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 third 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 on why virtual currency wallet providers need to take notice of the CFPB's Prepaid Card Rule that takes effect April 1st. In addition, we will cover recently enacted federal and state laws, federal and state regulatory activities, fresh judicial precedent and other important news.
As new prepaid rule takes effect, virtual currency wallet providers need to take notice
On April 1, 2019, the CFPB’s new Prepaid Rule takes effect, which extends Regulation E’s coverage to “prepaid accounts.” While much of the focus has been on how the new rule impacts traditional prepaid card issuers, the Prepaid Rule is sufficiently broad that it could apply to certain virtual currency wallets – and the CFPB has notably stated only that the application of the Prepaid Rule to virtual currencies is outside the scope of that particular rulemaking, not that virtual currencies themselves are outside the scope of Regulation E. Read more.
Remote Online Notarization
- North Dakota enables remote online notary (RON). On March 8, 2019, North Dakota passed House Bill 1110 to allow duly appointed and commissioned notaries to perform online notarizations. Generally the bill conforms to model laws. Notably, however, a solution provider for RON or for identity proofing used in RON, by consenting to the use of its technology in performing a remote online notarization by a North Dakota notary, appoints the North Dakota Secretary of State as the provider's agent for service of process in any civil action in North Dakota related to the notarial act.
- Kentucky, Utah and Idaho enable RON. This month, Kentucky, Idaho and Utah each enacted RON legislation generally conforming to the template of the model legislation proposed by the Mortgage Bankers Association and American Land Title Association (MBA/ALTA Model Legislation for Remote Online Notarization). The RON laws of Kentucky (Senate Bill 114) and Idaho (Senate Bill 1111) go into effect on January 1, 2020, while Utah's laws (House Bill 52) are effective November 1, 2019.
- South Dakota making strides towards remote notary. On March 18, 2019, South Dakota enacted House Bill 1272. House Bill 1272 does not appear to conform to the model RON laws or the RON laws adopted by other states. South Dakota's law allows a notary in the state with personal knowledge of the identity of a remote person as the signer to affix the notary's signature and seal "to the original tangible document executed by the [remote] person". The remote signer appears before the notary by audio-visual communication technology. Although drafted to allow all notarial acts to be conducted remotely using technology, the effect of the requirement that the notary sign "the original tangible document" appears to enable only remote acknowledgement of previously applied manual signatures.
- Montana revises existing remote notarization law to conform to model laws. On March 26, 2019, the Montana legislature approved House Bill 370, which modifies Montana's existing remote online notary laws to align with the model legislation from the Mortgage Bankers Association and American Land Title Association. Once signed by the governor, Montana's laws will conform to RON legislation enacted by a number of other states, such as Texas.
Blockchain and money transmission
Utah sends bill to governor that exempts blockchain tokens from money transmission definition: On March 21, 2019, the Utah Senate sent a bill to the Governor (SB 213) that would enact provisions related to blockchain technology. Specifically, the bill would define blockchain technology and a blockchain token − which is an electronic record that is recorded on a blockchain and capable of being traded between persons without an intermediary − and would exempt blockchain tokens from the definition of money transmission.
Blockchain and virtual currency
- Colorado enacts law providing certain exemptions to securities law for cryptocurrencies: On March 6, 2019, the governor of Colorado signed into law SB19-023, providing limited exemptions from the securities laws for cryptocurrencies and enacting the Colorado Digital Token Act. The bill provides limited exemptions from the securities registration and securities broker-dealer and salesperson licensing requirements for persons dealing in digital tokens. "Digital token" is defined as a digital unit with specified characteristics, secured through a decentralized ledger or database, exchangeable for goods or services and capable of being traded or transferred between persons without an intermediary or custodian of value.
- Wyoming creates new form of bank to assist blockchain companies: On February 26, 2019, the governor of Wyoming signed into law HB74,creating" special purpose depository institutions" as a new form of bank to assist blockchain innovators in accessing secure and reliable banking services. In passing this bill, the Wyoming legislature found that many financial institutions both in Wyoming and across the US refused to provide banking services to blockchain innovators and refused to accept deposits that resulted from selling virtual currency or other digital assets.
- Wyoming classifies digital assets under its UCC: On February 26, 2019, the governor of Wyoming signed into law SF1025, establishing the legal classification of certain digital assets within Articles 8 and 9 of the Uniform Commercial Code, identifying three classes of digital assets and classifying these assets, solely for purposes of Uniform Commercial Code (UCC) Articles 8 and 9, as follows:
- Digital consumer assets (UCC Article 9: general intangibles)
- Digital securities (UCC Articles 8 and 9: securities and investment property) and
- Virtual currency (UCC Article 9: money)
Each of the three classes is defined, and the three classes do not, taken together, cover or address all digital assets.
Among other changes, the new law specifies a method for perfecting a security interest under UCC Article 9 based on control relating to digital assets and it authorizes banks to voluntarily provide custodial services for digital assets, consistent with the Securities and Exchange Commission's qualified custodian requirements.
Blockchain and electronic records and signatures
- South Dakota revises its UETA to address blockchain technology: On March 7, 2019, the governor of South Dakota signed into law HB1196, providing a definition of blockchain technology for certain purposes. Specifically, the bill amends South Dakota's Uniform Electronic Transactions Act (UETA) to add the following definition for blockchain technology: technology that uses a distributed, shared, and replicated ledger, either public or private, with or without permission, or driven with or without tokenized crypto economics where the data on the ledger is protected with cryptography and is immutable and auditable. The bill further revises South Dakota's UETA to state that both an electronic record and an electronic signature include a record or signature respectively that is secured by blockchain technology.
Electronic delivery of insurance notices
- North Dakota enacts law allowing electronic delivery of certain insurance documents: On March 20, 2019, the governor of North Dakota signed into law HB 1137, allowing the electronic mailing, delivery or posting by insurers of notices or documents. Specifically, any notice to a party or any other document required under applicable law in an insurance transaction or any other document that is to serve as evidence of insurance coverage may be delivered, stored and presented by electronic means provided that the receiving party has given consent in the manner specified by law and has not withdrawn such consent. Additionally, an insurance policy and an endorsement that does not contain personally identifiable information may be posted on the insurer's website, provided that the insurer meets certain conditions, including mailing a paper copy to insured at no charge.
- Nebraska enacts law allowing electronic delivery of certain insurance documents: On March 21, 2019, the governor of Nebraska approved a bill (LB 116) that allows the electronic mailing, delivery or posting by insurers of notices or documents. The law provides that (1) any notice to a party or (2) or any document required in an insurance transaction or that serves as evidence of coverage may be delivered, stored and presented by electronic means provided that the receiving party has consented to such method of delivery in the manner required by law and has not withdrawn the consent. The electronic delivery method used must provide for verification or acknowledgment of receipt in instances in which proof of receipt is required for a mailing. Additionally, the law allows property and casualty insurance policies and endorsements that do not contain personally identifiable financial information to be mailed, delivered, or posted on the insurer's web site, provided that a paper policy and endorsements must be mailed without charge by the insurer to the insured upon request.
- Utah aims to create regulatory sandbox: On March 22, 2019, the Utah Senate sent to the governor HB 378, which would create a regulatory sandbox program in the Utah Department of Commerce allowing a participant to temporarily test innovative financial products or services on a limited basis without needing a license or otherwise being authorized to act under Utah's laws. The bill describes who may participate, how the Department of Commerce will administer the program and what the reporting requirements for participants will be.
STATE CASE LAW
Email correspondence held not to meet the statute of frauds. In KCAS, LLC v. Nash-Finch Company, 2019 WL 687885 (January 9, 2019), the parties negotiated by email correspondence, exchanging an asset-purchase agreement and sublease agreement, both of which were clearly labeled as "DRAFT." These agreements were nearly complete. After a telephone conversation, an agent of Nash-Finch sent an email to KCAS confirming that Nash-Finch's parent company, SpartanNash, "will be selling the [property] site to you in Scottsbluff, Nebraska, for $2,500, plus inventory, and we would like to schedule a closing the last two weeks of February this year. Once we hear back from SpartanNash on the closing, we will reach out to you again." The agent, Skip Melin, signed the email "Skip." The court failed to reach the issue of whether the typed name at the end of the email qualified as an electronic signature under Nebraska law. The court instead found that the email failed to satisfy the statute of frauds because it did not incorporate or reference the entirety of the parties' alleged agreement, which included the terms of the draft agreements.
Email exchange does not reflect written agreement: In Next Payment Solutions, Inc. v. Clearesult Consulting, Inc., 2019 WL 955354 (N.D. Ill February 27, 2019), the court, in applying Texas law to an email exchange between the parties, held that the exchange did not reflect a written agreement to extend the term of the parties' manually executed Master Services Agreement, because the parties did not reach an agreement on terms in the email exchange.
Court upholds employee's agreement to arbitrate entered into via clickwrap process. In Tanis v. Southwest Airlines, Co., 2019 WL 1111240 (S.D. Calif. March 11, 2019), the court applied California law and granted the defendant employer's motion to compel arbitration. The defendant presented evidence about its employee communication intranet, which required unique login credentials to access, and presented the arbitration agreement to employees via an announcement pop-up screen. The employees were informed in the announcement of the nature of the arbitration agreement, the agreement was made available for viewing or download via hyperlink, and the employee was required to click a check box to acknowledge receipt of a copy of the defendant's arbitration program and to be able to proceed to other portions of the intranet site.
Motion to compel arbitration granted in dispute over automotive retail installment sale contract. Applying Minnesota law, the court in Burnip v. Credit Acceptance Corporation, 2019 WL 1110801 (D. Minn. March 11, 2019) adopted the recommendations and findings of the Magistrate Judge that an electronically executed retail installment contract between Burnip and a defendant auto dealer reflected a valid arbitration agreement, and copies of the contract satisfied the Best Evidence Rule. The electronic signature process had required the plaintiff to initial the contract's arbitration clause as well as a separate section stating that she had read, understood and agreed to the terms and conditions of the arbitration clause. Notably, the arbitration clause included a 30-day right-to-reject clause, and Burnip failed to exercise that right.
Utah Court of Appeals infers consent to electronic transaction where agreement sent via fax was notarized and delivered by contesting party. In VT Holdings LLC v. My Investing Place LLC, No. 20170647-CA, 2019 WL 1187163 (Utah Ct. App. Mar. 14, 2019), the Utah Court of Appeals upheld the validity of a request for reconveyance that was sent via fax. The request for reconveyance was signed and notarized by representatives of VT Holdings, which would later argue that the parties never agreed to conduct business electronically, rendering the document invalid under Utah's UETA. The Court of Appeals, giving deference to the factual findings of the trial court, disagreed with VT Holdings and found that the context surrounding the fax made the trial court's inference that the parties agreed to conduct business electronically proper. Namely, the court noted that it made no sense that VT Holdings would go through the trouble of having the document prepared, signed, and notarized for no legal effect. The court also found the testimony of one of the representatives of VT Holdings to be vague and elusive, which, coupled with his prior conviction for a crime of moral turpitude, "hampered his credibility," making it all the more likely that all parties assented to conducting business electronically.
Motion denied for insufficient evidence of attribution. Applying California law, the court in Smith v. Rent-A-Center, Inc., 2019 WL 1294443 (E.D. Calif., March 21, 2019), denied the defendant employer's motion to compel arbitration, asserting that the defendant failed to meet its burden of establishing the authenticity of the employee's electronic signatures in response to the plaintiff's challenge of the signatures' validity. Citing Ruiz v. Moss Brothers Auto Group, 232 Cal.App.4th 836 (2014), the court found that the declaration of the defendant's human resources director and custodian of records failed to sufficiently detail the security procedures and processes involved in the defendant's electronic employee onboarding or in the creation and application of the plaintiff's electronic signatures to the arbitration agreements. The declaration failed to explain how the defendant inferred that it was plaintiff who created and entered the password, how defendant ascertained that the electronic signature was the act of plaintiff, or how defendant determined that the form was signed on October 4, 2016. No audit trail was presented or discussed.
Motion granted in light of sufficient evidence of attribution. In Walker v. Dillards, Inc., 2019 WL 1283001 (D. NM March 20, 2019), applying New Mexico law, the court granted the defendant's motion to compel arbitration in light of defendant's evidence detailing the process by which employees log into the defendant's intranet with a user ID and password, are presented with the arbitration agreement, scroll through the agreement, click "I agree" and enter their unique password to electronically sign the agreement.
M. Tank and D Whitaker, Trends in electronic signatures: strategies for addressing risk using biometric data," a white paper for Wacom.
M. Tank and D. Whitaker, "The Effectiveness of Clickwrap for Legally Enforceable Agreements, a white paper for DocuSign.
Margo Tank and David Whitaker presented on 2019 Legal and Regulatory Issues at the Electronic Signature and Records Association Winter Members Meeting on March 28, 2019 in Atlanta.