STATE OF
CALIFORNIA - STATE AND CONSUMER SERVICES AGENCY GRAY DAVIS, Governor March 9, 2001 Secretary Sallianne Fortunato Re: ESIGN Study-Comment P004102 Greetings: 1. Identity and authority. These comments are submitted by the California Department of Consumer Affairs pursuant to the Consumer Affairs Act (Cal. Bus. & Prof. Code Section 310(b)), which authorizes the department to represent the interests of consumers. The comments respond to the Commission's request for viewpoints on the benefits and burdens of requiring consumer consent to receive information electronically, in the manner prescribed in section 101(c)(1)(C)(ii) of the new Electronic Signatures in Global and National Commerce Act (E-Sign Act). 2. Benefits to consumers and businesses. In evaluating the merits of the consumer consent provisions that Congress wrote into the E-Sign Act, it is essential to consider the role that consumer consent plays in contract formation generally. It is also important to consider that the rules that govern the creation, interpretation and enforceability of private contracts are defined by state, and not federal, law, and that there is a large body of traditional state contract law on which the consumer consent provisions of the E-Sign Act build. 3. Federal law is an overlay on state law. There is as yet no general federal law on the formation, interpretation and enforcement of private contracts. Federal statutes do provide a variety of important overlays on state law - examples include the E-Sign Act, the Truth in Lending Act, and the Federal Trade Commission Act. While federal law modifies state law, federal law does not displace state law, and very few people argue that it should. 4. Lawmaking function of private contracts. When a private contract is enforceable by court action, the parties are in effect exercising lawmaking power. That is because their promises create obligations enforced by the state at the request of anyone entitled to performance. The "law" that governs the transaction as well as any court judgment is determined mainly by the parties' agreement. The power of the state is displayed most graphically when a party goes to court and secures a judgment which is enforced by a sheriff's levy of execution on the judgment debtor's assets, including possibly his or her home. 5. Evolution of private contract law. The law of private contracts has developed in two opposite directions, both designed to give people more power to structure their relationships as they desire. On the one hand, the law has steadily added to the kinds of agreements that are enforceable (for instance, executory contracts, which were once not enforceable). On the other hand, courts and legislatures have crafted rules that limit abuse and that help achieve fair results. These include the basic rules on contract formation (such as the rule that each party's consent be both real and free); writing and signature requirements (the familiar statutes of fraud, and recent consumer protection statutes); the rules of contract interpretation (e.g., the rule that resolves ambiguities against the stronger party); and a variety of limits on enforceability (such as rescission (cancellation) for fraud, mistake and undue influence; and refusal to enforce contracts and contract terms that are unconscionable, or that result in unfair surprise to the weaker party). 6. Fundamental public policy issue. The adoption of the E-Sign Act demonstrates the continuing evolution of private contract law. It also demonstrates both of the directions of contract law's evolution mentioned above. The E-Sign Act has both broadened the parties' power to create relationships that suit them best, and it also has established processes to guard against abuse and promote the Act's overall objective of promoting the formation of contracts electronically. Accepting that electronic commerce is here (and here to stay), the fundamental policy issue that Congress addressed in the E-Sign Act's consumer consent provisions seems to be as follows: Given the broadened contract-making power that appears necessary in the world of the Internet, how should the contract formation process be structured to promote the best interests of consumers and those who serve them? One element of this is, how easy should it be for a consumer to be saddled with legal obligations, and how easy should it be for a consumer to lose his or her assets or credit standing, simply by "a click of a mouse"? 7. What should the goals of private contract be? The rules that are crafted should reflect the overriding goals. The law of private contracts provides a legal framework in which private transactions of all kinds - including sales of consumer products and services on the Internet - can be planned and carried out. It is inescapable then that the law of private contract is an essential ingredient of the private marketplace. The signals that buyers and sellers give through their marketplace decisions are a chief driving force in the economy. Do consumers have a role in this? The only permissible answer is yes. They must. The entire concept of the marketplace, and its legitimacy, is premised on the principle of consumer sovereignty. And the means by which that is achieved is by ensuring that informed consumer consent lies at the heart of any contract formation, interpretation and enforcement process. Clearly, Congress was mindful of that. 8. Congress acted on the proposition that consumer consent is no less important in electronic transactions than it is in paper transactions. Just as modern legislatures and courts have refused to give legal effect to purported contracts that are unconscionable, or that result in unfair surprise to the weaker party, so Congress, in facilitating and promoting enforceable electronic transactions, also took measures to ensure that consumer consent continues to be an essential ingredient of enforceable contracts. It did this by requiring, as prerequisites to enforceability, both consumer disclosures (Section 101(c)(1)) and substantive requirements (Section 101(c)(2)(3)). These are well-crafted provisions that support and make real the concept of consumer consent. 9. Are the consumer consent provisions needlessly burdensome? In order to determine whether the Act's consumer consent provisions needlessly burden the electronic contract formation process -- whether the costs to the parties, which are ordinarily paid by consumers, outweigh the benefits to consumers -- it is essential to look closely at the statutory requirements. The most important rule is that an electronic record does not qualify under the E-Sign Act unless "the consumer has affirmatively consented to such use and has not withdrawn such consent." (Section 101(c)(1)(A).) Since the requirement of consumer consent also lies at the heart of private contract law, it is difficult to take issue with this basic requirement. However, in evaluating the merits of the E-Sign Act's requirements, it is also necessary to consider its provisions on disclosure, and on computer hardware and software. 10. Are the consumer disclosure requirements needlessly burdensome? In addition to consenting, the consumer must be given a clear and conspicuous statement of each of the following: (a) any right or option to get a written disclosure or other record in non-electronic form; (b) the right to withdraw consent, and the procedures for and consequences of doing so; (c) what transactions the consumer's consent applies to; (d) the procedures for updating the information needed to contact the consumer electronically; and, (e) how, after consenting to electronic records, the consumer can obtain a paper copy of any required information, and whether any fee will be imposed. (Section 101(c)(1)(B).) Is the provision of this information needlessly burdensome? The Department of Consumer Affairs submits that these requirements have been carefully crafted, and that each of them is both basic and necessary for informed consumer use of modern electronic decision-making and contract formation. 11. Is the required description of hardware and software requirements needlessly burdensome? The Act states that the consumer must also be given a statement of the hardware and software requirements for access to and retention of electronic records. (Section 101(c)(1)(C)(i).) Also, the consumer either must give consent electronically to receive electronic disclosures, or must confirm his or her consent electronically. (Section 101(c)(1)(C)(ii).) In either case, the consumer's consent or confirmation of consent must be done "in a manner that reasonably demonstrates that the consumer can access information in the electronic form that will be used to provide the information that is the subject of the consent." (Section 101(c)(1)(C)(ii).) While this requirement might be considered burdensome to some providers, it is burdensome only in the same way that it is sometimes burdensome to obtain a consumer's signature in a paper transaction, particularly where the business organization and consumer are not in the same town. If electronic methods of consummating enforceable transactions are to be given the same legal effect as enforceable written and signed contracts are, it is essential that the parties agree to a mechanism that will actually carry out their mutual desires. This provision of the Act does no more than that. By its provisions, however, it also nips some problems in the bud. Under this provision, for instance, a consent given by a consumer on a computer located in a dealer's salesroom would not provide the requisite demonstration that the consumer's own computer was capable of accessing the information electronically. 12. Do the benefits outweigh the burdens? The California Department of Consumer Affairs believes that they do. The burdens, such as they are, are relatively minimal. As technology advances, more efficient methods of complying with the requirements will develop. To the extent that the E-Sign Act's requirements impose costs or limit options, the benefits that they confer on both the consumer and the overall process seem to be well worth the burdens. An evaluation of the relative benefits and burdens also must take account of the losses that would accrue to both consumers and electronic commerce (as well as the economy) if consumer consent does not retain its historic fundamental role in the electronic contracting process. To the extent that consumer consent is displaced as a necessary element of private contracts, it is likely that some less freedom-supporting alternative will take its place, whether industry-designed contract terms or terms supplied by legislatures. Retaining consumer consent as a fundamental requirement also supports consumer-directed and marketplace-driven resolutions of economic and resource-allocation issues, enabling the market to evolve in the most efficient and productive ways that consumers will willingly embrace. These benefits need to be considered among all others in determining the relative weight of the respective burdens and benefits. 13. Will the absence of the consumer consent provision increase consumer fraud? It is difficult to believe that removing the existing consumer consent provisions of the E-Sign Act would not add to the incidence of consumer fraud in electronic commerce. While the consumer consent provisions do not absolutely preclude fraud, they significantly enhance the role of the consumer in the contract-formation process, and that in turn cannot help but avoid many forms of consumer fraud. The additional consumer "breathing space" that contract formalities entail gives consumers added opportunity to protect themselves against fraud. More important than increasing the incidence of consumer fraud, however, would be the diminution of trust in the electronic contracting process that would likely result from any increase in abuse, whether crime, fraud, misrepresentation, or sharp dealing. 14. Trust is still the most important facilitating element. The success of the Internet as a vehicle to better serve consumers will hinge on how well the process is trusted by both merchants and consumers. The fact that the volume of electronic commerce was exploding rapidly at a time when there was yet no "facilitating" electronic signature legislation suggests that trust may actually be a more important ingredient than legal enforceability. To the extent that electronic signature laws immunize parties from the consequences of their wilful or neglectful misdeeds, the required trust will be eroded. It is difficult to conclude that Congress had anything else in mind than enhancing trust by its decision to include well-designed consumer consent provisions in the new law. 15. Conclusion. The goal of policy makers should be to create a legal environment for electronic commerce in which the consumer retains the same royal status under the law that was and continues to be the foundation of our marketplace and laws. It would be a disservice to consumers and also to legitimate businesses and the promise of electronic commerce to repeal provisions of the Act that are designed to support and facilitate the comfort and trust that electronic commerce clearly requires. 16. Thank you. Thank you for this opportunity to comment. ____________________________ Doreathea Johnson Richard A. Elbrecht Norine B. 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