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Intellectual Property Law

Electronic Documents and Digital Signaturing:
Changing the Way Business Is Conducted and Contracts Are Formed

Paul R. Katz & Aron Schwartz

To allow businesspeople to rely heavily on electronic documents, common rules to authenticate and confirm the integrity of documents and their signers are required. Additionally, businesspeople and their attorneys want to ensure that electronic documents are enforceable in court and protected against illegal spying by third parties. To date, most proposals for providing these benefits center on digital signaturing technology and mathematical algorithms that encrypt entire documents.

Internet. According to a survey by the Yankee Group, 75 percent of MIS executives at Fortune 100 companies lack confidence in the Internet as an instrument of commerce because of a lack of security. Much of this vulnerability to unauthorized review of transmissions is due to the very means by which information is transmitted on the Internet.

When a document is sent from one location to another via the Internet, it is often routed through several intermediary host computers, called Message Transfer Agents (MTAs), in what is known as the Message Transfer System. Operating together, the MTAs relay messages and deliver them directly or indirectly through another MTA to their intended recipient. At each MTA, however, a message is vulnerable to either electronic eavesdropping or unauthorized manipulation of the information contained therein.

Digital Signatures. A digital signature is a sequence of bits created when a person, intending to sign an electronic document, runs his or her message through a one-way function to create a unique identifier used for sender verification purposes. The digital signature provides for three levels of authentication and thereby emulates the signature systems available in the paper-based transaction world. The first level of authentication stems from the unique digital signature itself. Like a manually signed signature, a digital signature is unique to the sender, and therefore shows that the signer has read the document and affixed his or her signature to indicate his approval of its contents. The second level provides a notary function similar to that in the paper world by requiring that the document be encrypted with the sender’s private key. Finally, the digital signature provides a means of preventing unauthorized alterations of the document by incorporating a message integrity code (MIC) computed to yield a "checksum" quantity unique to the particular combination of letters and spaces in the message at the time sent. In short, a digital signature scheme is an authentication mechanism with a powerful additional property: the recipient of a message may forward it to a third party and prove irrefutably that the document has not been manipulated since its author sent it.

The authentication and privacy enhancement afforded by digital signaturing are transforming the conduct of business. By securing the transactions flowing over the Internet rather than attempting to secure the Internet itself, digital signaturing allows electronic commerce to benefit from the openness of the Internet and the protection of a closed network.

Electronic communication has several competitive advantages over paper documents that will likely accelerate the switch away from paper-based communications. Electronic messages can traverse the country far faster than paper documents, permitting the more rapid conduct of business and, correspondingly, the reduction of float. Moreover, the cost of mailing documents, especially after accounting for the cost of paper, is significantly higher than the costs associated with e-mailing a document. Similarly, the cost of storing an electronic document is far less than for storing a paper document. Access to information stored electronically is also more rapid than with paper because of the ability to locate a document by topic or content despite how it was filed. Lastly, digital signatures permit authentication of electronic documents and safeguards against forgery that are not easily found in the paper-based world. The net effect of these advantages is that the use of electronic documents is significantly cheaper and more reliable than the use of paper. Consequently, the use of electronic documents is growing rapidly and changing the manner in which business is conducted.

Legal Considerations. As the volume and regularity of electronic transactions grow, society needs viable and implementable rules and regulations to ensure that agreements or transactions made electronically are legally enforceable. The emergence of electronic commerce is challenging our legal assumptions of how a transaction is consummated and placing the current body of law under some stress. Novel questions are arising out of the expanding use of electronic messaging, including: What is the electronic equivalent of a signature? Can electronic transmissions constitute the minimum contacts requisite in establishing personal jurisdiction over a foreign defendant? Are the new electronic documents used in electronic commerce legally binding and enforceable?

Although the international legal community has recognized the need to adapt to electronic messaging technologies, legislatures in America have been slow to react. For example, in most states, it remains unclear whether computerized documents meet the writing requirement of the Statute of Frauds. So long as businesspeople remain unsure of the enforceability of computerized contracts and continue to demand paper originals, the full impact of automation will not be felt as paper, mailing, and filing costs must still be incurred.

To date, one problem with electronic documents has been the difficulty of certifying their authenticity. Even with a scanned signature, questions have remained as to the authenticity of the signature and the document itself. Alas, a scanned digitized signature (as opposed to a digital signature) is alterable because the dots that comprise it may be individually manipulated to falsify it. In contrast a digital signature is absolutely unique and virtually unforgeable. Unlike a handwritten signature, forgeable fairly easily, it is virtually impossible to forge an encrypted digital signature.

As a result, there is a vast increase in reliability by the inclusion of a digital signature. Indeed, such records are more secure than any hardcopy counterpart since not even the most determined computer expert is likely to succeed in deciphering encrypted code.

Considering the enormous cost savings derived from electronic commerce, electronic messaging will continue to grow in popularity. Governments need to come to terms with this revolution and pass laws that facilitate electronic transactions while guarding against abuses of the new encryption technologies. For electronic agreements to receive the full protection of the law, it is critical that all fifty states pass legislation acknowledging that digitally signed agreements are "writings" for Statute of Fraud purposes. As electronic documents are easier to authenticate and verify origin of than written documents, the logic behind extending the definition of a "writing" to include electronic transmissions is apparent.

Less clear is whether legislation will need to establish rigid encryption standards and a third-party certification process as the Utah Act mandates. While such details produce a reliable system and satisfy government concerns about access to encrypted messages, they may also create a system not flexible enough to meet the challenges of ever-evolving technology.

Finally, states that vote to recognize digitally signed documents as the equivalent of signed paper documents must do more than merely authorize their use in limited circumstances. Such limits create uncertainty and this, in turn, can only stymie the development of electronic commerce.

Paul R. Katz is chair of the Intellectual Property and Technology Group of Troop Meisinger Steuber & Pasich, L. L. P. Aron Schwartz was a 1995 summer associate at the firm.

This article is an abridged and edited version of one that originally appeared in 14 IPL Newsletter 3 (Winter 1996 ).

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