ABA Section of Business Law
ABA Section of Business Law
Business Law Today
November/December 1998
Lock and load
Document security on the Net
By JAMES HILLHill is an associate with Knobbe, Martens, Olson and Bear, a law firm specializing in intellectual property, in Newport Beach, Calif.
Commerce on the Net: What a magnificent concept! But how can transactions be made secure? Welcome to the world of digital signatures.
The Internet is a global computer network of almost limitless potential, particularly in the area of electronic commerce. Despite a significant amount of crime on the Net, there has been a low incidence of civil fraud, perhaps because today there are still relatively few Internet transactions for value. But as the amount of electronic commerce increases over the next few years, the amount of fraud is likely to escalate unless security measures can keep pace.
The use of secret codes for safeguarding important information dates back at least to the third century B.C., during the reign of Alexander the Great. The Allies' victory in World War II was aided by their ability to crack German spy codes. In postwar America and the Soviet Union, intelligence services increasingly relied on computers to protect national secrets throughout the Cold War. Until fairly recently, only countries and large corporations possessed the computer power needed for the creation of sophisticated secret messages (encryption) and their decoding (decryption). Today, however, the average person using an ordinary personal computer can harness encryption power on a scale previously used only by the CIA.
The creation of secret messages is the most familiar use of cryptography, but its most important use for the foreseeable future is the realm of the Internet — in the authentication of the origins of data, the maintenance of message integrity and the nonrepudiation of messages by their creators. The primary way this is done today is the digital signature. Digital signatures are not written or manual signatures, so the term is a bit of a misnomer. Rather, a digital signature is an encoded message that assures the recipient that the sender is who she says she is. In this sense, the signature is akin to a personal identification number. In addition, however, a digital signature assures that a received message has arrived valid and intact, unchanged from the point of transmission.
Because these signatures can prove that a person created a message and that the message has not been altered after it was created, it becomes very difficult for the sender to repudiate her message. Consequently, the sender cannot avoid legal responsibility for the message and its consequences. Digital signatures have proven secure after more than a decade of scientific review, and they may provide the impetus for the full-scale explosion of electronic commerce.
People often reduce their transactions to signed writings. A signature is part of a transaction's form, not its substance. The act of signing a writing serves a variety of purposes, including expressing the signer's approval or authorization of the writing, or her intention that it have legal effect. A signature identifies the signer by her own unique mark, and it makes the document attributable to the signer. And because a signature often lessens the need to inquire beyond the face of a document, it increases the efficiency of transactions.
Legal systems vary in the degree to which a particular form, including one or more signatures, is required for legal transactions. The statute of frauds in the common law, for example, requires a signature. It does not, however, consider a transaction invalid without a signature, but merely unenforceable in court. The trend in most legal systems this century has been to reduce formal signature requirements. In the United States, a signature can be any mark made with the intention of authenticating the signed matter. Nonetheless, the custom remains to formalize a transaction in a way that best assures the parties of its enforceability and validity.
The methods of documenting transactions and creating signatures are changing today. People continue to write documents on paper, of course, if only to satisfy current legal requirements for a recognizable form. But often the information exchanged in a transaction does not take paper form. Rather, a computer may form the information, which can then travel from place to place by electrical and fiberoptic cables, and sometimes satellites, at speeds impossible for paper transmittal. And while human eyes alone can read paper documents efficiently, computers can both read large amounts of digital information efficiently and, in many cases, act on it rapidly.
While the essential nature of these transactions remains unchanged, the forms by which they are represented are changing dramatically. The law has only begun to change in response to this new technology. In order to be effective and achieve the purposes of personal signatures in the law, any system of electronic signatures should produce the following effects:
- Document authentication. The signature should identify what is signed, in order to provide evidence of the substance of the transaction. Furthermore, an ideal system should detect any attempts to alter or falsify the document or signature.
- Signer authentication. The signature should indicate who signed the message. Also, it should be difficult for anybody else to use the signature without authorization.
- Legal force. A person's signature should be able to legally consummate a transaction, as well as indicate authorization and approval.
Notably, U.S. law permits the domestic use of encryption of any strength, but it forbids the exportation of encryption hardware and software above a certain level of strength, treating this action as the illegal exportation of munitions. The Clinton administration plans to ease these restrictions in the near future, eventually allowing U.S. companies to sell full-strength encryption technology to 45 countries that have enacted anti-money-laundering statutes.
Two types of keys form the asymmetric cryptosystem: 1) a private key, which should be available only to the signer, and 2) a public key, available to anyone who may read the sender's message. Although the public key may be restricted to only one or a few users, it is usually made publicly available through an online repository that is operated by an independent party (the certification authority, discussed below). Anyone who has the public key can send messages that only the private-key owner can read. And the private key can be used to send messages that could only have been sent by that private-key owner.
The public and private keys are mathematically related, but virtually impossible to derive from each other. Even if many people know the public key of a particular signer, they can't figure out that signer's private key to use it, for example, to forge her digital signature.
Creation of a secure message using an asymmetric cryptosystem involves the following steps:
- First, the sender defines the precise message that she intends to send, whether it is a document or a portion of a document.
- Next, the sender's software uses an algorithm known as a hash function to create a sort of digital "freeze frame" of the message. This "freeze frame" is called a hash result, hash value or message digest, and it is merely a stripped-down, encoded version of that particular message. This hash result will later be used to check whether the message has been altered.
- The sender's software then combines the hash result with the sender's private key, creating a digital signature that is unique to the message and the private key.
- The sender then transmits both her message and digital signature over the Internet (or other computer network) to the recipient.
It is possible, however, that the sender could be an impostor. For this reason, the association between public and private keys is usually made by an independent, trusted third party, known as a certification authority. The certification authority's role is to assure the identity of a sender. It does so by issuing a certificate that sets forth the public key and represents that the signer identified on the certificate holds the corresponding private key. The certification authority digitally signs the certificate to assure authenticity.
How does a recipient know that the certification authority isn't an impostor? The recipient can verify the authority's digital signature using a public key on another public certificate, which in turn can be verified by the public key on another certificate, and so forth, until the recipient feels assured of the certificate's authenticity. It is becoming increasingly important to have reliable, reputable certification authorities that are recognized worldwide, in order to ensure secure global transactions like those used in international banking.
Recent developments in smart-card technology may soon allow personal computers to use smart cards containing a digital signature. The smart card could contain a private key and an encryption algorithm, allowing it to perform encryption functions using the card's own microprocessor chip, rather than the computer's. The smart card's portability would improve the ability to conduct electronic transactions from any location.
Digital signatures can permit lawyers to communicate with each other and with clients by the Internet using secure transmissions. Such security may help to maintain confidentiality between lawyer and client. For example, in early 1998, legal publisher West Group formed an agreement with VeriSign Inc., a certification authority, to provide secure communications to lawyers using digital signatures.
Under this scheme, VeriSign issues the digital signatures and West verifies them, so lawyers can maintain client confidentiality while communicating online. West's legal directory serves as the registration authority for issuing VeriSign digital signature certificates, and it maintains an online certificate repository. Lawyers can also acquire digital certificates for clients using similar methods.
Digital signatures ensure secure electronic communications through a three-party system, involving the message sender, recipient and a certification authority. The full potential of digital signatures in electronic commerce may not be realized until reasonably uniform rules governing the rights, obligations and liabilities of each of the three parties are established. In 1996, the American Bar Association published "Digital Signature Guidelines: Legal Infrastructure for Certification Authorities and Secure Electronic Commerce." This document is the first set of legal guidelines for cryptology, electronic signatures and authentication over open networks like the Internet. The creation of the ABA guidelines took four years, using contributions from lawyers, government policy and management professionals, information technology specialists and security experts. The ABA's guidelines are proving influential both here and abroad. In 1998, the Japan Federation of Bar Associations signed a licensing agreement with the ABA's Section of Science and Technology to translate the guidelines into Japanese and distribute printed copies among Japanese bar members. Japan, Germany and other countries either have established or plan to establish legal rules for electronic or digital signatures.
Congress has not yet enacted any federal law governing digital signatures and electronic commerce, although banking lobbyists have been anxious to have it do so. There is concern that nonuniform state laws may have a negative effect on the development of electronic banking and commerce nationwide. When Congress considers a federal digital signature statute, a major issue will be the law's preemptive effect. Only a completely preemptive federal law will assure national uniformity in the use of digital signatures, as well as clear notice of rights and liabilities. Such a law, however, could stifle more creative policy approaches now being considered by individual states.
Thirty states and the District of Columbia have enacted legislation on the use of digital or electronic signatures. Often this legislation is designed for relatively narrow uses, such as medical records, voter registration, tax filings or in connection with various licensing schemes. The ultimate aim of these laws is to allow for reasonable reliance on digital signatures and thus to create digital documents that, when signed and verified by the public keys listed in valid certificates, are as enforceable as paper documents.
In 1995, Utah became the first legal system in the world to enact a comprehensive law controlling the use of digital signatures in electronic commerce. Utah uses the public-key/private-key model, and it delineates the responsibilities of certification authorities. The Utah law limits liability of the certification authority to persons who rely on the public key certificate. In addition, digital signatures that satisfy the requirements of the Utah statute thereby also satisfy the laws that require written signatures. The latest effort to bring uniform rules to electronic commerce is a joint effort by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. This joint committee is preparing a document that will ultimately become Article 2B of the Uniform Commercial Code (UCC), which is likely to be the primary legal authority governing electronic contracts and software licensing contracts. The committee anticipates its final draft in the near future. Interested persons can view the draft versions of Article 2B, the latest of which is from Aug. 1, 1998, online at www.law.uh.edu/ucc2b.
Article 2 of the UCC governs the sale of goods, which are produced by a manufacturing-based economy. Contracts for online transactions in information, however, are not the equivalent of those for transactions involving goods, for purposes of Article 2. "Information transactions and, especially, licenses of information, differ substantively from transactions involving the sale or lease of goods," say the drafters of Article 2B. "The differences are manifested in both the conditional nature of the transaction and that the value lies not in the goods, but in information and rights that are severable from the goods. A law tailored to transactions whose primary purpose is to transfer title to goods cannot be simply applied to transactions whose purpose is to convey rights in information. Separate treatment is needed."
Accordingly, the Article 2B drafting committee has undertaken to provide new rules for online transactions in data, text and images. Called by its drafters a "cyberspace contract statute," Article 2B deals extensively with issues related to electronic contracts, proposing to modernize a contract's signature requirement by replacing it with an "authentication" requirement. But the draft does not follow the model used in many states' digital-signature statutes, which grant legal recognition to encryption technologies of a particular kind. Rather, the draft uses an open-ended definition of "authentication," without regard to a specific technology. Fingerprint, voiceprint, encryption and other technologies will be acceptable.
Article 2B will also address issues of fraud and reliance on the authenticity of the signature, referred to in the draft as the "attribution procedure." If two parties agree to a "commercially reasonable method" of attributing a document to a party, then compliance with that method gives it the legal status of a signature.
Although many existing state laws designate the public-key/private-key (dual-key) model as the primary or exclusive form of authentication for electronic commerce, the dual-key method is not the only form of electronic authentication. Other verification methods exist that either incorporate a digital signature as one of several components for secure electronic transactions, or do not involve the use of a digital signature at all. Two of these methods are:
Offline security. Electronic transactions do not necessarily require the use of a digital signature in order to be secure. Certain transactions, like the purchase of consumer goods, can begin online and be finished offline, thereby providing an adequate level of security. For example, some online payment systems allow those using their credit cards to purchase items without the credit card numbers ever being transmitted over the Internet. Instead, the system charges the purchase to a customer's "virtual PIN," which is a code for the buyer's credit card.
After confirming the transaction with the customer through e-mail, the merchant then charges the customer's credit card through a process conducted off the Internet. This type of offline payment system has been used, for example, to allow people to purchase tickets to football games from the Jacksonville Jaguars' Web site.
Electronic handwritten signatures. The electronic handwritten signature is an alternative to the digital signature. With this method, a person signs her name to a computerized document pad using an electronic pen. The system's software analyzes many attributes of the signature, such as letter height and depth, and generates an aggregate score based on how the signature compares to a template mathematically derived from other signature samples. The software also uses encryption to "bind" the signature to the document. As a result, the signature may not be attached to another document, copied or repudiated by the signer.
This method is already used in some businesses, such as some express package delivery services. Since signing one's name is an easy procedure, this method has the advantage of familiarity and simplicity to users.
Because state laws differ in their definitions of "digital signature," potential difficulties in achieving uniformity of laws may arise. For example, California law defines "digital signature" expansively, as an "electronic identifier, created by computer, intended by the party using it to have the same force and effect as the use of a manual signature." Utah law, on the other hand, defines "digital signature" quite narrowly, as "a transformation of a message using an asymmetric cryptosystem." And Wyoming's electronic-commerce statute does not even specify the means by which electronic authentication should occur.
A digital signature authorized in one state but not specifically linked to the private-key/public-key model may not be legally acceptable in other states. Ideally, state legislatures should define digital signatures broadly and prescribe a series of statutory requirements for an acceptable electronic signature, such as, 1) being under the sole control of the user, 2) being unique to the user, and 3) being capable of verification. In this way, legislatures may avoid drafting statutes that could become obsolete as cryptographic technology advances.
Another approach, taken by California, is to delegate to state regulatory agencies the authority to establish digital signature standards. These agencies presumably possess greater flexibility to amend digital signature regulations as technological advancements occur.
As the transmission of private information and faceless commercial transactions over the Internet increases, the need for security in the transmission of this information becomes increasingly critical. Authentication of computer-based business information affects both technology and the law. The purpose of digital signatures is not to create secrecy, but rather to authenticate messages and attribute them to their senders.
The use of digital signature technology is increasing as a substitute for conventional signatures, and digital signatures appear to provide the verification and security features needed to allow electronic commerce to expand to its full potential. The legal and business communities need to develop practices and rules that accommodate the special features of computer-based transactions, including uniform rules governing the use of digital signatures.
