Role and Efficacy of
International Bodies and Agreements
U. S. Perspectives on
Consumer Protection in the Global Electronic Marketplace
Federal Trade Commission
Public Workshop
Discussion Paper
June 9, 1999
Henry H. Perritt, Jr.[1]
Dean, Chicago-Kent College
of Law
Illinois Institute of
Technology
hperritt@kentlaw.edu
An
explosion of electronic commerce in the Internet gives rise to concerns about
the efficacy of existing legal systems. The Internet does not change human
nature, abolish greed or ensure ethical behavior. When large enterprises are
involved, existing domestic and international legal rules and institutions --
governmental and private -- can police commercial conduct. But the Internet's
low barriers to entry and low transaction costs facilitate transactions in
which small enterprises and individuals deal directly with each other or
through new kinds of electronic markets. For these types of transactions, new
types of private regulatory systems, backed up by innovative public
international law institutions, may be necessary.
This
paper explains why electronic commerce on the Internet may necessitate the
development of new legal systems of an international character, argues that
consumer protection is an especially appropriate subject for legal innovation,
inventories models of international legal regulation, evaluates political
factors likely to shape legal development, and concludes by identifying
particular issues for special attention.
If
legal and public policy communities accurately identify the unique
characteristics of Internet-based electronic commerce, while acknowledging the
inevitable -- and appropriate -- role of government, they can make use of
public and private tools to create a framework for new self regulatory
mechanisms, which can reduce uncertainty and preserve low transaction costs,
dealing with jurisdictional uncertainties, thus permitting the benefits of the
new characteristics of the Internet to be enjoyed within the inevitable
political and legal judgments animated by traditional concerns.
Transnational
merchant and consumer transactions have been occurring for thousands of years.
International legal systems, including the Law Merchant, bodies of substantive
commercial law, and private international law, are well accepted frameworks for
such transactions. The Internet provides a new kind of market for electronic
commerce ("e-commerce") transactions that cross national borders, but
it is not necessarily true that a new international legal system is necessary
for international e-commerce.
So two threshold questions must be answered in thinking about new roles
for international institutions in regulating the Internet. The first is, “Why
should we expect the Internet to require regulation at the international,
rather than the domestic[2]
level; i.e. why cannot domestic law handle whatever problems may arise from
growing electronic commerce in the Internet?”
The
second question is “Why do we need new institutions; i.e. why cannot
traditional international and domestic institutions handle the problems of
electronic commerce, domestic or international?” These two questions structure analysis of the broader issue “Does
existing law need to be modified for application on the Net or do we need a new
set of principles and adjudicatory procedures for international electronic
commerce?”
Seven
propositions frame responses to the question.
First,
some things have not changed.
Human
behavior is the same. Crooks still
exist, and they are using new Internet media just as they used older
technologies. Malcontent consumers
still exist, and some of them are making unreasonable complaints about products
and services delivered through the Net just as they always have about products
and services delivered in other ways.
Certain
concerns that shape legal rules have not changed. The need to strike an appropriate balance between private
ordering on the one hand and public regulation on the other has not changed.
Underlying concerns about inequality of bargaining power are still appropriate
to limit purely private regulation.
Also, it remains true that private self-regulatory mechanisms usually
involve agreements among competitors that raise questions of antitrust
law. These issues determine where the
boundaries should be drawn between deference to private regulation and
insistence on public regulation. And,
concerns about certain core matters of public order and protection of
vulnerable groups will continue to drive the political process in democratic
societies and ultimately determine the law’s rules.
Second,
some things are new with the Internet.
The
Internet offers sharply lower transaction costs, and this makes it possible for
low value transactions to take place on the Net. It presents low barriers to
entry, and this makes it possible for small enterprises and individuals to
participate directly rather than through traditional intermediaries. More
profoundly, the Internet is an inherently global phenomenon and it is difficult
to localize conduct. This is so even
though all of the world’s legal systems are premised on localization because
sovereign states are defined in terms of geographic boundaries.
Third, the difficulty in localizing conduct creates jurisdictional
problems.
Thomas
L. Friedman observes that The Internet is going to be like a huge vise that
takes the globalization system[3]
. . . and keeps tightening and tightening that system around everyone, in ways
that will only make the world smaller and smaller and faster and faster with
each passing day. . . . [T]hanks to the Internet, we now have a common, global
postal system, . . . we now have a common
global shopping center . . . we now have a common global library, and we now
have a common global university."[4]
David
R. Johnson and David Post say:
“Cyberspace[5]
radically undermines the relationship between legally significant (online)
phenomena and physical location. The
rise of the global computer network is destroying the link between geographical
location and: (1) the power of local governments to assert control over online
behavior; (2) the effects of online behavior on individuals or things; (3) the
legitimacy of a local sovereign's efforts to regulate global phenomena; and (4)
the ability of physical location to give notice of which sets of rules
apply. The Net thus radically subverts
the system of rule‑making based on borders between physical spaces, at
least with respect to the claim that Cyberspace should naturally be governed by
territorially defined rules.”[6]
Statistics
presented by the National Consumers League for 1997 show that Internet fraud
complaints involving non-U.S. consumers ranked 8th, just after
Illinois consumers and just ahead of Virginia consumers.[7]
Of
course “Information technology has been thought to erode the power of
sovereigns since at least the time of James I of England, when the spread of
the printing press alarmed the Church and the Crown.”[8]
So one might view expressions of alarm with some skepticism.[9]
Nevertheless, certain features of the Internet—its global reach, and its low
barriers to entry -- distinguish it from printing, radio and television,
suggesting that traditional sovereigns may have more difficulty regulating it
than earlier information technologies.[10]
When
electronic commerce occurs through the Internet, barriers to entry and
transaction costs do not vary with distance. In this respect, the Internet is
different from print, radio, television and telephone channels. The irrelevance
of distance makes the Internet inherently global, although barriers of language
and culture still remain.
It
also is true, however, that the Internet may make traditional regulators more
effective.[11] The Federal
Trade Commission and the National Association of Attorneys General offer more
visible complaint resolution mechanisms through the Internet than any private
dispute resolver.
Jurisdictional
issues exist in two different forms, with respect to prescriptive
jurisdiction—what American lawyers call choice of law[12]—and
adjudicative jurisdiction—what American lawyers call personal jurisdiction.
Both types of jurisdiction are thrown into question when commerce occurs in
Internet-based markets. If I put up a Web[13]
site in Georgia, will I be bound by a judgment entered by a court in Guanxi,
China? Will the laws of Bainbridge,
Georgia, or of Bulgaria govern my site?
Fourth, these jurisdictional issues create uncertainty and the
potential for conflicting regulation.
Both
uncertainty and conflicting regulation increase transaction costs,[14]
reducing the potential for the Web to fulfill its potential as a marketplace
for small transactions.
It
is possible, of course for traditional sovereigns to regulate the Internet.
Professor Jack Goldsmith regularly reminds his academic colleagues that plenty
of effective targets – users, and Internet service providers – are within the
reach of geographically based power.[15]
Goldsmith argues that those concerned about Internet jurisdiction make three
basic errors: they overstate the differences between cyberspace transactions
and other transnational transactions; they fail to distinguish between default
laws and mandatory laws; and they underestimate the potential of traditional
legal tools and technology to resolve the multijurisdictional regulatory
problems implicated by cyberspace.[16]
The
argument between Goldsmith and others is not as intractable as it might seem.
Peter Swire suggests why not by distinguishing between “elephants” and “mice.”[17]
"Elephants
are powerful and have a thick skin, but are impossible to hide. They are undoubtedly subject to a country's
jurisdiction. Once legislation is
enacted, they likely will have to comply.
By contrast, mice are small and mobile actors, such as pornography sites
or copyright violators, that can reopen immediately after being kicked off of a
server or can move offshore. Mice breed
annoyingly quickly‑new sites can open at any time. Where harm over the Internet is caused by
mice, hidden in crannies in the network, traditional legal enforcement is more
difficult. In such instances legal
enforcement, to be successful, will focus on someone other than the mice
themselves. Candidates for enforcement
include the individual users, the Internet service providers, the financial
intermediaries that transfer money to the mice, and the offshore countries that
provide the mice a cozy nest."[18]
Mice
are more numerous in the Internet than in other global marketplaces because of
the Internet's low barriers to entry.
As
I have observed “The problem is not the adaptability of International
Shoe-obtaining jurisdiction in a theoretical sense. The problem is obtaining
meaningful relief. The real problem is turning a judgment supported by
jurisdiction into meaningful economic relief. . . . The transaction costs dwarf
the value of the claim.”[19]
As
the following section explains, considering mice and elephants separately helps
reconcile the Goldsmith/Johnson debate. This is the underlying logic: Because
actors and consequences have physical locations, traditional jurisdictional
rules can be applied. The resulting judgment is of real value, however,
only if it is enforceable, and enforceability involves high transaction
costs. Historically, the value of the
judgment has made such costs reasonable, so that either the defendant defends initially
or the plaintiff is willing to go to the defendant’s forum to enforce the
judgment. When transactions occur
through the Internet the value of the dispute often will make the relative
level of such costs prohibitive. Therefore, there is a need for domestic
sovereigns to agree about which judgments they will enforce or for some new
mechanism to replace the traditional lawsuit.
Fifth, private regulation offers some answers to jurisdictional
uncertainty, because private regulatory regimes are not inherently limited by
geographic boundaries of sovereign states.
Private
regulation reduces uncertainty because of the capacity of private persons to
specify choice of law and to select forums (including arbitration) in
contractual arrangements.[20]
A relatively complete treaty framework makes international arbitration awards
enforceable,[21] while there
is no such treaty with respect to civil judgments.[22]
Johnson
and Post suggest a new legal regime, considering cyberspace to be a new kind of
sovereign.[23] I have
reviewed the arguments in favor of self-governance of cyberspace and concluded
that “considerable autonomy can be achieved through contractual arrangements
featuring arbitration accompanied by choice of customary substantive law.
However, there may be difficulties in defining community boundaries, in
implementing effective enforcement mechanisms, and in avoiding antitrust
problems in the electronic network context.”[24]
David
Oedel studied self-regulation in the banking industry over the last two
centuries.[25] He identified
six prerequisites for effective self regulation: absence of formal public
regulation, pooling of resources and sharing of risks and rewards among those
engaging in self regulation, provision
of discrete, useful service by the regulating entity, regulation by quasi
independent hybrid association rather than by self interested member of
regulated group, effective monopoly by regulatory entity, independent
operational role by regulating entity.[26]
He also concluded that self regulation is unlikely to be effective to control
the behavior of atomized individuals such as consumers.[27]
The transaction costs of organizing self regulation of consumers are so high
that regulation through the government is more efficient[28]
Goldsmith
is skeptical of proposals for private self-regulation, arguing among other
things, that they fail to recognize the difference between default and
mandatory rules. Default rules can be changed by private agreement; mandatory
rules cannot.
There
are some interesting new developments in creating credible private mechanisms
for self-regulation of electronic commerce.
Such mechanisms must have teeth or they will not be credible either with
consumers or with political actors. The
Department of Commerce and the information industry have been working hard in
making progress in negotiating with the European Union on parameters for such a
new self-regulatory regime.[29]
Sixth, however credible and complete private self-regulatory mechanisms
are, they cannot function without some sort of foundation and framework derived
from traditional law.
All
private, self-regulatory regimes ultimately depend on support from traditional
law articulated and applied by state-based institutions. Arbitration awards
must be enforced through legal machinery that can execute against property[30]
and incarcerate for contempt, although the creation of a fund such as through
iEscrow, discussed later in this paper eliminates the need to rely on
state-based institutions for enforcement. Exclusion from portions of cyberspace
as a penalty for misconduct will give rise to breach of contract or antitrust
lawsuits, and the courts hearing those lawsuits must decide whether to respect
or to punish the private rulemakers and enforcers. Persons complaining to
private enforcers may be subject to liability for defamation or intentional
interference with contractual relations.
Working
out the rules for deferral and immunity are difficult enough in the purely
domestic context. Because of the Internet’s global context such rules also must
be worked out internationally. This means some sort of international agreement,
to define the scope of permissible self-regulation and to immunize the private
regulators and those who make complaints to them.
Seventh,
new institutional approaches are most necessary in the international context,
when transactions involve buyers and sellers located in different states.
The
introduction posed the question, “Why should we expect the Internet to require
regulation at the international, rather than the domestic level; i.e. why
cannot domestic law handle whatever problems may arise from growing electronic
commerce in the Internet?” The answer results from the interaction of two
realities. First, low barriers to entry and low transaction costs result in a
greater portion of Internet based transactions crossing state borders, compared
with other marketing channels. Second, traditional state-based mechanisms are
likely to be less effective in the international context, because of diffusion
of the effects of conduct and dilution of power, legitimacy, and notice.
The
rapid growth of electronic commerce on the Internet is beginning to focus
attention on consumer protection. According to statistics maintained by the
National Consumers League, reports of consumer fraud on the Internet grew from
fewer than 1,000 in 1996 to nearly 8,000 in 1998.[31]
Consumer protection is a broad category, encompassing securities fraud,
deceptive advertising, failure to deliver promised products or services and
personal data privacy protection. It is
useful to deal with privacy separately, because it already has received so much
attention. While ultimately, it may be
desirable to focus separately on distinct aspects of consumer protection,
initially it is useful to seek to identify characteristics that may distinguish
the broad category of consumer protection issues from other Internet legal
issues such as taxation, hate speech, pornography, payment systems, and
intellectual property.
Peter
Swire's elephants and mice metaphor[32]
explains why new international[33]
regulatory institutions may be most necessary when elephants deal with mice,[34]
and when mice deal with mice. Adequate international mechanisms exist for
elephant-to-elephant transactions: private negotiation of rules in the form of
contractual terms, and private arbitration within the framework of the Federal
Arbitration Act and the New York Convention. Examples of successful private
elephant-to-elephant regulatory frameworks are international funds transfer
networks, and the Internet domain naming and address assignment system under
Jon Postel. When mice are involved, however, these mechanisms are less
effective and/or less acceptable.
One
distinguishing characteristic of consumer protection issues is the disparity of
bargaining power between seller and purchaser.
The bargained-for-exchange model of contract is conspicuously absent
from the vast majority of consumer transactions. Instead, sellers unilaterally specify the terms of the sale,
offering them to consumers on a take it or leave it basis. This disparity of bargaining power leads
legislatures and administrative agencies to prescribe special terms for
consumer contracts, terms, which supply default legal rules, and in some cases
which are non-waivable by contract -- so-called "mandatory rules." [35] The power disparities also lead law reform
initiatives such as UNCITRAL to limit their drafting activities to
business-to-business contracts[36]
and to special treatment of consumer transactions under the UCC.[37]
On
the other hand, it is not correct that consumers have no choices in electronic
marketplaces. Presently, the Internet
intensifies competition, offering consumers a wider array of products and
services from different sellers than they would have in geographically defined
markets. While consumers may not be
able to bargain with their voices across the negotiating table, they can
bargain with their computers, rejecting offers from sellers specifying less
attractive terms.
But
bargaining with a computer is a reality only while consumers are shopping, and
not necessarily after they have agreed to purchase, and only when the
information costs of knowing differing terms offered by different sellers are
low. Once a consumer has purchased a
continuing service, switching costs may be high enough to reduce significantly
the range of real consumer choices after the purchase decision is made.
Disparity
of bargaining power often has invited governmental intervention, and less
reliance on private ordering in consumer transactions, if only by requiring
certain levels of disclosure of the terms of the bargain offered, much as the
UCC requires that disclaimers of certain warranties be prominently disclosed.
A
second characteristic of consumer transactions is relatively low transaction
value. Indeed, the possibility of small
transactions is what makes the Internet such an interesting medium for
electronic commerce. Its inherently
lower transaction costs make it economical for buyers and sellers to purchase
and sell units of smaller value than they could do economically in physical
markets with their higher inventory, rental and utility, labor, and
transportation costs.
But
low transaction value means that less is at stake when something goes
wrong. Accordingly, consumers
victimized by unscrupulous or incompetent sellers are less likely to devote
necessary resources to investigating and prosecuting violations of legal
rights. This creates an economic
environment in which the costs of consumer abuse are diffuse while all the
benefits are concentrated. Such asymmetry of costs and benefits is a traditional
justification for governmental intervention in the form of publicly funded
investigation and prosecution resources, for example by appropriating public
funds for a governmental consumer protection agency, or by allowing class
action lawsuits and attorneys fees provisions to encourage private
representation of diffuse consumer interests.
A
third distinguishing characteristic of consumer protection is the existence of
consumer protection agencies at almost level of government. Such existing agencies naturally seek to
extend their jurisdiction into new areas of commerce to preserve their reason
for existence. Most such agencies have
considerable autonomy in making rules and in allocating resources for
investigation and prosecution. The
result is heightened potential for conflicting geographic demands on actors in
an inherently global marketplace.
Private
ordering is a traditional response to transnational jurisdictional and
regulatory conflicts, but private ordering techniques such as rule making
through self-regulation and dispute resolution through private arbitration are
less appropriate when disparity of bargaining power exists. Absent public law intervention,
self-regulation may simply enhance the position of sellers who are members of
the self-regulation “club” at the expense of consumers who are not. Trying to deal with this problem by giving
consumers a place at the self regulation table encounters all of the
difficulties of representation mechanisms encountered by the architects of
domain name administration reform.
Dispute
resolution through arbitration similarly may provide consumers far less due
process—real or perceived—than regular courts because of relatively less
knowledge on the part of consumers about arbitration procedures, and the
characteristics of potential arbitrators.
This information deficit has been widely noted in connection with
arbitration of individual employment disputes.
The low transaction value makes it less likely that consumers will avail
themselves of private counsel.
But
there is still room for private regulation of elephant-to-mouse transactions
and development of effective private systems serve the interests of
elephants. There is every reason to
expect that mouse-to-elephant transactions will occur to a significant degree
within the framework of existing credit card payment and dispute resolution
systems.[38] Credit card payment systems include both
rulemaking and quasi-adjudicatory elements.
The rules are embodied in merchant agreements, which define the
relationship among merchant sellers, their banks, and the credit card issuer,
and credit card consumer agreements, which define the relationship between the
card issuer and the purchaser/card holder.
Cardholders may be relieved of the obligation to pay for merchandise or
services if they complain to the card issuer and an investigation reveals
violation of the terms of the merchant agreement. Typical merchant agreements obligate merchants to make timely
delivery of conforming goods or services, and to respond to complaints. These credit card systems typically do not
provide for “hard” dispute resolution in the form of third party
arbitration. Nor do they provide for
referral of complaints to public authorities.
They are backed up by the economic threat of terminating service to a
merchant or terminating the extension of credit to cardholders. The framework provided by dimensional law
for these private regulatory mechanisms is relatively thin. There are only modest requirements under
federal law, [39] and there
is always the possibility of a breach of contract lawsuit by buyers or sellers
against each other or against the credit card issuer. Such lawsuits involve application of choice of law rules under
private international law and choice of law provisions in the merchant and
cardholder agreements, reinforced by the European contractual choice of law
convention. Personal jurisdiction would
be decided under private international law rules, the Brussels and Lugano
conventions and under the proposed Hague convention.
The Internet's low barriers to entry and low transactions costs make it
easier for mice to be involved on both sides of transactions. A mouse who wants
to be a seller need not set up a large purchasing and distribution network.
According to statistics gathered by the National Consumers League,[40]
more than two-thirds of the Internet fraud complaints involved auctions, where
it is reasonable to infer that mice were involved as sellers as well as buyers.
Only about a quarter involved "general merchandise" and
"computer hardware and software" and "Internet related
services," where it is reasonable to infer that an elephant was the
seller. Most of the remainder involved "work-at-home," business
opportunity/franchises," "multi-level marketing and pyramids,"
"credit card issuing," "advance fee loans," and "job
offers/overseas work," where it also is reasonable to infer that mice were
the sellers.
When mice deal with mice, their relationships are unlikely to be
sufficiently persistent to give rise to private rule making or establishment of
arbitration agreements. Some disputes
involving mice on both sides will be resolved in the traditional way, by
lawsuits in national courts and the claims made through administrative
agencies.
Should
all this be worked out through the application of private international law
concepts of comity, or should it be worked out within a framework developed by
international treaty or contractually provided by new kinds of private
intermediaries such as Ebay?
Market
forces well may stimulate creation of fairly complete systems of private
dispute resolution for mouse-to-mouse disputes. Ebay is a good example.
Ebay [41] is a
Web-based auction service popular with individuals and small businesses wishing
to buy and sell merchandise and services. Apparently because Ebay fears that
people will stop using its service because of threats of fraud and
non-performance of agreements, it offers several mechanisms for avoiding or
resolving disputes. One mechanism is
iEscrow, which allows purchasers to escrow their payments until they accept
delivered merchandise. The function of
iEscrow is very much like a documentary letter of credit.[42] Both the letter of credit and the iEscrow
are intended to protect the interests of both buyer and seller in international
transactions where there is a risk of non-performance on one side or the
other. Ebay also offers a complaint
mechanism and feedback and evaluation of buyers and sellers. The combination of these services permit a
mouse to assess, in advance, whether it wishes to deal with another mouse based
on that mouse’s reputation in the Ebay community, and then, if a complaint
arises, to enlist Ebay in attempting to resolve the dispute. Ultimately, Ebay commits only to refer
serious complaints to public authorities.
This is an obvious example of traditional law backing up a private
dispute resolution mechanism.
The
National Consumer League provides a somewhat similar service,[43]
although it, unlike Ebay, is not involved in facilitating electronic commerce
directly. NCL accepts complaints of
e-commerce fraud and forwards them to the Federal Trade Commission and to state
attorneys general. This is another
example of a new type of intermediary that helps mice mobilize the resources of
public authorities.
Some
of this is not very international yet. The NCL service only provides for
reference to U. S. authority, and there is no suggestion that Ebay will refer
complaints to consumer protection authorities in other countries. On the other hand, there is nothing about
the iEscrow, the feedback and evaluation system, or the internal Ebay complaint
resolution mechanisms that limit them to national boundaries; they function
just the same in transnational transactions as in local ones. Moreover, it is entirely conceivable that
including arbitration within the scope of the New York convention could
strengthen the Ebay complaint resolution machinery. Agreement to arbitrate could be either a condition of doing
business on Ebay or an option much as iEscrow is an option.
The
strongest political forces will focus on elephant-to-mouse transactions,
because it is those transactions that engender broad sympathy for overreaching
and abuse of private power. It is such political forces that stimulated so many
states to set up consumer protection units in their attorneys general offices
in the first place.[44]
Three
political realities will shape the evolution of international – and national –
consumer protection mechanisms. First, the usual mechanisms of issue
identification and priority setting in domestic politics are likely to prefer
government-based to private self-regulatory mechanisms. The aphorism that foxes
should not guard chicken coops has not lost its power merely because of the
Internet. Second, private enterprises always will prefer unilateral
decisionmaking and other attributes of autonomy to any form of third-party
dispute resolution. That is why non-union employment dispute arbitration has been
so slow to take root. That is why the
Virtual Magistrate project did not, in the end, produce the expected flood of
referrals from America On Line and other private providers. Third, much of the
ethos of Silicon Valley is undergirded by a remarkable ignorance of politics
and government, and ignorance breeds contempt. Some (but not all) of the demand
for the Internet being its own sovereign simply reflects lack of awareness of
what sovereign governments are. These attitudes of elephants will discourage development
of effective private regimes for protecting mice when they deal with elephants.
The
combination of the second and third factor are making it extremely difficult to
negotiate an agreement with the EU regarding privacy; a significant faction
within the interested industry rejects the legitimacy of any government
regulating conduct affecting its citizens when they deal on the Internet.
Several
types of international legal frameworks could regulate -- or back up private
regulation of -- consumer transactions on the Internet. The most traditional would be a treaty
framework, giving rise to state-based institutions resembling the World Trade
Organization, the International Civil Aviation Organization, or the World
Intellectual Property Organization, or supporting private regulation as in the
case of UNCITRAL's model laws for electronic commerce and for international
credit transfers.
Too
many people interested in the Internet’s development make the mistake of assuming
that treaties cannot be part of the answer.
They mistakenly assume that treaties take decades to negotiate. They do not. The Department of Justice often negotiates bilateral mutual
assistance treaties relatively quickly and, when the relevant interests where
aligned and sufficiently motivated, new copyright treaties were negotiated with
breathtaking speed in Geneva. Whether
or not one likes their content, they did not take decades to negotiate.
International treaties do represent a potentially useful tool in shaping the
legal climate for the Internet. In any
event, negotiations between governments, like the Department of Commerce/EU
negotiations over privacy, will be an inevitable feature of law making for this
new medium. The Hague Conference on Private International Law has underway two
relevant projects that may provide helpful treaty frameworks. The first is a
“Special Commission on international jurisdiction and the effects of foreign
judgments in civil and commercial matters,”[45]
which aims at negotiation of an international judgment-recognition treaty. The
second is a working group on Internet jurisdiction, scheduled to meet in
September, 1999.
There
several difficulties with this approach, however. First, private-sector forces are hostile to treaty based
organizations because of unsatisfactory experience with many of the
long-established frameworks. The
frameworks are widely perceived as being slow, being dominated by states that
have little immediate connection with Internet commerce, and having a tendency
toward over bureaucratization. It also
is widely perceived that it takes too long to negotiate the requisite treaties,
and that technology and the problems purportedly justifying legal regulation
are likely to change dramatically by the time a treaty can be negotiated.
Some
of the shortcomings of the traditional treaty based approach might be
alleviated through the same mechanisms employed in structuring domestic U.S.
legal institutions as the regulatory state developed in the 20th century. This approach involves delegation of rule
making and adjudicatory functions to administrative agencies within a
relatively broad statutory (treaty based) framework.
An
international administrative agency approach also suffers from some
deficiencies. First, it may be
politically unpalatable because it would involve ceding more sovereignty to
international administrative agencies that suffer the same flaws as existing
treaty-based organizations. If states A and B cannot agree on substantive rules
and judgment enforcement, it is not intuitively obvious that they could agree
on a new body to craft rules and to enforce the rules thus crafted.
The
traditional treaty-based framework limits participation to states rather than
to natural or artificial persons and rather than delegating rulemaking
adjudicatory powers to international institutions, only provides frameworks for
further negotiations over the rules by states and provides a some or framework
for adjustment of disputes by state representatives rather than providing for
"hard" adjudication. Taking
the next logical step by delegating rulemaking and adjudicatory powers to
international administrative agencies encounters legal as well as political
problems. It is far from clear that
such delegation could pass constitutional muster in either the United States[46]
or Germany.[47]
Private
self-regulatory mechanisms avoid the difficulties with both conventional
treaties and treaties establishing international administrative agencies. Building upon the experience with international
banking networks, and drawing foundation also from the New York convention for
adjudicatory dispute resolution through arbitration, they may be the best
approach for elephant-to-elephant transactions. Even here, however, local law such as article 4A of the Uniform
Commercial Code and the Model Law on transnational credit transfers, anchor the
private self-regulatory networks.
The
likelihood of hybrid private/public arrangements is greatest for
elephant-to-mouse transactions. Purely
private regulation of elephant-to-mouse transactions confronts several
potentially insuperable problems. First, purely private regulation engenders
the accusation that the "fox is regulating the chicken coop," giving
rise to pressure for more government involvement. Second, disparity of
bargaining power and asymmetry of information makes private arbitration
arrangements suspect. Third, the difficulty of formulating fair, acceptable and
efficient representation arrangements for both elephants and mice makes it
difficult to design rulemaking institutions.
Given the likely resistance to purely private regulation on the one
hand, and the advantages of private decision making on the other, it would be
fruitful to focus governmental energy on negotiating “safe-harbors” for private
regulation, as in the EU/DOC privacy discussions.
More
complete private self-regulatory mechanisms may be most appropriate for
mouse-to-mouse transactions, where the efficacy of government-based regulation
at the state level is lowest. New kinds
of intermediaries who organize markets for such transactions in the Internet
(eBay is a good example) will be motivated to enhance consumer security by
providing for private dispute resolution mechanisms and other transactional
security mechanisms such as escrow and letter of credit arrangements, under the
framework of privately prescribed rules unilaterally determined by the
intermediaries. There is no obvious
need here for government involvement, although designers of such private
systems must recognize and design for the potential that unhappy participants
may will jump out of the private mechanisms into local courts seeking
resolution of certain disputes. The
advantages of private intermediary-provided mechanisms for mouse-to-mouse
transactions include the avoidance of interstate jurisdictional and choice of
law controversies. These private mechanisms are better than national lawmaking
and dispute resolution procedures when the resources of claimants are limited
and the ability of respondents to pay judgments similarly limited, compounded
with the difficulty of finding small respondents. The deficiencies of national legal systems are compensated for by
the availability of resources available to pay claims through escrow or letter
of credit arrangements and the effectiveness of the denying further
participation to buyers and sellers through the intermediaries.
None
of the traditional mechanisms for dealing with transnational trade provide
directly for private recourse to dispute resolution mechanisms.[48] It is conceivable that direct private access
could be allowed under new treaty based arrangements, but political opposition
and constitutional difficulties with respect to any mechanisms that look a lot
more like the adjudication of private claims represent large barriers to such a
course of action. It may be better to
conceive of hybrid arrangements that allow private parties recourse to private
adjudicatory, and participation and private rulemaking procedures, backed up by
a treaty based framework that obligates and permits state representatives to
work out mechanisms for granting immunity to and recognizing the decisions of
the private bodies.
All of this suggests that Internet consumer
protection law initiatives fruitfully can focus on the following issues:
·
How
different are the basic ground rules imposed by public agencies on consumer
transactions? If they are not very
different, it may be possible to harmonize basic rules through an international
treaty or through UNCITRAL or OECD guidelines that can be applied by existing
institutions. Progress toward cooperation among the FTC and other national
consumer protection agencies,[49]
and cooperation in the antitrust arena[50]
are examples of the viability of this approach.
·
Is
it feasible to develop representation arrangements that would ensure a
reasonable balance of consumer and seller viewpoints in self-regulatory
mechanisms, without swamping the self-regulatory process with disputes over
representation? If such mechanisms are
feasible, they could be made part of the criteria for accreditation of
self-regulatory entities.
·
What
attributes of an arbitration systems are necessary to make if fair for consumer
disputes, including the burden of participating, accessibility, selection and
identity of arbitrators, and reviewability of awards? A starting point for such an inventory might be found in the EEOC
guidelines for arbitration of individual employment disputes. If an appropriate inventory of
characteristics can be developed, it could be imposed as one of the criteria
for accreditation of private dispute resolution mechanisms. Accreditation might result in a higher
degree of deference by and preclusive effect in public judicial forums.
·
What
terms would be appropriate for an international convention that provides a safe
harbor for private regulation of mouse-to-mouse transactions, granting immunity
from tort and antitrust liability, requiring deferral to private decisions, and
allowing for their enforcement through state-based coercion?
It is especially appropriate to concentrate on
developing hybrid systems for elephant-to-mouse commerce, while waiting for
further spontaneous evolution of mouse-to-mouse intermediaries.
This workshop is one important arena for considering
these questions. Another important arena is the American Bar Association
Internet Jurisdiction Project.[51]
Nationally
and internationally a strong trend toward privatization of rule making and
adjudication is likely. It is
implausible, however, that governments will wash their hands altogether of
disputes over electronic commerce.
Political pressures for governmental involvement will be especially
strong to protect consumers, especially respect to elephant-to-mouse
transactions. The interaction between
privatization and pressures for some governmental involvement will produce some
interesting new hybrid international institutions – combinations of contracts
and treaties, and combinations of contracts and regulatory agency approvals and
enforcement. Purely private regulation of mouse-to-mouse and
elephant-to-elephant transactions will prove more viable than purely private
regulation of elephant-to-mouse transactions.
[1] I appreciate thoughtful
comments and suggestions from my colleague, Margaret G. Stewart, reporter for
the ABA Internet Jurisdiction Project, and from my friend, Stuart P. Ingis,
Esq., of Piper & Marbury.
[2] "Domestic,"
"municipal," and "national" refer to state-based, as
opposed to international, law, legal institutions, and enforcement machinery,
as the context requires.
[3] Friedman argues that
globalization changes the traditional balance between nation states, that it
changes the relationship between nation states and global markets, and -- most
profoundly -- that it changes the balance between individuals and nation
states. Friedman at 11-12.
[4] Thomas L. Friedman, The
Lexus and the Olive Tree 118 (1999).
[5] "Cyberspace"
refers to the virtual space in which personal, political and commercial
relationships can be established. It is a superset of the Internet, including
also private electronic networks using other protocols.
[6] David R. Johnson &
David Post, Law and Borders – The Rise of Law in Cyberspace, 48 Stan. L. Rev.
1367, 1370 (1996)
[7]
<http://www.fraud.org/graphics/1997cons.gif>
[8] Henry H. Perritt, Jr., The
Internet as a Threat to Sovereignty? Thoughts on the Internet's Role in
Strengthening National And Global Governance, 5 Ind. J. Global Legal Stud. 423,
425 (1998).
[9] See Henry H. Perritt, Jr. & Margaret G. Stewart, False
Alarm: European Privacy Law and International Jurisdiction, 51 Fed. Comm. L. J. 811 (1999) (suggesting
that it is hard to find jurisdictional problems with European regulation of
transnational personal data flows)
[10] Perritt, 5 Ind. J. Global
Legal Stud. at 428-29.
[11] See Perritt, 5 Ind. J. Global Legal Stud. At (explaining how the
Internet can strengthen both national and international legal institutions).
[12] “[Prescriptive jurisdiction] refers to ‘the authority of a state
to make its law applicable to persons or activities,’ and is quite a separate
matter from "jurisdiction to adjudicate," Hartford Fire Ins. Co. v.
California, 509 U.S. 764, 813 (1993) (quoting Restatement (Third of Foreign Relations
Law of the United States). The concept
of prescriptive jurisdiction is incorporated into municipal (national) conflict
of laws rules. Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 445 (1964). Prescriptive jurisdiction enters into
conflict of laws analysis in the following way. When a court must make a choice
of law decision, applying its own choice of law rules, it considers whether its
own lawmakers (legislators or common law decisionmakers) have acted within the
limits of prescriptive jurisdiction to extend their substantive law to a
transaction that has some extraterritorial features. It also considers whether
another sovereign has acted within its prescriptive jurisdiction to apply its
substantive law to the same transaction. When only one sovereign has
prescriptive jurisdiction, that sovereign’s law applies. When both sovereigns
have prescriptive jurisdiction over the transaction, other choice-of-law rules
must be applied to resolve the conflict. Similar analysis applies when a second
sovereign is called upon to recognize a judgment from another sovereign.
[13] The World Wide Web is the
dominant Internet space. The Internet also includes electronic mail,
newsgroups, and facilities for remote control of computers. Most of this paper
focuses on the Web.
[14] "[A]
single [Internet] actor might be subject to haphazard, uncoordinated, and even
outright inconsistent regulation by states that the actor never intended to
reach and possibly was unaware were being accessed." Swire, 32 Int'l Law.
at 991.
[15] See Jack Goldsmith, What
Internet Gambling Legislation Teaches About Internet Regulation, 32 Int'l Law.
1115 (1998)(rebutting conventional wisdom that federal legislation prohibiting
Internet gambling cannot work; states can punish users who reside there, and
can force domestic Internet providers to exclude gambling); Jack L. Goldsmith,
The Internet and the Abiding Significance of Territorial Sovereignty, 5 Ind. J.
Global Legal Stud. 475, 475 (1998) (“from the perspective of jurisdiction and
choice of law, territorial regulation of the Internet is no less feasible and
no less legitimate than territorial regulation of non‑Internet
transactions.”)
[16] Jack L. Goldsmith, Against
Cyberanarchy, 65 U. Chi. L. Rev. 1199, 1200-1201 (1998).
[17] Peter P. Swire, Of
Elephants, Mice, and Privacy: International Choice of Law and the Internet, 32
Int'l Law. 991 (1998), http://www.acs.ohio-state.edu/units/law/swire1/elephants.htm.
Elephants are large enterprises, such as AOL. Mice are small enterprises and
individuals.
[18] Swire, 32 Int'l Law. at
993.
[19] Henry H. Perritt, Jr., Will the Judgment-Proof Own Cyberspace? 32 Int'l Law. 1121, 1123 (1998).
[20] See generally http://www.iccwbo.org/arb/3.htm
(International Chamber of Commerce information on international commercial
arbitration).
[21] New York Convention.
[22] The Brussels Convention
provides for judgment recognition within the European Union, but attempts to
negotiate such a treaty with global scope so far have proven unsuccessful.
[23] Johnson & Post, Stan. L. Rev. at ___; Perritt, 12 Berkeley
Tech. L.J. at 419 (“self-governance may
be more efficient; the rules and/or the adjudicatory techniques for applying
the rules may need to be different from those of the surrounding community; it
may be impracticable to apply the rules of the surrounding community; or compliance
with basic norms of the community may be higher when members of the
subcommunity participate in self- governance).
[24] Henry H. Perritt, Jr.,
Cyberspace Self-Government: Town Hall Democracy Or Rediscovered Royalism?, 12
Berkeley Tech. L.J. 413, 417 (1997) (also suggesting points of tangency between
cyberspace and other legal systems and rules of thumb for sovereign deference
to cyberspace “sovereignty”).
[25] David G. Oedel, Private
Interbank Discipline, 16 Harv. J. L.
& Pub. Pol’y 327 (1993).
[26] 16 Harv. J. L. & Pub. Pol’y at 402-404.
[27] Id. at 406-407.
[28] Id. at 407.
[29] National Telecommunications
and Information Administration, Department of Commerce, Notice and request for
public comment, Elements of Effective Self Regulation for the Protection of
Privacy and Questions Related to Online Privacy.
[30] Suggestions to recognize
intangible Internet interests as property subject to execution, see Perritt, 32
Int’l Law. at 1138-39, are beginning to be accepted by the courts. See UMBRO
Int’l Inc. v. 3263851 Canada, Inc., No. 174388 1999 WL 117760 (Va. Cir. Ct.
March 12, 1999) (allowing garnishment of Internet domain name).
[31] <http://www.natlconsumersleague.org/Internetscamfactsheet.html>
[32] Peter P. Swire, Of
Elephants, Mice, and Privacy: International Choice of Law and the Internet, http://www.acs.ohio-state.edu/units/law/swire1/elephants.htm.
Elephants are large enterprises, such as AOL. Mice are small enterprises and
individuals.
[33] The Swire metaphors also
explain why new domestic mechanisms may be necessary. As explained earlier,
however, the stress on traditional approaches is greatest when transborder
transactions are involved.
[34] A consumer is one type of
mouse. (A small, individual seller is another type.)
[35] Article 5 of the European
Economic Community Convention On The Law Applicable To Contractual Obligations
provides in material part as follows: “Notwithstanding the provisions of
Article 3 [providing that a contract shall be governed by the law chosen by the
parties.”] a choice of law made by the parties shall not have the result of
depriving the consumer of the protection afforded him by the mandatory rules of
the law of the country in which he has his habitual residence.
“ - If in that country the conclusion of the
contract was preceded by a specific invitation addressed to him or by
advertising, and he had taken in that country all the steps necessary on his
part for the conclusion of the contract, or
“ - If the
other party or his agent received the consumer’s order in that country, or
“
- If the contract is for the sale of goods and the consumer traveled from that
country to another country and their goods was ordered, provided that the
consumer’s journey was arranged by the seller for the purpose of inducing the
consumer to buy.”
Article
5 (2) of the New York Convention allows signatories to refuse enforcement of
arbitration awards when “(a) the subject matter of the difference is not
capable of settlement by arbitration in the law of that country, or
“(b) the recognition or enforcing of the
award would be contrary to the public policy of that country.” This language leaves it open to enforcing
states to provide by domestic law that consumer contracts are not arbitrable.
[36] A footnote to Article 1
“Sphere of application” of the UNCITRAL Model Law on Electronic Commerce
(1996), http//www.un.award.at/uncitral/en-index.htm, provides, “this law does
not override any rule of law intended for the protection of consumers.”
[37] Article 2-102 of the
Uniform Commercial Code provides, “nor does this Article impair or repeal any
statute regulating sales to consumers, farmers or other specified classes of
buyers.”
[38] See generally David G.
Oedel, Private Interbank Dicipline, 16 Harv. J. L. & Pub. Pol’y 327,
nn.139, 142 (1993) (summarizing credit card clearing process and dispute
resolution procedures).
[39] 15 U.S.C. §§ 1601-1666j (1997); and 12 C.F.R. § 226.13 (1999) (Federal
Reserve Regulation Z, imposing requirements on credit card billing dispute
procedures).
[40]
<http://www.natlconsumersleague.org/Internetscamfactsheet.html>
[42] A letter of credit is a
written commitment by a bank to make payment of a defined amount of money
(usually from an account set up by a buyer) to a beneficiary (usually the
seller) according to the terms and conditions specified in the contract between
the buyer and seller, typically the presentation of certain documents, such as
a bill of lading or an inspection certificate. Examples of documentary letter
of credit forms can be found at < http://www.avgtsg.com/gbmforms.htm>
(visited 29 May 1999).
[43] See Fraudulent Schemes on
the Internet, Remarks to the Senate Permanent Committee on Investigations, by
Susan Grant, Director of the National Consumers League's National Fraud
Information Center/Internet Fraud Watch Programs
February
10, 1998, http://www.natlconsumersleague.org/nettest.htm
The
NFIC was originally established in 1992 by the National Consumers League, http://www.fraud.org/. “Consumers can .. .
report [Internet] fraud through our Web site, www.fraud.org, or by calling the
hotline at 1-800-876-7060. Though the Web site was launched only two years ago,
we have had more than 5 million visitors to date. Every week, the National
Fraud Information Center and Internet Fraud Watch programs receive an average
of 1,500 calls and an equal number of e-mails, plus dozens of letters . . . .We
also take reports from consumers about possible telemarketing or Internet fraud
and relay them to a variety of federal, state and local law enforcement
agencies in the United States and Canada.
Our
data system uploads new reports daily to an electronic database maintained by
the Federal Trade Commission www.ftc.gov and
the National Association of Attorneys General, www.naag.org.”
Charts
showing types of fraud and geographic location for 1997 are available at http://www.fraud.org/news/1998/feb98/charts.htm.
Comparison charts for 1998, showing types of fraud, age of victim, and payment
methods are available at
http://www.natlconsumersleague.org/Internetscamfactsheet.html.
[44] Commissioners Starek,
speaking in 1995, identified some of the problems confronting consumer
protection agencies in dealing with Internet fraud and consumer disputes, while
also illustrating examples of international governmental operations in
investigating and remedying such problems. See generally Prepared Remarks of
Roscoe B. Starek, III, Commissioner, U.S. Federal Trade Commission, on the
topic of "Consumer Protection in the Age of Borderless Markets and the
Information Revolution" Prepared Remarks of Roscoe B. Starek, III
Commissioner U.S. Federal Trade Commission before the Conference on Transborder
Consumer Regulation and Enforcement University House Balmain Crescent,
Australian National University Canberra, Australia June 7, 1995,
http://www.webcom.com/~lewrose/speech/starek.html.
[45] Hague Conference On Private
International Law, Work. Doc. No. 144 E.
[46] Henry H. Perritt, Jr.
International Administrative Law for the Internet: Mechanisms of Accountability
[forthcoming in Admin. L. Rev.]
[47] Brunner v. European Union
Treaty, [1994] 1 C.M.L.R. 57 (BVerfG 1993) ("Accordingly the Federal
Constitutional Court will review legal instruments of European institutions and
agencies to see whether they remain within the limits of the sovereign rights
conferred on them or transgress them.")
[48] For example, Article 20 of
NAFTA allows “parties” (the three state signatories) to invoke dispute
settlement procedures. Under ANNEX 2 of the WTO Agreement, “Understanding On
Rules And Procedures Governing The Settlement Of Disputes”, only “parties” to
disputes may use the dispute resolution procedures. The language makes it clear
that only “members” can be “parties.”
[49] See generally Prepared
Remarks of Roscoe B. Starek, III, Commissioner, U.S. Federal Trade Commission,
on the topic of "Consumer Protection in the Age of Borderless Markets and
the Information Revolution" Prepared Remarks of Roscoe B. Starek, III
Commissioner U.S. Federal Trade Commission before the Conference on Transborder
Consumer Regulation and Enforcement University House Balmain Crescent,
Australian National University Canberra, Australia June 7, 1995, http://www.webcom.com/~lewrose/speech/starek.html
(giving examples of interstate cooperation among consumer protection agencies).
[50] See Department of Justice
and Federal Trade Commission, Antitrust Enforcement Guidelines for
International Operations, 59 Fed. Reg. 52,810 (Oct. 19, 1994).