On June 30, 2000 President Clinton signed the “Electronic
Signatures in Global and National Commerce Act” (ESIGN) using
his electronic signature ID, and thereby established the
validity of electronic signatures for interstate and
international commerce.
In the fours year prior to this Act’s passage a dozen states had
passed similar laws and guidance for state specific business
purposes, and in the five years since the Act’s passing every
other state has passed similar laws and legislation. What does
it all mean, and in the end how can it benefit businesses,
individuals and the nation or world as a whole?
The best way to answer a question like this is to take a look at
the origins of the law, and understand the reasoning behind its
passage and the passage of the state specific laws.
The Birth of the Electronic Signature – Faxing
In the 1980’s companies and even some progressive individuals
began using fax machines for high priority or time sensitive
delivery of paper based documents. Today, the fax machine is a
staple of the business world. Most people do not even consider
the original hurdles this new medium created, nor do they
consider its impact on the speed of communication and the
advantages of its use. However in its infancy many of the same
issues surrounding electronic communications and electronic
signatures had to be resolved when utilizing the facsimile.
When the first contract was signed and faxed it created the
basis for the discussion of electronic signature validity. After
all it was the first time someone could sign something, place it
in a machine, send it from one phone line to another and deliver
a digitally reproduced signature. The path this signature took
was not controllable or traceable, and in most cases it
traversed miles of wire before reaching its destination, so how
could it be considered a valid signature? The intentions of the
signature were clear to everyone, but businesses wanted to know
they could count on the validity of the signature, and if no one
actually witnessed the action of one individual or of a
corporation how could a business put any faith in it? This of
course caused quite a stir and in rapid fashion the courts ruled
this signature carried the same validity as if the parties were
standing in the room together. With this, the fax became
standard operating procedure world-wide.
The courts found validity in this method of signature capturing
and businesses also felt secure in this method. Quite a leap of
faith considering the complications caused by fax machines early
on. Many people didn’t realize that the original fax paper’s ink
would vanish after a period of time and you had to make another
copy of the fax using a copier if you wanted to store it
permanently. Also many times the quality of the image was poor
or barely legible, but businesses understood the intention and
would consider it signed even if there was only a partially
legible signature. So in essence you had a copy of a copy of a
digital image, and even with so many loopholes for alteration
and criminal malfeasance the fax still worked and business
flourished.
The business logic behind this thinking was easily justifiable.
Before the fax machine, the contract could have been signed
verbally between the sales person and the client, and then
somewhere down the road a paper copy would have been signed and
mailed. Many sales before the fax machine were consummated with
a simple “OK let’s do it” comment over the phone. This drive to
get business and make the wheels turn demonstrates the most
vital point in an electronic communications based world, or for
that matter in a digital world with no physical or direct
contact, is most businesses can operate on trust. They provide a
service to a customer and the customer trusts they will provide
that service in a satisfactory manner, while the service
provider trusts that the customer will pay for services
rendered.
Trust is not a new thing in business; it was often indicated by
a hand-shake or “You have a deal”, and that was all you needed
to get a deal done. Has that changed today? I believe the answer
is no, but what about the courts, and their opinion on the
validity of the electronic signature? After all the courts’ goal
is not just to keep the wheels turning and generate revenue, so
why did they trust this type of signature and what was the legal
question this signature answered? This line of thinking brings
us back to Electronic Signatures in Global and National Commerce
Act or as it is more commonly known, the (“ESIGN”) Act.
Electronic Signatures, the Courts and the Government
The Government Paperwork Elimination Act (“GPEA”), Uniform
Electronic Transactions Act (“UETA”), Electronic Code of Federal
Regulations (“e-CFR”), as well as the Electronic Signatures in
Global and National Commerce Act (“ESIGN”) are all attempts by
Congress, federal departments and the states to define the
liability and validity of an electronic signature, and help the
courts answer the questions about enforceability. These efforts
all center around three primary concepts authentication,
integrity and non-repudiation.
Authentication
Authentication is the reasonable basis on which to believe that
the entity electronically signing the file is who they say they
are. This can be accomplished in many ways. In the traditional
world it might be done by checking a driver’s license or other
form of identification, but in the electronic world this is not
always an option, so other methods must be used.
The most common and popular way of accomplishing this identity
check is to use an e-mail based identifier. This is a process
most people have experienced at some point while using the
Internet. If you signup for a web based service you generally
need to create a user name and password. When you create this
account many systems will send a verification e-mail to the
e-mail address you entered for your record, thus proving that
you own this e-mail address. You then copy and paste this
verification information into the confirmation system provided
by the web site and you become a verified member. That process
and most processes that use your e-mail address are known as
e-mail based ID systems.
Another way to verify an identity is to use a known third party
validation mechanism. In other words, use something that
presumably has already verified the entity in question. There
are several common methods for achieving this type of
authentication. You may have experienced it with a web site
requiring you enter in your home zip code, an account number or
in some cases a credit card number. Many web sites will have you
enter your credit card information into a form, allowing them to
cross reference the information you provide them with a credit
card merchant. Presumably if you told the credit card company
the truth about you, then it will match with the information you
provided the website.
The methods available and in use for identifying and
authenticating individuals are countless, and presumably the
higher the value of the transaction the more authentication
methods should be implemented.
Integrity
Integrity simply means providing a reasonable belief that any
file electronically signed on a system cannot and has not been
tampered with by anyone or anything. The concept is easy to
understand and the requirement for it is certainly justified.
When you are dealing with paper it is easy to give everyone a
copy, and any discrepancies are easily found, but with
electronic records it can be difficult to manually or even
visually tell if the file has been altered. To demonstrate
integrity electronic signature capture services generally use an
encryption algorithm to lock a file once it has been signed.
Even better services will continually validate a file all the
way through the signature process and then create a final
version once all signatures are finalized. Most technology used
today for identification purposes can be more accurate than
human DNA.
Non-repudiation
Think back to the Fax machine illustration. Someone can always
say, “That is not my signature” and claim that the signature was
forged. After all, someone could have placed an image of a
signature on to a document, and faxed it back to you. The point
is, under most circumstances you can never be 100% certain the
person you are doing business with is who they say they are.
Even in-person transactions can be at risk. Identity theft is
the fastest-growing crime and criminals are not just buying and
signing things online, they are going into banks, opening credit
cards and walking into retail establishments. So what can be
done to help protect businesses against fraud and abuse if they
use electronic signatures?
Just as a notary verifies the intent of the signatory,
electronic signatures can use verification methods to insure the
signatory understood the purpose and the intent of the signature
process. However, the road to a successful electronic signature
implementation lies in the careful understanding that the
electronic signature super highway has a minimum of three lanes.
Each of the signatories has a lane of relationship “traffic”
between them and the electronic signature service provider. The
lane dedicated to the relationship between the sender and the
recipient is just as relevant and important. It is this
relationship that will help to legally define the intent of the
signatories in various legal matters. Therefore, combining good
business practices with a solid electronic signature capturing
service will make non-repudiation less of an issue.
How Electronic Signatures Can Help You
In order to fully understand how electronic signatures can help
you and your business we need to take a look at why we want to
use them in the first place. Electronic signatures offer a wide
variety of benefits to everyone involved in a transaction. They
reduce costs associated with signing files by cutting overhead.
Electronic signatures allow us to cut hard costs like paper,
ink, printer wear, staples, pens, shipping and handling, but
they also allow us to cut soft costs like storage, copying,
filing, retrieval, auditing and tracking. Overall electronic
signatures can save hundreds of dollars on a single contract for
small contracts and thousands or tens of thousands for large
contracts.
Let’s demonstrate how the savings can be realized. A business
sends out 100 proposals per year that are approximately 150
pages long. It is primarily black and white ink. The client
prints the 150 page proposal on regular stock paper 1 and binds
it 2. The proposal is then placed in an overnight delivery
envelope and shipped next day air, with a return envelope
provided, which is also next day air 3. Once the client receives
the proposal, reads it and signs their acceptance, the proposal
is then shipped back to the business 4 in the provided overnight
envelope. Once the proposal arrives at the business, the sales
team and managers need to be notified, so they can engage the
client. The proposal then needs to be filed and stored in a safe
place. The person working at receiving desk will make three
copies of the proposal 5, and distribute them to the required
personnel, and subsequently file the original proposal in a
filing cabinet 6. So what are the costs?
Total Cost of Using Paper = ($112.50) x (100) = $11,250
(1) 150 + Ink + Paper + Wear and Tear on printer = $3.
(2) Binding = $1.50
(3) Outbound Overnight Shipping = $20
(4) Inbound Overnight Shipping = $20
(5) 3 x 150 + Ink + Paper + Wear and Tear on printer = $9
(6) 150 Pages Storage Using Government Estimate = $19
Labor @ 2 Hours for Total Process = $40
2 Days Opportunity Time for Best Delivery Option = $Unknown
Total Cost of a Paperless Transaction = ($10) x (100) =
$1,000
Labor @ 15 Minutes for Total Process = $5
Sending File Electronically = $5
Delivery Is Immediate = No Lost Opportunity Costs
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Total Savings Using Electronic Signature Service vs. Paper =
$10,250 Per Year
Having a technology available to your business that will reduce
overhead on a single expense by 90% is attractive for any
business, especially one that will benefit other areas as well.
Give Electronic Signatures a Chance to Save Your Business Money
Businesses today should look at the logistic benefits of
electronic signature technology and contemplate how they might
benefit their organization. If you have a fax machine then you
should certainly have an electronic signature service as well.
Electronic signature services provide unparalleled speed to
users. They are faster and more versatile than fax machines,
less expensive than overnight shipping options and the soft and
hard cost savings are extraordinary. Electronic signature
services can be used on any file type, including audio, video,
photos, and all text documents. Electronic signatures are also
easy to store, track and audit.
In the end electronic signatures will not change your life, but
they may change how you operate your business day-to-day. Just
like the fax machine did, it will make you more efficient and
help you get the job done faster, and that may just be the
difference that separates you from the competition.