U.S. Perspectives on Consumer Protection in the Global Electronic Marketplace

Dear Sirs:

The Direct Marketing Association submits these comments in response to the request for papers and comments of the Federal Trade Commission in Federal Register/Vol.63, No. 241/Wednesday, December 6, 1998.

The Direct Marketing Association (The DMA) is the largest trade association in the world for businesses interested in interactive and database marketing. There are more than 3,700 member companies located in the United States and 550 companies from 53 other nations located in Europe, Asia, Africa, and North and South America.

Founded in 1917, The DMA's members include direct marketers from every business segment as well as the non-profit and electronic marketing sectors. Included are catalogers, Internet retailers and service providers, financial services providers, book and magazine publishers, book and music clubs, retail stores, industrial manufacturers, telecommunications companies, and a host of other vertical segments including the service industries that support them. According to a DMA-commissioned study conducted by The WEFA Group, direct marketing sales in the United States exceeded $1.4 trillion in 1998. Approximately $705 billion in direct marketing purchases were made by consumers in the U.S. and $554 billion were made by U.S. businesses.

In addition, through its independent subsidiary, the Association for Interactive Marketing, The DMA is taking a leading role in representing the emerging electronic commerce marketplace. .

The DMA applauds this initiative of the FTC in exploring the complex issue of consumer protection in the global electronic marketplace and looks forward to participating actively in the forthcoming public workshop. With a membership of over 550 non-US companies, many of them actively engaged in electronic commerce, and a US membership of over 3700, an estimated 90% of whom have active commercial web-sites, The DMA is in a unique position to share the experience of its membership on this subject. Moreover, the DMA's International Council consists of over 154 companies, large and small, whose businesses depend wholly or in significant part on doing business internationally, and the DMA is a founding member of the International Federation of Direct Marketing Associations, a global organization referred to below.

Current overview of DMA Member Internet Usage

The DMA has just tabulated its 1999 survey of electronic media usage by its members. With responses by 507 of 3,684 members surveyed, the results show some interesting trends, which may help inform the Commission's focus and work.

Ninety-five percent of direct marketers responding report using the Internet/World Wide Web for sales or marketing applications, up from 83% one year ago. More than half (52%) make use of online services, up from 43% in 1998; and 51% use EDI, up from 45% in 1998.

There has been a steady increase in percentage of direct marketers having Websites, with 90% of respondents reporting their company currently has one, compared to 82% in 1997. The primary purposes of respondents' Websites are marketing/information (88%), lead generation (60%), and sales/e-commerce (51%).

The pattern previously noticed, of most usage being aimed at other businesses, remains constant, with 67% of the respondents targeting businesses, and 44% targeting consumers (greater than 100 due to dual targeting in some cases). Similarly to 1998, less than one-half of the respondents (43%) use their Websites to conduct electronic transactions.

With respect to the question of international e-commerce, questions newly posed in 1999 indicate that over half (51%) of the respondents report that their transactions are with domestic customers only (both business and consumers), and 46% a combination of domestic and international customers. A median of 5% of electronic consumer transactions and 10% of business-to-business transactions are from international customers. The top international markets cited by respondents are Canada, the United Kingdom, Europe generally, and Japan. 11% do not accept orders from international customers.

Increased Business Risks and Legal Compliance Challenges to Direct Marketers in the Global Electronic Marketplace.

The global electronic marketplace is an extension of a current, but less well-known marketplace, international direct mail. At the same time, it is a different marketplace with different demands, challenges, risks and opportunities.

All of the challenges and risks to business in international direct mail, plus some new ones, carry over to global electronic commerce, especially where products are delivered off-line. They include inconsistencies in laws regulating commercial communications and transactions; differing customs procedures and fees; restrictions and limitations on credit offers and permissible guarantees; practical difficulties in arranging for returns; data protection laws. Certainly, these difficulties, and others not of a consumer protection nature (customs procedures and fees; availability of lists; payment systems and means; postal service levels and costs) are implicated regardless of how the order reaches the company, by telephone, mail or the Internet.⁽¹⁾

Other challenges and risks to both consumers and business take on unique characteristics on the Internet: payment and messaging security; certain identification of the company and its geographical location; certain identification of the customer; trademark piracy; and copyright violations.⁽²⁾

Of those, the problem of the anonymity of companies and individuals dealing on-line is perceived by many members of The DMA as the major difference. Consumers need assurances that they are dealing with a reliable, real organization. Businesses need to establish one-to-one relationships with those consumers, in order to understand and meet their needs effectively. Anonymity when engaging in commerce on the Internet can frustrate satisfaction of either or both of those needs.⁽³⁾

Another major challenge to business exists in off-line international commerce, as well, but is aggravated by legal uncertainty and the immediacy and reach of the medium. That challenge is the diverse and sometimes conflicting or inconsistent laws of the many countries in which consumers are located, and the uncertainty of which laws apply to a particular transaction. For example, advertising of prescription drugs to consumers is forbidden in all European countries, but is permitted in the United States.

Providing Protection: The Multi-national Conundrum.

As discussed above, there are significant barriers to effective multinational business practice, some of which discourage small to medium-sized enterprises, and which in some cases have caused them to limit the geographical areas from which they will accept orders on their Internet Websites. This phenomenon has been noted in the Explanatory Memorandum of the European Commission's proposal of a directive on electronic commerce.⁽⁴⁾

In preparation for its proposal, the European Commission surveyed e-commerce participants on a variety of subjects. The survey indicates that the burden of attempting to assure full legal compliance in multiple markets is an onerous one. The survey also revealed a business need for uniformity and certainty of treatment, and disclosed that the cost of legal research to reach compliance was enormously burdensome for large companies and prohibitive for SME's.

One conclusion that can be drawn from that survey is that governments are not doing an adequate job of making legal requirements achievable and understandable. For example, it is our understanding that no governments other than Canada, Belgium, and Hong Kong publish official versions of their laws in more than one language. In France, we are informed, it would be illegal for the government to do so.

Another conclusion that can be drawn is that business takes its duty to comply with applicable law(s) seriously, and is not only willing, but eager, to "play by the rules". If, however, the expense of understanding and satisfying those rules is so burdensome as to make the business uneconomic, then the business will not be pursued, which deprives consumers of access to new products and services, and the benefits of increased competition.

Moreover, harmonization of the laws which countries differently refer to as "consumer protection laws" is unlikely, as they grow out of local social, political and economic cultures. The additional burdens inherent in global, Internet marketing will likely discourage other businesses from participating in this otherwise fertile market. The difficulty of harmonization is exemplified by Greece's ban on advertising toys on television to children, a perfectly legal action under Greek law, but one with Constitutional dimensions in the United States.⁽⁵⁾

Governments could assist in lowering the "transaction costs" of uncovering relevant applicable laws and regulations by making them more available in an easily-accessible form. This transparency might well serve to partially resolve the issue noted below under My Laws or Yours.

The DMA previously began a project to gather and make available on the Internet laws and regulations from around the world which are directly relevant to direct marketing, including consumer protection laws. We have concluded that this project should be expanded to include laws and regulations touching upon electronic commerce and would welcome partners from businesses, trade groups and governments around the world in this effort.

The Role for Self-Regulation: Off-line Migrates On-line.

The DMA believes that in many instances, market-driven and industry-led policies and practices have already developed which will provide consumers with a high degree of protection in the global on-line world. We believe those policies, if developed by business, likely will be internationally compatible and conducive to international trade.⁽⁶⁾ The programs established by American Express, Visa, and Mastercard have proven quite useful in assisting consumers to resolve disputes with merchants and similar programs are to be encouraged.

Premature or over-broad legislative or enforcement action by any one or several governments could have unforeseen negative consequences on the continued growth of electronic commerce. In all instances, policies of government and business should be in parity with the offline environment, technologically neutral, and in favor of consumer education and empowerment. Proscriptive rules, where found indispensable, should be discretely targeted, harmonized across international borders and include streamlined and transparent procedures on an international scale.

The DMA also firmly believes that there is a major role for self-regulatory programs that will enable business to meet consumer protection needs. That should include an educational mission by self-regulatory and trade organizations aimed at both businesses and consumers. Consistent with that view, the DMA is working with other associations around the world to develop new and effective consumer protection programs.

The DMA has long been a leader in developing self-regulatory initiatives designed to increase and improve consumer protection and confidence in direct and interactive marketing. Among those programs are maintenance and circulation of the Mail and Telephone Preference Service lists (MPS/TPS), to empower consumers with the ability to reduce or eliminate marketing approaches through those vehicles. Those services have proven popular with business and consumers, and are proving effective in limiting the amount of unwanted mail and telephone calls received by consumers.

The need perceived by the industry worldwide to foster a self-regulatory code and develop of guidelines for ethical business practices resulted in the founding of the International Federation of Direct Marketing Associations (IFDMA).⁽⁷⁾ The IFDMA now has a membership of 30.⁽⁸⁾ One of its first activities was to promote its own Paris Convention on mail preference service lists, pursuant to which signatories make their files available for use by mailers in other countries. Since 1996, The DMA has made the Mail Preference Service lists available in this country from the European countries that maintain them and permit their export. Currently, they include Belgium, Germany, Netherlands, and the UK.⁽⁹⁾ The Canadian Marketing Association makes its file available directly to US users.

This convention was paralleled in October 1998 by a similar agreement with respect to making telephone preference lists available among the members, in order to respect consumers' wishes in that medium.

Working to extend the same service into the electronic commerce arena, The DMA will soon announce its development of an e-mail preference service to which consumers and domain name organizations may subscribe, at no cost, to indicate their wish not to receive unsolicited commercial e-mail messages. The DMA will not limit or restrict the offer of this service to the United States, but will accept subscriptions from any country and make the list available to both DMA members and non-members who commit to use the list solely to delete addresses from their e-mail promotion lists. The DMA has invited all other associations around the world to point consumers in their countries to this service, and to link their web-sites to the preference service site to enable all consumers, located anywhere, to subscribe quickly and easily. News of the launch will be made through normal press channels, as well as at the The DMA's Website, www.the-dma.org.

In the area of consumer protection in the context of the mail order process, in 1971, The DMA established its Mail Order Action Line. This program enables consumers to lodge complaints and concerns regarding their experience with direct response companies. The DMA then works with the relevant company to endeavor to resolve the problem, and has had some significant success. There is no charge to the consumer for this service and The DMA continues to refine the program.

Although the level of international complaints is extremely low, nevertheless IFDMA members perceived that the Mail Order Action Line model merited extension internationally before complaint levels in international direct mail became a problem.⁽¹⁰⁾ The IFDMA members anticipated increased international product delivery as a result of the increase in e-commerce business. Inevitably, with more commerce, there will be more opportunity for disputes and misunderstandings. The system can accommodate complaints arising in the electronic commerce context.

Consequently, in October 1998, IFDMA adopted a convention of mutual assistance under which the signatory association agreed to receive and investigate complaints about their members' activities coming from other association. At this writing, the members are refining a written set of procedures to be followed to assure complaints are handled expeditiously and thoroughly. These procedures will provide for reference of complaints to government enforcement authorities in the appropriate circumstances. ⁽¹¹⁾

It is worth noting that these programs are funded at no cost to the consumer or taxpayer and the cost is borne by industry itself.

Educational Components are Essential. Industry Should Play a Major Role.

Domestically, The DMA has partnered in an educational role with many other bodies engaged in activities to protect consumers. Together with the FTC, the United States Postal Service, BBB, and others. The DMA has partnered in developing and distributing educational materials to both the business and consumer communities. Those materials provide useful tools to inform business of its obligations and to assist consumers in protecting themselves from fraud in the marketplace. Among these materials are: "Screening Advertisements, A Guide for the Media" (FTC and USPS); Sweepstakes Advertising, A Consumer's Guide (USPS); Shopping by Phone, A One-Stop Guide to Consumer Protection (FTC and FCC); "Facts for Business, A Check-list for Direct Marketers (FTC); "Make Knowledge Your Partner in Mail or Telephone Order Shopping (FTC); Compliance Guides for the Telemarketing Sale Rule and Mail or Telephone Order Rule (FTC).

Specifically with respect to electronic commerce, The DMA developed and distributes its very popular book Get Cyber Savvy. It provides parents with a guide to teaching children about the opportunities and risks that exist on the Internet. It was developed with the Children's Advertising Review Unit of the Council of Better Business Bureaus and Call for Action. To date, the DMA has distributed over 30,000 copies of Get Cyber Savvy to consumers, schools, libraries and government agencies.

The DMA is discussing with its counterparts in the IFDMA a project to create a multi-language version of Get Cyber Savvy and to provide additional information to consumers to empower them to make informed decisions when making purchases on the Internet. Plans to accomplish this will be drawn up at the bi-annual meeting of IFDMA in April of this year.

More Law is Unlikely to Help

In The DMA's view, fragmented and traditional inward-focused approaches by individual countries to the questions posed in the FTC's inquiry for papers has a strong possibility of resulting in continuing assertions of government's duty to focus on limited jurisdictional weapons to protect consumers. They will: (i) create in consumers a false sense of security that their governments can protect them; (ii) result in probable over-reaction and implementation of draconian measures by government enforcement bodies; (iii) result in the creation of new necessarily jurisdiction-bounded tools that will serve only to threaten large, generally law-abiding and customer-friendly multinational enterprises and impose disproportionate compliance costs on them; and (iv) lead to attempts to block Websites or control content, which raise Constitutional issues in the US which are not paralleled elsewhere. ⁽¹²⁾

The result could be the blocking of access by many foreign consumers to US Websites, or the forced expansion of US businesses to Websites and servers "located" abroad, or the incurrence of severe research and compliance costs on US businesses soliciting business from non-US customers.

Increased jurisdictional assertions by US enforcement authorities and courts may result in non-US Websites restricting their businesses to exclude US consumers.⁽¹³⁾

In that respect, it needs to be recalled that effective consumer relief is available in most OECD countries, where most e-commerce is developing, and where most consumers reside. These countries also have very developed consumer protection statutes and in some cases extremely effective and active consumer protection bodies.⁽¹⁴⁾ Access to those mechanisms at a distance is difficult due to a lack of knowledge about their existence, relief application formalities, and language. There is no question that justice delayed, or made overly expensive by virtue of distance, language, or procedural rules, is no justice at all. Similarly, justice for a defendant (who might be an SME) made overly expensive for the same reasons, is justice denied.

Before governments irrevocably pursue the path of extension of remedies and jurisdiction, co-operative relationships with governments and business associations should be deveIoped and employed.

Governments should first examine whether they can inter-connect the current enforcement and relief mechanisms in place in their countries, so that consumers may seek relief through existing procedures. That seems preferable as a first, truly international step to deal with these issues, rather than to pursue the path of developing new means to assert and project domestic jurisdiction with unintended consequences, which may lead to other countries' doing likewise, thus imperiling the growth of the market, and the effective delivery of meaningful relief and justice.

My Laws or Yours.

The general rule underlying distance selling in the US, and now being implemented in the EC (with certain exceptions), is that it is perfectly acceptable for parties to agree on what law governs their relationship. In a consumer's world, that usually means that a seller specifies what law governs his contract with the consumer. Usually, that means that the laws of the country of the seller, or "country of origin", govern the terms of the offer, how it may be accepted, what guarantees are given, the legality of the offer and advertising, and other obligations.

Additionally, governments everywhere have concluded that for various policy reasons certain aspects of those elements must be locally prescribed. Thus we have fragmented laws on a variety of issues such as advertising content (e.g. tobacco products, prescription drugs), promotions (e.g., sweepstakes), mandatory disclosures (e.g., securities laws, safety, cost of credit), and even whether advertising may be targeted at certain populations, such as children. Countries have taken different policy decisions on product safety and labeling requirements, a customer's "right of return", description of warranties, and of course controlled substances, what is and is not controlled, and how. ⁽¹⁵⁾

On certain subjects, such as the right to return a product and receive a refund, Europe has specified in the physical world of distance selling what the substantive rights of a seller and buyer shall be, and the US has its Mail or Telephone Order Merchandise Rule, which touches on other aspects of distance selling.

As noted above, there is evidence that these fragmented rules limit the fulfillment of the promise of borderless commerce. It is expensive to learn the laws. This, of course, drives business to advocate "country of origin" rules governing all aspects of the relationship with customers, from promotion, through sale and payment, delivery of products and the existence of or fulfillment of guarantees and warranties.

And there are arguments pointing in the opposite direction which can not be ignored. For example, if consumers are aware of any consumer protection laws and relief devices, they are likely to be their own local rules, and businesses are consumers, also. These expectations (created by awareness of local laws and rules) can not be lightly ignored. Counter to this is the struggle to determine if consumer participation at commercial Websites is more like getting on an airplane and visiting a store in another country, where his local laws may not protect him, or some other kind of experience.⁽¹⁶⁾

Nevertheless, it is undeniable for both businesses and consumers that the Internet is a new world and a new technological landscape, and there are indications that both consumers and businesses appreciate this. The indication, albeit anecdotal, that consumers trust brands on-line if they trust them off-line, shows that trust is an important element in consumer behavior. Moreover, it will be recalled that among DMA members two-thirds of the commercial transactions on the Internet are business-to-business⁽¹⁷⁾. This is as likely to prove the degree of technological penetration (Internet access) as anything else. However, interestingly, consumers are half as likely to engage in international transactions as businesses, 5% of consumer transactions being international, with 10% of business transactions being international. Why this difference? Is this a linguistic preference? The affect of general advertising driving traffic? Fear of the Web? Worry about consumer protection laws? No one knows. What we do know is that the multiplicity and diversity of laws, including consumer protection laws, does limit business's experimentation.

Of course, there are strong "non-negotiable" positions concerning many of those protections; the elected representatives of those countries presumably have adopted those laws at the insistence of the electorate. Businesses can not legitimately expect that they will not be subject to at least some of those local legal and compliance costs, at least when they have a physical presence in a country. That would be as true for US businesses as for European businesses. The issue is whether this cost should be imposed at a distance, and why.⁽¹⁸⁾

The DMA feels that at this stage of development of electronic commerce, resolution of many of these questions should await the experience of the market, the kind and degree of problems experienced and the reaction of businesses and associations to those problems. This is not to imply that nothing should be done. There are significant differences among the "protective" laws which need careful examination. Safety and labeling requirements for physical goods would seem at first glance to be of a different order, for example, than laws limiting promotional techniques or advertising content.

Thus, it is profoundly desired by business that these rules be re-examined for efficacy and need, and eliminated, harmonized or approximated if possible. Initially, however, because harmonization or approximation in this area is unlikely, the proper current effort should be for all governments to produce transparency and easy accessibility to resources that enable businesses to understand legal requirements in a cost-effective manner and to comply.

Consequently, governments could assist e-commerce globally by re-examining on a multi-national basis the rationale, need, and effectiveness of many of these laws. At the same time, governments can assist in lowering the "transaction costs" of uncovering relevant applicable laws and regulations by making them more widely available in an easily accessible and comprehensible form. The DMA repeats its welcome of assistance in its project to make such information available, as described under Providing Protection: The Multi-national Conundrum, above.

In Electronic Commerce "Foreign" is a Word, not a Place.

For consumers, in electronic commerce, there are no "foreign web-sites", because the only border is a dial tone. No airplane or train is needed to get there. There are, however, foreign commerce and delivery of goods and services, and payment or lack thereof, across borders. The paradigm of national laws and protections, national courts and jurisdictions, national law enforcement entities, is now, in a world of immediacy, under enormous strain to provide assurance, direction, and certainty to consumers and businesses. Indeed, the immediacy of the Internet strains the concepts of sovereignty and national jurisdiction on which domestic laws are based. A reinforcement or minor modification of current protection devices will only further polarize current systems, putting a further burden on businesses and discouraging global use of the Internet.

Work is being done on refining the issues as to providing consumer protection on the Internet at the OECD, the ICC, and the Global Business Dialogue. As early as August 1997, the Australian Competition and Consumer Commission identified and addressed many of these issues in its Discussion Paper, which contains much useful research and many thoughtful proposals for addressing them.¹⁹ The FTC's superb effort should be informed by these projects.

While business will do its part in fostering good practices, self-regulation, and education, governments will have to exert new and creative efforts to provide relief and solutions for the emerging issues. The DMA stands ready to assist the FTC in its efforts in this respect both directly and through its working relationships with the other 29 members of the International Federation of Direct Marketing Associations.

Respectfully submitted,

Charles A. Prescott
Vice President International Business Development
and Government Affairs

1. Differences in how countries regulate commercial communications and transactions, many of which create substantial barriers to participation in the international marketplace, especially by small and medium-sized enterprises (SME's) are identified in the Commission Staff Report of 1996, Anticipating the 21^st Century: Consumer Protection Policy in the New High-Tech Global Marketplace, vol. II, p. 42.

2. Many of those risks were identified and discussed in the same Commission Staff Report of 1996, supra, n.1.

3. Anecdotally, our membership informs us of the perception of two important trends on the Internet. First, Websites carrying known and respected brand-names appear to be more successful and frequently visited than lesser known sites. This suggests that trust is an important element in consumers' behavior on-line. Second, on-line customers are impatient and want immediate confirmation of their orders, by e-mail, and "immediate" order fulfillment. Off-line customers are less demanding in this respect, although industry practice is to provide customers with an order confirmation number at the time they place telephone orders and with written confirmation following as soon as possible.

4. Proposal for a European Parliament and Council Directive on Certain Legal Aspects of Electronic Commerce in the Internal Market, unofficial text, 18/11/98, pp.,7-9.

5. It is not clear that this law conforms with Greece's obligation under the Treaty of Rome and is under challenge by the European Commission.

6. Because businesses and business associations are not burdened by the need to observe diplomatic formalities and procedures in establishing new agreements and systems, they can react and create programs and systems much more quickly than governments.

7. The IFDMA was formed in 1996 by 23 international direct marketing associations with a mission of encouraging ethical business practices and the development of codes of practice to that end, as well as encouraging the development and use of direct marketing skills in more industries and countries.

8. Argentina, Australia, Brazil, Belgium, FEDMA, Canada, Chile, Colombia, Finland, France, Germany, Hong Kong, India, Ireland, Japan, Mexico, The Netherlands, New Zealand, Peru, The Philippines, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Kingdom, United States, Venezuela.

9. Data Protection Authorities in several Nordic countries have taken the rather strange position that their laws prohibit the export of these lists to the United States. It is paradoxical, at least, that the EU Data Protection Directive might also prohibit the continued export of these lists to the United States from the rest of Europe.

10. Other associations have adapted this program to their markets, notably Japan and the UK.

11. These procedures are modeled on those of the European Advertising Standards Authority, formed to manage cross-border complaints about advertising material on a self-regulatory basis.

12. We hasten to state that we do not question the need for this study, or the need for the examination of the important questions posed. They are critical and difficult questions and the job must be done. Our point is that focus on domestic "internal" technical questions risks to distract attention from the broader multinational policy issues raised regarding providing effective relief in a borderless world, and defining what governments need to provide relief from.

13. With a few exceptions, but nearly alone among the OECD countries, the United States legal system provides for easily-maintained class actions, contingency fees, unfettered discovery in litigation, jury determination of damages, and punitive damages. This has not gone unnoticed by foreign businesses.

ISBN 0 642 24914 8