House Subcommittee Questions Preemption Language in Electronic Signatures Bill

(October 2, 1999) The House Courts and Intellectual Property Subcommittee held a hearing on HR 1714, the E-SIGN Act, on Thursday morning, September 30. Subcommittee members and witnesses expressed support for federal legislation providing for the acceptance of electronic signatures, but opposed the preemption language in the bill.

HR 1714, the Electronic Signatures in Global and National Commerce (E-SIGN) Act, was introduced by Rep. Tom Bliley (R-VA), the Chairman of the House Commerce Committee, in May. Like S 761, introduced by Sen. Spencer Abraham (R-MI), and HR 1320, introduced by Rep. Anna Eshoo (D-CA), it provides for the acceptance of electronic signatures and records in interstate commerce.

All bills share the same purpose of promoting electronic commerce. All seek to be technology neutral. There is no publicly announced disagreement with either of these points in the Congress.

Rep. Howard Coble (R-NC)

Rep. Howard Coble (R-NC), the Chairman of the House Judiciary Committee's Courts and Intellectual Property Subcommittee presided for most of the hearing. In his opening statement he said that "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."

However, there is disagreement regarding the respective roles of the federal and state governments in this area. S 761 and its companion bill, HR 1320, would not preempt state law. HR 1714 would. This is significant because the National Conference of Commissioners on Uniform State Laws (NCCUSL) just completed its drafting of the Uniform Electronic Transactions Act (UETA). California has already adopted it.

Rep. Coble expressed concern about the preemption language of the bill. "Because H.R. 1714 would forever preempt State law, there is concern that it is overly preemptive," said Rep. Coble. He wants to pursue whatever "approach has the most benign effects on federal-state relations".

Rep. Howard Berman

Rep. Howard Berman (D-CA), the subcommittee's ranking minority member, was more critical. "HR 1714, although clearly well intentioned, is overly broad, and reaches deep into areas of law that throughout this country's history have successfully been left to the states. Laws governing commercial transactions and contracts are fundamental successes of our legal system, notably through the adoption by every state of the UCC."

"I urge continued adherence to this model," said Rep. Berman. "I agree that there may be a need for a 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 Transactions Act."

Rep. William Delahunt (D-MA) also addressed  preemption. "I know that it is wonderful to have uniformity, and it could very well be necessary, because I think everyone here wants to nurture e-commerce," he said. "But, I am just uneasy with this concept."

He suggested that the Congress was preempting the states in too many areas, citing legislation pertaining to class action procedure, product liability rules, property rights, federalization of state criminal law. "I mean, the direction we are headed in, we might as well just eliminate state courts."

The subcommittee heard from one panel of six witness. All were supportive of an electronic signatures bill, but not necessarily HR 1714, as it is currently written. The panel included two representatives from the administration: Andrew Pincus, General Counsel of the Department of Commerce, and Ivan Fong of the Justice Department.

"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," said Pincus. "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."

Pincus cited preemption as one of the reasons for opposing the bill. "HR 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."

Magistrate Judge Pamela Sargent, who participated in the NCCUSL's drafting of UETA, elaborated upon, and advocated the merits of, the uniform act. She criticized HR 1714 as "very difficult to interpret" and a "threat to state sovereignty". She also suggested that HR 1714 might cause the federal courts to become "the customary place of adjudication for contracts".

Several members of the panel expressed support for Sen. Abraham's bill, S 761. David Peyton, of the National Association of Manufacturers, encouraged the subcommittee to report "H.R. 1714 right away, preferably in a version close to what has been negotiated to the relative satisfaction of various parties in the Senate."

Magistrate Sargent stated: "While not endorsing any federal legislation that preempts state law, the NCCUSL's position is that S 761 does the least damage to state interests. Of the two bills before the Judiciary Committee, S 761 does not try to regulate the issue of technological neutrality to the extreme HR 1714 does and its preemption provision is within the recognized bounds of standard preemption doctrine."

Other than Hewlitt Packard's Scott Cooper, the panel did not include any companies involved in electronic commerce.

The administration's witnesses also opposed HR 1714's coverage of government transactions. Andrew Pincus stated that "we have strongly urged that HR 1714 be revised to exclude governmental transactions." He cited "security" as a reason.

Similarly, Andrew Fong stated that the Department of Justice "is concerned that HR 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."

Rep. Coble asked Pincus to elaborate on how HR 1714's "could impose a security threat to government systems." Pincus responded that "one of the concerns is that the bill would have a technology neutrality requirement, which we agree with to government regulation of private transactions. But, there are a lot of different ways to sign electronically."

Pincus continued that "we wouldn't want to have a situation where, for example, government agencies, because of their requirement that there be no discrimination, would be required to accept just an e-mail signed with someone's name at the bottom as a way to authorize the change of social security benefits, or the filing of a tax return, since we clearly want to know that the person who filed the -- and hold them to the things that are in that return. So the concern is, 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 to for that transaction, and implement that transaction. We are afraid that the non-discrimination provision denies that, both, to government at all levels."

Rep. Coble asked: "does S 761, in your opinion, have similar problems." Pincus replied that "S 761 excludes government transactions, so it doesn't have that problem."

Another area of concern discussed at the hearing was HR 1714's provision giving the Department of Commerce the authority to seek an injunction of state laws not incompliance with HR 1714. Rep. Coble stated: "There is concern about the dramatic effects HR 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."

The administration's witnesses not only said that the injunction provision was inappropriate, but also that they did not have the resources to enforce it.

A final area of concern about HR 1714 was consumer protection. Margot Saunders, an attorney with the National Consumer Law Center, stated that "consumers will welcome the opportunity to engage in safe and secure online transactions. However, safety and security are built upon our long history of providing strong consumer protection. Consumer protections equivalent to those found in the offline world must be built into the online marketplace."

She continued that  HR 1714 should be amended to address consumer protection. She suggested several principles for consumer contracts. Among these were the following:

• "Electronic contracts should not be permitted to replace paper contracts when the transaction has actually occurred in person."
• "The consumer must have the capacity to receive, retain, and print the electronic contract."
• "The contract must be provided to both parties in a format that they can each retain and print."
• "The contract must be provided to both parties in a format that prevents alteration after it has been received."
• "put the burden of proof of unauthorized use of electronic signatures on the merchant in merchant to consumer transactions."

Rep. Delahunt also offered a prediction that it might be March or April of next year before the House passes this bill. "I don't see this legislation receiving fast track priority."

Rep. Bob Goodlatte (R-VA) responded, however, that "our subcommittee will move promptly."

The members of the subcommittee who participated in the hearing were Howard Coble, Howard Berman, Bob Goodlatte, and William Delahunt. Rep. James Sensenbrenner (R-WI) also briefly attended.