NEW DEVELOPMENTS IN INTERNET CONSUMER LAW

IN THE UNITED STATES OF AMERICA

by

Peter B. Maggs

Peer & Sarah Pedersen Professor of Law

University of Illinois at Urbana-Champaign

INTRODUCTION

The Internet presents wonderful opportunities for consumers. It allows them to compare prices and products from thousands of suppliers, thereby encouraging competition in providing better and cheaper goods and services. At the same time it creates many new and different threats to consumers. These include: (1) unwanted and fraudulent email advertising; (2) damage to computers through viruses; (3) spreading false information about stocks; (4) payment system fraud and (5) dishonesty by participants at Internet auction sites. A most encouraging development is the emergence of competition among web merchants in the offering of protection to consumers who use their sites against these and other abuses. In the last several years the United States Federal and state governments also have recognized these challenges and have adopted new laws and new tactics to protect consumers. Some new laws, however, are clearly or potentially anti-consumer. These include laws validating harsh provisions in contracts made over the Internet and laws restricting competition on the Internet..

UNSOLICITED AND FRAUDULENT EMAIL

Now that tens of millions have email service, it has become much cheaper to bombard the public with email advertisements that are always annoying and often fraudulent than to use regular postal mail. Schemes that were money losers by direct mail have become money-winners using unsolicited email. Direct mail advertising can cost $1 per item mailed. If a seller can make $5000 from a sale to one person, but has to send 10,000 pieces of direct mail to make the sale, it will cost the seller $10,000 to make $5000, and so direct mail will not work. The cost of mass emailings may be as low as $.01 per message. If the same seller can make a sale to just one person out of 100,000, the seller is paying $1,000 to make $5000, so the scheme is very profitable. Even if the scheme is legitimate, if only one person out of 100,000 responds to an offer, the 99,999 others are inconvenienced by the unsolicited email.

Just as email may be more cost effective than direct mail for legitimate offers, email may also be more cost effective for fraudulent offers. A very high percentage of unsolicited email offers are fraudulent. It is safer for crooks to hide behind anonymous email addresses than to maintain a business office or post office box for the receipt of mail. The Federal Trade Commission has posted a warning on its website, "FTC Names Its Dirty Dozen:12 Scams Most Likely to Arrive Via Bulk Email" <http://www.ftc.gov/bcp/conline/pubs/alerts/doznalrt.htm> Fraudulent email, of course, is illegal under existing Federal and state legislation. Legislation is before Congress to block unsolicited email, however, it has not yet been passed.

The most important recent development has been the vigorous attack by Internet service providers on unsolicited mass emailing. Leading Internet service providers have brought numerous successful lawsuits against senders of unsolicited email. They have been successful on a variety of legal theories. See, e.g., America Online, Inc. v. LCGM, Inc, 46 F.Supp.2d 444 (E.D. Va. 1998). Once their rights to block unsolicited email were clear, various leading Internet service providers combined to support a not-for-profit blacklisting agency, Mail Abuse Prevention Systems LLC ("MAPS"). MAPS provides lists of known senders of unsolicited email and of Internet service providers that serve as conduits for unsolicited email. Many Internet service providers then reject mail from these sources. While there is some potential danger to free speech - a leading reputable public opinion survey agency, responsible for the famous Harris poll, has sued MAPS for blocking its email - most consumers are only too happy to be protected from unsolicited email. Nick Wingfield, "MAPS Can Be a Roadblock to Email Access," Wall Street Journal, Aug, 3, 2000, p. B5. Protection against unsolicited e-mail has become such an important element in competition among Internet service providers that government intervention against unsolicited email may become unnecessary.

VIRUSES AND HIJACKING

Competition has proved an important adjunct to government action in the continuing struggle to protect consumers against computer viruses. Operating system sellers, particularly Microsoft, offer free software updates to protect against newly discovered viruses. See: <http://windowsupdate.microsoft.com/>. Anti-virus software makers offer free advice and free trials of their software. See, e.g., <http://www.symantec.com/nav/beta/>. However, despite these free services, viruses remain a serious problem, because most virus remedies become available only after a virus attack reveals the workings of the virus and because many users neglect to install and use antivirus software. Thus criminal law enforcement is probably necessary as an adjunct to these private efforts.

The Federal Trade Commission has taken action against a peculiar kind of "hijacking" of Internet users. The Commission brought suit against the owner of a pornographic website, accusing it of cloning popular web pages so that when an Internet user searched for these pages, the user would instead go to the cloned page and be bombarded with advertising for pornography. "FTC Halts Internet Highjacking Scam; Millions of Legitimate Web Pages Cloned by Highjackers; Innocent Surfers Barraged with Smut; Agency Also Announces New Hi-Tech Fraud-Fighting Internet Lab" <http://www.ftc.gov/opa/1999/9909/atariz.htm>.

STOCK FRAUD

Touting of worthless stock is also much more cost effective over the Internet. Rumors can be spread cheaply and anonymously or under false names through the "chat rooms" devoted to stock information. The traditional slow pace of action of the Securities and Exchange Commission proved inadequate to deal with such fast-moving fraud. To solve the problem, the Commission has instituted a policy of fast reaction to Internet stock fraud. Michael Schroeder and John R. Emshwiller, "SEC Acts at Cyberspeed to Halt Suspect Trades," The Wall Street Journal, August 7, 2000, p. C1.

PAYMENT SYSTEM FRAUD

The problems of Internet payment system fraud are real, but quite different from those that the public imagines. Credit card fraud could occur due to interception of a credit card number being transmitted to an online merchant, theft of the number from the merchant, or by misuse of the credit card by the merchant. On line banks and payment agencies might escape the strict regulation that protects customers of bricks-and-mortar banks. Recently, the United States Government relaxed its rules concerning the distribution of secure Internet browsers with high-security 128-bit encryption. Since browsers - Internet Explorer and Netscape are free, users update their copies often. This means that soon most Internet users will have high-security browsers. It is far, far safer to transmit a credit card number over the Internet through a secure browser than to entrust a credit card to an unknown waiter in a restaurant. There is a minor risk that a merchant doing business over the Internet will store customer credit card numbers carelessly, with the result that the file of credit card numbers could be stolen electronically. However, several well-reported instances of such theft have led Internet merchants to tighten their security measures. The most serious problems with credit cards have involved fraud by website owners to whom consumers voluntarily gave their credit card numbers to make purchases. These website owners would then charge the credit cards for additional purchases never made by the consumers. In a typical case, the charges would be in small amounts, so the victim and credit card company would not notice them, and the website involved would be a pornographic site, so that the fraud victim might be embarrassed to complain. Government authorities have acted aggressively in such cases. The most notorious case is F.T.C. v. J.K. Publications, Inc., 99 F.Supp.2d 1176 (C.D.Cal.,2000); discussed at length at <http://www.labmed.umn.edu/~john/ccfraud.html>.

Competition among credit cards has caused credit card companies to issue guaranties, such as the following found at <http://www/americanexpress.com>:

When you use the American Express Card, you will not be held responsible for unauthorized charges online. You won't even be held responsible for the first $50 of unauthorized card activity which some other credit card issuers might charge.

AUCTIONS

Internet auction sites have millions of sellers Unfortunately some sellers misrepresent their goods or fail to deliver. The Internet auction system has made dishonesty more attractive for sellers because their lies can reach more people at less cost and because remote buyers cannot readily examine goods or enforce claims.

Internet auctions have been of great benefit to both buyers and sellers. In most communities in the United States there is no competition in classified advertising services. In many localities there is only one newspaper. An exception to the antitrust laws allows multiple newspapers in the same market to agree not to compete on classified advertising prices. As a result the price of advertising goods for sale to readers in a single city is high. For a price that is often lower, sellers can advertise nationwide on an Internet auction site. While there has been some government regulation of Internet auctions, to a large extent market forces are making government regulation unnecessary. The Federal Trade Commission has warned Internet auction users, but has not engaged in regular enforcement actions. <http://www.ftc.gov/opa/2000/02/internetauctionfraud.htm>

The leading auction site, <http://www.ebay.com> implements directly or through other businesses a variety of measures to protect against dishonest sellers and buyers. Other auction sites are being forced by competition to follow suit. These include: rating of sellers and buyers, an antifraud enforcement service, insurance, grading, escrow, dispute resolution, and a payment system.

Auction sites like ebay typically allow users to provide feedback ratings and commentary on other users, both sellers and buyers.. This system works less than perfectly, because a seller can use pseudonyms to award himself high ratings or a group of friends can award each other high ratings. Even worse, a group of friends can engage in "shill bidding" - bidding up the prices on each other's auctions or a seller can use a pseudonym to bid on his own auction. An particularly serious case of these practices is described in Judith H. Dobrzynski, "The Bidding Game: A Special Report; In Online Auction World, Hoaxes Aren't Easy to See," New York Times, June 2, 2000, sec. A, p. 1. Ebay is intensifying the efforts of its antifraud enforcement service, using special software designed to detect rating abuse and shill bidding, and suspending the guilty parties. But the very nature of Internet auctions and the wide availability of anonymous email signons make enforcement difficult. The same problems would make government enforcement much more difficult, since government agencies would have to have solid proof to take action, while auction websites, being private businesses, can refuse to do business on the basis of mere suspicion. Thus it appears that despite the difficulties, the future of antifraud efforts lies in the private sector.

Auction websites are making efforts to solve problems related to the remoteness of buyers from sellers. A major problem is the risk the buyer will pay but the goods will not be delivered. Amazon.com auctions, for instance, offers $250 insurance coverage to protect buyers who pay and do not receive the goods and $2500 insurance coverage to buyers who pay through Amazon's payment system. Another problem is the fact that the buyer cannot personally view the goods. Auction sites link to a number of independent grading agencies, which for a fee paid by the seller will grade, stamps, coins, sports memorabilia, used cars, and some other items offered on the major auction websites. After grading an item, such as a stamp or coin, the grading agency will, for a further fee, seal the item and the grade in a tamperproof plastic case. Settling disputes is also difficult. Given the relatively small size of auction purchases, the ordinary courts and traditional arbitration organizations are too expensive and complicated. Therefore a number of auction sites recommend the services of independent Internet dispute settlement services. Because of the delays involved when buyers send checks and sellers wait to make sure the checks have cleared, the leading auction sites use their own or third-party streamlined payment systems. These systems take the buyers' credit cards and pay the seller, freeing small-time sellers from the complexities of opening credit card merchant accounts.

PAYMENT SYSTEMS

In addition to the auction payment systems mentioned above, a number of other quasi-banking services have emerged on the Internet. In August 2000, the National Council of Commissioners on Uniform State Laws approved the Uniform Money Services Act and recommended it to the states for enactment. This act provides for licensing and regulation of non-bank money transmission services. Adoption of the act would bring government controls to a number of currently-unregulated Internet payment systems. The authors of the act claim it is pro-consumer, designed to protect the public against dishonest and insolvent payment organizations. However, one must worry that the act will create bureaucratic barriers that will hinder the development of the new micro-payment systems that are badly needed to enable consumers to take advantage of Internet commerce.

IMPOSING HARSH CONTRACT TERMS ON THE INTERNET

As mentioned, the vigorous competition among Internet auction sites has led them to put great efforts into developing consumer protection measures. In contrast, manufacturers selling directly over the Internet have sought to use the communication possibilities of the Internet to impose harsh contract terms on consumers and have lobbied for laws making these terms enforceable. Before the Internet, sellers of consumer goods could not effectively create detailed contracts with buyers of the goods, because they had no direct contact with the buyers. Substantively, the sellers were generally subject to the Uniform Commercial Code, which more or less evenly balanced rights of sellers and buyers. Procedurally, in case of the sale of products that caused economic damage to large numbers of consumers, manufacturers faced a serious threat of class actions. The substantial possibility of liability to individual consumers was much less of a threat to a manufacturer than the procedural possibility of a class action. Even if an individual consumer had a theoretical legal claim for economic loss from a defective product, the cost of litigation for the consumer of litigation would be far more than the loss in almost all cases. However, if thousands or millions or consumers suffered economic injury, there was real danger of a class action.

Thus a major goal of sellers over the Internet, particularly of manufacturers selling directly over the Internet, came to be the avoidance of class actions. These sellers faced two problems: (1) drafting a contract clause that would effectively forbid class actions and (2) the doubtful validity of contracts made over the Internet. The approach taken to the first problem was the use of an arbitration clause providing for the individual arbitration of claims of individual consumers. Then, if any consumer became plaintiff in a class action, the defendant seller could have the case referred to arbitration and have the class action proceedings dismissed. This scheme worked in Hill v. Gateway 2000, Inc.,105 F.3d 1147 (7th Cir. 1997). However, another court, while accepting the scheme, held that the particular arbitration clause was unconscionable. Under the provisions of the seller's arbitration clause, a buyer dissatisfied with a $2000 computer would have had to pay a $4000 fee of which $2000 was non-refundable to arbitrate a claim. Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569 (1998). Gateway 2000, Inc., has since revised its arbitration clause to provide terms that are fair and consumer-friendly, but which still eliminate the possibility of a class action. <http://www.gateway.com>. Having found a clause that would prevent class actions, the manufacturers then looked to find a way to bind Internet customers to such a clause. The result was intensive lobbying as a number of new laws were adopted. These included two new uniform laws, the Uniform Electronic Transactions Act, the Uniform Computer Information Transfers Act, revisions to the Uniform Commercial Code <http://www.nccusl.org>, and a new Federal Law, the Electronic Signatures in Global and National Commerce Act <http://thomas.loc.gov/>. Essentially the manufacturers sought and got language in all of these laws that would validate contractual assent made by clicking "YES" on the Internet.

RESTRICTING COMPETITION ON THE INTERNET

One of the most serious threats to consumers is legislation restricting competition on the Internet. Such legislation can deprive consumers of the great benefits of Internet competition. The website <http://www.shopper.cnet.com> allows buyers of consumer electronic products to compare prices from hundreds of suppliers. For instance a prices for a particular make and model of hard disk drive range from $198.90 to $434.99. This type of information empowers consumers to take full advantage of nationwide market competition. On the other hand, there is no such website for liquor prices or new car prices. The reason is that liquor distributors and automobile dealers have successfully lobbied through legislation protecting against Internet sales direct to consumers. While there may need to be some restrictions on Internet liquor sales to prevent purchases by minors, the restrictions on liquor sales go far beyond those required for this purpose. For instance, the restrictions apply to the purchase of a bottle 1928 Chateau d'Yquem Sauternes costing $1700 <http://www.klwines.com/cgi‑localbin/winelist.cgi?type=Old_Sauternes>. The restrictions on new car sales are a pure special-interest, anti-consumer measure with no justification other than the large contributions automobile dealers and their political action committees give to election campaigns.

There are also restrictions against practicing law and medicine over the Internet. While some restrictions are necessary to protect against unethical doctors and lawyers, the restrictions in place may well go far beyond what is necessary. For instance, a Federal court in Texas held that computer software that answered legal questions violated Texas legislation against unlicensed practice of law. Unauthorized Practice of Law Committee v. Parsons Technology, Inc. , 1999 WL 47235. (N.D. Tex. 1999), reversed on other grounds, 179 F.3d 956 (5th Cir. 1999).

CONCLUSION

While the government has an important role to play in protecting consumers using the Internet, in many areas, competition among private merchants of goods and services may actually provide better protection than the government could offer. Furthermore, there is a real danger that Internet sellers will succeed in lobbying for legislation that could harm consumers by allowing imposition of harsh contract terms and by preventing free competition.