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 bulletin is the seventh in a series 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 overview of fintech regulation in the United States. In addition, we will cover recently enacted federal and state laws, federal and state regulatory activities, fresh judicial precedent and other important news.
FINTECH IN THE UNITED STATES
A Q&A WITH OUR TEAM
US fintech companies are leading innovators in the development and deployment of virtual currencies; blockchain-based technologies; electronic payments; and digital delivery of consumer and commercial financial products and services. While the future prospects for digital transformation are bright, in the short term, fintech companies operating in the United States face a wide-range of regulatory hurdles.
In our recent contribution to the Lexology Fintech Navigator, we provide practical guidance for fintech companies on issues that they will face as they operate in the US.
The Q&A addresses the general climate and trends for fintech companies in the US, including recent regulatory developments in distributed ledger technology, alternative lending platforms, alternative financing (including ICOs and crowdfunding), robo-investing and AI. The Q&A also provides a high-level overview of the regulatory scheme within the US, including an overview of the federal laws that may apply to fintech companies. Finally, we address ancillary issues, such as what forms of IP protection are available for fintech innovations.
For more, please visit Fintech in the USA or reach out to any of us.
Industry expresses support for 21st Century IDEA Act. The Software Alliance along with the Electronic Signature and Records Association and other industry groups sent a letter of support for the 21st Century IDEA Act to Senate and House leadership, urging them to pass the legislation before the end of the year. The bill would modernize federal government websites to make them mobile-friendly, transition away from paper-based forms, and generally create a modernized digital experience for the government's online services.
Blockchain Records and Transactions Act of 2018 introduced in the House. Rep. David Schweikert (R – AZ-6) introduced the Blockchain Records and Transactions Act of 2018, which amends ESIGN to add definitions for blockchain and smart contracts as well as ensure that electronic records, electronic signatures, and smart contracts that are created, stored, or secured on or through blockchain have the same legal effect, validity, and enforceability granted by ESIGN to electronic records and signatures generally.
The Conference of State Bank Supervisors (CSBS) renews challenge to OCC's creation of special-purpose national bank charter for fintech companies. On October 25, 2018, the CSBS filed suit in the US District Court for the District of Columbia, seeking an injunction to prevent the Office of the Comptroller of the Currency (OCC) from creating a new special-purpose national bank charter under the National Bank Act (NBA). This suit was originally filed early this year, but was dismissed for want of standing and ripeness. Insisting the claim for relief is now ripe following a July 31 OCC press release entitled "OCC Begins Accepting National Charter Applications for Financial Technology Companies" (previously covered here), the CSBS argues that because fintech institutions do not receive deposits, they are not in the "business of banking," meaning the OCC lacks authority under the NBA to charter them as national banks. The CSBS adds that the program the OCC created to issue charters to fintech companies constitutes a rule which, under the Administrative Procedure Act, must be subject to public comment before being finalized.
FCC proposes a single, comprehensive reassigned numbers database. On November 21, 2018, the FCC released a Second Report and Order in which it details its proposal to establish a single, comprehensive reassigned numbers database. If created, this database will allow any caller to verify whether a number has been reassigned before calling that number. The FCC will consider this item during its December 12th Open Commission Meeting The FCC will also consider a Declaratory Ruling that would classify two forms of wireless messaging, Short Message Service (SMS) and Multimedia Messaging Service (MMS), as information services under the Communications Act, and help prevent consumers from receiving spam robotexts.
Arizona AG approves two more participants in its FinTech Sandbox program. In early November, the Arizona AG announced that Grain Technology, Inc. and Sweetbridge NFP, Ltd. have been approved to participate in the Arizona FinTech Sandbox. Grain Technology, Inc. will test a savings and credit product that offers customers customized savings plans and credit opportunities. Sweetbridge NFP, Ltd. will test a lending product using blockchain technology, with an APR cap of 20 percent.
Ohio allows tax payments via cryptocurrency. On November 26, 2018, the Treasurer of Ohio, Josh Mandel, announced that Ohio would allow businesses to pay 23 types of taxes using bitcoin through OhioCrypto.com. Ohio has partnered with BitPay to process the tax payments.
FEDERAL CASE LAW
Supreme Court grants certiorari in case regarding whether district courts must be bound by FCC interpretations of the TCPA. On November 13, 2018, the Supreme Court granted certiorari in PDR Network, LLC, et al. v. Carlton & Harris Chiropractic on whether the Hobbs Act – which is also known as the Administrative Orders Review Act, and which provides for judicial review of FCC final orders by certain federal courts of appeals, but not district courts – required the district court to accept the FCC's legal interpretation of the TCPA.
Process for obtaining electronic signature was not procedurally unconscionable. In Seeds v. Sterling Jewelers, Inc. 2018 WL 5892368 (W.D. Ky. Nov. 9, 2018), the court ruled that the process used by the plaintiff to agree to an arbitration agreement online was not procedurally unconscionable. The plaintiff admitted he had electronically signed the arbitration agreement, but argued that the process used to capture his signature was procedurally unconscionable because it did not tell him about the legal significance of the arbitration agreement before he signed. The court ruled that the defendant had provided a straightforward explanation of the arbitration agreement and had provided a caution just before signing telling the plaintiff to read and understand all content before signing. Kentucky law did not require that the defendant inform the plaintiff about the legal significance of the arbitration agreement; therefore, the process was not procedurally unconscionable.
Federal court upholds the validity of electronic signatures. In Keller v. Pfizer, Inc., 2018 WL 5841865 (M.D. Pa. Nov. 8, 2018), the court concluded that the plaintiff was subject to an arbitration agreement, finding the plaintiff's argument that she should not be bound by the arbitration agreement because it was not signed with paper and ink to be "archaic."
Totality of the circumstances sufficient to prove intent to proceed electronically. Mitchell v. Craftworks Restaurants & Breweries, Inc., 2018 WL 5297815 (D.D.C. Oct. 25, 2018), concerned the enforceability of an electronically signed arbitration agreement in which the plaintiff had not explicitly agreed to conduct electronic transactions with the defendant regarding onboarding documents. The US District Court for the District of Columbia found the agreement to be enforceable. Under the DC UETA, "[w]hether the parties [have] agree[d] to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties' conduct." The plaintiff had been required to acknowledge before electronically signing that she understood and accepted that the electronic consent process would be treated the same as a handwritten acknowledgement of consent. She was also required to enter a unique password before clicking the buttons to "Digitally Sign" the onboarding documents. The court concluded that the defendant's security measures, coupled with the plaintiff's assent to the terms of several other onboarding documents, rendered the fact that there was no explicit agreement to conduct transactions electronically immaterial.
Arbitration agreement not enforceable where plaintiff did not have actual knowledge. In Cottonwood Centers Inc. v. Klearman, 2018 WL 5084657 (D. Ariz. Oct. 18, 2018), the US District Court for the District of Arizona found that an arbitration provision included in standard terms and conditions – but not in the relevant, signed brokerage commission agreement – was unenforceable. In Arizona, to incorporate terms into an agreement by reference, the reference must be "clear and unequivocal and must be called to the attention of the other party . . . and the terms of the incorporated document must be known or easily available to the contracting parties." Here, the terms and conditions were attached to an email as one of five other separate attachments, with nothing to specifically draw the plaintiff's attention to the terms and conditions or to the incorporation reference. Further, while the court generally agreed with the defendant that the terms and conditions did not necessarily need to be initialed, the failure to do so here – where they were not physically attached to the agreement and where the form included an initial line – indicated a lack of consent. Overall, the court invalidated the arbitration agreement because it found insufficient evidence that the plaintiff had actual knowledge of the terms and conditions, including the arbitration agreement.
STATE CASE LAW
Defendant cannot enforce arbitration agreement because it could not authenticate employee's electronic signature. In Duenas v. Adecco USA, Inc., No. E068229, 2018 WL 5118496 (Cal. Ct. App. Oct. 22, 2018), the defendant sought to compel arbitration of a wrongful termination dispute brought by the plaintiff, a temporary employee, against the defendant and the defendant's client. The defendant presented to the court an arbitration agreement that purported to contain the plaintiff's electronic signature, which the defendant claimed was one of the standard onboarding documents filled out by new hires. The plaintiff denied signing the agreement. The court, in upholding the trial court denial to compel arbitration, found the defendant failed to meet its burden of authenticating the arbitration agreement because (i) the defendant provided inconsistent declarations about its onboarding procedures; (ii) the defendant failed to show that its electronic onboarding process used security measures that would prevent anyone other than the plaintiff from electronically signing the arbitration agreement, (iii) the plaintiff disputed the authenticity of the electronic signature and argued that some onboarding documents were filled out differently than she would have filled them out; and (iv) the countersigned handwritten signature was not that of the person authorized to sign for the defendant.
Electronic sales contract not enforceable where parties did not agree to conduct transaction electronically. In Dilonell v. Chandler, No. B282634, 2018 WL 5275217 (Cal. Ct. App. Oct. 24, 2018), the California Court of Appeals found the California Uniform Electronic Transactions Act (UETA) did not apply because the parties did not agree to conduct the transaction by electronic means. The defendant, without having reviewed any terms, gave her real estate agent permission via voicemail to execute a land sale contract by signing the defendant's name to the contract. The contract contained an agreement to arbitrate disputes. When the defendant refused to convey the property pursuant to the contract, the plaintiff sought to compel arbitration. Under California law, a land sale contract must be in writing to be effective. The court observed that the "equal dignities" rule requires that the defendant's authorization to the real estate agent, allowing the agent to sign the defendant's name on the land sale contract, must also be in the form of a signed writing. The plaintiff argued that under the California UETA, the voicemail left by the defendant constituted a signed, written authorization. The court found that in order for the California UETA to apply, the parties to the relevant contract – here, the land sale contract between plaintiff and defendant, and not the authorization from the defendant to her real estate agent – must have agreed to conduct the transaction by electronic means. The court held there was no agreement between the plaintiff and the defendant regarding electronic communications – only between the defendant and the agent who received the voicemail. Additionally, the court ruled that the voicemail could not constitute the defendant's electronic signature on the land sale contract, because there was no evidence the defendant intended to create an electronic signature when leaving the voicemail. Accordingly, the court held the purported contract and arbitration agreement to be unenforceable.