Testimony of Henry H. Perritt, Jr.
Dean and Professor of Law
Chicago-Kent College of Law
Illinois Institute of Technology
Federal Trade Commission & U. S. Department of Commerce Workshop
Tuesday, June 6, 2000

    Good morning.

    I'd like to congratulate Professor Izumi for an outstanding job of setting up an intellectual framework within which we can think about dispute resolution. I accept it as my own framework, and I would like to focus particularly on the category that she called "arbitration."

    Almost exactly ten years ago—maybe David and Ron you remember what month it was in 1990—David Johnson convened a series of informal seminars.  I remember we used to meet in the evening over in a conference room at Wilmer, Cutler & Pickering, and it was David and Ron Plesser and Jerry Berman and I and a couple of people from the industry.  This was, remember, before the Internet had extended into the consciousness of anyone beyond the National Science Foundation and its constituencies. It was in the days of dial-up access to CompuServe and America Online and Prodigy, but it was beginning to dawn on people that this cyberspace thing might have some effect on people's commerce and personal lives.

    In these informal seminars, we used to struggle to think about how regulation would work in this new kind of commercial and political space.  Instinctively, we were drawn to the idea that some kind of self-regulation might be desirable for many of the reasons that Professor Izumi identified and beyond.  And as we worked our way through it, we realized that to have a system of regulation, whether self-regulation, whether private, whether public.  But to have a system of regulation, you had to have some component that would make rules, some component that would apply and enforce the rules, and some component that would make the enforcement meaningful.

    We found it easier to figure out how the middle part—the application of the rules—might work, because, after all, arbitration has been well known to the international commercial community and to labor and employment lawyers for decades.  It wasn't long before, again prompted by David Johnson, this time joined by the American Arbitration Association and America Online and some other people, we set up an experimental online arbitration system called the Virtual Magistrate, when I was on the faculty at Villanova.

    It had a very limited purpose. It was aimed at giving interlocutory opinions to an online service provider accused of intellectual property infringement or invasion of privacy.  The Virtual Magistrate received a lot of publicity, but in its lifetime, it decided exactly one case. It stimulated the settlement of some half dozen or so more, but that's not a high-volume dispute resolution machinery.  Nevertheless I think we learned something.

    Then as the decade continued, along with many of you, I participated in things like the conference we organized in the fall of 1997 to try to understand the relationship was between formal governmental agencies and emerging private dispute resolution mechanisms. I also served on a committee the National Research Council appointed called "Global Networks and Local Values" that's half German and half American.  And, of course, consistently the Federal Trade Commission has done an outstanding job of hosting workshops like this so that all of us can come together and crystallize issues and learn more about possibilities.

    Now, based on this involvement over a period of a decade or more, let me offer some observations and pose some questions to you on three subjects. First, on the importance of alternative dispute resolution in cyberspace; second, on the qualities that a dispute resolution system would have that would make it particularly interesting to us; and third, on the politics of all of this, or if you are offended by the word "politics," we might call it "incentives."

    First of all, why is ADR so important? Why is it attracting so much attention? It seems to me the most interesting regulatory structures that are emerging for the internet are exemplified by the privacy safe harbor agreement that Barbara Wellbery has done such an outstanding job of shepherding to the point where all of the member states of the European Union now have agreed to it. That is interesting because it represents a hybrid framework within which public authorities and public law sketch out a kind of normative floor and backup enforcement. Above the normative floor and before the backup enforcement is triggered, there is a wide ambit of action for private self-ordering regimes to work out the details and accommodate the realities of technology.

    Another very interesting hybrid regulatory regime that has emerged and is operating is the ICANN regime for assignment of domain names and internet addresses. ICANN also is hybrid.  Public authorities play a very general role in terms of setting the ground rules, which were articulated in the request for proposals from the Department of Commerce a number of years ago, and then delegating certain kinds of governmental power to this private organization which then works out the details.

    Now, significantly, in both of these relatively comprehensive examples of self-regulation, alternative dispute resolution plays a major role. It does very much in the safe harbor agreement, and it certainly does in the ICANN arrangement.  Under its dispute resolution procedures to adjust disputes relating to domain names and trademarks, private bodies such as WIPO already decided some 400 cases, a much better track record than the Virtual Magistrate.

    In both of these hybrid regulatory regimes, ADR figures prominently, because it is, if you will, the teeth of self-regulation.  Alternative dispute resolution, as the regulatory teeth, is more interesting than traditional judicial institutions for many of the reasons that have been suggested to you already this morning.

    For one thing, the Internet, because of its low economic barriers to entry, enable small value transactions.  As Chairman Pitofsky said, people won't engage in small value transactions if they anticipate disputes and if the cost of resolving the disputes, the transaction costs, are so great that they swamp the value of the deal.  In fact, the justification for alternative dispute resolution recently was expressed in the following words:

    "It was recognized that consumer disputes are usually characterized by the fact that the goods and services have low economic value compared to the cost of seeking a judicial settlement."

    And in another expression: "Member states shall ensure that in the event of disagreement between an information society service provider and its recipient, their legislation allows the effective use of out-of-court schemes for dispute settlement, including appropriate electronic means."

    Those were not the words of an American law professor or arbitrator; those were the words of the European Commission. So, there is growing recognition around the world that alternative dispute resolution is important in cyberspace because we want the benefits of the low-value transactions.

    There are other reasons, as well. We are all perplexed by how to solve personal jurisdiction and choice of law problems in cyberspace. Some people advocate law of origin, some people advocate law of destination; everybody wants the home court advantage.  It's difficult to resolve those conflicts, but if you have alternative dispute resolution, resolving the jurisdiction and choice of law conflicts becomes much easier, because after all, virtually every private international law system around the world allows party autonomy with respect to choice of law and forum selection, at least to some extent, with some important exceptions for consumer disputes.

    What this means is that, if you have a framework of self-regulation that includes alternative dispute resolution, you, the parties to the transaction and the parties to ultimate potential disputes, can yourselves resolve in advance the jurisdiction and the choice of law problems.

    But if it is important, then what are the qualities that should interest us?  Some of the qualities are set forth in Article 17 of the European Commission's e-commerce directive.  In fact, those same qualities are embraced for the most part by the new agreement of the Electronic Commerce and Consumer Protection Group, an industry self-regulatory group that released a new agreement on alternative dispute resolution and consumer protection today.

    Basically those qualities have to do with due process. For those of you that are lawyers, you may be familiar with Judge Henry Friendly's article, "Some Kind of Hearing," published in 1976.  The way the Europeans express them are independence, transparency, respect for adversarial techniques, procedural efficacy, legality of decisions and freedom of participation and representation.

    I would submit to you that there are also some practical features of alternative dispute resolution systems that should interest us, and here I draw especially upon the Virtual Magistrate experience and some other early prototypical experiences.

    First, the ADR system has to be cheap. We are, after all, trying to lower transaction costs, and if we have an ADR system that is as expensive to use as going to the Superior Court in the District of Columbia, we haven't achieved much.

    Second, it's got to be simple, because what we're doing is we're trying to improve consumer confidence, among other things, in the trustworthiness of e-commerce.

    Third, and extremely important, it must be easy to find the courthouse. In retrospect, I think the biggest problem with the Virtual Magistrate system was that nobody could find it. It wasn't that one couldn't figure out the vmag.org URL. It was that the dispute resolution system was so remote from the marketplace that consumers and others had difficulty associating the two and believing that the dispute resolution system had credibility.

    The criterion of being easy to find the courthouse suggests that dispute resolution systems that are directly linked to the markets likely to produce the disputes that they will resolve should be the ones most interesting to us.

    Finally, it's important that the dispute resolution system have some kind of fund or other machinery for enforcement. If it just sits out there by itself with no real linkages to any enforcement mechanism, it can decide decisions until the cows come home, and it won't make any difference to anybody. So, if you have a system that is linked to a pot of money that can be used to satisfy the decision or if it is linked to people who have it within their hands to deprive someone of valuable assets -- ICANN is a perfect example of that, you lose your domain name if you don't comply with the decision -- or if it is linked to one of the participants or the participants agree in advance to some enforceable way to comply, that's much more interesting.

    When you work your way through those criteria, one dispute resolution approach stands out above all the rest in my view:  credit card charge-backs.  Cheap, transparent, all the way through the list. You've got a fund for enforcement.  It's linked to the marketplace, linked to the payment mechanism that people already use for e-commerce, great success rate.  You can comb through Westlaw and Lexis until you're blue in the face, and it's almost impossible to find a lawsuit growing out of credit card charge-back mechanisms. What that says to me is that it's been sufficiently acceptable both to consumers and to merchants that they don't sue about it.

    One of the things that mystifies me a little bit is why the credit card companies have not been prouder of their work and why they haven't been more aggressive in taking advantage of what is a huge market opportunity, not only to extend the dispute resolution business that they're already in but to extend the use of credit card systems as the principal payment mechanism for e-commerce in Europe and Asia, as it already is in the United States.  But maybe that question will be answered in the panel this afternoon when we talk about credit card charge-backs.

    Now, a bit about politics. When we talk about any kind of regulation, including self-regulation, we're talking about government, and government, in a democratic tradition, is political.  But, if you don't like the word "politics," if it makes you squeamish, then you can insert the word "incentives" every time I use "politics."

    What has been going on in the last three to five years in trying to understand how to achieve the benefits of e-commerce, while also protecting people against crooks and bad actors, is constructive in the sense that it has involved flexible industry/government cooperation.

    One of the lessons that we surely have learned is that the government has to push, but when it pushes, it should be flexible and open to new ideas, as have the Federal Trade Commission and has the European Commission. It was almost five years ago that the Clinton/Gore Administration made clear its commitment to an open environment for e-commerce and to stay the heavy hand of regulation. I have been a proponent in print and in the classroom and elsewhere of self-regulation for a lot longer than that, and so it's with some disappointment that I say to you the pace has been excruciatingly slow.

    I think the Federal Trade Commission's Year 2000 Report to the Congress was right in saying that there has been interesting progress, but the coverage, at least by some measures, is disappointingly small if we're looking for a reliable system to deal with problems on a comprehensive basis.

    For many, many months after BBB Online was announced one could file a complaint with the Federal Trade Commission online, but you could not file a complaint online with BBB Online.  Even today, when you go to the Federal Trade Commission site, there's a button at the bottom of the top-level page that takes you to a complaint form, but when you go to the BBB Online site, you have to drill down three levels before it even becomes clear that it's possible to file a complaint online.

    The work that industry has done, exemplified most recently by the E-Commerce and Consumer Protection Group agreement, is exemplary, but I suspect that it would not have happened absent the pressure from the FTC's Report to Congress recommending legislation. I suspect—I know— that the progress that we've made in privacy would not have happened but for the pressure from the European Commission's privacy directive.

    And so I think that it is important for those of you in government to have the courage of your convictions to continue to exert pressure and to be willing to criticize the industry efforts.  But it is equally important that you continue to remain open and ready to embrace real progress by industry to create credible alternative dispute resolution provisions.

    On the industry side that we need continued leadership, and that requires risk-taking. The seven companies that signed onto the E-Commerce and Consumer Protection Group issuance today took some risks.  Now the question is how quickly and how many more companies will step up and sign on to this framework or some other one? If you're in favor of self-regulation, you have to be willing to put your machinery where your mouth is.

    When we have done all this and even today, I think it's fair to step back a little bit and to be proud of what we've accomplished.  When I was in law school and studied administrative law and got exposed to what was going on in 1939 and 1940 when people were writing the Administrative Procedure Act, I sometimes asked myself, how is it that those people were smart enough to invent this whole new conception of how government might work?

    Well, if you think about it, that's exactly what we're doing now.  Barbara Wellbery at Commerce and Hugh Stevenson and Bob Pitofsky and Jodie Bernstein and the rest of you at the Federal Trade Commission have a lot to be proud of in terms of your leadership, to have exercised your authority sparingly but constantly to goad and prod and create opportunities like this for the rest of us to learn.

    I think Becky Burr and Ira Magaziner at the Department of Commerce have a lot to be proud of in creating the ICANN regime. Ron Plesser and Roger Cochetti can be proud of their handiwork that was released today. And certainly, David Johnson as someone said not long ago, is the father of most of the ideas that we talk about in terms of effective governance of cyberspace.

    And now there's a new generation of people that are coming into their professional maturity to help us think through the invention of new forms of government for this new marketplace, people like Stu Ingis, Lisa Rosenthal and Susan Crawford.

    So, whatever the frustrations, whatever the uncertainties about the right mix between public and private government, between U.S. traditions and European traditions and Asian ones, what we're up to here is very important, very worthwhile.  I look forward to continuing to work with you to accomplish some good results.