Digital Transformation: eSignature and ePayment News and Trends - 29 September 2020

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.

Each issue will feature in-depth insight on a timely and important current topic.

In this issue, we provide a reminder about the CFPB’s policies that are designed to foster innovation, especially in the digital space. In addition, this edition includes reports on other 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

Regulator strategies for encouraging innovation may be more relevant as firms move to digital offerings

By Margo H.K. Tank, R. David Whitaker, Andrew W. Grant and Liz Caires

Last year, the Bureau of Consumer Financial Protection (CFPB) issued final guidance on three policies intended to promote innovation by giving financial firms more opportunities and compliance flexibility to try new technologies, practices and methods. Taken together, these policies present companies with an opportunity to work with the CFPB to ensure compliance with the various consumer protection regulations that have specific formatting, font or paper size requirements or safe harbor forms – many of which were drafted when transactions, if they occurred at all electronically, were on larger computer screens rather than today’s smartphones and tablets. The CFPB is hosting a “tech sprint” from October 5 through October 9 that aspires to find innovations that will offer improvements over existing adverse action notices required under the Equal Credit Opportunity Act and the Fair Credit Reporting Act.  Read more.

REGULATORY DEVELOPMENTS

FEDERAL

Artificial intelligence

NIST releases principals of explainable artificial intelligence: In August, the National Institute of Standards and Technology (NIST) released, in draft form, its Four Principles of Explainable Artificial Intelligence. NIST noted that because one-size-fits-all explanations do not exist, different users will require different types of explanations. The four principles of explainable AI are (1) explanation; (2) meaningful; (3) explanation accuracy; and (4) knowledge limits.

Virtual currency

OCC releases interpretation on bank authority to hold stablecoin reserves. On September 21, the OCC released Interpretive Letter #1172, “OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Hold Stablecoin Reserves.”  The Interpretive Letter describes the OCC’s conclusion that banks have the authority to provide the service of holding fiat currency deposits which serve as 1:1 reserves for certain stablecoins where there is a hosted wallet. The bank must verify on a daily basis that the reserve account balance is always equal to or greater than the number of the issuer’s outstanding stablecoins. The OCC reserved on addressing the authority of banks to support stablecoin transactions involving un-hosted wallets.

That same day, the SEC released an SEC FinHub Staff Statement on OCC Interpretation warning parties that stablecoins may qualify as a security under the federal securities law, and that determination requires “a careful analysis of the nature of the instrument, including the rights it purports to convey, and how it is offered and sold.”

STATE

Money transmission

CSBS announces streamlined annual examination for payments companies: On September 15, the Conference of State Bank Supervisors (CSBS) announced the launch of a program whereby payments firms can undergo one comprehensive exam that seeks to satisfy all state examination requirements. The program, known as MSB Networked Supervision, currently applies to payments companies that meet the 40-state threshold.

California DBO issues opinion stating that video game developer does not need a money transmission license for use of DLT currency: On August 28, the California Department of Business Oversight (DBO) published an interpretive opinion regarding the use of digital assets in a video game. Specifically, the DBO concluded that the company did not require a money transmission license because (1) the sale or issuance of the currencies it creates constitutes a closed-loop transaction and the currencies are not transferrable and can only be used in the game; and (2) in a hosted secondary marketplace, the company does not receive money for transmission and instead a separately licensed money transmitter transfers funds from the buyer to the seller’s account and disburses those proceeds to the seller. The DBO declined to opine on the application of the agent-of-the-payee (AOTP) exemption question regarding a third-party secondary marketplace because under current law, it is not clear whether the AOTP exemption applies where multiple entities facilitate the settlement of funds for payment. The DBO noted that it has a pending rulemaking on the AOTP exemption and that while that rulemaking is pending, it will not require the company to report such activity as money transmission.

CASE LAW

FEDERAL

Electronic signatures and general online contract formation

Tax court finds that petitioner properly submitted electronically a Form 1040: In Fowler v. Commissioner of Internal Revenue, 155 T.C. No. 7 (Sep. 9, 2020), the court held that the petitioner’s first electronic submission of the Form 1040 was properly filed – three submissions total were attempted, and the IRS only accepted the final submission – thus the IRS’s notice of deficiency, which was timed to the final submission, was not issued within the statute of limitations. At issue was whether the originally filed Form 1040, which was submitted electronically by a public accountancy firm in its capacity as an electronic return originator (ERO), was executed under penalties of perjury. The IRS argued that the Form 1040 was not executed under penalties of perjury because the ERO did not submit a valid Identity Protection Personal Identification Number (IP PIN). The court concluded that the Form 1040 was executed under penalties of perjury because the ERO signed the tax return in the manner prescribed in the Form 1040 instructions. Those instructions allow a Self-Select PIN and a Practitioner PIN as a means of signing an electronic return. An IP PIN is not listed as a requirement to form a valid electronic signature under IRS guidance. The ERO signed the Form 1040 using the Practitioner PIN. The IRS argued that it needed an IP PIN to authenticate the person who provided the return. The court stated that while a signature can serve an authentication function, IRS guidance has acknowledged that an element other than an electronic signature can authenticate an electronic return. Finally, and “most fundamentally,” the law places the onus on the government to prescribe the signature method. Here, the ERO signed the Form 1040 using a Practitioner PIN, which the Form 1040 instructions identify as an electronic signature. Therefore, the Form 1040 constituted a “return” for purposes of triggering the statute of limitations.

Court denies parties agreed to arbitration because webpage did not put user on “inquiry notice” of the terms and conditions: In Arnaud v. Doctor’s Associates Inc., 2020 WL 5523507 (2^nd Cir. Sep. 15, 2020), the court affirmed a lower court ruling that denied the defendant’s motion to compel arbitration. The court did so because the defendant’s website was cluttered, did not use a conspicuous size or font for the terms and conditions link, and did not provide any notice that by clicking the “I’m In” button, the plaintiff was agreeing to the website terms and conditions.

Courts uphold arbitration agreement: In Yeomans v. World Financial Group Insurance Agency, Inc., 2020 WL 5500453 (Sep. 11, 2020), the court found that plaintiffs who used an electronic signature platform agreed to the arbitration provision (though the court denied the defendant’s motion to compel arbitration because the arbitration provisions were found to be unconscionable and unenforceable). The plaintiffs who used the electronic signature platform argued that the platform brought the plaintiffs directly to the page requiring a signature, thus jumping over the preceding pages. The defendants argued that the platform required plaintiffs to scroll past each page before reaching the signature page. However, neither party offered a demonstration supporting their arguments. The court, however, said such a demonstration was not needed because the question was whether the plaintiffs had notice of the arbitration agreement as a contract. The court stated that by using the electronic signature platform, the user had “clear opportunity to view all pages” of the membership agreement that contained the arbitration agreement.  The court concluded that because the plaintiffs who used the electronic signature platform had notice of the membership agreement that contained the arbitration agreement, their continued work on defendants’ behalf manifested acceptance of the agreement.

ADA

Court finds website subject to ADA without concluding whether website must have nexus to physical location: In Murphy v. Bob Cochran Motors, Inc., 2020 WL 5757200 (W.D. Pa. Sep. 28, 2020), the court held that the plaintiff adequately alleged that the defendant’s website violated the ADA. In doing so, the court noted that the Third Circuit had not adopted a uniform standard to determining when a website is subject to the ADA but held that under both the standards used by the district courts in the Third Circuit, the plaintiff adequately pled that the defendant’s website violated the ADA and denied the defendant’s motion to dismiss.

STATE

Electronic signatures and general online contract formation

Court denies enforceability of arbitration agreement because process did not meet requirements set forth in the arbitration agreement: In Murillo v. Santa Barbara Corporate Fitness, Inc., 2020 WL 5035198 (Cal. Ct. App. Sep. 15, 2020), the court upheld the lower court in denying the validity of the arbitration agreement. In short, the arbitration agreement required that the employee sign the agreement, an original signed agreement be provided to the supervisor and placed in the personnel file, and the employee be provided a copy of the signed agreement. Here, the defendant did not comply with these requirements. The appellate court held that “[b]ecause the [arbitration agreement] was never signed by [the plaintiff], the trial court could reasonably find the agreement was not completed.”  Further, the plaintiff raised other points about the on-boarding process that justified the lower court giving less weight to the defendant’s arguments, including that the exhibit provided of the agreement contained a different date than the date the expert witness testified the on-boarding occurred.

Court finds that exchange of emails did not create a signed contract: In Parish Transport LLC v. Jordan Carriers, 12020 WL 5089576 (Miss. Ct. App. Aug. 25, 2020), the court affirmed the lower court’s ruling that the defendant did not enter into a binding agreement with the plaintiff when the parties exchanged emails discussing the purchase of equipment. Mississippi’s statute of frauds requires that for a contract for the sale of goods for $500 or more, there must be a writing signed by the party against whom enforcement is sought. Here, the relevant email that read “Ok. Let’s do it” and “Sent from my iPhone” did not contain an electronic signature under Mississippi’s Uniform Electronic Transactions Act; an email that states “Sent from my iPhone” does not indicate that the email sender intended to sign the record.

RECENT AND UPCOMING EVENTS

Learn about upcoming events in the ESRA Digital 2020 Education Series, including webinars on mortgage eclosings, remote online notarization, and digital transformation in automotive selling and lending.

Margo Tank spoke at the MBA/ALTA Mortgage Boot Camp on Wednesday, August 19, 2020 regarding standards and practices required for both title insurance and lending on digital transactions.

RECENT PUBLICATIONS

The MBA Compliance Essentials Remote Online Notarization State Surveys, developed by DLA Piper, provides a comprehensive look at RON requirements in each state that has enacted RON legislation.  These fully editable surveys are organized by category of requirements, including registration, technology, seal and signature, certificates of RON acts, journal, authentication, session, recording, and additional requirements. Companies can purchase the full package which includes surveys for all states that have enacted RON legislation along with a matrix summarizing state requirements, or companies can purchase information about individual states as needed. Read more.

Margo H.K. Tank recently published an article in CoinTelegraph titled “Blockchain regulation: speedbumps, roadblocks and superhighways.” 

For more information

Please subscribe to our mailing list to receive alerts, webinar invitations and other publications.

Contacts

Learn more about our eSignatures and ePayments practice by contacting:

Margo H.K. Tank

David Whitaker