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 second bulletin for 2020, 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 Supreme Court denial of certiorari in ADA case and potential future impacts. 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.
Task Force on Artificial Intelligence hearing: Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services – key testimony on challenges and opportunities
By Victoria Lee and Andrew W. Grant
The House Financial Services Committee created its Task Force on Artificial Intelligence to determine how to use AI in the financial services industry and examine issues surrounding algorithms, digital identities, and combating fraud. On February 12, the task force held its latest hearing, featuring the testimony of five expert panelists. Congressman Bill Foster (D-IL), chairman of the task force, used his opening remarks to set out the hearing’s scope: what does it mean to design ethical algorithms that are transparent and fair, and how do we program fairness and have decisions explained to us? Find out more about the hearing.
Fed governor speaks on “The Digitalization of Payments and Currency”: On February 5, 2020, Lael Brainard, member of the Board of Governors of the Federal Reserve System, spoke at the Symposium on the Future of Payments outlining issues for consideration with the digitalization of payments and currency, including calls for the public sector to “engage actively with the private sector and the research community” over evaluation of potential needs for new guardrails and existing regulatory parameters.
- BigTech and FinTech’s entry into payment systems: BigTech and FinTech players bring benefits to payment systems including heightened innovation, introduction of new business models, increased competition, enhanced product offerings, and lower transaction costs which may increase payments access for the 8.4 million households unbanked and 24 million households underbanked where many have smartphones. There are potential risks associated with this transformation, however, as the Federal Reserve has limited oversight if nonbank players seek to reduce or eliminate the nexus to the banks through means such as digital wallets and digital currencies.
Real-time retail payment system: Due to the critical need to provide safety and security while increasing speed and efficiency, the Federal Reserve is building the FedNow Service as a new payments rail, and coupled with the Clearing House’s RTP, will “mov[e] the U.S. banking system to real-time retail payments.”
Digitalization of currencies: As a medium of exchange, private digital-currency-based payment systems could “magnify concerns surrounding illicit activity and consumer risk, while potentially creating challenges for the public sector’s ability to safeguard financial stability and use monetary policy to buffer the economy.” Design considerations for cryptocurrencies include if it is account-based or token-based, how the asset holder is authenticated (perhaps by biometrics on decentralized systems), and the convertibility of the cryptocurrency. With stablecoins, it is still not clear what consumer protections are available or “how much price risk consumers will face.” Ms. Brainard notes, “If not managed effectively, liquidity, credit, market, or operational risks - alone or in combination - could affect financial stability, triggering a loss of confidence and run-like behavior.”
- Central bank digital currencies (CBDC): Due to rapid adoption globally of stablecoin payment systems and the need for stability, central banks are evaluating and researching “issu[ing] digital currencies in order to maintain the sovereign currency as the anchor of the nation’s payment systems.” While 80 percent of surveyed central banks are engaged in some type of CBDC work, there are policy and design issues as well as legal considerations of CBDC for the U.S. to consider in determining if there would be overall net benefits.
FDIC releases new guide to help FinTechs connect with banks: On February 24, 2020, the Federal Deposit Insurance Corporation's technology lab (FDiTech) released a new guide to help financial technology companies and others partner with banks. Conducting Business with Banks: A Guide for Third Parties is designed to help third parties understand the environment in which banks operate and navigate the requirements unique to banking. The guide is an initial effort to address concerns from banks and technology companies across the country related to challenges associated with on-boarding at institutions.
State financial regulators launch nationwide technology platform to examine FinTechs and other nonbanks: On February 19, 2020 CSBS announced the nationwide rollout of the State Examination System (SES), the first nationwide platform to bring state regulators and companies into the same technology space for supervision, fostering greater transparency and collaboration. Through SES, state regulators will be able to enhance supervisory oversight of nonbanks while making the process more efficient for regulators and companies alike.
SES is developed and operated by the State Regulatory Registry (SRR), a CSBS subsidiary that also operates the Nationwide Multistate Licensing System (NMLS).
SES is built to:
- Support networked supervision among state regulators
- Standardize workflow, business rules and technology across states
- Facilitate secure collaboration between licensees and their regulators
- Help examiners focus more attention on higher-risk cases
- Move state supervision towards more multistate exams and fewer single-state efforts
Coalition of 17 groups request FCC to clarify definition of an automatic telephone dialing system: On February 5, 2020, 17 groups, among them the US Chamber of Commerce, ACA International, the American Bankers Association, and the Electronic Transactions Association urged the FCC to clarify “expeditiously” the definition of an automatic telephone dialing system (ATDS) by acting on the Petition for Declaratory Ruling (covered here) that was filed more than 21 months ago. This letter, which cites an Eleventh Circuit case covered below, urges the FCC to act on the petition for two reasons: (1) to make clear that to be an ATDS, the equipment must use a random or sequential number generator to store or produce numbers and dial those numbers without human intervention, and (2) find that only calls made using ATDS capabilities are subject to the TCPA.
Moody’s Investors Service releases report on use of electronic contracting in asset-backed securities: Moody’s recently released a report about how a growing source of legal and operational risk to US asset-backed securities is the lenders' increased use of electronic contracts to originate loans and leases. This has become especially prevalent in auto and equipment lease transactions according to the report from Moody's Investors Service.
Moody’s notes that traditional paper contracts can face similar risks, but their legal framework differs and includes clear, well-established and simple-to-satisfy steps. In particular, according to the report, if a party to the transaction fails to maintain clear control of an e-contract a third party could claim a superior interest in the loan or lease, and thereby divert expected securitization cash flows.
Two circuit courts hold that an autodialer must be able to both store and produce numbers using a random or sequential number generator: First, in Glasser v. Hilton Grand Vacations Company, LLC, (11th Cir. January 27, 2020), the Eleventh Circuit held that to be an automatic telephone dialing system (ATDS) under the Telephone Consumer Protection Act, the system must both be able to store and to produce numbers using a random or sequential number generator. At issue is whether the clause “using a random or sequential number generator” modifies both requirements that the ATDS be able “to store” and “to produce” telephone numbers, or if it modifies only one of these requirements. In contrast to the Ninth Circuit in Marks v. Crunch San Diego, LLC, 904 F.3d 1041, 1049 (9th Cir. 2018) (covered here), the court concluded that the clause modified both requirements. In doing so, it noted that “Congress in retrospect drafted the 1991 law for the moment but not for the duration.” Further, the court noted that the plaintiff’s lawsuit raised another problem − the telephone system required human intervention and was not an “automatic” dialing system. Therefore, even if the definition of an ATDS covered a telephone that automatically dialed a list of stored numbers, the system at issue would still not be an ATDS because it required human involvement before any calls were placed (employees needed to press a button on their computer screens labeled “make call; the court noted that the system required human involvement to do everything but press numbers on a phone).
Second, in Gadelhak v. AT&T Services, Inc., (7th Cir., February 19, 2020), the Seventh Circuit likewise held that an autodialer must be able to both store and to produce numbers using a random or sequential number generator. Therefore, the court held that the defendant’s system was not an ATDS when it sent unwanted texts to the plaintiff. To read otherwise, the court noted that it would have far reaching consequences, stating that every iPhone would constitute an ATDS because it stored numbers and could dial them automatically by, eg, using the Do Not Disturb While Driving function.
Electronic signatures and general online contract formation
Courts uphold arbitration agreements that were electronically signed:
- In Young v. Hoogland Foods, LLC, Slip Copy, 2020 WL 555106 (E.D. Mo. Feb. 4, 2020), the court granted a motion to compel arbitration by a defendant restaurant franchisee owner for claims of employment discrimination alleged by a plaintiff former employee. The defendant provided evidence of an electronically signed arbitration agreement for “all legal disputes and claims regarding the employment relationship, or the termination of it,” including the plaintiff’s user name within the signature box, printed name, and employee identification number. The court held that the arbitration agreement must be enforced, reasoning that the plaintiff’s “unsworn, self-serving assertions” that he that he does not remember seeing or signing the document are do not create genuine issues of material fact “as to the authenticity of the agreement.” The court further adds that the electronic signature of the arbitration agreement is “afforded full legal recognition under both Missouri and federal law.”
- In Boykin v. Family Dollar Stores of Michigan, Inc., Slip Copy, 2020 WL 563009 (E.D. Mich. Feb. 5, 2020), the court upheld a motion to compel arbitration of an electronically signed arbitration agreement between a former employee and an employer, in part reasoning that while the plaintiff did not physically sign or type a signature to acknowledge acceptance of the agreement, the plaintiff did download the document and “acknowledge that he read and accepted the terms.” Pursuant to Michigan law, this is a valid electronic signature to uphold an arbitration agreement, and the plaintiff’s “self-serving evidence” of being unable to recall signing or alleging someone else forged his ID number on the document is not sufficient to create a dispute of fact. The court notes that “through the adoption of the UETA, Michigan recognizes the legal effect of electronic signatures and electronic records in the formation of contracts.”
Court upholds arbitration agreement entered into via hybrid clickwrap agreement: In Hosseini v. Upstart Network Inc., Slip Copy, 2020 WL 573126 (E.D. Va. Feb. 5, 2020), the court granted a loan servicer defendant’s motion to compel arbitration for claims of Fair Credit Reporting Act violations alleged by a plaintiff who obtained a loan from the defendant’s service. The court held that the arbitration agreement contained within the hybrid clickwrap platform agreement was valid and enforceable, reasoning that the plaintiff affirmatively checking the “I agree” box was sufficient to form a contract and be bound by the terms agreed to including the arbitration clause within the platform agreement.
Online contract formation
Emails not sufficient to satisfy statute of frauds: In Copano Energy, LLC v. Bujnoch, 2020 WL 499765 (Tex. Sup. Ct., Jan. 31, 2020), the court held that the emails exchanged between the parties were not sufficient to create an enforceable contract under Texas’s statute of frauds. The case arose when the landowners, the respondent, brought an action against the energy company, the petitioner, for breach of contract, which was a claim based on an allegation that the energy company failed, as required by a purported contract between the parties, to pay landowners for easements obtained. The landowners also asserted a claim of tortious interference with a contract against company that later acquired energy company. The Texas Supreme Court, in overruling the lower court, held that e-mails exchanged on a certain day between the energy company's representative and the landowners' attorney did not constitute a written agreement containing all essential terms for purchase of pipeline easement, and that no other writing supplied the missing essential terms required by the statute of frauds. Because under the statute of frauds the proffered contract was not enforceable, the court reversed the lower court’s decision (which held that the emails satisfied the statute of frauds) as to the breach of contract claim and rendered a take-nothing judgment on all claims. In its analysis, the court did not address the Texas Uniform Electronic Transactions Act or the federal ESIGN Act.
On April 8-9, 2020, Margo Tank is a panelist at the MBA & ALTA’s Digital Closing & eMortgage Boot Camp in Atlanta. Learn more and register here.
On Thursday, February 27, 2020 at 1-2 Eastern, Margo Tank and Liz Caires conducted an MBA webinar, “Remote Online Notarization State-of-Play.”
Margo Tank presented at DLA Piper’s FinTech 2020 and beyond: eContracts and Asset Backed Securities event in New York on February 12, 2020.
Margo Tank presented at the Structured Finance Conference in Las Vegas on February 25, 2020, speaking on a panel entitled “eNotes, eClosings, and eVaults.”
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.