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FTC's Pitofsky On Cyberspace Dispute Resolution

FTC's Pitofsky On Cyberspace Dispute Resolution

"Balancing the New Powers and Interests of Consumers and Business in Cyberspace Commerce"

U.S. Federal Trade Commission Chairman Robert Pitofsky says resolution of disputes arising from global electronic commerce should be based on the laws of the country where the goods and services are sent. American Bar Association, 2000 Annual Meeting, Plenary Session on Cyberspace Jurisdiction, London, July 17, 2000. Source: Washington File distributed by the Office of International Information Programs, U.S. Department of State. EUR120, July 17, 2000.

The "country-of-destination" framework offers better consumer protection than the two other options: "country-of-origin" and "prescribed-by-seller" contractual terms, Pitofsky said in a speech to the annual meeting of the American Bar Association (ABA) in London July 17.

Pitofsky said his remarks -- made available in Washington -- represent his personal views, not those of the FTC.

The country-of-origin framework invokes laws where the e-commerce goods and services are shipped. The prescribed-by-seller rules would allow the seller to establish the rules of exchange.

Pitofsky said the country-of-destination approach would have to be modified to protect sellers from undue risks, such as exposing them "to the laws and courts of hundreds of jurisdictions."

Parallel to deciding jurisdictional issues, Pitofsky said alternative dispute resolution (ADR) should be developed to provide practical solutions for consumers and sellers.

Pitofsky said the private sector needs to be involved in the development of consumer protection practices. "Developing international framework that both protects consumers and is fair and predictable for business is key to the long-term growth of e-commerce," Pitofsky said.

Following is text of Pitofsky's remarks as prepared for delivery:

(begin text)

"Balancing the New Powers and Interests of Consumers and Business in Cyberspace Commerce"

By Robert Pitofsky (1) American Bar Association, 2000 Annual Meeting, Plenary Session on Cyberspace Jurisdiction, London, July 17, 2000.

Introduction

The electronic marketplace promises to grow at a stunning rate. Consumers can shop around the clock from merchants around the world. Likewise, businesses can reach customers worldwide quickly and at low cost.

This new marketplace poses the same risks inherent in any marketplace where false advertising and frauds can take root. At the same time, the new marketplace poses risks unique to the new technology involving, for example, the risk that an accidental mouse click will bind consumers to undesirable contractual terms. As we have seen, the global nature of the marketplace presents special challenges. Consumers have concerns about the availability of legal protections and redress. Businesses have concerns about the costs and unpredictability of the regulatory environment.

One role of the Federal Trade Commission -- along with law enforcement -- has been to explore, with consumers, businesses, academics, and government agencies, how best to develop a global electronic marketplace that offers safety for consumers and predictability for business.

In June 1999, the FTC held a public workshop on these issues.(2) One core principle that emerged from the workshop is that online consumers should receive no less protection than offline consumers. This concept also is the centerpiece of Guidelines for Consumer Protection in E-Commerce issued last year by the Organization for Economic Cooperation and Development ("OECD").(3)

Although there are no easy solutions to the range of legal challenges in the global electronic marketplace, we believe that with all interested groups working together there can be progress toward a shared goal. I would like to offer some suggestions for next steps in this area.

Jurisdiction and Choice of Law

My first suggestion involves the legal framework for jurisdiction and choice of law for consumer transactions. Three different frameworks have been proposed. The "country-of-destination" approach, in place in most developed countries, generally allows consumers to rely on core protections available where they reside. The proposed "country-of-origin" rule would subject companies only to the laws, courts, and law enforcers in their own country. The contractual or "prescribed-by-seller" approach -- also supported by many country-of-origin proponents -- would allow merchants to prescribe the applicable law and jurisdiction in their contracts with consumers. For example, a merchant's Web site disclosure of the governing law would bind the customers of that site.

Much attention has been focused on the prescribed-by-seller approach, which is incorporated in the Recommendations of the ABA's Cyberspace Jurisdiction Project. This approach, like the rule-of-origin system, addresses key business concerns, most notably the need for a predictable regulatory environment and reduced compliance costs. I think, however, the prescribed-by-seller and rule-of-origin systems raise significant consumer protection concerns that risk undermining consumer confidence in e-commerce.

Both approaches could create incentives for businesses to operate from or contractually impose the law of jurisdictions with lax consumer protections. The result could be a "race to the bottom."

Under both approaches, consumers could be required to travel to remote forums to seek redress pursuant to unfamiliar legal systems, possibly entailing travel and legal costs that dwarf the damages sought; as a result, consumers effectively will be denied any meaningful opportunity for redress.

Even if a Web site disclosed to consumers which country's laws and courts governed a transaction, it is unclear whether most consumers could make informed choices about complex international law issues.

If these approaches were applied to public law enforcement, companies would be subject only to authorities of the jurisdiction where they operate or they have selected in the contract, regardless of where their customers might be. Governments with the greatest stake in protecting their citizens from foreign wrongdoers would have to rely on other governments to carry out that responsibility.

Given the important consumer protection concerns raised by both the prescribed-by-seller and country-of-origin approaches, I do not think either should be adopted except, perhaps, in very limited circumstances. Instead, I think we should focus our efforts on improving the current jurisdictional systems, which generally prescribe country-of-destination rules.

I fully recognize that such country-of-destination approaches have drawbacks for businesses. Businesses need a measure of certainty and are concerned that simply by posting a Web site they could be subject to the laws and courts of hundreds of jurisdictions. They also have concerns about not knowing the location of online customers or the geographic areas their sites reach. Businesses in general, but especially small and medium sized enterprises, are further concerned about compliance burdens in a global marketplace. Nonetheless, I think there are some tangible ways we might refine the general country-of-destination approach to address these valid concerns.

First, we need to provide guidance to businesses on what practices may expose them to liability, e.g., distinguishing between simply posting a Web site and directing marketing to, or "targeting," a given jurisdiction. If businesses are targeting consumers in a particular country -- for example, in the clearest case, by stating on the Web site: "special offer available to U.S. consumers" or advertising in other media circulated in the U.S. -- it seems fair to subject them to jurisdiction in the targeted country.

I understand that some e-commerce transactions can take place without the parties knowing where the other is located. Still, I suspect that online merchants generally know where their customers are and have incentives to find out where they reside, which arise from the need to calculate duties or interest in personalizing marketing. Technology may be making this even easier. Thus, we should not overestimate the difficulties in determining the customer's location.

One related point should be stressed. Even absent targeting, it may be appropriate for governments to assert jurisdiction in certain cases to protect their citizens. For example, government action to stop dangerous or fraudulent claims may be appropriate to prevent harm.

Second, with respect to compliance burdens, I support easy entry for small companies, which helps to promote competitive markets. Without minimizing legitimate concerns, I note that the Internet offers technology that can make compliance with the requirements of different jurisdictions less burdensome than it would initially appear. For example, information about different consumer protection laws is becoming more easily accessible online and Internet-based "globalization" services that prepare businesses for the international marketplace are emerging rapidly. I have been impressed by the many online companies that take advantage of technology that enables them to create Web sites with different home pages geared toward consumers in different countries. This technology not only allows companies to comply simultaneously with different legal requirements, it also ensures that marketing, language, currency, and shipment information are relevant to the targeted customers.

Another way to reduce compliance burdens is to pursue incremental convergence of national and international consumer protection laws. For example, we might begin by identifying areas where there already is commonality, and make that explicit for businesses. We also might identify laws with similar substantive protections, but different compliance requirements, and work to harmonize the non-substantive requirements. As laws become more similar, law enforcers can more easily cooperate across borders and consumers should gain more confidence to buy goods from foreign sellers.

I recognize, however, that convergence is a very long-term solution. That is no reason, however, why we should not start.

Other Possible Avenues

My next suggestions involve avenues we should continue to pursue along with the jurisdiction issues.

As many of us know, alternative dispute resolution ("ADR") can be an efficient way to provide consumer remedies and reduce the risk of businesses being haled into courts around the world. It makes practical and economic sense for both consumers and businesses. The FTC and the Department of Commerce recently held a workshop to explore how we can encourage the development of mechanisms that resolve consumer disputes quickly and fairly.(4) While ADR may not resolve concerns relating to public laws and law enforcement, it will be a key component to resolving online disputes and building consumer confidence.

Additionally, private sector programs, like trustmarks, codes of conduct, and escrow programs, which better inform consumers and prevent disputes, should be encouraged. We see many creative and promising private sector initiatives taking shape and look forward to their effective implementation.

We also need to develop arrangements for cross-border judgment recognition and enforcement for both private and public actions, to give consumers access to real remedies and to hold businesses accountable for their practices.

To combat increases in cross-border fraud, law enforcers worldwide need to pursue arrangements to foster information sharing and cooperation. The FTC is hard at work in this area. The FTC, represented by Commissioner Mozelle Thompson, assumes the presidency of the International Marketing Supervision Network in a few months, where we will make this a priority.(5)

Conclusion

The FTC has been exploring emerging e-commerce issues for over five years. We have found that effective solutions require an inclusive process and dialogue among consumers, industry, academics and governments alike. As we move forward with these efforts, including the ABA's recommendations on Internet jurisdiction, I encourage you to seek input from all stakeholders.

There are no easy answers to the range of legal challenges in the global electronic marketplace. Nonetheless, developing an international framework that both protects consumers and is fair and predictable for business is key to the long-term growth of e-commerce. The Commission is committed to doing its part to ensure consumer protection and a fair and predictable regulatory regime in the global electronic marketplace. Again, I commend the ABA Cyberspace Jurisdiction group for convening this session and contributing to this important debate.

Endnotes

1. Chairman of the United States Federal Trade Commission. The views expressed are my own and do not necessarily reflect the views of the Commission or other Commissioners.

2. The Workshop was held at the FTC on June 8-9, 1999. The agenda, transcripts, requests for public comments, and submissions can be found at http://www.ftc.gov/bcp/icpw.htm

3. The guidelines, adopted in December 1999, represent the views of the 29 OECD countries and offer a framework for governments building online consumer protections, for the private sector developing self-regulatory regimes, and for consumers shopping online. The Guidelines can be found on the FTC's Web site at http://www.ftc.gov/opa/1999/9912/oecdguide.htm

4. The FTC and the Department of Commerce joint public workshop to further explore ADR for consumer transactions in e-commerce was held on June 6-7, 2000. Information about this workshop can be found on the FTC's Web site, http://www.ftc.gov/bcp/altdisresolution/index.htm

5. The International Marketing Supervision Network is an association of national consumer protection agencies from 29 countries. The FTC assumes the presidency of this organization for a one-year term beginning in fall 2000. The FTC is working with member countries to expand information sharing, cooperation, and efforts to combat fraud and deception online. More information about the Network can be found at http://www.imsnricc.org

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Directeur de la publication : Joël-François Dumont
Comité de rédaction : Jacques de Lestapis, Hugues Dumont, François de Vries (Bruxelles), Hans-Ulrich Helfer (Suisse), Michael Hellerforth (Allemagne).
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