"Consumer Protection in the Age of Borderless Markets and the Information Revolution"
Roscoe B. Starek, III
U.S. Federal Trade Commission
Conference on Transborder Consumer Regulation and Enforcement
Balmain Crescent, Australian National University
June 7, 1995
Good morning. The agenda for today's conference on Enforcement and Compliance in Global Consumer Transactions indicates that I am going to be speaking about "how the borderless market and the information revolution will change consumer protection as we know it." Without engaging in too much crystal ball-gazing, I would like to share my thoughts with you on some of the promises for consumers, and the problems for law enforcers, that the global market and the information revolution pose.
Before I proceed, I should point out that my remarks today are my own and do not necessarily represent the views of the Federal Trade Commission or of any other Commissioner.
The Borderless Market
Through such agreements as the GATT, the North American Free Trade Agreement, or NAFTA, and the Co-operation and Co-ordination Agreement between Australia and New Zealand, governments have made strides toward removing traditional, government-imposed barriers to international trade such as tariffs, import quotas, and domestic product subsidies. We anticipate that these changes will benefit consumers through lower prices and a greater selection of goods and services. And certainly manufacturing firms have the potential to expand their markets to reach consumers they couldn't reach before.
But removing tariffs and other obvious trade barriers is not sufficient to achieve a borderless market. Governments must also consider non-tariff barriers such as product labeling requirements, product specifications, and advertising standards.
Product specifications and even advertising standards can pose non-tariff barriers to trade. For example, if one government prohibits the use of a certain chemical in manufacturing, a manufacturer that makes products with that chemical must either forgo selling in that country or reformulate its manufacturing process.
Government regulations that set standards for advertising and marketing claims through strict prohibitions or performance standards may inhibit firms from advertising their goods in other countries. For example, one country may prohibit advertising that compares one brand to another or that makes a health claim for a food. If a television advertisement containing the prohibited messages is transmitted by a satellite, it will cross many national borders and potentially violate the law in some of those countries.
But for a borderless market to thrive, manufacturers must be able to communicate effectively with consumers in other countries. This means that they must be able to provide consumers with information about their products through advertising. As a result, there is a need for advertising standards that are flexible enough to accommodate both consumer protection and international trade considerations.
An example of this is found in environmental marketing. Environmental labeling programs are flourishing worldwide. Here in Australia you have the Environmental Choice program, and you're not alone. Canada also has an Environmental Choice program, Germany has the Blue Angel program, and Japan has its EcoMark program. Some work is being done, however, by the International Standards Organization to establish uniform international standards for environmental marketing claims. As you know, the ISO promotes private sector, voluntary, consensus- based standardization. The ISO has proposed international guidelines for environmental marketing claims. If adopted, these guidelines may provide a basis for assisting marketers in making claims about the environmental features of their products without running afoul of the varying laws of individual countries. By the way, the proposed ISO guidelines are quite consistent with the Federal Trade Commission's own environmental marketing guides, and, as a result, it appears that compliance with the ISO guidelines would most likely mean compliance with the FTC's guides.
While lowered barriers to trade ease the flow of goods across borders, they also present consumer protection challenges because they make it easier for fraudulent marketers to target even more consumers as victims. Technological advances in telecommunications and finance allow scam artists in one country to communicate easily with victims in another country and to transfer their ill-gotten gains from one country to another. For example, there was a case where a Panamanian company sent out invoices for entries in an international telefax directory. The invoices were mailed from the Czech Republic using a Swiss correspondence address on the invoice. Criminal proceedings brought in Switzerland against the company had to be abandoned because it was not possible to prove that a criminal act had been performed on Swiss soil.
Enforcement in the Borderless Market
The transnational nature of a scam may make it very difficult for law enforcers to catch the perpetrators and to compensate the victims. The ease with which a con artist can flee from one country to another may also make it difficult to prosecute law violations, no matter how quickly a law enforcement agency takes action.
The arena of telemarketing is particularly vulnerable to this type of problem. Telemarketers may have offices in one country but target consumers in another country. An example of this is in the area of gemstone fraud, where the Federal Trade Commission and other American consumer protection agencies received complaints from consumers about telemarketers who fraudulently sold gemstones as investments through high pressure sales tactics, promising large profits with few risks. Though consumers lost tens of millions of dollars to these firms, the telemarketers were located in Canada and therefore out of reach of American authorities. Fortunately, information sharing allowed Canadian law enforcement authorities to pursue the matter and make arrests in several cases.
There are real barriers, however, to investigating foreign marketers who victimize consumers in my country. Gathering information about fraudulent marketers abroad can be difficult. Victims of foreign fraudulent marketers in the United States may not know much about the marketers that defrauded them. Sources of information that we normally turn to in a domestic investigation, such as former employees, local law enforcement agencies, and informers, are less accessible in foreign countries. Even if those sources were inclined to supply information, they are less likely to know of the Commission's existence, and the Commission's staff is unlikely to know who they are. Moreover, the Commission's ability to use compulsory process may be ineffective to compel the production of documents or sworn testimony of persons outside the United States.
There are other barriers to conducting investigations in foreign nations. Differences in foreign law can make it difficult to investigate conduct that takes place in foreign countries. Some nations affirmatively block cooperation with foreign government investigations conducted on their soil. Some impose criminal sanctions on its citizens who provide information to American or other foreign law enforcement agencies. Others restrict their law enforcement agencies from sharing information with foreign governments. Moreover, conducting an investigation in a foreign country can be an expensive proposition, and United States government personnel posted abroad generally do not have the resources to assist us.
While the Commission is fully committed to appropriate cooperation with law enforcement agencies in other countries, the extent and nature of that cooperation are shaped by the statutory requirements imposed by our respective legislatures. Our ability to provide information to foreign authorities is limited by the non-disclosure provisions of Section 21 of the Federal Trade Commission Act, which was enacted to preserve the confidentiality of sensitive information submitted to the Commission during the course of its investigations. This includes information such as the identity of informants, the identities of parties under investigation (who ultimately may not be charged), and legitimate business trade secrets. In some countries, similar statutes are more restrictive than our own; in others, they are less restrictive.
If the Commission were to surmount these barriers and bring a civil action against a fraudulent foreign marketer doing business in the United States, further challenges would arise. First, if the marketer remains abroad, the United States courts cannot effectively compel its submission to American jurisdiction even if valid service of process can be obtained. Second, even assuming that an order is issued in absentia, the Commission likely would encounter difficulty in enforcing such an order against persons or assets located outside the United States. If the individuals or corporations under order are physically present in the United States, a violation of a court order prohibiting activities can be addressed with contempt sanctions. If they are outside of the United States, however, a federal court injunction in a civil case may well not be enforceable in foreign courts, and there may be nothing to deter the defendants from violating the order.
The Commission has been grappling for some time with the related problem of fraudulent transfers of assets from United States marketers to foreign countries. When American courts impose orders freezing assets to preserve marketers' funds for future consumer redress, significant problems arise when the assets are located outside of the United States. If the defendants are located in the United States, the court can order them to transfer the assets back to the United States, or to face incarceration until its order is obeyed. But if they are outside the United States, an asset-freeze order by an American court usually will not be enforceable as to assets located abroad. If a foreign court will not enforce asset-freeze orders as to money held in foreign banks, there is nothing to prevent the marketer from hiding or dissipating assets.
A concrete example of the complex interplay of these issues can be found in a recent Commission case. The Commission's attorneys, after obtaining an asset freeze from a federal district court in Utah and serving the defendant, discovered assets in a Canadian bank and sent copies of the asset-freeze order to the bank. At the same time, the court ordered the defendant to execute documents necessary to return the funds to the United States. Although the defendant executed the documents directing the Canadian bank to transfer the Canadian funds to an account in the United States which would be subject to the asset freeze, he also clandestinely told the Canadian bank to disregard these documents. The bank then commenced an action in Canada to determine who should have custody of the assets. When the American court threatened to hold the defendant in contempt until the money was returned, the defendant and the bank agreed to a procedure by which the funds were returned to the United States through the Canadian court. The assets were thus finally recovered after a somewhat tangled journey through two countries' court systems.
It is difficult for civil law enforcement authorities like the FTC to find marketers' assets when they are hidden in foreign countries. The uncertain ability of the Commission to compel information from foreign sources hampers its ability to obtain information about assets that have been secreted abroad. In the absence of international agreements that would allow access to this type of information in the face of foreign bank secrecy laws, it is virtually impossible for the Commission to obtain significant and timely information about marketers' assets overseas.
These obstacles notwithstanding, cooperation with foreign law enforcement authorities sometimes yields success. For example, one United States defendant in a telemarketing fraud case violated an asset freeze by withdrawing $1.2 million from frozen bank accounts and fleeing overseas. The Commission obtained an order that he show cause why he should not be held in criminal contempt for his actions. When he failed to appear, the court issued an arrest warrant. The defendant ultimately settled in Canada. Canadian customs officials learned of the arrest warrant, which had been entered in law enforcement databases, and then learned that he had lied on his application for entry into Canada. Canada deported him to the United States under circumstances that permitted him to be arrested on arrival. He was then successfully prosecuted and jailed for his contempt of the federal court's asset-freeze order.
United States agencies combating international telemarketing fraud also cooperate with foreign authorities on the criminal front. If a foreign-based telemarketer is criminally indicted for wire or mail fraud in the United States, extradition proceed- ings may be instituted to bring the responsible parties to the United States to face criminal charges. This procedure is not available to the Commission, which has only civil law enforcement authority. Nevertheless, the Commission intends to continue to make every effort to encourage the criminal prosecution and extradition of fraudulent foreign telemarketers by providing all possible assistance to the appropriate criminal agencies.
The United States is not alone in recognizing the globalization of marketing fraud, nor is it alone in the desire to respond to it. In 1992, I participated in the founding of the International Marketing Supervision Network, an international body of criminal and civil law enforcement agencies having responsibilities to protect consumers against fraud. The members include the Commission's counterpart agencies from European nations and the European Community, Australia, New Zealand, Canada, Mexico, and Japan. Among the purposes of the Network is to find ways of cooperating in tracking consumer problems associated with cross-border transactions in goods and services. Cooperation is on an informal basis with participants using their best efforts to help each other, subject to national law and practice and the availability of resources.
Given the Network's informal nature, it does not give its participants any rights or impose any obligations on them. It does, however, represent an excellent forum for the countries that experience law enforcement difficulties across international lines to communicate with each other. To this end, the Network maintains an up-to-date list of contacts in each participating country. Participating members share information about transnational scams, thus facilitating prosecution. For instance, in another example of the false directory invoice scams that I mentioned earlier, I received a request for assistance from the British Office of Fair Trading as to information on a company that used an American mailing address on bills that it sent to companies in Great Britain.
The Network also publishes a bulletin advising members of developments in members' consumer protection laws and in allegedly deceptive advertising practices. The Network is an example of how cooperation among nations can help overcome some of the information problems inherent in prosecuting international fraud that I discussed earlier.
The Information Revolution
Technological advances in telecommunications and finance are also being seen on the information highway, or what is also called the Global Information Infrastructure, or the GII, of which the Internet is one part. Online computer services permit the instantaneous exchange of information between consumers in different countries almost as easily as if they were next-door neighbors. Already nearly 40% of American households have personal computers, and nearly half of those computers are equipped with modems for communication with other computers. In the United States, advertisements for products as diverse as motor oil and alcoholic beverages now include their Internet address for consumers to call.
Two months ago, the FTC hosted a conference to discuss consumer protection issues raised by marketing on online services. The conference examined advertising, marketing, electronic payment systems, consumer privacy issues, and industry governance. The discussion in that conference illuminated some of the complex consumer protection issues already presented by the GII even though we are only on the cusp of the information revolution.
At this point, relatively few companies are advertising on the Internet, but those who are cover a wide range of products and services and companies and company sizes. Companies now advertising on the Internet range from automobile manufacturers who can respond to consumer requests for detailed information about their cars, to movie producers who promote their films through interactive chat areas and samples from the film soundtrack. The advantage of online advertising is that it allows companies to provide consumers with more detailed information than they typically would receive in other advertising media.
In more traditional advertising media, ads typically are directed or broadcasted to a wide audience. But advertising on the Internet is somewhat different: Much of it is located in specific areas devoted to advertising, areas that consumers generally must affirmatively seek out if they wish to see ads.
Another difference between traditional advertising and advertising on the Internet is that the technology bringing the advertising to consumers may blur the lines between what is, and is not, an advertisement. For example, online entertainment may in fact be an advertisement or may contain advertisements. This blurred line may be analogous to television infomercials, or program-length commercials, which are in fact advertisements but may appear to be investigative news or interview programs. The FTC requires infomercials to disclose that they are paid advertisements. This raises the question of whether online entertainment that is also advertising ought to contain a similar disclosure.
Online technology can also compress the advertising and the selling phase of consumer transactions. For instance, it is now feasible for consumers to view an ad for a product and immediately purchase that product. While the instantaneous nature of the transaction provides a convenience to consumers, it also makes it easier for fraudulent sellers to succeed because consumers have less time to consider their choices.
Internet technology can provide anonymity for the advertiser so that it may be difficult, if not impossible, for consumers to determine who the advertiser really is. Consumers have the opportunity to send out their own requests for information on a particular subject -- for example, an upcoming holiday trip to a particular destination -- and receive a variety of responses from companies online. Similarly, on various bulletin board services, consumers can ask other board users their opinions about particular products or services. However, these same consumers have no assurances that the opinions they receive are actually the opinions of other consumers who have used the product or service. It could be that the opinions are really disguised attempts by company representatives or competitors to persuade consumers to purchase or not to purchase a particular product. A possible solution to this problem might be to require personal identification and company affiliation if companies wish to advertise their products or services online.
This leads to the issue of whether people posting messages about products can be held liable for negative comments. One of the great benefits of online message bases is that the thousands of users provide a large and potentially very useful source of free information about products and services. So it seems important for consumers to be permitted to make negative comments about products without fear that they will be prosecuted for defamation. But while it may seem clear that consumers should not be held liable for honestly held opinions about products or services, the answer may be different when the question is whether competitors who speak out against a company's products can or should be insulated from liability.
Even if an advertiser accurately identifies itself, there are concerns about how consumers can distinguish reliable advertisers from fraudulent sellers. Many of the indicators of reliability that consumers rely upon -- such as store size and location -- are not available on the Internet. Thus, substitutes will have to develop. Possible substitutes include checking to see whether the advertiser provides dispute resolution mechanisms and money-back guarantees, and whether it provides or guarantees privacy with respect to consumer transactions with the company.
Once an advertisement is posted online, the question of liability for deceptive claims is raised. Federal Trade Commission law on this point is clear: online advertisers can be held liable for their claims. The Commission has already brought one case challenging allegedly deceptive advertising on an online service. The Commission charged Chase Consulting Services with advertising a credit rating-repair service advertised as 100% legal but that was in fact illegal. The Commission was able to take action quickly to settle the case and get the ad off the service before too many consumers were ripped off.
While advertisers are clearly liable for deceptive claims regardless of the medium in which their ads appear, a more difficult question is whether the online service providers themselves should be held liable for advertising that appears on their services. Court decisions on this issue have been mixed. For the most part the trend seems to be that online service providers are not liable. A court in New York, however, recently held an online provider liable for an allegedly defamatory statement posted in a message because the provider had taken it upon itself to perform a limited screening function to edit out certain unwanted messages. Of course, court decisions like that may well have the seemingly perverse result of discouraging online service providers from performing any screening function at all, in order to avoid liability.
Consumer responsibility raises the question of access by children to information on the Internet. In contrast to television, there is little pre-screening of information before it is posted online, so it is even more critical that parents monitor their children's access to it. Parents must also assume the responsibility of training and educating their children about the online world and how to interact with it. Certain online service providers already provide blocking functions to allow parents to prevent certain material from being accessed by their children, and this certainly should be encouraged. In general, it is important for consumers to become educated about cyberspace, what goes on there, and how to protect themselves.
This leads me to the question of policing the Internet. We should keep in mind that what advertising on the Internet looks like today may bear no relation to what it will look like in the future. Many have stressed that self-policing mechanisms should be encouraged and experimented with before the government steps in. The Internet is highly suitable for self-policing because of the quick feedback that consumers can provide, especially to the commercial online providers such as Compuserve, Prodigy, and America Online.
Some formal self-policing is now underway. In the United States, the National Advertising Division of the Council of Better Business Bureaus is a self-regulatory body that since 1971 has been resolving allegations of false or misleading claims about products or services. The NAD recently announced that it will start monitoring postings on online services and Internet newsgroups. In the event the advertiser refuses to stop making claims that the NAD finds deceptive, the NAD can refer cases to the Federal Trade Commission. A self-regulatory group such as the NAD may have an advantage over the FTC when it comes to online ads because many cyberspace users prize the almost anarchistic nature of cyberspace and resent governmental intrusions.
We must also recognize the unfortunate fact that, just as with traditional forms of advertising, there is no way to completely eradicate fraud from online services. There will always be con artists willing and able to use technology to stay one step ahead of law enforcers.
It may therefore be more useful to concentrate efforts on those companies and individuals who do not intend to deceive or defraud people, but simply do not know what the rules are. The Internet's easy and inexpensive accessibility lends itself particularly to individuals and small companies who are new to the advertising arena and may be unfamiliar with the general requirements of advertising law. It is possible that educating this group as to the appropriate rules could go a long way toward stemming deceptive advertising on the Internet.
Recognizing the importance of consumer education, the FTC has established its own site, or "home page," on the Internet's World Wide Web. The FTC now posts online news releases announcing law enforcement and other official agency actions, as well as brochures offering advice and tips for consumers. The FTC traditionally has distributed its consumer information brochures to key information sources throughout the United States, including state and local government offices, national consumer and business organizations, Better Business Bureaus, and universities. It is hoped that placing our news releases and consumer information brochures online will spread the word even further and will alert consumers to the latest fraudulent scams and deceptive practices.
Unfamiliarity with the ground rules for advertising may also be a problem when advertisers from other countries start to appear on the Internet. Such advertising raises the same problems and issues involving jurisdiction and authority that I noted earlier with traditional advertising. It is difficult, if not impossible, to enforce United States laws against offshore advertisers. At the same time, any laws passed in the United States are likely to have international ramifications because of the large volume of U.S. advertising that reaches other countries and because the U.S. is such a large market for non-American firms.
Borderless markets and the information revolution promise to provide many benefits to consumers. As we have seen, however, they also present some difficult consumer protection issues. Government enforcers must remain open and flexible as to the best ways to address the problems presented both by traditional international marketing and by online advertising. Efforts such as the International Marketing Supervision Network should continue to be very helpful in combatting some of these problems. Governments may have to acknowledge that self-regulatory methods may be more effective in the first instance than active government control of the Internet.
Consumer education efforts should be emphasized for two reasons. First, the old saying that "an ounce of prevention is worth a pound of cure" rings especially true given the difficulties of prosecuting those who will perpetrate fraud internationally or on the Internet. Second, the ease with which educational materials can be posted by the government or by consumer protection groups and then accessed by consumers makes consumer education on the Internet particularly cost-effective.
In sum, the challenge for governments is to find ways to inhibit deceptive and fraudulent marketers from taking advantage of the greater access to consumers provided by the global market and information infrastructure, without hindering or slowing the many benefits to consumers that these developments provide. Consumer education, industry self-regulation, and information sharing among governments should help achieve this goal.