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 fifth 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 it is not just the ADA that requires website accessibility. 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 new monthly bulletin Blockchain and Digital Assets News and Trends.
Website accessibility – not just about complying with the ADA
While website and mobile accessibility compliance continues to be a litigation risk under the Americans with Disabilities Act (ADA), companies should be aware of other statutes and regulations that also contain accessibility requirements. Find out more.
Electronic records and signatures
- CFPB engages in extended discussion of ESIGN in its proposed new regulation to implement Fair Debt Collection Practices Act: On May 21, 2019, the CFPB published in the Federal Register its proposed rule for amending Regulation F, which implements the Fair Debt Collection Practices Act (FDCPA). While the proposed rule addresses prohibited practices by debt collectors, it focuses on debt collection communications and disclosures. For disclosures required under the FDCPA to be in writing, the CFPB engages in an extended discussion about how to interpret ESIGN, including its requirement that the consumer provide consent to receive such required disclosures electronically. The CFPB notes that ESIGN allows federal regulatory agencies to exempt a specified category or type of record from the ESIGN consumer consent requirements. Therefore, in the proposed rule, the CFPB allows debt collectors to choose between one of two options when delivering notices required to be in writing electronically: (i) comply with ESIGN consumer consent provisions by receiving affirmative consent directly from the consumer, or (ii) comply with alternative procedures that the CFPB devised. Further, as noted above in our Insights piece, the CFPB takes seriously the issue of website accessibility as well as disclosures on mobile devices, and the proposed rule requires that the validation notice be provided "in a responsive format that is reasonably expected to be accessible on a screen of any commercially available size and via commercially available screen readers."
Comments are due by August 19, 2019.
FinTech and AI
- US House Committee on Financial Services announces task force on financial technology and artificial intelligence: On May 9, 2019, Maxine Waters (D-CA), the chairwoman of the House Committee on Financial Services, announced the creation of a Task Force on Financial Technology and a Task Force on Artificial Intelligence. Stephen Lynch (D-MA) will chair the Task Force on Financial Technology and Bill Foster (D-IL) will chair the Task Force on Artificial Intelligence.
The Task Force on Financial Technology will examine issues, including:
- Regulating fintech: domestic and international perspectives
- Fintech lending and new inputs: utilizing alternative data for loan underwriting and modifications
- Fintech and consumers: assessing the infrastructure and legal and regulatory framework for efficient payments
- Fintech and big data: reviewing challenges to data privacy
The Task Force on Artificial Intelligence will examine issues, including:
- Applications of machine learning in financial services and regulation
- Algorithms and Big Data: emerging risk management perspectives
- AI, digital identification technologies and combatting fraud
- Automation and its impact on jobs in financial services and the overall economy
- OCC solicits comments on proposed innovation pilot program. On April 30, 2019, the OCC opened a 45-day public comment period on a proposed Innovation Pilot Program. The voluntary program "supports testing of novel or innovative products, services, and processes (hereinafter, activities) that could present significant opportunity or benefits to consumers, businesses, financial institutions, and communities." The OCC is soliciting for comment answers to the following questions:
- As a supplement to existing agency processes, will the program provide additional value?
- Are the eligibility criteria and evaluation process appropriate for an effective program? Why or why not?
- Are the general program parameters appropriate? Why or why not?
- What may be the preferred nature of regulatory engagement through the program?
- What type of innovative activities would be best served through this program?
- Are there suggestions or feedback as to how the program should work?
Responses may be submitted to the OCC here by June 14, 2019.
- OCC releases Semiannual Risk Perspective: The Semiannual Risk Perspective addresses key issues facing banks. In the newest Perspective, the OCC highlights that advances in technology pose challenges for banks with BSA/AML/OFAC, fair lending and complying with consumer protection regulations. Concerning consumer protection, the Perspective states, "Bank management should be aware of the potential fair lending risk with the use of AI or alternative data in their efforts to increase efficiencies and effectiveness of underwriting. It is important to understand and monitor underwriting and pricing models to identify potential disparate impact and other fair lending issues. New technology and systems for evaluating and determining creditworthiness, such as machine learning, may add complexity while limiting transparency. Bank management should be able to explain and defend underwriting and modeling decisions." Further, the Perspective highlights the competition that banks face from non-bank fintech firms that are providing services traditionally offered by banks. Specifically, the Perspective notes that borrowers are turning more towards fintech firms for unsecured personal loans, as fintech firms went from the lowest originator to the top originator in just three years. The Perspective notes that in the coming years, competitive pressure for customers will affect banks of all sizes and models.
- CFPB publishes its rulemaking agenda for Spring 2019: The 2019 Spring Rulemaking Agenda reflects the CFPB's ongoing rulemaking activities. While none of the CFPB's current or proposed rulemaking appears to affect ePayments, the CFPB also published a list of its long-term actions, which includes Regulation E modernization. The CFPB notes that it will evaluate possible updates to the regulation, including but not limited to how providers of new and innovative products and services comply with regulatory requirements. Potential topics for consideration might include disclosure provisions, error resolution provisions, or other issues.
- CFPB announces review of overdraft rule: The CFPB is conducting a review of the Overdraft Rule, which the Board of Governors of the Federal Reserve enacted in 2009, consistent with section 610 of the Regulatory Flexibility Act. The Overdraft Rule amended Regulation E, which implements the Electronic Fund Transfer Act. The CFPB is seeking comments, including the nature and extent of the economic impacts of the Rule as a whole and of its major components on small entities, including impacts of the reporting, recordkeeping and other compliance requirements of the Overdraft Rule, as well as benefits of the Rule.
- FinCEN publishes guidance on virtual currencies. The Financial Crimes Enforcement Network (FinCEN) published guidance entitled "Application of FinCEN's Regulations to Certain Business Models Involving Convertible Virtual Currencies" and issued a press release on May 9 to introduce the guidance. The guidance is in response to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of multiple variations of businesses dealing in CVCs. The guidance does not establish any new regulatory expectations, but rather consolidates current FinCEN regulations, guidance and administrative rulings that relate to money transmission involving virtual currency, and applies the same interpretive criteria to other common business models involving CVC.
- FinCEN issues new advisory to warn of threats posed by virtual currency misuse. The Financial Crimes Enforcement Network has issued an Advisory on Illicit Activity Involving Convertible Virtual Currency to assist financial institutions in their efforts to identify and report suspicious activity related to criminal exploitation of CVCs for money laundering, sanctions evasion and other illicit purposes. The advisory highlights prominent types of activity and red flags associated with such activity, and identifies information likely to be most valuable to law enforcement if contained in suspicious activity reports.
- NYDFS creates new Consumer Protection and Financial Enforcement Division. The New York Department of Financial Services recently created a new Consumer Protection and Financial Enforcement Division, which is responsible for protecting and educating consumers and fighting consumer fraud, as well as ensuring that regulated entities comply with New York and federal law in relation to their activities serving the public. It is also responsible for developing investigative leads and intelligence in furtherance of the New York Department of Financial Service's efforts to enforce the banking, insurance and financial services laws, with particular focus on the review and response to cybersecurity events and the development of supervisory, regulatory and enforcement policy and direction in the area of financial crimes. The new division combines the previously separate Enforcement and Financial Frauds and Consumer Protection divisions.
Blockchain and electronic signatures
- North Dakota and Oklahoma amend state UETA for blockchain. In late April, North Dakota (HB1045) and Oklahoma (SB700) enacted amendments to their respective state Uniform Electronic Transactions Acts to recognize blockchain technology. The North Dakota and Oklahoma amendments provide that a signature or record secured through blockchain technology is considered to be in electronic form and an electronic signature or electronic record, as applicable. The amendments take effect on August 1 and November 1 respectively.
- Washington adopts law regarding legality of electronic records created using distributed ledger technology. On April 29, 2019, the governor of Washington signed into law a bill (SB 5638) that addresses the legal validity of electronic records that are generated, communicated, received or stored using distributed ledger technology. As noted in our prior issue, Washington recently repealed its Electronic Authorization Act.
- Florida creates Blockchain Task Force: On May 23, 2019, the governor of Florida approved a bill (SB 1024) that establishes the Florida Blockchain Task Force comprised of government and private sector representatives to study the ways in which the state, county and municipal governments can benefit from transitioning to a blockchain-based system for recordkeeping, security and service delivery. The task force is established within the Department of Financial Services.
- West Virginia to provide for electronic delivery of certain motor vehicle insurance forms: On March 25, 2019, the governor of West Virginia approved a bill (HB 2617) that amended the state's uninsured motorist laws to require that the insurance commissioner provide for the use of electronic means of delivery and an electronic means of signing the form. Notably, the bill states that any document delivered electronically satisfies any font, size, color, spacing or other format requirements that are established for printed documents, provided that the format of the document delivered electronically has reasonably similar proportions or emphasis for the characters relative to the rest of the electronic document.
Remote online notarization
- Maryland. On May 13, 2019, Maryland's governor signed SB678 adopting RULONA (the Revised Uniform Law on Notarial Acts), including RON, to be effective in Maryland on October 1, 2020.
- Iowa. SF475 was enacted on April 29, 2019, and will become effective on July 1, 2020. The bill revises Iowa's enactment of RULONA to add RON. Iowa added requirements for RON technology vendors to consent to service of process in Iowa as well as prohibiting the use of personally identifiable information gathered in the performance of the notarial act other than for purposes of the underlying transaction.
- Oklahoma. SB915 was enacted on May 19, 2019, to become effective on January 1, 2020. RON is currently the only method under Oklahoma law to notarize an electronic document in Oklahoma.
- Florida. HB409 was enrolled on May 2, 2019, to be effective January 1, 2020. The bill, awaiting the governor's signature, enables RON as well as remote online electronic wills, witnessing signatures, trusts, healthcare directives, waiver of spousal rights and certain powers of attorney directives, subject to specific procedures and requirements.
- Online lending company agrees to settle FTC charges, including violations of the EFTA: On April 15, 2019, the FTC announced that Avant, LLC had agreed to settle the FTC's charges that it engaged in deceptive and unfair loan servicing practices, such as imposing unauthorized charges on consumers' accounts and unlawfully requiring that consumers consent to automatic electronic payments from their bank accounts. The EFTA and Regulation E prohibit conditioning extensions of credit to a consumer based on the consumer repaying by a preauthorized electronic fund transfer. The FTC alleged that Avant violated the FTC Act when it conditioned its extension of credit to consumers by requiring the consumers to repay using preauthorized electronic fund transfers.
- DOJ announces sentencing for operator of unlicensed money transmission business. The Department of Justice announced on April 8 that Jacob Burrell Campos was sentenced to serve two years in prison and forfeit $823,357 he received in profits as the operator of an unlicensed money transmission business. Campos was arrested in August 2018 for buying and selling bitcoin on behalf of others.
- DOJ announces indictments related to bank fraud and unlicensed money transmission. The Department of Justice announced the indictment of Reginald Fowler and Ravid Yosef for conspiracy to commit bank fraud and committing bank fraud. Fowler is also charged with conspiracy to operate an unlicensed money transmitting business and operating an unlicensed money transmitting business. The defendants allegedly falsely represented to banks that the accounts they opened would be used for investing in real estate. The accounts were instead used to transmit funds related to an unlicensed money transmitting operation related to virtual currency exchanges.
- SDNY denies OCC motion to dismiss NYDFS lawsuit challenging "fintech" charters: On May 2, 2019, the Southern District of New York denied the OCC's motion to dismiss the case brought by the New York Department of Financial Services challenging the OCC's authority to grant "fintech" charters to entities that do not receive deposits. The court ruled that the NYDFS had stated a claim under the Administrative Procedures Act because the National Bank Act was unambiguous in making only depository institutions eligible to receive national bank charters from the OCC. The OCC argued that the relevant regulation – which permits the creation of a special purpose bank that need only perform one of three core banking functions – was entitled to Chevron deference because it was a reasonable interpretation of ambiguous language in the National Bank Act. Because the court concluded that the statute was unambiguous, the court did not determine whether the OCC's interpretation was reasonable and entitled to judicial deference.
- Second Circuit finds that plaintiffs have standing under the TCPA because of receipt of unwanted texts: In Melito v. Experian Marketing Solutions, Inc., 2019 WL 1906087 (2nd. Cir. Apr. 30, 2019), the court held that plaintiffs' receipt of unsolicited text messages, sans any other injury, was sufficient to demonstrate an injury-in-fact under the TCPA for standing purposes. In doing so, the court concluded that the nuisance and privacy invasion attendant with spam texts were the very harms that Congress was concerned about when it enacted the TCPA.
Online contract formation
- Court finds that employee agreed to electronically delivered arbitration provision by failing to opt-out: In Hoffman v. Compassus, 2019 WL 1791413 (E.D. Penn. Apr. 23, 2019), an employer distributed an arbitration agreement to its employees, including the plaintiff, to their personal company email accounts, informing the employees that the agreement was not mandatory. However, to opt out of the agreement, the employees were required to send the employer an email within 14 days of receipt of the agreement. Hoffman received the agreement, but did not sign it or opt out. Applying Pennsylvania law, the court held that Hoffman accepted the agreement and provided consideration to form a binding contract by continuing in employment after the close of the 14-day opt-out period.
- Court upholds arbitration agreement in clickwrap contract: In Roberts v. Obelisk, Inc., 2019 WL 1902605 (S.D. Ca. Apr. 29, 2019), the court upheld an arbitration agreement that the plaintiffs entered into via a "clickwrap" agreement. The plaintiffs made three arguments to the court regarding why the arbitration agreement should not be enforced. First, the plaintiffs argued they had no notice because the arbitration terms were not conspicuous. The court replied that the terms and conditions were conspicuous because the defendant required the plaintiffs to click a box stating that they agreed to the terms, and next to the box was a hyperlink to those terms. Relatedly, the plaintiffs argued that the hyperlink was not conspicuous because it was pink rather than the customary blue. The court noted that the hyperlink text was distinguishable from the grey text elsewhere on the screen. Further, by clicking the checkbox, a reasonable user would have been put on notice that a hyperlink was somewhere in the adjacent text. Second, the plaintiffs argued that the defendant did not provide an "executed" version. The court noted that were it to accept this argument, it would unravel almost all clickwrap agreements. Instead, the court noted that the defendant submitted evidence – a declaration by its vice president – that the plaintiffs pre-ordered materials and they were required to accept the terms and conditions. The defendant also provided the terms in place when the plaintiffs purchased their materials. And third, the plaintiff argued that the defendant's ability to unilaterally revise the arbitration agreement made it illusory. The court noted that this was immaterial because the defendants did not revise the arbitration agreement.
- Court upholds arbitration agreement despite technical glitch that omitted electronic signature from the agreement: In King, et al. v. AxleHire, Inc., 2019 WL 1925493 (N.D. Calif. Apr. 30, 2019), the US District Court for the Northern District of California applied California law to hold as enforceable an arbitration agreement between AxleHire and an independent contractor, Derion Davis, over Davis's claims that he never signed the agreement. AxleHire proffered a copy of an Independent Contractor Agreement containing an arbitration provision, and bearing Davis's printed name, IP address and the statement "CONTRACTOR AGREED AND SIGNED" below the words "by clicking 'I accept,' I acknowledge that I have read, understood and agreed to the Agreement." AxleHire also presented a declaration stating that, to be hired by AxleHire, Davis had to complete a signup process which required him to create an AxleHire online account and password, scroll through the agreement, click "I Accept," type his name into the agreement and click "E-SIGN." Despite an admitted technical malfunction omitting the visual rendering of Davis's electronic signature from the agreement, the court found that AxleHire "presented an abundance of evidence showing that Davis did, in fact, agree to the Agreement."
- Court upholds arbitration agreement entered into electronically: In Kemp v. GameStop, Inc., 2019 WL 2024292 (N.D. Ala May 8, 2019), the court granted the defendant's motion to dismiss and compel arbitration because the defendant met its burden of proving the existence of a contract entered into online that included an arbitration clause. In March 2014, the employee logged into the defendant's online system with his unique username and password and confirmed that he read, understood and agreed with the e-signature consent by submitting his electronic signature. Then in July 2014, he logged into the defendant's online system using his unique username and password, reviewed the updated handbook and electronically signed a statement by clicking a checkbox labeled "I Agree" – notably, the statement indicated that the signer acknowledges receiving a copy of the handbook and that all disputes will be resolved by binding arbitration. The court found that when the plaintiff clicked the "I Agree" box in July 2014, a binding agreement was formed.
- Court finds that plaintiff did not agree to arbitration when defendant could not produce appropriate documentary evidence: In Ramsey v. H&R Block, Inc., 2019 WL 2090691 (W.D. Mo May 13, 2019), the defendant sought to force the plaintiff to arbitrate claims arising from her employment with the defendant between 2010 and 2011 based on an arbitration clause that the defendant alleges the plaintiff agreed to when she unsuccessfully applied for a job in 2017. Specifically, the court found that the evidence submitted by the defendant – which included a declaration from a vice president, "true and accurate" copies of the arbitration agreement that the plaintiff allegedly signed, as well as the complete online application in use when plaintiff applied for the job – was insufficient to prove that the plaintiff agreed to arbitrate. The court called out that the defendant failed to provide a copy of the employment application that the plaintiff completed, nor any electronic record establishing that the plaintiff actually applied for the job in 2017 and agreed to arbitrate her claims, including past claims. The defendant failed to produce any document bearing the plaintiff's electronic signature or other electronic indication of assent to arbitrate. The court found that all this evidence, taken together, raised a genuine issue of material fact regarding whether the parties had formed an arbitration agreement, and thus the court denied the defendant's motion to compel arbitration.
M. Tank and D. Whitaker, "So you want to go digital…", Intellectual Property and Technology News (North America), Issue 41, Q1 2019.
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.
RECENT SPEAKING EVENTS
M. Tank spoke on "The Emerging Peer-to-Peer Economy: How Blockchain and Marketplace Lending Can Drive Economic Innovation" at the Future of Financial Regulation Public Policy Conference that was held at the Antonin Scalia Law School at George Mason University on May 16, 2019.