<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:81963.wais]
STATE IMPEDIMENTS TO E-COMMERCE: CONSUMER PROTECTION OR VEILED
PROTECTIONISM?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
COMMERCE, TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 26, 2002
__________
Serial No. 107-130
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
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___________________________________________________________________________
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
RICHARD BURR, North Carolina BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
GREG GANSKE, Iowa BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming BART STUPAK, Michigan
JOHN SHIMKUS, Illinois ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
TOM DAVIS, Virginia THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland LOIS CAPPS, California
STEVE BUYER, Indiana MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Commerce, Trade, and Consumer Protection
CLIFF STEARNS, Florida, Chairman
FRED UPTON, Michigan EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia DIANA DeGETTE, Colorado
Vice Chairman LOIS CAPPS, California
ED WHITFIELD, Kentucky MICHAEL F. DOYLE, Pennsylvania
BARBARA CUBIN, Wyoming CHRISTOPHER JOHN, Louisiana
JOHN SHIMKUS, Illinois JANE HARMAN, California
JOHN B. SHADEGG, Arizona HENRY A. WAXMAN, California
ED BRYANT, Tennessee EDWARD J. MARKEY, Massachusetts
GEORGE RADANOVICH, California BART GORDON, Tennessee
CHARLES F. BASS, New Hampshire PETER DEUTSCH, Florida
JOSEPH R. PITTS, Pennsylvania BOBBY L. RUSH, Illinois
MARY BONO, California ANNA G. ESHOO, California
GREG WALDEN, Oregon JOHN D. DINGELL, Michigan,
LEE TERRY, Nebraska (Ex Officio)
ERNIE FLETCHER, Kentucky
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Atkinson, Robert, Vice President, Progressive Policy
Institute.................................................. 7
Cohen, Tod, Associate General Counsel, Global Policy, eBay,
Inc........................................................ 12
Cruz, Ted, Director, Office of Policy Planning, Federal Trade
Commission................................................. 33
Sloan, David P., President, American Vintners Association.... 17
Zeidner, Joe, General Counsel, 1-800 Contacts................ 22
Material submitted for the record:
Duggan, Juanita D., CEO and EVP, Wine and Spirits Wholesalers
of Americe, letter to Hon. Cliff Stearns................... 44
(iii)
STATE IMPEDIMENTS TO E-COMMERCE: CONSUMER PROTECTION OR VEILED
PROTECTIONISM?
----------
THURSDAY, SEPTEMBER 26, 2002
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Commerce, Trade,
and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2322, Rayburn House Office Building, Hon. Cliff Stearns
(chairman) presiding.
Members present: Representatives Stearns, Radanovich, Bass,
and Towns.
Staff present: Ramsen Betfarhad, majority counsel, Yong
Choe, legislative clerk; and Jonathan J. Cordone, minority
counsel.
Mr. Stearns. Good morning. The Subcommittee on Commerce,
Trade, and Consumer Protection will come to order.
Welcome all of you, especially our witnesses to our hearing
examining State impediments to e-commerce. This hearing is one
of a number of hearings that the subcommittee has held on e-
commerce this Congress. The other hearings have included
examination of cyber security, cyber fraud and crime,
impediments to digital trade, electronic communications
networks, supplier-owned on-line travel sites and on-line
information privacy.
I think it is important that the subcommittee and the full
committee, as congressional custodians of the commerce clause
be vigilant of and encourage interstate commerce in general and
nascent forms of interstate commerce such as e-commerce, in
particular.
As times change, economic and political priorities change.
Now and again, history is witness to new and innovative
technologies that demand and bring about fundamental change in
the way commerce takes places. Those fundamental economic
changes then, in turn, require and indeed bring about needed
legal and regulatory change. The internet and the commerce that
transpires on the internet are such technologies and
innovations respectively.
Today, the value of on-line commercial activity at the
business to business level is in excess of $1 trillion
worldwide. While consumer transitions taking place online are
maintaining double digit growth rates year after year, it is
essential that the growth of e-commerce is not stymied by laws
and/or regulations that were enacted or promulgated at a time
when e-commerce was at best a figment of a few technologists'
imagination.
Many of those State laws and regulations did and may still
have important consumer protection objectives as part of their
rationale. I think it is imperative that every State carefully
examine its laws and regulations that were intended to advance
consumer protection, but now hinder e-commerce, albeit
unintentionally.
I am confident that States will find alternative legal and
regulatory approaches that will not impede e-commerce and at
the same time advance State consumer protection interests. We
will hear this morning that that is exactly what Illinois did
when it examined and ultimately revised its auction licensing
rule so that the rule could be more responsive to a new
business model, not really an auction house, called eBay.
However, there seems to be a trend where new State laws are
enacted and old ones are reinterpretated with the distinct
objective of protecting parochial, local commercial interests
from out of State on-line competitors. It is neither new nor
unusual for local commercial interests to appeal to their local
governmental authorities for relief from new competitors made
possible by technology or innovation.
Some of the greatest efficiencies accruing to the economy
and the individual consumer from the internet and e-commerce
has been in a dramatic reduction in the need for and cost of
distribution.
As such, many traditional industries in the business of
being intermediaries or middlemen are faced with significant
competition from on-line providers of such types of services.
So the hearing today focuses on three such industries, contact
lens, the wine and auction house industries. The current
intermediaries in the first two industries, optometrists and
wine distributors/retailers face potentially significant direct
competition from on-line providers of the same distribution
services. Auctioneers face a serious competitive challenge in
eBay, not an auction house in the traditional sense, but a
cybermall of sorts that allows sellers and buyers from around
the world to come together and trade over 10 million listings
for goods and services on a given day.
In the context of their respective industries, today's
witnesses will highlight some of the anti-competitive effects
on their on-line businesses from State laws and regulations,
some with clear protectionist intent, while most serve as a
barrier to e-commerce because they are relics of a bygone era.
There are many other industries where State laws and
regulations either unintentionally or intentionally are
impeding the growth of e-commerce. Some of those other
industries are subject of a forthcoming workshop at the FTC.
The Commission has schedule a 3-day workshop on the issue
before us this morning starting October 8. The Commission
hopes, among other things, to better understand particular
State laws and regulations that impede e-commerce by having
panels of experts address certain specific industries,
including retailing, automobiles, cyber charter schools, real
estate, mortgages, health care, pharmaceuticals, telemedicine,
wine sales, auctions, contact lenses and funerals.
Upon completion of the Commission inquiry including its
review of all of the pertinent filings made with the
Commission, the subcommittee hopes to have the FTC testify as
to their findings in a subsequent hearing in the 108th
Congress.
So I look forward to our witnesses' testimony this morning
and with that, I welcome the distinguished ranking member, Mr.
Towns from New York.
[The prepared statement of Hon. Clifford Stearns follows:]
Prepared Statement of Hon. Clifford Stearns, Chairman, Subcommittee on
Commerce, Trade, and Consumer Protection
Good morning. I am pleased to welcome you all, especially our
witnesses, to the Commerce, Trade and Consumer Protection subcommittee
hearing examining State impediments to e-commerce. This hearing is one
of a number of hearings that the subcommittee has held on e-commerce
this Congress. The others hearings have included examinations of (1)
cyber-security (2) cyber-fraud and crime (3) impediments to digital
trade (4) electronic communications networks (5) supplier-owned online
travel sites; and (6) online information privacy. I think it important
that the subcommittee and the full committee, as Congressional
custodians of the commerce clause, be vigilant of and encourage
interstate commerce in general and nascent forms of interstate
commerce, such as e-commerce in particular.
As times change, economic and political priorities change. Now and
again, history is witness to new and innovative technologies that
demand and bring about fundamental change in the way commerce takes
place. Those fundamental economic changes then in turn require and
indeed bring about needed legal and regulatory change. The Internet and
the commerce that transpires on the Internet are such technologies and
innovations respectively. Today, the value of online commercial
activity at the business-to-business level is in excess of one trillion
dollars worldwide. While, consumer transactions taking place online are
maintaining double-digit growth rates year after year.
It is essential that the growth of e-commerce is not stymied by
laws and/or regulations that were enacted or promulgated at a time when
e-commerce was at best a figment of a few technologist's imagination.
Many of those state laws and regulations did and may still have
important consumer protection objectives as part of their rationale. I
think it imperative that every state carefully examines its laws and
regulations that were intended to advance consumer protections but now
hinder e-commerce, albeit unintentionally. I am confident that states
would find alternative legal and regulatory approaches that would not
impede e-commerce and at the same advance state consumer protection
interests. We will hear this morning that that is exactly what Illinois
did when it examined and ultimately revised its auction licensing rule,
so that the rule could be more responsive to a new business model, not
really an auction house, called e-Bay. However, there seems to be a
trend where new state laws are enacted and old ones are reinterpreted
with the distinct objective of protecting parochial local commercial
interests from out-of-state online competitors. It is neither new nor
unusual for local commercial interests to appeal to their local
governmental authorities for relief from new competitors made possible
by technology or innovation.
Some of the greatest efficiencies accruing to the economy and the
individual consumer from the Internet and e-commerce has been in a
dramatic reduction in the need for and cost of distribution. As such,
many traditional industries in the business of being intermediaries or
middleman are faced with significant competition from online providers
of such distribution services. The hearing today focuses on three
industries: (1) contact lens (2) wine and (3) auction houses. The
current intermediaries in the first two industries, optometrists and
wine distributors/retailers, face potentially significant direct
competition from online providers of the same distribution services.
While, auctioneers face a serious competitive challenge in e-Bay, not
an auction house in the traditional sense, but a ``cybermall'' of sorts
that allows sellers and buyers, from around the world, come together
and trade over 10 million listings for goods and services on a given
day. In the context of their respective industries, today's witnesses
will highlight some of the anticompetitive effects on their online
businesses from state laws and regulations, some with clear
protectionist intent, while most serve as a barrier to e-commerce,
because they are relics of a by-gone era.
There are many other industries where state law and regulation,
either unintentionally or intentionally, is impeding the growth of e-
commerce. Some of those other industries are subject of a forthcoming
workshop at the FTC. The Commission has scheduled a three-day workshop
on the issue before us this morning starting October 8th. The
Commission hopes, among other things, to better understand the
particular state laws and regulations that impede e-commerce by having
panels of experts addressing certain specific industries, including:
retailing, automobiles, cyber-charter schools, real estate/mortgages,
health care/pharmaceuticals/telemedicine, wine sales, auctions, contact
lenses, and funerals (caskets). Upon completion of the Commission
inquiry, including its review of all the pertinent filings made with
the Commission, the subcommittee hopes to have the FTC testify as to
their findings in a subsequent hearing in the 108th Congress.
I look forward to hearing the witnesses testimony.
Mr. Towns. Thank you very much, Mr. Chairman. Holding this
hearing, let me begin by welcoming all the witnesses that I'm
delighted to see and we're glad to have you here and we're
looking forward to your testimony.
I understand that this is a hearing on State impediments of
e-commerce, Mr. Chairman. Why are there no witnesses from a
State regulator or a State attorney general? Should a State, at
least one of them, should be here to defend their regulatory
practice, at least one State. And many of the laws or practices
of the States are set up to protect consumers. And the question
we need to ask of ourselves is will our constituents save a few
dollars on goods or services, is it worth the roll back of what
many times are the protections as consumers? I'm interested to
hear what our guests have to say about that.
With many interests before us, I am sure many separate
opinions will be put forth and let me say here are some of
mine. I'm greatly intrigued by the fact that I can buy a putter
to improve my golf game from someone anywhere in America
through on-line auction services like eBay. As long as these
services have a policy to protect buyers and sellers, why
should they not be allowed to do business? At the same time I
question whether someone should be able to simply order contact
lenses over the internet and get them shipped to their house
without a doctor's verification. I have problems with that.
What if the prescription is bad? What if it hurts the eyes?
What recourse does that person have? Sometimes having the
doctor nearby is in the consumer's best interest, even if it
costs a few dollars more.
There seems to be a great rush to forget traditional brick
and mortar businesses in favor of e-commerce. I am all for e-
commerce. I want to make that point very clear in every way,
but let's not forget, Mr. Chairman, that in some parts of this
country, there exists areas where e-commerce is but an urban
legend or an old wive's tale. The digital divide is real and we
need to keep some options open for those who do not yet have
the opportunity to participate in e-commerce.
I would like to thank you again for holding this hearing
and to say to you that I think we need to hear from the States
as well, but on that note, I yield back and I'm anxious and
eager to hear from the witnesses.
Mr. Stearns. I thank my colleague and I would tell him that
our staff tried assiduously to get representation from the
States and in fact, Mr. Dingell who is the ranking member of
the full committee, his staff was trying to get members from
the National Association of State Legislators to come. They
were contacted. It was made clear to them what the itinerary
and subject matter was here and they declined.
We contacted the States attorney generals to see if they
had an interest in coming. Now we're not clear why they didn't
want to participate. We appreciate your attempt here to make
sure the hearings are balanced and we get both sides and we, as
you know, always try to do that and try to particularly try to
give the Democrats every opportunity to get witnesses that they
feel, so I'm just relaying to you what has been our efforts.
Perhaps the efforts, instead of just 100 percent, should have
been 200 percent, but any way, we did try and I regret, as you
do, that we do not have an attorney general or perhaps some
State legislators who would help us.
For an opening statement, the gentleman from California,
Mr. Radanovich.
Mr. Radanovich. Good morning and thank you, Mr. Chairman,
for having this hearing. Just a brief statement and I
appreciate the Chairman's effort to get this issue on the table
and I appreciate the fact that Mr. David Sloane of the American
Business Association is invited to participate in this. It's no
secret I have a small winery in California and I kind of find
it difficult you can ship loaded weapons in between States, but
you try to ship a bottle of Cabernet from California to
Florida, you can go to jail and it's all part of the e-commerce
and with this new technology that's coming forward, these are
things, I think issues that need to be ironed out over time and
I appreciate the fact that you're having this hearing and
getting the issues on the table. So I just want to say thank
you and I look forward to the testimony.
Mr. Stearns. I thank my colleague. It's always nice to have
someone, one of the members, who have actually--not only
understand the problems, but have experienced it, so I think
that's very helpful to have the gentleman from California.
[Additional statements submitted for the record follows:]
Prepared Statement of Hon. Charles F. Bass, a Representative in
Congress from the State of New Hampshire
Thank you, Mr. Chairman, for holding this hearing. I am fascinated
by this topic and the notion of state protectionism.
There are several competing forces at work for me when thinking
about this issue. First, are Internet based transactions inherently
Interstate? Because of the network's connectivity and the packet
switching protocols employed, we never know if an e-mail, a transferred
file, or the bits making up an order on any E-Commerce site traveled
across state lines.
Because the data making up these transactions are broken up and
transmitted through the network in a way that seeks out paths of least
resistance and are then reconstituted at the other end, should a data
bit that crosses a state line be thought of the same way as a good or
service transacted through the mail across such borders? What if we are
not sure of the vendor's or customer's actual location? Should we
assume it Interstate? Why not International?
If a physical product is delivered through the mail, it is easy
enough to track, but what about electronically delivered products, such
as music or software downloads? This of course has implications beyond
product regulation, it also affects how we tax, account for economic
activity, and think about matching needs for physical infrastructure
with citizen and local tax bases.
Second, what level of state oversight of the products and services
sold over the Internet is appropriate given the international scope of
the medium? Is there a compelling state interest in the types of
regulations we are talking about? Or is the only purpose to protect an
in-state product or enterprise? If the former is true, then we ought to
tread more lightly. If it is the latter reason, then maybe we should no
more tolerate that practice from the states then we do from foreign
nations.
New Hampshire is a low barrier state. We have no sales tax--which
may be the ultimate coercive regulation, and we generally avoid
infringing on the freedom for willing buys and willing sellers to
interact directly.
As I said, these are fascinating issues and I look forward to
hearing from these panelists.
______
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Thank you, Mr. Chairman. I appreciate your calling this hearing,
which involves a critical function of this Committee in the emerging
digital age: which is to make sure that actions that affect electronic
commerce, sometimes in the name of consumer protection, are not, in
fact, anti-consumer actions to stifle such commerce by non-digital
competitors.
The timing of this hearing is important, as we see continued growth
in the popularity of e-commerce and its importance in the American
economy. Last month, the U.S. Census Bureau reported that second-
quarter online retail numbers showed a healthy 24% increase from the
previous year--and these data do not include sales from online travel,
finance, and ticketing sectors.
As e-commerce continues to develop and mature, we will continue to
face new and difficult public policy challenges. We certainly must
determine what kind of new consumer protections are needed for this
digital economy. An example of this is the debate occurring in this
Subcommittee over the issue of information privacy.
We also must recognize that some consumer protections enacted long
ago are not applicable for this new medium. Many laws on the books were
designed under different circumstances for vastly different purposes,
and can now threaten the development of e-commerce, with minimal or no
offsetting benefit to consumers.
We should not forget that e-commerce produces fascinating new
opportunities that will completely alter the way some businesses
operate. By improving communications, reducing costs and time to
market, minimizing inventories, improving consumer information and
knowledge--just to name a few--the use of the Internet to conduct
business can have substantial benefits for businesses and consumers
alike.
Of course, in the process, e-commerce will also displace some of
the existing companies and firms that have played a valuable role in
our economic fabric for many years. One way it can threaten old
business set-ups is by cutting out the middle man--disintermediation,
as some call it--by connecting consumers directly with the producers of
goods and services, often across state lines.
Now, in many cases there may be legitimate roles for middlemen in
commerce. We examined some of these issues at a Subcommittee hearing on
online travel services held a couple of months ago. But e-commerce can
legitimately put those roles to the test, forcing them to prove their
worth. And this is not a bad thing when it improves competition for
certain goods and services. It can even enhance the middleman's role in
some instances.
The reaction of middlemen, faced with the e-commerce threat, can
well be predicted: sit by and watch it happen, or fight. Our concern
today involves one set of tools that businesses have to use against e-
commerce--state laws and state legislatures. If current middlemen use
their political connections, entrenched position in the market, and the
guise of ``consumer protection'' to influence state governments and
regulators to protect them, then that's a problem--particularly when it
affects interstate commerce.
And so I am interested to learn how state governments are reacting
to the development of e-commerce--both negatively and positively.
States and State Attorneys General play a vital role protecting
consumers. But states, just like the Federal government, can be
influenced by entrenched incumbents seeking to protect their market
position though new laws or reinterpreted laws instead of through new
services.
States' reactions to a middleman's quest for intervention to
protect their position can be a telling sign of whether e-commerce will
develop as we all hope. I expect our witnesses this morning will give
us a good picture as to the reaction of states and ``disintermediated''
middlemen.
Let me note that I understand there will be a detailed, three-day
FTC workshop on this subject next month. Chairman Muris should be
thanked for pushing forward with such a thoughtful examination. I am
hopeful that this hearing will be a helpful starting point for that
workshop and, in turn, that their work may assist us, should this
Committee move to consider any remedies that may be necessary.
I thank the Chairman and look forward to the testimony of the
witnesses.
Mr. Stearns. We welcome our first and only panel of Rob
Atkinson, Vice President of Progressive Policy Institute; Mr.
Tod Cohen, Associate General Counsel of Global Policy of eBay,
Inc.; Mr. David P. Sloane, President of the American Vintners
Association; Mr. Joe Zeidner, General Counsel for 1-800
CONTACTS; and Mr. Ted Cruz, Director, office of Policy Plant,
Federal Trade Commission. So I want to thank you for coming and
let's start from my left and we'll go to my right.
Mr. Atkinson, we welcome you.
STATEMENTS OF ROBERT ATKINSON, VICE PRESIDENT, PROGRESSIVE
POLICY INSTITUTE; TOD COHEN, ASSOCIATE GENERAL COUNSEL, GLOBAL
POLICY, eBAY, INC.; DAVID P. SLOAN, PRESIDENT, AMERICAN
VINTNERS ASSOCIATION; JOE ZEIDNER, GENERAL COUNSEL, 1-800
CONTACTS; AND TED CRUZ, DIRECTOR, OFFICE OF POLICY PLANNING,
FEDERAL TRADE COMMISSION
Mr. Atkinson. Thank you, Mr. Chairman, and members of the
subcommittee. For those of you who don't know, I'm Vice
President of the Progressive Policy Institute which is a think
tank here in Washington. It's affiliated with the Democratic
Leadership Council. For the last 4 or 5 years, one of our major
missions has been to promote the growth of e-commerce because
we see it as central to boosting productivity growth in the
U.S. economy which we believe is central to boosting wages for
American workers. And I think one of the key areas that we've
looked at is this whole issue, as you articulated, how the
middle man is fighting e-commerce.
I think one thing I want to mention before we start is
there's a myth out there that maybe e-commerce isn't as healthy
as it might be because of the dot com crash. Reality is,
according to the U.S. Census Bureau, just one portion of e-
commerce, e-commerce retail sales are growing 10 times faster
in the last year than normal or regular retail sales are.
Consumers are happy about this. They get lower prices, more
convenience and more choice. There's one group though that's
not happy and you've articulated that, a whole set of producers
in the middle of that transaction between the ultimate consumer
and the producer, these middle men are not happy. And rather
than compete in the marketplace which is the normal way
businesses respond to competition, many of these companies and
their associations are going to States, to the courts, to
Congress, to basically fight against this competition. You've
mentioned many of them. Let me just mention two.
One is you can all buy a computer today at Dell or Gateway
and you can go directly to the manufacturer on-line and buy a
computer and save hundreds of dollars by doing that. But you
cannot buy a car on line. And I would just refer to Mr. Towns'
comments. I think this is one of the critical areas where
helping lower income people get on line, one of the major
reasons they're not on line now is because it costs money to be
on line. And if we can create an e-commerce system where they
can save large amounts of money, for example, buying a car on
line, you can save $2,000 or $3,000 or $4,000, if you could buy
it directly from the manufacturer, we would see much more
adoption of e-commerce by lower income individuals.
Well, why are these companies doing that? Clearly, they're
doing it for one simple reason. They don't want to compete.
They want to be protected by government from competition.
I want to address one issue which I think is the key policy
issue here and that's are they really protecting the consumer
or are they protecting themselves? If you look very carefully
at the claims for consumer protection which we've done in a
report called ``The Revenge of the Disintermediated,'' how the
middle man is fighting e-commerce and hurting American
consumers, it's pretty clear that the cases divide into two
groups. There's one group of cases where the claims of consumer
protection are essentially frivolous and have no validity. I
would argue the contact lens case is one of those. State
attorney generals basically argue that there is no harm for
purchasing contacts on line if one has a prescription which is
currently what we're trying, what we would like to see.
In other cases there may be consumer issues. Wine sales is
a good example. There is a legitimate concern in wine sales of
underage drinking. But rather than just block all internet wine
sales, the States that have allowed it have put in place
underage signage requirements. You cannot deliver a bottle of
wine to somebody unless they sign and show ID that they're over
18 years of age or 21, whatever the drinking age is in that
State.
So it's clear that there are ways to protect consumers and
PPI is not a libertarian organization. We don't believe that we
should get rid of consumer protection. We need strong consumer
protection, but what we need to do is make sure that it isn't
set up in a way that limits e-commerce and limits any type of
commerce.
What can Congress do about this? I think there are really
three things Congress can do. One is simply in your own
deliberations and as cases come before Congress, resist the
protectionist pleadings of these interest groups that come
before you.
I think the classic case is Orbitz. Orbitz' competitors in
the on-line travel age space, as well as the travel agents
themselves have been trying to get Congress to put political
pressure on the administration to shut down Orbitz, close it
down or to prohibit it or restrict it. The second thing and I
support the FTC's efforts. The FTC is within the last year
making strong cases at the State level in terms of their
advocacy efforts and I know Ted will probably talk more about
that and I think that's very important so that consumer voice
gets in these debates at the State level.
Finally, I think it's important to really seriously look at
the issue of preemption of State laws or requiring States to
develop their own uniform laws. I think preemption is critical
in e-commerce. I know, Mr. Chairman, your privacy bill does
that. When we're in a national economic system where we're
crossing State borders, we simply can't have these conflicting
laws. We could do that in a number of areas, for example,
nonbank financial services now are regulated at the State
level. Why not let them be regulated at the Federal level as
well if companies want to compete in all 50 States. They're
still regulated. There is still consumer protection, but
they're not restricted at the State level.
Automobile dealers is another example. Contact lenses,
another example. Let the FTC make a ruling on contact lenses
that is the same as eye glasses, require a prescription
release.
So again our goal here is to enhance or at least to
maintain consumer protection, but to do it in a way that
doesn't restrict legitimate e-commerce.
Thank you very much. I'd be happy to take any questions.
[The prepared statement of Robert Atkinson follows.]
Prepared Statement of Robert Atkinson, Vice President and Director,
Technology and New Economy Project, Progressive Policy Institute
Mr. Chairman, members of the Subcommittee, I am Rob Atkinson, Vice
President and Director of the Technology and New Economy Project of the
Progressive Policy Institute. PPI is a think tank whose mission is to
define and promote a new progressive politics for America in the 21st
century. It is a pleasure to testify before you on the issue of how
middlemen are erecting legal and regulatory barriers to e-commerce. For
several years, PPI has been keenly interested in promoting public
policies to foster e-commerce, since we see it as a major driver of
economic growth. However, we see the growth of laws and regulations
that protect incumbent bricks-and-mortar companies from e-commerce
competitors as a major threat to the growth of e-commerce.
As Americans realize they can save money--often a lot of money--by
buying everything from books and CDs to contact lenses and airline
tickets over the Internet, e-commerce continues to grow.<SUP>1</SUP>
Notwithstanding the recent dot-com shakeout, the U.S. Census Bureau
reports that in the second quarter of 2002 e-commerce retail sales grew
10 times faster than all retail sales. Almost 60 percent of American
households are online and that number continues to grow.
While e-commerce is a progressive force for economic growth, not
everyone benefits from its lower prices, expanded consumer choice, and
enhanced convenience. In particular, a host of brick-and-mortar
retailers, distributors, brokers, and agents--all manner of
intermediaries--are at risk from the tide of e-commerce. For example,
15 percent of airline tickets are now purchased online, reducing the
market share of bricks-and-mortar travel agents. But rather than
compete fairly in the marketplace, travel agents and a host of other
middlemen are seeking to erect all manner of barriers--including
government legal actions, laws, and regulations--particularly at the
state level, to hobble their online competitors. These are not just
about intra-industry fights for competitive advantage; rather, they go
to the heart of consumer welfare as protectionists in many industries
limit consumer choice and keep more efficient competitors from the
market. In a free market economy, consumers, not vested interests
colluding and using the political process to impede competition, should
decide how commerce is structured.
why domestic free trade matters
In the old economy, people purchased most goods and services
through companies or professionals located in their state. Even if
people wanted to buy from out-of-state providers, with the exception of
a small mail order catalogue industry, most consumers couldn't. Today,
the rise of e-commerce enables Americans to buy a wide array of goods
and services from sellers located in different states, all without
going through a local middleman.
Using the Internet to bypass these bricks-and-mortar middlemen can
bring dramatic savings to consumers. Selling homes on the Internet can
reduce agent commissions by half. Buying a car directly from the
manufacturer is estimated to lead to savings of thousands of dollars.
Selling corporate and municipal bonds directly over the Internet can
eliminate most of the 2 percent to 5 percent commission charged by
middlemen. Trading futures contracts through the Internet is at least
50 percent cheaper than through bricks-and-mortar exchanges like the
Chicago Board of Trade. Drawing up a will or other simple contract
online can be 75 percent to 80 percent cheaper than using a lawyer. In
short, e-commerce holds the key to boosting productivity growth in a
host of industries.
But e-commerce is important not just because it saves consumers
money, but because it gives them more choices. Consumers are no longer
dependent upon local businesses to stock the products or provide the
services they want, they can use the Web to search the world and find
what they need.
the middlemen fight back
In PPI's report, The Revenge of the Disintermediated: How the
Middleman is Fighting E-Commerce and Hurting American Consumers, I
documented how incumbent companies in a wide range of industries--
including wine and beer wholesalers, auto dealers, music stores, travel
agents, pharmacies, mortgage brokers, real estate agents, auctioneers,
the U.S. Postal Service, lawyers, radiologists, and even college
professors--are fighting against robust e-commerce competitors.
While some of these battles are fought at the federal level, many
are playing themselves out in the states because that is where many
industries are regulated. In the old economy, where the buyer and
seller met face-to-face in the same state, states were the logical
nexus for applying these industry-specific consumer protection laws and
regulations. However, many of these laws and regulations that may have
not been a barrier when most commerce was intra-state now
unintentionally hinder e-commerce. In other cases, middlemen have been
able to convince state legislators and governors that in the face of
new competition, new protections are needed. In all cases, the simple
fact that national e-commerce businesses are subject to 50 different
state laws can raise their costs of doing business significantly. Some
illustrative cases at the state and federal level are:
<bullet> In Colorado, representatives of the bricks-and-mortar pharmacy
industry successfully lobbied to have legislation introduced to
make it illegal for pharmacy benefit manager programs to impose
lower co-pays for drugs purchased from pharmacies but through
mail order and web orders.
<bullet> In Maine, optometrists lobbied for a prohibition against
releasing prescriptions to their patients, to prevent consumers
from ordering contact lenses online.
<bullet> Texas, at the behest of car dealers and their trade groups,
stopped Ford Motor Co. from marketing used cars on the web,
despite potentially huge savings to consumers.
<bullet> Seventeen states require companies brokering a mortgage to
hire residents of the state and maintain a physical office
there.
<bullet> The National Customs Brokers and Forwarders of America have
fought against a proposal by the federal government to create
an International Trade Data System to electronically collect
all information for the federal government processing of trade.
<bullet> On anti-trust grounds, the travel agents and their trade
associations have lobbied Congress and the administration to
shut down Orbitz, the online travel site.
States differ widely on the extent to which their laws and
regulations hinder e-commerce. In PPI's report, The Best States for E-
Commerce, we ranked the states on 11 factors, including eight directly
related to middleman resistance. The least restrictive states were
Oregon, Utah, Indiana, and Louisiana. The most restrictive were South
Carolina, New Mexico, Alabama, and somewhat surprisingly, California.
But no state had a perfect record; all had at least one law or
regulation that imposed barriers to e-commerce and consumer choice.
These restrictions are costly. PPI estimates that American
consumers annually pay a minimum of $15 billion more for goods and
services as a result of such e-commerce protectionism by
middlemen.<SUP>2</SUP> Net Choice, a coalition of tech firms and
associations that promotes consumer choice on the Internet, is drafting
an analytical report on the costs to U.S. consumers of these barriers
to be published in concurrence with the FTC workshop in October on this
topic. I would anticipate that the reported costs will be even larger
than PPI's preliminary, conservative estimates.
consumer protection or producer protectionism?
To listen to middlemen one might believe that without these laws
consumers would be subject to the worst kinds of abuses. Wine
wholesalers and retailers say that laws prohibiting wine sales on the
Internet are needed to protect state tax revenues and limit underage
drinking. Travel agents claim that they ``act as the public's
representatives and help keep prices low,'' while providing the buying
public with choice.<SUP>3</SUP> Car dealers claim that cars are so
complex that dealers are needed to protect the consumer.<SUP>4</SUP>
Optometrists argue that buying contact lens' online will lead to eye
damage. Pharmacists claim that without them, people will be buying
inferior-quality drugs.
The reality is that states can design regulatory regimes that
protect consumers without squashing competition. States that allow
direct purchases over the Internet require that wine or beer shipments
use a carrier that requires proof of age upon delivery. States can
require that patients present a valid prescription order to obtain a
prescription from an online pharmacy, and can pass reciprocity laws
giving consumers legal recourse to file suit against out of state
doctors.
In many cases, the claims of consumer risk are just a smokescreen
for protectionism. For example, as the suit by 33 state attorneys
general against the American Optometrist Association states, ``The
industry has hidden behind claims of health concerns requiring that
individuals get their contact lenses from certain professionals, but
there is no scientific basis to that claim,'' since the lenses sold
online are identical to those sold in the optometrist's
office.<SUP>5</SUP> Travel agents' argument that they provide consumers
with more choice and unbiased fare selection than online services is
simply not true. The fact that many consumer groups have opposed many
of these protectionist practices, including the auto dealer franchise
and contact lens restrictions, suggests that these laws and regulations
are not designed to protect consumers, but rather to protect producers.
If industries' claims of protecting consumers are a smoke-screen,
what is their real motivation? It's much simpler: They seek to limit
competition. For example, praising a decision by the state of Texas to
prohibit Internet car sales by anyone other than car dealers, one Texas
car dealer was quoted, in a moment of unusual forthrightness, as
saying, ``...I hope they [Internet car dealers] never take over.''
<SUP>6</SUP> The head of the Texas car dealers' association, in
explaining his support of the restrictive franchise laws, stated that
the association would always be about ``the property rights of its
members. Don't expect us to change that.'' We shouldn't expect these
groups to change. But we also shouldn't expect policymakers or the
judiciary to protect the narrow interests of a select few in business
over the broader interests of American consumers.
The disintermediated rely on another argument to defend these laws;
they claim that consumers don't really want to bypass the middleman and
therefore there is no need to go to all the work to dismantle these
protections. On the contrary, if they are right and consumers don't
want to buy online (the experience suggests otherwise), then these
companies have nothing to fear from a level playing field. The National
Association of Automotive Dealers put forth perhaps the most creative
defense. They claim that even if car manufacturers tried to sell cars
directly to consumers online, ``they would still face a myriad of legal
challenges and would run a great risk of breaking the law.''
<SUP>7</SUP> But buying online directly from the manufacturer is
against the law precisely because car dealers have pushed so hard to
make it so.
Finally, many tribunes of industries justifying protectionist
regulatory regimes claim that while other industries may be
protectionists, they are not. Robert J. Maguire, the chairman of the
National Automobile Dealers of America states, ``For one thing, the
role of the middleman is not the same from industry to industry. This
is especially true of new car dealerships; their presence in the local
community has long been recognized as ``in the public interest'' by
state governments and the courts.'' At the end of the day, the fact
that each of these laws or regulations has its own unique justification
and call on the public interest does not mean that it's still not
protectionist.
what can congress do?
Some of these e-commerce battles, like that concerning Orbitz and
online travel, are being waged at the national level. As a result, the
first step Congress and the administration can take is to resist
protectionist pleadings and oppose actions designed to protect the
status quo against e-commerce competition. This requires thoroughly
analyzing the claims made by incumbents regarding consumer harm or
gain.
But the federal government can also play an important role in
helping to dissolve these state-level barriers. As the federal agency
charged with protecting consumer rights, the Federal Trade Commission
is well situated to weigh in on these debates at the state level. For
example, the FTC recently provided formal comments to the Connecticut
Board of Examiners for Opticians on a case regarding a restrictive
interpretation of state laws related to the sale of contact lenses. The
FTC can also file amicus briefs in court, as they did recently in
federal district court in the matter of Powers v. Harris, which dealt
with Oklahoma legislation that prevents anyone other than state-
licensed funeral directors, including online sellers, from selling
caskets. As a result, Congress should support the FTC's e-commerce
advocacy efforts.
While it's important to try to convince states to repeal or modify
their restrictive laws and regulations, at the end of the day,
persuasion is likely to go only so far. For many states, the political
forces for protection are strong and organized (in-state companies)
while the beneficiaries of reform are diffuse (unorganized consumers)
or not even in the state (e-commerce competitors). As a result,
Congress should seriously consider creating on an industry-by-industry
basis uniform national standards that enable e-commerce competitors to
sell more easily in all 50 states. At one time it made sense for states
to regulate local industries since all the activity was between sellers
and buyers in the same state. The rise of national e-commerce makes
this legacy regulatory framework a barrier to economic growth. As a
result, Congress could require states to develop uniform model
legislation that does not discriminate against e-commerce competitors.
The Gramm-Leach-Bliley Financial Services Modernization Act used this
approach to give states four years to have a uniform licensing
requirement or reciprocity for insurance, and if they don't act, the
federal system of insurance regulation would be imposed. This model
could be applied to other areas. For example, Congress should also
consider the possibility of requiring states to develop reciprocal
licensing arrangements so that doctors licensed in any state could
practice in any other, including practicing telemedicine.
In some cases, Congress may need to let e-commerce companies doing
business in areas currently regulated by states to be governed by new
federal statutes. For example, most non-bank financial service
providers are subject to state laws, and are not eligible for national
licensing. Congress should consider developing a national standard
based on best-in-class requirements that states currently impose. E-
commerce financial service companies would still have to abide by
effective consumer protection laws, but they would have only one law to
follow and it would be a law designed to promote e-commerce. There are
other areas where a national standard makes sense. For example, the FTC
should do what it did in 1979 for eyeglasses: simply say that
prescriptions for contact lenses must be given to consumers, who can
then choose where they want the prescription filled.
Some will argue that such federal preemption violates states'
rights. In our view, this is a misleading interpretation of the notion
of states' rights. The framers of the Constitution respected the rights
of states to govern internal activities, but made it clear that they
could not restrict interstate commerce. James Madison wrote, ``Such a
use of the power by Cong (sic) accords with the intention and
expectation of the States in transferring the power over trade from
themselves to the Govt. (sic) of the U. S.'' <SUP>8</SUP> Federalism
for the New Economy is not a paean to unlimited state freedoms. Rather,
it requires a new bargain between Washington and states: on the one
hand giving states more flexibility and accountability in many areas,
as the Leave No Child Behind Act did; and on the other, developing
national e-commerce governing frameworks in areas such as digital
signatures, privacy, SPAM, or e-commerce protectionism. In these cases,
state preemption is required to create a vibrant cross-border e-
commerce marketplace.
conclusion
The economic history of the United States is rife with business,
labor, and professional organizations attempting to use the powers of
government to protect their economic interests. During periods of rapid
technological change, such as the present one, that produce new sets of
winners and losers, political opposition to economic change increases
significantly. It is incumbent upon policymakers at all levels of
government, and in all branches, to resist the pressure from the
disintermediated and ensure that e-commerce competitors are allowed to
compete on a level playing field and not burdened with unfair and
discriminatory rules, regulations, and laws.
Thank you for the opportunity to appear before you.
Notes:
<SUP>1</SUP> It should come as no surprise that a large number of
dot.com companies are in trouble. Much of the investment made in the
last few years was focused on attempts to become a market leader,
beating out all the other companies. There are compelling historical
parallels. The 1930s saw the bankruptcy of scores of automobile
companies, but it was the takeoff point for the explosive growth of the
auto industry. There is no reason to suspect that the current situation
in e-commerce is any different. Moreover, the winners in e-commerce may
not be the pure play dot.coms, but instead might be the ``clicks and
mortar'' companies that use the Net to sell directly to consumers. In
this case, pure-play dot.coms might not grow significantly, but e-
commerce would.
<SUP>2</SUP> Robert D. Atkinson, Revenge of the Disintermediated,
Progressive Policy Institute, January 2001 at http://www.ppionline.org.
<SUP>3</SUP> Elizabeth Wasserman, ``Stuck in the Middle,'' Industry
Standard (March 6, 2000). Wasserman quotes Paul Ruden.
<SUP>4</SUP> David Hyatt, ``Franchise Laws in the Age of the
Internet,'' White Paper, National Automobile Dealers Association,
McLean, VA, January, 2001.
<SUP>5</SUP> State of California, et al against The American
Optometric Association, et, al, in United States District Court,
Eastern District of New York, January 17, 1997.
<SUP>6</SUP> Robert Elder and Jonathan Weil, ``To Sell Cars in
Texas, Online Firms Are Forced to Enter the Real World,'' The Wall
Street Journal, January 26, 2000, Texas Journal, p. T1.
<SUP>7</SUP> NADA, op. cit.
<SUP>8</SUP> James Madison to Joseph C. Cabell, 18 Sept. 1828.
http://press-pubs.uchicago.edu/founders/documents/
a1__8__3__commerces18.html.
Mr. Stearns. Mr. Cohen?
STATEMENT OF TED COHEN
Mr. Cohen. Mr. Chairman, Ranking Member Towns and members
of the subcommittee, my name is Tod Cohen. I'm Associate
General Counsel for Global Policy at eBay. Thank you for
inviting eBay to comment on the problem of unnecessary and
harmful State regulation of electronic commerce. We share the
concern that much of this regulation does far less to protect
the public than to protect entrenched monopolies and
oligopolies. These regulations do not protect consumers, but
penalize them.
We applaud you, Mr. Chairman, for calling this hearing to
shine a spotlight on this disturbing trend.
eBay is the world's first and largest on-line trading
community. Founded in September 1995, eBay has become the most
popular shopping site on the internet. eBay brings together
more than 50 million buyers and sellers from around the world
to buy and sell practically anything. Last year, eBay users
transacted over $10 billion in sales.
Today, there are more than 10 million items for sale on our
site and more than 1.5 million new listings a day. Sellers on
eBay, to remain competitive, must charge prices that are
competitive with both on and off line retailers. Such price
competition is great for consumers, but troubling to the
entrenched businesses that have been able to set prices
unfairly for years without any repercussion. E-commerce forces
them to face an unpleasant prospect: competition.
In order to prevent or ``manage'' competition, these
interests have used their allies in State and local government
to apply existing laws and regulations to internet companies in
a discriminatory manner. They justify these new, discriminatory
barriers with spurious claims that e-commerce may harm
consumers.
My testimony today focuses on a few of the barriers that
States have created and are considering that could inhibit the
growth of e-commerce. Mr. Chairman, the introduction of your
bill earlier this year, H.R. 2421, the ``Jurisdictional
Certainty Over Digital Commerce Act'' points the way to a
solution to this problem. H.R. 2421 would ensure a level
playing field for e-commerce companies, thereby improving
consumer choice.
First, let me talk about State regulations that impact the
goods that we sell on the site. They already demand time-
consuming and cumbersome efforts by our sellers to achieve
compliance. The scope of goods and services on eBay alone is
truly staggering, from BMWs to bulldozers, from antique
furniture to high tech computers. Every single one of these
sales could potentially be subject to regulation by one of the
50 States or even a county or municipality, keeping up to date
with these potential regulations and existing regulations is
practically impossible. However, we do believe that it is
essential to create a safe and legal marketplace.
What is a constant struggle for eBay is completely beyond
the resources of most of our sellers and other smaller e-
commerce companies. On eBay alone we have 69 categories of
goods and services that are either prohibited, questionable or
infringing. Prohibited items include tobacco, prescription
drugs, lock picking devices and postage meters. Certain items
that may be listed that are questionable include event tickets,
autographs and antique slot machines. To educate our buyers and
sellers, we provide hundreds and hundreds of pages of
explanations of why each category is included and under what
circumstances, if any, certain items can be sold. Many
prohibited or questionable items are included only because of
State laws. One area where State and local laws are extremely
varied and confusing to consumers are event tickets. Other
areas of inconsistent State regulations include travel
packages, packaged seeds and antique slot machines.
Now let me quickly turn to State auction laws that some
would like to apply to eBay and our sellers. Even though we
allow bidding for certain items on our site, eBay is neither an
auctionsite nor an auction house, nor are our sellers
auctioneers. We do not take possession of the goods, nor do we
make any representation about the goods. We are essentially a
cyber mall that is an unlimited number of store fronts where
things can be sold and space to rent and sell their goods. We
employ hundreds of individuals around the world to reduce fraud
on our site. Nonetheless, some State regulators and entrenched
middle men with whom they collaborate want to interpret State
auction laws or pass new ones to regulate eBay, our sellers and
other on-line marketplaces.
The licensing regimes are outrageous. For example, in North
Carolina, you are required to pass an examine to prove your
auctioneering aptitude, but you cannot take the exam until you
have completed a mandatory 80-hour course on auctioneering. The
curriculum includes 16 hours or bid calling, voice control,
proper breathing technique and the use and sequence of numbers.
Supplemental courses include tobacco, heavy equipment and most
important for internet sales, hygiene, personal appearance and
body language, something our late night sellers really need to
improve.
Even more significant impediments would result because of
substantive auction law provisions.
We have been working with one State that has attempted to
apply these laws to us, Illinois, and we were successful in
working with their licensing group to pass a law this year that
would restrict the regulations and switch from a licensing
scheme to a registration scheme. Over all, several other State
legislatures have also proposed bills that would have regulated
eBay or our sellers. A patchwork of these inconsistent State
laws regulating the internet will hinder competitive
marketplaces such as eBay. To protect consumers and allow them
to enjoy the maximum benefits, Congress needs to enact bills
like H.R. 2421.
Thank you for this opportunity to discuss these issues with
the committee today. I'm available to answer any questions you
may have.
[The prepared statement of Tod Cohen follows.]
Prepared Statement of Tod Cohen, Associate General Counsel--Global
Policy, eBay Inc.
Mr. Chairman and members of the Subcommittee: My name is Tod Cohen,
and I am Associate General Counsel for Global Policy at eBay Inc. Thank
you for inviting eBay to comment on the problem of unnecessary and
harmful state regulation of electronic commerce. We share the concern
that much of this regulation does far less to protect the public than
to protect entrenched monopolies and oligopolies. The net result of
these regulations is not to protect consumers, but to penalize them. We
applaud you, Mr. Chairman, for calling this hearing to shine a
spotlight on this disturbing trend.
eBay is the world's first and largest online trading community.
Founded in September 1995, eBay has become the most popular shopping
site on the Internet when measured by total user minutes, according to
Media Metrix. eBay brings together buyers and sellers from across the
United States and around the world to facilitate the sale of goods and
services by a diverse community of individuals and businesses. Last
year, eBay users transacted over $10 billion in sales.
The vision of Pierre Omidyar in creating eBay was to design the
ultimate, efficient marketplace. Today, with over 50 million registered
users worldwide and over 10 million listings, eBay is fulfilling that
vision. Buyers and sellers purchase goods and services easily, quickly,
and cheaply. Whether selling through a bidding process or fixed-price
format, sellers on eBay must charge prices that are competitive not
just with other eBay sellers, but also with other on and offline
retailers. Similarly, retailers in the traditional ``brick-and-mortar''
world can no longer base their prices merely on what their local market
dictates--they must now consider the price that consumers will pay on
eBay and at other Internet sites.
Such price competition is great for consumers, but troubling to the
entrenched monopolists and oligopolists that have been able to set
prices unfairly for years without repercussion. E-commerce forces them
to face an unpleasant prospect: competition. In order to prevent or
``manage'' competition, these ``middlemen'' have used their allies in
state and local government to apply existing laws and regulations to
Internet companies in a discriminatory manner and to enact laws and
regulations that treat interstate e-commerce companies differently from
offline intrastate companies. They justify these new, discriminatory
barriers with spurious claims that e-commerce may harm consumers. Far
too often, though, these claims simply seek to mask the fact that the
middlemen are just trying to protect their ``turf.''
My testimony today will focus on a few of the barriers that states
have created that could inhibit the growth of e-commerce and the need
for Congress to begin to examine in more detail the growing problem of
unnecessary and harmful state regulation of e-commerce. Mr. Chairman,
the introduction of your bill H.R. 2421, the ``Jurisdictional Certainty
Over Digital Commerce Act'' points the way to a solution to this
problem. By clearly prohibiting state regulation over commercial
transactions of goods and services conducted over the Internet, H.R.
2421 would ensure a level playing field for e-commerce companies,
thereby improving consumer choice.
i. the issue--state regulation of internet commerce
A. eBay's Efforts
Already, certain state regulations demand time-consuming and
cumbersome efforts by eBay and other e-commerce businesses to achieve
compliance. These state regulations have the effect of penalizing
consumers by limiting their access to goods and services offered online
and increasing the prices consumers must pay. Moreover, these ``rules
of the road'' do not fulfill their stated goal of increasing consumer
protection.
The scope of goods and services available for sale on the Internet
is almost limitless. On eBay alone, sellers from around the world
currently offer over 10 million items for sale--over a million new
items a day. The range of items is staggering: from BMWs to bulldozers,
from antique furniture to hi-tech computers, from the oldest 78s to the
most recent DVDs. Currently, over 18,000 categories of goods and
services are being bought and sold on eBay. Every single one of these
sales could, potentially, be subject to regulation by one of the 50
states, or even by a county or municipality. Keeping up to date with
all of those potential regulations is impossible; nevertheless, we do
our best to determine which federal and state laws apply to potential
listings on our site because we believe that it is essential that we
create a safe and legal marketplace.
What is a constant struggle for eBay is completely beyond the
resources of smaller e-commerce companies, many of which are eBay
merchants. They cannot analyze and develop compliance strategies for
the laws of the hundreds of jurisdictions where their customers reside.
Compliance with myriad, often inconsistent state and local laws should
not serve as a barrier to entry to participate in the electronic
marketplace.
In order to assist our sellers with the sale of certain goods, we
created a list of ``Prohibited, Questionable and Infringing Items.''
This list is found at http://pages.ebay.com/help/community/png-
items.html. It includes 69 categories of goods and services that either
(1) may not be listed on eBay (``prohibited items''), including things
like credit cards, tobacco, prescription drugs, lock-picking devices
and postage meters; (2) may be listed under certain conditions
(``questionable items''), such as event tickets, antique slot machines
and autographs; or (3) may be in violation of certain copyrights,
trademarks or other rights (``infringing items''). Furthermore, in
order to educate consumers, our site provides hundreds of pages of
explanations of why each category is included and under what
conditions, if any, certain items can be sold.
Many of the items that are prohibited or questionable have been
categorized that way because of state laws. For example, one area where
state and local laws are extremely varied, confusing to consumers, and
almost impossible to monitor, is the resale of tickets to entertainment
events (including sporting events, concerts, and plays). In order to
assist users and to promote lawful ticket sales, eBay has attempted to
identify the states that regulate the re-sale of event tickets and to
provide its users with that information. We have identified seventeen
such states.
State and local ticket regulations range from prohibitions against
the sale of tickets at any price above face value to prohibitions
against sales at a price of $5 or 25% (whichever is greater) above face
value. When a seller in one of the regulated states attempts to sell an
event ticket, an automated disclaimer is added to that seller's item
description explaining the applicable state regulation to potential
buyers. This process is a difficult and inefficient experience for both
eBay and our users. eBay has to try to determine both the seller and
buyer's respective states of residence based on their eBay registration
and their billing information. Identifying the state of residence of
those buyers can be impossible because we do not require buyers to
verify their location (just as offline marketplaces do not require
proof of residence from a person who enters their store).
This is just one example of the numerous goods that are either
prohibited or extremely hard to sell on the Internet simply because of
inconsistent State regulations. Others include travel packages,
packaged seeds and antique slot machines. In each case, inconsistent
state regulation is undermining the ability of eBay to provide the
ultimate efficient marketplace that our buyers and sellers seek and
deserve.
B. Auction Laws
Beyond the current plethora of state restrictions on the sale of
specific goods, there is also the threat that states will try to
regulate modes of commerce. For instance, while eBay is neither an
auction site nor an auction house, the listings on its site are often
referred to as ``auctions'' because of the bidding process for which
eBay often offers an online venue. As a result, some state regulators,
and the entrenched middlemen with whom they collaborate, want to
interpret state auction laws as regulating eBay and other online
marketplaces that involve bidding. Recognizing that in most cases these
laws cannot be interpreted in that way, they are also pushing for new
laws to hobble their new Internet competition. The passage of such laws
will only harm consumers and protect inefficient business models.
Furthermore, the harm to eBay, our army of entrepreneurs, and our
millions of customers could be significant.
Generally, auction laws require an auctioneer or auction house to
obtain a license to conduct auctions. Obtaining such a license in all
of the states with auction laws would be cumbersome and very costly.
eBay and other online marketplaces potentially could do this; but
millions of individual and small business eBay sellers certainly could
not. Such licensing regimes could require every online seller to obtain
state licenses (even in distant states) before he or she can sell goods
on eBay.
In addition, these licensing regimes can be remarkably burdensome.
For example to obtain an auctioneer license in North Carolina you are
required to pass an exam to prove your auctioneering ``aptitude.'' But,
you cannot take the exam until you have completed a mandatory 80-hour
course on auctioneering.
The curriculum includes 16 hours of ``bid calling, voice control,
proper breathing techniques and use and sequence of numbers . . .''
These arcane requirements make no sense for sellers trading goods and
services over the Internet. Other core requirements include 8 hours of
``Auction Law: Rules and Regulations,'' and a variety of supplemental
courses in such subjects as ``Tobacco,'' ``Cattle & Livestock,''
``Heavy Equipment,'' ``Farm Machinery,'' and most important for
Internet sales, ``Hygiene, Personal Appearance and Body Language.''
Beyond licenses, more significant potential dangers arise because
of substantive auction law provisions. The most onerous of those common
provisions is the requirement that the auctioneer or auction house be
responsible for the items being auctioned and thus liable for any
misrepresentation of the items being auctioned. Such a requirement
makes sense as applied to a classic auctioneer or auction house because
they actually take possession of the goods that are being sold; they
review the condition of the goods; they authenticate the origins of the
goods; they make sure that the auctioned goods are what is being
advertised. To comply, traditional auctioneers charge more than four to
five times the price that eBay charges sellers. In addition,
traditional auctioneers charge up to 10% of the final value to buyers.
In all but the most limited circumstances, eBay costs buyers nothing.
Applying this type of requirement to eBay, on the other hand, does
not make sense because eBay does not conduct auctions. It never takes
possession of the goods that are sold on its site nor does it make any
representations about those goods. eBay is essentially a ``cybermall''
that has an unlimited number of storefronts where individuals and
businesses can ``rent'' space to sell their goods and services. As a
cybermall, eBay cannot be responsible for the representations that are
made about the over one million new items that are listed each day and
continue to remain a viable business. Requiring eBay to comply with
state auction laws would simply destroy the benefits buyers and sellers
derive from eBay. Moreover, the traditional purpose of state auction
laws is to ensure that sellers receive the funds from the sale of their
property; this is not a problem for eBay since sellers arrange for
payment directly with buyers. Thus, perhaps most important of all,
applying these laws would not protect buyers or sellers.
ii. a possible resolution--the illinois compromise
In late 1999, after the Illinois legislature amended the Illinois
Auction Licensing Act to apply to the Internet, relevant state
regulators contacted eBay to discuss the applicability of Illinois'
auction laws to eBay. Earlier this year, after extensive discussions,
the Illinois Office of Banks and Real Estate (``OBRE'') agreed to work
with us to amend the Illinois law. Instead of trying to fit a new
business model into an existing regulatory structure, OBRE worked with
us to craft a separate category of company that was not regulated in
the same way as traditional auctions. The new bill was passed on May
23, 2002, and the governor signed it into law on August 15, 2002.
Instead of a strict licensing requirement, the new law creates a simple
registration scheme to allow individuals to contact businesses like
eBay if problems arise.
iii. the threat remains
While eBay would prefer not to register in states in which it is
not physically located, we understand and respect the legitimate need
of states to protect their citizens from bad actors. As a result, we
are not here complaining about a statute like the Illinois registration
act, as it does not threaten our business, our sellers, or e-commerce.
We are, however, concerned about states that attempt to apply auction
laws to eBay and that generally want to use state legislation and
regulation to benefit their local businesses to the detriment of
interstate e-commerce.
In the past year alone, several state legislatures have proposed
bills that arguably would have regulated eBay and eBay's sellers. For
instance in Missouri, the legislature considered a bill that
potentially could have regulated online sales. The proposed bill
defined auctions so broadly that it could have potentially included
sales by sellers on eBay. Likewise, California and New York both
proposed revisions to their current laws that were broad enough that
they could arguably have applied to eBay and eBay's sellers. While
these bills were defeated, they serve as examples of state proposals
that could have substantially impacted e-commerce. A patchwork of
inconsistent state laws regulating the Internet will hinder competitive
marketplaces such as eBay that result from this incredible medium.
We recognize that much of this state regulation is vulnerable to
legal challenge under several federal constitutional doctrines, as well
as for inconsistency with applicable federal statutes, but expensive
and interminable litigation is not the solution. In order to protect
America's consumers and allow them to enjoy the maximum benefits from
the competition that e-commerce can unleash, Congress needs to enact
bills like H.R. 2421 that will prohibit state regulation over
commercial Internet transactions.
Thank you for this opportunity to discuss this issue with the
Committee today. I am available to answer any questions you may have.
Mr. Stearns. I thank the gentleman.
Mr. Sloane?
STATEMENT OF DAVID SLOANE
Mr. Sloane. Good morning, Mr. Chairman. My name is David
Sloane. I'm President of the American Vintners Association, a
national tarde association of over 650 wineries in 48 States. I
want to commend you for holding this important hearing on State
impediments to e-commerce and I want to commend the Federal
Trade Commission for also doing this.
The number of wineries in the United States has exploded in
the past 25 years, rising from approximately 800 in 1975 to
2700 today and wineries now exist in all 50 States. Because
wineries bring much needed investment capital, stable
employment and significant tourism to depressed rural
economies, States have played an important role in helping the
industry to develop. Unfortunately, however, America's wineries
are also poster children for State impediments to e-commerce.
Laws, in this case, which do more to protect the economic
interest of in-state wholesalers than to further legitimate
policy purposes such as preventing underage access or
collecting taxes.
Following the repeal of prohibition in 1933, most States
adopted a mandatory three-tier system of distribution requiring
producers to sell only through wholesalers who in turn sell to
retailers. This system worked reasonably well until the 1980's
when consumer demand for boutique wines began to gather
momentum. Despite changing consumer tastes, wholesalers have
generally been unwilling to take on and properly service
smaller wineries with limited production capacity and demand,
preferring to stick with established national brands that
generate substantial sales volume.
The requirement to sell through wholesalers flies in the
face of an obvious reality. There are more than 25,000 labels
nationwide and wholesalers simply will not commit the resources
to servicing small wineries. Even in a large and vigorous
market like Illinois, only about 525 American wine brands are
available, about 2 percent of the total produced in the United
States. Small wineries are then effectively locked out of the
commercial mainstream.
To remedy the problem, wineries have aggressively lobbied
State legislatures to permit the interstate shipment of wine to
consumers, an alternative market mechanism that has gained
increasing currency with the advent of e-commerce. In all, some
23 States now have laws or regulations permitting consumers to
buy limited quantities of wine from out of State wineries.
While wholesalers have been unwilling to represent small
wineries, they have been more than willing to exercise their
considerable political clout in State capitals across the
country to oppose direct shipment and even to make it a crime.
Under the guise of protecting citizens against the evils of
alcohol, they have won enactment of felony statutes in five
States, Florida, Georgia, Kentucky, Maryland and Tennessee, and
misdemeanor statutes in another 18.
Preventing underage access and collecting taxes are the
primary justifications for State bans of interstate wine sales.
However, experience in the States that do permit such commerce
reveals the transparency of these arguments. With the exception
of wholesale or orchestrated stings, we are not aware of any
prosecutions involving the sale of wine to minors via the
internet. Of course, the same cannot be said of the three-tier
system where millions of illegal alcohol sales to minors are
consummated every year.
With respect to tax collection, States which allow the
interstate shipment of wine to consumers report no appreciable
decrease in excise tax collections from lost wine sales. In
those States which make payment of excise taxes a condition of
holding a direct shipping permit, wineries willingly make such
payments. Given the cost of collecting State excise tax
receipts on wine shipped from other States, however, some
States forego such collections. The so-called reciprocal
shipment States, those that allow consumers to buy from
wineries in other States and vice versa, assume the revenue
implications of direct shipping to be a wash.
To seek redress, wineries and consumers have now challenged
the constitutionality of State laws, banning the interstate
shipment of wine in seven States, arguing that such
discrimination is impermissible under the Commerce Clause,
notwithstanding the powers granted to States under the 21st
Amendment.
Hopefully, this issue will soon be ripe for Supreme Court
consideration. While we have not been successful in all of
these cases, virtually every Federal judge that has examined
this conflict has concluded that less extensive and intrusive
mechanisms than the mandatory three-tier system could
accomplish these State interests.
Congress has a clear constitutional role to play in
developing ground rules for when and how States may interfere
with interstate commerce and because the internet greatly
enhances the potential for remote commerce, it is imperative
that action be taken soon. State barriers to on-line wine sales
and rigid adherence to the three-tier system are impeding the
successful development of the American wine industry and the
potential benefit of that economic activity for depressed rural
economies.
By statute, the Congress should establish a test for
balancing State interests with the basic and fundamental right
to a national marketplace embodied in the Commerce Clause. In
so doing, Congress can provide important guidance to the courts
and to the States. In Central Hudson Gas Electric versus Public
Service Commission, a 1980 Supreme Court case, the Supreme
Court developed an excellent balancing test for a very similar
purpose that the Congress should look to as it develops
legislation to eliminate unnecessary barriers to all forms of
e-commerce.
The Central Hudson test requires one, the demonstration of
a substantial State interest; two, a showing that the
regulation or law in question directly advances the
governmental interests; and three, that the regulation or law
is not more extensive than necessary to serve the stated
purpose. Such a law would help to mitigate the special interest
political power of local businesses and ensure that parochial
State interests do not supersede the national interest of free
and unfettered commerce among the States.
On behalf of America's small craft wineries, I urge this
subcommittee to advance legislative to require States to meet
such a standard so that these businesses can be freed to serve
consumers without undue and unreasonable impediments.
Thank you.
[The prepared statement of David Sloane follows.]
Prepared Statement of David Sloane, President, American Vintners
Association
Good morning, my name is David Sloane. I am President of the
American Vintners Association, a national trade association with over
650 wineries in 48 states. I want to thank and commend the Subcommittee
for holding this hearing to examine state barriers to e-commerce, and
whether such barriers serve rational policy purposes, or amount to
economic protectionism.
The number of wineries in the United States has exploded in the
past 25 years, rising from approximately 800 in 1975 to over 2,700
today. Indeed, as an article in USA Today recently observed, wineries
are now a part of the rural farm economy in all 50 states. A large
percentage of this growth has occurred in just the past twelve years.
Since 1990, the industry has roughly doubled from 1,400 wineries to its
current number.
While California remains the premier winegrowing state--comprising
roughly half the nation's wineries and over 90% of the production--
there are high concentrations of wineries (in rank order) in
Washington, Oregon, New York, Ohio, Virginia, Pennsylvania, Texas,
Missouri, Colorado, New Mexico, Illinois and Michigan. These states
have a minimum of 30 wineries each, and the top three--Washington,
Oregon and New York--have more than 150 apiece.
States have played a major role in encouraging this remarkable
growth because wineries bring much-needed investment capital, stable
employment, and significant tourism to depressed rural economies. In
fact, for every bottle of wine sold at a farm winery, there is an
investment of approximately $50 in land, development, equipment and
working capital. Suffice it to say, farm wineries are a living
embodiment of the American ideal of entrepreneurial craft spirit.
mandatory three-tier distribution system
Unfortunately, America's wineries are also ``poster children'' for
state impediments to e-commerce--laws in this case--which do more to
protect the economic interests of in-state wholesalers than to further
legitimate policy purposes, such as preventing underage access or
collecting taxes.
Following the repeal of Prohibition in 1933, most states adopted a
mandatory three-tier system of distribution, requiring producers to
sell only through wholesalers, who in turn sell to retailers. This
system worked reasonably well until the 1980s, when consumer demand for
``boutique'' wines began to gather momentum. Despite changing consumer
tastes, wholesalers have generally been unwilling to take on, and
properly service, smaller wineries with limited production capacity--
preferring to stick with national brands that generate substantial
sales volume.
This requirement to sell through wholesalers flies in the face of
an obvious reality: Wholesalers do not sell, or properly service, the
products of smaller wineries. There are too many labels nationwide--
some 25,000 in total. Even in a large and vigorous market like
Illinois, only about 525 American brands are available--about 2 percent
of the brands produced by U.S. wineries. The three-tier system just
does not work for small wineries.
As the number of brands and labels has proliferated, the challenge
of securing wholesaler representation has become a crisis for small,
and even medium-sized, wineries. This ``market access'' crisis is
further exacerbated by the massive consolidation that has occurred
within the wholesale tier. By some estimates, the number of wine and
spirits wholesalers has declined from a high of 5,000 in the 1950s to
less than 400 today.
the direct shipping alternative
To remedy the problem, wineries have aggressively lobbied state
legislatures to permit the interstate shipment of wine to consumers--an
alternative market mechanism that has gained currency with the advent
of e-commerce. The most functional form of direct shipment legislation
has been the ``reciprocal'' shipment concept, which permits consumers
to receive a small quantity of wine each month from wineries in other
states affording the same reciprocal privilege to consumers within
their own state.
Thirteen states have enacted reciprocal shipment laws. Another nine
states have enacted ``permit'' laws, which, to varying degrees, also
facilitate the interstate shipment of wine to consumers. However, it is
worth noting that several of these laws--whether because of permitting
fees, burdensome paperwork requirements, or unwieldy purchasing
mechanisms--have not been utilized. Indeed, a few such laws were
drafted by wholesaler interests to placate state legislatures that were
being pressured by consumers to do something. Additionally, a few
states, and the District of Columbia, have made regulatory allowances
for small wine shipments.
economic protectionism
While wholesalers have been unwilling to represent small wineries,
they have been more than willing to exercise their considerable
economic and political clout in state capitals across the country to
oppose direct shipment, and to make it a crime. Under the guise of
``protecting citizens against the evils of alcohol,'' they have won
enactment of felony statutes in five states (Florida, Georgia,
Kentucky, Maryland and Tennessee), and misdemeanor statutes in another
18 states.
Indeed, as a direct consequence of wholesaler lobby campaigns, more
than half of the states--including several with large populations--have
effectively shut all but the top 100 wineries out of their markets by
insisting that all products go through the mandatory three-tier system.
These protectionist laws hurt wineries, to say nothing of
consumers, in many ways. For example, they prevent wineries from
selling and shipping wine to visiting tourists from states that
prohibit interstate shipment; from including such consumers in their
wine club offerings; and, from fulfilling gift orders to consumers from
such states.
Preventing underage access and collecting taxes are the primary
justifications for state prohibitions against interstate wine sales.
However, experience in the 23 states that do permit interstate wine
sales to consumers reveals the transparency of these arguments. In
fact, with the exception of wholesaler-orchestrated stings, we are not
aware of any prosecutions involving the sale of wine to minors via the
Internet. Of course, the same cannot be said of the three-tier system,
where millions of sales to minors are consummated every year.
With respect to tax collection, states which allow the interstate
shipment of wine to consumers report no appreciable decrease in excise
tax revenues from lost wine sales. In fact, a model law has been
developed which protects both excise and sales taxes by licensing out-
of-state shippers, and requiring them to collect and forward these
taxes.
State statutes banning the direct shipment of wine protect the
pecuniary interests of politically powerful in-state wholesalers, and
raise an insurmountable barrier to the consummation of commerce between
willing consumers and out-of-state sellers. This strange confluence is
a product of raw local political power of precisely the sort that the
Constitution seeks to discourage: ``[Each State] would pursue a system
of commercial policy peculiar to itself . . . States might endeavor to
secure exclusive benefits to their own citizens.'' (Federalist VII).
The contention that these protectionist laws serve some legitimate
policy purpose is merely a ruse, designed to mask blatant local
favoritism. Virtually every Federal judge that has examined this
conflict has concluded that less extensive and intrusive mechanisms
than the mandatory three-tier system could accomplish legitimate state
interests.
There is a need for a safety valve, and that safety valve is to
allow the limited direct shipment of wine to consumers. The Supreme
Court has commented on the importance of a national marketplace for
farmers and craftsmen: ``Our system, fostered by the Commerce Clause,
is that every farmer and every craftsman shall be encouraged to produce
by the certainty that he will have free access to every market in the
Nation . . . Likewise, every consumer may look to the free competition
from every producing area in the Nation to protect him from
exploitation by any. Such was the vision of the Founders; such has been
the doctrine of this Court which has given it reality.'' H. P. Hood &
Sons, Inc. v. Du Mond, 336 U.S. 525 (1949) [Cited favorably in 1994
West Lynn Creamery].
Members of the American Vintners Association are both farmers and
craftsmen.
congress can and should act
Congress has a clear constitutional role to play in developing
ground rules and boundaries for when and how states may interfere with
interstate commerce--and because the Internet greatly enhances the
potential of remote commerce, it is imperative that Congress act soon.
State barriers to online wine sales, and rigid adherence to the three-
tier system are impeding the successful development of the American
wine industry, and the significance of that economic activity for
depressed rural economies. In addition, these laws are raising the ire
of consumers, who fail to comprehend why they cannot order and take
delivery of wine from their favorite winery.
By statute, the Congress can and should balance the public policy
needs of the states with the basic and fundamental right to a national
marketplace embodied in the Commerce Clause. In doing so, it can also
provide important guidance to the courts.
In Central Hudson Gas and Electric v. Public Service Commission,
447 U.S. 557 (1980), the Supreme Court developed an excellent balancing
test for a very similar purpose that the Congress should consider as it
looks to develop legislation to eliminate unnecessary barriers to e-
commerce. The Central Hudson test requires: 1) the demonstration of a
substantial state interest; 2) a showing that the regulation or law in
question directly advances the governmental interest; and, 3) that the
regulation or law is not more extensive than necessary to serve the
stated interest.
It can be argued that every commercial regulation serves some
legitimate policy concern or another. To mitigate the special interest
political power of local businesses and to ensure that the concept of a
national marketplace is not subverted or unreasonably attenuated,
Congress should provide clear statutory guidance. Parochial state
interests should not be allowed to supercede the national interest of
free and unfettered commerce among the states.
On behalf of America's small ``craft'' wineries, I urge this
Subcommittee to advance legislation to require states to meet such a
standard so that these businesses can be freed to serve consumers
without undue and unreasonable impediments. Thank you.
Mr. Stearns. I thank the gentleman.
Mr. Zeidner?
STATEMENT OF JOE ZEIDNER
Mr. Zeidner. Thank you. My name is Joe Zeidner. I'm General
Counsel with 1-800 CONTACTS. I appreciate you allowing us to
come here today.
What I'd like to do, if it's okay, is just talk to you a
little bit about our business. I have prepared something in
writing, but----
Mr. Stearns. We'll be happy to put it as part of the
record, your written statement. By unanimous consent, so
ordered.
Mr. Zeidner. Contact lenses are perfect for e-commerce.
They're small, light, easy to ship and they're exactly the same
as the contact lenses you buy from your eye doctor. These
lenses right here are the fastest growing portion of the
industry. Daily lenses. You throw them away every day. This is
a 3-month supply. Most popular right now is 2 week lenses. This
is a 3-month supply right here. Monthly lenses comes in vials
like this. This is a 3-month supply, if you wear them each
month.
Although there have been tremendous advances in the
technology of contact lenses, there's also been tremendous
advances in the distribution method of contact lenses. It used
to be you'd only buy them from your eye doctor. Now you can buy
from the internet, from mass retailers, pretty much anywhere
you'd like to. However, there is a myriad of State laws and
regulations that's been erected that stifle competition and
don't allow consumers the right to choose? Why do you ask or
would you ask or do we ask? Why are there laws and impediments
in place that wouldn't allow people to be able to buy where
they want to? Because there's an anomaly in health care. Eye
care providers sell the products that they prescribe. And when
they play both retailer and prescriber, there comes a natural
conflict of interest that spins off a myriad of State laws and
regulations that are intended both to protect the health of the
consumers, but also to protect these retailers from
competition.
Originally, it was necessary to have eye care doctors sell
what they prescribe. I don't know if you remember, but when
contact lenses first came out they were hard lenses and they
were made specifically for your eye. You might remember
basketball games or movie theaters where they would stop
everything and say stop, there's a contact lens on the floor.
It's because it couldn't be replaced. It was custom made for
your eye. That's no longer the case. These are made by the
millions now. They're stamped out and they're the same every
single time. There's 10,000 different parameter that people can
wear, so they're perfect for centralized distribution.
The retailer around the corner, the eye doctor who does
your eye exam can't possibly carry all the different contact
lenses in stock, but we can, with one centralized distribution
facility.
Today, there's no need to buy your contact lenses only from
your eye doctor. You should be able to buy them from anywhere
you want to, Cosco, Walmart, 1-800 CONTACTS or your eye doctor.
However, there are State laws that have been put in place and
regulations that have been put in place to stifle competition.
They really fall into three main categories.
First off, prescription release. In about half the States,
believe it or not, you have no right to your contact lens
prescription. Although there's a Federal law that requires
mandatory release of your eyeglass prescription, you have no
right, federally, and in about half the States, to your contact
lens prescription. Once again, this is a throw back to the days
of contact lenses being custom fit to your eye. Therefore,
there would be no reason to give you a prescription.
Second, and also as a spin off of that, in some States
where you are allowed to have your prescription, you have to
sign a waiver to get your own prescription or in other States
you have to have an original hand-signed copy of your
prescription, not a fax, not an e-mail, not a phone call, an
original hand signed copy from your doctor before you can
purchase from anyone else other than him. That's the first area
where State laws impede competition in our industry.
Second, the prescription date is sometimes by State law
unduly short, without medical reason, to force you come back to
your eye doctor for another exam and hopefully for your eye
doctor to purchase contact lenses from him.
I would like to submit for the record an article that was
in a major optometry magazine that's called ``If You Can't Beat
Mail Order, Joint Them.'' And in this article, I'll just read
one quote, Dr. Goldberg, who is an emeritus fellow of the
American Academy of Optometry says ``patients should obtain
mail order lens replacement only during the service life of the
lens prescription, therefore practitioners must limit the
service life of a lens prescription.''
I recommend a 6-month interval. Hard lenses were much more
dangerous for your eye because you would wear them for many
years at a time. These lenses you throw away every day, yet the
profession is advocating that you come in every 6 months so
that you come back in and buy your lenses from them. That's the
second area of State law that we've seen that impedes
competition.
And probably the most insidious area is requiring the brand
name on the prescription and prescribing a boutique or private
label brand. The latest--if you're able to get a copy of your
prescription and buy where you want, if you get a prescription
for a brand that is only sold by your doctor's office, you
really don't have any choice. That's where we're seeing a lot
of the growth in the industry, is in the private label section.
I'd also like to submit one other document for the record
that was also in the Contact Lens Spectrum Magazine that's
entitled ``Using Private Label Lenses to Keep Patients in the
Practice.'' And in this article, the optometrist says ``we use
private labeling a lot. I think that originally we were fitting
lenses from Ciba, Bausch & Lomb and would get calls from
patients and 1-800 CONTACTS asking us for their contact lens
prescriptions. I wanted to use another strategy to prevent that
from happening.
Now when patients want to order a lens, they like the
particular lens that we provide. It's a private label. So they
can't get it anywhere else. It makes it a lot easier for them
to come back to us. If they go to Walmart or COSCO or some
place like that and ask do you have this lens, COSCO or Walmart
or 1-800 would say yes, we do, but it's a different name on the
box. This creates the problem within the patient's mind about
whether or not it's the same lines. I often don't give the
patients a choice. I don't say this is a private label lens. I
just say this is the best lens for you. It's the one you should
be wearing.''
We think that this industry is ripe for congressional
investigation. We think that there are health concerns with
contact lenses and we completely agree with that. We just think
that those concerns are not dependent on where you buy your
contact lenses, that people's health should be balanced with
their right to choose where to buy contact lenses. Thank you.
[The prepared statement of Joe Zeidner follows.]
Prepared Statement of Joe Zeidner, General Counsel, 1-800 CONTACTS,
Mr. Chairman and Members of the Subcommittee, my name is Joe
Zeidner, General Counsel for 1-800 CONTACTS. Our company sells
replacement contact lenses to consumers through an Internet web site
and a toll-free telephone number. I appreciate the opportunity to
appear before the Subcommittee today.
I commend you, Mr. Chairman, for holding this hearing to examine
the impediments imposed by states on e-commerce. When it comes to
contact lenses, this issue impacts the pocket books--and the ocular
health--of a great many Americans. Today, thirty-five (35) million
Americans wear contact lenses. While Americans of all ages wear
contacts, our typical customer is female between the ages of twenty-
five (25) and forty-four (44). Americans spend more than $3.5 billion
every year on contact lenses.
In many instances, state laws and regulations on contact lenses,
while cloaked as health measures, work to: (1) stifle competition--the
driving force for innovation, efficiency, and customer service; (2)
increase prices consumers pay for contact lenses; and (3) actually
compromise, rather than promote, the ocular health of contact lens
wearers.
Before providing the Subcommittee with a more detailed analysis of
these state laws and regulations, please allow me to note some things
for the record.
First, 1-800 CONTACTS respects the important role that eye care
professionals play in our health care system. We are not a substitute
for personal eye care. Each day, a growing number of eye care providers
work cooperatively with us. We are encouraged by our recent experience
in California where consumer groups and the California Optometric
Association worked to craft legislation (signed earlier this week by
Governor Davis) that protects the health of contact lens wearers, while
allowing for fair competition.
1-800 CONTACTS recognizes there are risks inherent in wearing
contact lenses and strongly supports the retention of measures which
legitimately protect consumer health.
However, these risks are not related to where a consumer purchases
replacement lenses. An investigation conducted by state attorneys
general examining the contact lens industry concluded that,
``[P]urchasers from alternative channels have had no greater
ocular health problems than purchasers from ECPs [eye care
professionals]. Our multi-state investigation has failed to
reveal any study showing any correlation between compromised
ocular health and receipt of lenses through alternative
channels.''
In addition, in settling anti-trust claims brought by 32 state
attorneys general, the American Optometric Association specifically
agreed that it gI22``shall not represent directly or indirectly that
the incidence or likelihood of eye health problems arising from the use
of replacement disposable contact lenses is affected by or causally
related to the channel of trade from which the buyer obtains such
lenses. Specifically, the AOA shall not represent directly or
indirectly that increased eye health risk is inherent in the
distribution of replacement disposable contact lenses by mail order or
pharmacy or drug stores.''
Perhaps the greatest threat to ocular health faced by contact lens
wearers is caused by failing to dispose of contact lenses frequently
enough. Doctors have reported that frequent replacement of lenses
significantly reduces eye infections and inflammation among disposable
contact lens wearers.
The less expensive contact lenses are and the easier they are to
obtain, the more frequently wearers will change their lenses. According
to a McKinsey and Company survey, fifty-seven (57) percent of consumers
would replace their lenses more frequently if lenses were cheaper.
Thirty (30) percent of consumers listed cost savings as a reason for
over-wearing lenses. Moreover, twenty-two (22) percent of consumers
stated they wear lenses longer than they should because ``purchasing
them is inconvenient.''
Finally, while too many states have protectionist laws shielding
vested interests from competition, a few states have adopted laws that
should help their residents benefit from e-commerce. Some of these
states, for example, have laws expressly authorizing the online
purchase of contact lenses.
Why would states want to impose barriers to e-commerce when it
comes to sales of replacement contact lenses, especially when such
barriers can threaten, rather than promote, consumer health? To answer
this question, it helps to understand how the contact lens industry
works.
a brief history and overview of the contact lens market
Originally contact lenses were custom made from rigid materials.
Commonly called ``hard'' lenses, they required eye care professionals
to engage in the labor-intensive practice of customizing the fit of
lenses to each patient's eyes. As hard contacts were a customized item,
consumers were effectively limited to purchasing them only from eye
care professionals.
Technological advances led to the introduction of ``soft'' contact
lenses in the late 1980s. Unlike customized hard lenses, soft lenses
are standardized, mass-produced commodities. The most popular soft
contact lenses are disposable and are designed to be replaced every two
weeks. The fastest growing segment of the industry are disposables that
are replaced every day. Currently, soft lenses are worn by
approximately 85 percent of all contact lens wearers. More than 90
percent of the orders we ship are for disposable soft lenses.
As the market moved towards mass-produced disposable lenses,
consumers began to purchase their lenses from outlets other than the
doctor who prescribed them. A variety of entities--pharmacies, mass
merchandisers, and mail order companies--began selling replacement
contact lenses directly to consumers.
Contact lenses are perfect for centralized distribution. Boxes of
contact lenses are small, light, and easy to ship and the product must
be replaced regularly. Because of the wide spectrum of possible
parameters, the product is just too unwieldy for the average eye care
professional to maintain stocks sufficient to quickly meet all of their
customers' needs.
Companies with the ability to (1) centralize distribution, (2)
store hundreds of thousands of different prescription parameters; (3)
purchase in bulk; and (4) execute Internet and phone orders, can bring
efficiencies to the market place--efficiencies which benefit consumers
through lower prices and more convenient service. Once a customer has
ordered from us, getting replacement lenses should be as easy for the
customer as a couple of clicks .
Unfortunately, the efficiencies of this business model (and the
benefits it makes available to contact lens wearers) are in many states
being thwarted by unnecessary regulations and statutes which shield
vested interests from the competition and market efficiencies made
possible by the advent of disposable soft lenses and the Internet.
The introduction of soft disposable lenses did more than change the
economics of the contact lens business--it also created a conflict of
interest: Eye doctors sell the products they prescribe.
There is no customization of disposable contacts. Consumers most
often buy these mass-produced lenses four 6-packs at a time. Daily
disposable customers commonly buy 180 or 360 lenses at a time.
When contact lenses were custom made, it was necessary for eye care
professionals to sell the lenses they fit on their own patients. With
disposable, mass-produced, widely available soft lenses, it is no
longer necessary for the prescriber to sell what they prescribe.
As the market place transitioned to soft disposable lenses, the
practices of eye care professionals remained the same. They retained
the ability to both prescribe and sell contact lenses, creating a
conflict of interest which has increased costs and restricted consumer
choice.
Comparing how contact lenses and prescription drugs are prescribed
and sold helps illustrate how this conflict of interest impacts
consumers.
With prescription drugs, there are a number of protections which--
while not perfect--help preserve competition, promote innovation, and
protect the consumer.
For example, first, when a patient visits a family care physician,
the patient knows the doctor is not going to sell what he or she
prescribes. Second, the patient is entitled to receive a copy of the
prescription, and can take it to any pharmacy the patient wishes.
Third, when the patient gets to the pharmacy, he or she is often given
the choice of a generic equivalent.
These protections are not available to contact lens wearers. First,
eye doctors do sell what they prescribe. Second, the patient is often
not entitled to, and even more often does not receive, a copy of the
prescription, and may not take it to a pharmacy because the doctor is
the pharmacy. Third, not only are there no generic alternatives,
consumers often don't have a choice of brands.
With contact lenses, the eye doctor, not the patient, usually
chooses the brand. There can be financial incentives for eye care
professionals to prescribe certain brands. Many eye doctors do not
prescribe brands unless they sell those brands in their store. In some
cases, eye doctors prescribe private label brands sold only in their
store and available nowhere else--leaving consumers to essentially pay
a premium price for a generic product.
The conflict of interest in the contact lens industry catches the
consumer in the middle. When a consumer decides to purchase her
contacts online, she must get permission from one supplier (her eye
doctor) in order to purchase from another. There is a financial
disincentive for eye doctors to give competitors permission to make a
sale to their customers.
Rather than update their laws and regulations to take into account
the changes in how contact lenses are fit, manufactured, and sold, many
states have adopted laws and regulations designed to preserve this
conflict of interest and insulate eye care professionals from
competition.
an analysis of state impediments
1. No Right to One's Own Prescription
Having a contact lens wearer receive a copy of her own prescription
is essential to promoting competition for replacement lenses. The
prescription has been called the consumer's ``ticket'' to lower prices
and better service.
Yet in the majority of states, consumers have no right to copies of
their own prescriptions. A survey conducted by The Detroit Free Press
indicates that consumers in the Detroit region often have a difficult
time obtaining their prescriptions. Of fifty (50) optometrists
surveyed, only one would release contact lens prescriptions to patients
after an exam. Fifty-four (54) percent of optometry offices stated that
they never release contact lens prescriptions to patients.
In some states, Americans have a right to their own contact lens
prescription--but only if they ask for it. In these states, burdensome
requirements are commonly used to frustrate the limited rights
consumers do have. Under Illinois law, for example, consumers have a
right to a copy of their prescription, but are required to request the
release in writing.
Finally, in the few states where contact lens wearers do have an
automatic right, that right is often not enforced.
Under federal law, every American has a right to a copy of his or
her own eyeglass prescription. However, the rule setting forth this
right does not extend to contact lenses because when the rule was
adopted in 1978, contact lenses were custom-made. We support updating
federal law to extend this rule, commonly known as the ``eyeglass
rule,'' to include contact lenses.
2. Restrictions on Who May Sell Contact Lenses
The laws of several states attempt to prohibit the sale of contact
lenses over the Internet. In some states, these laws seek to grant
monopolies to in-state eye care providers. We believe these laws are
unconstitutional. Georgia law, for example, attempts to have contact
lenses sold only in a face-to-face transaction with a state licensed
eye care professional. Similarly, under New Mexico law, only state
licensed physicians or optometrists would be allowed to sell contact
lenses.
3. Use of Prescription Lengths to Stifle Competition
Many states do not set a minimum period for the expiration of a
contact lens prescription. Absent a medically reasonable minimum
standard, eye care professionals can legally write unduly short
prescriptions--in some cases as short as one day--to frustrate a
consumer's ability to purchase replacement lenses from other sources.
In a recent issue of Contact Lens Spectrum, Dr Joe Goldberg, an
optometrist and Emeritus Fellow of the American Academy of Optometry
described how prescription length can be used for competitive purposes:
``We can't eliminate mail order replacement businesses, but we
can use our professional ingenuity and patients' contact lens
prescriptions to challenge them.''
He went on to note that:
``Patients should obtain mail order lens replacements only
during the service life of the lens prescription. Therefore,
practitioners must limit the service life of a lens
prescription.''
Dr. Goldberg ultimately recommends that eye care providers write
prescriptions for six months, a period substantially shorter than
recommended by leading professional associations. The American Academy
of Ophthalmology states that, ``While the optimal time limit for a
contact lens prescription has not been clearly defined, most eye care
professionals would recommend evaluation of the fit within two years,
and the more conservative would advise one year.'' Similarly, for
adults aged eighteen (18) to sixty (60), the American Optometric
Association suggests an evaluation every one (1) to two (2) years.
Mr. Chairman, I ask that the text of Dr. Goldberg's article be
included in the record at the end of my testimony.
On average, consumers spend approximately $100 for an eye exam. By
attempting to force consumers to come in for frequent eye exams without
medical justification, eye care providers can both compel consumers to
spend money on unnecessary exams and at the same time enhance the eye
doctor's ability to sell additional products.
4. Prescription by Brand
Some states require that prescriptions for contact lenses be brand
specific. These laws enable eye care professionals to write
prescriptions for brands sold only to the doctors that prescribe them.
An increasingly popular tactic is for eye care professionals to write
prescriptions for exclusive store brands available only from the
prescriber. Charles Hom, an optometrist in Walnut Creek, California,
described this tactic in an issue of Contact Lens Spectrum, stating
that:
``I often do not give the patients a choice. I don't say this
is a private label lens. I just say, `This is the best lens for
you. It's the one you should be wearing' ''
As noted above, this tactic effectively forces consumers to buy
generic lenses at premium prices.
Mr. Chairman, I ask that the text of Dr. Hom's comments be included
in the record.
5. Oversight by Self-Interested Boards of Optometry
A state-afforded right to a prescription is still no guarantee the
consumer will get her prescription. Enforcement of this right is
generally left to state boards of optometry, comprised largely of
optometrists.
Recently, 1-800 CONTACTS and the Texas Optometry Board (``TOB'')
entered into a legally enforceable agreement whereby the Board agreed
to require optometrists to respond to 1-800 CONTACTS' efforts to verify
that a customer's prescription is valid. In turn, 1-800 CONTACTS agreed
to wait indefinitely for optometrists to verify prescriptions.
Texas optometrists have failed to respond to these verification
attempts more than half of the time. These refusals have generated more
than 10,000 written complaints to the Texas Optometry Board in the last
three months alone. Neither we, nor our customers, have received any
response nor do we believe any action has been taken.
California stands in marked contrast to Texas. State legislators,
ophthalmologists, optometrists and consumer groups worked together to
develop a regulatory system that protects consumer's health and
promotes competition. In 1998, 1-800 CONTACTS agreed with the
California Medical Board to implement a passive verification method for
verifying prescriptions. Under this method, 1-800 CONTACTS communicates
to the eye care provider in writing the exact prescription
specifications received from the customer. It also informs the eye care
provider that it will complete the sale based on this prescription
unless the eye care provider advises it within a specific time period
that the prescription is expired or incorrect.
Earlier this week, Governor Davis signed legislation that
essentially codified the passive verification agreement in place since
1998. This law was supported by the California Optometric Association
which stated that the law ``supports safe and responsible patient
access to contact lens prescriptions'' and that the law ``strikes a
reasonable balance between access and accountability.''
recommendations: fair competition benefits consumers
Contact lens wearers need and deserve the same protections that
prescription drug purchasers and even eyeglass wearers have. Contact
lenses have changed, but elements of the old system which forces
consumers to purchase primarily from their prescriber have not. Without
similar protections, contact lens wearers who try to purchase online
and through other sources will continue to be impeded by state laws
which frustrate competition and hurt consumers.
As mentioned previously, pending federal legislation would open the
market to competition and benefit 35 million Americans who wear contact
lenses. We urge adoption of such legislation.
Thank you for the opportunity to appear before the Subcommittee to
share our views on these important issues. I would be happy to answer
any questions you and the other Members of the Subcommittee may have.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Stearns. I thank the gentleman.
Mr. Cruz, welcome.
STATEMENT OF TED CRUZ
Mr. Cruz. Thank you, Mr. Chairman.
Mr. Stearns. We'd be glad to put your documents as part of
the record. Just give them to the reporter.
Mr. Cruz. Thank you. I'm Ted Cruz. I'm the Director of
Office of Policy Planning at the Federal Trade Commission and
I'm pleased to be here today to present the Commission's
testimony. On behalf of the Commission, I'd like to thank the
subcommittee for addressing this important issue and thank
Chairman Stearns in particular for his leadership in addressing
this issue which we believe has the potential to significantly
impact the future of e-commerce.
E-commerce has the potential to transform many
relationships in our economic society and the economic boom
that e-commerce has begun to bring in even with economic
downturns promises to be very significant.
In addition, the internet offers enormous personal freedom.
What is interesting is that when many public policy analysts,
when many policymakers think of the internet and they think of
regulatory and legal issues concerning the internet, they often
think of the very important issues concerning taxation and
privacy, both of which are critically important. But in
addition to that, there is the entire set of issues we are
addressing here today, a set of issues that many analysts have
not focused on how those issues are potentially impacting e-
commerce. And in particular, some observers have suggested that
what we are seeing in the e-commerce sphere is an old pattern
repeating itself. And that's a pattern of existing businesses
appealing to government regulators for help to be an ally
against potential new entrants, against potential new threats.
And many of these commentators have suggested that what is
happening when State and local regulations are being extended
to e-commerce is exactly that.
Indeed, Mr. Atkinson and his two very comprehensive reports
that were issued on this analogy that pattern to what happened
in 1919 over 80 years ago when what was then the powerhouse
lobby association of this town, the Horse Association of
America, along with their traditional partners, the Master
Horseshoer National Protection Association an the National Hay
Association, lobbied very effectively State and local
governments to prohibit parking automobiles on public streets
and they explained at the time that everyone knew public
streets are where horses belong and these new fangled
automobiles should not be crowding them off.
That concern, the concerns that there were potential
barriers to e-commerce led the Commission to create in August
of last year an Internet Task Force which is a task force that
has spent the past year studying and examining the possibility
of these barriers. The task force has worked within the
Commission to prepare four different comments that the FTC has
filed that touch on these issues. The first was a staff comment
that the staff of the Federal Trade Commission filed in the
State of Connecticut before the Connecticut State Board of
Opticians.
There, the State Board of Opticians is considering
additional regulations to the internet sales of contact lenses.
And the FTC staff submitted a comment urging that as that Board
considered those regulations, it also considered the effect on
competition and that, while consumer protection concerns should
be paramount, that those concerns should be protected in a
manner that also allowed for competition so the consumers could
receive the benefit of competition and the lower prices as an
increased convenience that competition can bring.
In addition, the Commission filed joint filings in the
State of North Carolina and the State of Rhode Island, urging
that those States not adopt proposals to require the physical
presence of an attorney for every real estate closing and every
real estate refinancing in the State. And finally, the
Commission filed an amicus brief just this past money in
Federal District Court, concerning litigation in the State of
Oklahoma brought by an internet casket seller who is opposing
restrictions by the State Funeral Board that only licensed
funeral directors can sell a casket in the State of Oklahoma an
din that brief, the Commission argued that the justification
that the Oklahoma Board was asserting, namely that it was
defending the FTC's funeral rule, mischaracterized the FTC's
funeral rule because the purpose of the funeral rule was to
allow and facilitate consumer choice and to assure through that
choice that consumers were fully protected.
As the Chairman mentioned, we're holding a workshop,
October 8 through October 10, where we expect to hear panelists
address all these issues and we look forward to learning more
about the impacts on both sides of the potential impact of
consumers of these possible restrictions.
Thank you.
[The prepared statement of Ted Cruz follows.]
Prepared Statement of Ted Cruz, Director, Office of Policy Planning,
Federal Trade Commission
i. introduction
Mr. Chairman, I am Ted Cruz, Director of the Office of Policy
Planning of the Federal Trade Commission.<SUP>1</SUP> I am pleased to
appear before the Subcommittee today to testify on behalf of the
Commission regarding possible ``State Impediments to E-commerce.'' The
Commission thanks the Subcommittee for addressing this important issue,
which may have a significant impact on our nation's economy and on the
growth of e-commerce. In particular, the Commission would like to thank
Chairman Stearns for his leadership in this area, and for his foresight
in addressing an issue that is critical to the future growth of e-
commerce.
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\1\ The views expressed in this statement represent the views of
the Commission. My oral statement and responses to questions you may
have are my own and do not necessarily reflect those of the Commission
or any individual Commissioner.
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The Internet boom, heralded by many as the next industrial
revolution, is transforming society before our eyes. Even with recent
economic downturns, it has immense potential as an engine for commerce.
Moreover, the Internet also offers consumers enormous freedom. There
are, of course, important policy disputes about taxation and privacy
legislation. But, aside from those disputes, many think of the Internet
as a virtually unfettered free market, a place spawning creativity and
innovation and self-expression.
Some observers have suggested, however, that this perception of
unfettered competition may not be completely accurate. Instead, these
observers assert that existing businesses are seeking to use government
authority to impede new entrants from competing. In a number of
instances, and in a number of states, pre-existing regulatory regimes
have been extended to the Internet, and it bears examining whether
particular regimes are pro-competitive and pro-consumer, or whether
they eliminate cost savings or convenience without sufficient benefits
to justify those losses.
ii. ftc efforts to foster online competition
In response to these concerns, in August 2001, the Federal Trade
Commission formed an Internet Task Force to evaluate regulations and
business practices that could potentially impede e-commerce. The Task
Force grew out of the already-formed State Action Task Force, which had
been analyzing the antitrust doctrine concerning state regulations
generally, and out of the FTC's longstanding interest in the
competition aspects of e-commerce.
Over the past year, the Task Force has met with numerous industry
participants and observers, including e-retailers, trade associations,
and leading scholars, and has reviewed the relevant
literature.<SUP>2</SUP> The Task Force has been examining state
regulations, often enacted for purposes unrelated to competition, that
may have the effect of aiding existing bricks-and-mortar businesses at
the expense of new Internet competitors. Of course, these regulations
may be justified by consumer protection interests or other sound public
policy. The Task Force also is considering whether and to what extent
private companies may be curtailing e-commerce by employing potentially
anticompetitive tactics, such as by collectively pressuring suppliers
or dealers to limit sales over the Internet.
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\2\ In particular, the Progressive Policy Institute wrote two
comprehensive reports analyzing the trend toward potentially
anticompetitive efforts to restrict e-commerce. See Robert Atkinson,
The Revenge of the Disintermediated (Jan. 2001) (first report of the
Progressive Policy Institute) (``First PPI Report''); Robert Atkinson
and Thomas Wilhelm, The Best States for E-Commerce (Mar. 2002) (second
report of the Progressive Policy Institute) (``Second PPI Report'').
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To further these efforts, and the important inquiry of the
Subcommittee today, in October the FTC will host a public workshop that
will focus on two types of possible barriers to ecommerce. One type
consists of business conduct barriers that may arise when private
parties employ potentially anticompetitive tactics, such as when
suppliers or dealers apply collective pressure to limit online sales.
The other type consists of state and local regulations, such as
occupational licensing and physical office requirements, that may have
pro-consumer and pro-competition goals, but that nevertheless may
restrict the entry of new Internet competitors or hamper their
operations.
The workshop will take place at the FTC from October 8-10, 2002,
and will include consumer advocates, industry representatives offering
a variety of perspectives, academics, and state government
representatives. The FTC is actively seeking perspectives and data from
both supporters and critics of these possible restrictions, to
understand better their full impact. We have four principal goals for
the workshop: (1) to enhance the FTC's understanding of these issues,
(2) to help educate policymakers about the effects on competition and
consumers of restrictive state regulation, (3) to help educate private
entities about the types of business practices that may or may not be
viewed as problematic, and (4) to learn of additional avenues to
promote competition through e-commerce.<SUP>3</SUP>
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\3\ See 67 Fed. Reg. 48,472 (2002). More information about the
workshop is available at the homepage for the workshop, http://
www.ftc.gov/opp/ecommerce/anticompetitive/index.htm.
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iii. online competition in different industries
Each of the industries to be addressed at the FTC workshop has
enormous potential for providing goods and services to consumers over
the Internet and may be beginning to face significant barriers to
expansion. A review of several of the industries follows.
A. Retailing
E-commerce retail sales continue to expand rapidly. For example, in
the second quarter of 2002, retail e-commerce sales increased 24.2
percent, up to $10.2 billion, from the second quarter of
2001.<SUP>4</SUP> In contrast, all retail sales for the second quarter
increased only 2.5 percent from the second quarter of 2001.<SUP>5</SUP>
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\4\ United States Department of Commerce News, 2nd quarter 2002
release, Aug. 22, 2002, available at http://www.census.gov/mrts/www/
current.html.
\5\ Id.
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Nonetheless, in some instances we have seen attempts to limit e-
retailing through conduct that raises antitrust issues. For example, in
the late 1990s, a group of 25 Chrysler dealers in the Northwest
threatened to refuse to sell certain Chrysler models, and to limit
warranty service, unless Chrysler limited its supply of cars to an
Internet seller. In 1998, the FTC filed an administrative complaint
against the dealers.<SUP>6</SUP> The complaint alleged that the dealers
had formed an association B Fair Allocation System, Inc. (``FAS'') B
for the purpose of restricting the number of vehicles available to
competing dealers marketing, and offering lower prices, over the
Internet. The matter was settled by a consent order which prohibited
FAS from participating in, facilitating, or threatening any boycott of,
or concerted refusal to deal with, any automobile manufacturer or
consumer.<SUP>7</SUP>
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\6\ See Complaint in Fair Allocation System, No. C-3832 (1998),
available at http://www.ftc.gov/os/1998/9810/9710065cmp.htm.
\7\ See Consent Order in Fair Allocation System, No. C-3832 (1998),
available at http://www.ftc.gov/os/1998/9810/9710065.do.htm.
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Additionally, other reports B some published and some anecdotal B
suggest that some distributors may have applied pressure to discourage
their suppliers from selling online directly to consumers.<SUP>8</SUP>
We intend to examine whether, and in what circumstances, this conduct
may raise antitrust issues, or may address legitimate concerns about
free riding and channel conflict. We hope to develop a better
understanding of the conduct, and reasons for or against limiting
retail sales over the Internet.
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\8\ E.g., Doug Bartholomew, E-Commerce Bullies, industryweek.com,
Sept. 4, 2000, at 51. See also First PPI Report at 14 (noting that, in
a survey of 42 retail and manufacturing companies, 74 percent of the
manufacturers reported that they do not sell online due to worries
about how it might affect their other retail channels).
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B. Contact Lenses
Competition has increased dramatically in the eye care marketplace
since the 1970s. The most recent step in the evolution of this market
is the development of stand-alone sellers of replacement contact
lenses. Such firms do not fabricate lenses or fit them to the eye; they
sell only replacement lenses for which the customer has already been
fitted by an eye care professional. Unlike other eyewear sellers, their
business consists simply of shipping to customers lenses that come from
the manufacturer in sealed boxes labeled with the relevant
specifications. Most of these businesses are located in a single state
but ship orders to customers nationwide.
On one hand, some studies suggest that such sellers may be able to
provide consumers with substantial cost savings and with greater
convenience from delivering lenses to the consumer's door. These
factors may also induce consumers to replace their lenses more often,
which could have significant ocular health benefits.
On the other hand, some observers believe that online sales of
contact lenses may threaten consumer health. For example, online
purchases may reduce the number of times that a consumer visits an eye
doctor. Some also suggest that state licensing and an in-state presence
is necessary to allow a state to regulate effectively in order to
maintain quality and truthfulness. Some states have enacted
requirements that significantly restrict competition from online lens
providers. In other states, regulatory boards are currently considering
new requirements that might similarly restrict Internet sales.
In March 2002, the FTC filed a staff comment before the Connecticut
Board of Examiners for Opticians, which is currently considering
whether to require stand-alone sellers of replacement contacts to
obtain Connecticut optician and optical establishment licenses. Working
with the Connecticut Attorney General's Office, the FTC staff comment
argued that such a requirement ``would likely increase consumer costs
while producing no offsetting health benefits,'' and that such a
requirement in fact ``could harm public health by raising the cost of
replacement contact lenses, inducing consumers to replace the lenses
less frequently than doctors recommend.'' <SUP>9</SUP>
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\9\ FTC Staff Comment Before the Connecticut Board of Examiners for
Opticians (Mar. 27, 2002) available at http://www.ftc.gov/be/
v020007.htm. This comment expresses the views of the Bureau of Consumer
Protection and the Office of Policy Planning of the Federal Trade
Commission. The comment does not necessarily represent the views of the
Commission or of any individual Commissioner. The Commission did,
however, vote to authorize the Office of Policy Planning and the Bureau
of Consumer Protection to submit the comment.
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C. Real Estate / Mortgages / Financial Services
Consumers can now receive many professional and financial services
online. Through the Internet, consumers can get advice from real estate
agents, finance a house, or buy stocks through a broker. In addition to
convenience, online real estate, mortgage, and financial companies have
the potential to offer lower rates because, without a bricks-and-mortar
infrastructure, they may have lower costs.
A number of states have adopted regulations that may affect the
provision of these services by online, out-of-state firms. In several
states, companies must maintain an in-state office as a condition for
licensing if the company makes, brokers, or services residential
mortgage loans. Many other states require online mortgage brokers to
get in-state licenses. Many of these regulations are designed to
protect consumers from unscrupulous practices, and may indeed prove
substantially beneficial to consumers. They may also, however, have the
secondary effect of insulating local businesses from wider competition,
or of allowing only national mortgage firms that already have physical
offices in all states to sell online in all states.
The Commission and the Department of Justice have expressed
concerns regarding one type of state regulation of these services. The
agencies jointly filed comments opposing proposals in both North
Carolina and Rhode Island to require attorneys to be physically present
for all real estate closings and refinancings. These regulations could
seriously impede online mortgage lenders, who often rely on lay closers
rather than on attorneys with a physical presence in the state. In
letters to the North Carolina State Bar and the Rhode Island
Legislature, we argued in favor of consumer choice, citing empirical
evidence showing that non-lawyer closings can save consumers
significant amounts of money, sometimes up to $400 per transaction, and
can increase convenience for consumers, because non-lawyers often are
more willing to travel and meet consumers after work.<SUP>10</SUP>
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\10\ FTC/DOJ Letter to the Ethics Committee of the North Carolina
State Bar re: State Bar Opinions Restricting Involvement of Non-
Attorneys in Real Estate Closings and Refinancing Transactions (Dec.
14, 2001) available at http://www.ftc.gov/be/V020006.htm; Second FTC/
DOJ Letter to the Ethics Committee of the North Carolina State Bar
(June 11, 2001) available at http://www.ftc.gov/os/2002/07/
nonattorneyinvolvment.pdf;
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FTC/DOJ Letter to the Rhode Island House of Representatives re:
Bill Restricting Competition from Non-Attorneys in Real Estate Closing
Activities (Mar. 29, 2002) available at http://www.ftc.gov/be/
v020013.pdf.
D. Casket Sales
Because mark-ups on caskets can be significant, online casket
purchases can potentially save consumers substantial sums of money.
Additionally, online casket sellers also may be able to offer consumers
a greater variety of choices, such as individualized caskets. Some
states, however, require that casket purchases be made only through a
licensed funeral director at a funeral home.
On September 5, 2002, the Commission filed an amicus brief in
federal district court in the matter of Powers v. Harris, <SUP>11</SUP>
in which an Internet-based casket seller challenged a state law that
requires all sellers of funeral goods to be licensed funeral directors.
The Commission's brief stated that the FTC's Funeral Rule was adopted,
in part, to open casket sales to competition from sellers other than
funeral directors and that the Rule protects consumers by promoting
competition among providers of funeral goods, including independent
online casket retailers.<SUP>12</SUP>
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\11\ Powers v. Harris, No. Civ. 01-445-F (W.D. Okla. filed Mar. 14,
2001).
\12\ FTC Amicus Brief in Powers v. Harris (August 29, 2002)
available at http://www.ftc.gov/os/2002/09/okamicus.pdf.
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E. Automobiles
Automobiles represent one of the biggest investments for many
households, both in terms of their purchase price and their importance
to a family's daily life. A group of Yale economists have concluded
that consumers who use Internet purchase referral services to buy a car
pay on average 2% less than consumers who do not.<SUP>13</SUP>
Moreover, the Consumer Federation of America (``CFA'') projects that if
the restrictions currently imposed on Internet auto sales were removed,
savings of 10% per vehicle are achievable over time.<SUP>14</SUP> At
today's prices, CFA estimates that this would amount to savings of
$2,500 per car.<SUP>15</SUP> Yet another study has concluded that
expanded online auto purchases would especially benefit women and
minorities.<SUP>16</SUP>
---------------------------------------------------------------------------
\13\ Fiona Scott Morton, Florian Zettelmeyer, and Jorge Silva-
Risso, Internet Car Retailing, 49 J. Indus. Econ. 501, 502 (2001).
\14\ Mark Cooper, A Roadblock on the Information Superhighway:
Anticompetitive Restrictions on Automotive Markets 38 (Feb. 2002)
available at <http://www.consumerfed.org/ internetautosales.pdf>.
\15\ Id. at 37.
\16\ Fiona Scott Morton, Florian Zettelmeyer, and Jorge Silva-
Risso, Consumer Information and Price Discrimination: Does the Internet
Affect the Pricing of New Cars to Women and Minorities? (Oct. 2001)
available at <http://www.yale.edu/law/leo/papers/ scottmorton.pdf>.
---------------------------------------------------------------------------
On the other hand, many dealers argue that they have legitimate
reasons for concern about manufacturer Internet sales. The National
Automotive Dealers Association argues that franchise laws protect
consumers against unscrupulous manufacturers.<SUP>17</SUP> Dealers also
argue that Internet sales unfairly undermine their businesses by
letting online sellers ``free ride'' off the dealers' personal
services. Further examination of these concerns would be valuable.
Currently, all 50 states prohibit manufacturers and online sellers
without a franchise presence from selling new cars directly to
consumers.
---------------------------------------------------------------------------
\17\ First PPI Report at 7.
---------------------------------------------------------------------------
F. Wine Sales
Wine is a good example of how the Internet can permit fundamentally
different business models to flourish. Through the Internet, many
smaller vineyards, with limited distribution networks, can now market
their wines to consumers around the country.<SUP>18</SUP> Consumers
also can potentially save money by buying online, avoiding markups by
wholesalers and retailers.<SUP>19</SUP>
---------------------------------------------------------------------------
\18\ See, e.g., Second PPI Report at 21.
\19\ Id.
---------------------------------------------------------------------------
On the other hand, many states limit or prohibit direct wine sales
over the Internet. Under the common ``three tier'' distribution system,
many states require that wine pass through a wholesaler or a retailer
before reaching the consumer. These states, and many commentators,
contend that the distribution system furthers the state's interest in
taxation, advances the Twenty-First Amendment's important public policy
goal of temperance, and helps prevent alcohol sales to minors.
Lawsuits are pending in at least seven states regarding the direct
shipment of wine. In Texas,<SUP>20</SUP> North Carolina,<SUP>21</SUP>
and Virginia,<SUP>22</SUP> federal district courts recently struck down
state restrictions on direct shipment of wine on dormant Commerce
Clause grounds, while in Florida <SUP>23</SUP> and
Michigan,<SUP>24</SUP> federal district courts upheld such
restrictions. All these decisions currently are on appeal. In New York
<SUP>25</SUP> and Washington state,<SUP>26</SUP> lawsuits are pending
in federal district courts.
---------------------------------------------------------------------------
\20\ Dickerson v. Bailey, 212 F.Supp.2d 673 (S.D. Tex. 2002).
\21\ Beskind v. Easley, 197 F.Supp.2d 464 (W.D. N.C. 2002).
\22\ Bolick v. Roberts, 199 F.Supp.2d 397 (E.D. Va. 2002).
\23\ Bainbridge v. Bush, 148 F.Supp.2d 1306 (M.D. Fl. 2001).
\24\ Heald v. Engler, 00-CV-71438-DT (E.D. Mich. Sept. 28, 2001)
(unpublished).
\25\ See Swedenburg v. Kelly, 2000 WL 1264285 (S.D. N.Y. Sept. 5,
2000).
\26\ See Mast v. Long, No. CS-01-00298 (E.D. Wash.).
---------------------------------------------------------------------------
iv. additional industries
At the public workshop, the Commission will also be examining other
industries that may raise similar issues. Those industries include the
following:
<bullet> Healthcare, Pharmaceuticals, and Telemedicine;
<bullet> Cyber-Charter Schools;
<bullet> Auctions; and
<bullet> Online Legal Services.
The Commission expects to learn more about the existence of and
relative costs and benefits of any restraints on online competition in
these industries.
v. conclusion
Thank you for this opportunity to share our views on competition
and Internet commerce. We look forward to working with the public and
with the Subcommittee in understanding these issues and in helping to
give consumers the full benefits of online commerce.
Mr. Stearns. I thank the gentleman. I'll start with my
questions.
President Ronald Reagan was asked what book out of all the
books you've ever read has influenced you the most and I
believe he said Frederick Bastiak's book on economics. There's
a vignette in there in which the candlemakers' union is working
as hard as they can to prevent the light bulb from becoming the
omnipresent use in the society and how the candlemakers make
all their arguments to convince the government to prevent their
industry from becoming obsolete. And Mr. Bastiak goes to great
length to show how successful these candlemakers are and all
the ridiculous arguments they make, but this goes to the heart
of the problem.
In picking up your report, Mr. Atkinson, you have Joseph
Schumpeter in which he says ``the resistance which comes from
interests threatened by an innovation in the productive process
is not likely to die out as long as the capitalist order
persists.''
So I guess this has been an age-old problem and obviously
the light bulb succeeded and the candlemakers went into a
different marketing strategy. Folks have mentioned my bill,
H.R. 2421 as a prototype that we could use on a national level.
Mr. Cruz, besides the examples of the fair allocation system
incorporated in your testimony, has the FTC's internet task
force found other cases where brick and mortar retailers have
collaborated to restrict competition from e-commerce and if so,
elaborate?
Mr. Cruz. We have been actively looking for other
instances. It's a situation where there are anecdotal reports,
but there is little hard evidence that we have found. The Fair
Allocation Systems case, as you mentioned, was a case the
Commission brought and ultimately settled with a consent decree
where there was--the complaint alleged a horizontal threatened
boycott of Chrysler dealers against Chrysler if it continued to
sell to a dealer that was selling over the internet.
We are in the process of looking for similar instances. We
are certainly concerned that they are occurring, but much of
that depends upon consumer complaints and finding evidence of
this conduct and so we're looking for that.
Mr. Stearns. Mr. Atkinson, so you're advocating in your
paper, you suggest that we in Congress could enhance e-commerce
by creating ``an industry by industry basis uniform national
standard that enable e-commerce competitors to sell more easily
in all 50 States.''
This would be quite difficult, wouldn't it, to go industry
by industry to do this?
Mr. Atkinson. Well, first of all, most industries aren't
burdened by these laws because they're not regulated at the
State level. There are a small number and I don't know the
number, let's say 25 where this is a problem and many of those
are--have somewhat ancillary regulations at the Federal level.
Mr. Stearns. Is Florida one of those States?
Mr. Atkinson. We did a report, the best States for e-
commerce and we ranked the States----
Mr. Stearns. Why don't you give the top five States that
are best.
Mr. Atkinson. The best five States in order were Oregon,
that's No. 1, Utah, Indiana, Louisiana and Iowa.
Mr. Stearns. Where is California?
Mr. Atkinson. Believe it or not, California was 47th and
this is one of those surprises to us where California----
Mr. Stearns. That's where Silicon Valley is.
Mr. Atkinson. When it comes to e-commerce production,
they're great, but California has an enormous array of legacy
laws that make it difficult for California consumers to buy on
line.
Mr. Stearns. So Mr. Radanovich should move his winery to
Oregon?
Mr. Atkinson. Exactly.
Mr. Stearns. Where is Florida?
Mr. Atkinson. Florida is, I don't have the numbers here. It
looks like they're about 35th. So a little bit of work to do.
Mr. Stearns. Okay.
Mr. Atkinson. These are really for any State--I talked to
States and they said how can we move up and I said you can be
No. 1 next year, all you have to do is repeal these
protectionist laws next session. It's not all that difficult
although politically we can say it's a little bit more
difficult.
Mr. Stearns. I have one more question. Mr. Cohen, you sort
of indicate that H.R. 2421, the bill I have, that it might be a
prototype. Do you think we can craft a bill to preempt other
aspects of State regulation affecting e-commerce just in one
fell swoop? That's what you think we can do?
Mr. Cohen. It would my life much easier. It would make our
lawyers' life----
Mr. Stearns. You wouldn't have the balkanization of all
these 50 States and all their laws.
Mr. Cohen. They are amazing, the vulcanization. The
packaged seed regulations, the event ticket regulations. I mean
we've identified 17 different States that regulate the resale
of tickets and innumerable number of localities and the
absurdity is that certain States allow the resale of tickets
for $1 over the listing, the face price. Certain other States
allow it for $2. Certain other States, $3, some $4, some $5.
Just the absurdities are amazing. So what we would probably
recommend is a national standard and then work with people that
may potentially claim that there are some reasons to allow
States to regulate in some areas.
The better thing is a national standard as the default and
then work with industries that have a reasonable expectation
for some State regulation.
Mr. Stearns. Are there any industries you want to point
fingers at this morning as middlemen?
Mr. Cohen. Well, we do point out one of them is the auction
regulators.
Mr. Stearns. Any others besides the one in North Carolina?
Mr. Cohen. Oh, there are many, many other States that
regulate auctions that have similarly ridiculous standards for
on-line auctions. Other industries that we have confronted are
travel packages, very difficult to deal with.
Mr. Stearns. Mr. Zeidner, do you think just a simple GAO
study would be helpful in exposing many of the issues that you
present today since we're not going to legislate too much this
year. We're going to be through shortly. Even if we come back
in December, this will be difficult to pass, but I mean, maybe
in your particular case would help set the stage with a GAO
audit on this.
Mr. Zeidner. I agree. I think any type of investigation
that can be done into first the threshold question of the
framework that we find ourselves in of a person that prescribes
something and sells the same thing they prescribe should be
looked at. Although we also advocate and think that at the very
least, people should have the right to their prescription which
they don't have right now, but we do think there needs to be a
comprehensive study because some of these things that I read to
you, that's just the tip of the ice berg. There's a lot of
different ways that competition can be thwarted.
For example, even if you do get a copy of your
prescription, let's say that that's a Federal law, what if you
get a copy of a prescription that's for the Zeidner 55 because
I have a big chain of contact lens stores and you can only buy
it from me. It really hasn't done you a whole lot of good.
Mr. Stearns. Okay, my questioning is compete. Mr. Towns?
Mr. Towns. Thank you very much, Mr. Chairman. Let me begin
with you, Mr. Sloane.
Mr. Sloane. Yes sir.
Mr. Towns. How would you enforce a law that requires proof
of age at the time of delivery? Would UPS, FedEx? Who would be
responsible for enforcing such a law?
Mr. Sloane. Well, in fact, the Congress did pass a law 2
years ago that allows States, gives States additional authority
to be able to go after shippers or others that violation State
law requirements for adult signatures, things of that nature.
So there is an ability to enforce it, no question.
Mr. Towns. Let's use New York as an example. Say a State
like New York would lose, as a result of protectionist policy,
do you have those kind of figures?
Mr. Sloane. Well, I don't have those kind of figures. We
can probably work it out and try to give you something.
It's really more a question of the availability of the
products. In other words, in a market place like New York,
you've got a couple of major wholesalers and those wholesalers
represent a select range of the top brands that you're always
accustomed to, but good luck going around in the State of New
York and trying to find retailers, for example, that carry
wines that are produced in New York. And the reason is they
can't get into the three-tier system. Wholesalers just don't
want to carry those products. The selection issue is really the
problem for us, more than a cost issue, but there are certainly
cost implications as well.
Mr. Towns. Thank you. Mr. Zeidner, are you saying my
concern in reference to contact lenses, actually something I
shouldn't have to be concerned with?
Mr. Zeidner. No, I agree with you completely. In fact, I
think it's a well-founded concern. We really would like to have
a relationship with optometrists like pharmacies have with
doctors. The problem we have is we're essentially, when we
verify a prescription, maybe it would be helpful to you to
explain how we go about selling contact lenses. When a person
calls us they either have their prescription in their hand or
their prescription is written right on the side of the box.
There's basically three parameters. The base curve, the
diameter and the power. So they can read us their prescription
off the box. What we do is before we process an order, we have
to have the doctor's name and phone number. We call on every
single order during business hours to ask the doctor if this is
correct, if the prescription information we've been given is
correct. We wait a reasonable period of time and if we hear
from the doctor, we cancel the order if he says it's expired,
we don't ship it. If we hear from the doctor after we've
shipped the order, we send a copy of what the doctor sent to us
to the consumer and say you need to heed what your doctor said.
The problem that we have is, as you can imagine, whenever
you ask a competitor for the permission to make a sale, usually
they're going to greet that with no response or try to stop us
from doing it. So I think there is a valid health concern and
we wish it was more like a pharmacy/doctor relationship.
Unfortunately, we work within the framework where the person
that prescribes also sells.
Mr. Towns. Mr. Sloane, most opponents of wineries to sell
liquor to consumers argue they are protecting their citizens
against the evils of alcohol. Tell me what safeguards exist,
that you would give say to shipping to a person alcohol. You do
have people who will say the reason, in our State, we have this
law is we're going to protect them against sin. What do you say
to people?
Mr. Sloane. There are certainly safeguards in the system to
prevent underage people from buying alcohol over the internet.
For one thing, somebody has got to use a credit card which
there are verifications involved and that secondarily, there is
typically an adult signature that's required to the product.
Shippers don't simply leave a box of wine at somebody's
doorstep and walk away. So there are verifications and as far
as protection citizens against the evils of alcohol, anyone
over the age of 21 is allowed to drink and it's a matter of
personal choice and so that would be something that individuals
would have to decide on their own, but it's certainly a legal
product and people can go ahead and buy alcohol locally or
through the internet.
Mr. Towns. Mr. Cohen, let me just ask you quickly, take us
through the Illinois State Auction Statute, how the State tried
to alter it and how--what they had proposed would have affected
eBay business. Could you take us through the whole process very
quickly?
Mr. Cohen. In September 1999, the Illinois legislature
added three words ``and the internet'' to their auction
licensing act. They have been trying to apply that and issue
the regulation since January 2000. We started to work with--
we've been working with them the whole time and they continued
and especially at the beginning of this year, had decided to
issue regulations that would have required eBay and all of eBay
sellers who did one of three things, either had physical
property in Illinois, either or they were sellers based in
Illinois or they offered items that Illinois residents could
purchase, would have to get licenses for the State of Illinois
to do their business on eBay.
What we were confronted with, the issuance of the
regulations and the issuance of notices that we were out of
compliance, we contacted the Illinois regulators and asked to
work with them to amend the statute to change the statute from
a licensing act that would have basically ended our business in
Illinois and the businesses of our users in Illinois and move
to a registration scheme in which the only registration
requirement is for eBay to file a registration statement, a 1-
page statement with the State of Illinois that tells Illinois
residents who they're doing business with.
Now the problem is if they had been successful and enforced
the law, we had calculated that in their $1.5 million users of
eBay in Illinois that do approximately $300 million in sales,
transacting in Illinois, of that there are more than 3,300
businesses in Illinois that sell more than $1,000 a month on
eBay and of those 3,300 businesses, more than three quarters of
them are people that make less than $75,000 a year. So they're
the small business people of the country who would have been
the most impacted by the licensing requirements. And that's why
we fought and worked with them to come up with a better scheme
that we think is a model for nationwide adoption.
Mr. Stearns. I thank the gentleman. What we're going to try
to do is finish up the hearing with the gentlemen from
California and New Hampshire and then we'll conclude the
hearing because we have three votes and I didn't want to keep
you back here.
The gentleman from California.
Mr. Radanovich. Thank you very much. On the issue of
underage drinkers buying products over the internet, it's a
possibility for something like that to happen, but the fact of
the matter is it's far, far easier for an underage drinker to
get alcohol any other way and so it's just an option. That's
why there's been no sign of abuse, in California, where it's
legal to ship interstate all the time.
Mr. Cruz, I really am interested in the examples of the
candle and the horses. Over the years, we've obviously gone
through these kinds of things before. How does this happen? Can
you kind of chart a process through the future very briefly?
How does this happen on issues of wine and the three-tiered
system and shipping regulations? Do these things just take care
of themselves over time? I noticed, Mr. Cohen, you're here with
eBay, that eBay is arranging or sells wine over the internet
and has made arrangements in 35 States where usually right now
there is only about 12 or 13 reciprocal States where that's
possible to happen through legal maneuvers within the States to
be able to make it more available. Is that how this is going to
happen?
Mr. Cruz. I think the evolution of technology and of
commerce is a difficult thing to stop. I think historically
it's possible to slow it down and whenever there is change,
there are people who are improving and people whose situation
is not necessarily improving and those that stand to lose from
the change, often can be expected to try to slow it down.
But in terms of how these ultimately are addressed and let
me throw a caveat that I think is important from the
Commission's perspective, we are still very much in the
evaluating mode. We are concerned that these restrictions in
many of these industries are limiting competition, but we also
understand that many of these restrictions have important
consumer protection justifications and so we're trying to hear
from experts about the various aspects of it and understand the
aggregate impact, but often how it's changed is simply by light
being shined on it and an understanding of what are the impacts
on consumers and that hopefully in this instance will lead
policymakers to move toward a situation that protects consumers
more and promotes greater competition.
Mr. Radanovich. Thank you.
Mr. Stearns. The gentleman from New Hampshire.
Mr. Bass. Very briefly, Mr. Cruz, is internet commerce
interstate in your opinion inherently interstate?
Mr. Cruz. Obviously, it doesn't by definition have to be. I
mean one can, you know, you and I can engage in commerce within
the same State over the internet, but by its very nature
internet commerce is something that when it approaches any
scale at all tends to be interstate and often international.
Mr. Bass. Ergo, the only entity nationally that's going to
be able to regulate is Congress. I just want to know if it
would be all right if we have any further questions you folks
would be willing to follow up in writing? I yield back.
Mr. Stearns. I thank the gentleman. We want to thank the
witnesses. We are going to adjourn the subcommittee and thank
you again for your attendance. The subcommittee is adjourned.
[Whereupon, at 11:08, the hearing was adjourned.]
[Additional material submitted for the record follows:]
Wine and Spirits Wholesalers of America
805 15th Street, N.W., Suite 430
Washington, D.C. 20005
The Honorable Cliff Stearns, Chairman,
Commerce, Trade & Consumer Protection Subcommittee
Committee on Energy & Commmerce
U.S. House of Representatives
Dear Chairman Stearns: I want to thank the Chairman and members of
the Subcommittee for giving me the opportunity to present testimony
about a remarkable American success story known as the three-tiered
alcohol distribution system. I represent the Wine and Spirits
Wholesalers of America, Inc. (WSWA), a national trade organization and
the voice of the wholesale branch of the wine and spirits industry.
Founded in 1943, WSWA represents more than 400 privately held, family
owned and operated companies in 44 States, the District of Columbia,
and Puerto Rico that hold State licenses to act as wine and/or spirits
wholesalers.
I don't know how many members of the Subcommittee have visited
package store or tavern in your districts recently, but if you have,
you witnessed one of the great consumer success stories of the 20th
century. In virtually every store and tavern, the shelves are stocked
with literally hundreds of quality brands of wine, spirits and beer.
What is even more remarkable, considering the plethora of state and
federal regulations and taxes applied these products--a burden which, I
would add, at the federal level benefits imported spirits at the
expense of domestic spirits, and which WSWA is working with Congress to
change--the price for beverage alcohol products has remained
consistently affordable for the average consumer over the past 69
years. In fact, in many cases the pre-tax price has even declined when
adjusted for inflation.
The point I want to stress is that, for the average American
consumer, there has never been better quality, variety and
affordability in the beverage alcohol marketplace. I would venture to
say that the majority of the consuming public is quite satisfied--or
maybe even more accurately overwhelmed--with the quality and selection
of brands available to them just around the corner from their house. In
fact, even if a consumer opted to drink a different bottle of wine
each-and-every day, it would take two years to sample the total number
of wines available in the average marketplace.
The overwhelming success, both in terms of value and variety, of
today's marketplace can be traced back to the decision by state
lawmakers at the end of Prohibition to establish the three-tiered
system for the distribution of beverage alcohol--a decision which was
theirs to make as a result of the ratification of the 21st Amendment in
1933.
The 21st Amendment is unambiguous in its enumeration of power to
the states to regulate the importation and shipment of alcohol across
its borders. And no Supreme Court or appellate court decision
interpreting that amendment over the past 69 years has ever diminished
that authority. The simple fact is, as noted by respected jurist Frank
Easterbrook in a recent 7th Circuit opinion upholding Indiana's right
to determine and regulate the channels of distribution, alcohol is not
cheese--nor contact lenses--nor even auction sales for that matter.
Principal among the reasons that the three-tiered system was
established was consumer protection; it was determined that there
should be an intermediary separating the supply and retail tiers to
ensure that large suppliers with market power did not dominate
individual retailers to the exclusion of other suppliers who might try
to break into the market. In other words, the imposition of a mandatory
wholesale tier served to blunt monopolistic supplier tendencies that
had prevailed prior to Prohibition.
However, the beauty of the three-tiered system is not limited to
the benefits it obviously confers on consumers and the marketplace, or
in its operation as a hedge against monopolistic supplier tendencies.
The three-tiered system also functions as a partner with state
regulatory systems that are designed to promote the core 21st Amendment
concerns of the state--ensuring orderly market conditions, promoting
temperance, including keeping alcohol out of the hands of minors--and
collecting tax revenue. By requiring that every drop of alcohol pass
through the licensed three-tiered system, states are assured that every
bottle of alcohol is properly labeled, taxed, and sold only to
responsible adults.
In order to understand how the three-tiered system operates as a
partner with the state and federal regulatory communities and serves
the interests of consumer protection, I would ask you to follow a
bottle as it flows through the three-tiered system.
A supplier must obtain approval for the label from the BATF to
ensure that it contains truthful and non-misleading information and
that it contains mandatory health warnings. That bottle must then be
sold to a state and federally licensed wholesaler who is responsible
for maintaining and filing detailed records of each bottle brought into
the state, pays the excise taxes due on the alcohol, and delivers the
alcohol to a state licensed retail establishment. The retailer is
responsible for paying over to the state the sales taxes generated by
each sale, and is directly responsible for ensuring that alcohol does
not fall into the hands of minors or other prohibited individuals.
Since both the wholesaler and the retailer must be licensed by the
state, they are fully accountable for any dereliction of their duties.
They are subject to on-site inspections, auditing and compliance
checks, and any violation can result in a loss of license, fines and
other potentially more severe penalties.
It is this responsible, consumer oriented state-run system that
proponents of direct shipping of alcohol beverages seek to dismantle.
To truly understand the dangerous unregulated alcohol distribution
system that they suggest take the place of the three-tiered system, it
is helpful to illustrate how direct to consumer sale would differ from
the current model.
First, there is no guarantee that sales would not be made to
minors. Since states are unable to effectively monitor direct sales to
consumers, there is no guarantee that the person ordering the alcohol
is of age. Online systems, since they are not face-to-face, simply
cannot ensure that sales are not made to minors. Most teenagers between
the ages of 18 and 21 years of age (and many who are younger) possess
credit cards allowing them to order online--others have the use of
their parents' cards; there is no way for the online supplier to
accurately verify the age of the person ordering.
Moreover, there is no way to ensure that a minor does not
ultimately receive a shipment of alcohol. The suppliers wash their
hands of the alcohol once it leaves their premises, and there is no
guarantee that the delivery service will require an I.D. upon
delivery--or that they will not simply drop the box off at the door
unattended.
That is exactly what happened when scores of media outlets
conducted stings over the past several years to determine the safety of
direct sales. Those stings showed how easy it was for minors to order
alcohol online--and how sloppy the carriers were who delivered the
alcohol, often without checking I.D. and often just leaving the alcohol
on the front doorstep. Perhaps more telling, a recent sting by the
Michigan AG's office ensnared 79 different companies who illegally
shipped 1,020 bottles of wine, 318 bottles of beer and 20 bottles of
spirits, many of those sales going to underage buyers.
Proponents of direct shipping alcohol beverages discount the
implications of those stings, claiming they are somehow tainted and the
product of wholesaler orchestration. While we would like to claim
credit for these illuminating stings, wholesalers do not control the
media nationwide and certainly do not control the Michigan Attorney
General's office. But that really isn't the point; the fact is that the
companies caught up in these stings either did not have adequate
controls to avoid selling to minors, or that they simply didn't care if
they did sell to minors.
Direct shipping advocates also misconstrue the meaning of
statistics from the states, attempting to compare the number of
prosecutions for illegal face-to-face sales to minors when compared
with the smaller number of direct to consumer transactions being
prosecuted. However, the simple fact is that state budgetary
constraints make costly Internet sting operations less favored than
local compliance checks. In addition, it is the very nature of the
three-tiered system that provides for the apprehension of those
retailers who would sell to minors, a safeguard that is impossible to
implement with respect to online sales--unless one relies on precisely
the type of enforcement actions that the pro-direct shipping advocates
denigrate.
Second, when a bottle of alcohol is shipped direct to a consumer
from a reciprocal state, the tax revenue that would normally have been
collected by the receiving state wholesaler and retailer is lost.
States depend on these taxes for a variety of vital programs, not the
least of which is the funding of the regulatory agency itself. The
states are already suffering from a dearth of tax income due to the
recent recession and dive in stock market generated tax revenue. Should
the reciprocal system that direct shipping advocates support actually
go into effect, the states will take an even greater hit on their tax
base.
Some argue that a state could set up instead a licensed direct
shipment statute similar to that which Louisiana has created. However,
any such system ultimately relies upon ``the kindness of strangers.''
There is no way to conduct on-premises inspection of the books of these
``licensees'' to determine the accuracy of their reports as there is
with in-state entities--and there is no easy way to shut them down if
violations occur. These companies often claim when caught that they are
not subject to the jurisdiction of the receiving state, and the cost of
court action to hold out-of-state interests accountable for any
violation of their ``license'' would be prohibitive. It is simply much
easier and much more cost efficient for the state to focus their
compliance efforts on in-state interests than on out-of-state concerns.
Third, the alleged cost savings from direct shipment are non-
existent--and in fact the price is often cheaper for the same bottle
purchased locally. Why? Because the online suppliers do not list wine
online at the wholesale price, they list it at the retail price. Thus,
while the supplier captures the additional profits that would have
accrued to the wholesaler, the retailer and the state, the consumer
sees no differential in the price. Unless, of course, you add in the
additional costs of shipping, in which case the consumer actually ends
up paying more for the bottle than had the purchase gone through the
three-tiered system in the first place.
The proponents of direct shipping argue that wholesalers stifle
competition and that wholesaler consolidation has contributed to the
inability of some small wineries from accessing existing distribution
channels. This argument does not pass the laugh test. You could have
10,000 wholesalers in every state, but that would not correspondingly
increase the amount of shelf space available in retail stores, which
are glutted with hundreds of brands of wines.
Further, there is nothing about the three-tiered system that could
be considered unfairly restrictive of trade in the marketplace. No
wholesaler's phone number is unlisted. No legitimate supplier is
refused the opportunity to display and market his or her products at
the wholesaler's annual convention. In fact, there are hundreds of
imported wines that have managed to compete quite successfully in the
American marketplace despite the wholesalers alleged monopolistic hold
on the three-tiered system--a subject deliberately overlooked in
proponent's arguments.
Finally, no wine and spirit wholesaler would fail to market any
quality wine for which there is a demand--they are consummate
businessmen who have succeeded by understanding the rules of the
market; you make profit by marketing and selling beverages that are in
demand--period.
Vintner trade groups highlight with pride the increase in U.S.
wineries from 800 in 1975, to 1400 in 1995, to 2,700 today. However, at
the same time, these groups fail to recognize that wine must answer to
the same economic imperatives as other products, and that perhaps that
growth was simply not sustainable and was based upon an ``irrational
exuberance'' unrelated to the realities of the marketplace. Having thus
failed to accurately assess the marketplace, those wineries now want to
be rescued, overnight, by fundamentally altering a regulatory system
that has successfully evolved to the benefit of our nation's consumers
over the past 69 years. I would submit to the Subcommittee that it is
not the federal government's job to bail out every group of
entrepreneurs that ignores the realities of the marketplace and suffers
the consequences.
In addition, the Subcommittee should be aware that there have been
several court decisions, including district court decisions in Florida,
Michigan, and the 7th Circuit decision in the Bridenbaugh case, the
highest court to have addressed the issue of direct shipping, which
have upheld state rights under the 21st Amendment. Conversely, only a
few have found to the contrary.
However, if you read the decisions--instead of simply reading the
won/loss columns--you would discover that the better reasoned decisions
are the ones which uphold state laws and show deference to state
concerns relating to temperance, maintaining an orderly marketplace,
and ensuring tax revenue. They make sense both historically and
legally. Prior to prohibition, states had a great deal of difficulty
regulating traffic in alcohol originating in other states. Although the
courts had no problem with a state licensing and regulating suppliers
within their borders, those same courts consistently ruled that the
dormant commerce clause prevented them from regulating imports from
unlicensed out-of-state suppliers as an unlawful interference with
interstate commerce.
In response to those cases, Congress passed the Webb-Kenyon Act--
entitled ``An Act Divesting Intoxicating Liquors of Their Interstate
Character in Certain Cases''--that was designed to cede federal
commerce clause power to the states in an effort to provide them with
the authority to effectively regulate the importation of alcohol.
However, it wasn't until the end of prohibition that Congress passed,
and the states ratified, the 21st Amendment, formalizing within our
constitutional framework the delegation of commerce clause authority to
the states in the area of alcohol importation and shipment.
Once your understand that history, it becomes abundantly clear that
the Webb-Kenyon Act and the 21st Amendment were designed to reverse
discrimination that favored out-of-state suppliers, as Judge
Easterbrook noted in his seminal opinion in the Bridenbaugh case. Prior
to those enactments, it was in-state concerns that bore the burden of
discriminatory regulation. Only they had to be licensed; only they had
to pay taxes; and only they were accountable to the state. It was only
upon passage of the 21st Amendment that the states were free to require
that all suppliers, in state and out-of-state, be subject to their
alcohol distribution regulatory frameworks.
The proponents of direct shipping have applauded the decisions of
courts in North Carolina, Virginia and Texas that have struck down as
``discriminatory'' certain state laws prohibiting interstate direct
shipping. But what would those cases accomplish if upheld on appeal?
They would nullify the 21st Amendment and bring us back to the days
when only in-state suppliers were required to be licensed, regulated
and taxed. While the proponents of direct shipping may disagree with
prohibitions on interstate direct shipments, it is duplicitous of them
to fight against what they perceive as discriminatory barriers--while
at the same time encouraging the courts to craft a remedy whose effect
would be to effectively discriminate against in-state suppliers. And
that is just what the courts rulings in North Carolina, Virginia and
Texas would lead to ``unlicensed, untaxed and unaccountable out-of-
state suppliers competing on an uneven playing field with licensed,
taxed and accountable in-state suppliers.
You should also take note that Section 2 of the 21st Amendment
unambiguously proclaims that:
The transportation or importation into any state, territory, or
possession of the United States for delivery or use therein of
intoxicating liquors, in violation of the laws thereof, is
hereby prohibited.
It does not make any distinction between wine, spirits and beer.
Constitutionally, alcohol is alcohol. However, it is clear that the
proponents of direct shipping want you to believe that wine is somehow
different--that wine is just another agricultural product--not a
socially sensitive product subject to potential abuse.
Low production winemakers and other proponents of direct shipping
like to point out the H.P. Hood case, in which the Supreme Court
asserted ``every farmer and craftsman shall be encouraged to produce by
the certainty that he will have free access to every market in the
Nation.'' What they overlook in their enthusiasm is that the justices
in the H.P. Hood case were not speaking about alcohol beverages! I am
sure that vintners consider themselves simply farmers, but that doesn't
mean the Supreme Court would ignore the high alcohol content of their
product to place it in the same realm of consideration as wheat.
I would remind the Subcommittee that in safe guarding the best
interests of consumers, it is the legislature of each state that most
directly speaks to the concerns and choices of its citizenry. This
premise is clearly supported by the 21st Amendment when it comes to the
distribution of alcohol beverages. In fact, some legislatures have
found their citizenry to support such control in the distribution of
alcohol beverages that they have authorized only the state government
to act in the role of a wholesaler or retailer. Other states favor
controlling the distribution of alcohol through the licensing of
private companies. Still others have even legislated dry areas or
prohibitions against Sunday sales. Despite these widely varied systems
of distribution in the states, they all have one thing in common. They
were created in legislatures, by virtue of the power granted to the
states under the 21st Amendment.
Unless the 21st Amendment is repealed, this Subcommittee should
consider that unambiguous delegation of state authority and recognize
that alcohol beverages are a product with a unique standing in the
American culture and economy. As such, it is the firmly held opinion of
the Wine and Spirits Wholesalers of America that the distribution of
alcohol beverages does not belong in a forum debating federal
intervention in other forms of non-constitutionally empowered state
regulation. Thank you.
Sincerely,
Juanita D. Duggan, CEO and EVP