[Senate Report 106-131]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 243
106th Congress                                                   Report
                                 SENATE
 1st Session                                                    106-131
_______________________________________________________________________




 
                    MILLENNIUM DIGITAL COMMERCE ACT

                               __________

                              R E P O R T

                                 of the

           COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                                   on

                                 S. 761




                 July 30, 1999.--Ordered to be printed

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
69-010                     WASHINGTON : 1999


       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
                       one hundred sixth congress
                             first session

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA SNOWE, Maine                 JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                       Mark Buse, Staff Director
                  Martha P. Allbright, General Counsel
     Ivan A. Schlager, Democratic Chief Counsel and Staff Director
               Kevin D. Kayes, Democratic General Counsel

                                  (ii)


                                                       Calendar No. 243
106th Congress                                                   Report
                                 SENATE
 1st Session                                                    106-131

======================================================================




                    MILLENNIUM DIGITAL COMMERCE ACT
                                _______
                                

                 July 30, 1999.--Ordered to be printed

                                _______


       Mr. McCain, from the Committee on Commerce, Science, and 
                Transportation, submitted the following

                              R E P O R T

                         [To accompany S. 761]

    The Committee on Commerce, Science, and Transportation, to 
which was referred the bill (S. 761), ``A Bill to regulate 
interstate commerce by electronic means by permitting and 
encouraging the continued expansion of electronic commerce 
through the operation of free market forces, and other 
purposes'', having considered the same, reports favorably 
thereon with an amendment (in the nature of a substitute) and 
recommends that the bill (as amended) do pass.

                          purpose of the bill

    The purpose of this legislation is to promote electronic 
commerce by providing a consistent national framework for 
electronic signatures and transactions.

                          background and needs

    The growing use and global reach of the Internet can reduce 
paperwork and ease the burdens of conducting commercial 
transactions. Internet commerce has already been estimated at 
more than one hundred billion dollars and is growing rapidly. 
But for the Internet to reach its potential and function as a 
substitute for traditional paper transactions, the public must 
trust the integrity and reliability of electronic commerce and 
be assured that consistent and predictable legal rules will 
govern electronic transactions.
    Presently, however, one of the greatest barriers to the 
growth of Internet commerce is the lack of consistent, national 
rules governing the use of electronic signatures. More than 
forty States have enacted electronic authentication laws, and 
no two of these laws are the same. This inconsistency deters 
businesses and consumers from using electronic signature 
technologies to authorize contracts or transactions.
    Fortunately, the National Conference of Commissioners of 
Uniform State Laws (NCCUSL) is preparing a model State law that 
adapts existing commercial law to govern electronic commerce. 
This ``Uniform Electronic Transactions Act'' (UETA) will create 
a market-based, technology-neutral legal framework for 
electronic commerce. It is currently estimated that UETA will 
be finalized in July of this year.
    The impending release of UETA confronts the Congress with a 
situation similar to that which arose when NCCUSL first 
released its Uniform Commercial Code (UCC). The release of the 
UCC began a process that eventually created a predictable 
regime of commercial law that was adopted by all the States. 
However, the UCC was not adopted everywhere simultaneously. 
There was a transition period in which commercial law remained 
unsettled as States reviewed the UCC, debated its merits, and 
enacted it into law.
    Inevitably, a similar transition period will occur in the 
case of UETA. This legislation is intended to protect and 
foster commerce during this transition period by providing a 
predictable legal regime governing electronic signatures. This 
legislation is not intended to preempt or overrule the 
developing State law of electronic signatures embodied in UETA. 
Once the States enact uniform standards consistent with those 
of UETA, the standards prescribed in this legislation will 
cease to govern.

                          legislative history

    Senator Abraham, member of the Committee on Commerce, 
Science, and Transportation, introduced S. 761 on March 25, 
1999 to regulate interstate commerce by electronic means by 
permitting and encouraging the continued expansion of 
electronic commerce through the operation of free market 
forces, and for other purposes. On May 27, 1999, the Senate 
Commerce Committee held a panel hearing, chaired by Senator 
Abraham, on S. 761. Testimony was received from Mr. Ray A. 
Campbell, III, General Counsel, Information Technology 
Division, State of Massachusetts; Mr. Harris Miller, President, 
Information Technology Association of America; Mr. W. Hardy 
Callcott, Senior Vice President and Deputy General Counsel, 
Charles Schwab; and Mr. Ira H. Parker, Vice President and 
General Counsel, GTE Internetworking. On June 23, 1999, the 
Senate Commerce Committee, chaired by Senator McCain, met in an 
open markup session to consider S. 761. The Committee ordered 
that the bill be reported, favorable with an amendment in the 
nature of a substitute by voice vote.

                      summary of major provisions

    The bill promotes the use of electronic signatures and 
provides a consistent and predictable national framework of 
rules governing the use of electronic signatures. The 
legislation preempts State law that is inconsistent with UETA, 
and provides that the electronic records produced in the 
execution of a digital contract shall not be denied legal 
effect solely because they are electronic in nature. 
Thislegislation also assures that a company will be able to rely on an 
electronic contract and that another party will not be able to escape 
their contractual obligations simply because the contract was entered 
into over the Internet or any other computer network.
    This Federal preemption of State law is designed to be an 
interim measure. It preempts State law until the State enacts 
uniform standards which are consistent with those contained in 
this legislation or the UETA. Once States enact the UETA or 
other legislation governing the use of electronic signatures 
which is consistent with the UETA, the Federal preemption is 
lifted. The legislation also grants parties to a transaction 
the freedom to determine the technologies and business methods 
to be used in the execution of an electronic contract. 
Additionally, the legislation sets forth the principles for the 
international use of electronic signatures which stress that 
paper-based obstacles to electronic transactions must be 
eliminated and that a technology-neutral, market-based, 
nondiscriminatory approach to electronic authentication 
technology should be adopted. Finally, the bill directs the 
Department of Commerce and Office of Management and Budget to 
report on Federal laws and regulations that might pose barriers 
to electronic commerce and report back to Congress on the 
impact of such provisions and provide suggestions for reform.

                            Estimated Costs

    In accordance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate and section 403 of the 
Congressional Budget Act of 1974, the Committee provides the 
following cost estimate, prepared by the Congressional Budget 
Office:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 30, 1999.
Hon. John McCain,
Chairman, Committee on Commerce, Science, and Transportation, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 761, the Third 
Millennium Digital Commerce Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Shelley 
Finlayson (for the state and local impact).
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosure.

S. 761--Third Millennium Digital Commerce Act

    S. 761 would preempt state laws that regulate interstate 
commercial transactions conducted via electronic means (such as 
contracts with electronic signatures), unless states enact 
uniform standards equivalent to those specified in the bill. 
Such a preemption constitutes an intergovernmental mandate as 
defined in the Unfunded Mandates Reform Act (UMRA), but CBO 
estimates that the costs would not be significant and would not 
exceed the threshold established by the act ($50 million in 
1996, adjusted annually for inflation). As defined in the bill, 
the term ``transaction'' would specifically exempt any contract 
to which a governmental entity is a party. As a result, CBO 
estimates that the bill would not significantly affect the 
budgets of state, local, or tribal governments. S. 761 contains 
no new private-sector mandates as defined in UMRA.
    The bill also would require federal agencies to identify 
laws and regulations that impose barriers to electronic 
commerce. Finally, S. 761 would require the Office of 
Management and Budget and the Department of Commerce to submit 
a report within 18 months recommending legislation to remove 
barriers to electronic commerce and detailing actions by the 
federal government to remove such barriers through regulation.
    Based on information from the Department of Commerce, CBO 
estimates implementing the bill would cost about $500,000 a 
year, subject to the availability of appropriated funds. S. 761 
would not affect direct spending or receipts; therefore, pay-
as-you-go procedures would not apply.
    The CBO staff contracts are Shelley Finlayson (for the 
state and local impact) and Mark Hadley (for federal costs). 
This estimate was approved by Robert A. Sunshine, Deputy 
Assistant Director for Budget Analysis.

                      Regulatory Impact Statement

    In accordance with paragraph 11(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee provides the 
following evaluation of the regulatory impact of the 
legislation, as reported:

Number of persons covered

    The Committee believes that the bill will not subject any 
individuals or businesses affected by the bill to any 
additional regulation.

Economic impact

    After full implementation of the bill, individuals and 
businesses will benefit from the increased certainty provided 
by a consistent national framework for electronic commerce. 
Moreover, by facilitating the use of electronic records and 
purely electronic transactions, this bill will help to provide 
consumers with an alternative to paper transactions.

Privacy

    There will be no impact on personal privacy as a result of 
this legislation.

Paperwork

    The paperwork resulting from this legislation will be 
primarily due to the filing of reports by the Department of 
Commerce and Office of Management and Budget on the laws and 
regulations that might pose barriers to electronic commerce. 
However, to the extent that these reports lead to the future 
elimination of such laws and regulations, in the long term this 
Act will significantly reduce paperwork burdens.

                      Section-by-section Analysis

Section 1. Short title

    This section provides the short title of the bill as 
reported as the ``Third Millennium Electronic Commerce Act''.

Section 2. Findings

    In general, this section outlines the importance of 
electronic commerce, the benefits of uniformity in electronic 
transactions and the need for the Federal government and States 
to promote and not hinder this new market.

Section 3. Purposes

    This section sets forth Congress' goals that a consistent 
national baseline for electronic commerce, including the 
clarification of the legal status of electronic records and 
electronic signatures, be established in order to increase the 
public's confidence in, and the reliability of, electronic 
commerce. This section also states that it is Congress' desire 
that the marketplace, and not proscriptive government mandates, 
should direct the continued expansion of electronic commerce 
growth; and that private parties should be able to agree among 
themselves as to the terms and conditions on which they use 
electronic signatures and electronic records.

Section 4. Definitions

    This section sets forth the definitions of terms used in 
the bill. These definitions are consistent with the definitions 
contained in the UETA, written by the National Conference of 
Commissioners on Uniform State Law. In referring solely to 
commercial use, the definition of transactions provided in this 
legislation is intentionally narrower than is provided in the 
UETA.

Section 5. Principles governing the use of electronic signatures in 
        international transactions

    The Internet is a global electronic marketplace that 
transcends national borders. As governments around the world 
begin to review and implement approaches in the area of 
electronic signatures and authentication, it is important that 
the United States government advocate consistent principles for 
such action based on longstanding principles of commercial law. 
This section sets out the principles that the United States 
Government should follow, to the extent practicable, in its 
international negotiations on electronic commerce as a means to 
facilitate cross-border electronic transactions. The principles 
in this section are consistent with those adopted by the OECD 
Ministers in a Declaration on Authentication for Electronic 
Commerce, and proposals for multilateral and bilateral 
arrangements that are being discussed. These principles are 
included in order to support the efforts of the Departments of 
Stateand Commerce in advocating a technology-neutral, market-
based approach to electronic transactions and authentication 
technology.
    Paragraph (1) advocates the removal of paper-based 
obstacles to electronic transactions. This can be accomplished 
by taking into account the enabling provisions of the Model Law 
on Electronic Commerce adopted by the United Nations Committee 
on International Trade Law (UNCITRAL) in 1996.
    Paragraph (2) permits that parties to a transaction shall 
have the opportunity to choose the technology of their choice 
when entering into an electronic transaction. Parties to a 
commercial transaction should be able to chose the appropriate 
authentication technologies and implementation models for their 
transactions. Unnecessary regulation of commercial transactions 
distorts the development and efficient operation of markets, 
including electronic markets. Moreover, the rapid development 
of the electronic marketplace is resulting in new business 
models and technological innovations. This is an evolving 
process. Therefore, government attempts to regulate may impede 
the development of newer alternative technologies.
    Paragraph (3) permits parties to a transaction the 
opportunity to prove in a court or other proceeding that their 
authentication approach and transactions are valid. Parties 
should have the opportunity to prove in court that the 
authentication methods that they select are valid and reliable.
    Paragraph (4) adopts a nondiscriminatory approach to 
electronic signatures. It promotes the policy that governments 
should treat technologies and providers of authentication 
services from other countries in a nondiscriminatory manner. 
Under this policy, the free market, and not governments, will 
determine the type of authentication technologies to be used in 
international commerce.

Section 6. Interstate contract certainty

    In approving section 6 of the bill, it is the Committee's 
view (in accord with the findings and purposes of the bill) 
that a consistent legal foundation across multiple 
jurisdictions permitting the usage of electronic signature will 
promote the growth of electronic commerce. This can best be 
accompanied by the adoption of a uniform framework by the 
States. It is for these reasons that the Committee seeks to 
encourage the adoption of the UETA as its legal foundation for 
governing electronic signatures. To the extent that State laws 
or regulations do not provide such a consistent national 
baseline, the national interest is best served by Federal 
uniformity to the extent necessary to provide such a baseline 
and eliminate barriers to the growth of electronic commerce.
    It is the Committee's view that the provisions of section 6 
apply, consistent with the language of the bill, to any 
commercial transaction affecting interstate commerce. It is the 
Committee's intent that the scope of section 6 of the bill be 
consistent with the scope of the current draft of the UETA, 
other than to government transactions and negotiable 
instruments, which are dealt within other areas of law. The 
Reporter's Notes to UETA states that the Act is intended to 
apply ``in toto'' to transactions covered by Articles 2 and 2A 
of the Uniform Commercial Code. As those notes provide: ``it is 
in the area of sales, licenses and leases that electronic 
commerce is occurring to its greatest extent today.''.
    Subsection (a) sets forth the general rules that apply to 
electronic commercial transactions affecting interstate 
commerce. The provisions of this section are consistent with 
the provisions of the UETA. This section provides that a record 
or signature executed electronically shall not be denied legal 
effect solely because it is in electronic form. Moreover, this 
section mandates a written record or signature required by law 
will be satisfied by an electronic record or signature. This 
section also dictates that a contract may not be denied legal 
effect or enforceability solely because an electronic record 
was used in its formation. By limiting the scope of this 
legislation only to commercial transactions, the committee 
deliberately left to other areas of law such issues as probate 
documents, conveyance of real property, wills and codicils, 
instruments of title or negotiable instruments.
    Subsection (b) authorizes parties to a contract to adopt or 
otherwise agree on the terms and conditions on which they will 
use and accept electronic signatures and electronic records in 
commercial transactions affecting interstate commerce. This 
authority includes methods for using and accepting electronic 
signatures and records. Thus, for example, parties may adopt or 
agree on the use of particular technologies, business models or 
procedures in connection with their use of electronic 
signatures and electronic records. At the same time, subsection 
(b) makes clear that any party remains free to decline to agree 
to any particular terms or conditions regarding the use and 
acceptance of electronic signatures and electronic records; the 
provision is not intended to deprive a party of that choice.
    Where parties do wish to agree on particular terms and 
conditions regarding the use and acceptance of electronic 
signatures or electronic records, they may do so in the same 
contract in which they otherwise contract with one another 
using such signatures and records as they have agreed. 
Subsection (b) does not require parties to enter into a 
separate agreement regarding their use of electronic signatures 
and records before they may rely on agreed terms and conditions 
when contracting with one another. The provision is intended to 
ensure that parties have maximum flexibility in the use and 
acceptance of electronic signatures and electronic records in 
connection with commercial transactions affecting interstate 
commerce. This subsection is intended to clarify that parties 
have the same latitude to use and accept electronic records as 
they have with paper records.
    Subsection (c) applies common law principles regarding 
signatures to those of electronic signatures.
    Subsection (c)(1) describes the steps necessary to 
attribute a signature to a person. It clarifies that existing 
rules of attribution also apply to electronic signatures. 
Subsection (c)(2) describes the legal effect the signature will 
have. It reflects the current state of the law of signatures by 
assuring reference to all the relevant contexts and surrounding 
circumstances at the time the signature was created.
    Subsection (d) makes clear that a contract relating to a 
commercial transaction affecting interstate commerce may not be 
denied legal effect because it was formed by the interaction of 
electronic agents of the parties or by the interaction of an 
electronic agent of a party and an individual acting on the 
individual's own behalf or on behalf of another person who is a 
party to the transaction. Electronic agents typically are 
computer programs that independently initiate or respond to 
messages on behalf of a party without human intervention at the 
time of the message or the response is sent. Electronic agents 
are increasingly used in systems to effect transactions on 
behalf of principals who have created such agents and 
authorized them to act on their behalf. By ensuring that 
contracts formed through the use of electronic agents are not 
denied legal effect by virtue of the involvement of such 
agents, Section 6(d) seeks to facilitate the growth and 
development of efficient online commerce.
    Subsection (e) preempts State laws that are inconsistent 
with this legislation and thereby sets a national framework for 
electronic commercial transactions. However, this Federal 
preemption of State law will apply only if a State has not 
adopted the UETA as its legal foundation for governing 
electronic signatures. Once a State enacts the UETA, the 
Federal preemption is lifted.
    There is every indication that the UETA will codify a 
market-based, enabling approach to electronic commerce and 
provide a uniform law governing commercial transactions in 
cyberspace. However, this section addresses concerns that 
several years may elapse before the UETA is enacted by all of 
the States. This legislation provides a Federal legal standard, 
consistent with UETA, which is effective in the interim period 
while the States are enacting UETA.

Section 7. Study of legal and regulatory barriers to electronic 
        commerce

    This section directs the Department of Commerce and Office 
of Management and Budget (OMB) to report to Congress within 18 
months on Federal laws and regulations that might pose barriers 
to electronic commerce, including suggestions for reform. It is 
the Committee's intent that this information will provide the 
basis for the removal of additional impediments to electronic 
commerce. The Committee also expects that the individual 
Federal agencies will cooperate fully with the Department of 
Commerce and OMB in implementing this section, and that they 
will use their resources to develop those aspects of the study 
that relate to their particular programs.

                        Changes in Existing Law

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, the Committee states that the 
bill as reported would make no change to existing law.

                                  
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