House Signs Off on Bill Validating Online Contracts

The House overwhelmingly approved Wednesday the so-called digital signature bill, which would give electronic contracts the same legal status as a signature on a piece of paper.

If, as expected, the measure is approved by the Senate and signed by President Clinton, digital signatures could be in use by Oct. 1.

The legislation would enable consumers to set up online brokerage accounts, take out a mortgage or execute a home repair agreement without mailing in a document with a written signature.

These “e-signatures” are not actually online signatures, but instead, with clicks of a computer mouse, both companies and consumers could finalize business deals.

Digital signatures are expected to not only jump-start consumer transactions, further broadening the growth of online commerce, but will also eliminate the mountain of paperwork arising out of contractual deals between businesses.

In a bow to consumer fraud concerns, however, the bill does not allow e-signatures on some sensitive documents, such as adoptions, wills, cancellation of health insurance benefits and product safety recalls. The House also set aside mortgage foreclosures and utility cancellations as transactions that could not be completed online.

Still, proponents foresee the day when an entrepreneur can set up a company, borrow money to finance it and arrange for suppliers to send products, all without signing a single piece of paper.

Clinton applauded the House vote Wednesday, saying, “It will encourage the information technology revolution that has helped lower inflation, raise productivity and spur new research and development.”

The measure passed by a vote of 426 to 4, with all members of the California delegation approving it.

Under the legislation, businesses can use any available technology to process digital signatures in much the same way they approve consumer purchases of books and CDs when Web surfers click on Amazon.com, EToys or any other e-commerce site.

The new law mandates that businesses using digital signatures must require buyers to make at least two clicks of a computer mouse to complete a deal. The first mouse click would be to test the electronic link between business and buyer and ensure that the digital signature technology works, much like Web browsers now establish a secure connection with an online merchant by displaying a little icon of a padlock. Then, at least one other mouse click would be required to close a deal.

The warp speed of the Internet, however, along with digital signatures, will probably result in the virtual elimination of “buyer’s remorse,” because consumers will no longer have time to change their minds on a deal while waiting for the paperwork to arrive.

But businesses using digital signatures will also have to give consumers the option of receiving contract notices on paper, rather than electronically. The business could charge extra for paper notices if the consumer doesn’t opt for faster delivery by e-mail.

And because consumers would be able to get big-ticket items online, such as a mortgage or an insurance policy, it will almost certainly increase pressure on businesses to beef up security and verify who they are dealing with.

The measure would still affect a broad cross-section of commerce and help participating industries save hundreds of millions of dollars by not having to keep mountains of paper records or mail out paper forms for signatures. The measure also opens up big business opportunities for technology security firms such as Mountain View, Calif.-based VeriSign Inc., Entrust Technologies Inc. of Plano, Tex. and ILumin, an Orem, Utah, firm.

“Make no mistake, the potential here is huge and the savings for businesses are enormous.” said David Colton, counsel for the Information Technology Assn. of America, a Washington trade group.

Microsoft Corp., a supporter of the legislation, estimated that electronic signatures could save as much as $2,000 on the cost of a new home mortgage, largely due to the reduction in paperwork.

But Colton said a big challenge for policymakers and businesses “will be to take care of some of the security and [consent] issues the legislation doesn’t address.”

Even some lawmakers had misgivings.

“There is a need to validate and clarify the reliability of electronic authentication applications,” said U.S. Rep. David Dreier (R-San Dimas).

Businesses will probably rely on stronger versions of existing encryption technology to facilitate transactions using digital signatures.

For instance, a buyer could be issued a small computer file online containing a security code for a digital signature. Alternatively, if high security is needed, a buyer might be mailed a credit card-sized “smart card” that would hold the security code and be inserted into a device connected to a personal computer. Once inserted, the PC could then send the security information over the Internet.

As with many other online security technologies, however, these measures only identify a particular computer, not the actual user of the machine. So experts say it may still be possible for anyone with access to the PC, and who knows the security code, to pose as a legitimate customer.

Many businesses experienced in electronic commerce are aware of the problem and use “fancy technology infrastructure that most people don’t have in their computer” to minimize risk, noted Michael Hogan, vice president of DLJ Securities.