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December 2016

Guidelines for Creating Enforceable Electronic Signatures and Avoiding Traps for the Unwary

In recent years, the use of electronic signatures to facilitate a wide range of transactions has become ubiquitous. Increasingly, individuals and companies rely on electronic signatures to efficiently and reliably conduct business. In large measure, this is due to electronic signing software, such as DocuSign, eSignLive, Right Signatures and other software that ensures that the key statutory criteria for creating valid signatures are implemented. These criteria are set forth in the Uniform Electronic Transactions Act ("UETA"), adopted in California as Civil Code Sections 1633.1 - 1633.17 ("Cal-UETA"). While these software programs are extremely useful, they are not the only means through which electronic signatures are created. It is important, therefore, to understand what the UETA criteria are, and moreover to understand that there remains some circumstances where electronic signatures will not suffice. The following summarizes the key provisions of UETA as they have been interpreted by California courts, and further identifies several examples where electronic signatures are not valid substitutes for a traditional ink signature.

The key enabling provisions of Cal-UETA are found in Section 1633.7, which states affirmatively (subject to exceptions stated elsewhere in Cal-UETA) that (a) a record or signature may not be denied legal effect or enforceability solely because it is in electronic form; (b) a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation; (c) if a law requires a record to be in writing, an electronic signature satisfies the law; and (d) if a law requires a signature, an electronic signature satisfies the law. In other words, electronic signatures are in many circumstances just as effective at creating valid, binding agreements as are ink signatures. The question then is, what is an electronic signature? Under Section 1633.2(h), an electronic signature is "an electronic sound, symbol, or process attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign the electronic record." Yikes! This is extraordinarily broad. Does this mean that a voicemail can be an electronic signature? A typed name at the end of an e-mail? The answer is yes, but not always. Such "signatures" are valid only if the parties agreed to conduct the transaction electronically (Section 1633.5), the signing party actually intended to sign the agreement (Section 1633.2(h)), and the signature itself is authentically that of the signing party (Section 1633.9).

Cal-UETA Section 1633.5 requires parties to agree to conduct the transaction electronically. While the statute makes clear that such agreement can be determined from context and surrounding circumstances, the California Court of Appeal has held, in J.B.B. Investment Partners, Ltd. V. Fair, 232 Cal. App. 4th 947 (2014) ("Fair") that such agreement must be clear, as must be the intent of the party signing to enter into a binding agreement. In Fair, plaintiffs were investors in defendant Fair’s entities, and claimed that Fair had misrepresented facts and failed to document certain transactions. An e-mail exchange occurred between plaintiff’s attorney and Fair, in which they negotiated the terms of a settlement. In his e-mail making a settlement offer, plaintiff’s attorney stated that (a) plaintiffs required a yes or no answer -- that Fair needed to affirmatively accept in order for plaintiffs to refrain from litigation; and (b) that upon receipt of Fair’s agreement, settlement paperwork would be prepared. In responding through various messages (e-mail and voicemail), Fair stated his agreement. Plaintiffs then sent Fair a final agreement for his signature, which Fair did not sign. (He later stated that he had changed his mind.) Plaintiffs then brought an action to enforce the settlement agreement, arguing that Fair had signed it electronically. The lower court agreed; the appellate court did not. In its decision, the appellate court relied upon Section 1633.2(h)’s requirement that an electronic signature be executed by a person with the "intent to sign the electronic record", i.e., not that the person intended to sign the particular document or communication, but that he or she intended to formalize an electronic record. In this case, the conduct of the parties clearly indicated an intent to negotiate electronically. However, a negotiation is not the same as a formal agreement. Moreover, plaintiffs themselves did not act as if the agreement had been formalized: plaintiffs had clearly indicated that formal documentation would be prepared and further proceeded to initiate litigation when Fair did not sign such documentation. Further, Fair himself testified that he would never have signed a formal acceptance without the advice of counsel. Accordingly, the Court determined that no such formal agreement had been reached. Put simply, the facts and circumstances did not support the conclusion that the parties had agreed to conduct the transaction electronically such that Fair’s e-mail agreement could be reliably considered to create a legally binding obligation. In short, in order for an electronic signature to be binding, the parties must have agreed to reach a binding agreement electronically, and the party signing must intend to sign such agreement.

Electronic signatures have also been challenged in California courts in the context of employer-employee agreements, in particular, agreements to arbitrate disputes between the employer and employee. Notably, the issues raised by such cases involve employee’s intent to sign and whether the signature is, in fact, that of the employee. A pair of cases gives insight and guidance in this context. In Ruiz v. Moss, 232 Cal. App. 4th 836 (2014) ("Ruiz"), the Court held that the employee could not be held to an agreement to arbitrate that was generated through the employer’s electronically administered human resources platform when (1) the employee had no recollection of signing the agreement; and (2) the employer could not demonstrate that the employee was the person who had actually signed the agreement. The employer merely stated that each employee was required to log in to the employer’s system using his or her login ID and password to sign the agreement. In concluding that this statement was insufficient to authenticate the employee’s signature, the Court relied upon Section 1633.9, which states "An electronic record or electronic signature is attributable to a person if it was the act of the person. The act of the person may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable." Cal Civ. Code § 1633.9. Here, the employer merely inferred that the employee signed the agreement. The employer could not verify the process through which it ensured that the employee was the only one who could have electronically signed the agreement. But what exactly should the employer have done to authenticate the employee’s signature? A case decided this year provides employers with much needed guidance on this point. In Espejo v. Southern California Permanente Medical Group, 246 Cal. App. 4th 1047 (2016) ("Espejo"), the Court held that the employer did make the required showing. Relying upon Ruiz, the employee in Espejo claimed that he did not recall signing the DRP (the agreement in question); and further that his practice was to review documents carefully before he signed them. Accordingly to the employee, he would not have signed an 8-page agreement within one minute after signing the employment agreement, an act which would have prompted him to review and sign the disputed agreement. (Each agreement signed by the employee was identified with a time stamp as well as the IP address where the signing occurred.) The Court, however, distinguished Ruiz. In doing so, the Court stressed that the employer "offered the critical factual connection that the declarations in Ruiz lacked." Specifically, the employer was able to detail the specific security precautions that it took to ensure only the employee himself could have created the electronic signature. Such precautions included (a) issuing a unique user name and password that the employee himself would need to change for privacy purposes immediately upon accessing the system; (b) presenting the employee with an option to sign documents electronically; (c) (assuming the employee opted to sign electronically) presenting the employee with a menu of hyperlinks to each of the documents, which he would need to access individually to sign; and (d) ensuring that once signed, the agreement was finalized with the employees’ name, date, time and IP address where he electronically signed the agreement. Accordingly, the employer asserted, and the Court agreed, that the copies of the employee agreement and the DRP presented with employer’s petition were "true and correct copies of the documents electronically signed by Dr. Espejo." In short, Ruiz and Espejo demonstrate the importance of ensuring that the entire signature process is carefully structured to ensure there is both an agreement to enter into an electronic agreement and that the process of signing such an agreement has privacy and security safeguards to ensure the authenticity of the signatures themselves.

Another potential problem of which to be wary is that electronic signatures are not valid for all purposes. In particular, Section 1633.3 specifically excepts (among others) transactions subject to laws (a) governing the creation and execution of wills, codicils, or testamentary trusts; and (b) certain provisions of the Uniform Commercial Code. Also excluded are certain other transactions governed by various provisions of the Business and Professions Code, Financial Code, Vehicle Code, Insurance Code, Health and Safety Code, and Public Utilities Code. Accordingly, it is important verify that a transaction can be completed electronically before relying upon the electronic process.

In sum, the ability to reliably use electronic signatures to finalize agreements has made conducting and finalizing many transactions markedly more convenient and efficient. For many standard transactions, the use of electronic signature software ensures that key statutory criteria are met to create valid, enforceable agreements. In other contexts, it is important to adopt a process that does so as well. Specifically, parties must ensure that they expressly agree to conduct the transaction electronically, and that safeguards are in place to verify a person’s intent to sign an agreement and to authenticate that person’s signature. Finally, parties should be aware that there are some transactions that still require ink signatures, and, if in doubt, should check prior to proceeding along the electronic path.

For more general information on electronic signatures, please contact either Lawrence Inouye (linouye@shiotani-inouye.com) or Colleen Sechrest (csechrest@shiotani-inouye.com).