United States: eSignature And ePayment News And Trends - September 27, 2019

A fact of business today is that customers – both consumers and other businesses – and employees expect to transact digitally. To remain competitive, companies find themselves increasing their efforts to digitally transform their businesses.

Successfully implementing this transformation requires careful planning to ensure regulatory compliance, a smooth integration with existing business technology and a positive customer experience.

This is our ninth bulletin for 2019, again aiming to help companies identify important and significant news and legal developments impacting digital offerings. Each issue will feature in-depth insight on a timely and important current topic.

In this issue, we provide an analysis of the recent House Task Force on Artificial Intelligence hearing regarding the future of identity in financial services. In addition, we will cover recently enacted federal and state laws, federal and state regulatory activities, fresh judicial precedent and other important news.

For related information regarding blockchain and digital assets, please see our monthly bulletin Blockchain and Digital Assets News and Trends.

INSIGHT

The future of identity in financial services

On September 12, 2019, the Task Force on Artificial Intelligence, which is a task force within the House Financial Services Committee (FSC), held a hearing titled "The Future of Identity in Financial Services: Threats, Challenges, and Opportunities." Read more

REGULATORY DEVELOPMENTS

FEDERAL

• CFPB issues no-action letter, sandbox and trial disclosure policies. On September 10, the CFPB issued its final guidance on three policies intended promote innovation by giving financial firms more opportunities and compliance flexibility to try new technologies, practices and methods. The CFPB's new No-Action Letter (NAL) Policy will provide more certainty that the CFPB will not bring a supervisory or enforcement action against a company for providing a product or service under certain criteria, and establishes a streamlined review process focusing on the consumer benefits and risks of that product or service. Relatedly, the CFPB issued its first NAL under the new policy to more than 1,600 housing counseling agencies that participate in a program at the Department of Housing and Urban Development, as requested by HUD. The finalized Compliance Assistance Sandbox (CAS) Policy will evaluate a product or service for compliance with relevant laws and will offer approved applicants a safe harbor for certain specified conduct during the testing period, protecting them from liability under the Truth in Lending Act, the Electronic Fund Transfer Act, or the Equal Credit Opportunity Act. The CFPB's Trial Disclosure Program (TDP) Policy creates the "CFPB Disclosure Sandbox," through issuance of its revised Policy to Encourage Trial Disclosure Programs. Under the new TDP policy, "entities seeking to improve consumer disclosures may conduct in-market testing of alternative disclosures for a limited time upon permission by the Bureau," consistent with Dodd-Frank provisions giving CFPB authority to provide certain legal protections for entities to conduct trial disclosure programs. The new policy also streamlines the application and review process.

• CFPB announces partnership with state regulators.  Also on September 10, the CFPB announced a partnership with state regulators and the American Consumer Financial Innovation Network to increase coordination to promote financial innovation. While all state regulators have been invited to join, the initial group of member states numbers eight. "ACFIN members intend to facilitate innovation that benefits consumers through greater competition, consumer access, or financial inclusion in markets for consumer financial products and services," the organization's charter states.

• CFPB seeks comments on "tech sprints" as a means to encourage regulatory innovation. On September 18, the CFPB published a Notice and Request for Information in the Federal Register stating that it is exploring "tech sprints" as a model for collaborative innovation and that it is seeking comments regarding the same. Specifically, the CFPB is envisioning gathering regulators, technologists, financial institutions, and subject matter experts for several days to work together to develop innovative solutions to clearly-identified challenges. The CFPB notes that tech sprints have been used successfully by the Financial Conduct Authority in the UK.

STATE

Virtual Currency

• NY DFS authorizes trading of two stablecoins. On September 5, the New York Department of Financial Services announcedit has authorized Paxos Trust Company LLC to offer a gold-backed virtual currency – the first such virtual currency authorized by DFS − as well as BUSD, a virtual currency pegged to the US dollar. In total, DFS has approved three asset-backed tokens issued by Paxos: Paxos Standard (PAX), PAX Gold (PAXG), and BUSD.

LEGISLATIVE DEVELOPMENTS

Electronic Recording

• Illinois adopts law requiring electronic lien and title system for automobiles. On August 23, 2019, Illinois Governor JB Pritzker signed HB 2856, which requires the secretary of state to implement, manage, and administer an electronic lien and title system that will permit a lienholder to perfect, assign, and release a lien under Illinois's Vehicle Code. The act states: "The Secretary shall establish by administrative rule the standards and procedures relating to the management and implementation of the mandatory electronic lien and title system established under this subsection."

Blockchain

• Colorado blockchain working group publishes findings.  The Colorado Governor's Office of Information Technology announced on August 29 that the Colorado Council for the Advancement of Blockchain Technology Use has published its final report, which discusses how blockchain solutions can be implemented to serve the state. The Council identified as priorities: 1) providing guidance on money transmission laws; 2) establishing a "FinTech Point of Contact" to answer regulatory questions for FinTech companies; 3) exploring blockchain-based voting; 4) investigating any need for regulations or laws on tax issues; 5) conducting a blockchain and banking roundtable; and 6) collecting a survey on businesses' work with blockchain.
• Illinois adopts Blockchain Business Development Act. On August 8, Illinois Governor JB Pritzker signed into law HB 2540, which provides for the creation and regulation of blockchain-based limited liability companies as businesses that utilize blockchain technology for a material portion of their business activities. It also provides for various blockchain studies and reports and requires the Department of Commerce and Economic Opportunity to incorporate topics concerning blockchain technology and financial technology into business support programs, events, and activities. The new law takes effect in June 2020.
• Illinois enables smart contracts using blockchain. The Illinois governor also signed the Blockchain Technology Act, HB3575, on August 23, providing for the effectiveness and enforceability of smart contracts, records, and signatures maintained using blockchain technology, and sets certain limitations to the use of blockchain technology. The new law takes effect on January 1, 2020.

Insurance

• California revises law to allow for use of electronic records and signatures in insurance transactions.  On September 5, 2019, California Governor Gavin Newsom approved AB 1065, which amends California's Uniform Electronic Transactions Act and its Insurance Code to remove certain exemptions effective as of January 1, 2021 regarding the use of electronic records and signatures in insurance transactions. Now these notices may be provided electronically indefinitely, upon compliance with Insurance Code requirements.

Remote Online Notarization

• Ohio enacts RON regulations.  The new Ohio RON regulations were enacted effective September 22. For more information, see our discussion in our August issue.
• Nevada proposes draft RON regulations. On September 3, Nevada proposed draft regulations to support the state's enactment of RON. These draft regulations are identical to the temporary regulations Nevada has been operating under since December 2018. Notably, these temporary and draft regulations require a Nevada electronic notary to provide his or her electronic signature "in a file format that can be read without the need for additional software and that can be compared to the exemplar of the electronic notary public's holographic (handwritten) signature on file with the Secretary of State for authentication purposes."

ENFORCEMENT ACTIONS

Virtual Currency

• DOJ settles charges against money transmitter.   The US DOJ announced on August 23 that it has charged Kunal Kalra (a/k/a "Kumar," "shecklemayne," and "coinman") for operating an unlicensed money transmitting business and laundering of monetary instruments, among other things.  Kalra pled guilty to running an unlicensed bitcoin exchange for more than two years, exchanging up to $25 million in cash and virtual currency for individuals, among them Darknet drug dealers and other criminals, some of whom used his Bitcoin kiosk. Law enforcement seized $889,000 from Kalra's bank accounts and 54.3 Bitcoin and other virtual currencies. This is believed to be the first federal criminal case charging an unlicensed money remitting business that used a Bitcoin kiosk.

CASE LAW

FEDERAL

FinTech

• Court dismisses CSBS lawsuit against OCC FinTech charter. On September 3, the US District Court for the District of Columbia dismissed the Conference of State Bank Supervisors' (CSBS) second lawsuit against the Office of the Comptroller of the Currency that challenged the OCC's decision to accept applications for a Special Purpose National Bank Charter for FinTech companies. The court dismissed the case for a second time due to lack of standing: no FinTech firm has submitted an application for the FinTech charter. The case is Conference of State Bank Supervisors v. Otting, et. al., case number 1:18-cv-02449.

Online contract formation

• Court upholds arbitration agreements entered into electronically.
  • In Martinez v. Paramount Country Club, 2019 WL 4450552 (S.D.N.Y. Sep. 17, 2019), the court held that the plaintiff personally electronically signed anarbitration agreement during the onboarding process. The onboarding process consisted of creating an account by entering employee-specific information (such as the employee's name, social security number, demographic information, and citizenship status) and signing several forms, including an employee acknowledgments form that contained an arbitration clause. The defendant produced a copy of an electronically signed employee acknowledgements form as well as credible testimony regarding how the onboarding process worked.
  • In Floyd v. Kelly Services, Inc., 2019 WL 4452309 (N.D. Tex. Aug. 30, 2019), the court upheld an arbitration agreement when evidence showed that the defendant's business records indicated the plaintiff had electronically signed the arbitration agreement. To sign and complete the registration process, an applicant was required to enter a unique user ID and password, which the defendant sent to the applicant's email address. Once logged in, the applicant also had to enter her social security number and was unable to proceed past that screen until the information was provided.The plaintiff did not allege that someone else completed those steps, only that she did not sign the arbitration agreement. Because applicants must sign and accept every document, and the plaintiff provided no evidence beyond her declaration that she was not provided with the arbitration agreement, the court held for the defendant.
• Court upholds arbitration agreement where underlying agreement included auto-filled electronic signatures.  In Holley v. Bitesquad.com LLC, 2019 WL 4565060 (E.D. Ark. Sep. 19, 2019), the court upheld an arbitration agreement entered into electronically because the defendant provided an undisputed record that (1) the plaintiff was emailed a copy of the hiring packet; (2) to complete the hiring packet, the plaintiff had to (a) review each document before completing and signing the document, (b) fill out all fields, including signature fields, and (c) click a submit button; (3) the dates on the agreements and the audit logs matched; and (4) the document ID from the audit log matched the document ID on the agreements. The plaintiff attempted to argue that his signature was invalid because it was "auto-filled." The court, in analyzing Arkansas's Uniform Electronic Transactions Act, stated that the undisputed record showed that when a party reached the signature field, the party had the option of either signing each location individually or automatically affixing a signature wherever it was required. Further, even if the plaintiff chose to auto-fill his signature, he had to manually affix his printed name to the arbitration agreement twice, and he could not submit his hiring packet until he affixed both his signature and his printed name on all required locations. The court noted that the audit trail captured all this information.

STATE

Online contract formation

• Court denies motion to compel arbitration where defendant failed to prove plaintiffs had seen the agreement.  In Aerotek, Inc. v. Boyd, 2019 WL 4025040 (Ct. App. Tx. Aug. 27, 2019), the court affirmed a trial court's order denying the defendant's motion to compel arbitration because the defendant could not establish that the plaintiffs' denials of ever seeing the arbitration agreement were "physically impossible." The court found that the trial court was within its rights to give minimal weight to the defendant's witness, an employee without apparent IT experience specific to the type of system at issue. The court also noted that the defendant chose this legal approach even though it had contracted out creation and implementation of the system to a third party and brought no person from that entity to testify regarding the operation of the system.
• Court refuses to uphold arbitration agreement where evidence showed relevant party did not electronically agree.  In CEFCO v. Odom, 2019 WL 4248465 (Dist. Ct. App. Fl. 1st. Dist. Sep. 9, 2019), the court refused to uphold an arbitration agreement because the appellee (the defendant) filed an affidavit stating that during the hiring process, she provided certain information to the store manager, who then said "he would 'take it from there.'" The store manager later told the appellee that he had created a user ID and password for her; the appellee swore she never used that log-in information and did not complete any onboarding process. The court found the defendant failed to make any assertions or offer any evidence disputing the claims; affirming the lower court, it denied the motion to compel arbitration.

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