAHUNT. No, I don't.
Mr. COBLE. Good to have you with us.
Our first witness this morning will be Mr. Andrew Pincus, who, as the General Counsel, is the chief legal adviser for the Commerce Department. Mr. Pincus has already served as a legal adviser to the Secretary and the Department on a broad range of domestic and international issues.
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Mr. Pincus holds a bachelor of law degree from Yale College, where he was graduated cum laude, and a law degree from the Columbia University School of Law.
Our second witness on this panel is Mr. Ivan Fong, who serves as Deputy Associate Attorney General in the Department of Justice. He assists and advises the Associate Attorney General and other senior Department officials on a wide range of issues, including technology and e-commerce issues.
Mr. Fong is also an adjunct professor at the Georgetown University Law Center, where he co-teaches a seminar on law and new technology.
The subcommittee has copies of the witnesses' testimony, which, without objection, will be made part of the record.
Mr. Pincus, we will start with you.
I would like to remind you and Mr. Fong, if I may, that we operate under the 5-minute rule. When that red light illuminates in your eyes, you are on notice.
We have your written statements, and they, I assure you, have been read and will be reread. So it is good to have both of you with us.
Mr. COBLE. Mr. Pincus.
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STATEMENT OF ANDREW PINCUS, GENERAL COUNSEL, U.S. DEPARTMENT OF COMMERCE
Mr. PINCUS. Thank you, Mr. Chairman. It is an honor to appear before the subcommittee on this very important issue.
As you said, Mr. Chairman, the evidence is clear that electronic commerce is going to be a key driver of our economy as we move into the next millennium. Recognizing this, President Clinton and Vice President Gore in July, 1997, issued the Framework for Global Electronic Commerce which discusses the potential of this new medium and identifies the crucial policy issues that we believe have to be addressed for e-commerce to realize its potential.
One of these is the development of a uniform commercial legal framework that recognizes, facilitates, and enforces electronic transactions worldwide, because, obviously, as both you and Mr. Berman said, we cannot have electronic commerce without legally binding electronic agreements. The President directed Secretary Daley to oversee the Administration's efforts with regard to this issue.
My statement discusses what we are doing in the Internet arena, and I thought I would focus my oral testimony on the domestic questions that are the focus of the subcommittee's interest.
As the subcommittee knows, commercial law has historically been the province of the States; and the States, working together through the uniform law process, have developed a uniform commercial code governing commercial transactions that is truly the envy of the world in terms of setting a stable, clear framework under which commercial transactions can be entered into.
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That uniform law process, as you mentioned, has gone forward with respect to updating those principles for the new electronic era, and the National Conference of Commissioners on Uniform State Laws last July approved the Uniform Electronic Transactions Act, which is designed to ensure that electronic contracting can occur and can create legally binding obligations.
As I said, that has been sent to the States. One State has acted, and we understand that a number of States are going to be considering the legislation this year.
Although we believe that there is no reason to supplant the States as the primary sources of commercial law, the Administration has concluded that it is appropriate for the Federal Government to intervene in a limited way while the adoption process is under way to assure that in that interim period there is no doubt about the legal enforceability of electronic contracts. Thus, we agree with the basic purpose of H.R. 1714, but we have significant concerns about how that purpose is implemented in the legislation.
One of our concerns that Mr. Fong will address in more detail is that the bill extends beyond private commercial transactions to government transactions. Another of our concerns is that the bill has a continuing preemptive effect.
We think the best way to address this matter is to provide an interim rule that sunsets as States implement the UETA into their own law. That way, we will have served the goal of creating a transition, but we won't have duplicative Federal rules and State rules continuing at the same time, which could cause questions about the extent to which any State enactment of the UETA is preempted by whatever residual preemption there is in the Federal law and actually could undermine the principal goal of the legislation, which is to create certainty.
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We also have concern about the breadth of the bill's preemption provisions. Some aspects of the bill, especially the party autonomy provision, go beyond contract formation to the use of electronic records in the carrying out of a contract. We have concerns that that might allow parties to circumvent regulatory rules such as notice and disclosure rules applicable to consumer transactions that are very important in the physical world because they protect consumers against unfairness and clearly have to be carried forward into this new electronic world.
Finally, the bill provides that the Secretary of Commerce may seek an injunction against State laws that are preempted. That, too, we think is not really a necessary element of the legislation. In our view, these issues will arise in private litigation when there are disputes about the validity or applicability of particular contracts.
In that case, whichever party is trying to defeat the State rule can raise the preemption issue and it can be litigated there. We don't think the government has a role. We don't have the resources to supervise State laws and see what should be in and what should be out. In fact, it would be unfortunate if the Secretary's failure to act were to be construed as somehow validating a State law that is in effect.
Thank you very much, Mr. Chairman. That red light has appeared.
Mr. COBLE. I don't want to imply to you all that you will be keelhauled if you continue. If you are in the middle of a sentence, please continue.
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Mr. PINCUS. To finish that thought, we think that provision could, again, create more uncertainty, instead of resolving it.
There is also the issue that, of course, the Commerce Department cannot litigate on its own. Our lawyers are at the Justice Department. So if there were to be such a provision, we think it should be structured so that the Attorney General, on behalf of the Secretary, would institute that kind of litigation.
Mr. COBLE. Thank you, Mr. Pincus.
[The prepared statement of Mr. Pincus follows:]
PREPARED STATEMENT OF ANDREW PINCUS, GENERAL COUNSEL, U.S. DEPARTMENT OF COMMERCE
Mr. Chairman, members of the Subcommittee, thank you for inviting me to testify today about H.R. 1714, the ''Electronic Signatures in Global and National Commerce Act.'' My statement addresses the Administration's views concerning only titles I and II of the bill.
H.R. 1714 addresses important concerns associated with electronic commerce and the rise of the Internet as a worldwide commercial forum and marketplace. The Internet is revolutionizing every aspect of business, not just in the United States, but throughout the world. Although still a small percentage of our total economy, the volume of commerce conducted over the Internet is growing exponentially. In early 1998, experts estimated that Internet retailing might reach $7 billion by the year 2000. This level was probably exceeded last year, and forecasters now project on-line retail sales greater than $40 billion by 2002. As to overall electronic commerce, we noted in last year's Emerging Digital Economy Report that forecasters were suggesting a possible level of $300 billion by 2002. Already that estimate is seen by experts as low, with Forrester Research estimating total electronic commerce (including business-to-business activity) as reaching $1.3 trillion by 2003.
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President Clinton and Vice President Gore, in issuing the Framework for Global Electronic Commerce in July 1997, noted that ''[m]any businesses and consumers are still wary of conducting extensive business over the Internet because of the lack of a predictable legal environment governing transactions.'' Both Congress and the Administration have been working to address this important potential impediment to commerce. As part of the Administration's effort, President Clinton directed Secretary Daley to ''work with the private sector, State and local governments, and foreign governments to support the development, both domestically and internationally, of a uniform commercial legal framework that recognizes, facilitates, and enforces electronic transactions worldwide.'' The Framework identified several key principles to guide the drafting of applicable legal rules:
parties should be free to order the contractual relationship between themselves as they see fit;
rules should be technology-neutral (i.e., the rules should neither require nor assume a particular technology) and forward looking (i.e., the rules should not hinder the use or development of technology in the future);
existing rules should be modified and new rules should be adopted only as necessary or substantially desirable to support the use of electronic technologies; and
the process should involve the high-tech commercial sector as well as businesses that have not yet moved online.
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The basic legal Framework needed to enable electronic transactions in a commercial context consists of two essential elements. First is the elimination of statutory rules requiring paper contracts. There is a broad consensus that—with the exception of a few specialized agreements (wills and property deeds, for example)—parties' electronic agreements should have the same legal status as paper agreements.
The second element involves when and how an electronic commercial contract becomes legally binding on, and therefore enforceable in court against, a person or entity that is a party to the contract. In the off-line world, the key question is whether a party has manifested its intent to be bound by the contract, which generally occurs through a written record, and often, affixing a written signature to that written record. A signature, however, often is not a legal requirement (for example, a binding contract may be formed through an exchange of telegrams). The issue is, how can we apply and use long-standing commercial principles in connection with transactions in cyberspace?
As in the off-line world, a party to an electronic transaction may use any of a variety of methods to evidence his identity or his agreement to the terms of a contract—a function that has come to be termed ''electronic authentication.'' He might type his name at the end of an e-mail message containing the terms of the agreement. He could end a message with a previously agreed code-word, or with an electronic facsimile of his written signature created by his personal use of an electronic stylus. He might also ''sign'' the message using some digital signature technology or some biometric technology. Moreover, these technology models are evolving rapidly, and further authentication technologies will doubtless be created. The private sector today is using many forms of electronic authentication.
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One other variable is important in understanding the legal standards governing electronic authentication. When electronic commerce was first beginning, some observers imagined a world in which everyone would have a unique digital identifier in a universally recognized format that would be used to authenticate his or her electronic transactions. Each individual could surf the Internet and enter into transactions with anyone he encountered, confident that the other party's digital identifier provided a legally valid means of identifying that party in the event the transaction ended up in court.
Although the future may see both a market and the infrastructure necessary for a comprehensive, real-time authentication system, such a system does not exist now and will not likely be in operation very soon. Most electronic transactions now occur in ''closed systems'' in which parties already related to each other in some way conduct electronic transactions under a mutually agreed system. Sophisticated versions of this model are found in sectors ranging from manufacturing to the banking and financial services industries where commercial parties establish the technological approach they will rely on as well as their rules for operating, assigning risk and settling disputes. In the manufacturing sector, for example, the three major U.S. auto makers are developing a global system to tie product development together with more than 15,000 suppliers operating around the world.
Since 1997, the Commerce Department has been working to carry out our Presidential mandate to promote an appropriate international legal framework for electronic commerce. At the same time, the National Conference of Commissioners of Uniform State Law (NCCUSL), after a two-year effort by experts in commercial law, has completed a model ''Uniform Electronic Transactions Act'' (UETA) to establish a predictable, minimalist framework for legal recognition of electronic records and electronic signatures. The UETA was approved by NCCUSL in July of this year and has been submitted to the States for adoption. California already has adopted its version of the measure. Other States' consideration of the UETA is active, and when adopted in some form by all of the States, we believe that the UETA will provide both an excellent domestic legal framework for electronic transactions and a model for the rest of the world. The UETA is generally enabling, not prescriptive, as it requires no one to enter into electronic contracts but merely supports electronic transactions when people wish to interact in this way. It is also technologically neutral.
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In the international arena our focus is on promoting our principles of minimalism and facilitation (as opposed to governmental mandates and regulation) as the basis for enabling electronic commerce worldwide. The 1966 UNCITRAL Model Law on Electronic Commerce reflects a broad consensus that communication of legally significant data in electronic form is often hindered by legal obstacles to the use of such data, or by uncertainty as to their legal effect or validity. The Model Law sets out internationally acceptable rules to remove such legal obstacles and support a more secure legal environment for electronic commerce across national borders. We are pleased that our States decided to build on this international consensus in developing the UETA.
Despite this theoretical consensus, however, at least two different legal models for electronic authentication are developing internationally. The first, represented by the UETA and the UNCITRAL Model Law, eliminates barriers to electronic agreements and electronic signatures without granting special legal status to any particular type of authentication.
The second model involves a greater degree of government regulation. Under that model, a government creates a preference for one or more particular types of electronic authentication by establishing specific technical requirements for electronic signatures—often providing a legal presumption that electronic contracts signed using the stated methodology are binding. The European Union's Electronic Signatures Directive, now in the final stages of consideration by the E.U. Parliament, follows this approach. I do not mean to suggest that techniques typical of this ''second'' approach are never appropriate for particular issues, but only that they should be reserved for specific categories of transactions where the public interest requires direct government oversight. The prescriptive approach, in our view, should not be adopted as a general rule.
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Since July 1997, we have been encouraging other countries, regardless of which approach they adopt, to include provisions in their laws assuring parties that their transactions involving electronic authentication will be recognized and enforced—so that ultimately such legal recognition will be worldwide. Under this approach, countries would: (1) eliminate paper-based legal barriers to electronic transactions by implementing the relevant provisions of the 1996 UNCITRAL Model Law on Electronic Commerce; (2) reaffirm the rights of parties to determine for themselves the appropriate technological means of authenticating their transactions; (3) ensure any party the opportunity to prove in court that a particular authentication technique is sufficient to create a legally binding agreement; and (4) treat technologies and providers of authentication services from other countries in a non-discriminatory manner.
We have been successful in encouraging the adoption of this approach in a variety of multilateral and bilateral contexts. In October 1998, the OECD Ministers approved a Declaration on Authentication for Electronic Commerce affirming these principles. Further, the Global Business Dialogue on Electronic Commerce (GBDe), a global private sector initiative, recently issued a recommendation to governments that strongly embraces this approach. In addition, we negotiated joint statements affirming these principles with several important trading partners, including France, Japan, Korea, Ireland, Australia and the United Kingdom. Further, we have asked UNCITRAL to consider a binding international convention on electronic transactions that would embody these principles.
The Administration supports legislation that promotes a predictable, minimalist legal environment for electronic commerce and encourages prompt state adoption of uniform legislation assuring the legal effectiveness of electronic transactions and signatures. Although we appreciate the significant work of the House Committee on Commerce to address the Administration's concerns with H.R. 1714, we oppose this bill in the form in which it was reported by the House Commerce Committee. I would like to summarize the principal areas of concern.
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Title I of the bill focuses on the domestic legal standards governing electronic contracts. First, we are concerned that the bill extends to government transactions (Federal and State), not simply agreements between private entities. We have strongly urged that H.R. 1714 be revised to exclude governmental transactions. The Administration believes that governments should use electronic commerce to the maximum extent feasible in their dealings with citizens. That is why we supported—and are working hard to implement—the Government Paperwork Elimination Act (GPEA), title XVII of Public Law 105–277, the goal of which was to increase the ability of citizens to interact with the Federal Government electronically.
We do not believe that additional legislation is needed at this time to promote the use of electronic commerce by governments. And we are extremely concerned that provisions designed principally to eliminate legal barriers to electronic transactions between private parties would be counterproductive if applied to the marketplace activities of governments. For example, the GPEA recognizes that the Federal Government should not dictate authentication standards to the private sector and guards against this possibility by specifically requiring that government standards be compatible with those used by commerce and industry. The GPEA also requires that agencies, where practicable, adopt multiple optional means whereby citizens and businesses can transact business with them. The agencies, under OMB guidance, are working diligently to implement these mandates. But government should not be forced to transact its business and accept records by any means, and according to any standard, that may be available to someone at a given moment. Such a requirement, which could be read into H.R.1714 in its present form, would be extremely expensive and inefficient, as well as inconsistent with the fulfillment of important goals involving the security and permanence of government information and records. The GPEA recognizes this important consideration, while at the same time ensuring that the government cannot dictate its preferred standards or methods to the private sector or use its substantial information technology purchasing power to dominate the private marketplace.
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Second, Section 102 of H.R. 1714 places significant, and we believe inappropriate, limits upon the States' ability to alter or supersede the federal rule of law that the bill would impose. This legislation should be limited to a temporary federal rule to ensure the validity of electronic agreements entered into before the States have a chance to enact the UETA. Once the UETA is adopted by a State, the federal rule would be unnecessary and should ''sunset,'' leaving the transaction to be governed by state law. As the bill is now drafted, States' laws would remain subject to federal preemption even when those States adopt the UETA ''to the extent'' that any State rule—including the UETA—fails to meet a number of criteria, which in themselves are not clearly defined. Most significantly, subsection (b) of Section 102, ''Effect on Other Laws,'' takes away the authority of states to avoid federal preemption that is granted by subsection (a) of that section. For example, Section 102(a) permits laws or other measures that ''modify, limit, or supersede'' the rules set out in Section 101, but Section 102(b)(4) renders ineffective a law or other measure that is ''inconsistent with the provisions of section 101.'' Deference to state law in the area of commercial transactions—particularly in the law of contracts—has been the hallmark of the legal system in this country, and we see no reason not to trust the States to adopt uniform rules consistent with the principles promoted internationally by the Administration and set out in H.R. 1714.
We also see no reason for the four-year limit imposed by Section 102 (a)(2) upon the time in which states may adopt laws or regulations to supersede the federal rule, or for limiting (as does Section 102(a)) the ability of states to override the federal rule only in the context of laws ''enacted or adopted after the date of enactment of this Act.''
In addition, the non-discrimination (with respect to technologies) provisions of Title I of H.R. 1714 as currently drafted place excessive limits on governmental authority. In particular, the specificity of sections 102(b)(1) and (2), concerning non-discrimination as to both technologies and methods, would appear to preclude any regulation of private parties' authentication or record-keeping practices—even where the transactions involved may be significantly affected with a public interest—as governments now do with respect to paper-based transactions. It is important to ensure the continued ability of governments to engage in limited regulation of some private party transactions in the public interest. For example, state financial regulatory agencies impose limited but important requirements upon financial institutions to ensure the safety and soundness of their transactions. Minimum standards for computer security and interoperability are also sometimes needed, as well as some protective rules involving writings, signatures, and the like—in either a ''paper-based'' or an electronic context.
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We also are concerned about the breadth of the party autonomy provision (Section 101(b)) to the extent it relates to the use of electronic records other than the contract itself. Many regulatory laws and regulations specify the content, format, and method of delivery for notices and disclosures that have been found necessary to avoid unfairness, especially in the context of consumer transactions. We are concerned that this provision, together with the limitations on state regulatory authority just discussed, would significantly impair the ability of the States to protect consumers. Any legislation in this area should not wipe out state consumer protection laws (or allow the drafting of form contracts that circumvent such laws) and should preserve the States' authority to adapt their consumer protection regimes to the electronic environment.
Third, we believe that section 102(c), authorizing the Secretary of Commerce to bring actions to enjoin non-conforming state laws, would be counterproductive. Absent such a provision, section 102 would be self-executing and enforceable in private litigation by parties affected by the non-conforming laws. The mere existence of this injunctive authority, on the other hand, would tend to validate the conformity of any state law against which enforcement action were not taken or were not taken promptly. In addition, to the extent such a provision is included, it should provide that any litigation would be instituted by the Attorney General on behalf of the Secretary of Commerce.
Finally, I want to note that one issue that we raised previously concerning the scope of H.R. 1714 appears to have been addressed by the Committee on Commerce. We were extremely concerned that the bill as introduced overrode federal as well as state law. We note that the reference to federal law in Section 102 has been eliminated. We suggest adding language to Section 101 to make clear that the measure affects only state law standards.
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I also would like to outline our views on Title II, which provides for a Department of Commerce study (as well as other actions) concerning the elimination of barriers to the use of electronic signatures. The thrust of section 201, the study provision, is consistent with the Administration's commitment to ensure the careful review of possible legal and regulatory barriers to electronic commerce. However, we believe that the study required by this section should not be repeated on an annual basis. A biennial update of such a study, if not a periodic update as needed, would be more appropriate given the general speed of legal developments in this area. Also, we note that the Department of Commerce would need to depend in large part upon information provided by the private sector or developed by other agencies and even foreign governments as to regulatory developments within their jurisdiction or particular knowledge.
In summary, we believe that H.R. 1714 contains a number of significant flaws that would have to be addressed before the Administration could support this legislation. We do stand ready, however, to continue to work with the Congress on this important legislation.
Thank you Mr. Chairman. I would now be happy to answer any questions you may have.
Mr. COBLE. Mr. Fong.
STATEMENT OF IVAN K. FONG, DEPUTY ASSOCIATE ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE
Mr. FONG. Good morning, Mr. Chairman and members of the subcommittee. Thank you for inviting the Department of Justice to state its views on H.R. 1714. I am pleased to have the opportunity today to express the Department's views on the important subject of electronic contracts and electronic signatures.
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As Mr. Pincus has noted, this administration has long supported the growth and development of electronic commerce. Since 1997, the Department of Justice has had its own electronic commerce working group, comprised of over 50 attorneys from more than a dozen of the Department's components. Some of this activity is described in greater detail in material available on the Department of Justice's website.
Through this and other working groups, the Department is actively engaged in a variety of electronic commerce policy issues. Just last month the President issued an executive order, Executive Order 13133, that directs the Attorney General to chair an Interagency Working Group on Unlawful Conduct Involving the Use of the Internet. This working group will review certain Internet-related law enforcement issues in the context of the administration's policies of support for industry self-regulation where possible, technology neutral laws and regulations, and, more importantly, an appreciation of the Internet as an important medium, both domestically and internationally, for commerce and free speech.
As the Nation's litigator, legal adviser, and primary law enforcement agency, the Department of Justice strongly supports the administration's efforts to encourage the healthy growth of electronic commerce.
The current bill under review by this subcommittee, H.R. 1714, represents a significant effort to address the legal status of electronic signatures in transactions and contracts. The proposal contains broad provisions regarding the validity of electronic contracts and electronic signatures, including those to which the Federal Government and regulated entities are parties.
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The Department supports efforts to ensure that government services are provided in efficient ways that are accessible yet still protect the public. Accordingly, the Department supports the increased use of electronic transactions and electronic-based processes by government agencies. At the same time, we want to be careful to ensure that adequate safeguards exist so the government can retain its ability to enforce its agreements, programs, and laws.
The Department is concerned that H.R. 1714, as reported by the House Committee on Commerce, might limit the government's ability to put in place sufficient safeguards to ensure the effectiveness and enforceability of Federal agreements, programs, and laws. For example, in transactions in which the government or a regulated entity is a party, H.R. 1714 does not address the extent to which the use of electronic processes may affect the availability of records, the usability, persuasiveness, and admissibility in court of information in electronic form, and other legal responsibilities that may arise from the electronic processing of information.
These issues are important, and they are likely to take on heightened significance in view of the fact that the government is all too often a target of fraud, and although we are all familiar with fraud that is committed against government agencies through the use of paper records, agencies must also be able to manage risks arising from the potential for fraud undertaken through the use of electronic records.
In addition, except for title III of the bill, H.R. 1714 does not provide for regulatory needs that relate to agreements made by regulated entities whose own standards may be insufficient to serve the public interest. For example, disclosure or recordkeeping requirements that currently apply to regulated industries or transactions should continue to apply when such transactions are conducted electronically. These concerns, too, must be addressed systematically and deliberately.
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Congress last year, with support from the administration, enacted the Government Paperwork Elimination Act to provide an orderly process for increasing the ability of citizens to interact with the Federal Government electronically. To help agencies decide whether electronic processing of information is practicable and how best to achieve it, Congress directed the Office of Management and Budget to develop procedures for the use and acceptance of electronic signatures by executive agencies.
The GPEA links the legal effectiveness of electronic government processes to the procedures used to implement these processes. This linkage is essential to effective adoption of electronic processes by the government.
OMB has been working and continues to work diligently to produce its final procedures. We believe that enactment of H.R. 1714 could disrupt these deliberative efforts undertaken pursuant to congressional directive to allow for the use by Federal agencies of electronic transactions and processes in efficient ways that also protect the public interest.
Thank you, Mr. Chairman, for your leadership, and for the opportunity to present our views on this important topic. I would be pleased to answer any questions you might have.
Mr. COBLE. Thank you, Mr. Fong.
[The prepared statement of Mr. Fong follows:]
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PREPARED STATEMENT OF IVAN K. FONG, DEPUTY ASSOCIATE ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE
Thank you, Mr. Chairman and Members of the Subcommittee, for this opportunity to provide the Department of Justice's views on H.R. 1714, the ''Electronic Signatures in Global and National Commerce Act.'' My name is Ivan Fong. I am a Deputy Associate Attorney General at the Department of Justice. The Office of the Associate Attorney General is responsible for managing and overseeing, among other areas, the Department's civil litigating components, which include the Antitrust, Civil, Civil Rights, Environment and Natural Resources, and Tax Divisions. My particular responsibilities include oversight of civil litigation and environmental matters as well as technology issues, which include Internet and electronic commerce issues. I am pleased to have this opportunity today to express the Department's views.
This Administration has long supported the growth and development of electronic commerce. In its Framework for Global Electronic Commerce in July 1997, the Administration declared its support for electronic commerce generally and, in particular, for the development of a legal framework that ''recognizes, facilitates, and enforces electronic transactions worldwide.'' An interagency Working Group on Electronic Commerce, of which the Department of Justice is an active member, meets regularly to discuss and address electronic commerce policy issues. And, since 1997, the Department of Justice has had its own Electronic Commerce Working Group, comprised of over fifty attorneys from more than a dozen of the Department's components. (For more information on electronic commerce activity at the Department, please see the Department's website, at www.usdoj.gov/criminal/cybercrime/ecommerce.html.)
Through these working groups, the Department is actively engaged on a variety of electronic commerce policy issues. For example, earlier this year, the Department participated in the Federal Trade Commission's workshop on Consumer Protection in the Global Electronic Marketplace. Department officials have also testified before Congress on issues relating to Y2K liability, Internet gambling, and the sale of prescription drugs over the Internet. In addition, just last month, the President issued an Executive Order (E.O. 13,133) that directs the Attorney General to chair an interagency Working Group on Unlawful Conduct Involving the Use of the Internet. This Working Group will review certain Internet-related law enforcement issues in the context of the Administration's policies of support for industry self-regulation where possible, technology-neutral laws and regulations, and an appreciation of the Internet as an important medium both domestically and internationally for commerce and free speech. As the Nation's litigator, legal advisor, and primary law enforcement agency, the Department of Justice strongly supports the Administration's efforts to encourage the healthy growth of electronic commerce.
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The current bill under review by this Subcommittee, H.R. 1714, represents a significant effort to address the legal status of electronic signatures in transactions and contracts. The proposal contains broad provisions regarding the validity of electronic contracts and electronic signatures, including contracts and agreements to which the federal government and regulated entities are parties.
The Department of Justice, of course, strongly supports all efforts to ensure that government services are provided in efficient ways that are accessible to, yet still protect, the public. Accordingly, the Department supports the increased use of electronic transactions and electronic-based processes by government agencies. At the same time, however, we want to be careful to ensure that adequate safeguards exist so that the government can retain its ability to enforce its agreements, programs, and laws.
The Department is concerned that H.R. 1714, as reported by the House Commerce Committee, might limit the government's ability to put in place sufficient safeguards to ensure the effectiveness and enforceability of federal agreements, programs, and laws. For example, in transactions in which the government or a regulated entity is a party, H.R. 1714 does not address the extent to which the use of electronic processes may affect the availability of records; the usability, persuasiveness, and admissibility in court of information in electronic form; and other legal responsibilities that may arise from the electronic processing of information (such as those imposed by the Privacy Act, the Freedom of Information Act, and the Federal Records Act). These issues are important, because they affect the government's ability to enforce its agreements and programs and to defend itself from potential lawsuits. These issues are likely to take on heightened significance in view of the fact that the government is all too often a target of fraud, and although we are all familiar with fraud that is committed against government agencies through the use of paper records, agencies must also be able to manage risks arising from the potential for fraud undertaken through the use of electronic records.
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In addition, except for Title III of the bill, which authorizes the Securities and Exchange Commission to provide standards for electronic contracting under federal securities laws, the bill does not provide for regulatory needs that relate to agreements made by regulated entities, whose own standards may be insufficient to serve the public interest. For example, disclosure or record keeping requirements that currently apply to regulated entities or transactions should continue to apply when such transactions are conducted electronically. These concerns, too, must be addressed systematically and deliberately.
Indeed, Congress last year, with support from the Administration, enacted the Government Paperwork Elimination Act (''GPEA''), title XVII of Pub. L. 105–277, to provide an orderly process for increasing the ability of citizens to interact with the federal government electronically. Under the GPEA, executive agencies must, by October 2003, provide for the option of electronic submission and processing of information, when practicable as a substitute for paper, and for the use and acceptance of electronic signatures, when practicable (GPEA §1704). To help agencies decide whether electronic processing of information is practicable, and how best to achieve it, Congress directed the Office of Management and Budget (''OMB'') to develop procedures for the use and acceptance of electronic signatures by executive agencies (GPEA §1703). Congress further provided that electronic records would ''not be denied legal effect'' if they were submitted or maintained in accordance with the OMB procedures (GPEA §1707). The GPEA thus links the legal effectiveness of electronic government processes to the procedures used to implement these processes. This linkage is essential to effective adoption of electronic processes by the government.
OMB has been working and continues to work diligently to produce its final procedures by April 2000. Earlier this year, OMB published a proposed draft of its procedures (64 Fed. Reg. 10,896 (Mar. 5, 1999)). The Department of Justice submitted written comments to OMB on the proposed draft procedures, describing in substantially greater detail some of the themes mentioned above. (The Department's comments on OMB's proposed procedures under the GPEA are available at www.usdoj.gov/criminal/cybercrime/gpea.htm.)
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In short, OMB is already working with many federal agencies, including the Department of Justice, to define a set of procedures that address issues, including those identified above, that arise from federal agency use of electronic transactions and processes. We believe that enactment of H.R. 1714 as reported could disrupt those deliberative efforts, undertaken pursuant to Congressional directive under the GPEA, to allow for the use by federal agencies of electronic transactions and processes in efficient ways that also protect the public interest.
Even if H.R. 1714 were amended to apply only to transactions between private parties, we would remain concerned, because it would still cover transactions in which the federal government succeeds to the position of one of private parties who entered into the contract. For example, the federal government may in some instances find it necessary to enforce contracts made by private lenders to whom the government provides loan guarantees. Similarly, in legal actions against businesses related to reporting or business records, the government's evidence may depend on the terms and conditions established by the private parties to the transaction.
Thank you for the opportunity to present the views of the Department on H.R. 1714 and this important topic. We look forward to working with this Subcommittee or Committee in any way that you would find helpful. I would be pleased to answer any questions you might have.
Mr. COBLE. Thank you both for appearing before our subcommittee.
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Mr. Pincus, in your statement you argue that if H.R. 1714 is enacted, it could force the government to transact business and accept records by any means and according to any standards, which could pose a security threat to government systems. I am not quarrelling with that, but give us an example.
Mr. PINCUS. One of the concerns is that the bill has a technology neutrality requirement, which we agree with with respect to government regulation of private transactions, because there are a lot of different ways to sign electronically, anything from just sending an e-mail with your name typed at the bottom to the most sophisticated and secure cryptography.
We wouldn't want to have a situation where, for example, government agencies, because of the requirement that there be no discrimination, were required to accept just an e-mail signed with someone's name at the bottom as a way to authorize a change in Social Security benefits or for the filing of a tax return, since we clearly want to know that the person filed it in order to hold them to the things that are in that form or that tax return.
So the concern is that when the government itself is a party to the transaction, just like any other party, it should be entitled to determine the level of security and trust that it needs for that transaction and to implement that. We are afraid that the nondiscrimination provision denies that to governments at all levels.
Mr. COBLE. Does S. 761, in your opinion, have similar problems?
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Mr. PINCUS. S. 761 excludes government transactions, so it does not have that problem, because government transactions are carved out.
Mr. COBLE. Mr. Fong, section 102(C) of H.R. 1714 appears to have assigned to the Secretary of Commerce the duty of bringing an action to enjoin the enforcement of a State law that the Secretary of Commerce believes is inconsistent with section 101. What is the Justice Department's interpretation of this provision of H.R. 1714?
Mr. FONG. This type of language, which appears in several other statutes, is interpreted to mean that the actual injunctive action would, in fact, be brought by the Department of Justice as the Commerce Department's lawyers, working, of course, very closely with Commerce. That is, the language that is in section 102(C) does not confer independent litigating authority on the Department of Commerce. That is how both we and the Commerce Department agree that this language should be interpreted.
Mr. COBLE. Let me try to get one more question in. See, the red light applies to us, too, Mr. Pincus.
In your testimony, and this may be an extension of the question I put to Mr. Fong, in your testimony, Mr. Pincus, you stated that, instead of the Secretary of Commerce, that the Department of Justice would be the appropriate agency to bring an action for injunction against such statute that is not in compliance with H.R. 1714 once it is enacted. Tell us why you prefer the Department of Justice; and, also, do you have any concerns with the actions to enjoin section of H.R. 1714, regardless of who has the authority?
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Mr. PINCUS. Let me answer that question first, if I might, Mr. Chairman.
Our concern is with having that section at all, frankly. We don't have the resources in the Department to conduct our own examination of State statute books to figure out where there are problematic laws. The States themselves actually are going through that process as they enact UETA. That seems appropriate. We don't have the resources, so it would be extremely difficult for us, on our own, to conduct that examination.
Clearly, people could come to us, bring things to the Department's attention, and then the Department could evaluate whether to move forward. Our concern is that, because that provision is there, parties to a transaction and perhaps even courts might give significance to whether or not the Secretary, through the Attorney General, had brought such an action.
We think that, because the odds are that we won't be doing a lot of that for the reasons I just mentioned, this provison might prevent the appropriate adjudication of these issues.
Really, as with many other statutes that preempt State law with respect to dealings between private parties, we think the appropriate way for this to proceed is for there to be a rule, a Federal rule, and then leave it to the parties to the transaction and to the dispute to invoke that rule and to litigate its applicability when it arises.
Clearly, the government would have the ability to intervene to file an amicus brief if there was some important government interest involved, but, as a routine matter, we are afraid the provision will create an expectation that cannot be met and therefore affect the interpretation of the statute.
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Mr. COBLE. One quick question.
Mr. Fong, do you embrace that theory?
Mr. FONG. Yes.
Mr. COBLE. I figured you would.
The gentleman from California.
Mr. BERMAN. Thank you, Mr. Chairman.
My education on this subject started after I finished speaking, or, actually, while I was speaking it started and continues from now at least until the time of the markup, so I want to just go back to make sure I understand some basics here.
Somewhere, those people who do those uniform codes got together with the participation of what? The Commerce Department and the Justice Department? The Commerce Department? Any Federal presence?
Mr. PINCUS. We were involved in the process mostly as observers but with a large amount of input from all facets of the private sector.
Mr. BERMAN. Those people put together a Uniform Electronic Transactions Act, and now it is out to all the States. The States are starting to adopt that act?
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Mr. PINCUS. Yes.
Mr. BERMAN. How widely or how wide-ranging has been the adoptions?
Mr. PINCUS. So far, your State is the leader. California has acted. I think there is a witness on the next panel from NCCUSL who can probably give you more details. My understanding is that it was finalized at the end of July. My understanding is that it will be in 20——
Mr. BERMAN. California has already adopted it?
Mr. PINCUS. Yes. My understanding is a number of State legislatures are going to have it put before them this year. Whether they will get to final action, I don't know. But I think that action will be prompt on the scale of the speed with which these things are done. I think the NCCUSL people realize the importance of moving quickly, and they have made it a priority for the people in the States to try and get action soon.
Mr. BERMAN. As an observer of this process, what was your conclusion about what they came to, what they put together?
Mr. PINCUS. We think that they come up with a very good product; that it enables—it is technology neutral. It does not direct the market, but it provides a legal framework for the market to move forward.
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Mr. BERMAN. How did they deal with the government contracts issue?
Mr. PINCUS. They have special provisions. The bill has more than 20 sections—or about 20 sections. There is a special section applicable to government. They separate regulation of private transactions from regulation of the government. That happened in the uniform law process in California; they made that kind of separation. The uniform law provides a structure, but it provides that the States can carve out certain things.
Mr. BERMAN. Choose this, choose that?
Mr. PINCUS. And maybe leave certain regulatory provisions in place. I have not seen it, but I understand the California law identifies some close to 100 laws that are not to be affected, with the idea that they involve specific regulatory requirements applicable to transactions in the physical world and that there has been a directive to the California law revision authorities to look at those statutes and come up with electronic analogs for them so they can then be considered by the legislature.
Mr. BERMAN. The bill in front of us in effect preempts this uniform code?
Mr. PINCUS. Well, it allows the States to adopt it, but the concern is that it has some continuing restrictions on State authority. What is very unclear is, if a State chooses to make exemptions or accommodations to fulfill other public policy, regulatory, or consumer protection goals, how the continuing Federal preemption in this bill will interrelate with those State choices. It creates a lot of uncertainty.
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We think the risk is that, even after California has enacted UETA, the continuing preemption under this bill might prevent California from making those adjustments that I talked about in terms of translating regulatory consumer protection requirements into the electronic world or might limit California's options in doing that. We don't think that is appropriate.
Mr. BERMAN. Does the House bill that is in front of us, how does it deal with, say, something like the IRS regulations on electronic filing of tax returns? Does it defer to those regulations, or does it supersede them in any fashion?
Mr. PINCUS. Well, the bill has moved an important step forward since it was reported by the Committee on Commerce, because now restrictions on Federal regulatory authority have been removed, although we think it could be a little clearer, so it appears to allow the Federal Government to supersede these rules if it reenacts its own regulations.
But the problem is that although the reference to Federal regulations as being subject to the same standards as those of the States has been removed, transactions in which the Federal Government is involved as a party are still included. So the bill is a little ambiguous in this area. And, of course, the types of concerns that we have with respect to the IRS rules, the States also have with respect to their tax filings and all kinds of transactions. Those clearly are covered.
Mr. BERMAN. You want to preserve the right of the government to enter into or to try and get people to enter into adhesion contracts with the government?
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Mr. PINCUS. That is right. Well, we have some constraints on our ability to impose terms, such as the legislative process, that might not be true of private parties.
Mr. COBLE. The gentleman from Massachusetts, Mr. Delahunt.
Mr. DELAHUNT. Mr. Chairman, I guess my problem is in this area of the continuing preemption.
Since I have served on this committee, which is a little over 2 years, we are dealing with the issue of class actions, which diminishes the State role. We are dealing with proposals relative to property rights, which diminishes the State role. We are continuing to federalize State criminal law. We are diminishing the State role in terms of product liability issues. The direction we are heading in, we might as well just eliminate State courts. I think I understand, too, that this is the era of e-commerce
In fact, there was a recent opinion piece that ended up on my desk from some group that did a study which showed that the States at some point in time, and I don't even know if it is 5 or 10 years out, could very well lose some $15 billion in terms of State revenues because of e-commerce.
I know it is wonderful to have uniformity, and it very well could be necessary, because I think everyone here wants to nurture e-commerce. I think the three of us here on the panel supported the moratorium on new taxes relative to the Internet. But I am just uneasy with this concept.
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We hear from representatives of the Administration saying it is unclear as to the relationship between the, I think in your words, Mr. Pincus, the continuing preemption, even if a State should sign on to the new uniform act.
Any comments on what I am saying?
Mr. PINCUS. We agree with you, certainly on a number, if not all, of the issues that the gentleman has mentioned. The Administration has expressed the same concerns.
I think here, especially where the States have put in a lot of time, as Congressman Berman mentioned, 2 years studying this matter, and have come up with a product that deals with a lot of the details, and the details are important in issues like this, we think that that product deserves respect, especially because it comes in a context where the States have been able to develop a uniform commercial law that has facilitated interstate commercial dealings in the country for 50 years. That is what surprises me.
Mr. DELAHUNT. Because the States have shown responsibility in terms of commercial and contractual relationships. Maybe the second panel can address this question, but let me pose it.
Can you define the need, or is this a serious problem now in the marketplace? I don't know, maybe you can grade it on a scale of 1 to 10, but in your judgments, when would you expect that there would be a critical mass of States adopting the uniform code, which could compel all 50 States to sign on?
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Mr. PINCUS. Well, we started the process of the Administration's consideration of this legislation earlier this year with the view that really there was no need, that we had not seen the need for even an interim measure.
Through the interactional legislative process, we came to the conclusion that we could support something if it was clearly an interim measure and as long as it did not do any harm during that interim period, including no harm by disrupting consumer protections, regulatory requirements and things like that.
So clearly e-commerce is growing, if we look at the numbers. I think it is probably just as clear that there are lawyers worrying, as lawyers always do, about whether things are enforceable or not. To the extent some interim clarity can be provided without sacrificing these other goals, we are supportive of that. But that is why we think it has to be very targeted, very interim, and designed to just deal with the focal question of contract formation, which is where I think there can be some very minimal, clear rules.
But when we get into these other areas about notices and disclosures, because they are regulatory requirements, it becomes much more complicated.
Mr. DELAHUNT. Mr. Chairman, just one more question. I will repeat the question, the last question that I asked. Because you were observers during the course of the discussions among the Uniform Code Commissioners, do you have any sense as to the speed with which the States will respond?
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You indicated California. California is obviously a significant State. I understand, obviously, that the State legislature, for a variety of different reasons—they have Mr. Berman, of course, representing them here, and that is of great consequence——
Mr. BERMAN. That is why they want to preserve State options.
Mr. DELAHUNT. But in terms of the receptivity of the States, do you expect it will happen quickly?
Mr. PINCUS. Well, I think it will for two reasons.
First of all, I think NCCUSL, the State representatives to the uniform law conference, are aware that this decision is before Congress, and that in itself is prodding the States to move forward more quickly because they would obviously like to be the masters of their destiny. So I think that that has prodded the State representatives to give this issue more visibility, more prominence, and to push it more quickly within their States.
I also think that there is an interest, as there is in Congress and as we see in countries or in governments around the world, in doing whatever governments can do to facilitate this new economy.
And I think that among uniform laws—and I don't want to malign any particular legal area by thinking of one that might not be as topical—this is clearly a topical area. So it seems to me for that reason, in addition, that URTA will get more attention than the run-of-the-mill uniform law might get.
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Mr. COBLE. Mr. Berman, any additional questions?
Mr. BERMAN. One more question—or one short question and one longer question. The short question, the Senate bill, what do you guys think about that?
Mr. PINCUS. The Administration supported the bill that came out of the Senate Committee on Commerce. Some concerns were raised about the scope of that bill, especially with respect to consumer protections. There have been a number of discussions ongoing about that.
Senator Abraham said on Tuesday that there was going to be a substitute amendment jointly offered on the Senate floor by him and Senator Leahy, which I think will address those concerns. But they have not gotten the bill brought up yet on the Senate floor.
Mr. BERMAN. Under State law there are all kinds of issues involving how to authenticate contracts in the context of litigation. Just tell me, how do either the uniform code or this bill—how do they deal with authentication issues for purposes of enforceability? What is the structure for that?
Mr. FONG. The UETA is meant to be merely a procedural, rather than substantive, set of rules that would guide the kinds of issues that you discuss. It has a nondiscrimination principle that merely provides that, if the record is in electronic form, it may not be excluded simply because it is in electronic form.
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More importantly, the reporters' note to this section, which is 112, provides that, ''Nothing in this section relieves a party from establishing the necessary foundation for the admission of an electronic record.'' .
Mr. BERMAN. What was that——
Mr. FONG. Nothing would relieve a party from establishing a necessary foundation.
The general rule is, of course, that the proponent of a piece of evidence must lay the foundation; and, in that sense, we think UETA would not change those general rules that apply, whether they are in State court or in Federal court.
Mr. BERMAN. How about this bill, the House bill?
Mr. FONG. This bill does not contain——
Mr. BERMAN. Does not address the issue?
Mr. FONG. Right. We think for that reason it creates uncertainty on this issue.
Mr. BERMAN. Thank you, Mr. Chairman.
Mr. COBLE. I thank the gentleman from California.
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We have been joined by the gentleman from Wisconsin and the gentleman from Virginia. Do either of you have questions?
Mr. SENSENBRENNER. No questions, Mr. Chairman.
Mr. GOODLATTE. No questions.
Mr. COBLE. Good to have you with us.
Mr. Pincus and Mr. Fong, thank you for joining us. I think that you are closer to this than I, but I think the administration has come down in favor of the Senate bill, so if you all can get the administrative oars in the water, we might move along, because I think this is critical to the well-being of our economy.
I appreciate you all being here. Thank you.
Mr. FONG. Thank you, Mr. Chairman.
Mr. PINCUS. Thank you.
Mr. COBLE. We will now call forward the second panel.
The first witness on our second panel will be the Honorable Pamela Meade Sargent, the U.S. Magistrate Judge of the Western District of Virginia, and may well be your constituent, Mr. Goodlatte.
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Judge Sargent received her J.D. From the University of South Carolina School of Law and her BA in communication studies from the Virginia Polytechnic Institute and State University and is a magna cum laude graduate.
I did not know that you where from Mr. Goodlatte's district or I would have let him introduce you, Ms. Sargent.
Ms. SARGENT. Actually, Mr. Chairman, I belong to Mr. Boucher, who is not here. I am from Abingdon. I will claim Mr. Goodlatte, but I belong to Mr. Boucher.
Mr. COBLE. Our next witness is Scott Cooper, the Manager of Technology Policy at Hewlett-Packard Company. Mr. Cooper is responsible for global electronic commerce, Internet, and advanced network services issues for Hewlett-Packard. He has worked closely on United States legislation dealing with electronic signatures and authentication. Prior to working for Hewlett-Packard, Mr. Cooper was director for electronic commerce at the American Electronic Association.
Our next witness is Mr. David Peyton, who has been Director of Technology Policy at the National Association of Manufacturers since May 1996. He began his career at the National Commission on New Technological Uses of Copyrighted Works in 1996. Mr. Peyton holds a bachelor's degree in government and foreign affairs, Phi Beta Kappa from the University of Virginia, and a masters in political policy from the University of California at Berkley.
We may have to keep the VPI and the University of Virginia separated. I am glad there is someone between you two and therefore no scuffle will be forthcoming.
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Our final witness on this panel is Margo Freeman Saunders, who has been the Managing Attorney of the Washington office of the National Consumer Law Center. Ms. Saunders' duties include representing low-income clients in Congress on financial credit issues and analysis of water and energy issues as they affect low-income people.
Prior to coming to Washington in September 1991, she was the consumer specialist for the North Carolina Legal Services. Ms. Saunders holds an undergraduate degree from Brandeis University and is a graduate of the University of North Carolina School of Law.
You and I share a mutual alma mater, the school of law, Ms. Saunders. Good to have you.
We have written statements from each of you. It is good to have you with us. I would remind you all again of the ever-present red light. When you see it illuminated, that is your signal to wrap it up.
Now, we have a vote on, I am told by the bells. It appears there are two votes, probably one 15- and one 5-minute vote. If you all will rest easy, we will be back imminently.
[Recess.]
Mr. COBLE. Folks, I apologize for the delay, but the votes did come without notice, so we had to respond to that.
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I want to apologize, as well, to the panel. Oftentimes we are required to be at four or five places simultaneous, as I am sure you all are required to do in your respective jobs. Today is one of them days, as we say in the rural South.
I am going to have to depart before you all conclude. Do not take my departure as an indication of lack of interest. I assure you that is not the case. I think Mr. Goodlatte will relieve me when my time comes.
Mr. COBLE. We will commence; and, Ms. Sargent, why don't you begin? We will follow right on down the line.
STATEMENT OF PAMELA MEADE SARGENT, U.S. MAGISTRATE JUDGE, WESTERN DISTRICT OF VIRGINIA
Ms. SARGENT. Thank you, Mr. Chairman.
I am here on behalf of the National Conference of Commissioners on Uniform State Laws. This is the group that has promulgated the Uniform Electronic Transactions Act. I am one of ''those guys'' that have done this act. In fact, I was a member of the drafting committee which actually drafted the Uniform Electronic Transactions Act over the course of the last couple of years. So I appreciate the opportunity on behalf of NCCUSL to be here and to share our views on this House resolution.
I want to convey our conference's appreciation for the position that has been given to our uniform act, the UETA, in this bill. I want to say right up front that the conference, the Uniform Law Commissioners, supports the overall goal of this act. That is to promote a predictable, minimalistic legal environment for electronic commerce.
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However, I also need to state right up front that the conference strongly believes that the best way to accomplish this goal is by adoption of uniform State legislation, that being namely the UETA, rather than by Federal legislation which could possibly preempt State commercial law. That is one of our biggest concerns. I want to focus on that today in a moment.
I want to get away from my prepared remarks only because I want to answer some of the very specific questions that have been raised today and have been raised to some of the other gentlemen, and I think perhaps I am a little bit better prepared on behalf of the conference to answer these questions about the UETA.
The UETA project began more than 2 years ago. Of course, the conference itself is comprised of representatives from 53 jurisdictions. All of the States, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have representatives in the conference.
The drafting committee had a total of seven public meetings. These were not 1-hour meetings. These were 3-day meetings, 8-hour days. In attendance at those meetings were numerous representatives, attorneys, law professors, public officials, business representatives, and representatives from various local, State, and Federal agencies and governments.
I do want to express here at this point that there were many, many Federal agencies who participated in our process. In particular, just off the top of my head, I can recall today that there were representatives of the IRS on occasion, the Federal Reserve, Freddie Mac, Fannie Mae, Commerce, and there were many other representatives of other departments and agencies who were present.
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These committee meetings were attended by numerous observers. I use the word ''observers'' because that is how they are referred to, but that really is not a good description. Everyone who attended these meetings, every person was actively involved in the drafting of this act. When we have observers, they are not placed in the gallery. They are brought up to the table. They have the floor. They are able to talk and comment about the act and share their comments with the drafting committee.
I tell you this because I want to emphasize that the UETA that was adopted this July by the conference and is now ready to be introduced in all of the States, it really is a product of very wide consensus. It is an enabling bill, it is not intended to be a regulatory bill, and I want to state that right up front. It is an enabling bill which was designed to remove the unintended impediments to electronic commerce and transactions without in any way overriding the established law which governs the substance of those transactions.
We believe we have a good product. It is well-reasoned, it is well-drafted, and it is out there. It has been adopted by the conference. It has been introduced and has been adopted by the California legislature. It has been enacted into law.
To answer the specific questions about how fast a track it is on, we anticipate that in this legislative session—and by ''this legislative session'' I mean not just 1999, because many of the State legislatures do not meet again until after the turn of the year—but in this new legislative session, that 27 jurisdictions, the act will be introduced in 27 separate jurisdictions. In many of them, such as Virginia, Utah, Massachusetts, Pennsylvania, Kentucky, we are very hopeful that it will be adopted and enacted.
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Mr. COBLE. Thank you, Judge Sargent.
[The Prepared Statement of Judge Sargent follows:]
PREPARED STATEMENT OF PAMELA MEADE SARGENT, U.S. MAGISTRATE JUDGE, WESTERN DISTRICT OF VIRGINIA
I appreciate the opportunity to provide the House Committee on the Judiciary Subcommittee on Courts and Intellectual Property with the views of the National Conference of Commissioners on Uniform State Laws regarding H.R. 1714. The Conference supports the overall goals of this legislation of promoting a predictable, minimalist legal environment for electronic commerce. However, we strongly believe this goal will best be served by the prompt adoption of uniform state legislation—namely the Uniform Electronic Transactions Act or ''UETA.''
We must of course appreciate the position that UETA has been given in H.R. 1714. And the criticism of provisions in H.R. 1714 should not be taken as criticism of the good will and good faith of the drafters of H.R. 1714. Even with the deference to UETA shown in H.R. 1714, its provisions are predictably so troublesome, we feel compelled to comment on the problems we see in these provisions. But, first I would like to give some background on UETA.
UETA represents the measured, careful development of appropriate law that the NCCUSL has traditionally provided to the state legislatures, a statute that beneficially adapts the law to changed commercial circumstances, but avoids disruption of business, unneeded litigation and other unfortunate, unintended consequences.
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The UETA project began a little over two years ago with a study by the National Conference of Commissioners on Uniform State Laws. Efforts were already underway to make the Uniform Commercial Code electronically friendly. That study indicated that comparable efforts in other state law areas to those accomplished or under way in the Uniform Commercial Code to remove barriers to e-commerce were desirable. The study also indicated possible initiatives at the federal level, but emphasized the desirability of a state law initiative which could be expected to meld more smoothly with the state laws upon which it would impact, and would avoid disruption while encouraging e-commerce. A federal statute, which would rely upon the all or nothing approach of preemption to impose rules of law on the states, risks disrupting existing commerce, including commerce that is already conducted in electronic form. There are sad examples of this problem existing in federal legislation on consumer credit and secured transactions in farm products. Based on these considerations, the NCCUSL went forward with the drafting project.
The drafting committee created in response to the study began work and in the two years spent on the draft established a wide consensus on what is necessary to remove unintended impediments but at the same time not to override laws that establish necessary requirements not appropriately met in e-commerce. The drafting committee concluded its work with approval of UETA at the NCCUSL conference in July. Thus, UETA bills are currently being prepared for widespread adoption in the state legislatures next year.
UETA is designed to accomplish the following goals
Remove writing requirements which create barriers to electronic transactions.
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Remove signature requirements which create barriers to electronic transactions.
Insure that contracts and transactions are not denied enforcement because electronic media are used.
Avoid having the selection of medium (paper v. electronic) govern the outcome of any dispute or disagreement.
Assure that parties have the freedom to select the media for their transactions by agreement.
Provide for the enforceability of transactions conducted via electronic agents.
Furnish appropriate standards for the use of electronic media to give notices.
Authorize state governmental entities to create, communicate, receive, and store records in electronic records.
Encourage state governmental entities to move to electronic media in a manner which maximizes interoperability and compatibility of systems.
Fundamental principles which have governed all choices in the drafting are 1) to encourage and maximize the freedom of markets to achieve efficient and fair market solutions and 2) the freedom of both technology and markets to continue to evolve and develop. One guiding principle is that all solutions must be technology neutral and business model neutral. A second guiding principle is to do only what is essential to create a framework for electronic commerce, neither displacing the substantive law of the jurisdictions applicable to transactions nor creating a new regulatory regime.
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UETA is designed to interact with existing state law, assuring that the results and consequences of transactions do not vary on the basis solely of the media selected by the parties for conducting and recording their transactions. UETA provides, among other things, that electronic records, transactions and contracts are as effective and enforceable as if done on paper, that electronic signatures are effective and enforceable, that they are as admissible into evidence as their paper counterparts, that the parties are free to agree between themselves to use, or not to use, specific media including paper or electronic technologies. State law has, throughout the history of this Nation, been a source for most contract, property and other civil, private law. UETA is designed to leave the familiar rules intact and in place, simply assuring that they present no barriers or hindrance to electronic commerce.
The National Conference of Commissioners on Uniform State Laws has been very involved in commenting on the electronic commerce bills in Congress this year. The following comments are offered as an effort to reconcile state and federal efforts in-so-far-as that is possible. They address Title I of HB 1714. The other titles are outside the scope of NCCUSL interest. I will also address to some extent S.B. 761- the Millennium Digital Commerce Act. The following comments should not be interpreted as an endorsement of any federal legislation.
In addressing HB 1714 today, I will focus on two issues of concern and highlight additional problems with the bill. The first issue has to do with the enforcement powers given to the Department of Commerce. The second issue has to do with federal preemption. Finally, I will address the states efforts to adopt UETA on a uniform national basis.
ENFORCEMENT POWERS IN H.R. 1714
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H.R. 1714 gives the Secretary of Commerce equity powers against the states in Section 102(c): ''the Secretary may bring an action to enjoin the enforcement.'' That power reinforces the prohibitions of Section 102(b) and would leave the Secretary in the unenviable position of trying to interpret that section (discussion of Section 102(b) to follow). Because technology specificity is the labeled evil in Section 102(b), not only is the Secretary pitted against the states, the power seems very likely to be exercisable against one part of the computer information industry on behalf of another segment. There are, therefore, ominous and unfortunate implications of anti-trust in Section 102(c). The lack of standards for exercise of the power is likely to mean misuse. Misuse may be the only use, in fact. There is no indication that the Secretary of Commerce wants this power, and it is to the credit of the current Secretary that the Department does not want it. The ''Actions to Enjoin'' section of H.R. 1714 raise so many questions about the effect and constitutionality of Section 102(c), that we strongly recommend that it be stricken from the bill.
There are also very practical implementation problems. Section 102(b) does not address important issues of court jurisdiction, choice of law, or representation of the Commerce Department. The Commerce Department may have the power, but would have no clear means for the exercise of it.
PREEMPTION
H.R. 1714's preemption language is very difficult to interpret. Unlike S.B. 761, it assumes the hegemony of the rules in Section 101 and then permits some latitude for a state law to ''modify, limit, or supersede the provisions of section 101.'' Under Section 102(a)(1)(B), UETA is an acceptable modification, limitation or supersession of Section 101, in toto. UETA does not appear to be subject to the restrictions that apply to other state law under Section 102(a)(1)(B). Other state law may specify ''alternative procedures or requirements for the use or acceptance of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or agreements.'' This is the only substantive scope of permissible state law other than UETA. In addition, any state law that impacts the rule in Section 101, must be adopted within two years after the enactment of the federal rule and must make specific reference to Section 101.
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Without reference to the rest of Section 102, a court would always begin with the federal rule. State law would apply within the limited scope prescribed in Section 102(a). Only UETA, as adopted in state law, would stand alone as the source of law pertaining to electronic records and signatures. Without anything else, these provisions are a hybrid of field and subject preemption. For that reason, they lend themselves to no predictable interpretation.
One could make a serious argument that Section 102(a) encourages nonuniformity rather than uniformity. In a sense, it gives the states an incentive to consider variations in order to meet the two year rule. The federal rule may be thought of as a baseline against which the states are invited to enact variation. It is likely that the invitation will be accepted. Section 102(a), however, may not be considered by itself, alone.
Section 102(b) of H.R. 1714 adds whole new universes of complication. This provision prohibits state law that ''discriminates in favor of or against a specific technology, method, or technique of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures, or, ''discriminates in favor of or against a specific type or size of entity engaged in the business of facilitating the use of electronic records or electronic signatures.'' Section 102(b) goes beyond preemption in any recognized sense. This section intends regulation of future state law-making over the foreseeable long-term, and would put that law-making firmly under exclusive federal control. It is a direct attack on state sovereignty.
Discrimination in this context is a serious wild card. How do these provisions affect state procurement, for example? Or law governing contracts with service providers to a state? What about provisions in state law governing such matters as disclosure of contract terms in specific contexts? Is there not conflict between Section 102(b)(1), which prohibits discrimination against technology, methods and techniques and Section 101(a)(1)(B)(1), which suggests that state law may specify ''alternative procedures or requirements for the use or acceptance of electronic records or electronic signatures?''
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UETA is so specifically technologically neutral, that it is hard to propose a conflict between it and Section 102(b)(1). But that may not be true for the Uniform Computer Information Transactions Act and other state law pertaining to the use of electronic records and signatures. If a statute specifies standards for authentication, is that discrimination against technologies that do not meet the particular standard for authentication? Would any existing digital signature statute, no matter how discretionary, survive the test of section 102(b)(1)? These provisions are a new and dangerous adventure in federal-state relations that may be well beyond the bounds of the express powers of Congress. It is one thing to pose a rule that preempts a comparable state rule, when Congress has concurrent legislative power. It is another thing for Congress to dictate the state law-making process in making rules of law.
There is more to Section 102 of H.R. 1714, however. Section 102(b)(3) prohibits state law modifying, limiting or superseding Section 101 that ''is based on procedures or requirements that are not specific and or that are not publicly available.'' Section 102(b)(4) prohibits state law that is ''otherwise inconsistent with the provisions of section 101.'' Section 102(b)(3) opposes general, secret procedures or requirements. It is not easy to determine what those are. Section 102(b)(4) would seem to make all the rest of Section 102 irrelevant and to align H.R. 1714 with S.B. 761. Section 102(b)(4) is a rough statement of standard subject matter preemption: How this is to be interpreted in light of the rest of Section 102 is an unanswerable question.
What arises from Section 102(a) and (b), therefore, is large-scale ambiguity, conflict and threat to state sovereignty. Its impact on both state and federal law is not in any sense predictable. One of the serious impacts is the ability of state law to react to technological change. One possible impact of Section 102 would appear to be to freeze the law in time and place to now. There must be flexibility to respond to the technological change that we know is coming. It is absurd to hold the future hostage to an inchoate, ill-formed principle of technological neutrality.
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Another ominous unpredictable impact is upon federal courts. Since federal law controls under H.R. 1714 under its preemption principles, it is potentially possible that every contract case involving a question of the validity and legal effect of an electronic signature and record inherently contains a federal question. If so, that would potentially invoke federal jurisdiction in numbers of cases in which federal jurisdiction is not now a question. It is impossible to predict the impact of this shift on federal courts. There is not only a serious question of court dockets as the numbers of contracts in e-commerce increases, perhaps exponentially, but a serious question of fundamental jurisprudence. Will federal courts become the customary place of adjudication for contracts, and what impact will that have on the law of contracts, in general? H.R. 1714 provides no answer to these serious questions.
S.B. 761
Let me reiterate one point, as I move to the consideration of S.B. 761. The NCCUSL does not support federal legislation that preempts state law. Having said that, it is the NCCUSL's position that S.B. 761 does the least damage to state interests of the two bills before the Judiciary Committees. It does not attempt to regulate the issue of technological neutrality to the extreme extent H.R. 1714 does. Its preemption provision is within the recognized bounds of standard preemption doctrine. S.B. 761 shares a serious weakness with H.R. 1714. Neither bill exempts negotiable instruments and documents. That may have serious unintended consequences. Even so, S.B. 761 remains preferable. We think it will be mooted by the completion of UETA adoption in the state legislatures in a short period of time. Given the availability of UETA, it is a bill within which the states can reluctantly live.
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UETA PROJECTION IN THE STATES
One of the issues before this subcommittee is the time during which the states will consider and enact UETA. Please note California has adopted UETA. The California legislature held the bill up only for the purposes of waiting for the NCCUSL to complete its deliberation in July. Once UETA was promulgated, California swiftly acted, and UETA is now law in California.
As this hearing is taking place, a hearing is also taking place in Pennsylvania. An introduction is anticipated in Massachusetts before the end of the calendar year. An interim hearing with UETA as a topic has already been held in Virginia in anticipation of early introduction in 2000. I report these actions in four major commercial states to suggest that the states will move to adopt UETA with urgency. A survey of legislative plans for the year 2000 taken from the Uniform Law Commissioners during their Annual Meeting in July suggests that at least twenty-seven states will see introduction of UETA in 2000.
The Legislative Director of the NCCUSL estimates major consideration of UETA in a majority of states in 2000, with legislative activity almost certainly wrapped up in 2001. The symbol of the year 2000 looms very large in the development of UETA. How better to prepare for the millennium? However, 2000 is the short legislative year in the majority of states, though not in my home state-Virginia. Some states have no 2000 session, at all. Whether the millennium begins in 2000 or 2001 as some assert, we strongly believe that it will begin with UETA as the effective law of the land. We of the NCCUSL think it is the best start for the new millenni