E-signature confusion: Court OKs $7.2M award for former employees

A recent court decision out of California highlights just how important it is for employers to fully grasp the tech tools they use at work.

Case in point: A company’s CEO didn’t understand the ins and outs of e-signatures, which turned out to be an expensive seven-figure mistake.

Agreements include profit-sharing bonuses

Two C-suite employees – a male chief marketing officer (CMO) and a female executive vice president (VP) – worked for a residential mortgage lender at a branch in California.

In January 2019, they entered into separate, but almost identical, employment agreements with the company. Their employment agreements outlined that they were jointly entitled to 75% of the net revenue generated by loans originating from their branch if certain revenue goals were met.  

The employment agreements stipulated in two different sections that they could be modified only by written agreement of the parties.  

Proposed changes would slash bonuses

In October 2019, the company’s chief executive officer (CEO) proposed changes to the compensation structures outlined in the employment agreements.

According to the CEO, the CMO “orally agreed to the terms of the modifications, which were then confirmed in an email” to the CMO on Oct. 22, 2019.  

The subject line of the email read “[R]e: what we discussed yesterday.” The body of the email, according to the CEO, summarized the terms of the modified agreement.

Relevant here, the modified agreement would reduce the share of branch net revenue paid to the CMO and the VP from 75% to somewhere between 25% and 40%, which would be based on “a sliding scale proportionate revenue sharing model.”

On Oct. 23, 2019, the CMO responded via email, writing: “All agreed. What you said about the profit sharing starting in January next year means that the loan purchase date in the P&L (profit and loss) will be January, right?”  

Employees resist pay cuts, then get fired

In January 2020, the company paid the CMO and the VP according to the sliding scale model outlined in the October 2019 email.  

The CMO immediately notified the company’s accounting department, notifying it that he nor the VP had agreed to modify their compensation structures. Even so, the reduced compensation continued. The following January, the CMO and the VP were notified that the company planned to terminate their employment.  

Suit alleges breach of contract

The CMO and the VP sued the company and the CEO, asserting breach of contract and other claims.

They alleged the pay cut resulted in them losing a combined $9.6 million in 2020 and 2021, arguing the company breached their employment agreements “by failing to apply the proper compensation formula” in 2020 and 2021.

Both employees also submitted declarations:

• The CMO’s declaration denied that he’d been acting on behalf of the VP when he discussed the proposed modifications in October 2019. He insisted that it was his understanding that the company would send written agreements containing the exact details of the proposed modifications. At that point, he thought they’d both have an opportunity to review and possibly negotiate further before signing updated agreements.
• The VP declared that she had “repeatedly informed [the CEO] that [the CMO] was not authorized to negotiate on [her] behalf.”

The trial court sided with the employees, finding they established the probable validity of their breach of contract claims and concluding that the agreements had not been modified by the exchanged emails.  

After crunching the numbers, the court determined the company was on the hook for a whopping $7.2 million, with each employee entitled to about $3.6 million.  

Company fights back

On appeal, the company argued the “trial court misinterpreted the law regarding electronic signatures when finding the email exchange between [the CEO] and [the CMO] did not” modify the agreements.  

It further asserted that the CMO’s Oct. 23 email contained “his full name, title, address, two phone numbers, email address, and webpage URL” which was all it needed to “satisfy the electronic signature requirement of the Uniform Electronic Transactions Act” (UETA).  

E-signature legislation: What to know

The UETA is a model act that was published by the Uniform Law Commission in 1999. It has since been adopted by 49 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. (As an FYI, New York is the only state that has not adopted UETA but it has adopted similar laws addressing e-signatures.)

The following year, on June 30, 2000, Congress passed the E-Sign Act, which legislated that e-signatures are legal in every state and U.S. territory and outlined the requirements for valid e-signatures.      

Under the UETA and the E-Sign Act, the following requirements must be met for an e-signature to be valid:

1. Intent to sign: E-signatures are only valid if both parties intend to sign.
2. Consent to do business electronically: Both parties acknowledge that they agree to do business electronically, either explicitly or implicitly.
3. Association of signature with the record: E-signatures must leave a mark (either graphical or textual) on the document that can be associated with the record.
4. Record retention: Both parties must be able to access and save the signed document.

Why courts sided with employees

Here, the trial court determined the CMO didn’t put his e-signature in the Oct. 23 email to show an intent to sign the modified agreement because the “body of the emails … appears to document a ‘discussion’ or ‘thoughts’ about a revised compensation structure.” As a result, the first requirement was not met, the court concluded.  

Moreover, the CMO asked a follow-up question in the email to the CEO, “which suggest[ed] that the parties were still discussing potential terms of a modification, not that they were executing a final modified agreement,” the trial court opined.  

The appeals court agreed with the trial court’s finding.  

Applying legislative requirements to the current case, the appeals court explained that while the CMO’s name was at the bottom of the email, much more was “required to establish that he electronically signed the email with the intent to modify his (let alone [the VP’s]) revenue sharing agreement.”  

It affirmed the trial court’s finding, determining that the employees were properly awarded $7.2M for breach of contract.  

A practical solution for e-signatures  

As companies have gone paperless and transitioned to remote collaboration, the use of e-signatures has become much more commonplace in recent years, which makes it even more important to understand what does – and doesn’t – constitute a valid e-signature.  

This case shows an email exchange alone does NOT amount to a valid e-signature.  

Many employers use third-party e-signature platforms, e.g., HelloSign, DocuSign, Adobe Sign, etc., to handle compliance requirements of e-signature legislation.  

Park v. NMSI, Inc., 96 Cal. App. 5th 346, 314 Cal. Rptr. 3d 306 (Cal. Ct. App. 2023).