4 October 1999
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USIS Washington
File
_________________________________
01 October 1999
(Pincus objects to bill on e-contracts) (3340) The General Counsel of the Commerce Department, Andrew Pincus, says the Clinton administration opposes proposed legislation dealing with business contracts negotiated on the Internet. The "Electronic Signatures in Global and National Commerce Act" does not conform to the administration's standards for electronic commerce legislation, Andrew Pincus said September 30. He made the statement in testimony before the Courts and Intellectual Property Subcommittee of the Judiciary Committee of the House of Representatives. "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," Pincus said. Pincus said the administration opposes the legislation on three points: -- the bill would extend to government contracts. "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," Pincus said. -- the bill would impose inappropriate limits on state governments' freedom to adopt uniform rules on electronic commerce transactions. -- the bill would give the secretary of commerce authority to sue state governments with the goal of invalidating state laws that do not conform to the proposed federal statute on electronic commercial contracts. Following is the text of Pincus' statement as prepared for delivery: (Notes: in text, "billion" means 1,000 million; "trillion" means 1,000,000 million.) (begin text) STATEMENT OF ANDREW J. PINCUS, GENERAL COUNSEL ,U.S. DEPARTMENT OF COMMERCE COURTS AND INTELLECTUAL PROPERTY SUBCOMMITTEE, HOUSE COMMITTEE ON THE JUDICIARY H.R. 1714, the "ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT" SEPTEMBER 30, 1999 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. 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. 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. 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. 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. The1966 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. 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. 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. 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. 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. 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. (end text)