Cyber Consumer Law and Unfair Trading Practices 075462417X, 9781315258614, 9780754624172

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CYBER CONSUMER LAW AND UNFAIR TRADING PRACTICES

Markets and the Law Series Editor: Geraint Howells Lancaster University, UK Markets and the Law is concerned with the way the law interacts with the market through regulation, self-regulation and the impact of private law regimes. It looks at the impact of regional and international organizations (e.g. EC and WTO) and many of the works adopt a comparative approach and/or appeal to an international audience. Examples of subjects covered include trade laws, intellectual property, sales law, insurance, consumer law, banking, financial markets, labour law, environmental law and social regulation affecting the market as well as competition law. The series includes texts covering a broad area, monographs on focused issues, and collections of essays dealing with particular themes. Other titles in the series Information Rights and Obligations: A Challenge for Party Autonomy and Transactional Fairness Geraint Howells, André Janssen and Reiner Schulze ISBN 0 7546 2432 3 Consumer Protection Law Geraint Howells and Stephen Weatherill ISBN 0 7546 2338 6 (Pbk) ISBN 0 7546 2331 9 (Hbk) Personal Insolvency Law, Regulation and Policy David Milman ISBN 0 7546 4302 6

Cyber Consumer Law and Unfair Trading Practices

CRISTINA COTEANU Secretary of State on European and International Affairs, Ministry of Justice, Romania

First published 2005 by Ashgate Publishing Published 2016 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA

Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © Cristina Coteanu 2005 The author hereby asserts her moral rights to be identified as the author of the work in accordance with the Copyright Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.

British Library Cataloguing in Publication Data Coteanu, Cristina Cyber consumer law and unfair trading practices. (Markets and the law) !.Consumer protection - Law and legislation 2.Electronic commerce - Law and legislation I. Title 343 1.071 Library of Congress Cataloging-in-Publication Data Coteanu, Cristina, 1968Cyber consumer law and unfair trading practices I Cristina Coteanu p. em.-- (Markets and the law) Includes bibliographical references and index. ISBN 0-7546-2417-X I. Consumer protection--Law and legislation. 2. Electronic commerce--Law and legislation. I. Title. K3842.C68 2004 343.07 1 1--dc22 2004045818 ISBN 13: 978-0-7546-2417-2 (hbk)

Contents Series Editor’s Introduction by Geraint Howells Preface by Ian Walden Introduction

vii viii ix

1

Infrastructure of the Electronic Marketplace

2

Electronic Market Failures and Consumer Confidence

17

3

Standardisation of Online Contracts

45

4

Electronic Agents

69

5

Online Dispute Resolution

87

6

Disclosure of Online Information: From the Asymmetry of Information to the ‘Dominance of Technological Information’

115

7

Online Misleading Advertising

137

8

Fair Trading Legal Models in Commercial Practices: From a National or Community Principle to an International Model

155

Fair Trading Principle – The Starting Point for Online Consumer Law in Europe?

171

9

1

10 General Conclusion

205

References Index

211 237

To Patrick and our daughter, Alexandra

Series Editor's Introduction Geraint Howells University of Lancaster, UK

It is a great pleasure and honour to be invited to write a preface to this book. The author first came to my attention when she was awarded the ' International Prize of the IACL - International Association of Consumer Law' on the occasion of the 9th Annual Meeting of IACL at Athens in April 2003. Her reputation as a scholar of d istinction will be further enhanced by this present work. One of the strengths of the book is its clear structure and presentation. The author is one of these gifted people who has a knowledge of techno logy and an ability to explain it to others. She combines this with a sound grasp of law both in Europe and the US. She provides abundant analysis of relevant case law. Her central message is a powerful one. Through numerous examples she illuminates how the internet does not in practice equalise asymmetries of information and power. Rather it has the opposite effect of magnifying the unequal bargaining power between producers and consumers ami emphasising the vulnerable position of consumers on the internet. She brings the monograph up to-date with a discussion of the current debate about fair trailing principles within the EU. Conscious of the international character she seeks ways to develop universal principles or fair trading. Her work will assist in the development of such a framework. but one suspects the internet will continue to pose unique problems for consumers in the coming years. This book might suggest that these unique features call for special solutions not necessarily identical to those developed in the off-line world.

Preface Ian Walden Queen Mary, University of London

During the early years of the Internet, one of the central misconceptions bandied about in the popular media was that the Internet was unregulated and, more importantly, incapable of being regulated. As the Internet phenomenon took off at an exponential rate, governments became increasingly anxious to take some form of regulatory initiative, either to facilitate the further growth of Internet-based activity, from a domestic economic perspective, or to constrain behaviours that were felt to threaten traditional interests, such as right-holders, and particular actors, such as consumers. In our post dot.com boom era, a more sober assessment of the legal aspects of the Internet has revealed that the challenges for the Internet as an environment are not a lack of law and regulation, but an excess; continuing uncertainty over issues of validity and applicability, and an inadequacy of enforcement mechanisms, themes that are central to this book. This book is concerned with a particular area of Internet law relevant to us all: consumer protection. The statistics show that, in spite of the dot.com downturn, an ever increasing number of us are looking to the Internet and its services to engage in and carry out an ever more diverse range of activities and transactions, from buying cheap flights to meeting long-lost relatives. In terms of assessing the future shape of our Information Society, we are still ‘looking through a glass darkly,’ yet we are impelled to carry on looking, imagining and debating. The central thesis of the author is that existing consumer protection law fails to adequately protect the consumer when shopping online and, therefore, such laws need to be racast and tailored for this global online marketplace. It argues that the unique features of the online environment require countries to agree to cooperate and harmonise their laws in order to protect adequately their citizens, as consumers, when transacting across the Internet. The legal and policy issues addressed in this book are complex and challenging. The author is to be congratulated for her bravery in choosing to pursue such a difficult and broad field of study. The result of her efforts, this book, contributes to this important and ongoing debate.

Introduction Cyber consumer protection1 is both a story of creating a global marketplace for consumer transactions and of safeguarding reasonable consumer expectations in cyberspace. Furthermore, cyber consumer protection is also a story about the clash of legal systems under the impact of cyberspace; it is about the emergence of new challenges to national legal systems not familiar with a borderless environment. It is about the diffident consumer, not deeply confident whether he or she should rely on the free market rather than on governmental intervention. Faced with the inevitable difficulties of the electronic marketplace, consumers are confronted with a large number of questions to which they have difficulty in finding definitive responses. Would the free market approach fulfil legitimate consumer expectations, or should consumer protection issues rather be addressed by governmental regulation? Would this regulation increase consumer bargaining power? Would greater bargaining power for the consumers result in better quality services and in lower market prices? These questions are not exhaustive. Other dilemmas arise with regard to consumer confidence and the reliability of the existing legal framework. Should consumers rely on the protection offered by the consumer law of the 1960s2 or rather should they wait for a newly fashioned legal framework before contracting online? The story of consumers today may well be a story different from that of consumers in the sixties. In the sixties, the consumer was considered to be in a position of unequal bargaining power due to his/her difficulties in obtaining information. Due to the lack of information about the price and quality of products and services of competing traders, government intervention was considered necessary to alleviate market failures capable of impeding on the optimal operation of a competitive market.3 With the advent of the Internet, consumers can benefit from increased access to information, the increasingly easier format in which to use it and the immense range of online shopping options.4 However, one might wonder whether these advantages shift the classical market failures away from the electronic marketplace. A quick look to surveys5 carried out by consumers’ organisations demonstrate that for consumers, shopping over the Internet does not seem as simple as we might believe it to be. Unfair practices and unfair dispute resolution, product safety and product quality are only some of the problems possibly confronting consumers when doing electronic transactions. There is a lack of confidence and a wide range of questions regarding all the stages of the B2C6 commercial relationship ranging from advertising and ordering products and services to postcontractual aspects such as delivery information or applicable law. In the context of these quickly evolving electronic market failures, the development of consumer legislation becomes more than a question of ‘covering certain legal aspects of electronic commerce in the internal market.’7 Providing a coherent response to the consumers’ needs of protection should go beyond the reductive image of consumer

x

Cyber Consumer Law and Unfair Trading Practices

regulation as a ‘protective padding,’ filling the legal gap in the regulation of the electronic marketplace. Whilst having witnessed a proliferation of consumer legislations at national and European level, we notice that consumers still face difficulties when shopping online. The purpose of this study is to explore the fundamental rationales for cyber consumer protection in the electronic marketplace. Some commentators argue, ‘the final avenue for consumer protection on the information superhighway is consumer self-help.’8 Others simply argue that there is no need for regulation over the Internet.9 The main arguments supporting these views rely on a socio-political ideological approach. This approach can be described as the absolute opposition of Internet users towards any government regulation of cyberspace. By rejecting government regulation, Internet users label themselves ‘netizens,’ citizens of the Internet world, and agree to abide by their own self-imposed rules of ‘netiquette.’10 In line with this approach, but with a more legal touch, there are those views which consider that the existence of cyberspace creates a legal ‘disorder’ which does not necessarily rest on the creation of the rule of law but only on ‘an unbounded and perhaps permanently lawless’ state.11 To these views, we can also add the arguments of those who rely on the ability of the Internet to provide technical solutions to the whole range of consumer problems including issues of security and lack of information issues. For example, according to this technological approach, consumers would be able via electronic agents to identify the country, laws, protection, standards and remedial options most favourable for consumers whilst shopping on the Internet.12 Certainly, these views do not contradict the regulation of cyberspace. However, we can infer from this approach that technical remedies have the advantage over the need for a regulatory approach. Faced with these views, the study develops an opposing argument and argues that the electronic market is experiencing new failures, which should be addressed by legislation tailored to the peculiarities of the electronic marketplace. In doing so, the main consumer protection rationales are approached from the perspective of the technological specificity of electronic market, and of the electronic marketplace failures. The technological specificity of the electronic marketplace relies on the spatial and temporal separation between consumers, retailers, and products in electronic markets; on the encryption methods that make it easier to disguise the nature of transactions; and in general on the electronic markets that disregard national barriers and traditional means of forming contracts. These particularities generate new transactions, involve new technological tools and services and finally require a new architecture of consumer law suitable to respond to the innumerable questions relating to consumersí needs of protection in cyberspace. By a new architecture of cyber consumer law, it is understood that the identification of key issues that exist in a multitude of substantive legal areas, such as electronic contracts, online privacy and advertising, online dispute resolution and professional rules, as well as the manner in which these elements and key issues are regulated (or self-regulated) to form a complex set of rules and principles, protect the consumer against unfair commercial practices. The final purpose of designing this architecture is to demonstrate the need of a regulatory framework for an electronic marketplace that brings a new layer of sophistication requiring consumers to deal with new forms of electronic market failures.

Introduction

xi

The starting points for considering electronic marketplace failures are based upon the analysis of the unequal bargaining power and of the asymmetry of information. The unequal bargaining power is considered as a discrete rationale for consumer protection, a global concept for those market and private law failures which cause consumers to suffer economic detriment.13 In demonstrating the unequal bargaining power arising from online standardised contracts, the study identifies the main characteristics of the process of online standardisation. These characteristics range from the authoritarian process of designing terms and conditions – which means that the online contracts are prepared by business and imposed on consumers worldwide via the electronic medium, and ambiguous presentation of terms and conditions – whereby standardised terms and conditions relating to certain products or services are incorporated into a web page or floppy disk; to the non-negotiability of online terms and conditions in online consumer contracts including licence agreements and contracts concluded via electronic agents. Furthermore, it is argued that the emergence of licence agreements or contracts embodied in mass-market transactions and the multiplication of the role of electronic agents change our traditional view of unequal bargaining power based on the lack of negotiation between the consumer and the trader. It shows that the electronic market brings up a real dichotomy between current trading practices and our traditional view of unequal bargaining power. This dichotomy arises particularly from the US legal decisions in the area of the licence agreements such as shrinkwrap, click-wrap and browse-wrap agreements. In order to provide a complete picture of the unequal bargaining power, the study explores some of the essential aspects of unequal bargaining power in contracts concluded via (or through) electronic agents. In order to do so, it identifies the role of the electronic agents in online consumer transactions, and consumers’ problems emerging from the conclusion of contracts via electronic agents; it illustrates the multiplication of causes of unequal bargaining power within the B2C relationships intermediated by the electronic agents and provides a comparative analysis between the traditional and the technological model of contracts concluded via electronic agents. Finally, the study proposes solutions for alleviating the unequal bargaining power in the area of consumers’ contracts concluded via electronic agents. Another area is relating to online dispute resolution (ODR). ODR procedures are observed in a general manner by the doctrine. Nevertheless, the fundamental question of unequal bargaining power seems to be ignored. In order to fill the gap in this area, it is shown that multiple ramifications of ODR arising from ODR clauses, ODR information, ODR mechanisms and procedures, are all susceptible of creating unequal bargaining power in online consumer transactions. In demonstrating this, the main arguments rely on the examination of the main causes of unequal bargaining power relating to the inadequacy of technical and technological abilities of consumers; the imbalance of legal knowledge between consumers and traders in ODR procedures; and to mandatory ODR clauses and the provision of information about ODR procedures. With respect to the asymmetry of information, the study outlines its detrimental effect on the loss in consumers’ surplus14 that they experience due to the lack of information on price, terms and conditions, characteristics of product and services

xii

Cyber Consumer Law and Unfair Trading Practices

and to the difficulties in verifying through experience the performance and the characteristics of product or service advertised. The study argues that the asymmetry of information in online consumers’ transactions is much worse than in off-line environment and that the economic models such as the ‘price dispersion’ process are simplified methods for analysing the asymmetry of information in the context of consumer transactions. The exacerbation of asymmetry of information in the electronic market is generated by the ability of online businesses to collect valuable marketing information, the absence of physical location of marketers (or traders), the low cost to access the Internet, the tampering of a homepage website with labels certifying the respect of codes or false trust marks can easily mislead consumers and the difficulty of enforcing protecting consumer rules. All these trends demonstrate how different the potential risks of online misleading advertising are in comparison with consumers’ risks in the traditional market. Whilst exploring the imperfection of the electronic market in the area of online misleading advertising, the study investigates the appropriateness of the current legal framework to deal with online misleading advertising issues. To this end, the analysis takes into consideration the European Union and the US legal frameworks in the area of commercial communications; it also focuses on the most relevant US legal cases relating to cases such as: allowing online subscriptions without delivering the specified products or services; technical fraud such as embedding terms; selling misleading domain names; failure of disclosing information in the area of jewellery products etc. One of the purposes of this study is also to demonstrate that an adequate response to these evolving failures cannot be guaranteed only by applying traditional consumer protection concepts. The unique nature of the Internet and the difficulty of locating users lead to unpredictable results when applying the traditional jurisdictional concept according to which the national law is applied over everyone and everything within the territorial national borders. Yet another example of conceptual differences, which might arise in the area of the consumersí contracts is relating to the formation of the contract. There are major differences between the formation of a contract in off-line and online environments. In the off-line environment, the consumer has normally the opportunity to read the terms and conditions. In the online environment, a consumer involved for example, into a click wrap agreement whilst indicating his/her consent by clicking a button or a box installed on a floppy disk will be compromised into its terms and conditions. In sum, it is the global and virtual aspect of e-commerce which highlights the likelihood that a consumer might be subject to uncoordinated and inconsistent consumer rules that the consumer ‘never intended to reach and possibly was unaware were being accessed.’15 That demonstrates that cyber consumer protection could not be limited to one single geographical territory. The traditional concepts are connected to geographic limits. Nevertheless, ‘geography is a virtually meaningless construct on the Internet.’16 By exploring the main rationales for consumer protection, the study provides firstly a conceptual framework for the analysis of online unfair commercial practices. The study investigates the unfairness of commercial practices within the framework of the totality of the B2C commercial relationships including precontractual, contractual and post-contractual stages of the online consumer

Introduction

xiii

transactions. More concretely, the study is an attempt to lay foundations for a systematic reflection on the unfair commercial practices which include unfair standardised terms and conditions, commercial practices that are misleading or oblige consumers to adhere to mandatory online dispute resolutions clauses, or practices which do not disclose appropriate information to consumers or which do not offer any means of consumer redress. In order to counter the unfairness of commercial practices and the tremendous lack of unified and comprehensive rules that address these practices, the study proposes a model based on the fair trading principle. Otherwise, it is argued that a reliable legal framework for the protection of consumers over the Internet goes through an internationalisation of legal rules at the level of the global electronic market. The objective of this model is to look at the issue of adopting similar solutions and interconnecting similar principles at international level. In the context of the emerging electronic market, online businesses located in Europe are not just dealing with consumers located in the Internal Market. European online businesses are competing with electronic businesses located all over the world and targeting the same global electronic market. Furthermore, with the advent of E-commerce, the nature of competition as well as firms’ strategies and competitive advantages change. Increasingly, new entrants compete to set new consumer standards and new online business alliances are looking to play a strategic role in establishing the emerging standard. Within this context, the promotion of fair trading principle at international level should play an important role in striking the balance of market power among consumers and traders.17 The philosophy behind this principle lies in the integration of different legal systems and judicial cultures based on a common legal principle. Integrating legal systems and judicial cultures is as significant as the emergence of industries, postal, telegraph and telephone systems in the late 19th century. It was in the late 19th century that companies started to eliminate competition through coordinated industry and that the first anti-trust legislations were introduced at a time when even the industrial economics of the neo-classical school was still nascent.18 As we are in the 21st century, the emergence of the global electronic market requires a new legal and judicial space able to deal with the new models of commercial relationships that allay the suspicions of consumers whilst making online transactions in foreign countries. If in the past national governments have been generally able to counteract the persistent failures peculiar to a national market by endowing consumers with a national protective legislation, today this situation has changed. As Higgins remarks: [i]n the past, the fundamental legitimacy of governing authority has always been based on physical presence and territorially-empowered courts, but the global information infrastructure is composed of every jurisdiction on the planet and cyberspace itself exists in no physical place. Since every substantive area of human interaction is potentially impacted by electronic commerce, sources of law and regulatory interests are potentially all sources of law in every jurisdiction.19

On the basis of this emergent electronic market, the study ventures to predict that there is a need for a new interconnected look between the different national legal

xiv

Cyber Consumer Law and Unfair Trading Practices

systems which allow the international electronic marketplace to function as a single large system. The innumerable barriers to consumer confidence in purchasing in the electronic marketplace and to business confidence in crossborder selling are similar to those existing in the Internal Market. So far, at the level of the European Union, there is much discussion on how to provide stimulating competition and confidence for consumers in the Internal Market. One of the solutions suggested by the Green Paper on Consumer Protection,20 adopted in October 2001, is to develop a framework directive based on fair commercial practices. The principle has a unified perspective approach, at the level of both traditional and electronic market. The Commission’s 2001 Green Paper on EU Consumer Protection and the Follow-up to the Green Paper that took place in 2002 were followed by the adoption on 18 June 2003 of a proposal for a new Directive on Unfair Commercial Practices21 – primarily ‘misleading’ and ‘aggressive’ practices. The European Commission anticipates that the Directive will come into force early in 2005. Member States will have 18 months to implement the Directive into national law. According to Commissioner Byrne, the issue of consumer protection at EU level is inextricably linked to the development of the Internal level which means that businesses should be able to sell their products across borders as easily as they can at home and that consumers are confident when shopping across borders as they are within their national borders.22 These objectives are common for the electronic marketplace. Nevertheless, the question that arises is whether the solution proposed at the European Union level is adequate to the electronic marketplace. Before approaching the question of adequacy of fair trading principle at the international level, the study attempts to determine the multiple legal and sociological interpretations of the fair trading principle in online consumer transactions. In order to do so, the study demonstrates that the fair trading principle should be a matter of interpretation for both consumers and traders. For consumers, the fair trading principle means the protection of their legitimate expectations against deceptive and wrongful business practices. For traders, fair trading principle is a method of trade protection against unfair competition. These two interpretations constitute the starting point in analysing the two complementary sides of fair trading principle: unfair commercial practices and anti-competitive practices. The fair trading principle is an essential element of different legal systems but it does not exist as a separate or uniform concept. Most of the Member States integrate fair trading principle in their national legal systems but their approaches in formulating this principle become divergent in online cross-border consumer transactions. Furthermore, the emergence of new commercial practices peculiar to the electronic market such as website sponsorship, affiliation, remunerated search tools, use of meta-data and links, referrals and reviews, cookies, ‘spidering,’ coshopping and power shopping23 increase this difference. Many potential unfair practices are not caught by the national rules. Setting-up a principle of fair trading involves the establishment of common standards which approach both elements composing fair trading principle: ‘unfairness of the commercial practices;’ and ‘consumer detriment.’ The analysis of ‘unfair commercial practices’ is based on the observation of the main legal and institutional aspects of controlling and monitoring fairness of

Introduction

xv

commercial practices in the United Kingdom and United States models as well as on the model proposed by the Directive concerning Unfair Business-to-Consumer Commercial Practices in the Internal Market. The study shows that the ‘unfair commercial practices’ regulatory model should be supplemented by a deontology of fair trading. The electronic marketplace enhances the international dimension of duty of trading fairly that goes beyond the traditional model practised by a local merchant. In order to increase the consumers’ confidence in the electronic marketplace, there is a need for a new deontology of fair trading which involves the professionalisation of the business-to-consumer commercial relationship. The study shows that regulatory elements that support a deontology of fairness are already in place. In order to step forward to a common fair trading principle, a code or international convention should set uniform interpretations of fair trading principle on an ethical universal basis. The methodology of this study is based on the analysis of the European Union and United States relevant legal regulatory material in the area of online consumer contracts, licence agreements, electronic agents, online misleading advertising, disclosure of information and online consumer redress mechanisms. The legal material is appraised and comparative analysis produced in order to examine the way in which legal principals and concepts may cope with key issues of great importance for increasing consumers’ confidence in cyberspace. Throughout the study, in order to make the analysis easier to follow, examples are drawn in order to illustrate hypothetical or unfair commercial practices. The methodology is also based on the analysis of most important case law in the area of electronic contracts, licence agreements, online disputes resolution, and failure to disclose information. The area of research proposed by the study is limited to those aspects of law which are specific to the cyberspace environment. Sometimes, it has been difficult to make a precise distinction between off-line and online legal environment since some consumer problems arising over the Internet might be more or less resolved by the legislation existing in the traditional environment. In order to map out the main evolutionary lines of online unfair commercial practices, the study approaches in a very general way some the main economic theories and political views relating to consumer protection law. NOTES 1 2

3 4

All over our research, we have used the expression of ‘consumer protection’ combined with the term ‘cyber’. ‘Cyber’, a derivative of the word ‘cybernetic’, means in Greek ‘to govern’ (kubernân). Since 1960 most developed countries have enacted significant consumer protection legislation. However, as it was suggested by J.P. Cunningham, consumer protection is not a modern phenomenon: ‘legislation regulating prices of foodstuffs existed in ancient Rome and in medieval England’ in Fair Trading Act 1973, Consumer Protection and Competition Law, Sweet & Maxwell, London, 1974, p. 15. I.D.C. Ramsay, ‘Rationales for Intervention in the Consumer Marketplace’, OFT, 1984, p. 15. E. Yannon, ‘On-line purchasing’, Maryland Bar Journal, March/April, 2002.

xvi 5 6 7

8 9 10 11 12 13 14 15 16 17

18 19

20 21

22 23

Cyber Consumer Law and Unfair Trading Practices ‘Should I buy?’, Shopping online 2001 is an international comparative study of electronic commerce, carried out in September 2001 by the Consumers International Organisation. B2C electronic markets could be defined as Internet-based electronic markets designed to allow online business-to-consumer communications and transactions (see chapter 1). Recital (7) of the Directive on Electronic Commerce. ‘In order to ensure legal certainty and consumer confidence, this Directive must lay down a clear and general framework to cover certain legal aspects of electronic commerce in the internal market.’ (Directive 2000/31/EC of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market 17.7.2000 OJ 178/13.) D. Pridgen, ‘How Will Consumers Be Protected On The Information Superhighway?’ 32 Land & Water L. Rev. 237, 1997. J.P. Barlow, ‘Selling Wine Without bottles: The Economy of Mind on the Global Net’, available at: http://www.eff.org/pub/Intellectual_property/idea_economy.article. D. Pridgen, ‘How Will Consumers Be Protected On The Information Superhighway?’, 32 Land & Water L. Rev. 237, 1997. J.P. Barlow, ‘Selling Wine Without bottles: The Economy of Mind on the Global Net’, available at: http://www.eff.org/pub/Intellectual_property/idea_economy.article. Report of the American Bar Association (‘ABA’) ‘Jurisdiction in Cyberspace’ 1999, p. 83. I. Ramsay, Consumer Protection, Text and Materials, Law in context, Weidenfeld and Nicolson, London, 1989, p. 57. From a legal standpoint, the ‘consumer detriment’ should be expressed as the ‘loss in consumer surplus’ that consumers experience due to the unfair character of a commercial practice. Am. Libraries Assn. v. Pataki 969 F. Supp. 160 (S.D.N.Y.) Am. Libraries Assn. v. Pataki 969 F. Supp. 160 (S.D.N.Y.) See also Discussion Paper of the Alliance for Global Business, ‘On Trade-Related Aspects of Electronic Commerce In Response to The WTO’s E-Commerce Work Programme’, April 1999, p. 41 (The Alliance for Global Business (AGB) 1 is a coordinating mechanism of leading international trade associations created to provide business leadership on information society issues and electronic commerce. Jointly, these organizations represent the bulk of electronic commerce in almost all countries in the world. The coalition represents a diverse cross section of business in over 140 countries.) M. Furse, ‘The Role of Competition Policy: A Survey’, European Competition Law Review, 1996, 17(4), pp. 250–58. C.W. Higgins, ‘Legal Issues of Electronic Commerce: Activity Policies, Intelligent Agents and Ethical Transactions’, Paper reprinted from the Conference Proceedings of SGML/XML Europe 1998, ‘From Theory to New Practices’, 17–21 May 1998, Paris, France. COM (2001) 531. Proposal for a Directive of the European Parliament and of the Council concerning unfair business-to-consumer commercial practices in the Internal Market and amending directives 84/450/EEC, 97/7/EC and 98/27/EC (the Unfair Commercial Practices Directive) Brussels, 18.6.2003, COM (2003) 356 final, 2003/0134 (COD). D. Byrne, ‘From National Legislation to a Framework Directive on Fair Commercial Practices’, Workshop on Unfair Commercial Practices, Brussels, 22 January 2003. The ‘power shopping’ method could be defined as an accumulation of customers that is gathered through the Internet in order to buy goods or services at a reduced price that is granted by providers of the goods or services provided that a sufficient quantity has been ordered.

Chapter 1

Infrastructure of the Electronic Marketplace INTRODUCTION So far we do not have any knowledge about the existence of an ‘architecture of cyber consumer law’ definition. In my view, it could be defined as a complex set of rules and principles relating to substantive legal areas such as electronic contracts, online privacy and advertising, online dispute resolution, and professional rules applicable in the context of the electronic marketplace. The infrastructure of the electronic marketplace is used to support electronic commerce transactions and includes telecommunication networks, hardware, software and users involved in electronic commerce as well as the interrelations existent between all these elements. The infrastructure of the electronic marketplace is viewed from two perspectives: as electronic commerce and as a B2C commercial relationship. Through this twofold perspective, the chapter shows that the architecture for cyber consumer law depends on the infrastructure of the electronic marketplace and its legal taxonomy. It is argued that the legal taxonomy of the electronic marketplace infrastructure leads to a reconsideration of the way in which consumer protection rules are applicable in cyberspace. Identifying the architecture for the cyber consumer law taken as a starting point, the infrastructure of the electronic marketplace is aimed to set up a basis for an overview of the current rationales for cyber consumer law. The chapter describes the infrastructure of the electronic marketplace as follows. It describes a basis for understanding the electronic marketplace, i.e. we set up a legal taxonomy that may lead to a reconsideration of the way in which consumer protection rules are applicable in the electronic marketplace. It outlines the potential obstacles or market failures that electronic commerce raises in connection with the conclusion of the contract, privacy, security issues and misleading advertising. The chapter provides a typology of the Internet services to consumers and their implications for consumer protection and it approaches the B2C commercial relationship from a legal perspective. Finally, it focuses on the legal qualification of ‘seller’ in the electronic marketplace. 1.1 Basis for Understanding the Electronic Marketplace Since 1970, the traditional marketplace has experienced rapid changes: ‘from mass production for a homogeneous market to specialized products and services competing for segmented/targeted consumer and business markets; from brand

2

Cyber Consumer Law and Unfair Trading Practices

loyalty, long product cycles to discriminating consumers shopping for quality, service and the best value for money from product development followed by market-testing to survey and other research to roll out innovations tailored to the preferences expressed by consumers; from arm’s length transactions, involving distinct roles and competing claims of producers and consumers to blurring of traditional distinctions between buyers and sellers, and increasing reliance on feedback from consumers; from focus on physical and financial capital to focus on information, innovation and human resources – the high performance workplace corresponding to the demanding, well informed consumer.’1 On the background of these challenges not totally assimilated by the classical consumer law, the electronic marketplace is based on a new market that generates new transactions, involves new technological tools and services and brings a new layer of sophistication which requires consumers to deal with unexpected electronic market failures. Infrastructure of the electronic marketplace, for the purposes of this study, is examined on the one side as a market that generates multiple electronic commerce transactions and on the other side as a commercial relationship between a consumer and a trader. 1.1.1 Electronic marketplace as electronic commerce The electronic marketplace includes: players (market agents such as suppliers, marketers, electronic agents, brokers and consumers); products (goods and services); processes (supply, production, marketing, competition, distribution etc.).2 In general terms, electronic marketplace refers to electronic commerce. The electronic commerce includes all aspects of commercial transactions involving both consumers and businesses, based upon the electronic processing and transmission of data including text, sound and visual images. The best-known use of ‘electronic commerce’3 relates to the context of retail consumer purchases, such as a CD or a book via a site on the World Wide Web. However, electronic commerce encompasses a much broader field of activities. It covers activities such as banking and insurance services, ranging from account inquiries to loan transactions completed entirely on-line; information services for education or entertainment, whether for payment or free of charge; ordering tangible products such as computers or flowers for delivery locally or overseas; dealing with after sales service inquiries; twenty-four hour shopping; advertising; travel bookings; inventory control, ordering, invoicing and account management.4 Electronic commerce also concerns digital products such as: software, movies, music, books, and information services such as banking, insurance, consulting, etc. There is no single accepted definition of electronic marketplace as electronic commerce. The reason for that consists in the fact that new forms of electronic commerce are emerging every day. The OECD defines electronic commerce as ‘all forms of commercial transactions involving both organisations and individuals, that are based upon the electronic processing and transmission of data, including text, sound and visual images. It also refers to the effects that the electronic exchange of commercial information may have on the institutions and processes that support and govern commercial activities. These include organisational management,

Infrastructure of the Electronic Marketplace

3

commercial negotiations and contracts, legal and regulatory frameworks, financial settlement arrangements, and taxation, among many others.’5 Other definitions state that the electronic commerce is a broad concept that covers any commercial transaction that is affected via electronic means and includes such means as facsimile, telex, EDI, Internet and the telephone.6 Faced with this diversity of electronic commerce forms, it is difficult to know how to apply a consistent treatment with regard to the protection of consumers in the electronic marketplace. Any discussion of consumer protection would normally require a legal taxonomy that classifies electronic commerce into identifiable categories. A legal taxonomy7 of the electronic commerce is illustrated in the table below: Table 1.1 Current legal taxonomy of electronic commerce Electronic commerce

Online contract

Online performance

Physical performance

Goods (books, CDs, food, clothing, cars)

✓

–

✓

Services (banking services, database access, education, legal services etc.)

✓

✓

–

Digital products (software, music, movies etc.)

✓

✓

–

Such taxonomy may well lead to a reconsideration of the way in which consumer protection rules are applicable in the electronic marketplace. For example, it can lead to the conclusion that into a specific online consumer transaction where the product is physically delivered, the consumer protection should be considered under the traditional national consumer law. Would this criterion of classification of electronic commerce according to the means of performance (online or physical performance) offer better criteria for consumer protection in the electronic marketplace? That means that consumers would be obliged to assume the particular risks of the electronic marketplace on the basis of traditional consumer principles that probably are not adequate for the new environment. As it will be observed in the following chapters relating to the unequal bargaining power and asymmetry of information, sometimes the application of traditional legal principles can be insufficient for effective protection of consumers in cyberspace. A narrow interpretation of electronic commerce might be a key inhibitor for

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consumer protection in the electronic marketplace. In my view, the electronic commerce taxonomy should be broadly architected. It should not exclude from its field of application, transaction processes online that include off-line orders, ‘nontransactional’ elements arising in pre-contractual and contractual aspects such as the provision of information about products and services, distribution of ordered products or orders placed over a network, regardless of whether or not the payment and the delivery took place online. Nevertheless, before approaching the issue of consumer risks in cyberspace, the following section briefly describes the technical aspects of the services offered to consumers by the electronic marketplace. 1.1.1.1 Typology of Internet Services to Consumer Cyberspace is becoming a real space, which is no longer the privilege of universities, research or military institutions. The statistics shows that by 2005, one billion people will be connected to the Internet with more than 75% of them outside of North America.8 These figures show the magnitude of the impact of this new market for consumers in the near future. In evaluating the impact of online services for consumers it is important to learn about the particularities of the Internet as a new consumer medium. As Judge Preska noted in American Libraries Association v. Pataki,9 ‘the Internet represents a new consumer medium. The Internet is different from anything consumers have used in the past. Due to the Internet’s unprecedented speed of communication, consumers can interact with businesses virtually instantaneously. In addition, consumers can access products and services throughout the world with the click of a mouse. Thus, the Internet’s speed and interconnectivity present new challenges to a legal system designed to protect consumers.’10 The growth of the electronic marketplace is explained by the variety of the services that it offers, which facilitates the exchange of information at global level. The consumer is able to exchange messages in various ways such as: 1 2 3 4 5 6

One-to-one messaging (such as ‘e-mail’); One-to-many messaging (such as ‘listserv’ or ‘mail exploder’); Distributed message databases (such as ‘USENET newsgroups’); Real time remote computer utilization (such as ‘Internet Relay Chat’); Real time remote computer utilization (such as ‘telnet’); and Remote information retrieval (such as ‘ftp,’ ‘gopher,’ and the Web).11

This typology demonstrates that the online medium ‘offers several different facilities through which commercial activities may be conducted. Given the variety of these forms of communication, the online medium may be more properly viewed as a collection of several different media, united by their common use of computerto-computer communications at a distance.’12 The variety of online services, ranging from networks and websites to listserv and chat rooms, is not only public networks but also the place that creates a tremendous risk for online consumer protection.

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1.1.1.1.1 Electronic mail and Listserv Electronic mail is one of the most popular and simplest forms of communication in cyberspace. E-mail is not an instantaneous form of communication. The sender does not normally receive immediate feedback concerning the delivery of its message. The message, which can contain text or images, sounds or entire computer programs, is sent into the Internet and routed around by various computers until it reaches its destination.13 By using a piece of software called ‘mailer,’ the e-mail can be sent into cyberspace. The mailer then breaks the message down into smaller pieces known as packets. The packets travel separately across the networks but are ultimately recombined at the destination. During the trip, the packets bump along from router to router through bridges and switches. Each router or switch looks at the packet’s destination, without inspecting its contents, and decides the best way to pass it along.14 Sending e-mail was compared with ‘sending a first class letter.’15 Judge Preska in American Libraries Association v. Pataki criticized this comparison for two reasons. On the one side, it is considered that the sender directs his message to a logical rather than geographic address, and therefore need not to know the location of his correspondent in real space. On the other side, Judge Preska argues that ‘most programs provide for a “reply” option, which enables the recipient to respond to the sender’s message simply by clicking on a button; the recipient will therefore not even need to type in the sender’s e-mail address. A further distinction concerns the level of security that protects a communication. Whilst first-class letters are sealed, e-mail communications are more easily intercepted.’16 In order to prevent the risk of unauthorised interceptions of messages, consumers can encrypt information about their transactions. The use of encryption technology is expected to become more common in the next years. The difference between listserv and E-mail consists in the fact that listserv allows the transmission of ‘one-to-many’ messages whilst e-mail is ‘one-to-one’ communication. The role of listserv servers is to maintain lists of computer users’ names and electronic mail addresses. It is a service adapted to the exchange of information. Whilst many web sites allow visitors to correspond with the site owners by electronic mail, in most situations, ‘it is the visitor who must actively access the site himself rather than “receive” the site in the same way as he would passively receive electronic mail.’17 1.1.1.1.2 Usenet newsgroups and chat rooms Usenet newsgroups and chat rooms allow users to discuss topics of common interest online. Within the framework of Usenet groups, users are allowed to read or send messages to newsgroups without any prior subscription, and there is no way for a speaker who posts an article to a newsgroup to know who is reading the message.18 However, when someone visits a Usenet group in which he cannot post anonymously to newsgroups, by making a comment or addressing a question he will automatically give his e-mail address. Thus, Usenet newsgroups might present a risk for the protection of privacy by allowing unwanted junk e-mail (spamming practices). While legal considerations around the unsolicited e-mail are now focused around the principle of opt-out19 allowing transmission of unsolicited mail until the recipient asks for the mailings to cease, spamming practices within newsgroups continue to be viewed as highly offensive by users who access a newsgroup in order to find material on a particular

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topic, and instead must wade through screen after screen of commercial postings that are of no interest.20 Legislation against illegal spam and its enforcement may be useful but not sufficient as long as technical standards do not effectively impede new methods of spamming practices. For example, a study by MX Logic, an e-mail security solutions provider, shows that after the entry into force of the US Can-Spam Act in January 2004, the compliance was still at low levels21 and e-mail recipients had to take matters into their own hands to prevent spam from entering their inboxes. Usenet newsgroups remain unsecured in terms of consumer protection since many of them are used for misleading promotions including pyramid schemes, fraudulent business opportunities, and deceptive health claims. Contrary to what many people seem to think, the newsgroups are regulated with regard to unfair commercial practices. Placing advertising in a newsgroup may be subject to consumer protection standards which prohibits misleading and deceptive advertising regardless of the user’s location. 1.1.1.1.3 World Wide Web Developed in 1992 by Tim Berners-Lee,22 the web is the common method of communicating one-to-many information online. It is known as the common expression used to describe Internet. The information is available through web pages. The web allows file transfer facilities, meaning that consumers accessing a web page are able to download files onto their own computer hard drives. From a business perspective, the web is one way through which businesses can attract consumer attention by describing products via textual, graphical, and multimedia material designed to entice the viewer to spend more time absorbing marketing messages.23 It allows businesses to deliver electronically online services and to target consumers by collecting valuable marketing information. Furthermore, it is an interactive place where acceptance may be indicated by clicking on a particular button and where companies can provide a large amount of information about their products and services via commercial communications such as banner advertisements, electronic agents and rich media.24 From a consumer perspective, the web is a contradictory place. Whilst the web is the place where users can find alternative sources of goods and services and that offer the possibility to easily turn to third-party sources that provide additional information, it remains the place where the online transaction, marketing, security and privacy issues are often blurred by the technical peculiarities of the Internet. It can be concluded from this brief list of online consumer services that the electronic marketplace is characterised by potential failures related to the conclusion of the contract, privacy, security issues, misleading advertising etc. As noted later in this study,25 the particularities of the electronic market also raise questions with regard to the performance aspects in online consumer transactions. Before approaching these in the following section, the chapter determines the manner in which the law apprehends the evolution of the electronic marketplace from the perspective of the B2C commercial relationship.

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1.1.2 Electronic marketplace as B2C commercial relationship Understanding the functioning of the electronic marketplace requires the consideration of the economic and legal aspects of the B2C commercial relationship. B2C electronic markets could be defined as Internet-based electronic markets designed to allow online business-to-consumers communications and transactions. Another functional definition describes B2C as encompassing all ecommerce activities that address a final, individual consumer.26 However, electronic commerce includes a multitude of other business dimensions such as business-to-business (B2B),27 business-to-government (B2G)28 and consumer-toconsumer aspects (C2C).29 B2C relevant actors include suppliers, distributors, commerce services providers, infrastructure providers and customers. Statistics show that online shopping is becoming increasingly an important mainstream activity in the US. According to the US Census Bureau of the Department of Commerce the estimate of US retail e-commerce sales for the second quarter of 2004, not adjusted for seasonal, holiday, or trading-day differences, was $15.7 billion, an increase of 23.1% (±3.5%) from the second quarter of 2003.30 According to an analysis by eMarketers in 2003, 19% of the Western European population was an online buyer, equating to 75 million people, or 45.5% of all Internet users. France, Germany, Italy and the UK, were all at different stages of ecommerce development and, despite the fact that Germany has the largest population in Western Europe, the UK leads all other countries in B2C ecommerce.31 From a regulatory perspective, there are some essential distinctions between B2C and B2B. For example, whilst in the area of B2B relationship, regulatory issues tend to be more straightforward and less political, the B2C relationship is more sensitive as it often involves conflicting regulations such as privacy, jurisdiction, commercial communications etc.32 These distinctions are often translated in a variable risk allocation which corresponds to a different type of protective legislation. 1.1.2.1 Legal Approach of the B2C Commercial Relationship The architecture of cyber consumer law could not be imagined without drawing up the legal profile of consumer and seller within the electronic marketplace. In the following sections, the chapter endeavours to see how law reasons de iure condendo on the consumer and seller’s existence in cyberspace. Whilst in a B2B transaction, the parties to the contract are presumed to have equal bargaining power but in a B2C transaction, this level playing field is not presumed and consequently, the consumer would require special needs to be protected. In a B2B relationship, an equal bargaining power would be translated in an equal ability to accept or reject enforceable contractual clauses. In a B2C context, the consumer is generally considered as being the weaker party. For example, a consumer who will have difficulties in discharging the burden of proof in relation to large companies would be compensated by special protection that would prevent the abuse of the consumer by professional parties.

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1.1.2.1.1 What is the notion of ‘consumer’ within the cyberspace context? There is no internationally agreed definition of a ‘consumer’. In the United States, Section 101(15) of the Uniform Computer Information Transactions Act (UCITA) elaborated by the US National Conference of Commissioners on Uniform State Laws defines ‘consumer’ as: an individual who is a licensee of information or informational rights that the individual at the time of contracting intended to be used primarily for personal, family, or household purposes. The term does not include an individual who is a licensee primarily for professional or commercial purposes, including agriculture, business management, and investment management other than management of the individual’s personal or family investments.33

In the European Union, there are a large number of national definitions for ‘consumer’. For example, in Belgium, the Cour de Cassation held in the Saint-Brice case that the ‘consumer’ who needs the protection of Art. 94 of the LPC (Loi sur les pratiques du commerce et sur l’information et la protection du consommateur) the most, is the least attentive consumer who accepts without criticism the representations made to him and is not in a position to see through the traps, exaggerations or the manipulative silences.34 Within the framework of the German credit law,35 the term ‘consumer’ relates to all natural persons unless the agreement stipulates that a credit contract is intended for the pursuit of an already existing professional activity. Credit for funding the starting up of a professional activity therefore remains subject to German law. In the United Kingdom credit law, the consumer or rather the debtor is defined as being the person (‘the individual’) who has received credit under a consumer credit agreement, including the person whose rights and obligations have been transferred by transfer or entitlement. This person may be a partnership or any other association of persons not entirely made up of legal persons. In European law,36 the term ‘consumer’ has different legal connotations. The ‘consumer’ is defined as ‘a natural person who, in transactions is acting for purposes, which can be regarded as outside his trade or profession’37 or ‘who is acting for purposes, which are outside his or her trade, business or profession.’38 The point arises of the individual contracting partly for business, partly for other purposes. Since the regulation does not require a consumer to be acting ‘wholly’ outside the business, it seems arguable that as long as one purpose was outside the person’s business, he or she could still be a consumer despite the business purpose. A more restrictive test, whilst still recognising that having some business purpose will not disqualify a person being a consumer, is to read the definition as requiring the consumer to act primarily for purposes which are outside of his or her business.39 The definition of ‘consumer’ is subject to many other European legal provisions. For example, definitions that are different to some extent from those mentioned above are suggesting that a consumer may also be ‘any natural person who (...) is acting for purposes which are not directly related to his trade, business or profession.’40 Within the framework of self-regulatory approaches, the term ‘consumer’ applies ‘to individuals acting in their personal, family, or household capacity.’41 For example, the ‘Guidelines for Merchant-to-Consumer Transactions’ specifies that it

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would not apply to individuals who engage in transactions in their professional capacities.42 The term ‘consumer’ is intended to apply broadly to include the buyer of any goods or services as well as an individual who licenses a product or subscribes to a service. Moreover, the Guidelines are not intended to apply to consumers when in their individual capacity they engage in a transaction for the purpose of reselling the good or service. An extensive ‘consumer’ definition should cover mixed contracts, such as credit contracts granted to a natural person for purposes, which are mainly, but not exclusively, private. For example, a lawyer using credit to purchase a car for simultaneous professional and personal use or a credit used simultaneously to refinance existing consumer credits and reimbursement of a commercial debt. According to Section 102 of Uniform Computer Information Transactions Act (UCITA), the term ‘consumer’ means an ‘individual who is a licensee of information or informational rights that the individual at the time of contracting intended to be used primarily for personal, family, or household purposes. The term does not include an individual who is a licensee primarily for professional or commercial purposes, including agriculture, business management, and investment management other than management of the individual’s personal or family investments.’43 As suggested by the Official Summary of UCITA, a ‘consumer’ is ‘an individual (human being) who obtains information primarily for personal, household, or family purposes. Whether an individual is a consumer with reference to a transaction is determined at the time of contracting and in light of the thenintended use of the information’.44 In my view, the varying degrees of bargain power require a clear definition of consumer. If the harmonisation of cyber consumer law should be envisaged, it is important to discuss the necessity of a uniform definition of ‘consumer’. A narrow interpretation of ‘consumer’ that excludes small businesses might create unfair situations for small businesses. Whilst the ‘consumer’ will be endowed with a wide range of protective rights, the smaller business will be automatically included in the B2B category of commerce. Thus, a contract that would be unenforceable against a consumer, and would be negotiated out by a larger business, would be enforceable against the small business. Furthermore, small businesses would not have the right to reject a defective product and they will be weighed down by the burden of proof. The transactions between small businesses with large-scale businesses will be characterised by unequal bargaining power. Most legal systems45 consider that small businesses are in a position similar to that of consumers due to their inexperience in negotiating contracts with large-scale businesses. As suggested by Kaner: [a] small business owner has no more negotiating power in this transaction than an individual homemaker, it is entirely unrealistic to expect either of them to retain a lawyer to interpret the terms. Narrow definitions of ‘consumer’ that exclude small businesses will put small businesses into an unreasonable and unfair situation. (...) And the small business will not have the bargaining power or the legal budget that we normally associate with business-to-business transactions.46

Whilst the ‘universalisation’ of the ‘consumer’ term would prevent restrictive interpretation of the unequal bargaining power between consumers and traders, its

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‘extension’ to small business would avoid unfair situations, which would slow down entrepreneurship and independent business values. 1.1.2.1.2 The many facets of the ‘seller’ in cyberspace The qualification of ‘seller’ is essential in determining the level of online contractual liability between consumers and traders. Within the framework of the electronic market, the term ‘seller’ pertains to a large range of online contracts. In order to determine the ‘seller’ definition, it is necessary to determine as distinctly as possible the different categories of activities which may be subject to a contract in relation to the consumer target. An online seller can undertake different categories of activities such as supply of goods, supply of services and information. Under the European law, these activities can make the object of different forms of ‘distance contract.’47 A ‘distance contract’ means any contract concerning goods or services concluded between a supplier and a consumer under an organised distance sales or serviceprovision scheme run by the supplier who, for the purpose of the contract, makes exclusive use of one or more means of communication up to and including the moment to which the contract is concluded. Under the ‘distance contract,’ the ‘seller’ called ‘supplier’ means any natural or legal person who, in contracts, is acting in his commercial or professional capacity.48 The question which arises, is whether a ‘seller’ acting in his personal (mercantile) interest would remain the same ‘seller’ with the same level of liability and information duties. This question was approached in the US context. According to Official Comment 2 to U.C.C. § 2–104, the category of ‘sellers’ who have ‘specialized knowledge as to business practices’ includes ‘almost every person in business,’ as long as he is buying or selling goods in a ‘mercantile capacity,’ as opposed to a purely personal one. For these purposes, ‘banks or even universities, for example, may well be “merchants.”’49 According to Section 101(46) of the Uniform Computer Information Transactions Act (UCITA), a ‘merchant’ is a ‘person: (A) that deals in information or informational rights of the kind involved in the transaction; (B) that by the person’s occupation holds itself out as having knowledge or skill peculiar to the relevant aspect of the business practices or information involved in the transaction; or (C) to which the knowledge or skill peculiar to the practices or information involved in the transaction may be attributed by the person’s employment of an agent or broker or other intermediary that by its occupation holds itself out as having the knowledge or skill.’50 Furthermore, the Uniform Commercial Code (UCC)51 provides that a ‘seller’ is a person who by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill. This definition does not refer to the provision of services. For example, network health information providers52 engage in contracts for services and not goods and thus are not subject to the uniformly applied laws of the UCC. These ‘suppliers’ would be governed by common law, which includes no implicit warranties in online service contracts and allows for further disclaimers and remedy limitations. Under the common law principle, the supplier has a duty to

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carry out services with reasonable care and skill.53 What happens in practice, if the contract contains both elements of goods and services? Contracts, which refer to both elements, could be treated distinctly or considered in accordance with its predominant characteristics. That means that a contract of services endowed with predominant characteristics specific to the sale of goods, would ultimately be qualified as being a sales contract.54 This distinctive approach has important legal consequences for the establishment of the liability regime. For example, in the US case, Neilson Business. Equipment Center Inc. v. Monteleone,55 the court determined firstly, the nature of the contract and secondly, ‘measured’ the specialised knowledge of the defendant in computer technology. Firstly, the court stated that when a mixed contract is presented, it is necessary to review the factual circumstances surrounding the negotiation, formation and contemplated performance of the contract to determine whether the contract is predominantly or primarily a contract for the sales of goods. Neilson contracted to supply a turnkey computer system; this is a system sold as a package which is ready to function immediately. Secondly, the court stated that the plaintiff relied on Neilson’s expertise to provide a computer system tailored to the needs of Dr Monteleone. The contract between Neilson and Dr Monteleone was finally considered as a sale of goods where the provision of specialised services was accessory to the sale. If the contract were considered as being as a contract of service, the court may have imposed the liability based on the reasonable care negligence standard. This standard is less rigorous than the strict liability. The providers of services are permitted to reduce their responsibility towards consumers by issuing disclaimers and remedy limitations. Finally, the qualification of a given party to a transaction as ‘seller,’ is important in determining the qualification of a contract; qualification that, at its turn, should identify the applicable regime of liability. CONCLUSIONS The final purpose of designing an architecture for cyber consumer law is to demonstrate the need for a regulatory framework which copes with an electronic marketplace that brings a new layer of sophistication requiring consumers to deal with new forms of electronic market failures. The infrastructure of the electronic marketplace presents new features which distinguishes it in comparison with traditional marketplace. The infrastructure of the electronic marketplace composed of players (market agents such as suppliers, marketers, electronic agents, brokers, and consumers); products (goods and services); processes (supply, production, marketing, competition, distribution etc.) requires a legal taxonomy that classifies electronic commerce into identifiable categories. This legal taxonomy may lead to a reconsideration of the way in which consumer protection rules are applicable in the electronic marketplace. It is shown that a narrow interpretation of electronic commerce might be a key inhibitor for the consumer protection in the electronic marketplace. Otherwise, the architecture of the cyber consumer law has as a starting point the examination of the manner in which we envisage the electronic marketplace infrastructure. Designing a well-structured legal taxonomy for the

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electronic market infrastructure is essential for fostering consumer confidence in cyberspace and for contributing to a harmonised design, form, and structure for the architecture of the cyber consumer law. The architecture of cyber consumer law such as it can be observed today remains incomplete as long as it is not based on common legal definitions. In this context, architecture may impede on the evolution of the electronic marketplace infrastructure. Definitions of consumer, small business or seller will have to be agreed upon as part of this global architecture. Finally, our first chapter conclusion is that the electronic market infrastructure entails a new well-structured architecture for the protection of consumers in cyberspace which is different from that existing in the traditional market. However, the electronic marketplace infrastructure is in continuous movement. Thus, the time changes the value. Therefore, our second chapter conclusion is that we do not know how these values will articulate the regulatory architecture of cyber consumer cyberspace law. What we certainly know is that finding new solutions to the current problems would require forgetting our traditional conceptions based on traditional legal systems which come out of old territorial spaces. NOTES 1 2 3

4

5 6 7 8 9 10 11 12 13

Interim Report Office of Consumer Affairs, Industry Canada, ‘New Approaches to Consumer Law in Canada’: October 21, 1996, p. 18. P. Loshin, J. Vacca, P. Murphy, Electronic Commerce: On-Line Ordering and Digital Money, Charles River Media, 2001, p. 4. The UK Department of Trade and Industry has proposed the following definition of ecommerce: ‘Electronic commerce is the exchange of information across electronic networks, at any stage in the supply chain, whether within an organisation, between businesses, between businesses and consumers, or between the public and the private sectors, whether paid or unpaid.’ (The Performance and Innovation Unit of the Cabinet Office, September 1999, available at: http://www.cabinet-office.gov.uk/innovation/ 1999/ecommerce) M. De Zwaer, ‘Electronic Commerce: Promises, Potential and Proposals’, University of NSW Law Journal, available at: http://law.unsw.edu.au/publications/journals/unswlj/ index.html, D. Tapscott, The Digital Economy, Promise and Peril in the Age of Networked Intelligence, McGraw-Hill (1996); and E. Schwartz, Webonomics: Nine Essential Principles for Growing Your Business on the World Wide Web, Penguin, 1997. J. Sacher, OECD Report on Electronic Commerce, 2000. Australian Report of the Electronic Commerce Expert Group to the Attorney-General, ‘Electronic Commerce: Building the Legal Framework’, March 1998, available at: http://www.law.gov.au/aghome/advisory/eceg/single.htm. Professor C. Reed suggested this taxonomy during related discussions. www.commerce.net/resources/chap1-9/pg2/html. American Libraries Association v. Pataki 969 F.Supp. 160 (S.D.N.Y. 1997). American Libraries Association v. Pataki 969 F.Supp. 160 (S.D.N.Y. 1997). American Libraries Association v. Pataki 969 F.Supp. 160 (S.D.N.Y. 1997). J. Rothchild, ‘Protecting the Digital Consumer: the Limits of cyberspace utopianism’, 74 INLJ 893, Indiana Law Journal, Summer, 1999. M. Chissick and A. Kelman, Electronic Commerce: Law and Practice, Sweet & Maxwell, London, 2000, p. 80.

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14 G. Fresen, ‘The Internet: an introduction to basic legal risks that impact consumers’, 10 Loy. Consumer L. Rep. 64, 1998. 15 Reno v. ACLU, 929 F 117 S.Ct. 2329 (1997). 16 American Libraries Association v. Pataki 969 F.Supp. 160 (S.D.N.Y. 1997). 17 W.A. Effross, ‘The Legal Architecture Of Virtual Stores: World Wide Web Sites And The Uniform Commercial Code’, 34 San Diego L. Rev. 1263, 1997, at 1268. 18 American Libraries Association v. Pataki 969 F.Supp. 160 (S.D.N.Y. 1997). 19 The ‘opt-out’ option presumes that a consumer welcomes junk e-mail unless they expressly signalled his/her objection (for example, by entering his/her name on a register set up for this purpose) whilst ‘opt-in’ presumes that a consumer does not want e-mail unless he/she expressly consented. According to Article 7 of the Electronic Commerce Directive, ‘Member States shall take measures to ensure that service providers undertaking unsolicited commercial communications by electronic mail consult regularly and respect the opt-out registers in which natural persons not wishing to receive such commercial communications can register themselves.’ See also, the US Can-Spam Act of 2003 (‘An Act to regulate interstate commerce by imposing limitations and penalties on the transmission of unsolicited commercial electronic mail via the Internet legislation’) entered into force January 2004. 20 J. Rothchild, ‘Protecting the Digital Consumer: the Limits of cyberspace utopianism’, 74 INLJ 893, Indiana Law Journal, Summer, 1999. 21 According to MX Logic, an e-mail security solutions provider, has been tracking CANSPAM compliance since the act went into effect by examining 10,000 random unsolicited commercial e-mails every week. (‘CAN-SPAM Compliance Higher – But Still Low’, October 13, 2004 available at http://www.emarketer.com/Article.aspx?1003087). 22 Developed by Tim Berners-Lee, a physicist at the nuclear physics research centre, CERN, the www uses the system known as a hypertext to create links between documents. (Lloyd, I.L., ‘Information Technology Law’, Butterworths, 1997, p. 8.) 23 J. Rothchild, ‘Protecting the Digital Consumer: the Limits of cyberspace utopianism’, 74 INLJ 893, Indiana Law Journal, Summer, 1999. 24 Rich media ads include audio-enhanced banners and streaming audio-video advertising. (I. Maghiros, ‘The Supply of Information to the Consumer: When More is Actually Less’, 2000, available at: http://www.jrc.es/pages/f-report.en.html.) 25 See chapter 2, section 2.2.1 on ‘The particularities of global electronic marketplace’. 26 DG enterprise, ‘E-business report no. 2’, European Commission, 28 November 2000, drafted by Patrick Vittet-Philippe and Reinhard Buescher. 27 ‘Business-to-business’ (B2B) represents all business transactions and relationships between trading partners. These relationships are not new; they have existed for as long as business has existed – albeit in the form of face-to-face, phone, and fax communication. The advent of EDI in the mid-1960s and, more recently XML, has given companies the ability to communicate electronically and significantly increase the speed, reliability, and efficiency of their transactions. 28 Business-to-government (B2G) occurs at a business-to-government level in connection with public procurement, and with administrative functions like customs and excise. 29 Consumer-to-consumer (C2C) refers to electronic auctions and represents a significant growing part in electronic commerce. For example, E-Bay is an example of C2C relationship with 145,000 products available for auction in 1100 categories. 30 Report on 2nd Quarter 2004 E-Commerce Sales available at http://www.census.gov/mrts/www/ecom.pdf. 31 ‘Western Europe B2C E-Commerce’, Online Article by eMarketer, July 2004 available at http://www.emarketer.com/. 32 P. Vittet-Philippe and R. Buescher, DG enterprise, E-business report no. 2, European Commission, 28 November 2000, p. 3.

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33 Uniform Computer Information Transactions Act ‘UCITA’ (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws). 34 Cour de Cassation Cass. 12 October 2000 (Saint-Brice NV/Etat belge), J.L.M.B. 2001, 188. 35 German Consumer Credit Act (VerbrKrG). 36 The Brussels Convention and the Rome Convention define a consumer contract as ‘a contract the object of which is the supply of goods or services to a person (the consumer) for a purpose which can be regarded as being outside his trade or profession (article 13 Brussels Convention and article 5 Rome Convention).’ The explanatory reports of these conventions are in line with the interpretation restrictive of term consumer by the European Court of Justice. 37 Article 1§2, of the Consumer Credit Directive, Article 2 of the Distance Selling Directive, Article 2(b) of the Unfair Contracts Terms Directive etc. Furthermore, in Benincasa/Dentalkit, the European Court of Justice held: ‘According to settled case-law, it follows from the wording and the function of that provision (Article 13 of the Brussels Convention), that it affects only a private final consumer, not engaged in trade or professional activities. (…) Only contracts concluded for the purpose of satisfying an individual’s own needs in terms of private consumption come under the provisions designed to protect the consumer as the party deemed to be the weaker party economically.’ Benincasa v. Dentalkit, C-269/95, [1997] E.C.R. I-3767; See also Shearson v. T.V.B., C-89/91, [1993] E.C.R. 1993, I-139; Brenner and Holler v. D.W. Reynolds, C-318/93, [1994] E.C.R. I-4275; Mietz v. Intership Yachting Sneek, C-99/96, [1999] E.C.R., I-2277. 38 Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (OJ L 171, 17.7.2000, p. 1). 39 C. Scott and J. Black, ‘Cranston’s Consumers and the Law’, Butterworths, 2000, p. 90. 40 Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees (OJ L 171, 7.7.1999, p. 12). 41 Guidelines for Merchant-to-Consumer Transactions, Electronic Commerce and Consumer Protection Group: www.ecommercegroup.org/guidelines.html. The Electronic Commerce and Consumer Protection Group (‘E-Commerce Group’) is composed of leading companies in the Internet, online, and electronic commerce industries. These companies recognise the importance of consumer protection in the Internet age and have chosen to affirmatively address these issues for the purpose of creating industry best practices and a predictable legal framework for consumer protection in global electronic commerce and transactions. 42 Guidelines for Merchant-to-Consumer Transactions, Electronic Commerce and Consumer Protection Group: www.ecommercegroup.org/guidelines.html. 43 Uniform Computer Information Transactions Act ‘UCITA’ (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws). 44 Uniform Computer Information Transactions Act ‘UCITA’ (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws). 45 See for example, Weaver v. American Oil Co 276 Ne 2ed, 1971, the American court held that small businesses might be vulnerable when they have a limited experience of the industry. Section 2-203 of the Uniform Commercial Code protects small businesses. In the UK legal system, according to the definition in Section 12 of the Unfair Contract Terms Act 1977, someone basically ‘deals as consumer’ if they do not contract ‘in the

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46 47 48 49 50 51 52 53 54

55

15

course of a business’ and the other party does contract ‘in the course of a business’. In the case of R&B Customs Brokers, the Court of Appeal held that the acquisition of a car by R&B Customs Brokers, the transaction was not ‘in the course of a business’ but rather dealing as consumer (R&B Customs Brokers v United Dominion Trust [1988]1 All ER 847), See also Davies v Sumner [1984] 3 All ER 831; Devlin v Hall [1990] RTR 320. Comment of Cem Kaner to US Federal Trade Commission, ‘Perspectives on Consumer Protection in the Global Electronic Marketplace’, 1999. Art 2(1), Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts (OJ L 144, 4.6.1997, p. 19. Art 2(3), Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts (OJ L 144, 4.6.1997, p. 19. W.A. Effross, ‘The Legal Architecture Of Virtual Stores: World Wide Web Sites And The Uniform Commercial Code’, 34 San Diego L. Rev. 1263 (1997), at 1268. Uniform Computer Information Transactions Act (UCITA) (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws). Article 2 of the Revision of Uniform Commercial Code, available at: http://www.law.upenn.edu/bll/ulc/ucc2/2300.htm. K.B. Keltener, ‘Networked Health Information: Assuring Quality Control on the Internet’, available at: http://www.law.indiana.edu/fclj/pubs/v50/no2/keltner.html. Section 13 of Supply of Goods and Services Act 1982, amended in 1994. F.M. Greguras et al., ‘Electronic Commerce: On-Line Contract Issues’, Issues, 452 PLI/Pat 11, 24 1996, available at: http://www.batnet.com/oikoumene/ec_contracts.html Contracts for services ‘are governed by the UCC only when services are incidental to a sale of goods. This means that contracts with Internet access providers, as well as contracts for information services, may still be governed by common law. The common law may also apply to a transaction that does not fall within the formal definition of a “sale”, such as shareware or free sample software.’ Equipment Center Inc. v. Monteleone 524 A.2d; 1172 (1987).

Chapter 2

Electronic Market Failures and Consumer Confidence In 1984, Ramsay identified a number of potential market failures1 in consumer markets. Among these, two potential failures are of fundamental importance to justify the rationales for consumer protection. First, markets need adequate information on prices, quality, and terms. Second, markets need an institutional framework, which efficiently enforces individual consumer claims. One might wonder whether these old failures are still relevant today within the context of the electronic market? Does the information failure make sense in a cyberspace environment where the average consumer should be reasonably well informed and reasonably observant and circumspect? Could the cyber consumer argue the lack of information within the context of an environment, which by definition is synonymous with ‘wealth of information’? Would it not be better to leave the regulation of the cyber consumer market to the rules of the ‘perfect market’? When this market is predicted to fail what are the remedies for rescuing cyber consumer protection? There are several questions to be answered when approaching the issue of the need for cyber consumer protection. Providing an answer to all these questions requires undoubtedly a study in greater detail of the economic and conceptual fundamentals of the new electronic marketplace. Whilst these fundamentals are important for understanding the nature and the extent of the cyber consumer protection rationales, a detailed analysis of economic and political views is not possible given insufficient space to deal with such a complex matter. The aim of this chapter is to approach some of the aspects of the cyber consumer rationales and to look at the manner in which these rationales are reflected by the development of the cyber consumers’ laws. In order to do so, the chapter analyses the electronic marketplace via the model of the ‘perfect market’ comparable to that promoted by classical neo-liberal theories in the 1960s and 1970s. Moreover, it approaches the electronic market failures dealing with two particular cases: online privacy and misleading advertising. It also outlines the most important aspects of the virtual organisation of companies which refers to web address URL different from the real name of the company; and to the methods used by traders to divert consumers to different URL transactions. Finally, the chapter approaches the issue of electronic records by trying to provide answers to the following questions: When does a business’s duty to preserve documents, including electronic records, arise? What are the records that should be preserved? It clarifies the 3 confidence fields in electronic payments: confidence in the security of payment systems; confidence in the use of inexpensive electronic payment instruments; confidence in the effectiveness of rules governing electronic payments.

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2.1 Assumption of a Perfect Electronic Marketplace By definition, a ‘perfect market’ rejects any need of governmental regulatory intervention. There are many other ways to express the ‘conventional wisdom’ on the existence of a perfect electronic marketplace. For example, some commentators suggest that the Internet is a nearly ‘perfect market’ ‘because information is instantaneous and buyers can compare the offerings of sellers worldwide. The result is fierce price competition, dwindling product differentiation, and vanishing brand loyalty.’2 Others, on behalf of the biggest online companies, ‘support the view that the emerging global electronic marketplace is already perfect and that overbroad or rigid regulations will not only stifle its growth, but may also risk not addressing the problems they were meant to meet.’3 According to some companies, government regulation is not the solution to ensure cyber consumer protection. On the contrary, they consider that ‘governments should resist the urge to regulate electronic commerce and should encourage participants in the global electronic marketplace to adopt best practices and provide consumer education.’4 It is probably tempting for those who advocate the laissezfaire economic theories to endorse these arguments. After all, why should we not view the electronic marketplace as a perfect marketplace that generates the lowest possible prices, where the consumer does not face any failure problems? There is plenty of information accessible through the Internet and there are no problems of unequal bargaining power. As will be discussed later in this study, all these assumptions risk the same fate. The laissez-faire views are clearly based on the assumption that the electronic marketplace is by its nature an effective competitive system where retailer ‘location’ is irrelevant and consumers are fully informed of prices and product offerings.5 The proponents of these theories rely on the belief that intervention is less effective in comparison with the market’s own corrective force. According to their analysis, the market enjoys self-correcting properties, which contribute to consumer welfare.6 Consequently, ‘[a free market economy] gives people what they want instead of what a particular group thinks they ought to want.’7 In this sense, the consumer’s privacy was considered a relevant example of the functioning of the ‘perfect market’. Swire noticed that in the pure market, there are two important constraints on companies’ privacy policies: ‘[t]he first restraint comes from consumer preferences. The more that some or all consumers are willing to change their purchasing decisions based on privacy policies, the greater the market discipline on companies. The second restraint comes from publicity about companies’ privacy practices. Publicity affects customers’ choices by making them better informed about which companies are meeting their preferences. The prospect of such publicity encourages companies to conform to customers’ preferences. Publicity over time may also shape consumers’ preferences, such as by making them more concerned as a group about possible privacy problems.’8 It might be inferred from the ‘perfect model’ imagined by Swire that the consumer’s expectations are fulfilled by simply giving to the consumer the possibility of choosing between different market options without any need for regulatory governmental intervention. Even though the ‘perfect market’ forces may

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contribute to the protection of the consumer’s privacy, in my opinion it would be an error to leave privacy issues at the discretion of market solutions. The area of privacy as a perfect model is related to existence of voluntary approaches such as codes of conduct. However, most of these self-regulatory models are confined to a geographical area whilst the cyber consumers operate in a global electronic market. In such a global market it is difficult for consumers to identify those companies who really respect their privacy. Besides, the lack of effective self-regulatory rules to respond adequately to electronic market failure in the field of consumers’ privacy is illustrated by the US Federal Trade Commission [FTC] in its report on ‘Privacy Online: Fair Information Practices in the Electronic Marketplace’9 addressed to the US Congress. The Commission states that: ‘[b]ecause self-regulatory initiatives to date fall far short of broad-based implementation of effective self-regulatory programs; the Commission has concluded that such efforts alone cannot ensure that the on-line market place as a whole will emulate the standards adopted by industry leaders.’10 The Commission concluded that the enactment of the legislation is the only solution to ensure an adequate protection of consumer privacy online. Most selfregulatory systems have not been very successful in enhancing the online business practices. FTC noticed that ‘[s]elf-regulation cannot address recalcitrant and bad actors, new entrants to the market, and drop-outs from the self regulatory program.’11 Animated by the philosophy of regulatory intervention, many other governmental institutions and consumer organisations have opened a broad debate about the need for a proactive cyber consumer policy, which enhances consumer confidence in the Internet. This approach is contrary to any laissez-faire policy which for example might promote the stereotyping image of (1) a cyber consumer who anyway is no longer concerned about his privacy issues or of (2) a cyber consumer who by definition should be very observant and circumspect and so able to realise whether online advertising is misleading or not. It is clear that these opposing views giving consumers the choice of privacy or confronting them with the real need of being sophisticated by nature, create irremediable choices for those consumers who under the impact of technology, might face the prospect of having to live their lives weighing every transaction, every ‘click on,’ wondering if they could somehow use it to their detriment. 2.2 Case Studies Illustrating Electronic Market Failures As discussed in the previous section, that approach rejects the simplified image of a ‘perfect electronic market.’ It demonstrates that the electronic market is characterised by innumerable failures. The key market failures with respect to consumer protection reflect the inability of parties to identify the risks of a particular transaction to determinate the potential consequences of a specific business practice or to undertake commercially valuable exchange relationships. The consequences of the electronic market failures may result in higher prices, lower quality and a lesser choice of products and services. For the purpose of this study, this section examines two case studies relating to privacy (subsection 2.2.1) and misleading advertising of prices (subsection 2.2.2). The analysis shows that it is

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difficult to agree with those views that envisage the electronic marketplace as an area where governmental regulatory intervention should be avoided. Consumer protection legislation should help to rectify market failures by redressing the unfair inequalities of information and power in the B2C commercial relationship. 2.2.1 Case study: privacy An international company whose headquarters is based in the UK, offering online financial advice and services to an international clientele plans to collect anonymous information on the basis of credit card transactions. Whilst the company strategy promotes a sensitive marketing campaign for protecting cyber consumers’ privacy, there is a suspicion that the company is not true to its privacy policy. Although the company does not sell personal consumer data such as name, address, and social identification information, the company collects anonymous credit card transaction information. The latter information is meant to be traded to retailers and marketing companies interested in extending their markets, in targeting certain categories of consumers, or in assessing their advertising campaign. Such use is in line with the policy of most companies that collect anonymous data.12 Currently, there is no regulation which prohibits the use of anonymous data to target the electronic market. According to the Data Protection Directive13 all Member States shall lay down appropriate safeguards for personal data stored for longer periods for historical, statistical or scientific use. Consequently, under the alibi of the statistical, historical, and scientific studies, companies may use anonymous data and regularly monitor personal data, which has been collected. Furthermore, in the US, the Federal Trade Commission protects ‘consumers’ privacy in the most indirect (and fleeting) of ways: its vindication of consumers’ privacy rights is dependent upon companies’ violations of their own stated privacy policies under the theory that such violations constitute deceptive trade practices.14 We may wonder whether this specific circumstance of online environment might be predictable of the ‘perfect market’ model? For the company, the sale of anonymous credit card transaction information could be very lucrative. It is not for nothing that online marketers and tech companies consider the whole consumer privacy debate as an unfair assault on the net.15 On the cyber consumer’s side, they are simply unaware that information about their credit card transactions is collected. Whilst for the companies, this type of information brings profits, for cyber consumers it is valueless. Under the model of a ‘perfect market,’ theoretically, the cyber consumers should have the possibility of purchasing and negotiating their personal data as well as the information resulting from their consumer behaviour. Nevertheless, as suggested by Swire ‘[i]t is a daunting prospect for an individual consumer to imagine bargaining with a distant Internet marketing company or a huge telephone company about a desired privacy regime.’16 However, assuming a consumer succeeds in negotiating and trading his data to an online company, this information will make the object of a first contract, after which it will be out of the cyber consumer’s control. In a further stage, it will not be possible for a consumer to control the use of his personal information. Finally, the personal data will be traded between different companies specialising in targeting private information. Furthermore, according to the proponents of the ‘perfect market,’ the market enjoys

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self-correcting properties. Consequently, only by using self regulatory models may the market forces operate freely. Nevertheless, in our case, the industry selfregulation does not provide any solution to the process of collecting anonymous credit card transactions data. Moreover, this practice may constitute a niche for trading information under the alibi of respect for cyber consumer privacy. Finally, the purpose of this case study was to demonstrate the fact that the functioning of the electronic market is predisposed to certain anomalies and failures. The anomalies result not only from the companies’ craftiness of by-passing established privacy rules, but also from the specificity of the electronic market which may be a threat for cyber consumers’ perception of their interests. According to Alderman and Kennedy,17 consumers are not only ignorant about the fact that their private information is collected but also about their statutory rights. As some commentators suggest, the industry should accede to consumer demand and move toward opt-in,18 informed consent policies in computer-mediated environments.19 Rectification of these market failures goes through the recognition of consumer right to data ownership in the global electronic marketplace. Furthermore, from a consumer’s perspective, another point arising here, regards those business practices which consist of displaying dozens of pages meant to explain their policy of privacy. In our view, these practices, which again rely on private self-regulatory standards, are unfair for consumers, who are supposed to read in detail all the privacy statements so that they can finally decide if they will enter the website or not. Whilst looking for appropriate information, it would be rather difficult for consumers to read dozens of privacy statements in order to preserve their privacy. This contextual situation demonstrates not only that the protection of consumer’s privacy cannot pass the test of the ‘perfect market’ but also that provision of quantitative information might be a tool for certain companies to easily by-pass the consumers’ statutory rights. Consequently, it is likely that not only governmental legal intervention is needed in the future but also the effective enforcement of the current regulatory frameworks. What does effective enforcement of the privacy legislation in crossborder environment mean? Is it about the consumers’ interests or traders’ interests, or both? Since the effectiveness of legislation means ‘to get the best’ for both consumers’ and traders’, it is important to identify the real consumers’ and traders’ problems with regard to privacy by providing practical solutions able to tackle the emerging obstacles in a complex cross-border environment. 2.2.2 Case study: misleading advertised prices If a consumer tries to book online a return ticket from Dover–Calais through the website of a company which operates crossing transfers, he risks a great deal of wasted time and energy. Whilst the company advertises the cheapest crossing transfer on its website (‘Up to 50% off if you register on-line now!’), in order to benefit from this advert, the consumer is obliged to provide his personal data, lifestyle and travel pattern data online and to accept that this information is traded to third parties. After inputting all his personal data, the consumer can try in vain for hours and hours to fill out the booking application form displayed on the company website for

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the special offer. The only booking possible would be at the full rate whilst the website continued to display advertising for a cheaper price. Having contacted the company through an e-mail message, several days later the consumer receives several messages. One of the messages explains that all the departures for his crossing are fully booked, whilst the other message admits that their feedback is too late and that he should have sent his message to an e-mail address intended for customer services and which in reality he did. Nevertheless, the company’s replies leave his questions unanswered. Even if he asked for an explanation on the causes of their trading practice, the company did not make any attempt to provide an explanation with regard to the accuracy of the content of the website. From an economic standpoint, this example shows that the electronic market has failed to meet the consumer’s legitimate expectations. The causes of this failure might lie either in the website malfunction or in the attempt of perpetrating deceptive trade practices. Nevertheless, the company did not indicate any computer malfunction. It goes beyond our purpose here to analyse the specific online legal aspects of misleading advertising.20 These aspects will be analysed in a following chapter.21 However, it should be noticed that in this case, the price indication orients the consumer decision to deal with this specific company which offers special fares and that there is no need for evidence of a specific completed purchase transaction to prove whether or not a price promise was misleading. According to the decision of the High Court of Justice Queen’s Bench Division (Divisional Court)22 a consumer does not need to complete a specific transaction to prove whether or not a price promise is misleading. In this case, Dixon was prosecuted for a misleading price indication in connection with a price promise advertised on the outside of the store. A trading officer checked the advertising indication by asking whether the store would be more competitive than a local competitor’s price. The answer was negative and the sale was not concluded. A case that addressed similar issues concerns the online advertisement made by Virgin Atlantic Airways. In 1996, the company was punished for its misleading online advertisement accessible to consumers via the UK server. The US Department of Transportation discovered that the list of fares was no longer available in relation with the USA flights.23 Furthermore, in an adjudication of July 2000 against Easyjet Airline, the UK Advertising Standards Authority (ASA) whilst considering that the complaint against the company was not upheld, deemed that the web pages accessed before a customer entered into a transaction, constituted an advertisement. Moreover, in a French case of May 2004 against a travel agency, the Pontoise Tribunal24 discussed the unavailability of services suggested with the sale. Flight tickets were posted online at a certain price but at the time of the reservation, they were unavailable or proposed at a higher price. Even if ongoing technical problems with the update of the web pages might mean these pages were never in real time, it remains legally reprehensible. The Tribunal considered that it was beholden on the travel agency to check the availability of online services suggested to the supplier concerned before their marketing. At least three lessons can be learned from this case study:

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• Whilst the legal principles which apply to traditional advertising are similar to online advertising, new legal issues arise in connection with online advertising. In our case, if consumers are seeking injunctive relief under the online advertising law, they have to prove that the advertisement is false advertising. However, within a virtual environment where technical problems may happen, false advertising is difficult to prove. In these online areas of 20 business practices where consumers systematically cannot find practical solutions through the rules of the ‘perfect market’ (self-regulatory methods), a regulatory governmental intervention would be required. • Advertising on the telephone, radio, TV, made in print or online falls within the same legal regimes. Consequently, online businesses are responsible for reviewing the information contained by an advertisement placed on a website with the same care as an advertisement made in a print publication. A piece of information which is not updated, may become a false advertising. According to the US Federal Trade Commission, advertising agencies or website designers are responsible for reviewing the information used to substantiate ad claims. They may not simply rely on an advertiser’s assurance that the claims are substantiated.25 • Similar to traditional advertising, online advertising is a mechanism which provides consumers with information about the existence of special prices or specific products or services. From a practical standpoint, the case study described above departs from the traditional market where companies, for example, advertise by phone. As a case in point, it will be more difficult for the supplier offering his products or services by phone, to require consumers to make an immediate payment without prior delivery of the advertised products or services. In general, the technique of advertising by phone allows consumers to exercise their preferences and choices in time. Usually, it is only after the reception of the products that the consumer decides to keep the goods or not and, finally, to pay. The same principles apply to television advertising in which after seeing the advertisement, the consumer will visit a store, examine the product, and ask questions regarding its functioning. In the electronic market, the online advertising is instantaneous and predominantly of the ‘pull’ type. Due to the fact that electronic commerce constitutes a suitable and instantaneous means of payment, the online advertising relies on the cyber consumer’s proactive behaviour. The servers on the Internet are passive and do not allow the consumer to enter into a legal binding commercial relationship unless that willingness of the consumer is expressed by making an online payment. For the advertiser, the first signal that the consumer really wants to enter into a legal binding commercial relationship will consist in the fact that the consumer makes a payment. Besides, in electronic transactions, consumers are regularly required to pay before receipt of goods.26 For consumers, doing an online payment will not necessarily represent his final decision to agree on preestablished commercial relationships. Usually, the consumer will make the payment primarily not with the aim of possessing the products or services ordered but rather to have the possibility of inspecting the products or services advertised. Only after the consumers realise that the products ordered correspond to the

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quality of goods described on the website, do they consent or not to a binding commercial relationship. By analysing the two case studies, the main purpose was to demonstrate that the electronic market is far from being perfect. Certainly, the conclusions inferred from these two cases could be considered as simply suggestions given the lack of specific legal cases. The common trend of these two cases is the uncertainty in which the cyber consumer is left. In the first case, the uncertainty lies in the hidden face of an alleged policy of respect for cyber consumer privacy. In the second case, the uncertainty is entertained by the ambiguous trader behaviour that leaves the consumer under the impression that they are experiencing technical problems (see last company’s response). It is uncertainty that affects consumer confidence in the Internet. Accepted as normal, these symptomatic uncertain situations regress to a caveat emptor policy disrespectful of consumers’ needs. A well established legal and educational framework might be a palliative for minimising the uncertainty which erodes the ‘imperfect electronic market’ and which impedes consumers from making rational decisions online. It may be concluded that the ‘perfect market’ is far from possessing its own corrective effects. The fact that most of the self-regulatory systems established following governmental pressures, are regionally confined and they were not successful in enhancing consumer confidence, is illustrative of the failure of the ‘perfect market’. Obviously, the idea of relying on the model of the ‘perfect market’ with its own self-regulatory systems was found by governments more attractive than traditional command and control regulation. Some of the reasons of governments identified by Singleton in favour of self-regulatory approaches consist of: ‘[f]irst, it [self-regulation] is less costly to the economy. Command and control rules are for obvious reasons unsuited to the rapid changes of technology in the innovation age. Second, self-regulation is less costly to the government, because authorities need not drastically expand their enforcement mechanisms. More cynically, a push for self regulation lets regulators avoid some of the cumbersome processes of proposing particular rules, submitting them to public comment, and considering their costs and benefits.’27 Whilst many of the ambitious self-regulatory initiatives are currently in their preparation stages, several questions might arise in connection with the particularities of the global electronic marketplace. What are the risks ensuing from the consumer’s participation in the electronic marketplace? Why not simply consider buying a book online to be the same as in the traditional marketplace? Would the regulation of the global electronic marketplace offer the same level of protection as in the traditional market? In practice, it can be observed that the electronic markets are different from physical world markets.28 There is a spatial and temporal separation between consumers, retailers, and products in electronic markets; the encryption methods make it easier to disguise the nature of transactions; the electronic market disregards national barriers and traditional means of forming contracts.29 The following section focuses on the main particularities of the global electronic market: the virtual organisation of the global electronic market and the difficult reliability of electronic records and insecure electronic payments.

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2.3 Virtual Organisation of Companies The virtual organisation of companies consists in the ability of technology to create a major ‘selling point’ to anyone, from an individual to a multinational corporation, with a product to market.30 Through the ability to reach millions of Internet users simply by establishing a web site, it is quite feasible for companies to have no physical presence with respect to the consumer, or to have a server located outside the jurisdiction of the consumer’s country. For traders, the electronic market provides companies with the capacity of conducting business activities in a jurisdiction with no physical location or participation in the economic life in any jurisdiction anywhere. For consumers, the virtual organisation of companies creates difficulties for consumers who are confronted with the recognition of the website, with web pages being modified permanently. Often recognising the website of a business several days later may be difficult when web traders frequently renovate their virtual shop-fronts, form and change new alliances, and occasionally cease their online activities. In this context, the information on the company’s identity, including its legal name, its principal geographic address, a telephone number, and an e-mail address for questions related to sales and service become relevant for the consumer. This is all the more important because in a virtual environment, consumers cannot readily recognise what sort of business they are dealing with, reliable companies or with casual or inexperienced companies. This situation is quite different from the traditional market place. In the traditional world, a company through its permanent physical establishment, its location and staff, provide the consumer with a certain image of its own reputation and the quality of its commercial practices. In the global electronic marketplace, the indications of repute of virtual companies may be only apparently. Behind an impressive but low-cost website, might be a less impressive company. Most important aspects of the virtual organisation of companies can be summarised as follows: (1) web address URL different from the real name of the company; and (2) diverting of consumers to different URL transaction. 2.3.1 Inexistent web address URL or different from the real name of the company In the traditional market, when consumers travelling abroad want to bring back some souvenirs from their trips, they might risk being caught in a tourist trap. Nevertheless, whilst consumers would probably encounter potential difficulties in obtaining redress, at least they will have the possibility of addressing their complaint to a company, which has a physical location. In the electronic market, the web address URL (Uniform Resource Locator), may be different from the legal real name of the company. In absence of the physical location of a company, a national court established in the consumer’s country would not accept jurisdiction since a lawsuit involves the provision and the exchange of legal documents between litigation parties. Consequently, national courts may refuse to have jurisdiction on a matter related to a company with no physical location. The absence of physical location of a company has also a real impact on the formation of online services contracts. For example, in the case of online services,

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the service will normally be considered as performed in the supplier’s own jurisdiction. Determining jurisdiction in a medium that has no borders is difficult and at times technically impossible. Jurisdictional approaches to consumer protection that work in the physical world may not translate when applied to the digital world. In many transactions there will be a discussion between trader and consumer as to applicable law and the national jurisdiction able to defer on this law applies and/or as to the state in which litigation should take place. 2.3.2 Diverting consumers to different URL transaction A trader may legitimately divert users to the new page/s if a page or set of pages have moved to another URL. However, there are cases when consumers are diverted before or during the transaction, to an URL that has no connection with the sender or delivery papers. For example, a consumer who is trying to book a hotel room online through the website www.travelshoppe.com site is diverted automatically to a site called www.travellersweb.ws. The ‘ws’ suffix indicates that the site is based in the Pacific island of Western Samoa. However, a number of features indicated that the business was based in the UK (for example, British spelling and prices in pounds sterling).31 In this case, the performance of the booking service is certainly located on a server located in a third jurisdiction where there is no consumer legislation.32 The operation of diverting consumers to other website or URL addresses might have as their final purpose not only the legal evasion, escaping of regulated territories, but also marketing reasons. For example, in the UK case, ASA v. ‘888 Casino’,33 by clicking on ‘cancel button’, consumers were diverted to the defendant’s website. Defendants considered that Internet users were accustomed to being exposed to a wide variety of advertising, some of which was bolder than advertising in more traditional media. This is a clear case in which defendants attempted to impose unfair commercial practice standards to consumers. For the defendants, diverting consumers was a reality in practice since (1) the Internet was a transient medium that needed to create attractive and attention grabbing advertisements in order to be commercially viable; (2) other advertisers used similar tactics. Finally, the Authority of Advertising did not agree with their view of commercial practice via the Internet. There are also cases when a consumer is diverted to other sites on which can be displayed advertisements for online gambling, instant credit, and pornography. This practice, called ‘tangled web’ can be avoided only by shutting down the computer, an operation that might risk losing your data in unsaved application. If a consumer returns to the initial page they will be stuck in websites they are not interested in. Diverting consumers to another website might be also done when consumers mistyped an URL into their browser; they were directed to a website or series of sites where they were bombarded with advertising, literally trapped in a tangle of webpages.34 In addition to exposing users to illicit advertising, consumers may infringe the trademark rights of legitimate website owners. For example, in FTC v. Zuccarini the defendant deliberately maintained the domain names to divert consumers from Shields’ website, which harmed the goodwill associated with the Joe Cartoon mark. Zuccarini diverted consumers from the joecartoon.com website either for commercial gain or with the intent to tarnish or disparage Shields’ mark

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by creating a likelihood of confusion. In the Zuccarini case, the FTC approximates the defendant earns between $800,000 and $1 million annually, charging advertisers whose banner ads and affiliate programs were included on his websites. In 1-800 Contacts Inc v. WhenU.Com and Vision Direct,35 the American district court noticed that the defendant WhenU displayed pop-up ads of plaintiff’s competitor to computer users when they typed plaintiff’s domain name into either their browser or a search engine. The court considered that such conduct is likely to cause actionable ‘initial interest confusion’ and to allow defendants to divert consumers seeking plaintiff’s products to their own products and thereby unfairly profit from plaintiff’s goodwill. Consumers are wary of conducting extensive transactions electronically not only because of the virtual organization of companies on the Internet but also because of the lack of reliable electronic records and insecure electronic payment. The uncertainty surrounding the electronic records is enhanced by the unpredictability or inexistence of legal rules as well as by the lack of legal results of the technical standards for effective record management. 2.4 Electronic Records Approaching the issue of electronic records36 requires taking into consideration the peculiarities of electronic transactions. The different stages of the consumer information process are missing in an electronic transaction. Despite the requirement for a written acknowledgement or receipt, a consumer would not receive any confirmation of the service recipient or he will receive it only after a certain delay. In certain cases, the confirmation of the service recipient and electronic record are very important. For example, a consumer who is visiting a travel agency’s website, to book a ‘last minute’ special offer for a weekend abroad, will need to receive an electronic receipt of his flight booking at least a day before his date of departure. If the consumer would like to sue the travel agency, he would need proof of the existence of the special offer, its terms and conditions. Even if the consumer prints out a copy containing information about the special offer and a copy indicating the service request, he would probably need to prove that his request was received by the travel agency and that the request was made when the special offer was already available on the website. The peculiarity of electronic transactions reinforces the unpredictability surrounding electronic records. If the predictability has itself a virtual appearance in the electronic market then how can traders be made more accountable about records in the electronic market? In finding solutions, several underlying assumptions should be considered in any research for setting up a coherent legal approach of the electronic records. 2.4.1 Assumptions for electronic records From the traders’ standpoint, compulsory regulatory frameworks for electronic records are (1) burdensome for consumers; (2) create consumer frustration or confusion.37 (1) Legal approach of electronic records is burdensome because of additional steps that can dissuade consumers from making transactions online. These steps

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relate to the consumer consent procedure necessary for sending and receiving electronic transactions. Section 101 of the Electronic Signatures in Global and National Commerce Act (E-Sign Act) states that information required by law to be in writing can be made available electronically to a consumer only under two cumulative conditions – if the consumer affirmatively consents to receive the information electronically38 and the trader clearly and conspicuously discloses specified information to the consumer before obtaining his consent.39 Section 101(c)(1)(C)(ii) adds that a consumer’s consent to receive electronic records is valid only if the consumer ‘consents electronically or confirms his or her consent electronically, in a manner that reasonably demonstrates that the consumer can access information in the electronic form that will be used to provide the information that is the subject of the consent.’40 Requiring consent for receiving electronic records is beneficial for consumers because it increases awareness of consumers in considering the legal impact of electronic information. Such type of burden might be resolved or minimised over time as businesses and consumers adjust to the consent procedure and gain experience by sending and receiving documents in an electronic form. (2) The reverse of the consumer input in receiving electronic records was interpreted as an issue of consumer frustration or confusion.41 Asking for consumer consent becomes a question of good practice ensuring that the consumer is able to deal with an electronic format. A request for consumer’s consent reduces the risk of changing the terms of contracts unilaterally by the traders and allows time for reflection for consumers before confirming consent electronically. For traders, compliance with the consumer consent requirement, presents the advantage of legal certainty of electronic documents. Traders have ‘some assurance that they have obtained consent and provided electronic documents in a manner sufficient to make the electronic transactions legally valid.(…). In addition, they obtain information to show that the record they provided could be accessed by the consumer.(…) As a result, the consumer consent provision may protect e-commerce businesses from baseless legal claims by providing an electronic or paper document trail of the transaction when disclosures or other records are provided electronically to consumers.’42 Furthermore, the retention of electronic records’ policy management may be an element that differentiates traders. The record retention process is often costly, challenging to implement and sometimes technically difficult to manage. However, it can give a trader considerable advantage over other traders in respect of the ability to guide consumers through their abilities to choose between different alternatives of doing online transactions. 2.4.2 Record retention The issue of record retention should provide responses to the following questions: What is the scope of the duty to preserve? When does a business’s duty to preserve documents, including electronic records, arise? What are the records that should be preserved? Should a trader preserve every e-mail or electronic document? In general, statistics shows that companies are not well prepared to ensure the authenticity of electronic records. To the question addressed in 2003: ‘If legally challenged…can your business demonstrate that its electronic records are accurate,

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reliable and trustworthy – many years after they are created?,’ 62% of companies responded slightly or not at all confident.43 Record retention refers to the accuracy of electronic records at the time of and which remain accessible for later reference and with the emergence of electronic transactions, it becomes a real duty for traders regulated by legal and technical standards. If at legal level, the duty to provide electronic records represents a requirement of professional diligence, at the technical level it can be considered as a concern of compliance that should achieve many business benefits.44 For example, from a legal standpoint, according to the Uniform Electronic Transactions Act (UETA) if parties have agreed to a conduct transaction by electronic means and a law requires a person to provide, send, or deliver information in writing to another person, the requirement is satisfied if the information is provided, sent, or delivered, as the case may be, in an electronic record capable of retention by the recipient at the time of receipt. An electronic record is not capable of retention by the recipient if the sender or its information processing system inhibits the ability of the recipient to print or store the electronic record.45 A different, technical but convergent approach is provided by the British Standard Institute which launched a new version of the Code of practice for legal admissibility and evidential weight of information stored electronically.46 The duty of care as provided by this Code of practice is described in terms of technical needs as a requirement of a company for having an information security policy. The Code of practice identifies technical and procedural issues on retention records and establishes the measures to be taken by the companies in order to ensure efficient record retention. It establishes a duty of care ensuring a reliable record retention in terms of system availability time and information accuracy. The implementation of the Code does not guarantee a legal effect to an electronic record but it may serve as standards by ensuring a uniform technical level of acceptance. A uniform standard does not guarantee that rogue traders will not look for a competitive advantage by failing to comply with technical or legal requirements. If from a legal standpoint, traders may encounter enforcement actions under state consumer protection laws for unfair or deceptive practices, compliance with the selfregulatory codes remains to be enforced by auditing and/or delivering of quality labels for companies keen on having an information security policy. For the sake of the consumer’s confidence, the OCDE in its Guidelines refers to the retention process as to a duty of trader to ensure adequate maintaining and appropriate access to record information. The OCDE Guidelines specifies that redressing the balance between the trader and consumer with regard to the reliability of electronic records requires businesses to provide consumers with a clear and full text of the relevant terms and conditions of the transaction in a manner that makes it possible for consumers to access and maintain an adequate record of such information.47 According to the US Electronic Signatures in Global and National Commerce Act (E-Sign Act)48 of June 30, 2000, an electronic contract or record satisfies legal requirements for retention in writing, if it accurately reflects the information set in the contract or other record; and remains accessible to all persons who are entitled to access by statute, regulation, or rule of law, for the period required by such statute, regulation, or rule of law, in a form that is capable of being accurately

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reproduced for later reference by all parties or persons who are entitled to retain the contract or other record. The question then arises whether a record may be reliable if for example, it allows the sender to be changed every time it is opened. As almost all business records are now created and stored electronically, it is clear that businesses must ensure that electronic records remain unaltered. Regulating the distortion of electronic records has become a priority for many countries. Thus, the US Sarbanes – Oxley (SOX) Act, in its section on ‘Destruction, Alteration, or Falsification of Records’ states ‘[w]hoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies or makes entry in any record, document or tangible object with the intent to impede, obstruct, or influence the investigation ... shall be fined under this title, imprisoned not more than 20 years or both.’49 The risk of alteration exists not only when it is a deliberate deterioration but also when electronic records may be made up of a word-processed document with a dynamic link to a database, or when electronic records are built on the fly and never recorded anywhere. When information is provided by integrated multiple systems, and consist in temporary webpage built-in response to a user accessing the system. Usually, it is unlikely that electronic records will reproduce the exact form in which the consumer accessed the system. In deciding how to address this critical issue it is important to note that businesses have much more information about the reliability of electronic records than consumers. As a rule, consumers will not have the sophistication necessary to assess the reliability of electronic records. Best practices in the area of electronic records retention should ensure continuing identity and integrity of records against media and across technological change. Sometimes, electronic records may be affected by obsolescence of digital medium. For example, floppy disks have changed considerably in their capacity for storing information over the past few years, making it impossible to use earlier models. A consumer who would like to consult a stored electronic document would not be able to view it in its original form due to the lack of interoperability50 of different software programs. Under the emerging duty of care, businesses should be able to demonstrate that they have taken best practices to establish rules, regarding which records should be authenticated, by whom, and the means of authentication.51 These best practices need not only to be defined but also implemented. An important advance in the clarification of the best practices relating to both legal and technical aspects of electronic discovery is illustrated by the case of Zubulake v. UBS Warburg.52 This first American case encompassing five written decisions in the area of an employment discrimination case, clarifies the obligation of preserving electronic evidence in litigation and the lawyer’s duty to monitor their clients’ compliance with electronic data preservation and production. The Court stated that ‘obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation.’53 Moreover, it is considered that the ‘duty to preserve attache[s] at the time that litigation [is] reasonably anticipated.’54 The legal consecration of the best practices reminds companies that they are operating in a different environment that progressively creates its own rules. In this environment, the consumer consent remains the effective tool to promote consumer confidence in the electronic marketplace. It enhances the consumer in his right to receive hard copy versions of his transactions. The basic principle is the agreement

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between parties with regard to the kind of technology, format used and their methods of exchange. If such an agreement cannot be established then the following step should be to provide hard-copy versions of the transactions documents. In the European Union, the Directive on Invoicing55 addresses issues such as the obligation to issue an invoice, the content of an electronic invoice, it provides for the acceptance of electronic records by the Member States and for the storage of electronic invoices. The reliability of electronic records is dependent on two cumulative conditions: authenticity and integrity which are satisfied by means of an advanced electronic signature within the meaning of Article 2(2) of Directive 1999/93/EC of the European Parliament and of the Council of 13 December 1999 on a Community framework for electronic signatures. Member States may however ask for the advanced electronic signature to be based on a qualified certificate and created by a secure signature creation device. If mutual recognition were not effectively applied, the overall costs of electronic invoicing will be increased. Certification obtained in one Member State does not represent recognition in the others. For these reasons, the Directive allows that invoices may, however, be sent by other electronic means subject to acceptance by the Member State(s) concerned. The Commission will present, by the latest on 31 December 2008, a report, together with a proposal, if appropriate, amending the conditions on electronic invoicing in order to take account of possible future technological developments in this field. The Directive might act as a catalyst not only to establish common rules on the information to be included on invoices and the form the invoices should take in order for VAT authorities to recognise their validity but also for encouraging companies in a real record retention policy. 2.5 Electronic Payment Whilst in the traditional environment, confidence is based on the consumer’s identification, the use of secret PIN numbers or the use of a handwritten signature for confirming a payment transaction, in the electronic market consumers are more reluctant about disclosing card information. In its generic interpretation, confidence means the trust of the consumer in making electronic transactions by using electronic payment methods. Electronic payment methods include access payment instruments and electronic money instruments.56 By access payment instrument, we understand instrument as enabling a consumer to access funds held on his account at an institution, whereby payment is allowed to be made to a payee and usually requires a personal identification code and/or any other similar proof of identity. This includes in particular payment cards (whether credit, debit, deferred debit or charge cards) and phone- and home-banking applications. Electronic money instrument means a reloadable payment instrument other than a remote access payment instrument, whether a stored-value card or a computer memory, on which value units are stored electronically, enabling a consumer to effect transactions. Electronic payment instruments are issued and managed only by banks or financial institutions which are subject to the provisions of the nationals rules of the banking law.

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In this section, confidence in electronic payment includes 3 fields: • confidence in the security of payment systems; • confidence in the use of inexpensive electronic payment instrument; and • confidence in the effectiveness of rules governing electronic payments and implicitly the respect of consumers’ rights in electronic payment. The 3 confidence fields will be approached further. 2.5.1 Security of electronic payment systems Failure of secure payment systems might be caused by human intervention. For example, the security breach of Barclays’ online banking site seemed to be caused by the upgrading of its software. In the Safeway and Oxfam cases, a hacker managed to access the sites and obtain e-mail addresses.57 However, failures might also be of technological nature. For example, a consumer received an extra charge after buying directly from the web of Direct Holidays. The Direct Holidays spokesman explained that this was the result of a technical problem with the company website.58 These explications are not sufficient to convince consumers of the security of electronic payment systems. Confidence in the security of electronic payment systems is the starting point for encouraging payment transactions. Amongst the most important security payment systems, we can include Secure Socket Layer (SSL), Secure Electronic Transaction (SET), and Public Key Software Infrastructure (PKI). For example, Secure Socket Layer (SSL) enabling encryption can be viewed by a consumer via a dialogue box, a padlock in the bottom task bar, or a blue key (like Netscape Navigator) to indicate that a secure session is in progress. Secure Electronic Transaction (SET) allows encryption of payment card transaction data and checks the identity of parties. Public Key Software Infrastructure (PKI) is based on the use of digital certificates and certification authorities. Surveys59 show that few consumers can assess the effectiveness of existing online security and encryption methods in relation to the electronic payment systems. How could an ordinary consumer assess the performance of security payment systems? Few consumers comprehend the technological characteristics of smart cards and cryptography and usually they are enabled to determine to what extent one product is more secure than another. There is a natural propensity not to be confident in electronic payment over the Internet due to the fact that consumers are not capable of understanding the significance of secure payment systems and their vulnerabilities. This is probably a matter of time and awareness for both consumers and companies with regard to the security of payment systems. Companies should realise that enhancing trust in the minds of consumers in connection with the security of payment systems is more than a question of technology, it is a question of explaining this technology in order for it to be easily understood by consumers. This need increases progressively with the range of quantitative and varied national security requirements.

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2.5.2 Inexpensive electronic payment instrument In the electronic market, consumers expect payment transactions to be offered at a marginal price and in near real time. Under these conditions, digital cash solutions might have a beneficial impact on the commercial dimension of the electronic market. Digital cash payments – mostly offered free to consumers by mutualising the cost to society – are likely to be increasingly replaced by modern non-cash payment means.60 Due to the large area it covers, digital cash seems to be an attractive option for both consumers and companies. We will examine two types of the emerging digital cash systems: smart cards and digital coins. 2.5.2.1 Smart Cards Smart cards contain a microprocessor chip, which is embedded into bankcards to make smart cards. The capacity of chips to store information will provide the smart card with multiple functions. These range from electronic wallets to transport tickets or access cards.61 For instance, Bus Eireann, in Ireland, has developed the ‘Dash’ project where they have created a smart card which has four multi-functions: a transport ticket, payment for small purchases in shops, telephone cards and a car parking pass.62 These smart cards can be programmed to function as an ‘electronic purse’. The programming for an authorised transaction is made by an electronic terminal, giving the consumer the possibility to process data and to control registered data. The functioning of smart cards in electronic transactions is based on the principle of connecting the consumer to a central database via two encryption keys, one of which is retained by the consumer card holder, with the other linked to the bank’s computer. Mondex, a subsidiary of MasterCard International,63 Proton and VisaCash are some examples of micro-payment systems which allow consumers to download electronic money from a personal computer via online banking. Mondex, Proton or VisaCash have a variety of functions which can be used in the payment of goods and services starting with the financial transfer between consumer and companies and include customer loyalty schemes. The benefits of smart cards for the consumer are security, as unauthorised access is prevented by a lock function; convenience, as it is an easy method of payment; flexibility, as smart cards can be used for all kind of purchases although certain limits are set within each country; control on spending within the limits of an existing amount on the card; and international use – the possibility to allow cardholders to use the card when travelling or transferring money abroad. Finally, in comparison with a credit card, a smart card allows consumers an interest free loan. With regard to companies, the smart cards present certain advantages such as efficiency, as smart cards negate the need for customer identification; adaptability – as the smart cards are suitable for the companies of all sizes. For instance, in order to use the Mondex cards, companies will need a Mondex compatible terminal, either integrated with existing equipment or an inexpensive stand-alone version. The pocket sized Mondex ‘wallet’ can itself be used as a hand held point-of-sale terminal, suitable for use in a taxi or on a market stall.64

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Further advantages of smart cards include the capacity to solve compatibility problems, which means that companies can use a single electronic terminal for all types of cards. In addition, there are lower costs as the use of smart cards does not involve a large investment for companies, apart from staff training and the purchase of an electronic terminal. In the US, consumers seems to be satisfied with existing alternatives such as cheques, credit cards and debit cards which, in comparison with smart cards, already offer consumers considerable benefits under existing federal regulations.65 Moreover, consumers seem to ‘have shown a high degree of rationality in their choice of electronic payment systems, and have stayed away from more risky or less favourable innovations. Regulated electronic payment systems offer incidental attributes such as float, or reversibility in the event of dispute. Consumers may migrate toward regulated systems because they provide these incidental benefits without regard to how well systemic risk issues are managed. But so long as regulators guarantee the provision of both, then consumers can migrate toward the most favourable package of rights and obligations.’66 At the European level, there are a certain number of initiatives aimed at promoting smart cards as a mechanism for enhancing consumers’ confidence in the use of e-commerce. For example, the ‘e-Action Plan-Secure Network and Smarts Cards’ prefigure the new strategy of the EU in the field of electronic commerce. This strategy will be oriented towards the promotion of privacy enhancing technologies and proper codes of conduct. It will also include – the promotion and the development of open source software, security platforms for effective ‘plug and play,’ as well as a common core of specifications for using smart cards and for ensuring their security. 2.5.2.2 Digital Coins In the absence of appropriate equipment for smart card on the consumer’s computers, digital coins can be an appropriate method of payment for electronic transactions. The digital coin is based on the following principal: the bank provides consumers with the serial number of a coin encrypted with the bank’s private key. If the consumer wants to spend the coin, the bank checks the serial number on the list of spent coins and, if the coin has not already been spent, the bank either credits the company’s bank account or provides the company with a new coin.67 There are also other opinions considering that digital coins do not imply lower costs and that a new form of ‘script’ needs to be arranged for micro-transactions.68 There are two main concerns for using digital coins: anonymity of the consumer and online verification. With respect to anonymity, it is clear that each transaction using a digital coin allows the processing of personal data and the bank ends up with a database containing information on all of its customers; as in the credit-card model, the customers have no privacy.69 However, anonymity could be preserved by blinded coins which protect the details of the payer but not that of the payee. The second concern of the consumer is related to online verification. In etransaction between companies and consumers, the company should verify if the coin offered to him has not previously been spent. It is possible to check the coin’s digital signature via the public key corresponding to the coin. However, this

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verification seems to entail delay and expense.70 Obviously, the use of digital cash would enable the growth of e-commerce only if banks implementing this electronic system could ensure consumer privacy protection. 2.5.3 Regulatory frameworks for electronic payments A reliable framework for electronic payment systems constitutes undoubtedly an important factor of strengthening consumers’ confidence. At the EU level, many Directives71 contain provisions regarding these payment systems. For example, the Distance Selling Directive provides that consumers be allowed to pay by card. In this way, Member States shall ensure that appropriate measures exist to allow a consumer to request cancellation of a payment where fraudulent use has been made of his payment card and, in the event of fraudulent use, to be re-credited with the amount paid. The Commission Recommendation 97/489/EC of 30 July 1997 concerning transactions by electronic payment instruments and, in particular, the relationship between issuer and holder responds to a number of major issues related to the contractual relationship between the issuer and the holder of the payment instrument. The Commission Recommendation establishes obligations on information concerning the terms and conditions of payments and the use of electronic payment instruments, as well as on the liabilities of parties involved in a contractual relationship. With respect to the loss or theft of electronic payment instruments, the consumer’s liability should be limited. The ‘price’ of his liability should not exceed 150 Euro, except where s/he has acted with extreme negligence or has acted fraudulently. After notification, the consumer should no longer be liable for any loss except where s/he has acted fraudulently. It is also recommended that where payment has taken place without the physical presentation or electronic identification of the instrument itself, the consumer should not be liable for any loss. A study72 commissioned by the European Commission on the implementation of Recommendation 97/489/EC concerning transactions carried out by electronic payment instruments and in particular the relationship between holder and issuer, identified important problems with regard to the implementation of this Recommendation. Thus, the study concludes that insufficient information is provided by issuers to holders; information is provided in an unclear and/or inaccessible way; information is not provided at the appropriate time; and levels of compliance on this matter differ according to the type of electronic payment instrument. Moreover, the study shows that there is a substantial level of noncompliance with the Recommendation in respect of the obligations and liabilities of the parties to the contract in the following respects: failure to limit a holder’s liability after notification; lack of uniformity in relation to what constitutes gross negligence across the Member States; notification period for changes to the contract is often less than 1 month; countermanding provisions for unspecified sums are very rare; failure to provide for the liability of the issuer for defective or non-executed transactions etc. With respect to the standardisation of payment card systems in order to guarantee access for all electronic cardholders, it would be useful to remember the

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Commission Recommendation 87/598/EEC of 8 December 1987 on a European Code of Conduct relating to electronic payments. The aim of this Code is to promote security and ease of use for consumers and to enhance greater security and efficiency for both traders and issuers. The Recommendation set out a series of general principles relating to the contract between issuers (banks) and traders or consumers. These principles concern the respect of privacy of information given by consumers and the right of fair access to the system for traders, irrespective of their size. Obligations related to the relations between issuers and traders include a ban on any exclusive trading clause which requires the trader to operate only one system as well as an obligation on cardholders to take all reasonable measures in order to make a secure payment. In addition, the terms of the Commission Recommendation 88/590/EEC of 17 November 1988 concerning payment systems and, in particular, the relationship between cardholder and card-issuer are relevant for consumer protection. Its aim is to provide consumers with adequate information concerning the terms of the contract, particularly with regard to fees. The Recommendation stipulates the rights and contractual obligations of consumers and specifies that consumers would be better protected if contracts were made in writing. In this sense, indications should be made on the period of time within which operations will normally be credited, debited or invoiced. Regarding the treatment of contracts, important indications are stipulated regarding the fact that operations authorised by issuing bodies must be recorded in order to allow the possibility of correcting errors. Furthermore, the Recommendation specifies the moment of the conclusion of the contract and aims to establish the issuer’s liability. The contract concluded between the consumer and the issuer of the payment device must take effect after the consumer has received the payment device and after the consumer has received information on the applicable terms of the contract. The liability is incumbent on the issuer for non-execution or erroneous execution of a contracting holder’s payment instructions and allied operations, and for operations which have not been authorised by the contracting holder. This is subject to the contracting holder’s own obligations in the event of lost, stolen or copied payment devices. All these recommendations establish a high level of professional diligence in relations between consumers and banks or financial institutions. However, their effectiveness may be reduced by the existence of national rules which might be different. Secure electronic payment is a key enabling technology for the provision of electronic services over the Internet but it seems that very often consumers have little awareness of their rights and sometimes do not know where to address their complaints. Nevertheless, how many consumers are aware of their right to require the cancellation of a contract without penalty, for example, in the event of withdrawal? Companies shall ensure that appropriate measures exist to allow a consumer the right to request cancellation of a payment where fraudulent use has been made of his payment card. Best practices start with the online service of high street banks as well as with the existence of a secure, user friendly and cost-effective payment system. It also includes the respect of privacy and the use of smart cards as well as enhancing privacy technologies and fair information practices. It was remarked by a commentator that ‘the future of e-banking depends heavily on the future development of technology.’73 In our view, the future of e-banking will be

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determined by the manner in which e-banking will find solutions for the two irreconcilable needs of the electronic market characterised by the need of growing for the banks by developing impersonal online services and the consumers’ needs of personal contact and information. 2.5.4 Liability shift for chargeback An additional element which we should remember when approaching the issue of consumer confidence in electronic payment is about the issue of liability shift for charge in international card schemes (Europay/MasterCard, Visa, Amex...). These schemes contain provisions on the chargeback.74 One example of strengthening consumer confidence is illustrated by the Verified by Visa programme for secure electronic payments. Verified by Visa (VbV) is an improved authentication protocol for electronic transactions, aiming to verify the buyer is who he claims to be, using 3-D (3 Domain) Secure technology. The 3-D (3 Domain) approach builds on proven SSL technology to provide a standard, secure method of performing transactions over the Internet through authentication of all parties involved in an online transaction: • the trader and its bank (Acquirer Domain); • the consumer and its bank (Issuer Domain); • the consumer’s bank and the trader’s bank (Interoperability Domain). The 3-D Secure enables consumer and trader to authenticate each other by exchanging digital certificates (electronic identifications) before proceeding with an online transaction, assuring the consumer that he is dealing with a legitimate trader and providing the trader with proof of participation of the real consumer. The principle of dividing the 3 domain is to identify the risk level and to enforce the liability of each party in its own field. It is expected that such a program would enhance consumer confidence in cross-border transactions. The approach known as 3-D (3 Domain) Secure technology excludes the liability of traders to the banks when (1) the trader adopts this programme; (2) the bank authenticates the cardholder using Verified by Visa programme; and (3) after verifying authentication, the bank authorises the transaction and the trader receives a final approval. Chargeback due to non receipt of goods is still possible. In general many banks do not inform consumers about the existence of chargeback procedures. Besides, when a problem occurs for the consumer (for example because the card information was used fraudulently), he is usually asked to prove that the payment was not due, so he is obliged to contact the trader who is probably located in another country in order to get documents that confirm payment was not due. Finally, even in the future, the consumer’s knowledge about the existence of the chargeback will be more transparent, as the practical problems remain the same when fraud or abuse intervene.

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CONCLUSIONS The chapter demonstrates that analysis of the electronic market through the model of the ‘perfect market’ might lead to a confusing conclusion that there is no need for governmental regulatory or self-regulatory intervention. However, the ‘perfect electronic market’ is far from possessing its own corrective effects. On the basis of two case studies relating to online privacy and marketing, it has been shown that the electronic market is far from ‘perfect’ and that there is an imperative need for appropriate cyber consumer legislation. The need for appropriate cyber consumer legislation is doubled by the need for effective enforcement of legislation in crossborder transactions. On the basis of different national legal cases and of a factual example in the area of online misleading advertising, it has been clarified that the particularities of the electronic marketplace do not lead to the same forms of unfair commercial practices as in the off-line marketplace. For example, whilst certain resemblances exist between traditional and online unfair advertising, fundamental differences still remain. If consumers are seeking injunctive relief under the online advertising law, they have to prove that the advertisement is false advertising. However, within a virtual environment where technical problems may happen and where a company may disappear before the beginning of any legal proceeding, false advertising is difficult to prove. The chapter also illustrates the most important aspects of the virtual organisation of companies which range from the difficulties for consumers who are confronted with the recognition of the website, to web pages being modified permanently, from web address URL different from the real name of the company; to risk of consumers being diverted to different URL addresses. These structural particularities of the electronic market increase the lack of confidence of consumers in doing electronic transactions and diminish the possibility of effective enforcement of consumer legislation. Another electronic market failure discussed by the chapter is about electronic records. Uncertainty surrounding electronic records is enhanced by the unpredictability or inexistence of legal rules as well as by the lack of legal results of the technical standards for effective record management. In demonstrating this issue, the chapter clarifies the 3 confidence fields of electronic payments: confidence in the security of payment systems; confidence in the use of inexpensive electronic payment instrument; and confidence in the effectiveness of rules governing electronic payments and implicitly on the methods of payment. It has been concluded that enhancing trust in the minds of consumers in connection with the security of payment systems is more than a question of technology; it is a question of explaining technology knowledge in order to be easily understood by the consumer. The consumer need for readily-available information increases progressively with the range of quantitative and varied national security requirements. In sum, the consumer’s confidence is synonymous of fair commercial practices that includes reliable electronic records and retention of electronic records policy; secure user friendly and cost-effective payment system; and the respect of privacy and enhancing privacy technologies. In our view, the future of e-banking will be

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determined by the manner in which e-banking finds solutions for the two irreconcilable needs of the electronic market, characterised on the one side by the need for the banks to grow by developing impersonal online services, and on the other side by the consumers’ desires for personal contact and information tailored to their personal needs. NOTES 1

2 3 4 5 6 7 8 9 10 11 12

13

These conditions are described as following: ‘there may be a lack of competition (monopoly, oligopoly); there may be barriers to entry; there may be problems with product differentiation where there are qualitative differences within a product market (and thus a lack of product homogeneity); there may be information gaps between buyer and seller, or certain market signals, e.g. seller reputation may be imperfect; there may be third-party effects which are not costed in the market price – this is the classical problem of externalities (…)’ (I.D.C. Ramsay, ‘Rationales for Intervention in the Consumer Marketplace’, OFT, 1984, pp. 15–16). R. Kuttner, in Business Week, May 11, 1998 cited by E. Brynjolfsson, M.D. Smith in ‘Frictionless Commerce? A Comparison of Internet and Conventional Retailers’, Management Science, Vol. 46, No. 4, April 2000, pp. 563–85. Dell Computer Corporation comments on the US Perspectives on Consumer Protection in the Global Electronic Marketplace, 63 Fed. Reg. 69289, December, 1998. America Online comments on the US Perspectives on Consumer Protection in the Global Electronic Marketplace, 63 Fed. Reg. 69289, December, 1998. E. Brynjolfsson, M.D. Smith, ‘Frictionless Commerce? A Comparison of Internet and Conventional Retailers’, May 1999, available at http://ecommerce.mit.edu/papers/friction, p. 1. J. Kirkbride and J. Scholes, ‘EC Competition Law’, in European Business Law, Dartmouth, Sydney, p. 59. Ibid., p. 59. P.P. Swire, ‘Markets, Self-Regulation, and Government Enforcement in the Protection of Personal Information’, available at http://www.osu.edu/units/law/swire.htm, 1996. US Federal Trade Commission, Report on ‘Privacy Online: Fair Information Practices in the Electronic Marketplace’, Report to Congress, May 2000, available at: http://www.ftc.gov/reports/privacy2000/privacy2000.pdf. Ibid., pp. i–ii. Ibid., p. 6. For example, many network advertisers and sellers collect anonymous information by using ‘cookies’ to track the consumer’s movements on the seller’s site. A cookie is a file on the user’s computer that can be and is accessed by websites that a user visits. A cookie does not contain information about the consumer. See Article 6 § e of the EU Directive 95/46 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, OJ No L 281, 23.11.1995; See also Recital 25 of the Directive 2002/58/EC of the European Parliament and of the Council of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic communications sector (Directive on privacy and electronic communications) in Official Journal L 201, 31 July 2002 p. 37; ‘such devices, for instance so-called “cookies”, can be a legitimate and useful tool, for example, in analysing the effectiveness of website design and advertising, and in verifying the identity of users engaged in on-line transactions. Where such devices, for instance cookies, are intended for a legitimate purpose, such as to facilitate the provision of

40

14 15 16 17 18

19 20

21 22 23 24 25 26 27 28 29 30

Cyber Consumer Law and Unfair Trading Practices information society services, their use should be allowed on condition that users are provided with clear and precise information in accordance with Directive 95/46/EC about the purposes of cookies or similar devices so as to ensure that users are made aware of information being placed on the terminal equipment they are using. Users should have the opportunity to refuse to have a cookie or similar device stored on their terminal equipment.’ J.M. Spaeth, M.J. Plotkin, S.C. Sheets, ‘Privacy, Eh!: the Impact of Canada’s Personal Information Protection and Electronic Documents Act on Transitional Business’, 4 Vanderbilt Journal of Entertainement Law and Practice, Vol. 28. No. 4, 2002. ‘Sellers try to soothe fears about personal data safety’, in USA Today, April 27, 2001, p. 2. P.P. Swire, ‘Markets, Self-Regulation, and Government Enforcement in the Protection of Personal Information’, available at http://www.osu.edu/units/law/swire.htm, 1996. E. Alderman, C. Kennedy, The Internet, Consumers and Privacy, Internet Policy Institute, July 2000, available at: http://www.internetpolicy.org/briefing/current.htm, p. 4. The ‘opt-out’ option presumes that a consumer welcomes junk e-mail unless they expressly signalled his objection (for example, by entering his name on a register for this purpose) whilst ‘opt-in’ presumes that a consumer does not want e-mail unless he expressly consented. T. Novak, D.L. Hoffman, M. Prelata, ‘Building Consumer Trust in Online Environments: The Case for Information Privacy’, available at: http://www2000.ogsm.vanderbilt.edu/papers/CACM.privacy98/CACM.privacy98.htm. Almost all countries are endowed with legislation, which prohibits misleading advertising. According to the EU Directive, the misleading advertising is defined as any advertising which in any way, including its presentation, deceives or is likely to deceive the persons to whom it is addressed or whom it reaches and which by reason of its deceptive nature, is likely to affect their economic behaviour or which, for those reasons, injures or is likely to injure a competitor. See chapter 8 on ‘Online Misleading Advertising’. See DSG Retail Ltd v. Oxfordshire County Council, No. CO 4793/00, Neutral Citation Number: [2001] EWHC Admin 253, High Court of Justice Queen’s Bench Division, Divisional Court. M. Chissick and A. Kelman, Electronic Commerce Law and Practice, 2nd ed, Sweet and Maxwell, 2000, p. 220. TGI Pointoise, Ordonnance of 20 February 2001, Register Number: 01/00381, minute: REF/2001/466. US FTC Report on, ‘Advertising and Marketing on the Internet: Rules of the Road’, 2000, available at: www.ftc.org. Consumer International Survey, ‘Consumers – Shopping: An International Comparative Study of Electronic Commerce’, available at: http://www:consumerinternational.org/compaigns. S. Singleton, ‘U.S. Perspectives on Consumer Protection in the Global Electronic Marketplace’, March 25, 1999. M.D. Smith, J. Michael, Bailey, E. Brynjolfsson, ‘Understanding Digital Markets: Review and Assessment’, 2000 E. Brynjolfsson, B. Kahin, eds. Understanding the Digital Economy, MIT Press, Cambridge. C. Swindells, ‘Legal Regulation of Electronic Commerce’, in the Journal of Information, Law and Technology (JILT), 1998 available at: http://elj.warwick.ac.uk/jilt/983/swindells.html. W.A. Effross, ‘The Legal Architecture Of Virtual Stores: World Wide Web Sites And The Uniform Commercial Code’, 34 San Diego Law Review, 1998, at 1268.

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31 This example is cited by a survey carried our by Consumers International, ‘Should I buy?’, Shopping online 2001: An international comparative study of electronic commerce, Consumers International, September 2001, available at: http://www.consumersinternational.org/CI_Should_I_buy.pdf. 32 C. Reed, Internet Law, Butterworths, London, 2000, p. 195. 33 See adjudication of 9th January 2002, 888 Casino, available at www.asa.org.uk. 34 FTC v. John Zuccarini (FTC File No. 012-3095), June 2001. 35 1-800 Contacts Inc v. WhenU.Com and Vision Direct, 309 F.Supp.2d 467 (S.D.N.Y., Dec. 22, 2003). See also District Court for the Eastern District of Virginia in U-Haul International, Inc. v. WhenU.com, 279 F.Supp. 2d 723 (E.D.Va. 2003), District Court for the Eastern District of Michigan in Wells Fargo & Co. v. WhenU., 2003 WL 22808692 (E.D. Mich. 2003). 36 In the traditional market, the term ‘record’ refers to handwritten or typewritten documents. Today, ‘record’ has a broader meaning that includes ‘electronic record’. According to Uniform Electronic Transactions Act (UETA), which was adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1999, ‘record’ means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. The electronic records can be created online or can be scanned into an electronic filing system. A printout is an electronic record since it is a mean of intelligible display of the contents of the record. The Canadian Uniform Electronic Evidence Act (UEEA) specifies that photocopies of the printout would be paper records subject to the usual rules about copies, but the ‘original’ printout would be subject to the rules of admissibility of this Act (Canadian Uniform Electronic Evidence Act, 1998). In the same direction, the UEEA noticed that the printouts that are used only as paper records, and whose computer origin is never again called on, are treated as paper records. (Canadian Uniform Electronic Evidence Act, 1998, see subsection 4(2).) 37 Electronic Signatures in Global and National Commerce Act (E-Sign Act), Section 101(c)(1)(C)(ii), subject to certain exceptions, the law’s effective date is October 1, 2000, with record retention requirements effective beginning March 1, 2001, available at http://www.ftc.gov/os/2001/06/esign7.htm#N_1_#N_1_. 38 Section 101(c)(1)(A). Electronic Signatures in Global and National Commerce Act (ESign Act). 39 Ibid. Section 101(c)(1)(B). 40 Ibid. The disclosures include: (1) whether the consumer may request to receive the information in non-electronic or paper form; (2) the consumer’s right to withdraw consent to electronic records and the consequences – including possible termination of the relationship – that will result from such withdrawal; (3) the transaction(s) or categories of records to which the consent applies; (4) the procedures for withdrawing consent and updating the information needed to contact the consumer electronically; and (5) how the consumer may request a paper copy of the electronic record as well as what fees, if any, will be charged for the copy. Section 101(c)(1)(B)(i)-(iv). In addition, businesses must provide the consumer with a statement of the hardware and software needed to access and retain the electronic record. Section 101(c)(1)(C)(i). 41 Electronic Signatures in Global and National Commerce Act (E-Sign Act), Section 101(c)(1)(C)(ii), subject to certain exceptions, the law’s effective date is October 1, 2000, with record retention requirements effective beginning March 1, 2001, available at http://www.ftc.gov/os/2001/06/esign7.htm#N_1_#N_1_. 42 Ibid. Section 101(c)(1)(C)(ii). 43 See ARMA, AIIM Sponsored White Paper, 2004, Source: Electronic Records Management Survey, Cohasset Associates Inc. Confidence level on Legal Submission.

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44 A. Shipman, ‘Legal Admissibility and Evidential Weight of Information Stored Electronically – What are the benefits of implementing the Code of Practice?’, in Electronic Document, Records and Content Management 2004, p. 1. 45 Section of Uniform Electronic Transactions Act (UETA) § 8(b)(3) available at: http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta.htm. 46 Code of Practices (BSI BIP 0008:2004) available at: http://www.bsi-global.com. 47 OECD – Guidelines for Consumer Protection in the Context of Electronic Commerce (OECD-1999) available at: http://www.oecd.org/dsti/sti/it/consumer/). 48 Electronic Signatures in Global and National Commerce Act (E-Sign Act), Section 101(c)(1)(C)(ii), available at http://www.ftc.gov/os/2001/06/esign7.htm#N_1_#N_1_. 49 Canadian Standards: ‘Electronic Records as Documentary Evidence’, available at: http://www.aiim.org/events/presentations/StandardsinCanadacmgov2004.pdf. 50 Interoperability means using common technical standards. 51 C. Hangey, cites ‘The International Research on Permanent Authentic Records in Electronic Systems (InterPARES)’ which aims at developing the theoretical and methodological knowledge essential to the long-term preservation of authentic records created and/or maintained in digital form. This knowledge should provide the basis from which to formulate model policies, strategies and standards capable of ensuring the longevity of such material and the ability of its users to trust its authenticity. Information available at: http://www.interpares.org/ in Best Practices for Electronic Records Retention (Part One) Robert Frances Group, February, 2003, available at: http://www2.cio.com/analyst/report930.html. 52 Zubulake v. UBS Warburg (Zubulake IV) 220 F.R.D. 212 (S.D.N.Y. 2003). During 2003 and 2004, US District Court issued five decisions in the case of Zubulake v. UBS Warburg. In this case Laura Zubulake, an equities trader sued her former employer, UBS, claiming gender discrimination, failure to promote and retaliation. In Zubulake I (217 F.R.D. 309 (S.D.N.Y. 2003)) was discussed who should bear the cost of producing email contained on computerised backup tapes, while in Zubulake III (216 F.R.D. 280 (S.D.N.Y. 2003)). 53 Ibid., at 215 (S.D.N.Y. 2003). 54 Ibid., at 217. 55 Council Directive 2001/115/EC of 20 December 2001 amending Directive 77/388/EEC with a view to simplifying, modernising and harmonising the conditions laid down for invoicing in respect of value added tax, Official Journal of the European Communities L 15/24, 17 January 2002. 56 Commission Recommendation 97/489/EC of 30 July 1997 concerning transactions by electronic payment instruments. 57 Ajay Patel, ‘Consumer Confidence and online security, Electronic Business Law’, October 2000, p. 13. 58 ‘Extra charge after buying off the web’, The Times, December 2000, p. 4. 59 ‘E-commerce and consumer’, A report by the UK National Consumer Council, August 2000, Publication reference PD40/2000 PD40/2000. 60 Communication from the Commission to the Council and the European Parliament concerning a New Legal Framework for Payments in the Internal Market (Consultative Document), COM(2003) 718 final, Brussels, 2 December 2003. 61 P. Thomas, A.C. Lacoste, ‘Smart cards and centralised databanks’, Venice, 27–30 September 2000, Seminar Paper, p. 1. 62 Gavin Sutter, ‘Law & Technology Convergence: Electronic Payments Systems’, ECLIP EP 27028, 16 December 1999. 63 The Mondex Card is an integrated circuit card (ICC), a ‘smart’ card – a normal plastic card with a small microcomputer ‘Chip’ embedded in it. The Card takes the form of an ISO 7816 integrated circuit card, the international standard for IC cards.

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64 Mondex is a subsidiary of MasterCard International, Information available at: http://www.mondex.com. 65 Jane Kaufman Winn, ‘Clash of the titans: regulating the competition between established and emerging electronic payment systems’, available at: http://www.smu.edu/~jwinn. 66 Ibid. 67 A. Michael Froomkin, ‘Flood Control on the Information Ocean: Living With Anonymity, Digital Cash, and Distributed Databases’, Pittsburgh Journal of Law and Commerce, Vol. 15 U., No. 395, 1996. 68 S. Glassman et al., ‘The Millicent Protocol for Inexpensive Electronic Commerce’, http://HTTP.CS.Berkely.EDU/~gauthier/millicent/millicent.html. R.L. Rivest, A. Shamir, ‘Payword & MicroMint: Two simple Micropayment Schemes’, 8 November 1995, information available at: http://theory.lcs.mit.edu/~rivest/RivestShamir-mpay.ps. 69 A. Michael Froomkin, ‘Flood Control on the Information Ocean: Living With Anonymity, Digital Cash, and Distributed Databases’, Pittsburgh Journal of Law and Commerce, Vol. 15 U., No. 395, 1996. 70 Stefan A. Brands, Centrum voor Wiskunde en Informatic (CWI), Off-line Electronic Cash Based on Secret-Key Certificates 1-2 (1995) (Report CS-R9506) http://www.cwi.nl/ftp/brands/CS-R9506.ps.Z. 71 Directive 97/7 of 20 May 1997 on the protection of consumers in respect of distance contract; Council Directive 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit; Commission Recommendation 97/489/EC of 30 July 1997 concerning transactions by electronic payment instruments and in particular the relationship between issuer and holder. 72 The study has been undertaken under contract to the European Commission in response to Call for Tender XV/99/01/C by a consortium of 10 European partners led by CRID, University of Namur and the IT Law Unit, Centre for Commercial Law Studies, Queen Mary University of London, available at: http://europa.eu.int/comm/internal_market/payments/docs/study-recomm-97-489/studypart1-recomm-97-489_en.pdf. 73 P.B. Southard, Communications of the ACM, October 2004, Vol. 47, No. 10, p. 102. 74 ‘Chargeback’ is the technical term used by international card schemes to name the refunding process for a transaction carried out by card following the violation of a rule. This process takes place between the consumer (who retains the card) and the acquirer (the trader’s bank).

Chapter 3

Standardisation of Online Contracts INTRODUCTION In 1965, the US Special Committee on Retail Instalment Sales posed the following question: ‘It is fair to ask precisely what it is that the consumer is to be protected from. Must he be protected from his own lack of knowledge or discipline? … Is he to be protected from the “fringe” operator who may take advantage of the ignorance and gullibility of the consumer to cause him to overbuy or pay too much?’1 This question is still relevant today not only from a historical standpoint but also from its updated perspective. At that time, consumer protection answered this question by formulating the major rationales for government regulation of the marketplace: the inequality of bargaining power,2 the growing and frequently total disparity of knowledge concerning the characteristics and technical components of the goods or services and the disparity of resources that reflected itself in a consumer’s difficulty to obtain redress unaided for a legitimate grievance.3 Amongst these rationales, unequal bargaining power was considered as a discrete rationale for consumer protection, ‘an umbrella concept for those market and private-law failures which cause consumers to suffer economic detriment.’4 The major part of the doctrine5 described unequal bargaining as including two major aspects: unfair standardised terms and the ineffectiveness of consumer redress mechanisms. The first aspect evolves from the premise that contracts should be based on the negotiation of terms and conditions between consumers and traders. The lack of bargaining power was compared with the phenomenon of ‘standards contracts’ or ‘contracts of adhesion.’6 Formulated several decades before, these views are still alive today. However, one might wonder how standardised contracts emerge in this new global electronic marketplace and what are their consequences on the negotiation process between parties of equal bargaining power? In order to answer these questions the chapter starts by analysing the standardisation of online contracts and elaborating the basis for a new view on unequal bargaining power ensuing from the B2C online electronic transactions. The chapter demonstrates that the standardisation of online contracts can be problematic in protecting consumers in cyberspace and that this market failure cannot be addressed by an application of traditional views based on ‘the contract-as-consent model,’7 which involves a meeting of the minds between two humans. The adherence of many scholars to this model is not surprising at all, as usually providing answers to the new issues emerging from the development of information technologies would require the application or the adaptation of general principles of law. Though, it is not that with the advent of Internet these principles become inadequate but rather that they risk being transformed by a technological context in obsolete methods of legal reasoning. Building on that critique, my inclination remains nevertheless towards regulatory intervention. This consists of

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capturing the current development of commercial practice in a legal safety net, which responds to the consumer’s need for protection in cyberspace. In this connection, the chapter concentrates on the analysis of the peculiarities of the standardisation of online contracts and the manner in which the jurisprudence scrutinises the terms and conditions of standardised online agreements. 3.1 Standardisation of Online Contracts: Two Interpretations In general terms, standardisation of online contracts can be defined in relation to the process of harmonisation of the law at international or European level. For example, the effort of UNCITRAL to formulate model legislation on electronic commerce should be seen from the perspective of harmonisation of law that helps to remedy disadvantages stemming from disparities among national laws that create obstacles to international trade. In a strict sense, the standardisation of online contracts can be defined as a comprehensive process of authoritative decision-making in which standard terms and conditions are designed by businesses and imposed on consumers in their attempt to make electronic transactions. From the perspective of business, standard online contracts are totally legitimated by the fact that distributing products online is incompatible with separately negotiated terms and conditions. This argument is rather contradictory to the interests of consumers who would probably like to negotiate online but to their surprise, realise that practically this is not possible. The only alternative left in order to equalise their bargaining power would probably be before a court. The court would scrutinise the fairness of the terms and conditions submitted and balance the bargaining power between consumers and traders. In the electronic marketplace, standardisation can be for example, illustrated by licence agreements in which terms are based on a take-it-or-leave-it basis, which make them look more like a property scheme designed by private companies instead of by governments.8 In ProCD, Inc. v. Zeidenberg,9 Judge Easterbrook citing the US Restatement (2d) of Contracts §211 comment a (1981) supported the standardisation of online contracts, mainly on the basis that shrink-wrap licences10 are beneficial for consumers: ‘[s]tandardization of agreements serves many of the same functions as standardization of goods and services; both are essential to a system of mass production and distribution. Scarce and costly time and skill can be devoted to a class of transactions rather than the details of individual transactions.’11 The court held that standardised licence contracts reduce transaction costs because they make costly bargaining in repeated transactions of substantially identical nature unnecessary.12 3.2 Peculiarities of Standardised Online Contracts Standardised online licence agreements and common B2C commercial contracts raise innumerable questions concerning their impact on the bargaining power between consumers and traders. Notwithstanding similarities existing between the standardisation of traditional contracts and of online contracts, the standardisation

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of online contracts presents specific peculiarities: its contents are prepared by business and imposed on consumers worldwide via a ‘durable medium;’13 standardised terms and conditions relating to a certain product or services are incorporated into a web page or floppy disk; standardised terms and conditions cannot be negotiated. As will be noticed below, these peculiarities bring up a large number of issues with regard to the implication of standardised online contracts on the balance of power between consumer and trader. 3.2.1 Authoritarian process of designing terms and conditions Standardised online contracts are prepared by business and imposed on consumers worldwide via the electronic medium. Nevertheless, in online transactions, standardised terms and conditions do not fit with the variety of national legal systems. The authoritarian process of designing terms and conditions in the electronic marketplace create an advantage for businesses which would benefit from time and expertise in preparing standardised forms. The consumer usually would not have the experience necessary in assessing the unfairness of standardised terms and conditions. In addition, as remarked by Farnsworth: the chance to read the form may be diminished by the use of fine print and convoluted clauses. (…) [D]ickering over contract terms may not take place between parties of equal power. More often, the case will be that there is no opportunity to bargain at all where the enterprise has such disproportionately strong economic power that it simply dictates the terms.14

In the context of the electronic marketplace, where the speed of information dissemination enables the formation of strategic alliances, and other forms of competitive collaborations, standardised contracts imposed upon consumers create significant risk of market failure. This is the case where consumers do not have the possibility to make online transactions for comparable products and services on different terms and conditions. Nevertheless, this failure can be counterbalanced by the fact that businesses, contracting in a borderless environment on the basis of standardized terms and conditions will be confronted by myriad mandatory rules which protect consumers who enter into such electronic transactions. Furthermore, the process through which standardised rules are made in an off-line environment differs from standardisation in the online environment. Off-line, businesses prepare standard contracts within the framework of one legal system. In online transactions, businesses would have difficulty in preparing standardised contracts which fit various legal systems. Supposing that a sophisticated consumer located in the UK succeeds in negotiating in detail the terms of his contract with an online company based in France but has written the contract in French – thus in a language which is different from the consumer’s legal system. Would this freedom of negotiation help the consumer to correct the balance of power in his favour? The response to this question may be negative due to the differences in the interpretation of terms and conditions peculiar to the different legal systems. If general terms and conditions are drafted on the basis of one legal system, they will often be quite incomprehensible for a contractual partner

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in another jurisdiction. The main consequence will consist of the enforceability of contracts under a conditional recognition in respect of the fairness principle. 3.2.2 Ambiguous presentation of terms and conditions Standardised terms and conditions relating to certain products or services are incorporated into a web page or floppy disk. Presentation of terms and conditions on a web page or a floppy disk, may not allow consumers to have any knowledge about the terms and conditions, which apply to their transaction. The presentation and incorporation of standardised terms in a web page differ from one category of contract to another. Thus, there are three categories of the B2C commercial contracts15 which can be formed over the Internet: contracts for the sale of physical goods; contracts for the supply of services and facilities; contracts for the supply of digitised products. 3.2.2.1 Contracts for the Sale of Physical Goods and of Contracts for the Supply of Services For contracts for the sale of physical goods and of contracts for the supply of services, standardised terms can normally be viewed by consumers via a link at the bottom of the home page or elsewhere or by giving the consumer the opportunity of either downloading or asking via e-mail. Nevertheless, sometimes standardised terms and conditions refer to various issues relating to security and privacy, passwords and online payments, which have no direct relation to the consumer’s transactions. For example, eToys’s ‘terms and conditions’ page provides the information about the conditions, which apply to the acceptation of an offer: [t]he receipt of an e-mail order confirmation does not constitute the acceptance of an order or a confirmation of an offer to sell. eToys reserves the right, without prior notification, to limit the order quantity on any item and/or [sic] refuse service to any customer. Verification of information may be required prior to the acceptance of any order.16

Moreover, frequently, the ‘terms and conditions’ might lack coherence as instead of having the opportunity to consult the ‘terms and conditions’ under a unique reference, consumers will be obliged to download terms and conditions which can be found under different titles such as: ‘Return/Exchange Policy,’ ‘Shipping Information,’ and ‘Please click here for legal restrictions and terms of use applicable to this site.’ The fragmentation of terms and conditions under different titles could be time-consuming and cumbersome for consumers who want to view these terms and conditions.17 Faced with innumerable links relating to different legal issues, consumers will finally not have any knowledge about the terms and conditions which apply to their transaction. 3.2.2.2 Contracts for the Supply of Digitised Products Another type of B2C commercial contract relates to the supply of digitised products. Digitised products can take the form of software, newspapers, music, movies, and

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books etc. In transactions regarding the supply of digitised products such as software programmes, the terms and conditions are presented in a different way in comparison with online contracts for supply of goods. For example, in a click wrap agreement, the terms and conditions are presented to the user with a message on his or her computer screen,18 requiring that the user shows his or her assent to the terms of the licence agreement by clicking on an icon. Another method of presenting contractual terms to a consumer is the browser wrap agreement.19 Through this method, the trader allows the consumer the opportunity to view the terms and conditions, requiring the confirmation of consumer assent only after making the payment for the product. The philosophy behind these agreements is to allow software traders to protect information that would otherwise be permissible to copy under international intellectual property laws.20 The courts have already addressed the issue of ambiguous presentation of terms and conditions. In Ticketmaster Corporation v Tickets.com Inc,21 the federal court emphasised the need for websites to display their terms and conditions of use prominently, stating that failure to do so might result in those terms not being enforceable against the users of those websites. Finally as it will be observed further in our study, the particular aspects of standardised terms and conditions in licence agreements raise serious questions regarding the validity and the enforceability of contractual terms and conditions. 3.2.3 Non–negotiability of terms and conditions The terms and conditions of standardised online contracts cannot be negotiated. Would the electronic marketplace change our view on unequal bargaining power between consumers and traders? Within the framework of B2C commercial consumer contracts, terms and conditions are not frequently negotiated because of the low value of the contracts. Nevertheless, the unequal bargaining power arises in relation to the licence agreements concluded between consumers and traders. The analysis of the judicial opinions with respect to enforceability of standardised licence agreements is examined mainly in view of the B2C consumer agreements such as shrink-wrap, click wrap and browse-wrap agreements. This section will also consider relevant B2B legal cases, due to their preponderance in comparison with the B2C legal cases. Furthermore, most legal decisions held in respect of B2B commercial contracts contain elements that are useful for the legal analysis of unequal bargaining power in the B2C consumer contracts. 3.2.3.1 Shrink-wrap Agreements A ‘shrink-wrap’ licence is used in the sale of software packaged in a container or wrapper that advises the purchaser that the use of the software is subject to the terms of a licence agreement contained inside the package. The licence agreement generally explains that, if the purchaser does not wish to enter into a contract, he or she must return the product for a refund, and that failure to return it within a certain period will constitute assent to the licence terms.22

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Shrink-wrap agreements differ from other adhesion contracts in that they do not invite a signature on the contract, but rather purport to infer acceptance from the offeree’s conduct.23 The key questions, which arise from shrink-wrap agreements, relate to the moment of the formation of contract and to the incorporation of the standardised terms into the sale contract. As will be noticed from the analysis of the legal decisions presented below, courts are reserved when enforcing shrink-wrap agreements in consumer transactions. In general, in their analysis of the validity and enforceability of contracts, the courts proceed in two stages: first, they proceed to the examination of contract in order to see if it presents the characteristics of an online standardised contract; second, if evidence exists that the contract in question is a standard contract, the court will scrutinise whether its terms and conditions are unreasonably favourable to the party against whom unfairness is directed. In Step-Saver Systems, Inc. v Wyse Technology24 a software vendor made a number of sales to a value-added reseller. The court held that shrink-wrap agreements are unenforceable because the user learned about the producer’s licence terms only after payment. The court argued that shrink-wrap standardised terms could not change the terms of the already existing sale of goods contract since the purchaser had not expressly assented to the new terms. In a similar case, Arizona Retail Systems, Inc. v Software,25 the court concluded that the terms of the licence agreement are not applicable. In all material respects, the subsequent purchases in this case are equivalent to the purchases in Step-Saver. In ProCD Inc v Zeidenberg,26 the plaintiff (ProCD) compiled information from over 3,000 directories into a telephone book database containing approximately 95 million telephone listings (the database in SelectPhone cost more than $10 million to compile) and developed a search engine that facilitates the use of the database.27 ProCD licensed the database at a higher price for commercial users and a lower price for private users.28 Zeidenberg bought the licence as a private user package, but ignored the licence,29 extracted the listings, and made the database commercially available over the Internet through his own proprietary search engine.30 The court of first instance held that the licence is unenforceable because the purchaser had not been able to know its content before the sale was concluded. The lower court decision was overruled by the circuit court, which enforced the shrinkwrap contract. The court stated that the consumer accepted the contract when he assented to the licensing terms on his computer. Furthermore, the main argument used by the court was focused on the formation of the contract in particular, i.e. how and when the contract was formed, whether a vendor may propose that a contract of sale be formed, not in the store or over the phone with the payment of money, but rather after the customer had the chance to inspect both the item and the terms.31 In the ProCD case, Judge Easterbrook held that ‘[s]hrink-wrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (…).’32 The district court held the licence agreement not enforceable, as the agreement terms were not on the outside of the package and thus were unknown to the purchaser at the time of purchase. The court reasoned that the buyer did not agree to terms that were unknown to the buyer at the time of purchase.33 Judge Easterbrook disagreed with the holding of the district court and concluded ‘[a] vendor, as master of the offer,

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may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance.’ ‘A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognise the existence of such a contract.’34 Furthermore, the court argued that the licence agreement at issue was a proposed contract that a buyer may accept by using the software after having an opportunity to read the licence.35 Finally, it was considered that the consumer did not accept the terms of the contract by purchasing the software, but he accepted the terms by using the software. The court’s decision was founded on the option of returning the software within thirty days of sale. Others commentators argued that in the ProCD case, the seller splashed the licence on the screen when the program was run and would not let the buyer proceed without indicating acceptance.36 In the Hill v. Gateway 2000 case,37 the court followed the ProCD decision.38 In the Hill case, the consumers ordered a computer by phone and paid with a credit card.39 It was held that the consumers had knowledge of the agreement, even if they had not read it, but the court did not address the issue of notice of the agreement’s terms.40 The terms of the contract were included in the computer’s box, stipulating ‘[t]his document contains Gateway 2000’s Standard Terms and Conditions. By keeping your Gateway 2000 computer system beyond thirty (30) days after the date of delivery, you accept these Terms and Conditions.’41 The Hills did not return the computer within the period prescribed. The plaintiffs sued Gateway for breach of contract, fraud, and racketeering. The terms of the contract contained an arbitration clause; however, before considering the arbitration clause, the court was obliged to address the question relating to the enforceability of contract terms. The court held that the Hills were bound by the terms in the licensing agreement, because they agreed to the terms of the contract by using the computer. The district court refused to enforce the arbitration clause, stating that ‘the present record is insufficient to support a finding of a valid arbitration agreement between the parties or that the plaintiffs were given adequate notice of the arbitration clause.’42 However, by applying the ProCD reasoning, the court reversed the district decision and enforced the arbitration clause. Once again, the court’s decision seems to be more a victory for click-wrap rather than an increasing consensus for consumer protection. Assuming that a consumer does not agree to an arbitration clause, for instance, it seems like an undue burden to require a consumer to ship back the computer to reject the clause.43 In Brower v. Gateway,44 the court refused to enforce the arbitration clause in Gateway’s shrink-wrap agreement, which was ‘unreasonably favourable’ to Gateway. The arbitration clauses required that Gateway purchasers with claims against the company could not sue, but were instead required to arbitrate, paying a $4000 fee, $2000 of which was non-refundable, to participate in arbitration proceedings in Chicago, and pay Gateway’s legal fees in the event that they lost. Finally as it was suggested by Brown,45 the combination of the ProCD and Gateway decisions left little doubt that courts would enforce computer software and hardware agreements when the consumer can only read the contract after the purchase and after opening the sales packaging. In Klocek versus Gateway, Inc.,46 the court refused to enforce the arbitration provision contained by a shrink-wrap agreement. The court found that by ordering

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a computer, the consumer had made an offer to buy a computer that the manufacturer accepted by sending the computer and accepting payment. The manufacturer had included terms in the computer’s box but ‘did not communicate to plaintiff any unwillingness to proceed without plaintiff’s agreement to the [license terms].’ Finally, the court held that the terms could not become part of the contract unless the purchaser agreed to them, which the purchaser did not. In the UK, the case of Beta Computers (Europe) Ltd v. Adobe Systems (Europe) Ltd47 in 1995 can be considered as the first case relating to the validity of shrinkwrap licences.48 In this case, the Scottish Court of Session held that a shrink-wrap agreement is enforceable and that the contract for supply was concluded only when the shrink-wrap terms had been seen and accepted by the purchaser. In this case, it was the purchaser who sustained the enforceability of shrink-wrap agreements. Adobe had ordered a piece of Informix software from Beta, which supplied the software package. The software was delivered in a package, which showed that the software was subject to strict end user licence conditions under the name of the author. It stated on the package that ‘Opening the Informix S.I. software package indicates your acceptance of these terms and conditions.’ The company attempted to return the package unopened, but the suppliers refused to accept its return and sued for payment of the price. The argument of the suppliers consisted in the fact that there was an unconditional and unqualified order for identified software; that, as they had supplied what was ordered, the defenders were obliged to pay the price. In this case Lord Penrose considered that the supply of off-the-shelf software against payment is not a contract for the sale of goods, but is a sui generis contract incorporating elements of purchase and licence. What are the lessons that could be learned from the Beta decision with regard to consumer protection? If consumers do not accept the licence terms, the retailer should refund them. The retailer cannot claim that he is not concerned by the contract intended to benefit the third party owner of the intellectual property rights. With respect to software companies, the court argued that if the shrink-wrap agreements were unenforceable, this would create concern for the computing industry which is based on licence agreements to limit the fiscal damage caused by consumers using software without paying. The Beta decision was criticised by Robertson, who argues that ‘notwithstanding the desirability or otherwise of shrinkwrap licences, the relevant law did not exist to justify the findings of the Court.’49 All the legal decisions presented above demonstrate that it is quite difficult for a lawyer to draft a unique sample of a shrink-wrap agreement, which is totally enforceable worldwide. In order to compensate for unequal bargaining power arising from shrink-wrap or click-wrap agreements, the court indicated in the ProCD case that a software company that simply includes: a conspicuous notice of the existence of licence terms on the package; an ‘I agree’ routine in its software at start-up time; and an opportunity for a refund should be able to claim that its agreements’ terms are enforceable. It is doubtful whether the enforceability of shrink-wrap agreements in the electronic marketplace can be definitively resolved through the three conditions indicated by the court in the ProCD case. In order to ensure that a realistic equal bargaining power exists between consumers and software companies, I consider that the following steps should be considered by software companies:

Standardisation of Online Contracts

• • • • •

•

•

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Software companies should place the information on wrapping or even offer the possibility to the consumer of receiving a copy of the licence before placing an order; This information should be translated into the language of those countries in which licences are distributed; Terms and conditions of licences should be included in a brochure and should allow the possibility for consumers to read terms and conditions before accepting the consumer’s order; Terms and conditions should be viewed by consumers on their computer screens and they should be submitted for the acceptance of consumers; Terms and conditions should be drafted by taking into consideration the provisions of the Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance;50 and of the Council Directive 91/250 on the legal protection of computer programs (the ‘Software Directive’)51 regarding the prohibition of reverse engineering and blocking the assignment of software; Terms and conditions should be prepared in conformity with mandatory consumer protection law regarding applicable law and online dispute resolution. In order to compensate for the probability of unenforceable terms, companies should rely on the application of the national law rather than imposing a particular law with no connection to the consumer’s country; Consumers should have the opportunity to obtain a refund if they disagree with terms and conditions imposed by shrink-wrap licences.

Most of these criteria are also available for click-wrap agreements. 3.2.3.2 Click-wrap Agreements A ‘click-wrap’ licence presents the user with a message on his or her computer screen, requiring that the user shows his or her assent to the terms of the licence agreement by clicking on an icon, and ‘[t]he product cannot be obtained or used unless and until the icon is clicked.’52 In Groff v. America Online. Inc,53 the court upheld the validity of a click-wrap choice of forum by an AOL subscriber. Although the plaintiff, stated ‘I never saw, read, negotiated for or knowingly agreed to be bound by the choice of law ...’, the court argued that the plaintiff by clicking the ‘I agree’ button placed next to the ‘read me’ button or the ‘I agree’ button next to the ‘I disagree’ button agreed at the conclusion of the subscription agreement, which contained the forum selection clause.54 The court held that plaintiff could not claim that he was uninformed in the area of contract law. The plaintiff, as pointed out by defendant (…) had been at the bar in that state for approximately thirty years.55 The court quoted the case Moretti & Perlow Law Office v. Aleet Associates,56 where the plaintiff was resisting his claim being transferred from Rhode Island to New York under a forum selection clause in the agreement. The court observed, ‘[W]ith respect to overweening bargaining power (plaintiff) is an experienced Rhode Island attorney well-versed in the rudiments of contract law. If he did not read and understand the motor vehicle lease in question, he surely should have done so.’57 This argument is not consistent as it

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can lead to the idea that all lawyers who are subject to unequal bargaining power would be at fault when entering into a standardised contract relationship. In Caspi v. Microsoft Network,58 the court was called upon to determine the validity and enforceability of a forum selection clause contained in an on-line subscriber agreement of the Microsoft Network (MSN). The court held that a membership agreement for an on-line computer service with an Internet service provider (ISP) provided adequate notice of the forum selection clause. Potential subscribers were free to scroll through the computer screens that presented the terms before clicking in agreement. The clause was presented in exactly the same format as most other provisions and was not presented unfairly.59 In RealNetworks, Inc., Privacy Litigation,60 the court ruled, in answer to a defence based on procedural unconscionability, that the click-wrap agreement is binding on the user because the arbitration clause appeared in the final paragraph of the agreement under the caption ‘Miscellaneous,’ which included provisions on choice of law and forum. The court noted that the clause was in the same font as the rest of the agreement, was freely viewable without time restrictions. It also noticed that users should agree to the online licence agreement before being able to install software from the provider’s website. The Williams v. America Online, Inc. case61 addressed the issue of unequal bargaining in connection with click wrap agreements. In this case the plaintiffs, a group of users that installed AOL version 5.0 (‘Software’) on their computers, claimed that the installation of this software ‘caused unauthorized changes to the configuration of their computers so they could no longer access non-AOL Internet service providers, were unable to run non-AOL e-mail programs and were unable to access personal information and files.’62 The plaintiffs claimed that the defendant’s commercial practice is unfair and infringed consumer protection laws. The court considered that the evidence showed that AOL’s software altered the users’ systems before they had a chance to review the click-wrap agreement and the alterations would proceed even when users rejected the agreement. The court also concluded that because users’ systems were changed before the agreement could be reviewed; consumers had no notice of the forum selection clause, and no opportunity to accept or reject it. Given this contextual situation, the court held that AOL could not invoke the forum selection clause to require users to proceed in Virginia. In Specht v. Netscape Communications Corp.,63 the court rejected a claim by Netscape that ‘the mere act of downloading indicates assent’ because ‘clicking on an icon stating “I assent” has no meaning or purpose other than to indicate such assent,’ but ‘[t]he primary purpose of downloading is to obtain a product, not to assent to an agreement.’ The court argued that ‘SmartDownload is available from Netscape’s website free of charge,’ and that ‘[b]efore downloading the software, the user need not view any license agreement terms or even any reference to a license agreement, and need not do anything to manifest assent to such a license agreement other than actually taking possession of the product.’ The court compared SmartDownload to ‘a free neighbourhood newspaper, readily obtained from a sidewalk box or supermarket counter without any exchange with a seller or vender. It is there for the taking.’64 The court held that the only indication that a contract is being formed is one small box of text referring to the licence agreement, a text that appears below the screen

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used for downloading and that a user need not even see before obtaining the product: ‘Please review and agree to the terms of the Netscape Smart Download software license agreement before downloading and using the software.’ Couched in the mild request, ‘Please review,’ this language reads as a mere invitation, not as a condition. The language does not indicate that a user must agree to the licence terms before downloading and using the software. The court argued that while clearer language appears in the ‘License Agreement’ itself, the language of the invitation does not require to read those terms or to provide adequate notice other than that a contract is being created or that the terms of the ‘License Agreement’ will bind the user.65 In America Online, Inc. v. Superior Court,66 the California Court of Appeal found grounds on which to decline to enforce consumer click-wraps. The court invoked a public policy exception to consumer choice of forum and considered that the forum selection clause in a click-wrap agreement made during an installation process on CD-ROM is unfair and unreasonable. The court argued that the clause (a) was not negotiated at arm’s length, (b) was in a standard ‘form’ contract, (c) was in small text and placed at the end of the agreement, hence not readily identifiable by plaintiff and (d) was contrary to California public policy which affords its citizens specific and meaningful consumer remedies. The prime difference between the Virginia consumer protection law and that of California was that the California statute allows a consumer to bring a class action, Virginia’s does not.67 In this case, the central issue when considering consumer click-wrap agreements is no longer the consumer assent but rather the public policy issue. It can be concluded from this overview of the main US legal decisions, that clickwrap agreements are scrutinised by the courts through a process which risks being variable when interpreting the notion of ‘assent’ or the non-negotiability of terms and conditions. Certainly, most of this variability is due to the contextual situation peculiar to each case. 3.2.3.3 Browse-wrap Agreements The ‘browse-wrap’ agreement refers to any substantive agreement that is accessible by means of a hyperlink from a website’s home page.68 These agreements could result in a non-negotiable contract simply by the consumer’s action of accessing a product. Thus, consumers may be bound by a contract without giving their assent or without knowing about the existence of this contract. In Specht v. Netscape Communications Corp.,69 the court stated that the ‘browse-wrap’ licence ‘differs fundamentally from both click-wrap and shrink-wrap licensing’ because click-wrap and shrink-wrap agreements ‘require users to perform an affirmative action unambiguously expressing assent before they may use the software’ and this ‘affirmative action is equivalent to an express declaration stating, “I assent” to the terms and conditions of the license agreement or something similar.’ The question which arises is whether a browse-wrap is a binding contract despite the lack of affirmative assent of the consumer to the contract terms. In Ticketmaster Corp. v. Tickets.com, Inc.,70 Ticketmasters’ companies complained about the alleged breach of the website terms and conditions concerning ‘deep linking.’71 The district court held that in this case the browse-wrap agreements could not be considered as binding contracts. It was considered that ‘[i]t

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cannot be said that merely putting the terms and conditions in this fashion necessarily creates a contract with anyone using the website.’72 However, the court considered the intentional conduct from which Ticketmaster could infer consent: The motion to dismiss the second claim (breach of contract) is founded on the ‘terms and conditions’ set forth on the home page of the Ticketmaster site .... In defending this claim, Ticketmaster makes reference to the ‘shrink-wrap license’ cases, where the packing on the outside of the CD stated that opening the package constitutes adherence to the license agreement (restricting republication) contained therein. This has been held to be enforceable. That is not the same as this case because the ‘shrink-wrap license agreement’ is open and obvious and in fact hard to miss. Many websites make you click on ‘agree’ to the terms and conditions before going on, but Ticketmaster does not. Further, the terms and conditions are set forth so that the customer needs to scroll down the home page to find and read them. Many customers instead are likely to proceed to the event page of interest rather than reading the ‘small print’. It cannot be said that merely putting the terms and conditions in this fashion necessarily creates a contract with anyone using the website. The motion is granted with leave to amend in case there are facts showing Tickets’ knowledge of them plus facts showing implied agreement to them.73

In Pollstar v. Gigmani,74 the court concluded that a browse-wrap licence agreement might arguably be valid and enforceable although users could see the licence but did not have to click on anything in order to see the site information. This licence agreement can be viewed on the home page but on a different web page that is linked to the home page. The consumer is not obliged to assent to the licence agreement by clicking ‘I agree.’ However, the consumer is alerted to the fact that use of the website is subject to a licence agreement because of a notice that appears on the home page. Gigmania downloaded pollstar.com from the Internet and placed information that was copied from the pollstar.com website on its own website at www.gigmania.com. The plaintiff argued that users of site information are bound by the licence agreement. An overview of the main legal decisions regarding the enforceability of licence agreements is presented in the Table 3.1 below. On the basis of current legal decisions, my purpose is to clarify some of the rules for contract formation in licence agreements. Understanding these rules could be helpful in addressing the issue of unequal bargaining between consumers and traders. Thus, it is generally considered that although consumers adhere every day to standardised contracts, they are bound even though their terms and conditions are not read or negotiated. Requiring a personal consent from the consumer might not reflect online commercial practice where most terms and conditions presented on the web pages are not even read or negotiated. Sometimes, consumers cannot negotiate a contract as they might not have read the standardised terms and conditions before clicking in sign of consent. Sometimes, when they will really want to consult these terms, they realise that they do not have any opportunity to consult them before giving their assent to the formation of contract. Finally, most businesses use standardised terms to disclaim implied warranties, consequential damages and unilaterally to determine the jurisdiction and applicable law to a contract. M.J. Radin judiciously described the avatars of consumers when referring to online standardised transactions:

Unenforceability of shrink wrap – shrink-wrap standardised terms could not change the terms of the already existing sale of goods contract since the purchaser had not expressly assented to the new terms Shrink-wrap agreement enclosed in the software package was assented to and therefore was enforceable

An arbitration agreement packaged inside a computer shipping box was enforceable

Step-Saver Systems, Inc. v. Wyse Technology 939 F. 2d 91 (3rd Cir. 1991)

ProCD Inc v. Zeidenberg 86 F. 3d 1447 (7th cir. 1996)

Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997)

Shrink-wrap agreements

Enforceability/unenforceability of licence agreements

– the Hills were bound by the terms in the licensing agreement, because they agreed to the terms of the contract by using the computer – refusal to enforce the arbitration clause, opining that ‘the present record is insufficient to support a finding of a valid arbitration agreement between the parties or that the plaintiffs were given adequate notice of the arbitration clause’

– shrink-wrap licences are enforceable unless their terms are objectionable on grounds applicable to contracts in general – the seller or licensor in a transaction has the power to condition acceptance on certain conduct by the buyer – the consumer should have the opportunity to see and reject terms upon opening package and the right to obtain refund

– the sales contract between the vendor and the purchaser had already been concluded at the time of payment, before the user learned about the producer’s licence terms

Legal grounds

Legal decisions regarding the enforceability/ unenforceability of licences agreements

Types of licence agreements

Table 3.1

Refusal to enforce the arbitration clause in Gateway’s shrink-wrap agreement

Unenforceability of the arbitration provision contained by the shrinkwrap agreement

Enforceability of shrink-wrap agreements

Brower v. Gateway, 246 A.D.2d 246, 676 N.Y.S.2d 569 (1st Dept. 1998)

Klocek v. Gateway, Inc., 104 F.Supp. 2d 1332 (D.Kansas 2000)

UK – Beta Computers (Europe) Ltd v. Adobe Systems (Europe) Ltd 1996 SLT 604; 1996 SCLR 587

– the court held that the supply of off the shelf software for payment was not a contract for the sale of goods, but is a sui generis contract incorporating elements of purchase and licence – the contract cannot exist until the terms are accepted by the purchaser of the licence terms intended to benefit the third party owner of the intellectual property rights, so those terms were enforceable

– by ordering a computer, the consumer had made an offer to buy a computer that Gateway accepted by sending the computer and accepting payment – Gateway had included terms in the box with the computer but ‘did not communicate to plaintiff any unwillingness to proceed without plaintiff’s agreement to the [license terms].’ – the terms could not become part of the contract unless the purchaser agreed to them, which the purchaser did not

– the arbitration clause in Gateway’s shrink-wrap agreement was ‘unreasonably favourable’ to Gateway – the clause required that Gateway purchasers with claims against the company could not sue, but were instead required to arbitrate, paying a $4000 fee, $2000 of which was non-refundable, to participate in arbitration proceedings in Chicago and pay Gateway’s legal fees in the event that they lost

Enforceability of a click-wrap choice of forum by an AOL subscriber

A forum selection clause contained in the click-wrap agreement of an on-line service provider was enforceable

Groff v. America Online, Inc., No. PC 97-0331, 1998 WL 307001 (R.I.Super. 1998)

Caspi v. Microsoft Network, L.L.C., 732 A.2d 528 (N.J. App. Div. 1999)

Click-wrap agreements

– that membership agreement for on-line computer service with Internet service provider (ISP) provided adequate notice of the forum selection clause; potential subscribers were free to scroll through the computer screens that presented the terms before clicking agreement with mouse, the clause was presented in exactly the same format as most other provisions and was not presented unfairly – when a website user is not required to actively assent to the terms of the click-wrap agreement, and the terms of the agreement are accessible only via a hyperlink at the bottom of the home page, which the user must scroll down to see, the terms of the click-wrap agreement may not be enforceable – refuse to enforce a clause only if it fits into one of three exceptions to the general rule: (1) the clause is a result of fraud or ‘overweening’ bargaining power; (2) enforcement would violate the strong public policy of New Jersey; or (3) enforcement would seriously inconvenience trial

– the assent based on website that required the user to click on ‘I agree’ or ‘I disagree’ – regarding the overweening bargaining power (plaintiff) the plaintiff cannot claim that he is uninformed in the area of contract law. Plaintiff, as pointed out by defendant (…) has been at the bar in this state for approximately thirty years

The click-wrap agreement is binding on the user as against a defence of procedural unconscionability

Unenforceability of a forum selection – the user’s systems were changed before the agreement could be reviewed

Users cannot be bound by a valid click-wrap contract without viewing licence agreement, without requirement that user view it or click on agreement

RealNetworks, Inc., Privacy Litigation, 2000 WL 631341 (N.D. Ill.)

Williams v. America Online, Inc., 2001 WL 1356825

Specht v. Netscape Communications Corp., 150 F.Supp.2d 585 (S.D.N.Y. 2001)

– the act of downloading the software did not sufficiently manifest the plaintiffs’ assent to be bound by the terms of the licence agreement – Netscape’s download page for the SmartDownload software contained a single brief reference to the licence agreement, with a link to the text of the agreement. The proposal to form a contract with users was presented under a small box of text located at the bottom of the download page that invited users to review the licence agreement – the language of the invitation did not require the reading of the licence terms or provide adequate notice that a contract was being created or that the terms of the licence agreement would bind the user

– AOL’s software altered the users’ systems before they had a chance to review the click-wrap agreement; and the alterations would proceed even when users rejected the agreement – the user’s systems were changed before the agreement could be reviewed; consumer had no notice of the forum selection clause, and no opportunity to accept or reject it

– enforceability even though the arbitration clause appeared in the final paragraph of the agreement under the caption ‘Miscellaneous’, which included provisions on choice of law and forum – the clause was in same font as the rest of the agreement, was freely viewable without time restrictions – users should agree to the online licence agreement before being able to install software from the provider’s website

Unenforceability of a browsewrap agreement due to the fact that terms and conditions are not formulated to bind an user

Browser wrap agreement may be arguably valid and enforceable although users could see the licence but they did not have to click on anything in order to see the concert information

Pollstar v. Gigmania Ltd 2000 WL 33266437 (E.D. Cal.).

Unenforceability of consumer click-wraps agreements on the basis of a public policy exception to consumer choice of forum

Ticketmaster Corp. v. Tickets.com, Inc., No. CV 99-7654 (C.D.Cal. Mar. 27, 2000)

Browse-wrap agreements

America Online, Inc. v. Superior Court, 90 Cal. App. 4th 1 (2001)

– This licence agreement can be viewed on the home page but on a different webpage that is linked to the home page – The consumer is not obliged to assent to the licence agreement by clicking ‘I agree’. However, the consumer is alerted to the fact that use of the website was subject to a licence agreement because of a notice that appeared on the home page

– Ticketmaster’s terms of use did not constitute a binding contract with a user of the site, noting that ‘[I]t cannot be said that merely putting the terms and conditions in this fashion necessarily creates a contract with any one using the website’ – the court dismissed the plaintiff’s breach of contract claim but gave the plaintiff leave to amend ‘in case there are facts showing [defendant’s] knowledge of [the terms of the click-wrap agreement] plus facts showing implied agreement to them’

– the court invoked a public policy exception to consumer choice of forum and considered that the forum selection clause in a click-wrap agreement made during installation process on CD-ROM is unfair and unreasonable – the clause (a) was not negotiated at arm’s length, (b) was in a standard ‘form’ contract, (c) was in small text and placed at the end of the agreement, hence not readily identifiable by plaintiff and (d) was contrary to California public policy which affords its citizens specific and meaningful consumer remedies

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Cyber Consumer Law and Unfair Trading Practices Almost every website contains a little link at the bottom of the home page labelled ‘terms’ or something similar. If you click on these terms, you will most often see a full-blown purported adhesion contract containing much fine print, in which the user exculpates the firm for its own negligence, agrees to binding arbitration or litigation on its home turf under its home jurisdiction’s law, agrees to limit damages to the price of the product, waives all warranties express and implied, and so on.75

As can be observed, the emergence of the electronic market brings up a real dichotomy between current trading practice and our traditional view of the unequal bargaining power of the consumer. The electronic marketplace is favourable to the standardisation of online contracts embodied in mass-market transactions.76 Massmarket transactions are ‘directed to the general public as a whole under substantially the same terms for the same information. Transactions come within this definition if they are retail, whether the customer is a business or a consumer.’77 In this context, someone might argue that in reality there is a false dichotomy since the online contracts seem to exemplify the traditional view of contracting and that the standard form adhesion contracts are not different from those existing online. In my view, this dichotomy is real and it is based on the difference between contracting in cyberspace and contracting off-line. As was argued: [w]hat is different (between online contracts and those made by traditional methods) is the method by which those contracts are formed (…). When we add to this the fact that a seller may not be communicating directly with the customer but instead form part of a virtual marketplace or Internet shopping mall, and that the customer may not be making purchasing decisions directly but acting through an automated agent, it becomes obvious that the process of contract formation is not so straightforward as in the physical world.78

It is this difference that relates more to method than substance79 that influences our traditional view on unequal bargaining power between consumer and traders. Whilst from a ‘substance’ perspective, the online standard contracts seem to be identical to traditional standardised contracts, from a ‘method’ form, the online contracts and specially mass-market licences are different from negotiated licences. As suggested by the Official Summary of UCITA, ‘A term is not part of a mass-market license unless the term is readily available to the licensee and until the licensee has had an appropriate time to review it.’80 This means that the terms and conditions must be immediately available to the consumer either in nonelectronic form or in electronic form that the licensee can print or store electronically. This dichotomy is reflected by the legal decisions presented above and summarised in the conclusions of this chapter. CONCLUSIONS There is no miracle solution to deal with unequal bargaining power ensuing from the standardisation of online licence agreements. The emergence of licence agreements and, as will be observed in the following chapter, the multiplication of the role of electronic agents change our traditional view of unequal bargaining power based on the lack of negotiation between the consumer and trader. The new

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technological context changes even our conception of contract-as-consent.81 We notice a transition from the contract-as-consent model to the model of contract-astechnological assent. ‘Technological assent’ may encompass the whole range of ‘clicking or breaking’ … clicking on a button, breaking the shrink-wrap or commencing to use information. It is this shift which emerges from the ProCd case.82 In this case, the court argued it was inefficient to require the express assent of consumers to terms prior to payment since such transactions are especially common in online sales of consumer goods and computer software. The court also remarked ‘transactions in which the exchange of money precedes the communication of detailed terms are common.’83 Finally, the court noticed that consumers would be harmed by the refusal to enforce shrink-wrap licences simply because they were delivered to the consumer after purchase. This ‘would drive prices through the ceiling or return transactions to the horse-and-buggy age.’84 However, despite this progressive view, other courts showed their resistance to the emergence of new disturbing technological challenges. In Specht v. Netscape Communications Corp.,85 the court concluded that ‘[t]he case law on software licensing has not eroded the importance of assent in contract formation,’ ‘[m]utual assent is the bedrock of any agreement to which the law will give force,’ and ‘[d]efendant’s position, if accepted, would so expand the definition of assent as to render it meaningless.’ Faced with this oscillating legal scenario, one might wonder whether the principles of freedom of choice of law and of private autonomy are sufficient to improve consumer protection online. If consumers have the possibility of negotiating the terms and conditions of their contracts, would this allow them to increase their bargaining power? How much equal bargaining power have consumers who in a commercial relationship with a trader use the mouse to click on the ‘I accept’ button and which in the same instant realise that they do not have any opportunity to review their assent? Although the standardisation of online contracts might be profitable for consumers in terms of research of information, the standardisation process raises new challenges concerning the unequal bargaining power between consumers and traders. These challenges relate to the existence of unfair terms and conditions presented on the website, included in licence agreements or inserted in contracts concluded by electronic agents. It can be inferred from this contextual technological environment that the electronic marketplace changes the nature of relationships between consumers and traders in a variety of ways, where the consequences of the balance of bargaining power between consumer and trader differ markedly from those existing in the traditional marketplace. The emergence of the electronic marketplace enhances the ability of traders to decide on dominant standardised terms and conditions. In this context, consumers do not have the possibility to make online transactions regarding comparable products and services on the basis of different terms and conditions. The standardisation of online contracts is synonymous with electronic market failure. Although the formulation of terms and conditions tailored to consumer needs is technologically possible on the Web as never before, ‘nevertheless machine-made contract and the global scope of electronic commerce may result in more standardization and even less room for old-fashioned bargaining.’86 Should we conclude that the mass-market context within the technological context changes

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the balance of negotiating power in the favour of consumers? Answering this question would require clarification of the intrinsic relationship between consumer protection rules and technological rules. Whilst information technology should continue its role in creating solutions that are effective for consumers, the growing disparity between consumer knowledge and the characteristics of technological environment creates new rationales for consumer protection. A new legal framework should balance the prevalence of information technology on consumer protection and alleviate the unequal bargaining power between consumers and the technological interface of the electronic marketplace. In this context, business should realise that enhancing trust in the minds of consumers is more than a question of technology, it is a question of best practice. Best practice starts with the existence of secure, user-friendly methods of contracting online. Coping with problems relating to agreeing, applying and enforcing online contracts is a prerequisite for dealing with the potential unequal bargaining power emerging from online consumer transactions. NOTES 1 2 3 4 5

6

7

U.S. Special Committee on Retail Instalment Sales, Small Loans And Usury, 1965, p. 9. I. Ramsay, Consumer Protection, Text and Materials, Law in Context, London, 1989, p. 33. J. Ziegel, ‘The Future of Canadian Consumerism’, 51 Can. Bar Rev, 1973, p. 33. I. Ramsay, Consumer Protection, Text and Materials, Law in Context, Weidenfeld and Nicolson, London, 1989, p. 57; The author analyses the most important scholarly efforts in order to provide a comprehensive analysis of consumer protection rationales. Even before the development of modern consumer protection laws, the legal doctrine represented by Kessler concluded in 1943 that: ‘Standards contracts are typically used by enterprises with strong bargaining power. The weaker party, in need of goods or services, is frequently not in a position to shop around for better terms, either because the author of the standard contract has a monopoly […] or because all competitors use the same clauses. His contractual intention is but a subjection more or less voluntary to terms dictated by the stronger party, terms whose consequences are often understood only in a vague way, if at all.’ (F. Kessler, ‘Contracts of Adhesion: Some Thoughts about Freedom of Contract’, Columbia L Rev., 629 pp. 631–2, 1943, M.J. Trebilcock, in ‘Consumer Protection in the Affluent Society’, 16 McGill LJ 263, 1969.) In line with Kessler, Slawson added later that ‘… the overwhelming proportion of standards forms are not democratic because they are not, under any reasonable test, the agreement of the consumer … recipient to whom they are delivered.’ (D. Slawson, ‘Standard Form Contracts and Democratic Control of Lawmaking Power’, Harvard Law Rev., 1971, p. 529.) Rakoff considers the contract of adhesion in the following terms: ‘The term “contract of adhesion” has acquired many significations and therefore needs definition. One of the factors that intuitively lie at the core of the concept is the use of standard form documents. But that element is certainly not sufficient; two parties could employ standard forms as the basis for a negotiating session, and no one would be concerned.’ (T.D. Rakoff, ‘Contracts of Adhesion: An Essay in Reconstruction’, 96 HVLR 1173 Harvard Law Review, April 1983.) M.J. Radin distinguishes between two views or models of contract. The contract-asconsent model (…) involves a meeting of the minds between two humans, or at least

Standardisation of Online Contracts

8 9 10 11 12 13

14 15 16

17 18

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voluntariness, or at least consent. (…) The contract-as-product model is the typical model assumed by economists. In this model, the terms are part of the product, not a conceptually separate bargain; physical product plus terms are a package deal. (M.J. Radin, ‘Humans, Computers, and Binding Commitment’, Indiana Law Journal, Fall 2000, Addison C. Harris Lecture, October 26, 1999.) M.J. Radin and D.L. Appelman, ‘Doing business in the digital era: some basic issues’, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series, PLI Order No. G0-009O, August/September, 1999. ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 C.A.7 (Wis.), 1996. The shrink-wrap is most often a licence whose terms and conditions are contained in or on a box containing software that a consumer can buy in a store. Restatement (Second) of Contracts §211A (1981). ProCD II, 86 F.3d at 1451. See also B. Covotta and P. Sergeeff, ‘ProCD, Inc. v. Zeidenberg’, 13 Berkeley Tech. L.J. 35, 35 n.3 (1998). Consumer protection directives refer to the ‘durable medium’ in connection with the provision of information to a consumer (see e.g., the Distance Selling Directive, or Article 6 of the Consumer Sales Directive). However, these directives do not provide any definition of what means durable medium. The Directive 2002/65/EC of the European Parliament of and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/ 27/EC, OJ L 271, 09/10/2002 contains a definition of ‘durable medium’. In Article 2(f) ‘durable medium’ means any instrument which enables the customer to store information addressed personally to him in a way accessible for future reference for a period of time adequate to the purposes of the information and which allows the unchanged reproduction of the information stored. In particular, durable medium covers floppy disks, CD-ROMs, DVDs and hard drives of personal computers on which electronic mail is stored, but it excludes Internet sites, unless such sites meet the criteria specified in the first paragraph. See E. Allan Farnsworth, 1 Farnsworth §4.26, at 480 (2d ed. 1990). Farnsworth uses the term ‘imposition’ of standardised terms and conditions. For a classification of online contracts, see G. Smith, ‘Internet Law and Regulation’, Sweet & Maxwell, London 2002, p. 437. http://www.etoys.com.This example was given by M. Budnitz in ‘Consumers Surfing for Sales in Cyberspace: What Constitutes Acceptance and What Legal Terms and Conditions Bind the Consumer?’, Georgia State University Law Review 16 Ga. St. U. L. Rev. 741, 742 , 2000. M. Budnitz, ‘Consumers Surfing for Sales in Cyberspace: What Constitutes Acceptance and What Legal Terms and Conditions Bind the Consumer?’, Georgia State University Law Review 16 Ga. St. U. L. Rev. 741, 742 , 2000. The way in which sellers are presenting the click-wrap contract terms to the consumer is described as following: ‘ONLINE SOFTWARE LICENSE AGREEMENT IMPORTANT! The Software you seek to download from the [Vendor] website (“Website”) is licensed only on the condition that you (referred to as “YOU” or “CUSTOMER”) agrees with [VENDOR] (referred to as “VENDOR”) to the terms and conditions set forth below. PLEASE CAREFULLY READ THE TERMS OF THIS SOFTWARE LICENSE AGREEMENT. IF YOU AGREE TO BE BOUND BY THE TERMS OF THIS AGREEMENT, YOU SHOULD CLICK ON THE BOX AT THE BOTTOM OF THIS PAGE LABELED “I ACCEPT” AT WHICH TIME THE SOFTWARE WILL BE DOWNLOADED TO YOUR COMPUTER. IF YOU DO NOT AGREE TO THE TERMS OF THIS AGREEMENT, YOU SHOULD CLICK ON THE BOX AT THE BOTTOM OF THIS PAGE LABELED “I DO NOT ACCEPT” AT

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19 20 21 22

23 24 25 26 27 28 29

30 31 32 33 34 35 36 37 38 39

40 41 42 43 44

Cyber Consumer Law and Unfair Trading Practices WHICH POINT YOU WILL RETURN TO THE PRIOR WEB PAGE WITHOUT THE SOFTWARE BEING DOWNLOADED.’ See Pollstar v. Gigmania, Ltd., 2000 WL 33266437, *6 (E.D.Cal. 2000) (using the term ‘browser wrap’). M.A. Lemley, Intellectual Property and Shrink-Wrap Licenses, 68 S. Cal. L. Rev. 1239, 1995. Ticketmaster Corp. v. Tickets.com Inc., 54 U.S.P.Q.2d 1344 (C.D. Cal. 2000). Specht v. Netscape Communications Corp., 150 F. Supp. 2d 585 (S.D.N.Y. July 5, 2001). Shrink-wrap licenses have been enforced by the courts in ProCD, Inc., v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.), cert. denied, 522 U.S. 808 (1997), and Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 676 N.Y.S.2d 569 (N.Y. App. Div. 1st Dep’t 1998). B. Goodman, ‘Honey, I Shrink-Wrapped the consumers: the shrink-wrap agreement as an adhesion contract,’ Cardozo Law Review 21 CDZLR 319 October, 1999. Step-Saver Systems, Inc. v Wyse Technology 939 F.2d 91 (3rd Cir. 1991). Arizona Retail Systems, Inc. v Software Link, Inc. 831 F. Supp. 759 (1993). ProCD Inc v Zeidenberg 86 F. 3d 1447 (7th cir. 1996). See ProCD II, 86 F.3d at 1449. See ProCD II, 86 F.3d at 1449. The shrink-wrap license was printed on the actual CD-ROM and in the user’s guide and appeared on the screen every time the program ran. The licence limited the use of the listings to non-commercial purposes. See ProCD, Inc. v. Zeidenberg, 908 F. Supp. 640, 645 (W.D. Wis. 1996), rev’d, 86 F.3d 1447 (7th Cir. 1996). See B. Covotta and P. Sergeeff, ProCD, Inc. v. Zeidenberg, Berkeley Technology Law Journal 1998. ProCD Inc v Zeidenberg 86 F.3d 1447 (7th Cir. 1996). ProCD Inc v Zeidenberg 86 F.3d 1449 (7th Cir. 1996). See D. Davidson, ‘Click and Commit: What terms are users bound to when they enter web sites?’, William Mitchell Law Review, 2000, available at: http://www.westlaw.com. ProCD Inc v Zeidenberg 86 F.3d 1452 (7th Cir. 1996). See also, U.C.C. §2-204(1). ‘A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.’ See, W.A. Effross, ‘The Legal Architecture Of Virtual Stores: World Wide Web Sites And The Uniform Commercial Code’, 34 San Diego L. Rev. 1263 (1997), at 1268. Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997). See also, M. Grossman and A. Hift, ‘Software Licensing: Shrinkwrap and Clickwrap Agreements’, February 2000, available at http://www.gigalaw.com/articles/grossman2000-02a-p2.html. Hill v. Gateway 2000. Inc., 105 F.3d 1147 (7th Cir. 1997). (The court succinctly set forth the relevant facts of the case: ‘A customer picks up the phone, orders a computer, and gives a credit card number. Presently a box arrives, containing the computer and a list of terms, said to govern unless the customer returns the computer within 30 days.’) See D. Davidson, ‘Click and Commit: What terms are users bound to when they enter web sites?’ William Mitchell Law Review, 2000, available at: http://www.westlaw.com. Brower v. Gateway, 246 A.D.2d 246, 676 N.Y.S.2d 569 (1st Dept. 1998). Brower v. Gateway, 246 A.D.2d 246, 676 N.Y.S.2d 569 (1st Dept. 1998). J.M. Gutermuth and S. Jurkiewicz, ‘Consumers Contracting over the Internet: Determining Offer, Acceptance and material terms’, available at: http://gsulaw.gsu.edu/ lawand/papers/fa00/gutermuth_jurkiewicz/. Brower v. Gateway, 246 A.D.2d 246, 676 N.Y.S.2d 569 (1st Dept. 1998).

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45 P. Brown, ‘Validity of clickwrap licences, Patents, Copyrights, Trademarks, and Literary Property Course’ Handbook Series, PLI Order No. G0-0124, September 26-27, 2002, New York City. 46 Klocek v. Gateway, Inc., 104 F. Supp. 2d 1332 (D.Kansas 2000). 47 1996 SLT 604; 1996 SCLR 587. 48 S.J.A. Robertson , ‘The Validity of Shrink-Wrap Licences in Scots Law. Beta Computers (Europe) Ltd v. Adobe Systems (Europe) Ltd’, Case Note, 1998 (2) The Journal of Information, Law and Technology (JILT) available at:http://elj.warwick.ac.uk/ jilt/cases/98_2rob/. 49 S.J.A. Robertson, ‘The Validity of Shrink-Wrap Licences in Scots Law. Beta Computers (Europe) Ltd v. Adobe Systems (Europe) Ltd’, Case Note, 1998 (2) The Journal of Information, Law and Technology (JILT) available at: http://elj.warwick.ac.uk/ jilt/cases/98_2rob/. 50 According to the provisions of Distant Selling Directive, consumers should be provided with specified information about the supplier and the goods or services prior to the conclusion of any contract. This information must be provided in a clear and comprehensible manner in any way appropriate to the means of distance communication used. The written confirmation of this information in a durable medium must be sent to the consumer no later than the time of delivery and it must include the procedures for exercising the right of withdrawal and a geographical address for the supplier where complaints may be sent. (Directive 97/7/EC of the European Parliament and the Council on the protection of consumer interests in respect of distance contracts, OJ L144 of 04.06.97, p19.23 COM (97) 353 final). 51 For example, according to provisions of the Software Directive, the mere act of reverse engineering or decompiling would be a restricted act, irrespective of the absence of any copying of the final product. The Directive allows the reproduction of software code and translation of its form when these acts ‘are indispensable to obtain the information necessary to achieve the interoperability of an independently created computer program with other programs.’ (Council Directive 91/250 Legal Protection of Computer Programs, 1999 O.J. (L 122), 0042-0046.) UCITA prohibits reverse engineering of computer information; a contract cannot restrict reverse engineering that a licensee does for the purpose of making computer programs interoperable. Licensees may solve interoperability problems without breaching licence contract. (Uniform Computer Information Transactions Act (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws).) 52 Specht v. Netscape Communications Corp., 150 F. Supp. 2d 585 (S.D.N.Y. July 5, 2001) Click-wrap licenses have been enforced by the courts in RealNetworks, Inc. Privacy Litigation, 2000 U.S. Dist. LEXIS 6584, 2000 WL 631341 (N.D. Ill. May 8, 2000) and Hotmail Corp. v. Van$ Money Pie, Inc., 2000 U.S. Dist. LEXIS 10729, 1998 WL 388389 (N.D. Cal. Apr. 16, 1998). 53 Groff v. America Online, Inc., 1998 WL 307001 (R.I. Super. 1998). 54 Groff v. America Online, Inc., 1998 WL 307001 (R.I. Super.1998). 55 Groff v. America Online, Inc., 1998 WL 307001 (R.I. Super.1998). 56 Moretti & Perlow Law Office v. Aleet Associates 668 F.Supp. 103, 107 (D.R.I.1987). 57 Groff v. America Online, Inc., 1998 WL 307001 (R.I. Super.1998). 58 Caspi v. Microsoft Network, L.L.C., 732 A.2d 528 (N.J. App. Div. 1999). 59 Caspi v. Microsoft Network, L.L.C., 732 A.2d 528 (N.J. App. Div. 1999). 60 RealNetworks, Inc., Privacy Litigation, 2000 WL 631341 (N.D. Ill). 61 Williams v. America Online, Inc., 2001 WL 1356825. 62 Williams v. America Online, Inc., 2001 WL 1356825. 63 Specht v. Netscape Communications Corp., 150 F. Supp. 2d 585 (S.D.N.Y. July 5, 2001).

68 64 65 66 67 68 69 70 71 72 73 74 75 76

77 78 79 80

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82 83 84 85 86

Cyber Consumer Law and Unfair Trading Practices Specht v. Netscape Communications Corp., 150 F. Supp. 2d 585 (S.D.N.Y. July 5, 2001). Specht v. Netscape Communications Corp., 150 F. Supp. 2d 585 (S.D.N.Y. July 5, 2001). America Online, Inc. v. Superior Court, 90 Cal. App. 4th 1 (2001). D.T. Rice, ‘Copyright Disputes involving online activities’, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series PLI Order No. G0-0124 September 26-27, 2002. Specht v. Netscape Communications Corp., 150 F.Supp.2d 585 (S.D.N.Y. 2001), Pollstar v. Gigmania, Ltd., 170 F. Supp.2d 974 (E.D. Cal. 2000). Specht v. Netscape Communications Corp., 150 F. Supp. 2d 585 (S.D.N.Y. July 5, 2001). Ticketmaster Corp. v. Tickets.com, Inc., No. CV 99-7654 (C.D. Cal. Mar. 27, 2000). The defendant Tickets had established hyperlinks allowing its customers to bypass the Ticketmaster home page and instead go directly and deeply into the Ticketmaster site. Ticketmaster Corp. v. Tickets.com, Inc., No. CV 99-7654 (C.D. Cal. Mar. 27, 2000). Ticketmaster Corp. v. Tickets.com, Inc., No. CV 99-7654 (C.D. Cal. Mar. 27, 2000). 170 F. Supp 2d 974 (E.D. Cal. 2000). M.J. Radin, ‘Online Standardization and the integration of text and machine’, Fordham Law Review, March, 2002. According to Section 102 of Uniform Computer Information Transactions Act, ‘Massmarket transaction’ means a transaction that is: (A) a consumer contract; or (B) any other transaction with an end-user licensee if: (i) the transaction is for information or informational rights directed to the general public as a whole, including consumers, under substantially the same terms for the same information; (ii) the licensee acquires the information or informational rights in a retail transaction under terms and in a quantity consistent with an ordinary transaction in a retail market; and (iii) the transaction is not: (I) a contract for redistribution or for public performance or public display of a copyrighted work; (II) a transaction in which the information is customized or otherwise specially prepared by the licensor for the licensee, other than minor customization using a capability of the information intended for that purpose; (III) a site license; or (IV) an access contract. (Uniform Computer Information Transactions Act ‘UCITA’ (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws).) H.K. Towle and B. Dengler, ‘Contract formation: electronic contracts and online terms’, Practising Law Institute, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series PLI Order No. G0-00D9, April-May, 2000. C. Reed, Internet Law, Butterworths, London, 2000, p. 175. J.C. Dodd and J.A. Hernandez, ‘Contracting In Cyberspace’, Computer Law Review and Technology Journal, Summer 1998, p. 1. See UCITA – Summary of the UCITA, available at: http://www.ucitaonline.com; See also Section 209 of UCITA (Uniform Computer Information Transactions Act (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws)). The contract-as-consent model (…) involves a meeting of the minds between two humans, or at least voluntariness, or at least consent. (..) (M.J. Radin, ‘Humans, Computers, and Binding Commitment’, Indiana Law Journal, Fall 2000, Addison C. Harris Lecture, October 26, 1999). ProCD II, 86 F.3d at 1452. ProCD II, 86 F.3d at 1451. See also Brian Covotta and Pamela Sergeeff, ‘ProCD, Inc. v. Zeidenberg’, 13 Berkeley Tech. L.J. 35, 35 n.3 (1998). Specht v. Netscape Communications Corp., 150 F. Supp. 2d 585 (S.D.N.Y. July 5, 2001). M.J. Radin, ‘Humans, Computers, and Binding Commitment’, Indiana Law Journal, Fall 2000, Addison C. Harris Lecture, October 26, 1999).

Chapter 4

Electronic Agents INTRODUCTION As was noted in the previous chapter, unequal bargaining power in its traditional sense includes two major aspects: unfair standardised terms and the ineffectiveness of consumer redress mechanisms. They are based on the premise that contracts should be based on the negotiation of terms and conditions between consumers and traders and that the consumer redress mechanisms should enhance consumers’ rights of access to justice through effective means of resolution of cross border disputes at a low cost. A new area of unequal bargaining power that may arise in the electronic marketplace concerns the use of electronic agents1 in the online consumers’ transactions. There are views that suggest that by concluding contracts without any human interaction, electronic agents allow the reduction of transactional costs and broad comparative shopping.2 It is true that within the framework of the electronic market, the electronic agents and shopbots3 will normally lead to a radical reduction in the cost of obtaining and distributing information. They will normally reduce consumers’ information acquisition costs4 and will lower their risk when making purchases. However, whilst many consumers will have access to wide sources of web information, many cyber consumers would have difficulty in searching for perfect, accurate and timely information or they may simply not be sophisticated enough to search and locate all the useful information.5 The use of electronic agents may enhance the ability to access useful information. Nevertheless, this beneficial effect by the electronic agents may be cancelled out by the emergence of new ranges of unequal bargaining causes relating to the existence of unfair standardised terms, the technological defectiveness of electronic agents, their reduced technical capacities and the consumers’ lack of knowledge with respect to the technical capacities of electronic agents. The purpose of this chapter is to explore some of the essential aspects of unequal bargaining power in contracts concluded via (or through) electronic agents. In order to do so, the chapter identifies first the practical aspects of the electronic agents in online consumer transactions and the consumers’ problems when concluding contracts via electronic agents. Secondly, it illustrates the multiplication of causes of unequal bargaining power within the B2C relationships intermediated by the electronic agents and provides a comparative analysis between the traditional and the technological model of contracts concluded via (or through) electronic agents. Finally, it proposes some solutions for alleviating the unequal bargaining power that might be generated by consumers’ contracts concluded via (or through) electronic agents.

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4.1 Practical Aspects of Electronic Agents in Online Consumer Transactions There are different categories of electronic agents.6 The most important type of agents in the B2C commercial relationship are: search information agents,7 watcher agents8 and agents for e-commerce.9 Many of these electronic agents provide practical advantages for consumers. Consumer agents collect information about a number of products and services requested by consumers. They also provide comparisons with classified advertisements. When consumers want to buy products or services in the electronic marketplace, they may use an agent that acts on their behalf. Consumers should provide the agent with specified terms and conditions such as desired date to sell item by; a desired price; the lowest acceptable price and then release it into the marketplace to interact and complete a transaction. In order to complete a transaction, the consumer agent and trader agent require confirmation from the consumer. This confirmation is usually made by e-mail or a screen message if the consumer is already on line. If the consumer is interested in purchasing the product, he/she will finally confirm the conclusion of the sale. An interesting ongoing research project for consumers is Kasbah, a project that uses multiple agents ‘that [are] intended to help bring about a fundamental change in the way buying and selling is conducted doing much of the work on the user’s behalf.’10 At the moment, the system supports the buying and selling of CDs and books. In the future, there are plans to allow electronic agents to complete transactions without any human interference. The electronic agent would automatically be able to buy the product and arrange for delivery. This process will be facilitated by the use of electronic cash. Electronic agents definitely revolutionise the manner in which online transactions between consumers and traders are made in cyberspace. Nevertheless, whilst this process is accompanied by access of consumers to useful information which helps them to make reasonable choices, practical questions might arise in connection with the impossibility for consumers to read the terms and conditions or to review their consent in a contract concluded with or via an electronic agent. 4.2 Unequal Bargaining Power When Concluding Contracts Via (or Through) Electronic Agents The risks of unequal bargaining power in online consumer contracts involving the use of electronic agents are suggested by both their technological and legal definitions. From a technical perspective, Wooldridge and Jennings define ‘electronic agents’ as ‘... a hardware or (more usually) software-based computer system that enjoys the following properties: • •

Autonomy: agents operate without the direct intervention of humans or others, and have some kind of control over their actions and internal state; Social ability: agents interact with other agents (and possibly humans) via some kind of agent-communication language;

Electronic Agents

•

•

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Reactivity: agents perceive their environment (which may be the physical world, a user via a graphical user interface, a collection of other agents, the Internet, or perhaps all of these combined), and respond in a timely fashion to changes that occur in it; Pro-activeness: agents do not simply act in response to their environment, they are able to exhibit goal-directed behaviour by taking the initiative.’11

Wooldridge and Jennings’ technical definition of ‘electronic agent’ poses many questions in relation to the conclusion of consumers’ contracts via electronic agents. The technical abilities of electronic agents to act autonomously on behalf of consumers are captured by the current legal frameworks such as UCITA,12 UETA13 and UECA.14 In the United States, section 202(a) of the Uniform Computer Information Transactions Act (UCITA) elaborated by the US National Conference of Commissioners on Uniform State Laws defines an ‘electronic agent’ as a computer program ‘used by a person to initiate an action, or to respond to electronic messages or performances, on the person’s behalf without review or action by an individual.’15 According to Bing’s view supported by Artosi, ‘the interpretation of the text does not construe the program as an “agent” acting on behalf of the principal, rather that the principal does not review or intervene in the actions of the program.’16 Artosi concludes that an ‘electronic agent’ is ‘a technical term with a well understood legal interpretation which involves essentially the notion of being a juridical person, and that a computer program is not the sort of thing that can be qualified as an agent in this sense.’17 In my view, the autonomy and the pro-activeness of the technical characteristics of the electronic agents are well outlined by the current legal regulatory frameworks. Furthermore, these characteristics question the issue of unequal bargaining power in consumers’ contracts concluded via electronic agents. For example, the impossibility for consumers to read terms and conditions or review their consent creates two potentially unfair practical situations for them. First, it is possible that electronic agents programmed by consumers will conclude on behalf of consumers, contracts containing unfair standardised terms and conditions; second it is possible that electronic agents will accept contracts containing terms or conditions different from those specified by the consumer. 4.2.1 Conclusion by electronic agents of contracts containing unfair standardised terms and conditions The conclusion of consumer contracts by electronic agents is regulated by specific legislation in the United States, whilst in Europe this area depends on the principles arising from the traditional law. This subsection questions the adequacy of the current legislation to provide consumer protection against the risks of unequal bargaining power that might arise when concluding contracts via (or through) electronic agents. The UCITA provides that ‘a contract may be formed in any manner sufficient to show agreement, including offer and acceptance or conduct of both parties or operations of electronic agents which recognize the existence of a contract.’18 However, these rules do not resolve the uncertainties ensuing from the formation

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of a contract, when consumers have not had the opportunity to read the standardised terms and conditions. The electronic agent programmed by consumers will conduct the whole process of creating the contract. According to the provisions of the UCITA, an agent must act independently in a manner relevant to creating or performing a contract. Mere use of a telephone or e-mail system is not use of an electronic agent. The automated system must have been selected, programmed or otherwise intentionally used for that purpose by the person that is bound by its operations. The legal relationship between the person and the electronic agent is not equivalent to common law agency since the ‘agent’ is not a human.19 The consumer will normally be responsible for the operations of the electronic agent. Section 107(d) of UCITA clearly specifies that a person that uses his or her own electronic agent for authentication, performance, or agreement, including giving assent, is bound by the operations of the electronic agent, even if no individual was aware of or reviewed the agent’s operations or the results of the operations. According to these provisions, the contracts concluded by consumers using electronic agents are automatically valid. As suggested by Radin: instead of asking for intent of both parties, UCITA asks for objective characteristics of reason to know on the part of one party what the other party will infer. UCITA’s provisions about electronic agents are similarly difficult to parse, but also seem to move away from the traditional picture of consent.20

This transition from traditional to technological consent might pose questions with regard to unequal bargaining power between consumer and trader (or trader’s agent) since the consumer would not have the possibility of reading the terms and conditions of a contract concluded by the agent programmed by traders. If consumers do not have the possibility to read terms and conditions, it might be possible for electronic agents to conclude contracts containing unfair standardised terms and conditions. If under general principles of consumer protection, the consumer seems to be well protected against concluding contracts by electronic agents online containing unfair or unconscionable terms, the situation becomes more complex when electronic agents have been given negotiating powers.21 In this hypothetical situation, confirming assent becomes a relevant issue in considering the validity and the enforceability of contracts. Whilst in Europe, manifestation of assent by electronic agents is not yet regulated, in the United States, a legal model is provided by the US National Conference of Commissioners on Uniform State Laws in the Uniform Computer Information Transactions Act (the UCITA) in Section 112(b): (b) An electronic agent manifests assent to a record or term if, after having an opportunity to review it, the electronic agent: (1) authenticates the record or term; or (2) engages in operations that in the circumstances indicate acceptance of the record or term. Supposing that a electronic agent would manifest assent to an electronic transaction in which the consumer made an error in programming with wrong instructions related to the purchasing of ten (10) books instead of one (1). In this case, the consumer’s defence is guaranteed by UCITA under provisions related to ‘electronic error.’ ‘Electronic error’ means an error in

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an electronic message created by a consumer using an information processing system if a reasonable method to detect and correct or avoid the error was not provided. According to the Section 214(1) For electronic errors, a consumer is not bound by an electronic message that she did not intend if the consumer: (1) promptly on learning of the error: (A) notifies the other party of the error; and (B) causes delivery to the other party or, pursuant to reasonable instructions received from the other party, delivers to another person or destroys all copies of the information; and (2) has not used, or received any benefit or value from, the information or caused the information or benefit to be made available to a third party.22

These provisions are considered a real advance in the protection of consumers in cyberspace.23 As emphasised by Towle and Dengler, ‘the Restatement (Second) of Contracts, common law courts have traditionally been reluctant to allow a party to avoid a contract on the ground of mistake, even as to a basic assumption, if the mistake was not shared by the other party.’24 Consumer transactions might also be covered by the Uniform Electronic Transactions Act (UETA).25 According to Section 3 of UETA, and Comment 1 to this section, the provisions of the UETA applies to transactions related to business, commercial (including consumer) and governmental matters where electronic records and electronic signatures are used in the transaction. In comparison with UCITA, Section 2(6) states: ‘Electronic agent means a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part, without review or action by an individual.’26 In their comments, the drafters of UETA considers that ‘an electronic agent, by definition, is capable within the parameters of its programming, of initiating, responding or interacting with the other parties or their electronic agents once it has been activated by a party, without further attention of that party.’27 Section 14 of UETA on the automated transactions provides that: (1) A contract may be formed by the interaction of electronic agents of the parties, even if no individual was aware of or reviewed the electronic agents’ actions or the resulting terms and agreements. (2) A contract may be formed by the interaction of an electronic agent and an individual, acting on the individual’s own behalf or for another person, including by an interaction in which the individual performs actions that the individual is free to refuse to perform and which the individual knows or has reason to know will cause the electronic agent to complete the transaction or performance.28

Furthermore, section 10 of UETA provides that If a change or error in an electronic record occurs in a transmission between parties to a transaction, the following rules apply: (1) If the parties have agreed to use a security procedure to detect changes or errors and one party has conformed to the procedure, but the other party has not, and the nonconforming party would have detected the change or error had that party also conformed, the conforming party may avoid the effect of the changed or erroneous electronic record.

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Cyber Consumer Law and Unfair Trading Practices (2) In an automated transaction involving an individual, the individual may avoid the effect of an electronic record that resulted from an error made by the individual in dealing with the electronic agent of another person if the electronic agent did not provide an opportunity for the prevention or correction of the error and, at the time the individual learns of the error, the individual: (a) promptly notifies the other person of the error and that the individual did not intend to be bound by the electronic record received by the other person; (b) takes reasonable steps, including steps that conform to the other person’s reasonable instructions, to return to the other person or, if instructed by the other person, to destroy the consideration received, if any, as a result of the erroneous electronic record; and (c) has not used or received any benefit or value from the consideration, if any, received from the other person. (3) If neither paragraph (1) nor paragraph (2) applies, the change or error has the effect provided by other law, including the law of mistake, and the parties’ contract, if any. (4) Paragraphs (2) and (3) may not be varied by agreement.29

This section tackles the human error in the formation of the contracts formed by electronic agents but eludes the question of technological defectiveness and reduced technical capacities of electronic agents and their consequences in electronic transactions. In civil law countries, consumers are bound only by those terms and conditions to which they manifest assent. In order to determine the validity of an online contract, the judges will verify whether the parties subjectively intended to be bound by the contract. So, in the case of contracts concluded by electronic agents on behalf of consumers, consumers would need to have the opportunity to review the contract terms in order to engage intentionally in conduct from which the trader or the electronic agent will infer the consumer’s assent to the respective terms and conditions. This is also confirmed by the Official Comment to Section 112 of the UCITA, intentional conduct is satisfied if the alternative of refusing to act exists, even if refusing leaves no alternative source for the computer information. On the other hand, conduct is not assent if it is conduct which the assenting party cannot avoid doing, such as blinking one’s eyes. Courts use common sense in applying this standard in common law and will do so under this Act. Actions in a context of a mutual reservation of the right to defer agreement to a contract do not manifest assent; neither party has any reason to believe that its conduct will suggest assent to the other party.30

Consumers would need to have the opportunity to review the contracts’ terms not only in order to avoid their engagement in the contracts based on unfair standardised terms but also in order to prevent their involvement in contracts containing terms and conditions different from those programmed via the electronic agents.

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4.2.2 Conclusion by electronic agents of contracts containing terms or conditions different from those specified by the consumer Other potentially unfair situations for consumers might arise from being unable to agree or review their consent which may lead electronic agents to conclude electronic contracts under terms or conditions different from those specified by the user. This is the case when electronic agents do not understand the significance of legal terms from different legal systems and accept contracts made under other terms or conditions different from those specified by the user. Consequently, electronic agents will make electronic mistakes in the negotiation and conclusion of a contract. In some ways, even for a consumer in its own legal system, it may be difficult to understand the implication of various terms or conditions agreed upon between the parties. However, this might not be an excuse for accepting the electronic agents’ mistakes resulting from their reduced technological capacities. Indeed, these hypothetical situations might have significant repercussions on the balance of bargaining power between consumer and trader and raise important questions relating to the validity and enforceability of contracts31 concluded by electronic agents under unfair terms and conditions; or, with regard to the liability of contracts concluded in case of non-performance and error. The Uniform Computer Information Transactions Act (UCITA) in Section 112(e)2 provides the following rules to the opportunity to review consent: (1) A person has an opportunity to review a record or term only if it is made available in a manner that ought to call it to the attention of a reasonable person and permit review; (2) An electronic agent has an opportunity to review a record or term only if it is made available in manner that would enable a reasonably configured electronic agent to react to the record or term.32

These provisions contain elements of procedural unconscionabilty. As suggested by Towle and Dengler, when parties are given fair notice that conduct will mean something (such as forming a contract), and given a fair chance to look at the contract, then engaging in that conduct does mean something and the party engaging in the conduct should have no cause for complaint.33 However, another question which arises relates to the interpretation of a ‘reasonably configured electronic agent.’ The UCITA does not provide any definition of this expression. Technical specifications would be needed in order to clarify what a reasonable configured electronic agent means. Clarifying this aspect would allow an equitable allocation of risk between consumers and traders in relation to the use of electronic agents and potential electronic mistakes which might result from their activities. 4.3 Levelling the Balance of Unequal Bargaining Power in Online Consumer Transactions Concluded Via Electronic Agents As was noticed, electronic agents in their search for making the best deal according to the consumer’s requirements, have the ability to conclude negotiated contracts

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providing alternatives across a range of prices and added value options indicating an adequate transaction, whilst taking the consumer’s demands into account. As Lerouge suggested, the development of the use of electronic agents may finally appear as a chance for the consumer. By creating a mechanism that allows the consumer to indicate the minimum of protection in the terms and conditions of a contract, sellers will be encouraged to create clear, protective terms and conditions. Well-used, electronic agents may actually help consumers not familiar with disclaimers and therefore reduce the imbalance between buyers and sellers.34 From this perspective, one might conclude that in the future, electronic agents would avoid the risk of unequal bargaining power. By outlining the differences between the traditional and the technological model of unequal bargaining power in consumer contracts concluded via electronic agents and by providing proposals for alleviating the risks of unequal bargaining power, this subsection illustrates an opposite view to those who advocate a complete eradication of risks of unequal bargaining power in the electronic marketplace. 4.3.1 From a traditional to a technological model of unequal bargaining power The traditional model of unequal bargaining power in online consumer transactions is based on the existence of unfair terms and conditions within them. Figure 4.1 illustrates that the potential unequal bargaining power is based on the relationship between consumer and trader. The consumer collects information about products and services and if these correspond to his/her need it will

Consumer

Products Services

Trader

Contract

Unequal Bargaining Power Unfair Standardised Terms

Figure 4.1 Traditional model: potential unequal negotiating bargaining power and standardised contracts

Electronic Agents

Consumer

Online Products and Services

Consumer Agent

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Trader Agent

Trader

Contract

Technological defectiveness of EA

Unequal Bargaining Power

Lack of knowledge with respect to the technical capacities of EA

Reduced technical capacities of EA

Unfair Standardised Terms

Figure 4.2 Technological model: potential unequal negotiating bargaining power in standardised contracts concluded between consumer and electronic agents conclude a contract. Due to the lack of negotiation process, the unequal bargaining power will be mainly based on the presence in contracts of unfair terms and conditions. With the advent of electronic agents we assent to a transition from the traditional model to a new technological model of unequal bargaining power. This transition is illustrated in Figure 4.2 that outlines the role of the electronic agents in maintaining and enhancing potential unequal bargaining power between consumer and trader. In Figure 4.2, consumers buy products and services via electronic agents. Consumers collect information about a wide range of products and services via electronic agents (EA) and finally they will buy products via those electronic agents. The lack of negotiation will enhance the failures of unequal bargaining powers. In addition to the existence of unfair standardised terms, other major failures will be generated by the technological defectiveness of electronic agents, reduced technical capacities of electronic agents and the consumer’s lack of knowledge with respect to the technical capacities of electronic agents. These failures will be approached in the following subsections.

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4.3.1.1 Technological Defectiveness and Reduced Technical Capacities of the Electronic Agents Technical defectiveness and reduced technical capacities of the electronic agents increase the range of unfair bargaining power in online consumer transactions. For example, suppose that an electronic agent is sent by a consumer on the electronic marketplace to find a special offer of ‘last minute’ flight booking for a weekend abroad and that the electronic agent will come up with three possible options. As the consumer will trust his/her electronic agent, he/she will immediately give assent to one of its options. After confirming consent, the consumer would therefore make the same research via shopbots and he/she will realise that the fares provided by the electronic agent are not the most advantageous in the electronic marketplace. The question which arises is how the law approaches the situation of electronic agents that produce unintended results due to their technical defectiveness or reduced technical capacities. Kerr argues that the liability under the provisions of UETA would be attributed to the person who initiated the electronic agent even if it malfunctioned or performed operations unintended by the person on whose behalf it was operating.35 As was noticed in the previous section, UCITA clearly specifies that a person who uses an electronic agent in the conclusion of electronic transactions may be bound by the operations of the electronic agent, even if no individual was aware of or reviewed the agent’s operations or the results of the operations.36 It can be inferred from the UCITA’s provisions that consumers are protected against the malfunction of electronic agents that generate errors in the performance of their transactions only if the consumer, promptly on learning of the error, notifies the other party of the error; and causes delivery to the other party or, pursuant to reasonable instructions received from the other party, delivers to another person or destroys all copies of the information; and has not used, or received any benefit or value from, the information or caused the information or benefit to be made available to a third party.37 Nevertheless, this situation requires that an information-processing system allow the consumer to detect such errors. From a practical perspective, demonstrating the technical defectiveness and reduced technical capacities of the electronic agents will be cumbersome and time-consuming for consumers. This weak position will be enhanced by consumers’ lack of knowledge with regard to the technical capacities of the electronic agents. 4.3.1.2 Consumers’ Lack of Knowledge Relating to the Technical Capacities of Electronic Agents One might wonder if the consumer should be expected to control all the stages of programming electronic agents? According to Kerr ‘part of the problem is that the operations of these devices will not always be dictated by those who program them. The electronic devices of tomorrow will “learn for themselves” what is necessary in the usual course of business to complete the transaction.’38 It can be concluded that consumers will not need technical knowledge for programming their agents. In the long run, this statement might be true. Nevertheless, the difference between lack of knowledge and knowledge relating to the technical capacities of electronic agents

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will usually substantiate the consumers’ intentions in transactions that pose legal risks. This situation is due to the particularities of electronic agents. Electronic agents are a piece of software through which consumers can input their social preferences. Nevertheless, it would be difficult for consumers to determine whether the electronic agent was functioning according to their specifications. That is why the ability of controlling the technical capacities of electronic agents will always constitute a rationale for protecting consumers when dealing via (through) electronic agents. Cavanillas suggests that ‘e-suppliers should pay the “cost of confidence” in ecommerce (the cost of probability of unwanted contracts being concluded by mistake and the cost of the technical tools and procedures employed to reduce the probability of mistakes).’39 The solution provided by Cavanillas would probably make the difference between the added value of remedy solutions offered by the electronic marketplace and those offered by the traditional marketplace. 4.3.2 Proposals for alleviating unequal bargaining power arising from the conclusion of the contracts via (through) electronic agents Several proposals might be considered for alleviating unequal bargaining power arising from the conclusion of the contracts via (through) electronic agents. The first category of proposals are based on the ‘self-regulatory’ characteristics of law and of the electronic marketplace and they are inspired by the system of trustmarks40 used for monitoring of website consumer protection policies. The second category of proposals aims to provide a clear legal framework for the conclusions of contracts via (through) electronic agents. They refer to a re-conceptualisation of the theory of agency specially designed to address the issue of the conclusion of contracts via electronic agents. 4.3.2.1 Self-regulatory Proprieties of the Electronic Marketplace The first type of proposal relies on the self-regulatory proprieties of the electronic marketplace. Stuurman and Wijnands propose the certification of agents by reference to a particular class of security standards. This system is based on the creation of independent verification marks for agent security features.41 As for the classical market, in order to alleviate this risk of unequal bargaining power, consumers may probably use electronic agents as they use brand names as a signal of product quality. In case that they do not have enough experience to look for information, they look at the information provided by electronic agents. One might wonder about the reliability of information provided by electronic agents. The trustworthiness of the electronic agents is an uncertain field where practical solutions are looking to the challenges raised by their impact on the online consumer transactions. Yip and Cunningham confirm this view when arguing that: [m]oreover, human society has many aids to help with the decision: a brand conveys more than just a name, it also has the reputation of the company behind it. Media helps to distribute information regarding companies’ trustworthiness and also trust in the justice system which seeks to protect members of its society. Our existing agent models lack the

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Finally, the process of labelling websites proposed by Lerouge might resolve the trustworthiness of the information. Through labelling, electronic agents will be accredited with regard to their capacities to function properly. Furthermore, it may impose an obligation on the programmer to inform users if the electronic agent was submitted to an audit or labelling control. A doubting element to the labelling method is formulated by Radin, who expresses a hope ‘that ideological labels will not prevent us from working constructively on the future of consent in the contractual infrastructure of electronic commerce.’43 As will be noticed in the following subsection, there is an imperative need for regulating electronic agents. 4.3.2.2 Need for Regulating the Use of Electronic Agents Regulating the use of electronic agents can reduce the risk of unequal bargaining power in the tripartite relationship between consumer–business–agents. Lerouge suggested that programmers could not promote any electronic agent services without first ensuring that they are conforming to the law. It is also considered that the regulation of electronic agents could limit programmers’ abilities to exempt themselves from liability. Lerouge suggests that establishing technical criteria by law is not easy since such criteria run the risk of preventing technological evolution.44 In my view, any proposal for lessening the unequal bargaining power generated by the conclusion of consumers’ contracts via electronic agents goes through a clarification of the legal relationship between consumer (C) (and consumer’s agent – CA) and business (B) (and business’s agent – BA). Several views set the basis of the relationship between C –CA and B–BA on the basis of the theory of appearance45 or of the theory of agency.46 The applicability of these traditional theories to the electronic agents is a controversial issue in the doctrine. The purpose of this subsection is not to determine the adequacy or inadequacy of these theories for the electronic marketplace. Such an attempt will require a study in greater detail of different comparative aspects of these legal institutions in common and civil law systems. Nevertheless, it might be relevant to note that these theories are based on different legal connotations peculiar to various legal systems. A comparative analysis would also be useless, since the current legal framework on electronic agents is very clear; it rejects any comparison with the theory of agency. The Official comments to UCITA provide that ‘[t]he legal relationship between the person and the automated agent is not equivalent to common law agency, but takes into account that the “agent” is not a human. However, parties that use electronic agents are ordinarily bound by the results of their operations.’47 According to US legislation, the consumers are responsible for the acts of their agents. That means that in comparison with the traditional market, when consumers usually do not read terms and conditions of their contracts, in the electronic marketplace, consumers would be obliged to pay much more attention to the terms and conditions they input to their electronic agents.

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From a legal perspective, the relationship between consumer (C) (and consumer’s agent – CA) – business (B) (and business’s agent – BA) requires a complete reconceptualisation of the theory of the agency specially designed to address the issue of the formation of consumers’ contracts via electronic agents. The reconceptualisation of the theory of the agency in the electronic marketplace should clarify fundamental questions facing consumers when using electronic agents. What are the legal consequences of electronic agents on consumers’ transactions? What is the legal status of electronic agents? When legal problems arise in relation with the use of electronic agents, who should support the cost of liability? Who is the person responsible for loss, errors and costs arising from electronic agent faults and failures? Is it the consumer or the electronic agent programmer? Should liability depend on the ability of the consumers to control the programming of the electronic agents? Should we speak of a vicarious, absolute liability or ‘joint and several liability’ between the consumer–agent–business? The allocation of risks in online consumers’ transactions will depend on the responses to these questions. CONCLUSIONS In order to provide a complete picture of unequal bargaining power, the chapter explored some of the essential aspects of unequal bargaining power in contracts concluded via electronic agents. In order to do so, it identified the role of the electronic agents in online consumer transactions, and consumers’ problems emerging from the conclusion of contracts via electronic agents; it illustrated the multiplication of causes of unequal bargaining power within the B2C relationships intermediated by electronic agents and provided a comparative analysis between the traditional and the technological model of contracts concluded via electronic agents. The chapter showed that in order to participate within the electronic marketplace, the consumers would need to acquire professional knowledge and abilities similar to those existing in a B2B commercial relationship where the contracting parties often dispose of negotiating terms and conditions or obtain favourable terms and conditions. Even if a certain ‘rapprochement’ between B2B and B2C might occur in future, this situation will not totally eliminate the new risks of unequal bargaining power emerging from the malfunctioning of electronic agents, their defectiveness, or the limited warranties of the programmer of the electronic agent. In this context, it can be concluded that the issue of fairness of electronic agents remains an uncertain coexisting matter of efficiency and effectiveness. On the one hand, efficiency of electronic agents which lies in their performance and ability to respond to consumers’ expectations will be influenced not only by the level of technological security of the software programs but also by the legal parameters which give effects to their transactions. On the other hand, effectiveness of electronic agents, consisting of secure data transfer between consumer and trader, will depend not only on consumers but also on the available online information supporting consumers in making an informed decision.

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NOTES 1

2

3

4 5 6 7 8

9

10 11

12 13

At the European Union level, there are no provisions referring to electronic agents. Article 9 of the Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on electronic commerce) provide that ‘Member States shall ensure that their legal system allows contracts to be concluded by electronic means.’ According to the US National Conference of Commissioners on Uniform State Laws ‘Electronic agent’ means a computer program, or electronic or other automated means, used independently to initiate an action, or to respond to electronic messages or performances, on the person’s behalf without review or action by an individual at the time of the action or response to the message or performance. Section 102. Definitions (27) (UCITA as amended in 2002). These views are suggested by J.-F. Lerouge in ‘The Use of Electronic Agents questioned under contractual law: suggested solutions on a European and American level’, John Marshall Journal of Computer and Information Law, 18 JMARJCIL 403, Winter 1999. Shopbots are considered as Internet-based services that provide ‘one-click’ access to price and product information from numerous competing retailers. In so doing, they reduce buyer search costs for product and price information by at least 30-fold compared to telephone-based shopping and even more compared to physically visiting the retailers. (M.D. Smith and E. Brynjolfsson, ‘Consumer Decision-making at an Internet Shopbot’, July 23, 2001, available at: http://ebusiness.mit.edu/erik1.) Information and search costs are a category of costs necessary for obtaining information in order to engage a commercial transaction. R. Warner, ‘Border disputes: Trespass to chattels on the Internet’, Villanova Law Review 47 VLLR 117, 2002. For an overview of the different categories of electronic agents see: S. Gonzalo, ‘A business outlook on Electronic agents’, November 2000; C. Revelli, Intelligence stratégique sur Internet, Dunod, Paris, 1999. The role of these agents is to optimise the research of information. One of the most known agents in this category is ‘Copernic’ (from Copernic.com). The role of watcher agents consists in identifying useful information required by users on a permanent basis. The information is provided to the user by news flash. An example of a watcher agent available on the Internet is ‘Tierra Highlights’ built-up by Register.com. The main task of agents for e-commerce is to facilitate e-Commerce by helping users get the products or services they want at the best price. Some examples of this type of agent are ‘BargainFinder’ developed by Andersen Consulting, ‘Jango’ available at: http://www.jango.com, ‘Shopper.Com’ available at: http://www.shopper.com. Electronic Purchasing Agents available at: http://purchasing.about.com/library/ weekly/aa020698.htm. W. Wooldridge, Michael and Nicholas R. Jennings, ‘Agent Theories, Architectures, and Languages: a Survey’, in Wooldridge and Jennings Eds., Intelligent Agents, Berlin: Springer-Verlag, 1995, 1-22, N.R. Jennings and W. Wooldridge, ‘Applications of Intelligent Agents’, Queen Mary & Westfield College, University of London, available at: http://www.ai.univie.ac.at/~paolo/lva/vu-sa/html. Section 202(a) of the Uniform Computer Information Transactions Act (UCITA) (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws). United States Uniform Electronic Transaction Act (UETA) available at: http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ueta.htm.

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14 Section 19, Uniform Electronic Commerce Act 1999, Canada, defines ‘“Electronic agent” as computer program or any electronic means used to initiate an action or to respond to electronic documents or actions in whole or in part without review by a natural person at the time of the response or action.’ available at: http//www.law.ualberta.ca/alri/ulc/current/euecafin.htm. 15 Section 202(a) of the Uniform Computer Information Transactions Act (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws). 16 J. Bing, ‘Legal Aspects of Electronic Agents: With an Emphasis on Intellectual Property Law’. Paper delivered at the University of Bologna, Faculty of Law, 2002 cited by A. Artosi, in ‘On the Notion of an Empowered Agent’ paper delivered by the Department of Philosophy, University of Bologna. 17 A. Artosi, in ‘On the Notion of an Empowered Agent’ paper delivered by the Department of Philosophy, University of Bologna. 18 UCITA §202(a). Uniform Computer Information Transactions Act (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws). 19 Uniform Computer Information Transactions Act (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws)). 20 M.J. Radin, ‘Humans, Computers, and Binding Commitment’, Indiana Law Journal, Fall 2000, Addison C. Harris Lecture, October 26, 1999. 21 C. Reed, Internet Law, Butterworths, Law in Context, 2000, p. 181. 22 Uniform Computer Information Transactions Act (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws). 23 H.K. Towle and B. Dengler, ‘Contract formation: electronic contracts and online terms’ Practising Law Institute, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series PLI Order No. G0-00D9, April-May, 2000. 24 Restatement (Second) of Contracts, §153. a. 25 United States Uniform Electronic Transaction Act (UETA). The UETA was drafted by the National Conference of Commissioners on Uniform State Laws. The UETA was approved at the 1999 Annual Meeting. UETA is available at: http://www.law.upenn.edu/ library/ucl.htm. 26 United States Uniform Electronic Transaction Act (UETA), available at: http://www.law.upenn.edu/library/ucl.htm. 27 United States Uniform Electronic Transaction Act (UETA), available at: http://www.law.upenn.edu/library/ucl.htm. 28 United States Uniform Electronic Transaction Act (UETA). 29 United States Uniform Electronic Transaction Act (UETA). 30 Section 112 UCITA (as amended in 2002) available at: http://www.law.upenn.edu/ bll/ulc/ucita/ucita02.htm. 31 In case of contract concluded by electronic agent under unfair or unconscionable terms, consumers are legally protected through similar rules that apply to off-line environment. Supposing that an electronic agent has agreed terms and conditions, which are unfair to consumer, the EU Unfair Terms Directive (Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, Official Journal L 95, 21.04.1993) protects the consumer against unfair non-negotiated terms in a contract signed with a professional. According to the provisions of this directive, a term is unfair when it establishes a significant imbalance, to the consumer’s detriment, between the rights and obligations of the contracting parties. (Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, Official Journal L 95, 21.04.1993, Article 3, §1.) When assessing the unfair nature of a contractual term some consideration should take into account: the nature of the goods or services covered by the contract; the circumstances surrounding

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32 33 34 35 36 37 38 39 40

41

42 43 44 45

Cyber Consumer Law and Unfair Trading Practices the drawing up of the contract; the other terms in the contract or in another contract to which it relates. According to the provisions of Article 4§2, the assessment of the unfair nature of the terms ‘shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplied in exchange, on the other, in so far as these terms are in plain intelligible language.’ However, where there is doubt as to the meaning of a term, the interpretation most favourable to the consumer will prevail. Section 112(e) UCITA (as amended in 2002) available at: http://www.law.upenn.edu/ bll/ulc/ucita/ucita02.htm. H.K. Towle and B. Dengler, ‘Contract formation: electronic contracts and online terms’ Practising Law Institute, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series PLI Order No. G0-00D9, April-May, 2000. J.-F. Lerouge, ‘The Use of Electronic Agents questioned under contractual law: suggested solutions on a European and American level’, John Marshall Journal of Computer and Information Law, 18 JMARJCIL 403, Winter 1999. I.R. Kerr, ‘Providing for Autonomous Electronic Devices in the Uniform Electronic Commerce Act’, p. 35, available at: http://www.law.ualberta.ca/alri/ucl/current/ekerr.htm. Section 107(d) of Uniform Computer Information Transactions Act (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws). Uniform Computer Information Transactions Act (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws). I.R. Kerr, ‘Providing for Autonomous Electronic Devices in the Uniform Electronic Commerce Act’, p. 59, available at: http://www.law.ualberta.ca/alri/ucl/current/ekerr.htm. Cavanillas, ‘An introduction to web contracts’ in E-commerce law and practice in Europe, Woodhead Publishing Limited: Cambridge, 2001. For example TRUSTe, an organisation founded by CommerceNet and the Electronic Freedom Foundation, has developed a system to facilitate the monitoring of website privacy policies, in which registered websites display a TRUSTe certification, or ‘trustmark’. This trustmark indicates the level of privacy protection provided by the site. Available at: http://www.etrust.org/. Stuurman, Wijnands, ‘Intelligent Agents: a curse or a blessing? A survey of the legal aspects of the application of intelligent software systems’, See also E.M. Weitzenboek, ‘Electronic Agents and the Formation of Contracts’, International Journal of Law and Information Technology, Vol. 9, No. 3, pp. 204-234, available at: http://www3.oup.co.uk/ inttec/Oxford University Press 2001. A. Yip and J. Cunningham, ‘Some Issues on Agent Ownership’, COMMA Group, Department of Computing, Imperial College of Science, Technology and Medicine, London, UK, supported by the EC project Agentcities.RTD. M.J. Radin, ‘Humans, Computers, and Binding Commitment’, Indiana Law Journal, Fall 2000, Addison C. Harris Lecture, October 26, 1999. J.-F. Lerouge, ‘The Use of Electronic Agents questioned under contractual law: suggested solutions on a European and American level’, John Marshall Journal of Computer and Information Law, 18 JMARJCIL 403, Winter 1999. Poullet argues that ‘the Code civil theory of the appearance, considered as a source of obligations, might solve the problem taking into account the needed balances between the interests of the user of these technologies and the contracting party.’ Y. Poullet, ‘Conclude a Contract Through Electronic Agents?’ (1999) (research paper for the Research Centre for Computer Law, University of Namur); see also J.-F. Lerouge, ‘The Use of Electronic Agents questioned under contractual law: suggested solutions on a European and American level’, John Marshall Journal of Computer and Information Law, 18 JMARJCIL 403, Winter 1999. In the same article, Lerouge suggests that the

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theory of the appearance in the civil law constitutes a source of binding obligations that may be justified by a consideration of equity and legal security taking into account the position of the victim of the semblance. 46 There are views pro and con the theory of agency. For example, Fischer suggests the applicability of the theory of agency to the electronic agents: ‘[w]hen computers are given the capacity to communicate with each other based upon preprogrammed instructions, and when they possess the physical capability to execute agreements on shipments of goods without any human awareness or input into the agreements beyond the original programming of the computer’s instructions, these computers serve the same function as similarly instructed human agents of a party and thus should be treated under the law identically to those human agents’ (J.P. Fisher, ‘Computers as Agents: A Proposed Approach to Revised U.C.C. Article 2’, 72 Ind. L. J. 545, 570,1997). The major part of the doctrine agrees that the theory of agency is not applicable to the electronic marketplace due to the lack of personality or representativeness of electronic agents. 47 Official Comments to the UCITA, available at http://www.ucitaonline.com/ucita.html.

Chapter 5

Online Dispute Resolution INTRODUCTION The term ‘Online Dispute Resolution’ (ODR) ‘is used loosely to include the use of the Internet and other web and computer based technologies for facilitating alternative dispute resolution.’1 The growth of the electronic marketplace leads to a prevalence of disputes in B2C commercial relationships relating to the issue of quality or delivery disputes, excessive delivery costs, absence of information on possible associated costs, breach of privacy policy, breach of security of confidential information, non reimbursement of goods returned,2 disputes arising from online banking transactions etc. These disputes are usually characterised as time consuming and by a difference between the low economic value of the electronic transaction and the costs of a judicial settlement. Confronted with these drawbacks, consumers would probably like to resolve their disputes by opting for ODR and without turning to the courts. However, a quick perusal of commercial practices demonstrates ODR procedures and decisions in their current form may be particularly inaccessible (1), lack of effectiveness (2), lack of efficiency (3) and risks being unfair in protecting the consumer (4). (1) Inaccessibility concerns the inability of the ODR providers to provide information of its existence, to involve user-friendly procedures, to ensure proportionate procedural costs, to be easy to handle. (2) Ineffectiveness of ODR is relating to the inability of the procedures to operate by ensuring consumer complaints are dealt with by the appropriate process and by reassessing their performance. (3) Lack of efficiency refers to the inability of the ODR scheme to be appropriate for resolving consumers’ problems and to provide proper terms and conditions. Most of ODR costs are disproportional in comparison with the value of commercial transactions and consumers’ lack of confidence is reduced by the failure of ODR providers to provide evidence of the respect of principle of independence to the panel in charge of ODR decisions. (4) Unfairness can be defined in connection with unequal bargaining power: ‘[w]hen the decision-making process in a going private transaction resembles an arm’s length bargaining process, the result of the process – the substantive terms of the transaction – may be considered fair on the assumption that it will resemble the result of an arm’s length bargaining process.’3 The aim of this chapter is to outline the inaccessibility, ineffectiveness, inefficiency, unfairness of ODR procedures and decisions via the wide range of UBP causes which stem from the inadequacy of technical and technological abilities of consumers, to the imbalance of legal knowledge between consumers and traders in

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ODR procedures, and from mandatory ODR clauses to the provision of information about ODR procedures. Although the literature on ODR4 procedures is quite extensive, the fundamental question of unequal bargaining power seems to be left out. Several authors remarked on the emergence of unequal bargaining power between consumer and trader in connection with ODR. Thornburg points out ‘the types of pressures that lead merchants to impose [ODR] clauses resolving uncertainty in their favour are intensified on the Internet.’5 Katsh, Rifkin and Gaitenby comment that ODR ‘is a power that marketplace owners do have, since parties that refuse to participate and abide by decisions could be threatened with exclusion.’6 Finally, Ponte concludes that unequal bargaining power arises because there are no clear means of redress for consumers and that there are no uniform laws and no unified court system.7 To complement these views, the chapter attempts to provide answers to the following several questions. Should we believe that transferring the exercise of negotiating power from online traders to ODR providers, which we see today, resolves the risk of unequal bargaining power for consumers? Would the lack of negotiating power of the consumer finally be resolved via complex ODR technological programmes or rather through international regulatory frameworks? How would consumers be protected via technological remedies that they are not able to control? Finally, on the basis of this analysis, the aim of this chapter is to demonstrate that there is still enough room for governmental intervention to alleviate the unequal bargaining power raised by private ODR. For the sake of coherence in the examination of the causes mentioned above, the chapter starts by providing a brief overview of the main legal framework of ODR in online consumer transactions. 5.1 Starting Points for Online Dispute Resolution (ODR) in Online Consumer Transactions The evolution of ODR mechanisms is determined by different regulatory approaches in the European Union and the United States. The common starting point for ODR mechanisms on both continents is the traditional ADR (Alternative Dispute Resolution). Many of the ADR rules are based on national regimes and interconnected at international level by convention and legal models such as, the UNCITRAL Conciliation Rules,8 adopted in July 1980, the ICC Conciliation Rules (as amended as of 1 January 1988),9 the Convention of New York on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958, the WIPO Meditation and Arbitration Rules of 1 October 1994, rules of various other arbitral institutions10 and chambers of commerce. In the European Union, according to the Green Paper on alternative dispute resolution in civil and commercial law, the European Commission defines ADR as out-of-court dispute resolution processes conducted by a neutral third party.11 In the United States, ADR generally refers to ‘any procedure that is used to resolve issues in controversy, including, but not limited to, conciliation, facilitation, mediation, fact-finding, minitrials, Arbitration, and use of ombuds.’12 In the electronic marketplace, ADR becomes ODR.

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ODR is a means of dealing with consumer and merchant complaints and disputes arising from the provision of services by electronic means but it does not exclude conflicts arising in the traditional marketplace. ODR is characterised by the intervention of an independent third party, by decisions which might be non-binding proposals or recommendations (mediation’s case), or, binding decisions (arbitration’s case) and not by face-to-face meetings between disputing parties. Either in the European Union or the United States, the reflections around ODR procedures are encouraged by the general interest for fostering the confidence of consumers in electronic commerce. 5.1.1 European legal frameworks for ODR In the European Union, the promotion of consumer confidence in electronic commerce, in particular through alternative dispute resolution systems, is considered within the framework of the ‘eEurope 2002 Action Plan.’13 The European Commission stresses the importance of adapting general guidelines which reflect its concern for ADRs to follow principles identical to those applied to the traditional channels of conflict resolution. In the context of consumer disputes, the Commission has adopted two recommendations aimed at offering minimum quality guarantees to parties engaged in ADR procedures such as independence, impartiality, transparency, effectiveness and respect for the law. The first recommendation14 is based on the following seven principles: independence, transparency, adversarial principle, effectiveness, legality, liberty and representation. The second recommendation15 is based on the principles of impartiality, transparency, effectiveness and fairness. Within the framework of the Green Paper on ADR, the Commission noted that the European Union has adopted a legal framework which guarantees the validity of virtual agreements. This applies both to the contractual clauses defining recourse to ADRs, and to the contracts in which the parties decide to submit an existing dispute to an ADR procedure and ADR agreements concluded at the end of the procedure. The Electronic Commerce Directive16 contains the main legal provisions that refer to ODR. Article 17 of the Electronic Commerce Directive stipulates that Member States should ensure their legislation does not hamper the use of out-of-court schemes available under national law17 for dispute settlement. The growing interest by the European Commission in ODR is motivated by the need to enhance consumer’s rights of access to justice through effective means of cross border dispute resolution at a low cost and by the need to ensure a fair balance between the different interests of the internal market, especially regarding the free movement of services, the freedom of establishment and the general interest to establish a high level of consumer protection. In its Communication on ‘widening consumer access to alternative dispute resolution,’ the European Commission suggests that ODR is not just a question of promoting consumer confidence but also ensuring that there is effective competition and access to the Internal Market for business, especially for SMEs.18 From a practical perspective, the European Commission supported financially some online ADR initiatives,19 quality control projects for commercial sites,20 university studies and training programmes,21 and has set up a discussion and

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information exchange forum on the theme of consumer confidence on the Internet (‘e-confidence’).22 The European Commission has also encouraged the promotion of high standards of commercial good practice by the interested stakeholders, representing professionals and consumers.23 It also set-up two European networks24 of national bodies, both aimed at facilitating access for consumers to out-of-court procedures for the resolution of cross-border disputes in the event that the professional is located in a Member State other than the Member State of residence. According to the Follow-up Communication to the Green Paper on EU Consumer Protection, many traders do not give adequate priority to the effective handling of their customers’ queries and complaints and this is reflected in systems, resources, cultures and outcomes. Traders should ensure that they respond quickly and effectively to any complaint and make full redress when justified. Rules should focus on outcomes here, rather than prescribing methods, leaving companies free to organise their internal practices. The Follow-up Communication provides some examples of elements that should be approached by legislation. These elements are as follows: co-ordinating the handling of complaints; ensuring that information from complaints of general interest is reported to the firm’s management; informing consumers about how to make a complaint and the follow-up of their complaints; contact points at which consumers can lodge a complaint; and internal controls to ensure that complaints are properly dealt with; information about third party resolution mechanisms.25 In order to alleviate the potential unequal bargaining power in ODR, a series of further initiatives at the European Union level, reflecting the particularities of ODR are expected to be taken in the near future.26 Institutional and regulatory responses await to be formulated to respond to the need of online redress, focusing on providing a legal system to enable the simplification and acceleration of a settlement. Such a system should provide access to justice and offer effective means of resolution for cross border disputes able to ensure a low cost. 5.1.2 International legal framework for ODR At the international level, ODR is strongly related to the work of the Organisation for European Cooperation and Development (OECD). Thus, the Guidelines section on Dispute Resolution and Redress provides that businesses, consumer representatives and governments should ‘work together to continue to provide consumers with the option of alternative dispute resolution mechanisms that provide effective resolution of the dispute in a fair and timely manner and without undue cost of burden to the consumer.’27 The OECD’s Report on ‘Legal Provisions related to business-to-consumer alternative dispute resolution in relation to privacy and consumer protection’28 mentions that all OECD Member countries expressed an interest in promoting fair and effective ODR as a way to resolve small value B2C disputes, particularly cross-border disputes. Nevertheless, the current differences in existing legal frameworks affect the operability of ODR in the cross-border context. Consumers, as businesses, do not always have information of the type of ODR existent in a particular country. The interest in providing an ODR legal framework is to lessen

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practical problems facing consumers who wish to take action against online traders across national borders. At non-governmental level, ODR was subject to several recommendations issued by a number of international non-governmental organisations such as GBDe (Global Business Dialogue on e-commerce),29 the TABD (Transatlantic Business Dialogue)30 and the TACD (Transatlantic Consumer Dialogue).31 Furthermore, the ‘Electronic Commerce and Consumer Protection Group’ (‘E-Commerce Group’) made up of leading technology companies such as America Online, AT&T, Dell, IBM, Microsoft, Network Solutions and Time Warner has launched the Guidelines for Merchant-to-Consumer Transactions.32 These Guidelines stipulate that merchants should provide consumers with fair, timely, and affordable means to settle disputes and obtain redress. The Guidelines also recommend that merchants should establish internal mechanisms to address consumer complaints. These allow merchants to contractually require consumer participation, if notice is given at the time of the transaction. Merchants are encouraged to participate in reputable, independent third-party dispute resolution programmes, including online dispute resolution processes. It also suggests ‘third-party dispute resolution programs should encourage consumers to seek redress through a Merchant’s internal complaint mechanism prior to being granted access to third-party dispute resolution programs.’33 At present, there is no international legal framework for ODR procedure. This absence is justified by some authors through the fact that technology and ecommerce have outpaced the ability of governments worldwide to construct a viable multilateral instrument to govern the problems or disputes arising from e-commerce transactions.34 Others authors consider that if an international legal framework on ODR would exist, it should be primarily established on a self-regulatory basis. For example, Ethan Katsh, Janet Rifkin and Alan Gaitenby argue that: [a] marketplace could … rely on an arbitration process … and use the threat of exclusion as the mechanism for enforcing the terms of the ruling. … [w]e increasingly felt that eBay could be considered to be a jurisdiction in itself, a legal authority in itself, an entity that might even be considered to be able to exercise a loosely defined sovereign power…35

In the same vein, Schultz suggests that ‘online non-binding arbitration could work: independent from state and courts, with its own system of enforcement, and its own threats to back its orders. Maybe this mechanism could illustrate how dispute resolution in cyberspace should best be implemented.’ In my view, even if ODR is endowed with self-regulatory frameworks, in practice they would still lack effectiveness. These self-regulatory frameworks are too general and any attempt to launch a workable self-regulatory system at international level will fail due to the diverging consumer protection rules existing at national level. Self-regulatory legal systems in relation to ODR procedures might be essential in the preparatory work of national governments and in the formation of a ‘customary cyber consumer law.’36 Nevertheless, if ODR is to play a challenging role in promoting electronic commerce on a real, international level, the regulation of ODR should be made through coordinated international governmental interventions aiming to establish effective legal rules of ODR in consumer transactions.

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5.2 Functional Mechanisms of ODR in the B2C Commercial Relationships Online disputes arising on the Internet, despite clichés about ‘Internet speed,’ can be time-consuming to resolve, legally murky, and factually complex.37 Many ODR mechanisms in online consumer transactions present several differences in comparison with traditional off-line ADR mechanisms. Whilst mediation and arbitration are already well known and used in the off-line world, in an online environment they are influenced by the interactivity and unpredictability of cyberspace. On the contrary, Automated Settlement Systems are a new form of ODR specific for the online environment. The following section describes the main functional mechanisms of ODR in online consumer transactions. This description will be useful for understanding the main causes of unequal bargaining power between consumer and trader confronted with conflicting transactions issues. 5.2.1 Online arbitration Online arbitration38 generally refers to the ‘application of dispute resolution skills and resources over a network.’39 It is similar to traditional arbitration, in the sense that a third party chosen by the parties, or nominated by the institution chosen by the parties, renders a decision on the case having heard the relevant arguments and seen the appropriate evidence. In comparison with traditional arbitration, proceedings are conducted entirely by e-mail, moderated by an impartial magistrate drawn from a pool of neutrals with experience in computer and Internet law.40 However, the essence of online arbitration consists in the fact that non-binding arbitration is much more developed online. Traditional arbitration produces awards, which have a binding force that is similar to a judgment.41 It is generally considered that arbitration is not suitable for consumer transactions42 due to the legally binding charter of arbitral awards. In the United States, arbitration clauses in consumer transactions allowed it. The situation is different in the European countries. According to the OECD Report on ‘Legal Provisions related to Business-to-Consumer Alternative Dispute Resolution (ADR) in relation to Privacy and Consumer Protection,’ the legislation in Sweden and France mandates that consumer contracts entered prior to a dispute containing an arbitration clause are automatically invalid as unfair. Also, in the United Kingdom, an arbitration agreement is automatically void as unfair for consumers specifically if it relates to a claim for a small amount.43 The model set up by the Which? Consumer Association and the UK Chartered Institute of Arbitrators is illustrative of the promising innovation with regard to the binding character of online arbitration in consumer transactions. The particularity of this model is that the online arbitration is binding only for the trader but not for the consumer.44 The trader pays the costs, which are limited to an amount equal to the claimant’s registration fee for the arbitration.45 Within the framework of this model, potential subscribers should adhere to a code, which requires in a first stage of disputes, that consumers enter into negotiation with the trader. If the negotiation does not lead to a satisfying solution, consumers can request the assistance of a consumer association for solving the respective dispute. If, afterwards the dispute does not arrive at a solution, consumers can proceed to online arbitration

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proceedings under the authority of the Chartered Institute. The arbitration proceeding covers claims for up to £10,000 and the fees are relatively small. This model described above allows consumers to refuse to be bound when a decision is considered to be unreasonable for them. It is for this reason that in most European countries, the arbitration clauses which bind a consumer are presumed void. This demonstrates again the necessity of alleviating the imperfection of the electronic market by regulatory governmental intervention. 5.2.2 Online mediation Another common form of ODR is online mediation46 which is a process whereby a mediator simply passes the proposed settlement to the other party and the counterproposal back to the first party until the two have reached agreement.47 Whilst involving sophisticated communication platforms,48 online mediation is considered by some authors49 as the most suitable for small consumer disputes. Through online mediation, the mediator can help the parties in the negotiation process by normalising the parties’ feelings about the problem and minimising their distrust for each other.50 Other authors51 question the effectiveness of online mediation. Thus, Teitz argues that: [m]ediation is often recommended and encouraged where parties have had an ongoing relationship and the mediator can draw on the parties’ prior and continuing experience. That is missing in many ODR transactions where the parties are often consumers or buyers in one-shot deals and there is no past experience and not much interest in ensuring a future working relationship, but only an interest in resolving this one dispute.52

Whilst there are issues of controversy about the effectiveness of online mediation, there are currently over 30 online mediation providers as for example SquareTrade;53 Trusted Shops; Which? Web Trader; Web Assured; WebMediate; BBBOnline; Claim Resolver; CEDR; Consensus Mediation; ECODIR; eMediator.co.uk; the Camera Arbitrale di Milano; GWMK; Internet Neutral; Internet Ombudsman; MARS; Mediation America.com; NovaForum; Online Resolution; Resolution Forum.org; SmartSettle etc. 5.2.3 Automated settlement systems Another form of ODR is Automated Settlement Systems. Providers of IT services offer a wide range of sophisticated automated settlement systems. According to the European Commission, these systems are not dispute resolution procedures conducted by third parties but technical devices designed to facilitate direct negotiations between the parties to the dispute.54 Automated negotiation is a computerised process, mostly designed to settle monetary disputes. It is often based on a system of blind bidding, through which the parties enter successive bids in an attempt to reach agreement, but without knowing what the other party has offered. The process concludes when the bids become sufficiently close to one another and the computer program can propose a solution.55 The computer examines the offer and demand and, depending on its programmed range for calculating agreement,

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advises the parties whether there has been settlement and, if so, at what amount. If the computer finds there is no settlement, the parties are so advised.56 For consumers, it is very important to read the terms and conditions of an automated negotiation carefully, as the outcome generated by the computer can be a legally binding contract. Amongst the most important systems of automated negotiation (blind bidding systems) are cybersettle.com or clickNsettle.com. After outlining some of the main functional mechanisms of ODR, the following chapter focuses on the legal analysis of the interconnection between unequal bargaining power and ODR, under its multiple legal forms (ODR clauses, ODR information or ODR mechanisms and procedures). 5.3 What are the Causes of Unequal Bargaining Power (UBP) in Relation to ODR? The unequal bargaining power (UBP) generated by ODR can be summarised by the position of the consumer who is coerced to accept the trader’s compromise deal from a weak position. A consumer who purchases over the Internet would have much more difficulty in pursuing a complaint in a different country due to the redress costs, mandatory ODR clauses, inadequacy of information about ODR, lack of legal knowledge or language constraints. The causes of unequal bargaining power relating to ODR actors are presented in the Figure 5.1 below. They will be analysed in detail in the following sections. At first sight, the figure shows that causes of unequal bargaining power are multiple. They lie in the fact that companies may require high redress costs, may draft arbitration clauses and consumers may lack technological and legal knowledge of ODR mechanisms. Some of these instances of unequal bargaining power illustrated in the figure are also present in the traditional world.57 For example, the mandatory arbitration clauses and redress costs are also failures persistent in the traditional market. The purpose of this section is to explore the wide range of causes that create unfair advantages if a dispute arises in cyberspace and which consumers cannot negotiate. 5.3.1 Causes of UBP relating to the inadequacy of technical and technological abilities and to imbalance of legal knowledge between consumers and traders Inadequacy in technical, technological and legal knowledge of ODR mechanisms prompts the question on the consumers’ abilities to negotiate. Variation of technical expertise and necessary legal or practical knowledge to choose an ODR can affect the balance of negotiating power in online commercial transactions. In order to demonstrate, this section first analyses the causes relating to the lack of consumers’ knowledge of technical and technological issues, and their ability to negotiate. Secondly, the chapter explores some issues relating to the imbalance of legal knowledge between consumer and trader in relation with ODR procedures.

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Online Products Online Services

Consumer

Trader

Contract

Non-performance of contractual obligations (late delivery, non-delivery, non-conformity of the goods or the service purchased, excessive delivery costs, absence of information on possible associated costs, non-reimbursement of goods returned as non-payment for goods or services, misrepresentations, breach of the privacy policy, breach of security of confidential information) etc.

Online Dispute Resolutions Trader Unequal Bargaining Power Consumer

Inadequacy of Technical Abilities and of Legal Knowledge

• Redress Costs • Mandatory ODR Clauses • Inadequacy of Information about ODR

Figure 5.1 Causes of unequal bargaining power in relation to ODR

5.3.1.1 Causes of UBP Relating to the Inadequacy of Technical and Technological Abilities of Consumers The technical and technological abilities of consumers to deal with ODR procedures encompass various ranges of online skills such as typing skills, knowledge of foreign languages, use of e-mail, connection speeds, and hardware availability.

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Some scholars reject the view of unequal bargaining power based on the lack of technological knowledge. Thus Linden considers that [t]he use of email seems to cut across all age brackets from 4 years old to 90 years old. [...] If an individual can use the Internet at all, they seem to have mastered to one degree or another, the use of email. [...] Therefore, it is not necessary for the disputant to learn a new skill set to invoke the use of email in the process of dispute resolution.58

In the same sense, Friedman rejects unequal computer knowledge in that the ‘[u]se of e-mail has increased dramatically in the legal and business worlds during the past two years, and will continue to do so....’.59 In my view, because of this inequality of computer and legal knowledge between consumers and traders, the use of ODR mechanisms impairs the consumer’s ability to conduct adequate ODR procedures. As Katsh and Rifkin suggested, ‘technological skill and equipment that affects ability to participate [in ODR procedures] can create a power imbalance.’60 In order to counteract the unequal bargaining power emerging for ODR, consumers should have a sound knowledge of technological issues. As suggested by Eisen, ‘online mediation shifts power to those who understand computers. Even when there is a serious economic imbalance between the parties, access to the [online] highway to resolve the dispute makes sense: the economic size of the parties is “invisible” to the particular dispute resolution process.’61 Furthermore, Eisen argues: [t]hose who have worked with online graphical environments would be able to process information more readily than others. Because most communication would be textual, disparities in literacy levels would give an advantage to those who read quickly; those who cannot read at all or who do so less well would be disadvantaged. Participants with extensive expertise in complex litigation will have additional advantages over those who do not. For example, industry groups with experience in document management could threaten to dominate the process by generating voluminous E-mail messages that other participants would have to read and digest.62

From a practical point of view, in order to avoid the criticism of creating unequal bargaining power, ODR systems should be conceived in a ‘proactive’ manner. This means that ODR procedures should elicit from consumers their potential and basic abilities, the knowledge that supports them to solve disputes in interaction with a virtual and spontaneous online environment, characterised by various cultures and time zone differences. In a ‘proactive’ ODR process, consumers should be directed to respond to a list of questions by which the answers can contribute in a fair way to solve their dispute with the trader. A ‘proactive’ ODR process can be imagined by comparison with consumer labelling systems. Labelling systems are based upon an understanding of human information processing limitations and characteristics.63 Similar to labelling systems, ODR procedures should be conceived in a ‘proactive way’ as a measure in terms of availability, simplicity and accessibility. The availability and simplicity of ODR are characterised by the capacity of ODR systems to be operated without the parties having to study in detail how the system works, and without them having to acquire expensive software or hardware.64 Other abilities would be needed to counteract unequal bargaining power especially the enhanced capacities of consumers to communicate and detect potential risks of

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unequal bargaining power in ODR. This aspect relates to the accessibility of legal information and is underlined in the following section. It can be concluded that whilst it is expected that the variations in the practical use of ODR procedures and of the Internet in general will level out with time, if the failure in negotiation is due to the inadequacy of the technological and technical knowledge of consumers, a remedial solution might consist in enhancing the responsibilities of traders in establishing ‘proactive’ ODR systems. 5.3.1.2 Causes of UBP Relating to the Imbalance of Legal Knowledge Between Consumers and Traders The imbalance of legal knowledge between consumers and traders can arise in the pre-dispute stage in which consumers would need to consider which form of ODR would apply to their transaction; or, in the dispute stage in which consumers would need to be circumspect without overlooking fundamental requirements of procedural justice and due process. Faced with all these requirements, consumers will be weighed down by the burden of responsibility. For example, in order to decide whether methods of ODR proposed by traders are suitable to their electronic transactions, consumers would not only need to check the terms and conditions under which the transaction will be conducted, they would also need to have a real sound knowledge in the use of ODR procedures. This is because the use of ODR procedures in online consumer transactions is strictly related to the interactivity of electronic medium where consumers should react directly to pursue their claim. So, understanding ODR procedures can go to the extent of possessing practical and legal knowledge about the use of a specific ODR procedure. In the hypothetical case, where traders will not specify any particular form of ODR, one might wonder whether consumers should agree with the trader on a specific form of ODR which would apply in the event of a dispute arising in connection with their transaction. It is difficult for a consumer to agree with a trader prior to a dispute. That is difficult even for the most experienced consumer to anticipate which form of ODR or judicial action would better correspond to a particular potential dispute. The appropriateness of ODR to a specific dispute depends on the need to provide conclusive proof or reverse the burden of proof by requiring high and costly technological expertise, or by the need to demonstrate the unfairness of a commercial practice on the grounds of particular facts. For example, in cross-border situations, consumers should anticipate whether they would like to resolve their dispute on the basis of a particular law rather than in the furtherance of their interests and goals. Consequently, by requiring consumers to agree with a specific form of ODR before the appearance of a dispute, the balance of power will always tilt toward the trader rather than in the favour of the consumer. As mentioned in the previous section, ODR procedures should be designed in a proactive manner. This also includes the capacity of ODR procedures to support consumers to choose the most appropriate ODR process and to introduce and clearly draft their complaint. If these factors are ignored, they may create reasonable claims of unequal bargaining power. These claims are justified by situations common to the off-line environment such as: consumers may encounter difficulties in making a complaint which clearly explains the cause of their complaint; they can have

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problems in identifying the failure of the trader to perform their contractual obligations and proceeding with their complaints. For example, consumers can refer to facts that are probably important to them but which legally are irrelevant or, they may omit facts that are legally relevant.65 Another aspect of unequal bargaining power in relation to ODR procedures consists of the fact that the communication of consumers with traders and arbitrators is made in writing and is spontaneous. This situation raises the risk of unfair advantage to those who can organise and eloquently state their case.66 As suggested by Thornburg, [a]s the consumer has the burden of proof, any weakness, or even any ‘tie’ in terms of the weight of the written evidence will go to the seller. Further, if the arbitrator has any prodefendant bias, the lack of live evidence may make it less likely that the consumer’s presentation can counteract that bias.67

Other factors that suggest unequal bargaining power in ODR procedures relate to the lack of legal representation of consumers on the Internet. Due to the low economic value of the electronic transaction, consumers may renounce any recourse to an arbitrator or mediator. In the absence of sufficient sophistication, consumers will be normally penalised for their lack of inadequate ODR knowledge. Experienced traders in ODR procedures would usually forestall any arguments contained in consumer complaints by providing large quantities of research on a particular point of their dispute with a consumer. Providing consumers with pertinent legal advice may alleviate some of the disparities of legal sophistication between consumers and traders but not all the area of UBP. Perritt suggests, in all but the simplest cases, counsel is invaluable in helping a naive disputant understand the procedure, the relevant rules for decision, and the most effective way to prevent a case. Online arbitration systems should allow for counsel, perhaps subject to control by the arbitrator, who may determine in simple cases that no counsel is permitted.68

These suggestions are welcomed in the online consumer transactions characterised by consumer complaints of large value but not for consumer complaints of small value where consumers will usually act without the help of counsel. In the law value disputes, the potential UBP could justify a governmental intervention which supports consumer organisations to intervene in defending consumers’ interests. The criteria of intervention of the consumer organisation should not take into account the value of the claim but rather the variable degrees of expertise that consumers may experience in certain areas. For example, in the area of financial services where consumers will not always have significant experience, intervention of the consumer organisation will be needed, as the consumers will not be expected to defend themselves. 5.3.2 Causes of UBP relating to the redress costs Redress costs are often at the root of potential failure in the consumer market, and are particularly important for understanding the rationales of consumer protection.

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The question which arises is whether consumers should pay the costs of ODR. Practice varies from one country to another. At the international level, it is accepted that ‘consumers can contribute to ADR costs but argued that those costs must be proportional to the value of the transaction and the amount in dispute – that is, that consumers should be able to obtain redress without losing the value of the purchase in dispute resolution costs.’69 In general, consumers might be required to pay ODR costs that exceed the amount of the claim. This is quite common as the electronic market is characterised by low value cyber consumer online disputes. The complexity of technical and jurisdictional issues in connection with online disputes may represent a déni de justice when redress costs are too high. According to statistics established in 2001, by the Consumer International Organization, only 13 ODR providers from 29 operational ODR services work to solve B2C disputes for small amounts and issues other than those of monetary settlement.70 Eight of the ODR schemes provide free services for consumers, and four providers charged fees at an affordable rate to consumers in general disputes.71 The costs required by ODR providers within the framework of Automated Settlement Systems72 reflect the fact that these mechanisms do not always help consumers to relieve the pressure of the redress costs. For example, the redress costs imposed by SettlementOnline are of $300 for each claim.73 Within the framework of CyberSettle, the costs depend on the amount of the settlement. For example, any settlement under $5000 costs $100.74 These ODR schemes reveal the imperfection of the electronic market with regard to ODR since in order to obtain satisfaction, the consumers would be obliged to support redress costs. The imbalance of technical knowledge between consumer and trader can be compared with that existing in the traditional market where consumers might lack professional knowledge of products and services. As in the traditional market, it is general practice that the States do not provide legal aid for ODR. There are also some exceptions. In France, for example, legal aid can be granted to pay the fees of the lawyer who conducts transactional negotiations.75 Nevertheless, it should be noted that legal aid is granted on the basis of financial need, not in rapport with the sophistication of the litigant. In general, the position of relative weakness of consumers is fostered by the fact that traders are aware that cyberspace is not necessarily an environment favourable to repeat player consumers. The consumers are interested in one-shot deals. That is why the dispute resolution clauses in standardised contracts are chronically undervalued by one-shot players: ‘they are a mean by which traders enrich themselves at the expense of those with whom they contract, by systematically impairing the enforceability of the latter’s statutory rights.’76 5.3.3 Causes of UBP relating to mandatory ODR clauses and provision of information about ODR Other causes of UBP relate to the fact that traders obtain the consent of the consumer to pre-dispute mandatory ODR clauses which are unfair to consumers. The term of pre-dispute mandatory ODR clauses does not mean that these clauses are mandated by law. Pre-dispute mandatory ODR clauses concern the clauses which are included in standard form contracts and which are presented to consumers

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on a take-it-or-leave-it basis. More precisely, it refers to the question of the validity of consumer consent given in a contractual relationship with a professional. In the online environment, traders obtain consent to mandatory ODR clauses by sending terms and conditions containing a large quantity of information or by their placement on the website.77 In certain cases, traders do not provide any information about their policies on dispute settlement. The information is provided only after consumers have given consent to enter into a commercial relationship. In other situations, traders will require consumers to waive their rights to go to court. Yet, in other situations, the consumer will be in a position of weakness, as the trader would draft their arbitration clauses in order to respond to his own needs of choice of arbitrator and location of arbitration.78 All these practices risk being unfair for consumers as the majority of consumers’ claims are small and may be disproportionate in comparison with ODR fees. This section analyses some of the most serious and prevalent problems regarding mandatory ODR clauses and the provision of information on ODR procedures. 5.3.3.1 Causes of UBP Relating to the Mandatory ODR Clauses Mandatory ODR clauses in the online environment can be fixed by traders in the ‘terms and conditions’ of a consumer contract; in a click-wrap agreement where the terms and conditions are presented to the user with a message on his or her computer screen, requiring that the user shows his or her assent to the terms of the licence agreement by clicking on an icon; in the terms of a contract accompanying the product for which the consumer has already paid.79 The legal status of mandatory ODR clauses is different in the United States in comparison with the European Union. In the European Union, consumers cannot waive the protection of the national consumer law of their Member State.80 In most EU Member States, consumers are free to agree to ODR on a contractual basis,81 subject to the restrictions that apply generally to contracts such as fraud, duress or public policy concerns (e.g. unconscionability, non-waivable rights, clauses unfair to an individual, and concerns of equity and fairness).82 The question which arises is whether ADR clauses in consumer contracts are not in principle forbidden by Directive 93/13/EEC on unfair terms.83 According to the Unfair Terms Directive, ‘a contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.’84 Furthermore, the directive includes a non-exhaustive and indicative list of clauses, which can be declared unfair. Amongst these, clauses which figure as unfair include clauses that ‘exclude or hinder the consumer’s right to take legal action or exercise any other legal remedy.’85 Moreover, the European Court of Justice held in Océano Grupo Editorial SA v. Roció Murciano Quintero joined cases that: where a jurisdiction clause is included, without being individually negotiated, in a contract between a consumer and a seller or supplier within the meaning of the Directive and where it confers exclusive jurisdiction on a court in the territorial jurisdiction of which the seller or supplier has his principal place of business, it must be regarded as unfair within the

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meaning of Article 3 of the Directive in so far as it causes, contrary to the requirement of good faith, a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.86

In order to counter unequal bargaining power which arises from mandatory arbitration clauses, several proposals were made by Senderowicz87 in the context of the off-line environment. Senderowicz proposed that standardised contracts containing arbitration clauses should illustrate procedural differences between litigation and arbitration and provide financial incentives to negotiate for consumers who agree to elect arbitration. These considerations appear to be of general interest for the current online environment dominated by mandatory ODR clauses. At present, many online providers of services such as Amazon.com88 and Dell.com in their terms of sale impose upon consumers clauses that render the consumers powerless to obtain redress for their claims and where the parties have no equal standing before the law. For example, the terms and conditions of Amazon mention that: [a]ny dispute relating in any way to your visit to Amazon.com or to products you purchase through Amazon.com shall be submitted to confidential arbitration in Seattle, Washington, except that, to the extent you have in any manner violated or threatened to violate Amazon.com’s intellectual property rights, Amazon.com may seek injunctive or other appropriate relief in any state or federal court in the state of Washington, and you consent to exclusive jurisdiction and venue in such courts. Arbitration under this agreement shall be conducted under the rules then prevailing of the American Arbitration Association. The arbitrator’s award shall be binding and may be entered as a judgment in any court of competent jurisdiction. To the fullest extent permitted by applicable law, no arbitration under this Agreement shall be joined to an arbitration involving any other party subject to this Agreement, whether through class arbitration proceedings or otherwise.89

Instead of inserting mandatory ODR clauses into a terms-and-conditions page, traders would be better explaining to consumers how the substantive protection offered by their companies are more advantageous in comparison with the local consumer law. This would normally help consumers to make informed decisions and to understand their rights. As suggested by Krause, [t]he consumer is generally not a repeat player, or legally savvy enough to understand the full import of the clause – what rights and recourse they are in fact giving up. Consumers can be and are held to these contracts, but no one creating these clauses could credibly assert that more than a small percentage of consumers read all of the small print on each transaction.90

Amongst the most common mandatory ODR clauses conducive to unequal bargaining power, the following examples are the most relevant in describing unequal bargaining power between consumer and trader: uncertain or unreasonable ODR fees; consumers needing to travel long distances to resolve their disputes, to get enforcement abroad or to pay expensive long-distance teleconference charges and one-way ODR clauses.

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5.3.3.1.1 Uncertain or unreasonable ODR fees There is a large number of ODR clauses that do not provide any information about ODR fees and leave the consumer uncertain about arbitration fees. Most consumer claims are of small value. As in the case of traditional consumer transactions, the prospect of paying excessive ODR fees would discourage consumers making or pursuing their complaint. Besides, the disproportion between ODR fees and the value of consumer complaints may infringe fundamental principles of fairness because it makes it too difficult for customers to fight battles over the relatively small amounts of money at stake on an individual basis.91 In order to avoid disproportionate fees, the American Arbitration Association (AAA) has established through the Arbitration Rules for the Resolution of Consumer Related Disputes,92 a list of fees especially for consumer disputes. Besides, the fees differ from one ODR procedure to another.93 Discussing consumer confidence in online transactions, the Global Business Dialogue’s Working Group on Alternative Dispute Resolution concludes: ‘the cost and complexity of cross-border enforcement will stand in the way of proper redress in the vast majority of cases.’94 5.3.3.1.2 Consumers should travel long distances to resolve their disputes, to get enforcement abroad or to pay expensive long-distance teleconference charges The use of the term ‘ODR’ does not exclude that certain forms of dispute resolution or stages of the respective proceedings are carried out traditionally and not entirely online.95 So, the label ‘ODR’ might sometimes be misleading. By accepting ODR, consumers risk incurring either expensive long-distance teleconference charges, or even travel and related expenses. This situation would be unfair if a consumer, who, for example, makes a transaction worth 400 Euro would need to travel to another state in order to get redress or to obtain the enforcement of their decision. In this case, ODR will be profitable for traders but certainly not for consumers who in most cases will decide not to proceed with their claims. For example, in Brower v Gateway Inc96 involving the purchase of a computer and related software products, the arbitration agreement stipulated arbitration before the International Chamber of Commerce (ICC) Court of Arbitration. The New York Appellate Court held that the arbitration agreement was unenforceable and remanded the case back to a lower court to encourage the parties to find an appropriate arbitration procedure for their small claims dispute. 5.3.3.1.3 One-way ODR clauses These clauses illustrate unequal bargaining power in the plain view of consumers. Thus, consumers are required to waive their right to go the court, to pay arbitration fees, to pursue their claims on a class action basis.97 For example, in Brower v. Gateway,98 the mandatory arbitration clauses inserted in Gateway’s shrink-wrap agreement required that Gateway purchasers with claims against the company could not sue, but were instead required to arbitrate, paying a $4000 fee, $2000 of which was non-refundable and pay Gateway’s legal fees in the event that they lost. This clause is illustrative of unequal bargaining power forcing the consumer to engage in an ODR procedure whilst being informed through clear and conspicuous provisions. Faced with these risks, it can be concluded that ODR clauses and procedures should be designed under criteria of flexibility in order to allow consumers control of the process of resolving their disputes.

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5.3.3.2 Causes of UBP Relating to the Inadequacy of Information about ODR Procedures Most websites do not contain any information about ODR procedures and do not appear to provide any information about ODR providers, training, licensing, and selection of lawyers or neutrals, monitoring or auditing of performance, and enforcement of ODR decisions is often insufficient.99 The inadequacy in providing information to consumers is one of the causes of unequal bargaining power between consumers and traders. Certain views seem to uphold the duty of consumers being informed and of researching specific ODR. This view can be elicited from the following suggestion: it is important ‘to allow users to find rapidly and easily the information concerning the ODR providers and the services they propose. This can be done through networks that can offer different services …’100 In my view, the provision of information should lie with the trader’s responsibility to make the process of dispute resolution comprehensible to consumers. Nevertheless, it cannot be concluded from the presence of multiple hyperlinks with ODR providers and services that traders will automatically be exempt from the obligation to provide ODR information. Such a view reassures the opinions of those who completely tilt the debate towards the provision of information by ODR providers. The provision of information by ODR providers of their services is of paramount importance in convincing a consumer to submit his or her dispute to their authority and represents an essential part of promoting or advertising activities by ODR providers. Nevertheless, the disclosure of information on traders’ websites will better help consumers in making informed decisions about ODR providers and procedures. Furthermore, as consumers should have the liberty to choose between several ODR providers, they should be able to exercise this opportunity from the trader’s website and not by doing time-consuming researches to find the best ODR procedure or provider. It is quite improbable that consumers after looking for a product or a service that meets their expectations and after collecting and comparing this general information will spend time gathering preliminary information about ODR procedures via different professional ODR providers. The disclosure of information on the trader’s website will allow consumers not only to understand the nature of the dispute resolution process but also to clarify their rights, the obligations of traders and the roles of ODR providers. 5.4 Fairness in ODR Procedures Alleging that an ODR is unfair requires the diagnosis of the procedural and substantive aspects of unfairness. An ODR is unfair when it creates a significant imbalance between the rights and the obligations of the parties and deprives the consumers of an advantage corresponding to their reasonable expectations. In order to ensure the protection of consumers against unfair arbitral proceedings, the American Arbitration Association (AAA) through the National Consumer Disputes Advisory Committee launched the Consumer Protocol composed of a statement of 15 principles for fairness of ADR programs.101 The Protocol provides that ‘[a]ll parties are entitled to a fundamentally fair ADR process.’102 Whilst the Consumer

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Protocol refers to arbitral proceedings, these principles can apply to all of ADR/ODR. At the European Union level, as mentioned in the previous section, two Recommendations are important when considering the fairness of ODR procedures: the Recommendation on the Principles Applicable to the Bodies Responsible for Out-of-Court Settlement of Consumer Disputes103 and the Recommendation on the Principles for Out-of-Court Bodies Involved in the Consensual Resolution of Consumer Disputes.104 This section points out the main aspects relating to the procedural and substantive unfairness arising from ODR mechanisms and procedures. Procedural unfairness in the ODR context includes deceptive practices such as: refusal to bargain over the terms of an ODR clause, non-disclosure of information to consumers about how to make a complaint and how to follow-up their complaints; non-disclosure of information about third part resolution mechanisms etc. The failure of disclosing information may result in failure for consumers to express a valid consent to ODR procedures. Therefore, procedural unfairness represents the first stage before considering the substantive unfairness. For example, it would be unnecessary to prove the substantive unfairness of an ODR clause since consumers gave their assent without knowing about the existence of all conditions relative to ODR procedures or mechanisms. As suggested by Silver, ‘[i]n general, procedural fairness is viewed as a means of obtaining substantive fairness.’105 Procedural unfairness is related to the due process requirements. This includes the right to be heard, right to respond and fair hearing. According to the Commission Recommendation 98/257/EC of 30 March 1998 on the principles applicable to the bodies responsible for out-of-court settlement of consumer, the right to a fair hearing means that each party must be given an opportunity to state their case and to hear and respond to the other party’s submissions.106 That means that ODR should allow all the parties concerned to present their point of view and to ‘hear’ the arguments and facts put forward by the other party and any experts’ statements. According to the Consumer Protocol, all parties are entitled to a fundamentally fair arbitration hearing, which requires adequate notice of hearings and an opportunity to be heard and to present relevant evidence to impartial decision-makers. Ponte suggests that in some cases, such as some small claims, the requirement of fundamental fairness may be met by hearings conducted by electronic or telephonic means or by a submission of documents.107 Nevertheless, as suggested in the first part of this chapter, the due process might be compromised when the consumers lack a sound knowledge of technological or legal issues and would be unable to protect themselves efficiently against unfair ODR mechanisms and procedures. In addition, their rights may be too ‘diffuse’ or too ‘small’ to seek protection, or they may even be unaware of their rights.108 Due process requirements concern also the fact that ‘arbitrators are not required to follow the law, have discretion over how much discovery to allow, and are not required to issue written opinions stating findings of fact or conclusions of law.’109 Furthermore, due process might be infringed by excessive costs that may face the consumer to seek redress through ODR mechanisms. Another criteria for detecting the unfairness of an ODR (which is also a cause of unequal bargaining power) is the provision of information to consumers. As

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mentioned in a previous section,110 many websites do not provide clear information for the average consumer. ODR clauses are included in lengthy ‘terms and conditions’ and formulated in specific terms which are not easily understood by consumers. In cross-border situations, the information becomes even more complicated because of differences in language and the legal interpretation of different commercial practices or customs. These factors may have a considerable impact on the consumer’s ability to understand their rights and obligations. As suggested by Thornburg, consumers are unlikely to have any information about the prior rulings or background of ODR providers. Traders, however, may have a record or other sources of information on the decisions of ODR providers. Thus, the superior knowledge of the general approaches by ODR providers gives a real advantage to traders vis-à-vis consumers.111 In order to avoid the risk of unfair ODR procedures, Ponte identifies five categories of duties in relation with information requirements on the ODR mechanisms. These categories are as following: • • • • •

Duty to Disclose the Existence of Pre-Dispute ADR/ODR Clauses; Duty to Disclose the Nature of ADR/ODR Programs; Duty to Disclose Any Business or Financial Relationships with ADR/ODR Service Providers; Duty to Disclose Outcomes or Findings of ADR/ODR Proceedings; Duty to Disclose Information to Educate the Public about ADR/ODR Methods.112

These duties will be better accepted and respected by the traders if they are formulated within the framework of governmental regulatory framework. The disclosure of information on ODR procedures has previously been satisfied by its acceptance as a general duty upheld by guidelines of non-governmental organisations113 by European law114 or international law.115 However, despite its general acceptance, there are many online companies that do not seem to pay too much attention to the principle of disclosing information on ODR procedures. Accepting that disclosure of information remains at the stage of ‘duty’, variations in the interpretation of this principle will be dependent on the circumstances of a particular dispute being dealt with in a national electronic marketplace. This legal context will not reinforce consumer confidence in the electronic market environment. The disclosure of information should be regulated from the perspective of its existence as an obligation under a trader’s responsibilities, operating in a global electronic marketplace. The substantive unfairness of ODR refers to circumstances such as inclusion in the terms of an ODR clause of an inconvenient forum-selection clause; or imposing on consumers to waive their procedural rights to go to court. These elements of unfairness were analysed above in relation to the standardised online contracts.116 As a reminder, in Patterson v. ITT Consumer Financial Corp.,117 the arbitration agreement ‘on its face suggests that Minnesota would be the locus for the arbitration.’118 Usually, the consumer cannot possibly negotiate such clauses. Therefore, the consumer should not be considered as giving consent to this type of clause if it is to his/her detriment.

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CONCLUSIONS The role of ODR should be that of enforcing the consumer’s rights of access to justice, through effective means of resolution of cross border disputes, ensuring a low cost. In order to handle complaints and responses electronically, and to have the capabilities to bring the parties together in real time to discuss the dispute if need be, the ODR need to be flexible and account for possible variations in law, language and custom between different jurisdictions; they must be low cost considering the potential expense of bringing a complaint against an online company – at distance; and provision must be made to ensure the decision is binding on the supplier.119 Detailed governmental regulation of ODR could theoretically solve the concerns of substantive and procedural unfairness. The remaining ODR question is whether challenges raised by technology would be a driving force for equal bargaining power through legislation. Another remaining question is whether an international legal framework would move ahead at a faster pace than technology to ensure effective consumer protection. Confronted with this dilemma and contrary to Reagle’s view, my inclination is towards regulatory intervention and not towards technology since I believe we are better served by educating and focusing designers on the relevant principles of law rather than explaining notions of computer networks to lawyers.120 How otherwise, could we imagine designers appraising the hidden face of law in sophisticated technological models where the negotiation process between parties is driven by software without the intervention of a human third party? Finally, as Teitz judiciously remarked, ‘[p]arties to crossborder transactions must have confidence (…) in the capacity to resolve subsequent disputes in an equitable and efficient manner, even if those disputes involve parties and occurrences half way around the world.’121 NOTES 1 2 3 4

‘American Bar Association Task Force on E-commerce & Alternative Dispute Resolution’, Draft Preliminary Report & Concept Paper, May 2001, available at: http://www.law.washington.edu/ABA-eADR. M. Philippe, ‘Where is everyone going with online dispute resolution?’, The International Business Law Journal (RDAI), No. 2, 2002. C.B. Silver, ‘Fair Dealing comes of Age in the Regulation of Going Private Transactions’, Journal of Corporation Law, 9 JCORPL 385, Spring, 1984. Online dispute resolution (ODR) is a component of online redresses mechanisms which also includes credit card chargebacks, neutral evaluation and escrow agreements. A chargeback is related to a consumer who files a complaint with their credit card company disputing a particular charge and seeking to stop a payment of a particular product or service on the consumer’s credit card bill. (See Perritt H.H., ‘Dispute Resolution in Cyberspace: Demand for New Forms of ADR’, 15 Ohio St. J. on Dis. Res. 675, 684, 2000); Neutral Evaluation involves the neutral third party making a decision on the basis of the written submissions and documentary evidence provided by the parties. In neutral evaluation, this decision takes the form of a non-binding recommendation. The Australian ‘Fair Trading Tribunal’ promotes this scheme. The

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Fair Trading Tribunal is an independent, statutory Tribunal established under the Fair Trading Tribunal Australian Act 1998. This Tribunal may ask for a neutral evaluation to be undertaken to assess the strengths and weaknesses of each party’s case and offer an independent opinion of the likely outcome of the matter. For more information, available at: http://www.agd.nsw.gov.au/ftt/ftt.nsf/pages/ftt_1; escrow mechanisms allow purchasers to escrow their payments until they accept delivered merchandise. E.G. Thornburg, ‘Going private: Technology, due process, and Internet Dispute Resolution’, U.C. Davis Law Review, 34 UCDLR 151, 2000. E. Katsh, J. Rifkin and A. Gaitenby, ‘E-Commerce, E-Disputes, and E-Dispute Resolution: In the Shadow of Ebay Law’, 15 Ohio St. J. on Dis. Res. 705, 720-721, 2000. L.M. Ponte, ‘Boosting Consumer Confidence in E-Business: Recommendations for establishing fair and effective dispute resolution programs for B2C online transactions’, Albany Law Journal of Science and Technology, 2002, 12 ALBLJST 441. See also, L.M. Ponte, ‘Cyberjustice: Online Dispute Resolution for E-Commerce’, Prentice Hall, August 31, 2004. Uncitral Conciliations Rules, General Assembly Resolution 35/52, available at: http://www.uncitral.org/en-index.htm. Rules of arbitration of the International Chamber of Commerce (in force as from 1 January 1998) available at: http://www.iccwbo.org/court/english/arbitration/rules.asp. Chartered Institute of Arbitrators, Arbitration rules, 2000 http://www.arbitrators.org/ Materials/Arb/rules.htm. Green Paper on alternative dispute resolution in civil and commercial law, European Commission, Brussels, COM(2002) 196 final 19.04.2002. 5 U.S.C. §571 (2000). This objective was reaffirmed at the European Council at Santa Maria da Feira in June 2000 when the ‘e-Europe 2002 Action Plan’ was approved available at: http://europa.eu.int/information_society/eeurope/action_plan/index_en.htm. The first recommendation (Commission Recommendation of 30 March 1998 on the principles applicable to the bodies responsible for out-of court settlement for consumers which was adopted on 30 March 1998 (OJ L 115,17.4.1998, p. 31)), relates to the procedures which, no matter what they are called, lead to a resolution of the dispute through the active intervention of a third party who formally adopts a position with regard to a solution. This first recommendation, which sets out the seven minimum principles for the establishment and operation of ADR facilities, does not relate to the procedures often referred to as ‘mediation’ procedures. The second recommendation (Commission Recommendation of 4 April 2001 on the principles for out-of-court bodies involved in the consensual resolution of consumer disputes) (OJ L 109, 19.4.2001, p. 56) relates to the procedures which are limited to a simple attempt to bring the parties together to convince them to find a solution by common consent. It may be that the third party is called upon to propose a solution informally. Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on Electronic Commerce) (OJ L 171, 17.7.2000, p. 1). The main consequence ensuing from the European Commission approach relies on various national structures in the process of implementation of out-of-court settlement of consumer disputes (OCSD). The variety of national structures range from the Ombudsman in the UK and the National Board for Consumer Complaints in Sweden to arbitrage panels in Belgium or France. This diversity may be perceived as a positive element of the proximity for consumers that contribute to strengthen their confidence. However, the same diversity might be questionable when approaching the functioning

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Cyber Consumer Law and Unfair Trading Practices of OCSD from a cross-border perspective. At this level, OCSD encounters problems related to coordination between different OCSD systems and to implementation of different OCSD procedures in online and off-line procedures. It this for these reasons, that at the European Union level, a large number of issues have been explored with regard to the necessity of developing of a unified and consistent out-of-court settlement of disputes for both the interests of consumers and industry. The existence of the OCSD has been endorsed through a wide range of EU initiatives such as the Commission Recommendation 98/257/EC of 30 March 1998 on the principles applicable to the bodies responsible for out-of-court settlement of consumer (published in OJ L/115, 17.4.1998, pp. 31-34), the Commission Working Document on the creation of a European extra-judicial network (EEJ-Net) (SEC (2000) 405) and the Commission Communication on ‘widening consumer access to alternative dispute resolution’ (Brussels, 4.4.2001, COM(2001) 161 final). The Communication of the Commission on ‘widening consumer access to alternative dispute resolution’, Brussels, 4.4.2001, COM(2001) 161 final, p. 1. ECODIR (Electronic Consumer Dispute Resolution Platform) available at: http://www.ecodir.org receives Community financial support, which is managed by the European Commission, Health and Consumer Protection Directorate-General. Online Confidence is a project supported by the Commission under its TEN-Telecoms programme (Directorate-General for the Information Society). Webtrader, a private international project aimed at controlling commercial sites and awarding quality labels. This project includes consumer organisations from 10 countries, 8 of them Member States (see for example http://www.budget-net.com/ webtradersite/reseau_be.html). This project includes the development of codes of conduct and the setting in place of ADR systems. It receives Community financial support which is managed by the European Commission, Enterprises Directorate-General. Work spearheaded by ECLIP (Electronic Commerce Legal Issues Platform), a consortium of five European research centres specialising in legislation on the new technologies, available at: http://www.eclip.org. This work receives the support of the European Community, which is managed by the Commission, Information Society Directorate-General, under the IST programme (Information Society Technology Programme) available at: http://www.cordis.lu/ist/home.html. European Commission’s E-confidence Forum, available at: http://econfidence.jrc.it. According to the EC Green Paper, the European Consumers’ Organisation (BEUC) and the Union of Industrial and Employers’ Confederations of Europe (UNICE) presented a proposal for a European accreditation system of confidence labels in electronic commerce, available at: http://www.beuc.org, http://www.unice.org. The first network called the European Extra-Judicial Network ‘EEJ-Net’ was officially launched on 16 October 2001. It consists in providing consumers with support and information structure by the creation of national contact points (or ‘Clearing Houses’) located in each Member State and in Iceland and Norway. See in particular, on the EEJ-Net, Commission working document SEC(2000) 405, the Council Resolution of 25 May 2000, OJ C 155, 6.6.2000, p. 1, and the Own-Initiative Resolution adopted by the European Parliament on 3 July 2001.) The second network called the ‘FIN-NET’ (Financial Services Complaints Network) was launched by the Commission on 1 February 2001 and it is a network of the competent national ADR bodies which meets the requirements of the first Commission recommendation. FIN-NET provides consumers who have problems relating to financial services (banks, insurance companies, investment services) with direct access to an ADR facility, and has already had beneficial effects. Available at: http://europa.eu.int/comm/internal_market/ en/finances/consumer/adr.htm.

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Follow-up Communication to the Green Paper on EU Consumer Protection, Brussels, 11.6.2002, COM(2002) 289 final. Forthcoming Communication on the promotion of ODR, mentioned at paragraph 40 of the Green Paper on alternative dispute resolution in civil and commercial law, European Commission, Brussels, 19.04.2002, COM (2002) 196. OECD – Guidelines for Consumer Protection in the Context of Electronic Commerce (OECD-1999), available at http://www.oecd.org/dsti/sti/it/consumer/. The OECD Report on ‘Legal Provisions related to business-to-consumer alternative dispute resolution in relation to privacy and consumer protection’ DSTI/ICCP/REG/CP(2002). The document presents a synthesis of Member Country responses to the Questionnaire on Legal Provisions related to Business-to-Consumer Alternative Dispute Resolution (ADR) in relation to Privacy and Consumer Protection. GBDe (Global Business Dialogue on e-commerce) http://www.gbde.org. TABD (Transatlantic Business Dialogue) http://www.tabd.com. TACD (Transatlantic Consumer Dialogue) http://www.tacd.org. Electronic Commerce and Consumer Protection Group: www.ecommercegroup.org/ guidelines.html. Electronic Commerce and Consumer Protection Group: www.ecommercegroup.org/ guidelines.html. See for example, M.S. Martin, ‘Keep it online: The Hague Convention and the need for online dispute resolution in international business-to-consumer e-commerce’, Boston University International Law Journal, Spring 2002, 20 BUILJ 125. E. Katsh, J. Rifkin and A. Gaitenby, ‘E-Commerce, E-Dispute, and E-Dispute Resolution: In the Shadow of eBay Law’, 15 Ohio St. J. on Disp. Resol. 705 2000, 728. The article 38, paragraph 1, of the Statute of the International Court of Justice (June 26, 1945, art. 38, para. 1, T.S. No. 993, at 30) defines an ‘international custom, as evidence of a general practice accepted as law’. By analogy with this general definition, the ‘customary cyber consumer law’ can be defined as the general practice of participants in the electronic marketplace followed constantly by them from the perspective of a compulsory conduct. E.G. Thornburg, ‘Going private: Technology, due process, and Internet Dispute Resolution’, U.C. Davis Law Review, 34 UCDLR 151, 2000. In online arbitration, the Virtual Magistrate project is one of the first experiments sponsored by the National Center for Automated Information Research (‘NCAIR’) and the Cyberspace Law Institute (‘CLI’). E. Katsh, ‘The New Frontier Online ADR Becoming a Global Priority’, 6 No. 2 Disp. Resol. Mag., Winter 2000, at 6. R.J. Ambrogi, ‘Resolving Disputes over the Web’, Legal.Online, Department, 44-MAY RESG 36, 2001. T. Schultz, ‘Online Dispute Resolution: An Overview and Selected Issues’, United Nations Economic Commission for Europe Forum on Online Dispute Resolution, Geneva, 6-7 June 2002. M.S. Martin, ‘Keep it online: The Hague Convention and the need for online dispute resolution in international business-to-consumer e-commerce’, Boston University International Law Journal, 20 BUILJ 125, Spring 2002. OECD, ‘Legal Provisions related to Business-to-Consumer Alternative Dispute Resolution (ADR) in relation to Privacy and Consumer Protection’, July 2002. The ODR schema ‘Which? Consumer Association’ available at: http://www.arbitrators.org/WebTrader/index.htm. The funding of ODR providers by traders may create doubts with regard to the impartiality of ODR procedure.

110 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69

Cyber Consumer Law and Unfair Trading Practices There are over 30 online mediation providers as for example SquareTrade; Trusted Shops; Which? Web Trader; Web Assured; WebMediate; BBBOnline; Claim Resolver; CEDR; Consensus Mediation; ECODIR; e-Mediator.co.uk; etc. Alternative disputes resolution, Global Business Dialogue on Electronic Commerce, September 26, 2000. See for example, the Mediation Room.com, http://www.themediationroom.com. E. Katsh and J. Rifkin, Online Dispute Resolution, Resolving Conflicts in Cyberspace, San Francisco, Jossey-Bass, 2001, pp. 140-142. C. Cherry Lisco, Vice President, Dispute Resolution Services, SquareTrade, ‘Case Study in Online Mediation: Resolution Across Borders’, www.squaretrade.com. L.E. Teitz, ‘Providing legal services for the middle class in cyberspace: The promise and challenge of on-line dispute resolution’, Fordham Law Review, 70 FDMLR 985, December, 2001. L.E. Teitz, ‘Providing legal services for the middle class in cyberspace: The promise and challenge of on-line dispute resolution’, Fordham Law Review, 70 FDMLR 985, December, 2001. Processing over 10,000 cases a month, SquareTrade handles a wide variety of disputes; from goods and services, to traditional commercial and property disputes (Cara Cherry Lisco Vice President, Dispute Resolution Services, SquareTrade, www.squaretrade.com). Green Paper on alternative dispute resolution in civil and commercial law, Brussels, 19.04.2002, COM (2002) 196 final, p. 6. Resolving E-commerce dispute online: asking the right questions about ADR, OECD, July 2002. B.G. Davis, ‘Building The Seamless Dispute Resolution’, Texas Wesleyan Law Review, 8 TXWLR 529 symposium 2002. S. Goldberg, E. Green and F. Sander, Dispute Resolution, Boston: Little Brown, 1985, p. 389. J. Linden, ‘Low Tech On-Line Dispute Resolution’, ADR Online Monthly, http://www.ombuds.org/center/adr2002-5.html. G.H. Friedman, ‘Alternative Dispute Resolution and Emerging Online Technologies: Challenges and Opportunities’, 19 Hastings Comm&Ent. L.J. 695, 1997. E. Katsh and J. Rifkin, Online Dispute Resolution, Resolving Conflicts in Cyberspace, San Francisco, Jossey-Bass, 2001, p. 78. J.B. Eisen, ‘Are we ready for mediation in cyberspace?’, Brigham Young University Law Review, BYULR 1305, 1998. J.B. Eisen, ‘Are we ready for mediation in cyberspace?’, Brigham Young University Law Review, BYULR 1305, 1998. W.K. Viscusi and W.A. Magat, Learning about Risk, Harvard University Press, Cambridge, 1987, p. 41. T. Schultz, ‘Online Dispute Resolution: An Overview and Selected Issues’, United Nations Economic Commission for Europe Forum on Online Dispute Resolution, Geneva, 6-7 June 2002. E.G. Thornburg, ‘Going private: Technology, due process, and Internet Dispute Resolution’, U.C. Davis Law Review, 34 UCDLR 151, 2000. H. Perritt, ‘Dispute Resolution in Cyberspace: Demand for New Forms of ADR’, 15 Ohio St. J. on Dis. Res. 675, 684, 2000. E.G. Thornburg, ‘Going private: Technology, due process, and Internet Dispute Resolution’, U.C. Davis Law Review, 34 UCDLR 151, 2000. H. Perritt, ‘Dispute Resolution in Cyberspace: Demand for New Forms of ADR’, 15 Ohio St. J. on Dis. Res. 675, 684, 2000. ‘Dispute Resolution in Electronic Commerce’, Discussion Paper, Australia Consumer Affairs Division, The Treasury, October 2001.

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Consumers International Organization, ‘Disputes in Cyberspace in 2001: Update of ODR for consumers in cross-border disputes’, available at: http://www.ombuds.org/ cyberweek2002/library/cireport.pdf. Consumers International Organization, ‘Disputes in Cyberspace in 2001: Update of ODR for consumers in cross-border disputes’, available at: http://www.ombuds.org/ cyberweek2002/library/cireport.pdf. Same example of ODR providers that offer Automated Settlement Systems are as follows: Cybersettle http://www.cybersettle.com, SettleOnline http://www.settleonline.com. SettlementOnline, Settlement Online Pilot Program Proposal, available at: http://settlementonline.com/Proposal.html. Cybersettle, Attorney Pricing, available at: http://www.cybersettle.com/ products/atty_pricing.asp. Green Paper on alternative dispute resolution in civil and commercial law, European Commission, Brussels, 19.04.2002, COM (2002) 196, p. 9. (According to the Green Paper, the Commission has already taken the initiative to harmonise the legislation of the Member States on this point in its draft Council directive on the approximation of certain laws, regulations and administrative provisions of the Member States on legal aid and other financial aspects of civil proceedings. Proposal presented on 18 January 2001, COM (2001) 13 final.) Article 16 of this draft directive stipulates that ‘Legal aid shall be granted in cases where disputes are settled via extra-judicial procedures, if the law makes provision for such procedures or if the parties to the dispute are ordered by the court to have recourse to them.’ (Draft Council directive on the approximation of certain laws, regulations and administrative provisions of the Member States on legal aid and other financial aspects of civil proceedings.) P.D. Carrington, ‘Regulating Dispute Resolution Provisions in Adhesion Contracts’, Harvard Journal on Legislation, 35 HVJL 225, 1998. M.E. Budnitz, ‘Alternative Dispute Resolution for Consumer’ on the occasion of the hearing of the US Federal Trade Commission, 2000. F.L. Miller, ‘Arbitration Clauses in Consumer Contracts: Building Barriers to Consumer Protection’, 78 Mitch B.J. 302, 1999. See for example, Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.). For example, the Electronic Commerce directive ‘does not affect the law applicable to contractual obligations relating to consumer contracts; accordingly, this Directive cannot have the result of depriving the consumer of the protection afforded to him by mandatory rules relating to contractual obligations of the law of the Member State in which he has his habitual residence.’ Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on Electronic Commerce) (OJ L 171, 17.7.2000, p. 1). According to the Rome Convention, the parties are able to select the law governing their transactions, with the exception of consumer contracts where the choice of law may not exclude the consumer of the protection of certain ‘mandatory rules’ of the law of the state of the customer’s residence. These rules include provisions about unfair terms in standard form contracts, obligations of the supplier to provide certain information, and ‘cooling-off’ periods for certain types of transactions. (1980 Rome Convention on the law applicable to contractual obligations, Official Journal C 027, 26/01/1998 pp. 0034-0046.) ‘Legal Provisions related to Business-to-Consumer Alternative Dispute Resolution (ADR) in relation to Privacy and Consumer Protection’, OECD, July 2002. Council Directive 93/13/EEC of 5 April 1993 concerning abusive clauses in contracts concluded with consumers, OJ L 95, 21.4.1993 p. 29.

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Cyber Consumer Law and Unfair Trading Practices Council Directive 93/13/EEC of 5 April 1993 concerning abusive clauses in contracts concluded with consumers, OJ L 95, 21.4.1993 p. 29. Council Directive 93/13/EEC of 5 April 1993 concerning abusive clauses in contracts concluded with consumers, OJ L 95, 21.4.1993 p. 29. Joined Cases Cases C-240-243/98, Océano Grupo Editorial SA v. Roció Murciano Quintero, 2000 E.C.R. I-4941, para. 24. J. Senderowicz, ‘Consumer Arbitration and Freedom of Contract: A Proposal to Facilitate Consumers’ Informed to Arbitration Clauses in Form Contracts’, 32 Colum. J.L. 275, 276, 1999. For example, see the terms and conditions of Amazon website. See the terms and conditions of Amazon website at: www.amazon.com. W. Krause, ‘Do you want to step outside? An overview of online alternative dispute resolution’, John Marshall Journal of Computer and Information Law, Spring 2001, 19 JMARJCIL 457. Szetela v. Discover Bank, Cal. Ct. App., 4th App. Dist., G029323, 22 April 2002. The Arbitration Rules for the Resolution of Consumer Related Disputes of 15th March 2001, http://www.adr.org/index2.1.jsp. Schultz mentions that according to recent research ‘[t]he fees for automated negotiation are usually determined on the basis of the settlement amount and split between the two parties. For a settlement amount below 20 000 USD, the fee is typically around 100 USD. The fees for assisted negotiation are often covered by annual membership or trustmark fees, or are charged on an hourly basis. The fee range is between 50 and 300 USD per party and per hour. … Fees for online mediation are usually computed on an hourly basis, and range from 50 to 250 USD per party and per hour. In the online arbitration schemes of the Chartered Institute, the fees range from approximately 15 USD for a dispute worth less than 300 USD – in the Which?WebTrader scheme to 250 USD for a dispute worth between 7500 USD and 15000 USD. (T. Schultz, ‘Online Dispute Resolution: An Overview and Selected Issues’, United Nations Economic Commission for Europe Forum on Online Dispute Resolution, Geneva, 6-7 June 2002.) Alternative Dispute Resolution & e-Confidence, by Global Business Dialogue Working Group, available at: http://mediate.com/articles/econfidence.cfm. United Nations Center for Trade Facilitation and Electronic Business (UN/CEFACT), Draft Recommendation on Online Alternative Dispute Resolution, 26 June 2002. Brower v Gateway, 246 A.D.2d 246, 676 N.Y.S.2d 569 (1st Dept. 1998). An arbitration clause in a credit card agreement prohibiting class actions over small individual claims is unconscionable and unenforceable under California common law, the California Court of Appeal, Fourth Appellate District, ruled April 22 (Szetela v. Discover Bank, Cal. Ct. App., 4th App. Dist., G029323, 4/22/02). Brower v. Gateway, 246 A.D.2d 246, 676 N.Y.S.2d 569 (1st Dept. 1998). L.E. Teitz, ‘Providing legal services for the middle class in cyberspace: The promise and challenge of on-line dispute resolution’, Fordham Law Review, 70 FDMLR 985, December, 2001. M. Philippe, ‘Where is everyone going with online dispute resolution?’ The International Business Law Journal, No. 2, 2002. For an analysis of the main principle contained by the Protocol (see Ponte L.M., ‘Boosting Consumer Confidence in E-Business: Recommendations for establishing fair and effective dispute resolution programs for B2C online transactions’, Albany Law Journal of Science and Technology, 12 ALBLJST 441, 2002). Statement of Principles of the National Consumer Disputes Advisory Committee, Consumer Due Process Protocol, April 10, 1998, http://www.adr.org. Commission Recommendation 98/257/EC of 30 March 1998 on the principles applicable to the bodies responsible for out-of-court settlement of consumers, OJ

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L/115, 17.4.1998, pp. 31-34. This Recommendation refers to binding arbitration procedures. Commission Recommendation of 4 April 2001 on the principles for out-of-court bodies involved in the consensual resolution of consumer disputes, OJ L 109, 19.4.2001, p. 56, Recommendation concerns consensual, non-binding forms of consumer dispute resolution. C.B. Silver, ‘Fair Dealing comes of Age in the Regulation of Going Private Transactions’, Journal of Corporation Law, 9 JCORPL 385, Spring, 1984. Commission Recommendation 98/257/EC of 30 March 1998 on the principles applicable to the bodies responsible for out-of-court settlement of consumers, OJ L/115, 17.4.1998, pp. 31-34 http://europa.eu.int/comm/internal_market/en/finances/ consumer/intro.htm (see also, J. Hornle, ‘Online Dispute Resolution in Business to Consumer E-commerce Transactions’, The Journal of Information, Law and Technology (JILT) 2002 (2), available at: http://elj.warwick.ac.uk/jilt/022/hornle.html). Principle 12(1) of Consumer Protocol; See also Ponte L.M., ‘Boosting Consumer Confidence in E-Business: Recommendations for establishing fair and effective dispute resolution programs for B2C online transactions’, Albany Law Journal of Science and Technology, 12 ALBLJST 441, 2002. See M. Cappelletti and Garth’s views about online redress mechanisms, in ‘Access to Justice’, Alphne Aan Den Rijn: Sijthoff, Ed.Bryant 1978, vol III, p. 519. M. Budnitz, ‘Alternative Dispute Resolution for Consumer on the occasion of the hearing of the US Federal Trade Commission’, 2000. See chapter 6 on ‘Disclosure of Online Information’. E.G. Thornburg, ‘Going private: Technology, due process, and Internet Dispute Resolution’, 34 UCDLR 151, U.C. Davis Law Review, 2000. L.M. Ponte, ‘Broadening Traditional ADR Notions of Disclosure: Special Considerations for Posting Conflict Resolution Policies and Programs on E-Business websites’, 17 OHSJDR 321, 2002. ODR is subject to recommendations issued by a number of international nongovernmental organisations whose work is being closely followed by the Commission, such as the Global Business Dialogue on e-commerce, the Transatlantic Business Dialogue and the Transatlantic Consumer Dialogue. Council Directive 93/13/EEC of 5 April 1993 concerning abusive clauses in contracts concluded with consumers, OJ L 95, 21.4.1993 p. 29. For example, OECD Council on December 9, 1999 (see text of the Guidelines at http://www.oecd.org/dsti/sti/it/consumer/prod/guidelines.htm). See chapter 3. Patterson v. ITT Consumer, Financial Corp., 18 Cal. Rptr.2d 563 (Cal. Ct. App. 1993), See also Brower v. Gateway 2000, 676 N.Y.S.2d 569 (N.Y. Sup. Ct. 1998). Patterson v. ITT Consumer, Financial Corp., 18 Cal. Rptr.2d 563 (Cal. Ct. App. 1993), See also Brower v. Gateway 2000, 676 N.Y.S.2d 569 (N.Y. Sup. Ct. 1998). ‘Dispute Resolution in Electronic Commerce’, Discussion Paper, Australia Consumer Affairs Division, The Treasury, October 2001. For a contrary opinion, see J. Reagle, ‘Agent: I don’t think it means, what you think it means’, Berkman Center Working Draft, 1999, available at http://cyber.law.harvard.edu/people/reagle/agents-19990524.html. L.E. Teitz, ‘Providing legal services for the middle class in cyberspace: The promise and challenge of on-line dispute resolution’, Fordham Law Review, 70 FDMLR 985, December, 2001.

Chapter 6

Disclosure of Online Information: From the Asymmetry of Information to the ‘Dominance of Technological Information’ INTRODUCTION The main purposes of disclosure of information in the context of the electronic market is to inform consumers about price, terms and conditions, characteristics of product and service and for purposes of ensuring that appropriate information is made available. Diametrically opposite to disclosure of information, asymmetry of information occurs when one party to a transaction has better or more information than the other party. In general it is the trader that knows more about the product or service. In the electronic market just as is the case in the traditional market, consumers encounter problems with information including not knowing what products are available for their needs, being overwhelmed by information in leaflets, not understanding complex terminology, stupefied by the content of small print and unaware of how to access comparative information on products.1 In correcting the asymmetry of information arising from the lack of disclosure of information in the electronic market, different approaches were considered by national governments. One approach was to set up self-regulatory bodies and to adapt the existing consumer laws in order to respond to the new consumer needs for protection over the Internet. A second approach was to adopt new laws (or directives) that also take into account the particularities of the electronic marketplace. A third approach which was not entirely considered consists of the need to adopt legislation grounded on the electronic market failures deriving from the technological and technical problems of consumers. Usually, when setting up legal rules, the particularities of the electronic market were considered only if they were also existent in the traditional market. The proposed Unfair Commercial Practices Directive is illustrative of this unitary approach of both off-line and online commercial practices. Some legislation was however tailored to respond to specific consumers’ needs of protection in the electronic market. Distance Marketing of the Financial Services Directive2 lays down EU common rules on the degree of information that must be supplied to consumers when financial services are provided at a distance. But even in this case, the approach shows through a unitarian vision that treats similarly consumer contracting by distance means and consumer contracting through ‘durable medium.’ It is with this drawback in mind that the chapter explores questions such

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as: Why is disclosure of online information so important for consumers in the electronic market? What are the differences between the asymmetry of information in the electronic market and traditional market? Why does disclosure of information on the websites contribute to the asymmetry of information? What are the solutions for alleviating asymmetry of information resulting from the lack of disclosure of information? Why do we need a new theory of ‘dominance of technological information?’ What is the role of this theory in enhancing our understanding of the rationale for consumer protection in the electronic market? In order to respond to these questions, the chapter starts by outlining the two-fold aspects of the disclosure of information. It explores the disclosure of information from a content perspective. It examines the current self-regulatory legal system and the specific European legislation which protect consumers against unclear disclosure of information. The chapter analyses the disclosure of information by considering its placement, proximity and its use by traders and advertisers by means of different national legal cases. It also identifies the main differences existing between the disclosure of information in press, television and text messages advertisement and respectively the disclosure of information on the Internet. It clarifies the particularities of the asymmetry of information in the electronic market. After discussing the new emerging trends of the asymmetry of information, the chapter ventures to predict the need for a new theory of the ‘dominance of technological information.’ The role of this theory is to outline a new rationale for consumer protection which supplements the two main traditional rationales for consumer protection: asymmetry of information and unequal bargaining power. 6.1 Disclosure of Online Information: Two Interpretations For the purposes of this research, the disclosure of information is approached from the perspective of its content and of its form. The disclosure of information in these chapters refers not only to material information about products and services that can be viewed by consumers when entering the trader’s website but also to commercial communications.3 In general terms, the disclosure of information in online consumer transactions refers to the obligation of traders to provide information which helps consumers to make informed decisions. The compliance of traders with the obligation of disclosing information should take into account the content of product or service information, and on the other hand, the form in which this information is presented to consumers. The content of product or service information, on which consumers may take their decision, may be insufficient or inaccurate. The failure to provide sufficient information about product or service prices, the characteristics and qualities of the products and services, may represent a serious failure of the electronic marketplace to the same extent as the inaccuracy of information.4 As remarked by Rothchild, ‘[f]or many purchasing decisions, consumers can gather the necessary information on their own, through inspection of items offered for sale or by making small, experimental purchases.’5 In the electronic marketplace, the inspection product will be much more difficult than in the traditional marketplace as consumers will not

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have the possibility to examine or test online products and services. In a stricter sense, disclosure of information refers to the placement and the proximity of disclosures, the use of hyperlinks, frames, pop-up screens and interstitials to make disclosures in banner ads.6 When disclosure of information is not presented clearly and conspicuously on the website, consumers risk not perceiving or understanding its meaning. 6.2 Disclosure of Information – From a Content Perspective The disclosure of information may refer to the information on the vendor’s identity – allowing the possibility for the consumer to be aware of the identity of the person; on the product or service – the consumer will need to receive a description of the product or service; on all terms and conditions of sale including: the price, delivery prices, customs duties, shipping charges, geographic limitation, time of delivery; on the method of payment and any cost implications of using different options; on cancellation and complaint procedures – the consumer should have the possibility to cancel and to communicate their complaints and to know beforehand how these will be dealt with; on the processing of personal data – the consumer should be aware if their personal information is being collected and for what purpose. The seller should inform the consumer about his policy on the use of personal data; on the payment security system – the consumer should be informed if the information provided in the selling process is well protected etc. The respect of the obligation of disclosing information by online traders is important since on the one hand, cyberspace represents a medium which allows a quick delivery of information and on the other hand, online traders lack any personal contact with consumers. 6.2.1

Specific rules of European law

Three Directives are relevant for consumers’ information in respect of the electronic marketplace: the Electronic Commerce Directive,7 the Distance Selling Directive8 and the Distance Marketing of Financial Services Directive.9 The Electronic Commerce Directive deals with information society services such as online newspapers and specialised news services including financial information; online selling of various products including books, computer hardware and software, pharmaceuticals; the online provision of financial services including online banking, online investment. The Electronic Commerce Directive provides specific rules relating to electronic commerce that are intended to ensure that the contract concluded between consumers and sellers by electronic means is based on a free and valid consent. Article 5 ensures that transparency rules are applicable with regard to a service provider’s identity and place of establishment. The information to be provided refers to the name of the service provider, his geographic address, details permitting his rapid contact, and relevant entries in trade or similar registers. In addition, the information provided by seller to consumer must be clear, comprehensive and unambiguous at all stages of the online purchase process leading to the conclusion of the contract. This information must be supplied prior to the order being placed by the recipient of the service. The information duty includes all

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the different stages for the formation of contracts, whether or not the concluded contract will be filed by the service provider and will be accessible, the technical means for identifying and correcting input errors prior to the placing of the order and the languages offered for the conclusion of the contract. Furthermore, the service provider must also indicate any relevant codes of conduct to which he subscribes and information on how these codes can be consulted electronically. These requirements of better information have been transposed almost literally by most of the EU Member States and the EEA countries. Only Ireland introduced additional information by which a service provider shall provide details of how individuals can register their choice about receiving or not receiving unsolicited commercial communications.10 Whilst the Electronic Commerce Directive sets up transparency and information special requirements for the electronic market in European law, a new layer of protection for consumers will be added by the proposed Directive on Unfair Commercial Practices,11 the proposed Regulation on Enforcement Cooperation12 and the proposed Regulation on Sales Promotions,13 Whilst high legal standards are now in place, it seems however that in practice there is plenty of room for achieving compliance for Internet service providers.14 The Distance Selling Directive contains specific rules relating to conclusion of distance contract between consumers and business. These rules are designed to protect consumers who buy goods and services by mail order, phone, fax and Internet. Two provisions are relevant concerning the obligation to provide information to the consumer: prior information and written confirmation of information. According to these rules,15 the consumer shall be provided with information relating to the identity of the supplier, the main characteristics of the goods or services, the price of the goods or services, including all taxes, delivery costs, where appropriate, the arrangements for payment, delivery or performance, the existence of a right of withdrawal, the cost of using long distance communication, the period for which the offer or the price remains valid and the minimum duration of the contract in the case of contracts for the supply of products or services to be performed permanently or recurrently. These provisions therefore require businesses engaged in e-commerce to provide sufficient information on terms, conditions of sale and costs of a transaction in order to enable consumers to make an informed choice. Just like the electronic commerce rules, the distance selling rules stipulate that this information should be clear, comprehensive and easily accessible with regard to the principles of good faith in commercial transactions. This means that the information should be provided in such a way as to give consumers an adequate opportunity to review their decision before entering into the transaction and they can retain a record of the agreement. Moreover, the consumer must receive written confirmation, or confirmation in another durable medium, setting out his rights and obligations prior to the agreement. This information should set out the time of delivery where goods not for delivery to third parties are concerned.16 Distance Marketing of the Financial Services Directive17 includes EU common rules on the information that must be supplied to consumers when financial services are provided at a distance. The Directive complements the Distance Selling Directive which does not apply to financial services. Whilst the Electronic

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Commerce Directive applies to a broad range of commercial activities, the Distance Marketing Directive applies to contracts where the supplier makes exclusive use of one or more means of distance communication (e.g. telephone, internet, fax or mail). One of its main features is an obligation to provide consumers with comprehensive information before a contract is concluded. Thus, Article 3 of the Directive states core principles for the disclosure of information prior to the conclusion of the distance contract which refers to: (1) the supplier including the identity and the main business of the supplier, the geographical address; the identity of the representative of the supplier; the trade register in which the supplier is entered and his registration number or an equivalent means of identification in that register; where the supplier’s activity is subject to an authorisation scheme, the particulars of the relevant supervisory authority; (2) the financial service including a description of the main characteristics of the financial service; the total price to be paid, including all related fees, charges and expenses, the basis for the calculation of the price enabling the consumer to verify it; notice of special risks; notice of the possibility that other taxes and/or costs may exist that are not paid via the supplier or imposed by him; the period for which the information provided is valid; the arrangements for payment and for performance; any specific additional cost; (3) the distance contract including information on the right of withdrawal where the right of withdrawal exists, its duration and the conditions for exercising it, the minimum duration of the distance contract in the case of financial services to be performed permanently or recurrently; practical instructions for exercising the right of withdrawal; the contractual clause relating to the law applicable to the contract etc; (4) redress including information about the existence of any out-of-court complaint and redress mechanism; the existence of guarantee funds or other compensation arrangements, not covered by Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit guarantee schemes and Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor compensation schemes; Article 3 states that the information shall be provided in ‘good time’ before the consumer is bound by any distance contract or offer. In addition, Article 4(2) states that Member States may impose, or maintain, more stringent prior information requirements. The obligation of information is further detailed in Article 5 (1) which requires the supplier to provide all the terms and conditions as well as the information as described by Articles 3 and 4 ‘on paper or other “durable medium” available and accessible to the consumer in good time before the consumer is bound by any offer.’18 This obligation can be fulfilled immediately after the conclusion of the contract, if the contract has been concluded at the consumer’s request using a means of distance communication which does not enable providing the contractual terms and conditions and the information in conformity with Article 5 (1).

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According to Recital 20, ‘durable medium’ include in particular floppy discs, CDROMs, DVDs and the hard drive of the consumer’s computer on which the electronic mail is stored, but they do not include Internet websites unless they fulfil the criteria contained in the definition of a durable medium. These criteria refer to the possibility of the consumer storing information addressed personally to him in a way accessible for future reference for a period of time adequate for the purposes of the information and which allows the unchanged reproduction of the information stored.19 Therefore, one might wonder whether the terms and conditions presented on a website can be defined as a ‘durable medium.’ Some views considered that downloading a copy of the terms and conditions will not be a durable medium since ‘it leaves it to the consumer to decide whether or not to record that information.’20 For me this would be a too simplified vision of the ‘durable medium.’ In my view, the main criterion for considering the ‘durable medium’ consists in the fact that both consumer and trader use the same information channel by electronic means. Downloading terms and conditions from a website is not the same as press or television advertising which include unidirectional information. Downloading terms and conditions from a website falls under the criteria of the ‘durable medium’ for the following reasons: (1) the act of downloading allows retention through printing or saving of terms and conditions by means of the consumer’s computer; (2) the terms and conditions presented on the website are directed to him in an accessible way. It is not compulsory that the online information targets consumers by creating the impression that the consumer was ‘specially selected’ to receive the information; (3) the act of downloading is equivalent to a request for information since the data stored on the floppy or on the hard drive of the consumer’s computer can be considered as a stock of information. Accepting a restrictive interpretation of the act of downloading terms and conditions presented on a website may lead to different levels of standard protection. A consumer who contracts by telephone will be protected by the Directive despite the fact that in general the Directive did not establish a specific direction for the transmission of the information from the consumer to trader or from the trader to consumer. The request of information might well be the result of a consumer’s personal telephone call. Contrary to this situation, a consumer who concludes a contract guided by terms and conditions presented by a website, will not be covered by the Directive. Such a legal gap might incite rogue traders to distort the behaviour of an average consumer. After displaying favourable terms and conditions on his website and providing means to allow the consumer to contract electronically, a trader will probably want to change these terms and conditions without being likely to fall under the provisions of the Distance Marketing of the Financial Services Directive. The rules on disclosure of information are very important for protecting consumers who would like to contract financial services transactions across borders involving different intermediaries and languages and multiple commercial practices. In terms of impact, the implementation of the Directive in the national law will raise

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many questions with regard to the interpretation of notion ‘intermediary,’ ‘financial advice,’ ‘country of origin’ and in general as regards the possibility of Member States to impose additional information requirements beyond the core requirements established by the Directive. The European core principles for the disclosure of information prior to the conclusion of the distance contract synthesise an enhanced understanding of consumer expectations with regard to information matters. Whilst this legislation can reduce the asymmetry of information, the existence of the global electronic market is reducing the effectiveness of the European rules since imposing compliance on foreign companies with that legislation is difficult. As will be noted in the following section, the global electronic market is lessening the effectiveness of self-regulation models since the standards of consumer protection vary from one national market to another. 6.2.2 Self-regulatory models When approaching the issue of disclosure of information, several questions might arise: To what extent are traders required to provide disclosure to consumers? To what extent does the lack of disclosure of information enable consumers to complain about the practices of foreign traders in the electronic marketplace? The self-regulatory models elaborated as a result of private21 or international organizations’ initiatives provide the answer to the first question related to the obligation of traders to provide information to consumers. For example, the Code of Online Business Practices established by BBOnLine can be considered as an important model which set up a guide of five principles aimed at governing the B2C commercial relationships as follows: (1) truthful and accurate communications in online advertising, marketing and use of technology; (2) accurate disclosure about the business, the goods or services available for sale, and the transaction itself; (3) adoption of appropriate practices to treat customer information with care; (4) adoption of customer satisfaction policies; and (5) use of special care when dealing with children under the age of thirteen.22 Furthermore, the OECD provides a selfregulatory model at international level. Referring to the principle of providing information thorough online disclosures, the OECD Guidelines on Consumer Protection for Electronic Commerce23 provide the following recommendations with regard to the provision of information in online consumer transactions: • Businesses engaged in electronic commerce with consumers should provide accurate, clear and easily accessible information about themselves. This information is considered as sufficient if it allows, a minimum of: i) Identification of the business – including the legal name of the business and the name under which the business trades; the principal geographic address for the business; e-mail address or other electronic means of contact, or telephone number; and, where applicable, an address for registration purposes and any relevant government registration or licence numbers; ii) Prompt, easy and effective consumer communication with the business; iii) Appropriate and effective resolution of disputes; iv) Service of legal process; and v) Location of the business and its principals by law enforcement and regulatory officials.

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Where a business publicises its membership in any relevant self-regulatory scheme, business association, dispute resolution organisation or other certification body, the business should provide consumers with appropriate contact details and an easy method of verifying that membership and of accessing the relevant codes and practices of the certification body. • Businesses engaged in electronic commerce with consumers should provide accurate and easily accessible information describing the goods or services offered, sufficient to enable consumers to make an informed decision about whether to enter into the transaction and in a manner that makes it possible for consumers to maintain an adequate record of such information. • Businesses engaged in electronic commerce should provide sufficient information about the terms, conditions and costs associated with a transaction to enable consumers to make an informed decision about whether to enter into the transaction. Such information should be clear, accurate, easily accessible, and provided in a manner that gives consumers an adequate opportunity for review before entering into the transaction. OECD Guidelines also provide that where more than one language is available to conduct a transaction, businesses should make available in those same languages all information necessary for consumers to make an informed decision about the transaction. Businesses should provide consumers with a clear and full text of the relevant terms and conditions of the transaction in a manner that makes it possible for consumers to access and maintain an adequate record of such information. Where applicable and appropriate given the transaction, such information should include the following: i) an itemisation of total costs collected and/or imposed by the business; ii) notice of the existence of other routinely applicable costs to the consumer that are not collected and/or imposed by the business; iii) terms of delivery or performance; iv) terms, conditions, and methods of payment; v) restrictions, limitations or conditions of purchase, such as parental/guardian approval requirements, geographic or time restrictions; vi) instructions for proper use including safety and health care warnings; vii) information relating to available after-sales service; viii) details of and conditions related to withdrawal, termination, return, exchange, cancellation and/or refund policy information; and ix) available warranties and guarantees. All information that refers to costs should indicate the applicable currency. To avoid ambiguity concerning the consumer’s intent to make a purchase, the consumer should be able, before concluding the purchase, to identify precisely the goods or services he or she wishes to purchase; identify and correct any errors or modify the order; express an informed and deliberate consent to the purchase; and retain a complete and accurate record of the transaction. The consumer should be able to cancel the transaction before concluding the purchase. Consumers should be provided with easy-to-use, secure payment mechanisms and information on the level of security such mechanisms afford. The OECD rules with regard to the provision of information are exemplary by their precision. However, the old recurrent question of the legal effect of the ‘soft rules’ seems to be true more than ever. In order to correct the asymmetries of information, the OECD model provides rules for best practices rather than for binding rules. This international model has

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been implemented at national level by a new round of self-regulatory models. For example, in Australia, the Guidelines for Consumer Protection in the Context of Electronic Commerce (the ‘Guidelines’) form the basis for the Australian Ecommerce Best Practice Model Building Consumer Sovereignty in Electronic Commerce: A Best Practice Model for Business.24 New Zealand also developed a model code for consumer protection inspired by the OECD Guidelines. In the same vein, the Japan Fair Trade Commission (JFTC) has published a statement in which it spells out, specifically referring to the Guidelines, how businesses engaged in B2C electronic commerce should disclose material information via the Internet to protect consumers’ interests.25 In order to prevent misleading information, the FTC staff issued a working paper, ‘Dot Com Disclosures: Information about Online Advertising,’26 intended to provide guidance to businesses on how the Commission’s rules and guide apply to advertising and sales on the Internet. The purpose of this guideline is to promote clear and conspicuous online disclosures. Self-regulatory models are confined to a geographical area whilst the cyber consumers operate in a global electronic market. Due to the fact that they are regionally confined, these models are not successful in enhancing consumer confidence in the electronic marketplace. As suggested by the Committee on Consumer Policy of the OECD, there are differences in the manner in which member countries have implemented these Guidelines.27 Various national substantive consumer laws in OECD countries enhance these differences. Differences between the different national rules may have impact when considering the legal value of the duty of providing information. Whilst, in certain legal systems, the obligation of information in the post contractual stage of the B2C commercial relationship (information about means of obtaining warranty service and correcting errors, providing notice on terms for ongoing services and opportunity to cancel), might be very important, in other legal systems, it can be relatively important. Differences between consumer protection systems should not be seen in a simplified way; they are justified by different cultures and various consumer needs. Furthermore, at their turn, the consumers’ needs of protection are depending on their personal expectations as well as on their experience in the electronic marketplace. Formulating viable proposals able to cope with the paradox of coexistence between a variety of legal national rules and a proclaimed common legal framework for disclosure of information is no doubt a daunting task. Finally, the answer to the question launched at the beginning of this section: ‘To what extent the lack of disclosure of information enables consumers to complain about the practices of foreign businesses in the electronic marketplace?’ would require exploring a common enforcement strategy in order to ensure that consumers enjoy a common level of consumer protection in the electronic marketplace. 6.3 Disclosure of Information – From a Perspective Form The analysis of disclosure of information from a perspective form refers to the placement and the proximity of disclosures, the use of hyperlinks, frames, pop-up screens and interstitials to make disclosures in banner ads.28 For example, when the placement and the proximity of disclosure do not incite consumers to click on a

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hyperlink or a button to confirm their understanding of the disclosure, there is a risk that the consumers will not gather the necessary information to help them to make appropriate purchasing decisions. That demonstrates that in the electronic marketplace, the failure of information depends not only on the content but also on the form in which it is presented. There are many similarities in the manner of presenting clear information on the off-line and online market. Significant differences come out when they concern unclear or inconspicuous information. For example, in press advertising, the disclosure of information might be placed in the border area, in fine print or in small-type footnotes. The UK Advertising Standard Authority (ASA) in its investigation of an advertisement for ‘100 Hour Free Internet Trial,’29 published in a magazine by AOL, stated that the advert including a footnote printed in small size, was misleading. The footnote was presented vertically on the left-hand side of the page and stating that the trial was open for one month only and that monthly subscription applied afterwards. In television advertising, the Australian Full Federal Court upheld the decision that Medical Benefits Fund Health Insurance30 has used misleading advertising television by using disclaimers that contained fine print. It was considered that even an astute and observant viewer may not have sufficient time to peruse the fine print with sufficient care to notice the qualification and it is not unlikely that even a reasonably careful viewer might have been misled.31 In Internet advertising, there is physically sufficient time to read all the information but of course it is difficult to say whether and to what extent unclear information is considered by a consumer. If in television advertising there is no real opportunity to review the information presented only for a short time in order for a viewer to realise that something of importance has been said, in the electronic market, the consumer may often review the information. While in the television medium, a marketing company will interpret the disclosure of information as ‘lifestyle’ advertising or as an irrelevant element in making the final decision of the consumer, in the electronic market, the information even under its instantaneous aspect will be seriously taken into consideration for determining its misleading character. In the area of mobile phones, text messages cannot be viewed properly and this particularity is essential when classing information as misleading; In its adjudication of 26th May 2004 against Orange Personal Communications Services Ltd, the UK ASA considered that although the defendant had made the terms and conditions available on their website, those conditions were not made clear in the text message and considered that the presentation of the conditions through that medium was not sufficient to ensure recipients had a full understanding of the promotion.32 In the electronic market, the information should be disclosed next to the advertised price stated the US Federal Trade Commission (FTC) which also considered that advertisers should not use pop-up windows or hyperlinks to other electronic pages to display key cost information. A hyperlink should be prominent, near the claim it is qualifying, easily noticeable, and lead directly to the qualifying information. Vague labels like ‘Terms and Conditions’ are not enough to direct consumers to important restrictions or qualifications.

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Disclosure of information is regulated by following several criteria set up by the US Federal Trade Commission (FTC)33 in its Guidelines on Internet Advertising. 6.3.1 Placement of the disclosure in ad and its proximity to the claim it is qualifying When evaluating the proximity and the placement of a disclosure in the context of a web page, the traders should consider that the disclosure is more likely to be effective if consumers view the claim and disclosure together on the same screen.34 For example, when a disclosure is not placed next to the product or service, consumers might have difficulties in accessing the necessary information. Sometimes a disclosure may not appear on the same screen, as the product or service information or the disclosure may be too long to be placed next to the product or service to which it makes reference. In this case, traders should indicate to consumers that they would need to scroll and to avoid formats that discourage scrolling. Traders can also include links that lead to important information. In this situation, they should make clear that the link is related to a claim and indicate the kind of information that consumers will find by clicking through.35 6.3.2 Prominence of the disclosure According to the US Federal Trade Commission (FTC) Guidelines on Internet Advertising, the trader or advertiser should display disclosures prominently so they are noticeable to consumers. In Value America, Inc., C-3976,36 Office Depot, Inc., C-397737 and BUY.Com, Inc., C-3978,38 the US FTC considered that the three retailers failed to disclose information which enables consumers to determine the real, out-of-pocket costs of so called ‘free’ and ‘low-cost’ computer systems. In these cases, the information was disclosed in major newspapers, magazines, television infomercials, radio, and online in banner ads and on the companies’ websites. The Commission states that ‘In the case of Internet advertising, these disclosures can be made through hyperlinks, if those hyperlinks are prominent and adequately labelled to identify the information to which they are linking. For example, a hyperlink to a disclosure about possible telephone charges must be labelled: You May Have to Pay Significant Telephone Charges to Use the Internet Service. Click Here.’ In the computer and telecommunication sector, many companies advertise ‘free’ or low-cost computers. These offers are usually accompanied by important discount when the consumer accepts a long-term contract for Internet service. In many of these offers, disclosure of information about the real costs is presented in unnoticeable or unclear fine print. For example, in Hewlett-Packard Co, File No. 002-322039 and Microsoft Corp. File No. 002-3331,40 the US FTC complaint stated that a disclosure at the bottom stating ‘Modem Required. Sold separately,’ was inconspicuous since it was displayed in extremely fine print of approximately four point type, (e.g., ) or six point type (e.g., This is six point type). Finally, information disclosed in fine-print footnotes or video superscripts which do not allow a consumer to receive clear and conspicuous information are current practices in both off-line and online transactions. The first problem with footnotes This is four point type

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is that although they are required, there are no rules for clarity or conciseness. Some standards were formulated in France where the use of footnotes in advertising is accepted by Bureau de Verification de la Publicité41 under two cumulative conditions: to clarify the information contained in an advertisement and to be presented in the same font size as the size of the main statement. 6.3.3 Whether other elements of the ad distract attention from the disclosure The asymmetries of information can result from elements like graphics, sound, text or even hyperlinks that lead to other pages or sites which could mean that the disclosure of information will not be noticed, read or understood it. So, if the visual is dynamic (like video), traders should be sure the disclosure appears for a sufficient duration for a consumer to notice, read and understand it.42 Furthermore, it is possible that consumers may not have speakers, appropriate software, or appliances with audio capabilities, so they will not hear the claim or the disclosure. That is why disclosures triggered by a claim or other information on web pages should not be placed solely in an audio clip. 6.3.4 Whether the ad is so lengthy that the disclaimer needs to be repeated Consumer access to web pages can be made through the homepage or by linking to that page via a search engine or another website. As consumers usually will not read all the words on a website, it might be useful to repeat information in order to ensure that consumers will notice and understand it. As US FTC Guidelines outline, the disclosure need not be repeated so often that consumers would ignore it and that it would clutter the ad. 6.3.5 Whether the language of the disclosure is understandable to the intended audience The positive impact of disclosures depends on the fact that disclosures are made in a clear language that is understood by consumers. In order to avoid the risk of information asymmetries, traders and advertisers should use clear language and syntax and avoid legal or technical jargon. Also, incorporating extraneous material into the disclosure also may diminish the message that must be conveyed to consumers. Compliance with the criteria described above are not influenced by the defendant’s intent of detrimental effect on the consumer’s behaviour, it depends on how a consumer actually understands disclosures within the context of the entire advertisement. To enhance credibility, traders and advertisers need to focus not only on highly visual and colourful information but also on disclosure of information containing adequate explanatory text or important terms and conditions. This is because a judge when considering the misleading or deceptive advertisement will take into account the impression left by advertising on a consumer and not necessarily the material appearance of the offending advertising.

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6.4 Asymmetry of Information When consumers cannot perfectly assess the quality of a product or a service, the consumers’ choice over the quality to purchase – at any given price – may not be appropriate for their real needs. As remarked by Larabie-LeSieur: ‘[w]here incomplete or false information in relation to a product or service is fed into the market, market performance is adversely affected. Distortion of the marketplace harms both consumers and honest competitors. Consumers are precluded from making informed purchasing decisions and firms are denied the ability to compete on a level playing field.’43 Asymmetry of information is based on the economic models set up in 1970s by George Akerlof, Michael Spence and Joseph E. Stiglitz who in 2001 received the Nobel Prize for their analyses of markets with asymmetric information. George Akerlof44 demonstrated when a seller has more information than buyers about the product quality they can contract into an adverse selection of low-quality products. Michael Spence identified the auto-regulation of the market when the better informed take costly actions in an attempt to improve on their market outcome by credibly transmitting information to the poorly informed.45 Joseph Stiglitz explained that poorly informed agents extract information from the better informed, ‘such as the screening performed by insurance companies dividing customers into risk classes by offering a menu of contracts where higher deductibles can be exchanged for significantly lower premiums.’ 46 Application of the asymmetry of information in the traditional market focuses also on the model of ‘price dispersion’ process. According to ‘price dispersion’ models formulated by Salop and Stiglitz47 and Varian,48 some consumers will be informed of all prices and other consumers will know only one price and they will not look for other prices. In accordance with these models, assuming that the price is the main determining factor: ‘the informed consumers purchase from the retailer with the lowest price whilst, the uninformed consumers will purchase if the price they are aware of is lower than their reservation value. The main consequence is that some stores charge low prices in an attempt to attract informed consumers while other stores charge high prices to sell to uninformed consumers.’49 It is difficult to measure the impact of these theories on consumer protection since significant consumer protection legislation started to be enacted in 1960. If these theories did not set up a basis for the first rationales for consumer protection, it is supposed that they explained and opened up the path for a better consumer protection. It is also difficult to assess the value of these models in the electronic market where factors which play essential roles in consumer decisions are not only quality and prices, but also information about the legal terms and conditions, information about the company. In the case of asymmetry of information generated by the disparity of information between consumer and trader with regard to the legal terms and conditions, traders will hold back that information until after payment so as not to drive away customers.50 Since a large quantity of information is accessible in a short time in the electronic market, the asymmetry of information is related to the quality of information about the company. In the electronic market it is difficult for a consumer to determine in

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advance whether a trader is likely to be unscrupulous. There are imperfections in the ability of consumers to investigate a company’s purchasing policy. Asymmetry of information in the electronic market can be explained by the ineffectiveness to take costly actions against the trader due to the low value of transactions. As Perritt remarks: ‘[…] consumers victimized by unscrupulous or incompetent sellers are less likely to devote necessary resources to investigating and prosecuting violations of legal rights. This creates an economic environment in which the costs of consumer abuse are diffuse while all the benefits are concentrated.’51 Moreover, the asymmetry of information is illustrated by the lack of information about the nature of a company’s privacy policies, since the company typically knows far more than the consumer ‘about how the private information will be used by the company. (…)’52 Other aspects of asymmetry of information are relating to the difficulties of consumers in knowing if they will be protected against unauthorised or fraudulent use of their credit card; lack of information for consumers about shipping costs, about the costs incurred when returning a product to the business, lack of information or unclear information about the conditions of cancellation or cooling off, warranties and charge back mechanisms etc. Finally, these examples demonstrate that even if the same market failures are present in whether a consumer makes purchasing decisions based on a direct mail piece, an electronic mail message, or a web-based sales presentation; is looking at a paper-and-ink catalogue, or an online version,53 in the online environment, the asymmetry of information is more exacerbated than in the off-line environment.54 6.5 From the Asymmetry of Information to ‘Dominance of Technological Information’ According to the Oxford Dictionary, ‘dominance’ means ‘power and influence over others.’ The usual concept of ‘dominance’ has military connotations. According to an article displayed on the Information Warfare55 website, the ‘dominance’ represents ‘the degree of information superiority that allows the possessor to use information systems and capabilities to achieve an operational advantage in a conflict or to control the situation in operations other than war while denying those capabilities to the adversary.’56 In the electronic market, a possible definition of the ‘dominance of technological information’ is relating to the behaviour of those traders that influence the structure of the market by using technological methods different from those which are employed for a normal competition and which control the consumers’ behaviours and thus impair the fair competition in the electronic market. Undoubtedly, the analysis of ‘dominance’ would require a study in detail of the economic aspects of the electronic marketplace. Approaching ‘dominance’ from an economic perspective goes beyond of the purpose of our study. Our aim is to set up a basis for a future theory of dominance of technological information, to provide some clarification for the above definition, to explain the role and the manner in which this theory supplements the theory of the asymmetry of information.

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It can be inferred from the above definition that the ‘dominance of technological information’ is relating to (1) the behaviours of the traders; (2) the use of technological methods different from those used for a normal competition; and (3) the detrimental impact for the normal process of competition in the electronic marketplace. (1) The ‘dominance of technological information’ is the result of the traders’ behaviours which cannot be directly controlled by the buyers. There is empirical evidence on the technological ability of traders (a) to control vast amounts of data from and about the consumers who visit their websites without informing consumers about the collection and use of data. There are also practices that (b) control consumer access to the Internet. For example, in the case of SNC AOL Bertelsman Online France v. UFC Que Choisir,57 AOL by not being able to provide Internet access to all subscribers, preferred to install technical means (timers)58 which forced the user to automatic logoffs after a set time. Despite the fact that the AOL’s advert stated ‘unlimited access’ to the Internet, AOL used restrictive commercial practices that finally lead to unwanted disconnections and complaints from consumers. Whilst the Versailles Court of Appeal59 and the Nanterre Court60 stated that ‘unlimited access’ entitles a subscriber to stay connected to the Internet for as long as they wanted, the Courts did not pronounce on the legitimacy of AOL installing timers which control consumers within the context of ‘unlimited access’ to the Internet. However, it is clear that someone can undoubtedly qualify this practice as a form of ‘dominance of technological information.’ (c) There are also practices such as price discrimination or predatory behaviours that allow business to easily change products and services prices seen by consumers over the Internet. Odlyzko noticed that ‘[s]ellers are likely to rely to an even greater extent on techniques such as bundling that will allow them to extract more consumer surplus and also to conceal the extent of price discrimination.’61 These practices are confusing for consumers since as explained by Anderson ‘[p]roducts and services are sold both singly and in combinations on a great variety of different contracts. New technology is making “bundling” and “tying” strategies ever easier, while IT goods and services markets are developing so as to make them ever more attractive to vendors.’62 Finally, there is also another category of practices that even if it does not involve the use of technological means, is characterised by a dominant technological aspect due to the medium in which it is perpetrating. It concerns (d) traders’ practices that do not provide simultaneously and in good time a complete and clear product description, including function and use; the conditions and terms of contract (such as terms of delivery, guarantee and payment conditions plus delivery quantities). Braucher outlined this practice by explaining that: ‘effective disclosure of important terms is essential to prevent deception and make possible a working, competitive marketplace in which customers can shop before they make a choice of a product or service. In the information age, disclosure is cheaper than ever and could be more effective, too, using the interactive, vivid

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communication that is possible online. Ironically, however, some of the biggest players in the “information economy” are trying to create a legal culture in which it is permissible to hold back important information about transactions until after customers pay.’63 (2) An important element of the ‘dominance of technological information’ definition refers to the recourse of technological methods different from those used for a normal competition. Usually, these methods consist in (a) inciting consumers to click on sophisticated banner advertisements.64 For example, in its investigation against ‘888 Casino’,65 the UK ASA objected to a banner advertisement, on BT’s website, showing a dialogue box that stated ‘downloading ...’ and featured flashing lights that showed progress and a cancel button. When people clicked on the advertisement they were taken to the advertisers’ website. The advertisers argued that ‘the Internet was a transient medium, they had to create attractive and attention grabbing advertisements for them to be commercially viable.’ The ASA considered that users were unlikely to understand that pressing cancel took them to the advertisers’ website and that the advertisement was misleading and was likely to encourage people to press cancel. Another method consists in (b) asking registration for accessing information. As explained by a group a group called Consumers Against Supermarket Privacy Invasion and Numbering (CASPIAN), asking for registration for accessing online newspapers has become widespread but the experience shows that consumers need to be on the watch for questionable practices which lead to solicitations on multiple channels.66 (3) As it results from the above definition, the ‘dominance of technological information’ is detrimental for the normal process of competition in the electronic marketplace. Detrimental effect might be potential and it can lead to a degradation of the market dynamics by excluding other competitors and by obliging the consumers to pay more than it costs to produce. Finally, the electronic market is characterised not only by asymmetry of information and unequal bargaining power but also by the ‘dominance of technological information’ according to which traders are endowed with technological abilities to control much better information than consumers. This control is decisive in allowing the consumer to access important information or in influencing the consumers’ behaviour. The role of setting up a theory of ‘dominance of technological information’ might help in establishing unified legal framework that protects consumers against the impact of technological interface of the electronic market. Legislation should not disregard the technological aspects of the electronic market which risk leading to a non reliable electronic market. CONCLUSIONS In this chapter, we have discussed the disclosure of information from the perspective of its content and its placement. It was noticed that in the EU electronic market, the disclosure of online information is mandatory and that the EU Directives containing

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provisions on the disclosure of information are now designed under the model of ‘maximum harmonisation’ not allowing the Member States the possibility of adopting provisions other than those already laid down in the Directive. At the European Union level, there are no regulatory bodies which have enforcement responsibility for action taken in the EU electronic market in respect of either type of infringement, including the responsibility for the coordination of action of all national enforcers. There is a lack of coherence in coordination between varying national regulatory or self-regulatory bodies and regulations. In the US electronic market, the FTC guidelines prescribing clear and conspicuous information represents a one-size fits all solution for all type of online disclosure of information which encompass online disclosure, hyperlinks and online banner ads. In the global electronic market, despite the EU mandatory law and the US effectiveness in enforcing federal rules, there is still need for improvement in disclosing information to consumers on websites. The key for clear and conspicuous information is not depending on the length or the detailed character of the information prescribed by the law but rather on what type of information should be provided into an easy-to-access and user-friendly layout. Clear and conspicuous information shall respond not only to the special legal requirements but also to the professional standards which require that the information provided be readily understood – in an area where public understanding is different from that of the telecommunications industry. The chapter also approached the disclosure of information from the perspective of the asymmetry of information and of the ‘dominance of technological information.’ Despite the current regulatory system composed of a patchwork of EU legislations, national laws and self-regulatory guidelines developed by international organisations, the asymmetry of information still remains in online consumer transactions. Furthermore, we insist on exacerbating the asymmetry of information, coupled with a ‘dominance of the technological information.’ Based on the imbalance of technological information between traders and consumers in the electronic market, this new theory raises new issues for consumer protection. NOTES 1 2 3

FSA (Financial Services Authority) ‘Informing Consumers: a review of product information at the point of sale’, § 42, November 2000. The Directive was implemented on 9th October 2004. Art 2 (f) of the ‘Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the internal market’ defines commercial communications as: ‘any form of communication designed to promote, directly or indirectly, the goods, services or image of a company, organisation or person pursuing a commercial, industrial or craft activity or exercising a regulated profession. The following do not in themselves constitute commercial communications: information allowing direct access to the activity of the company, organisation or person, in particular a domain name or an electronic-mail address, communications relating to the goods, services or image of the company, organisation or person compiled in an independent manner, particularly when this is without financial consideration.’

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Cyber Consumer Law and Unfair Trading Practices The inaccuracy of the information is analysed in the section on misleading advertising. J. Rothchild, ‘Protecting the Digital Consumer: the Limits of cyberspace utopianism’, 74 INLJ 893, Indiana Law Journal, Summer, 1999. See the US, Federal Trade Commission Staff Issues Guidelines on Internet Advertising, available at: www.keylaw.com/FTC/Rules/ftc0005001.htm (May 2000). Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on electronic commerce) (OJ L 171, 17.7.2000, p. 1) The implementation date for Electronic Commerce Directive was August 2002. Directive 97/7/EC of the European Parliament and the Council on the protection of consumer interests in respect of distance contracts, OJ L144 of 04.06.97, p19.23 COM (97) 353 final. Directive 2002/65/EC of the European Parliament and the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC, EN OJ L 271/16 of 9.10.2002. See Regulations, 2003 (S.I. No. 68 of 2003), which give effect in Ireland to certain provisions of the Electronic Commerce Directive. COM(2003) 356 final, 18.6.2003. COM(2003) 443 final, 18.7.2003. COM(2001) 546 final, 2.10.2001, amended proposal COM(2002) 585 final, 25.10.2002. See also a study carried out by the European Consumer Centres with regard to the implementation of the information requirements ‘Realities of the European online marketplace’, available at http://www.iia.ie/downloads/eec_report.pdf; see also a study of the VZBV (Verbraucherzentrale Bundesverband – German association of consumer organisations) between October 2002 and February 2003, available at: http://www.vzbv.de/home/start/index.php?page=themen&bereichs_id=5&themen_id=2 0&mit_id=164&task=mit. See, Article 4 of the Directive 97/7/EC of the European Parliament and the Council on the protection of consumer interests in respect of distance contracts, OJ L144 of 04.06.97, p19.23 COM (97) 353 final. See, Article 5. The Directive was implemented on 9th October 2004. Article 5(1). See Art 2(f). W. Yonge quoting some views on ‘Distance marketing of financial services’, Fountain Court Chambers, (http://www.fountaincourt.co.uk/publications/pr_.nservices_article1.htm) in ‘The Distance Marketing of Consumer Financial Services Directive’, April, 2003, Henry Stewart Publications 1479–1846 (2003) Vol. 8, 1 79–92 Journal of Financial Services Marketing. Electronic Commerce and Consumer Protection Group / Guidelines for Merchant-toConsumer Transaction, available at: http://www.ecommercegroup.org/guidelines.htm; ECOM (Japan) Guidelines for Transactions between Virtual Merchants and Consumers available at: http://www.ecom.or.jp/ecom_e/report/full/wg14/guidline1.0.htm; UNICE General Principles and specific Guidelines for Generic Codes of Practice for the sale of Goods and Services to Customers on the Internet available at: http://www.unice.org/C125679E00338D8B/AllDocumentsSearchEng/E67336523B4E9 3 FF; The Canadian Principles of Consumer Protection for Electronic Commerce available at: http://strategis.ic.gc.ca/SSG/ca01180e.html etc. OECD Recommendation concerning the guidelines governing the protection of consumers in the context of electronic commerce, available at: http://www.oecd.org. See

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also, the OECD Report ‘Consumers in the Online Marketplace: The OECD Guidelines Three Years Later’, Report by the Committee on Consumer Policy on the Guidelines for Consumer Protection in the Context of Electronic Commerce, 3 February 2003. The report summarises the results of implementation activities in OECD countries and includes in an Appendix a table with selected activities organised on a country-bycountry basis. OECD Recommendation concerning the guidelines governing the protection of consumers in the context of electronic commerce, available at: http://www.oecd.org. See also, the OECD Report ‘Consumers in the Online Marketplace: The OECD Guidelines Three Years Later’, Report by the Committee on Consumer Policy on the Guidelines for Consumer Protection in the Context of Electronic Commerce, 3 February 2003. The report summarises the results of implementation activities in OECD countries and includes in an Appendix a table with selected activities organised on a country-bycountry basis. The Guidelines and the Australian E-commerce Best Practice Model are both promoted through a new website. (http://www.ecommerce.treasury.gov.au). OECD, ‘Consumers in the Online Marketplace: The OECD Guidelines Three Years Later’, Report by the Committee on Consumer Policy on the Guidelines for Consumer Protection in the Context of Electronic Commerce, 3 February 2003, available at www.oecd.org. FTC Rules and Guides Online ‘Dot Com Disclosures: Information about Online Advertising’, May 3, 2000, available at http://www.ftc.gov. OECD, ‘Consumers in the Online Marketplace: The OECD Guidelines Three Years Later’, Report by the Committee on Consumer Policy on the Guidelines for Consumer Protection in the Context of Electronic Commerce, 3 February 2003, available at www.oecd.org. See the US Federal Trade Commission Staff Issues Guidelines on Internet Advertising, available at: www.keylaw.com/FTC/Rules/ftc0005001.htm. See the adjudication of the Advertising Standard Authority from 12 December 2001 available at: http://www.asa.org. Medical Benefits Fund of Australia Limited v. Cassidy; John Bevins Pty Limited v. Cassidy [2003] FCAFC 289 (16 December 2003) available at: http://www.austlii.edu.au/ au/cases/cth/FCAFC/toc-M.html. Medical Benefits Fund of Australia Limited v. Cassidy; John Bevins Pty Limited v. Cassidy [2003] FCAFC 289 (16 December 2003) available at: http://www.austlii.edu.au/ au/cases/cth/FCAFC/toc-M.html. Promotional text message stated ‘Orange have been trying to contact you to give you 1 free month of wap, 10 free text and 20 photo messages. Reply YES to accept. Terms apply’: www.orange.co.uk/ow. See the US Federal Trade Commission Staff Issues ‘Guidelines on Internet Advertising’, available at: www.keylaw.com/FTC/Rules/ftc0005001.htm. In addition to the rules on the disclosure of information, the US FTC established Guidelines For Proximity and Placement of Online Disclosures – Hyperlinking and Guidelines for Proximity and Placement of Online Banner Ads. The US FTC mention that hyperlinks may be useful to tell consumers about less critical terms and conditions of an offer, especially when the information may be extensive, to direct the consumer to the cancellation terms and additional Internet connection costs of many Internet rebate offers. When using a hyperlinked disclosure, advertisers should clearly label the hyperlink so it shows the importance, nature and relevance of the information to which it links (for example, ‘Early cancellation of Internet Service may result in substantial penalties. Click Here’). See the US Federal Trade Commission Staff Issues Guidelines on Internet Advertising, available at: www.keylaw.com/FTC/Rules/ftc0005001.htm.

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35 S.P. Tapia, ‘Advertising and consumer protection under FTC guidelines’, Practising Law Institute Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series, 712 PLI/Pat 297, July, 2002. 36 Value America, Inc., C-3976, http://www.ftc.gov/opa/2000/06/comp629.htm. 37 Office Depot, Inc., C-3977, available at: http://www.ftc.gov/opa/2000/06/comp629.htm. 38 BUY.Com, Inc, C-3978, available at: http://www.ftc.gov/opa/2000/06/comp629.htm. 39 Hewlett-Packard Co, File No. 002-3220, available at: http://www.ftc.gov/os/ 2001/04/index.htm#3. 40 Microsoft Corp. File No. 002-3331, available at: http://www.ftc.gov/os/ 2001/04/index.htm#3. 41 BVP, Advertising Verification Bureau (Bureau de Vérification de la Publicité), is an advertising self-regulation organisation in France. For more information see: http://www.bvp.org. 42 S.P. Tapia, ‘Advertising and consumer protection under FTC guidelines’, Practising Law Institute Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series, 712 PLI/Pat 297, July, 2002. 43 R. Larabie-LeSieur, Deputy Director of Investigation and Research Competition Bureau, Industry Canada, ‘Misleading Advertising on the Internet: Competition Law Enforcement in the Electronic Marketplace’, Remarks to the Canadian Corporate Shareholder Services Association, September 19, 1996. 44 ‘Markets with Asymmetric Information’, October 10, 2001, Information Report available at: http://nobelprize.org/index.html; see also G. Akerlof, ‘The Market for Lemons: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics 84, 1970, pp. 488–500. 45 M. Spence, ‘Job Market Signaling’, Quarterly Journal of Economics 87, 1973, pp. 355–74. 46 ‘Markets with Asymmetric Information’, October 10, 2001, Information Report available at: http://nobelprize.org/index.html, See also Rothschild M.J. Stiglitz, ‘Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information’, Quarterly Journal of Economics 90, 1976, 629–49. Stiglitz, J., ‘Economics’, 2nd edition, 1997, W.W. Norton (New York). 47 S. Salop, J.E. Stiglitz, ‘The Theory of Sales: A Simple Model of Equilibrium Price Dispersion with Identical Agents’, 1982, The American Economic Review. 72:5 (December), pp. 1121–30. 48 H.R. Varian, ‘A Model of Sales’, The American Economic Review, Vol. 70, Issue 4 (September) 1980, pp. 651–9. 49 E. Brynjolfsson, M.D. Smith, ‘Frictionless Commerce? A Comparison of Internet and Conventional Retailers’, May 1999, available at http://ecommerce.mit.edu/papers/ friction, p. 1. 50 J. Braucher, ‘Delayed Disclosure in consumer e-commerce as an unfair and deceptive practice’, 46 Wayne Law Review, 1805, 2000. 51 H.H. Perritt, ‘Dispute Resolution in Cyberspace: Demand for New Forms of ADR’, 15 Ohio St. J. on Dis. Res. 675, 684, 2000. 52 P.P. Swire, ‘Markets, Self-Regulation, and Government Enforcement in the Protection of Personal Information’, available at http://www.osu.edu/units/law/swire.htm, 1996. 53 J. Rothchild, ‘Protecting the Digital Consumer: the Limits of Cyberspace Utopianism’, 74 INLJ 893, Indiana Law Journal, Summer, 1999. 54 J. Rothchild, ‘Protecting the Digital Consumer: the Limits of Cyberspace Utopianism’, 74 INLJ 893, Indiana Law Journal, Summer, 1999. Furthermore, as the Australian Competition and Consumer Commission judiciously remarked that ‘[a]symmetry of information is likely to be a greater problem for transactions that do not involve face to face transactions because consumers cannot see the products they are purchasing or the

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set-up of the retailer or service provider, or check for features like dispute resolution mechanisms, money back guarantees and privacy safeguards. (See ‘Australian Competition & Consumer Commission, The Global Enforcement Challenge’, 5–6 (1997).) The Information Warfare Site is an online resource that aims to stimulate debate on a variety of issues involving information security, information operations, computer network operations, homeland security and more, information available at: http://www.iwar.org.uk/index.htm. ‘Information dominance vs Information superiority’, 1 April 1997, available at: http://www.iwar.org.uk/iwar/resources/info-dominance/issue-paper.htm. CA Versailles, 14th chamber, 14 mars 2001, TGI Nanterre, Ordonnance of 20 February 2001, Register Number: 01/00381, minute: REF/2001/466, available at: http://www.juritel.com. UFC Que Choisir v. SNC AOL Bertelsman Online France. See also Christine Riefa, Spotlight on French Cyberlaw: ISP headaches and evolving IP rights, EBL September 2001, Vol. 3, No. 8, pp. 9-12. Timers allow modulating the length of sessions insuring a rotation amongst users at busy periods. CA Versailles, 21 November 2001, SNC AOL Bertelsman Online France v. SA Liberty Surf and SA TOnline, EBL April 2002, Vol. 4, No. 3, p. 15. TGI Nanterre, Ordonnance of 20 February 2001, Register Number: 01/00381, minute: REF/2001/466, available at: http://www.juritel.com. Andrew Odlyzko, ‘Privacy, Economics, and Price Discrimination on the Internet’, article available at: http://www.dtc.umn.edu/»odlyzko, Revised version, July 27, 2003. R. Anderson, ‘Cryptology and competition policy – Issues with “trusted computing”’, 2003, available at: http://www.cpppe.umd.edu/rhsmith3/agenda.html. J. Braucher, ‘Delayed Disclosure in consumer e-commerce as an unfair and deceptive practice’, 46 Wayne Law Review, 1805, 2000. See UK ASA adjudication of 10th May 2000 in Lineone; also Freemoney Ltd, 14th March 2001. See adjudication of 9th January 2002, 888 Casino. Consumers Against Supermarket Privacy Invasion and Numbering (CASPIAN), ‘Online newspaper registrations can lead to more than articles’, available at: http://www.nocards.org/news/index.shtml#registration.

Chapter 7

Online Misleading Advertising INTRODUCTION In the traditional market, the advertising of products and services entail on the one side, the dissemination of information through different traditional media – TV advertising, magazine advertising or other advertising media and on the other side, the sale stage involves office infrastructure and personnel. In comparison with traditional advertising, Internet advertising reduces the different transaction stages consisting in search of information, contact with the company and the selling process by immediate contact with consumers. The efficiency of this medium is reflected by a recent study of the New Media Group of PricewaterhouseCoopers showing that Internet advertising surpassed a couple of traditional media sectors and follows magazines, by a considerable margin.1 Furthermore, a forecast by Jupiter Research predicts that online advertising will more than double over the next five years and it will grow from $6.6 billion in 2003 to $16.1 billion in 2009.2 Several reasons are given for the effectiveness of the online market: the consumers exercise their choice of products and services almost instantly, spend less time making their buying decisions and expect efficient customer service.3 This can be translated in pressure on Internet advertising pricing by sliding down the cost of the traditional mass market advertising.4 In this case, the respect of similar rules by all the participants in the electronic market represents a need for allowing the electronic market to develop into a fair market. If some businesses would make use of misleading or aggressive commercial practices in order to gain profits or retain market share, the impact of misleading advertising would have important adverse economic consequences on both consumers and businesses. When the advertising channel is used by the companies to provide useful, complete and accurate information, advertising allows consumers to take advantage of the low prices and high quality products and services. Contrary, when businesses would display (1) misleading advertising on the websites; and (2) send unsolicited e-mail advertising (that can be deceptive or that do not include opt-out provision for future messages or which come from false ‘from’ addresses), there is a clear infringement of the fair competitive market. In this context, the question that arises is about the ability of an internal regulation to regulate the advertising market. Some commentators joined the inability of State regulation with the progress of information technology. Such considerations are expressed by Bradley who observes that ‘[r]ules that are designed to reflect current market practices may not adapt well to future developments in business or in technology, even if they are designed to be flexible.’5 There are also some views considering that the State fails as a regulator because it cannot know regulatory circumstances in sufficient detail to regulate well.6 Yet others argue that

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devolving regulation from the State may be appropriate when the context is technical, novel and still developing.7 In my view, the real question is about the inappropriateness and the controversial legitimacy of a national regulation to control conflicting situations in territories which fall under the control of another State. The validation of this assumption requires providing answers to the following questions: Which are the obstacles to truthful online advertising, and how can they be overcome? Could the law really deal with the ineffectiveness of the electronic market resulting from misleading advertising? Is the present legal framework sufficient clear and simple for businesses? Would the current legal framework for consumer protection be an effective solution in cross-border situations? Why is so difficult to enforce legislation in the electronic market place? In order to provide solutions to the issue of misleading advertising and of spam, the chapter examines the level of coherence and efficiency of the current legal framework for protecting consumers against misleading advertising as well as the manner in which the provisions on online misleading adverting are enforced in the electronic market. Section 7.1 discusses the issue of the asymmetry of information arising from online misleading advertising and unsolicited commercial communications. It examines the new ways through which misleading advertising increases the asymmetry of information and the particularities of online misleading advertising. On the basis of this analysis, section 7.2 provides a systematised picture on the legal rules in the area of misleading advertising and of unsolicited commercial communications at the EU and US level. Section 7.3 outlines the most relevant institutional aspects of the enforcement of the online misleading advertising and its interrelation with the self-regulation and globalisation of the electronic market. 7.1 Online Misleading Advertising – Rationale for Consumer Protection Online In the electronic market, as a result of online misleading advertising, many welfare losses can occur as a result of market failure caused by the asymmetry of information between consumers and advertisers. Compliance costs with the legislation are not negligible. Despite the fact that advertisers spend financial resources to comply with the regulatory systems and national governments allocate funds for regulatory and institutional enforcement, consumers still incur concern about online misleading adverting. Why is so difficult to use advertising as an effective channel of communication for truthful and effective information for consumers? Online advertising is different from other type of advertising. To synthesise the characteristics of online advertising, Bradley suggests that web publishing allows a large variety of audience; readers of material on the web read a screen of information at a time, and cannot always develop a sense of the full document they are reading from the outset. Web publishers also tend to use hyperlinks, which is an attractive feature of web-published documents, allowing readers to pursue subjects that interest them. The Internet is more interactive than other media: investors can participate in electronic message boards, and in chat sessions. Much of the

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informational content available on the Internet is the same as that available offline.8 The Internet is also a useful medium for the provision of timely information about breaking financial news. Bradley noticed that investors can read analyses of the market, of trading strategies, and of individual issuers and investments online. In addition, investors can now access online information about trading prices for securities without paying for that information.9 In comparison with the prolific environment which empower ordinary consumers, the capacity for consumers to make informed decisions is predominantly worse than in the traditional marketplace. This capacity is affected by the lessened possibility for a consumer to check an advertisement placed online. The classical imbalance of information between advertiser and consumer is enhanced by (1) the technological and crossborder electronic market and (2) by the use of unsolicited commercial communications. 7.1.1 Technological and cross-border electronic advertising Misleading advertising is aimed to provide the consumer with information that a good or service has sponsorship, approval, performance characteristics, accessories, ingredients, quantities, components, uses or benefits that it does not have.10 It is the representation that any goods or services are of a particular standard, quality, grade, style or model that it is not.11 These forms of misleading advertising are generated by the difficulty for consumers to physically verify the products or services ordered via the Internet. Whilst an advertisement in a traditional paper presents a static aspect, in the electronic market it is usually interactive. In order to take advantage of an advertised ‘good deal,’ the consumer will be incited to exercise their preferences and choices in a few minutes and so will not be able to check the accuracy of the information. If in a previous chapter on online dispute resolution we have discussed the imbalance of technological knowledge between the providers of online dispute services and consumers, in the case of online advertising, we notice an imbalance of ‘evidence based’ approach between advertisers and consumers. ‘Evidence based’ approach means a practical or observational assessment by a consumer of products or services that allow sufficient evidence to establish the validity of an online advertising. Certainly one might consider that ‘evidence based’ approach is equivalent of substantiation. The two concepts might be similar. The difference consists in the fact that while the substantiation is objective and it is based on objective compilation of the scientific evidence about product or services, ‘evidence based’ approach is designed subjectively by considering the capacity of a consumer of verifying if the products correspond to his first personal expectations. A consumer who books a hotel online would try to search for evidence about the hotel services via other consumers who already booked the hotel. Sometimes, search engines may display consumers’ comments about the quality of services in different hotels that advertise online. Thus, ‘evidence based’ approach requires for the advertisers of hotels to set up a new standard of providing information based on the consumer’s previous experience. Unfortunately, many hotels do not have an ethical or business incentive to abide by common practices or self-regulatory principles and do not take profit from repeat business or referrals from satisfied customers.

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Whilst the Internet may provide consumers with access to up-to-date, easily searchable information about companies’ performance history,12 the information about a company may often not be accurate. For example, I recently contacted a company specialising in translation services located not very far from my office. The company, which had opened its doors several months earlier, was very small, managed by two young persons. Wanting to obtain further information on the company’s performance, I looked for information via the Internet. To my surprise, the company website, in its desire to attract foreign clients, mentioned having over 30 years’ experience and being located in over 20 countries with more than 300 experts worldwide. Certainly someone might consider that the fact that the branch (office) is small does not necessarily mean that the claims made on the website are untrue or misleading. However, a company which states that ‘it is located in over 20 countries with more than 300 experts world-wide,’ would certainly exercise a considerable influence on the consumer in making his decision. This is why it is very important for this company to substantiate its statement by providing contact information for each alleged country. Otherwise, the company risks being accused of misleading commercial practices. These examples demonstrate that the electronic marketplace creates a favourable environment for online misleading advertising. Furthermore, as suggested by Dethloff: ‘[w]hereas in traditional media, such as print or broadcasting, the design of advertisements is merely aimed at keeping consumers switched on, advertising in data networks generally has to be designed in such a way that it is actively sought after by users. This constitutes a new challenge for advertisers: they have to provide special incentives for Internet users to make them download an advertising page.’13 Due to the fact that there is no control of advertising, these special incentives may mislead consumers. Although the advertising will contain an address and telephone number, it is probable that the company will disappear before even a law enforcement agency will have time to investigate the misleading character of the respective communication. Asymmetries of information have increased effects in cross-border electronic transactions where the consumer lacks access to counterbalancing information and where there are new and complex products or technological services. The Internet increases the usual difficulties that law enforcers face in cross-border marketing. Fraudulent marketers can set up shop cheaply and easily and can readily communicate with their victims in foreign countries. A marketer in one country might use a service provider in another to put up a home page on which false claims are made about the safety of its product. Consumers around the world can access the page, and the law violations might differ depending upon the country in which the consumer accesses the information.14 In addition to this uncertainty, the combined aspects of online advertising create the risk for the promotion of techniques through which offers relating to the goods or services are not clearly identifiable as such by the consumer.15 These techniques may use ‘metatags,’16 ‘mouseover text,’17 and hyperlinks,18 in placing labels certifying the respect of codes or false trust marks and can easily mislead consumers, in banner advertising19 etc.

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7.1.2 Unsolicited commercial communications The use of e-mail represents a new form of direct marketing which allows marketers to send promotional literature to a large number of recipients at a low cost. This form of direct marketing is particularly effective because consumers can be targeted much more precisely according to particular criteria.20 When marketing e-mails are sent without the consent of a consumer, we can talk about unsolicited commercial communications (UCC). UCC can be defined as the e-mail sent without the consent of the addressee and without any attempt at targeting on recipients who are likely to be interested in its contents. UCC has as a result annoyance for consumers, wasted time and resources, bulk volume handling problems for Internet Service Providers and is highly offensive to consumers. UCC is a source of extreme frustration for the majority of consumers, they receive financial offers most closely followed by product sales from unknown sellers, pornographic emails, quick schemes and prescription drug offers. The receipt of unsolicited commercial electronic mail continues to place a heavy burden on consumers since they cannot refuse to accept such mail or incur costs for the its storage, spend time accessing, reviewing, and discarding such mail etc. As noticed by TACD, the growth in unsolicited commercial electronic mail imposes significant monetary costs on providers of Internet access services, businesses, and educational and nonprofit institutions that carry and receive such mail, as there is a finite volume of mail that such providers, businesses, and institutions can handle without further investment in infrastructure. Unsolicited commercial electronic mail includes misleading information in the messages’ subject lines in order to induce the recipients to view the messages. Moreover, while some senders of commercial electronic mail messages provide simple and reliable ways for recipients to reject (or ‘opt-out’ of) receipt of commercial electronic mail from such senders in the future, other senders provide no such ‘opt-out’ mechanism, or refuse to honour the requests of recipients not to receive electronic mail from such senders in the future, or both.21 The risk of UCC for consumers consists in the increased possibility for a contract to be formed through e-mail contacts. That is also because consumers have varying degrees of reaction to unsolicited commercial communications which are deceptive and coming from unknown advertisers.22 It is questionable if the rapid growth and abuse of unsolicited commercial electronic mail will be solved by legislation. However, while the development of technological filtering methods is not expected to be a magical solution, it will complement the need for effective legislation. 7.2 The Current Legal Framework Online marketing is an important channel of communication for business worldwide. However, the efficiency of the current legal framework is questionable since the Internet is not regulated by a unique authority and the control of enacting legislation is fragmentised between different national organisations. The aim of this section is to provide a systematised picture on the rules existing in the area of misleading advertising and of unsolicited commercial

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communications and to clarify some of the differences or similarities existing between EU and the US legislation in these areas. 7.2.1 European/US rules on online misleading advertising At present there is no standard definition of online advertising. In Europe, the legal framework on misleading advertising is composed of a patchwork of Directives. In the United States, online advertising is subject to regulation from a variety of sources, including federal and state regulatory agencies, and private sector bodies. As in Europe, in the US there is not a separate body of law to deal specifically with this new and revolutionary medium.23 The principles applicable in the traditional market apply also for online misleading advertising. 7.2.1.1 European Rules In order to harmonise the national rules on commercial practices with a view to eliminating legal obstacles to the functioning of the internal market, the European Commission proposed a Directive on Unfair Commercial Practices. According to Article 6 and 7 of the proposed Directive, commercial practices may mislead either through action or omission, and this division is reflected in the structure of these articles. They include the current provisions of the misleading advertising Directive and apply them to other commercial practices, including those after sale. These provisions reproduce the provisions of the existing misleading advertising Directive with the additions necessary to achieve full harmonisation. For example, it will be misleading to deceive consumers about the results to be expected from the product, such as weight loss, hair re-growth or enhanced performance. The proposal provides a short list of misleading practices which are prohibited throughout the European Union which includes claiming to be a signatory to a code of conduct when the trader is not; ‘bait advertising’ scams (advertising a product as a special offer without actually having it in stock, or having only a token stock of the product); stating that a product can legally be sold when it cannot; materially misrepresenting the risk to the consumer or his family if the consumer does not purchase the product; describing a product as ‘gratis,’ ‘free,’ ‘without charge’ or similar if the consumer has to pay anything other than the unavoidable cost of responding and collecting or paying for delivery. The proposed Directive is not interconnected with the Electronic Communications and Privacy Directive which regulate unsolicited commercial communication. Since the definition of ‘commercial practice’ provided by the Unfair Commercial Practices explicitly includes commercial communication and advertising, it is expected that unsolicited commercial communications would not be covered by the principle of mutual recognition but rather by the principle of full harmonisation which states that as soon as traders comply with the provisions of the directive they do so not just in their own national context but on EU-level. The same principle might be available for the EU Directive on Electronic Commerce which defines ‘commercial communication’ as ‘any form of communication designed to promote, directly or indirectly, the goods, services or image of a company, organisation or person pursuing a commercial, industrial or craft activity or

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exercising a regulated profession.’24 The term ‘commercial communications’ covers all forms of advertising, direct marketing, sponsorship, sales promotions and public relations promoting products and services.25 The directive requires that commercial communications should comply at least with the transparency criteria such as: they shall be clearly identifiable as advertising and the conditions for promotional offers, competitions or games shall be clearly identifiable, easily accessible and be presented clearly and unambiguously.26 Furthermore, unsolicited e-mails must be clearly identifiable immediately upon receipt, and those sending them must respect the wish of those who register not to receive such e-mails.27 It can be inferred from this brief overview of the acquis in the area of misleading advertising, that there is a need for a comprehensive explanation on the relation between the proposed Directive on Unfair Commercial Practices and the implementation of the Electronic Communications and Privacy. The adoption of principle of full harmonisation by the proposed Directive on Unfair Commercial Practices following political agreement and abandonment of mutual recognition represents without any doubts a step forward that contributes to the efficiency of the electronic market. It also alleviates the self-regulation differences existing between different legal systems. 7.2.1.2 US Rules There are many similarities between the content of the legislation on misleading advertising in EU and the US. The main differences relate to the system of enforcement of this legislation. Before approaching this issue, it is useful to outline the main provisions in the area of misleading advertising. The FTC Act’s prohibition on ‘unfair or deceptive acts or practices’ includes advertising claims, marketing and promotional activities, and sales practices in general. Under Section 5 of the FTC Act, the Federal Trade Commission is allowed to act in the interest of all consumers to prevent deceptive and unfair acts or practices. The Commission has determined that a representation, omission or practice is deceptive if it is likely to ‘mislead the consumer acting reasonably in the circumstances, to the consumer’s detriment.’28 According to the Commission, the information material is an essential element in the formation of the consumer’s decision whether to buy or use a product. This information may refer to the cost of the product or service, to its purpose, safety, efficiency, durability, performance, warranties or quality.29 Furthermore, in considering the deceptive characteristic of an advertisement, which targets vulnerable consumers (children, the elderly, or the terminally ill), the Commission evaluates the effect of the practice on a reasonable member of that group rather than the effect on consumers as a whole.30 The FTC Act, 15 U.S.C. §45(n) and the FTC Policy Statement on Unfairness provides that an advertisement or business practice is unfair if it causes or is likely to cause ‘substantial injury to consumers’ (such as monetary loss or unwarranted health or safety risks), which is ‘not reasonably avoidable by consumers themselves’ and not ‘outweighed by countervailing benefits to consumers or to competition.’31 The Commission is authorised to act through civil actions filed by its own attorneys in federal district court, as well as through administrative cease and desist actions.32

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According to the FTC policy statement, online advertising claims must also be substantiated.33 An advertisement is deceptive and unfair if not substantiated.34 Traders are responsible for unsubstantiated advertising, especially when they concern health and safety, slimming products, financial services or the performance of products and services. Furthermore, advertising agencies or website designers and catalogue marketers may be liable ‘for making or disseminating deceptive representations if they participate in the preparation or distribution of the advertising, or know about the deceptive claims.’35 On the basis of legal cases36 and of the FTC policy statements37 in the area of misleading advertising, Hertz argues that all express or implied objective claims within it must have at least the advertised level of substantiation (e.g., nine out of ten doctors recommend, studies show, etc.). Absent an express or implied level of support, all claims must have at least a ‘reasonable level of support.’ (…) ‘The type of evidence necessary to provide a “reasonable level of support” depends upon several factors including: the type of claim [e.g., safety or health related], the product [e.g., food, drug or potentially hazardous product], the consequences of a false claim [e.g., injury to person or property], the benefits of a truthful claim, the cost of developing substantiation for the claim, and the amount of substantiation experts in the field believe is reasonable.’38 Another federal provision related to the misleading advertising is included in Section 43(a) of the Lanham Act39 which prohibits ‘any false or misleading description...or representation of fact, which is likely to cause confusion ... as to the origin, sponsorship or approval of ... [one person’s] goods, services or commercial activities by another person.’40 Furthermore, it prohibits ‘any false or misleading description ... or representation of fact ... in commercial advertising or promotion [which] misrepresents the nature, characteristics, qualities or geographic origin of his or her or another person’s goods, services or commercial activities.’41 According to these dispositions and different from Section 5 of the FTC Act, ‘enforcement is not restricted to the Commission; a claim can be brought by any person who believes that he or she is likely to be damaged.’42 However, the drawback of the EU legislation consists in the lack of concerted effort among EU members and countries worldwide to ensure that the Internet remains an effective means by which legitimate advertising can be communicated. In this sense, the International Chamber of Commerce (ICC) formulated several codes of practice, including the International Code of Advertising Practice,43 the International Code of Sales Promotion, and the ICC International Code of Practice on Direct Marketing. Despite their international vocation and their prescribing character, these Codes remain at the good willing of traders and advertisers without a means of effective enforcement. 7.2.2 European/US rules on unsolicited commercial communications Many States have enacted legislation aimed at reducing unsolicited commercial electronic mail, but which is characterized by different standards and requirements. There is no one single legal definition for unsolicited commercial communications. In Australia, unsolicited commercial communications represent a communication that could not reasonably be assumed to be wanted or expected by a recipient.

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(Working definition, Australian National Office for the Information Economy (NOIE), 2002.) In France, unsolicited commercial communications represent an illicit collection of personal data used in a massive commercial mailing operation (National Commission for Computer and Liberties, CNIL). If the regulation of unsolicited commercial communications finally results in a unifying legal framework, it will lead to the elaboration of effective solutions that do not construct on fragmentised legal concepts. The European Union and the United States are characterised by two opposing methods of regulating unsolicited commercial communications. 7.2.2.1 European Rules According to Article 13 of the Privacy and Electronic Communications Directive,44 Member States shall prohibit the sending of unsolicited commercial communications by fax or e-mail or other electronic messaging systems such as SMS and MMS unless the prior consent of the addressee has been obtained (opt-in system). The system is mandatory for any e-mail, SMS or fax addressed to natural persons for direct marketing. Article 13(4) of the Directive prohibits direct marketing messages by e-mail or SMS which conceal or disguise the identity of the sender on whose behalf the communication is made, or without a valid address to which the recipient may send a request that such communications should be ceased. After the implementation of the Directive 2002/58/EC on privacy and electronic communications, it is expected that problems associated with the increasing number of UCC will be solved. However while the Directive applies to all communications sent from or received on a public network within the EU, it would be difficult to enforce outside the EU. At practical level, even in the EU, the enforcement of the legislation against spam might be debatable since an unsolicited commercial communication may not contain an address and may not be identifiable by a geographical address. 7.2.2.2 US Rules According to the Can-Spam Act45 which went into effect in January 2004, an advertiser who sends commercial communications must notify that these communications are commercial in nature; it should allow an opt-out mechanism by which a recipient can choose not to receive other commercial communications and a valid postal address. By contrast with the EU legislation, Can-Spam Act advances an opt-out approach to unsolicited commercial electronic mail, allowing it to be sent and shifting the burden to addressees to object to future messages. The respect of legislation is generally enforced through state agencies. Can-Spam legislation is an exception to this general rule. The most interesting aspect of the Can-Spam legislation is relating to its enforcement which allows the Internet service providers (ISP) to take legal action in place of those who directly receive unsolicited commercial communications. Since the private right of action is particularly difficult to exercise by the consumers for injuries such as unsolicited commercial communications, the legislator preferred that enforcement is done by the ISP who exercises the technologic control power and

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who are the biggest sufferers of spam in terms of economic costs. ISP protects themselves from the voluminous unsolicited commercial communications by alleging breach of contract and statutory violations. For example, in America Online, Inc v Nat. Health Care Discount, Inc, 121 F. Supp.2d 1255 (N.D. Iowa 2000),46 the National Health Care Discount’s contract e-mailers were liable to ISP America Online under the Computer Fraud and Abuse Act and the theory of trespass of chattels for sending unsolicited commercial communications. According to the Directive on Unfair Commercial Practices, a claim for unfair commercial practices for unsolicited commercial communications should not increase the plaintiff’s burden of proof. The burden of proof is reversed in the case of a trader who makes a factual claim about a product, which he is unable to substantiate. The purpose of the reversal of the burden of proof and of legal presumptions ought also to extend to any arbitration proceedings that may be laid down in a code of conduct, in order to make the code genuinely competitive with the court and administrative proceedings laid down as the normal means of recourse. By contrast, in the US, the philosophy behind the Can-Spam legislation is guided not by the concern for the exercise of a private statutory right of action for consumers but rather by practical aspects such as the disparity between the costs of litigations and unquantifiable measures of the UCC. Levelling the balance of power between the main enforcer FTC and the ISP should help to maintain accurate monitoring that protect their interests along with those of consumers. The US and EU laws on spam differ significantly in other respects. For example, whilst in Europe according to the proposed Directive on Unfair Commercial Practices, an advertiser will be able to base a defence on professional diligence, in the US, it is not possible to act under a diligence standard. Many questions still require answering in practice with regard to how the legal relationship between online service providers and advertisers should be characterised? What are the liabilities and responsibilities of each party? Under which circumstances, if at all, should online service providers be held liable for advertisers’ deceptive practices? 7.3 The Enforcement of the Legislation In this section, we will approach the enforcement of the legislation from two perspectives. First, from an institutional perspective of the national consumer enforcement bodies and consumer associations that seek injunctions actions before the Court. 7.3.1 Institutional aspects According to the Injunctions Directive,47 the entities able to stop the infringement of European consumer law are interpreted as including any body or organisation which, being properly constituted according to the law of a Member State, has a legitimate interest in ensuring that the protection of the consumer is respected. In practice, most member countries enforce consumer protection legislation via self-regulatory bodies. For example, in the UK, the British Codes of Advertising and Sales Promotion Codes are written and enforced by the Committee of Advertising

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Practice (CAP)48 which is composed of representatives from 22 trade bodies representing all sectors of the advertising industry (advertisers and agencies, direct marketing, sales promotion, and media). If an advertisement infringes legal, decent, honest and truthful standards, the Advertising Standards Authority (ASA) can require marketers to amend or withdraw it. Non-compliance can be followed by a number of sanctions that includes adverse publicity and peer pressure. The ASA also has the power to refer cases of misleading advertising to the Office of Fair Trading (OFT) for legal action under the Control of Misleading Advertisements Regulations 1988 (as amended).49 These advise that an advertisement is misleading if: (a) it is likely to deceive those who see it and (b) as a result of that deception, consumers are likely to alter their economic behaviour or (c) for the reasons given in (a) and (b), it injures or is likely to injure a competitor of the person whose interests the advertisement promotes. These Regulations do not allow the Director General of Fair Trading to seek compensation or other redress on behalf of complainants. However, they provide the opportunity for the Director General of Fair Trading to introduce a court injunction prohibiting the further publication of a misleading advertisement. The role of Director General is complementary to that of the ASA which is in charge of complaints about misleading advertising as well as to the local trading standards departments.50 At the level of institutional US self-regulatory system, the Council of Better Business Bureaus’ Online Service Centre is an initiative intended to halt online misleading advertising in the United States. The Council has promulgated the Code of Advertising of the Council of Better Business Bureaus.51 Within the framework of the dispute resolution system offered by BBBs,52 consumers can file complaints against fraudulent and misleading advertising. Companies that apply the BBB Code are authorised to use the label ‘BBBOnLine’ seal in their online advertising. The National Advertising Division (the ‘NAD’) of the Council of Better Business Bureaus is responsible for implementing the BBB Advertising Code. The proceedings are instituted on their own or by a complaint from competitors or consumers. The refusal of a marketer to modify or stop misleading advertising will allow the NAD to refer the case to the Federal Trade Commission. NAD has issued several decisions concerning online advertising. For example, in Furman Foods, Inc. at the complaint of a competitor, the NAD considered that online advertising displayed by Furman Foods, Inc. created consumer confusion. The online advertising claimed the use of ‘fresh’ tomatoes in its canned tomato and vegetable products. Furman was obliged to modify the online advertising by distinguishing between those products that contain fresh-packed tomatoes and those that do not.53 The US institutional model might be useful when looking for an institutional model for the European Union. Nevertheless, as suggested by Reich, the ‘US experience shows that, even though the concept of an independent regulatory agency is well established, substantial limitations on its powers through congressional oversight and judicial review are unavoidable.’54 7.3.2 Enforcement, self-regulation and globalisation The two factors that influence the enforcement of the legislation in the electronic market and on which we are focusing in this section are self-regulation and

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globalisation of the electronic market. The focus on enforcement arises from the need to ensure the effectiveness for consumer protection legislation in the electronic market. However, the enforcement might be difficult in the context of selfregulation framework which dominates the Internet. K. Smith notices that selfregulation is a form of decentring movement from state centric ‘command and control’ to other non-state actors.55 Preventing such a decentring movement to diminish the effectiveness of law requires strengthening international cooperation through networking. Polarisation of networking legal cooperation is a form of counteracting the globalisation. For example, in 2004, the UK Department of Trade and Industry, the US Office of Fair Trading (OFT) and the Information Commissioner (ICO) signed a Memorandum of Understanding with the Federal Trade Commission (FTC) in the United States, the Australian Communications Authority (ACA) and the Australian Competition and Consumer Commission (ACCC) for mutual assistance in the enforcement of spam laws. This cooperation would allow the possibility of consumers enforcing their rights against misleading advertising arising beyond the national borders of their countries. Other forms of international cooperation can be identified in the course of legal actions procedures. Thus, in the FTC v. TLD Network Ltd and Quantum Management,56 the Federal Trade Commission obtained a temporary restraining order from the court against the TLD Network Ltd and Quantum Management companies. That restraining order obtained by the US FTC was followed by the intervention of the UK OFT which on the basis of the ‘Control of Misleading Advertisements Regulations 1988’ has been ‘stopped from publishing misleading advertisements for website domain names that are difficult to view on the world wide web.’57 In this case, the defendants located in London were selling false domain names such as .sex, .bet, .brit and .scot domains for $59. As these domain names were not approved domains by the Internet Corporation for Assigned Names and Numbers (ICANN),58 the consumers did not know what they were buying and how accessible the domain names were. In order to ensure the effectiveness of the legislation in cross-border transactions, both businesses and consumers from one country or another need a reliable, clear, simplified legal framework that allow rules to be regularly enforced in the electronic market. That involves not only informal mechanisms for consumers but equally coordination amongst global organisations. Colin Scott argued that ‘[a] stunning innovation in international cooperation is the annual international Internet sweep organized by the International Consumer Protection and Enforcement Network (ICPEN). Established in 1997, the 2003 sweep involved eighty-seven enforcement agencies in twenty-four countries simultaneously surfing the Internet proactively in search of misleading claims. (…)’59 At first sight when looking on the website of this international network, there is no reference of a practical case of enforcement. The only documents available for the public are composed of a collection of links to the main pieces of legislation, to self-regulatory texts or reports or to the national bodies in charge of misleading advertising existing in different countries. Colin Scott added that the organisation in 2003 targeted travel websites, and found many infractions of applicable laws in the various jurisdictions. As travelling worldwide has become a very widespread practice among consumers, it would have been very useful to inform consumers via the ICPEN website about different misleading traders or enforcement cases. Sharing information between the various agencies is

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not the only solution to reinforce the protection of the consumer on the Internet. Global enforcement is based on communicating information in-out and it should not be reduced to the internal aspect of coordination between the network members. As this type of organisation does not have regulatory enforcement powers, its role should be strength by providing useful information that contributes to consumers, and traders, education. The basic principle of enforcement in the global electronic market requires the recognition of legal actions of consumers in cross-border cases, specification of documentary evidence that should support a claim, details on the possibility of the contestation of a defendant, the extension of the enforceability of a judgement delivered in a foreign country and the improvement and simplification of the Exequatur process. In Europe, in order to improve the circulation of judgements and public documents, the member states (with the exception of Denmark) have namely passed the Council Regulation (EC) No. 44/2001 of 22 December 2000, which replaces the Brussels Convention on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters of 1968. According to Article 57 of the Regulation, public documents which are formally drawn up and enforceable in one member country will, on application, be declared enforceable in another Member State in accordance with the procedures for judgements of the courts. However, these rules do not exclude cooperation with a foreign country. These issues would be of high importance on the agenda of the European Commission after the adoption of the Regulation on Consumer Protection Cooperation.60 The aim of the Regulation is to remove existing barriers to information between national enforcement authorities and enable them to take coordinated action against rogue traders who abuse the freedom of the Internal Market in order to deceive consumers. The regulation was formally adopted by the Council on 7 October 2004. The new EU-wide enforcement network will start work in 2006. Still the network shall expand by the cooperation with third countries and with the competent international organisations in order. The arrangements for cooperation, including the establishment of mutual assistance arrangements, may be the subject of agreements between the Community and the third parties concerned. The emergence of the regional polarisation of ‘networking’ cooperation to which we assist today should reduce the problematic of national jurisdiction and applicable law which is so critical in a cross-border electronic market. As the Internet is not endowed with a supranational authority to control flow of information, the networking cooperation might enable the detection and apprehension of offenders to online advertising. The following two considerations result from the current legal and self-regulatory misleading advertising online framework. First, the cross-border nature of the Internet reduces consumer protection against online misleading advertising. National jurisdictions apply consumer laws that protect consumers against misleading advertising on a national basis. National self-regulatory bodies deal with consumer complaints in accordance with their own national guidelines. National laws and advertising self-regulatory systems do vary from country to country.61 Whilst national agencies scrutinise online advertising claims, there is no international organisation or co-operation that specifically monitors the soundness of advertising in the global electronic marketplace.

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The cross-border electronic marketplace reduces the value of national selfregulatory systems based on varied standards. The legislation should by supplemented by effective enforcement by Member States and public authorities, technical and self-regulatory solutions by industry, consumer awareness, and international cooperation. Second, there is a need for international co-operation between self-regulatory and governmental institutional structures able to resolve consumers’ complaints relating to misleading advertising and ensure fair competition between cross-border companies. CONCLUSIONS Hence, we may conclude that online misleading advertising increases the risk of asymmetry of information between consumer and marketer in the electronic marketplace. Consumers are unable to assess the reliability of online advertising at the time of ordering online products or services. They cannot be expected to identify the risks or the potential consequences of a transaction concluded as a result of particular advertising placed in a changing and instantaneous environment. The ability to send misleading information without any cost, to an enormous number of people and in a short period of time also increases the risk of the asymmetry of information. There is an imbalance of ‘evidence-based’ approach between advertisers and consumers which means that a consumer cannot in practice have sufficient evidence to establish the validity of online advertising. Online marketing is an important channel of communication for business worldwide. However, we conclude that the efficiency of the current legal framework is questionable since the Internet is not regulated by a unique authority and the control of enacting legislation is fragmentised between different national organisations. On the one side, the enforcement might be difficult in the context of self-regulation framework characterised by decentring rules. On the other side, polarisation of networking legal cooperation is a form of counteracting the negative impact of globalisation on an effective enforcement of the legislation in the area of online misleading advertising. In this context, national governments should clarify that the basic principle of enforcement in the global electronic market requires the recognition of legal actions of consumers in cross-border cases, specification of documentary evidence that should support a claim, details on the possibility of the contestation of a defendant, the extension of the enforceability of a judgement delivered in a foreign country and the improvement and simplification of the exequatur process. NOTES 1 2

‘The Internet Advertising Revenue Report’, conducted by the New Media Group of PricewaterhouseCoopers LLP, April 2004. ‘Online Advertising Through 2009: Pricing Growth Drives a Balanced Market’, Lead Analysts: Nate Elliott, Niki Scevak, Contributing Analysts: Zia Daniell Wigder, Eric T. Peterson, Gary Stein, available at: http://www.jupiterdirect.com/bin/ report.pl/95467/937.

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According to DoubleClick, 45% of consumers expect customer service response emails within 24 hours, while 44% say from ‘immediately’ to ‘within 12 hours’. Only 9% found two days acceptable. DoubleClick’s 2004, ‘Consumer Email Study’, October 2004, p. 3 (DoubleClick, working with ROI Research and the TNS NFO Access Panel of 900,000 US consumers, polled 1,000 consumers via email during July and August of 2004). According to the Report of ZenithOptimedia of October 2004, ‘[w]hile the online share of market remains small, it is growing at a faster rate than any other medium, and that bodes well for the future. (…) Europe ad expenditures remain on course to grow faster than US spending in 2005. After hitting a low of 0.78% in 2003, Europe’s advertisingto-GDP ratio has recovered to a healthy trend rate of 0.80% and rising.’ (‘Ad Spending Rising around the World’, October 13, 2004) available at: http://www.emarketer.com/ eNews/NewsByTopic.aspx?title=Advertising&pathID=95. C. Bradley, ‘Online Financial Information: Law and Technological Change’, Law and Policy, Vol. 26, Nos. 3 & 4, July and October 2004, p. 378, p. 379. K. Smith quoting Baldwin (After Command and Control. In the Human Face of Law, edited by K. Hawkins, Oxford: Clarendon Press, 1997) in ‘Beyond the Rule of Law? Decentred Regulation in Online Investing’, in Law and Policy, July–October 2004, p. 448. K. Smith quoting Mendelson and Peacke (‘Intermediaries or Investors: Whose Market is it Anyway?’, Journal of Corporations Law 19, 1994, p. 443) in ‘Beyond the Rule of Law? Decentred Regulation in Online Investing’) in Law and Policy, July–October 2004, p. 448. C. Bradley, ‘Online Financial Information: Law and Technological Change’, Law and Policy, Vol. 26, Nos. 3 & 4, July and October 2004, p. 382. C. Bradley, ‘Online Financial Information: Law and Technological Change’, Law and Policy, Vol. 26, Nos. 3 & 4, July and October 2004, p. 382. ‘Follow-up Communication to the Green Paper on EU Consumer Protection’, Brussels, 11.6.2002, COM (2002) 289 final. ‘Follow-up Communication to the Green Paper on EU Consumer Protection’, Brussels, 11.6.2002, COM (2002) 289 final. U.S. Perspectives on Consumer Protection in the Global Electronic Marketplace – Comment, FTC File No. P994312, Comments of Dell Computer Corporation submitted, Regina M. Keeney, Chief Policy Counsel, Dell Computer Corporation, p. 2. N. Dethloff, ‘Marketing on the Internet and international competition law’, in Neue Juristic Wochenschrift, Number 22, 2000. R.B. Starek, III, L.M. Rozell, ‘A Cyberspace Perspective, The Federal Trade Commission’s Commitment to on-line Consumer Protection’, 15 J. Marshall J. Computer & Info. L., 1997, 679. The Follow-up Communication to the Green Paper on EU Consumer Protection has proposed several categories of misleading advertising. These categories are identifiable in both traditional and online environment and cover techniques to promote offers that are not clearly identifiable as such by the consumer; representations that goods or services have sponsorship, approval, performance characteristics, accessories, ingredients, quantities, components, uses or benefits that they do not have; representations that goods or services are of a particular standard, quality, grade, style or model that they are not. On the basis of these categories, I have identified several examples of online misleading advertising. See for example, FTC v. Lane Labs – USA Inc, (D.N.J. filed June 28, 2000), Michael D. Miller d/b/a Natural Heritage Enterprises, File No. 992 3225 (April 2000). See for example, Michael D. Miller d/b/a Natural Heritage Enterprises, File No. 992 3225 (April 2000).

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18 See for example, FTC v. Lane Labs – USA Inc, (D.N.J. filed June 28, 2000), CMO Distribution Centers of America, Inc File No. 982 3180 (April 2000), EHP Products, Inc. File No. 982 3181 (April 2000), Michael D. Miller d/b/a Natural Heritage Enterprises, File No. 992 3225 (April 2000). 19 The banner advertising allows the user to click on the ad and be transported directly to the home page of the advertiser, or to other relevant content regarding an offer. (K.M. Saunders, ‘Confusion is the Key: A Trademark Law Analysis of Keyword Banner Advertising’, Fordham Law Review, 1 FDMLR 543, November, 2002.) 20 N. Dethloff, ‘Marketing on the Internet and international competition law’, in Neue Juristic Wochenschrift, Number 22, 2000. 21 Resolution on Unsolicited Commercial Electronic Mail, January 2004, available at: http://www.tacd.org/db_files/files/files-293-filetag.doc. 22 Double Click AOL Survey-Spam: The Consumer (July 2003), available at: http://www.doubleclick.com/us/knowledge_central/documents/research/dc_aol_spam_0 307.pdf. 23 L.M. Hertz, ‘Advertising Regulation on the Internet’, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series PLI Order No. G0-00V9, January, 2002. 24 Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (‘Directive on Electronic Commerce’) (OJ L 171, 17.7.2000, p. 1). The following do not in themselves constitute commercial communications: – information allowing direct access to the activity of the company, organisation or person, in particular a domain name or an electronic-mail address, – communications relating to the goods, services or image of the company, organisation or person compiled in an independent manner, particularly when this is without financial consideration. 25 See Green Paper on Commercial Communications in the Internal Market, COM (96) 192 final. 26 Section 2: Commercial communications, Article 6 on Information to be provided in Directive on electronic commerce. 27 According to Article 7 of the Directive on electronic commerce, Member States have the option of controlling the use of unsolicited e-mails in their territory. (Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market, OJ L 171, 17.7.2000, p. 1.) 28 See FTC Policy Statement on Deception, available at: http://www.ftc.gov/ bcp/policystmt/ad-decept.htm. 29 L.M. Hertz, ‘Advertising Regulation on the Internet’, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series PLI Order No. G0-00V9, January, 2002. 30 See FTC Policy Statement on Deception, available at: http://www.ftc.gov/ bcp/policystmt/ad-decept.htm. See also L.M. Hertz, ‘Advertising Regulation on the Internet’, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series PLI Order No. G0-00V9, January, 2002. 31 15 U.S.C. § 45(a)(1)(2001). See also FTC Policy Statement on Unfairness, appended to International Harvester Co., 104 F.T.C. 949, 1070 (1984). 32 15 U.S.C. §§ 45(a) and 53(b). 33 For example, in the Miller, CMO Distribution and EHP, the US Federal Trade alleged that these companies made unsubstantiated claims for their respective products and for any food, drug, dietary supplement or program and misrepresented the results of any tests, study or research, available at http://www.ftc.gov/opa/2000/04/cure-all2.htm. 34 See FTC Policy Statement on Advertising Substantiation, see also Thompson Medical Co., 104 F.T.C. 648, 839 (1984).

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35 FTC ‘Advertising and Marketing on the Internet: Rules of the Road’, available at www.ftc.gov. 36 Pfizer, Inc., FTC Dkt. 8819 Trade Reg. Rep. 20,056 (July 11, 1972). Thompson Medical Co., 104 F.T.C. 648, 839 (1984). 37 See FTC Policy Statement on Advertising Substantiation, available at: http://www.ftc.gov/bcp/guides/ad3subst.htm. 38 L.M. Hertz, ‘Advertising Regulation on the Internet’, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series PLI Order No. G0-00V9, January, 2002. 39 15 U.S.C. § 1125 (a), 2001. 40 15 U.S.C. § 1125 (a)(1), 2001. 41 15 U.S.C. § 1125 (a)(2), 2001. 42 15 U.S.C. § 1125 (a)(2), 2001 For an overview on Federal Regulation, see the article of L.M. Hertz, ‘Advertising Regulation on the Internet’, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series PLI Order No. G0-00V9, January, 2002. 43 ICC International Code of Advertising Practice art. 10 (1997), available at: http://www.iccwbo.org/home/statements_rules/rules/1997/advercod.asp. 44 Directive 2002/58/EC on data protection and privacy, Official Journal, OJ L 201, 31.07.2002. 45 CAN-SPAM ACT – Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003. 46 Am. Online Inc. v. Nat’l Health Care Discount Inc., 121 F. Supp.2d 1272 (N.D. Iowa 2000) (5 ECLR 1203, 12/13/00. 47 Directive 98/27/EC of the European Parliament and of the Council of 19 May 1998 on injunctions for the protection of consumers’ interests, Official Journal of the European Communities L 166/51, 11.6.98. 48 CAP is also responsible for ensuring that advertisements and sales promotions conform to the Codes, and it does so by co-ordinating the activities of its members to ensure the highest degree of compliance with the Codes. 49 The Control of Misleading Advertisements (Amendment) Regulations 2000 (SI 2000/914) amend the Control of Misleading Advertisements Regulations 1988 in line with a European Directive on comparative advertising, available at: http://www.gnn.gov.uk/gnn/national.nsf. 50 The role of the Trading Standards Departments is to enforce the Trade Descriptions Act and other consumer law. The departments are to be found in the county and borough councils of England, Scotland and Wales. The Trade Descriptions Act 1968 provides that it is a criminal offence for a trader to make false statements about goods offered for sale. In addition, this principle also applies to services. However, in the case of services, an offence is committed only if the trader knows, or does not care, that statements are misleading. 51 BBB Code of Advertising, available at: http://www.bbb.org/advertising/adcode.asp. 52 BBB regroups business organizations that promote ethical business practices through voluntary self-regulation and consumer and business education. 53 M. Cendali, Dale, V.B. Ellner Brian, ‘Advertising and consumer protection on the Internet: How to ensure that your site complies with consumer protection laws’, 712 PLI/Pat 261 Practising Law Institute, July 2002; L.A. Goldstein, ‘Update on Internet Advertising and Promotions’, Practising Law Institute, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series, PLI Order No. G0-00VJ, February–March, 2002. 54 Reich N., ‘FTC – A Model for Effective Consumer Protection in a Unifying European Market?’, in a study produced by Institut für Europaisches Wirtschafts und Verbraucherrecht e.V for Health & Consumer Protection DG, 2001, available at: www.europa.eu.int.

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55 K. Smith, ‘Beyond the Rule of Law? Decentred Regulation in Online Investing’, in Law and Policy, July–October 2004, p. 446. 56 FTC v. TLD Network Ltd., Quantum Management (GB) Ltd., TBS Industries Ltd., Thomas Goolnik, and Edward Harris Goolnik (Northern District of Illinois, Eastern Division), No. 020-1475(N.D.Ill., 3/11/02) FTC File No. 012 3237 available at http://www.ftc.gov/opa/2002/03/tld.htm. 57 UK OFT Press Releases: ‘Misleading domain name ads stopped, First UK/US joint action’, available at http://www.oft.gov.uk/News/Press+releases/2002. 58 Internet Corporation for Assigned Names and Numbers. 59 C. Scott, ‘Regulatory Innovation and the Online Consumer’, Law and Policy, Vol. 26, Nos. 3 & 4, July and October 2004, p. 497. 60 Proposal for a Regulation of the European Parliament and of the Council on cooperation between national authorities responsible for the enforcement of consumer protection laws (‘the regulation on consumer protection cooperation’), Brussels, 18.7.2003, COM(2003) 443 final, 2003/0162 (COD). 61 C.R. Michelotti, Response to the Department of Commerce (DOC) and the Federal Trade Commission (FTC) on Alternate Dispute Resolution Mechanisms for Consumer Transactions in a Borderless Online Marketplace. March 2000.

Chapter 8

Fair Trading Legal Models in Commercial Practices: From a National or Community Principle to an International Model INTRODUCTION The difficulty of finding a harmonised global solution to the protection of consumers in cyberspace lies not only in the inherent conflict between the need for consumer protection and the recognition of traders’ interests in accessing the global electronic marketplace, but also in the different choices that consumers coming from different cultures make when considering what level their protection should reach. This is indeed obvious in the emergent European legal culture. Muir Watt outlines that: vast areas of what might be termed the ‘modern’ law of obligations, such as consumer protection (…) as well as an increasingly large part of private international law (…) are all affected by the move to harmonise and unify the individual legal systems. It is here that the whole issue of ‘Europeanisation’ becomes extremely sensitive, insofar as one may call into doubt the legitimacy of a deliberate filing down of those cultural differences which are characteristic of the various legal traditions represented within the European Union.1

Against this divergent background, it is surely reasonable to wonder whether the consecration of the fair trading principle would be able to provide a global solution for the protection of consumers in the electronic marketplace. The premise of a general principle of fair trading is that the law should provide a macro legal model which should seek to maximise the efficiency of the electronic market. Such an approach might leave the impression of an inevitable clash between the aspiration of one global market of business and consumer preferences for national values. Consumer preferences may be economically inefficient. In accordance with this view, Coleman argues that: [d]ivergent rules in our view still leave the internal market badly fragmented with companies unable to compete as efficiently abroad as they do at home. And that is why, in a nutshell, if companies were able to operate the same business model on a larger scale in the Union they could pass the corresponding economies to consumers, who would benefit from lower prices, whilst they themselves were able to develop their businesses more successfully.2

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The application of the general principle of fair trading may reconcile the aforementioned clash. The purpose of this chapter is to provide a legal framework for the analysis of the fair trading principle whilst establishing its legal multiples and socio-legal interpretations in online consumer transactions. Furthermore, the chapter explores fundamental questions faced by the fair trading principle in the area of consumer protection in the electronic marketplace. Does fair trading resolve the fundamental problems of the consumer when shopping in cyberspace? How would fair trading enable the confidence of EU consumers buying products or services from foreign business? If fair trading were already recognised as a general principle existing in all national legal systems, why would we need to support it by additional legislation? In order to answer these questions, the chapter analyses different regulatory models of unfair trading practices at the light of the UK and US legal systems. 8.1 A Legal Synopsis of the Fair Trading Principle The fair trading principle is an essential element in different legal systems but it does not exist as a separate or uniform concept. Most Member States have developed a regulatory environment that integrates a fair trading principle but their approaches in formulating this principle diverge in the case of online cross-border consumer transactions. Furthermore, divergence is increased by the emergence of new commercial practices peculiar to the electronic market, such as website sponsorship, affiliation, remunerated search tools, use of meta-data and links, referrals and reviews, cookies, ‘spidering,’ co-shopping and power shopping.3 Several of these potentially unfair practices are not caught by the national rules. This situation calls for the need for the formulation of common legal minimum standards for establishing a fair trading principle in business with regard to consumer commercial practices. Before approaching the issue of the minimum requirements for fair trading principle, this section analyses the twofold aspects of the fair trading principle: as legal norm, and the regulator principle. 8.1.1 Fair trading principle – as legal norm The fair trading principle in online consumer transactions refers to a legal norm, the aim of which is to protect consumers against unfair pre-contractual, contractual and after-sales commercial practices. Furthermore, the principle of fair trading is a flexible and open legal norm, the aim of which being not only to protect consumers but also to offer economic efficiency for online traders. 8.1.1.1 Flexible Concept There is no single accepted definition of the fair trading principle. It is based on different approaches and concepts.4 According to German Law, the fair trading principle relating to the legislative disposition dealing with good faith performance5 can be found in Section 242 of the German Civil Code – the Treu und Glauben

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(Good Faith) provision. It states, ‘[t]he debtor is obliged to perform in such a manner, as faith and credit with regard to custom requires.’6 As suggested by Farnsworth, this brief passage has produced a mass of case law, resulting in an annotation, the sheer volume of which has come to dwarf the provision itself.7 In France8 and the Netherlands,9 the concept of fair trading can be considered under the concept of ‘unlawfulness,’ which is based on extra-contractual liability, concepts of fault, control, causation and damage. In English common law, the concept of fair trading has developed under principles such as ‘unconscionability’ and ‘equity’ as a means of ensuring balance and fairness in commercial transactions.10 The regulatory system of the UK is based on self-regulation. The multiple aspects of fair trading are analysed in a further section. Finally, the analysis of fair trading principle in different legal systems illustrates the great lack of a unified and comprehensive framework for a legal fair trading principle at present. This fragmented terminology of a fair trading principle may lead to confusion in an electronic marketplace already characterised by the clash of national legal systems. The adoption of a common model for fair trading might be a basis for allowing Member States to move towards convergence whilst avoiding the separation of cross-border commercial practices from national cultures, consumers’ choices and values. 8.1.1.2 Open Concept The fair trading principle is an open concept. That means that the application of this principle is dependent on the factual circumstances surrounding the pre-contractual, contractual and post-contractual aspects of commercial practices and is a consequence of its high level of abstraction. A high level of abstraction could be appreciated positively in the lawmaking process. However, a just application of the fair trading principle in online consumer transactions requires specific indications about the circumstances such as the elements of causation, causal link and burden of proof. The open character of the fair trading principle is also determined by the peculiarities of various legal cultures. Whilst certain legal systems focus on the precautionary aspect of fair trading,11 others concentrate on its remedial aspect.12 As will be observed later in this chapter, the diversity of different legal cultures has a direct impact on the allocation of risks between consumer and traders and consequently on the role of fair trading in protecting consumers who buy via the Internet. The application of the fair trading principle also depends on the abilities of consumers to exercise a real control over the technological aspects of unfair commercial practices. Designing a well – structured fair trading principle requires the protection of consumers against technological risks such as unauthorized use of verification procedures in online contracting or unauthorised or fraudulent use of credit cards. Prevailing the alibi of the technical aspects of certain commercial practices over the legitimate consumers’ interests might lead to a restrictive approach to consumer protection. Applying Kaufman Winn and Ellison’s analysis of the moral hazard13 in connection with technological risks to the context of commercial practices might lead to a new view of the fair trading principle, which

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imposes on consumers the obligation to accept technological risks which they are reasonably able to control. The systematisation of unfair commercial practices under one single legal framework challenges the abilities of the States to address unfair commercial practices adequately beyond their borders. It is not that these views would lead to an autonomous fair trading principle separate from the traditional market, but rather that it would lead to the convergence of different accepted fair commercial practices. 8.1.2 Fair trading – as regulator principle As a regulator principle, the aim of the fair trading principle is to cover the legal gaps created by disparate interpretations of fair commercial practices in different legal systems. Furthermore, the fair trading principle should be articulated around different commercial practices arising before, during and after the sale. However, the European Commission proposal for regulating unfair trading practices14 develops a different approach. Its proposal is based on the view that the future Framework Directive15 will not cover contract law and contractual remedies. Even if most aspects of the pre-contractual, contractual or post contractual stages are already covered by the European directives, as argued by Schlechtriem: these directives are not being coordinated by an overall design, their implementation into the multifarious domestic laws seems to make matter worse. The diversity of languages and concepts would do less harm if the European domestic systems of private law themselves would follow a common plan, or would at least have strong common roots, so that the implementation of European law could be fitted into a common pattern.16

A unified approach across the different transactional stages might diminish the significant semantic variations in the application of the fair trading principle at different stages of the B2C commercial relationships. An opposite approach lessens the fair application of this principle to online consumer transactions. For example, it can lead to the conclusion that the respect of adequate information practices at the pre-contractual stage (information about products and services) has legally become more important than the obligation to provide information at the post contractual stage of the B2C commercial relationship (information about the means of enforcing warranties and correcting errors, providing notice on terms for ongoing services and the opportunity to cancel). Therefore, the variation in the interpretation of the obligation of information within the different transactional stages does not facilitate the role of this principle in ensuring a high standard of consumer protection in all the stages of online consumer transactions. For the sake of coherence, a proposal for a fair trading principle should cover the totality of these stages in online consumer transactions. As suggested by Murray, ‘the least efficient way to do this [dealing with commercial practices] would be on a piecemeal basis, trying to deal with one practice or one sector after another and struggling to adapt to changes in the marketplace.’17

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8.2 Fair Trading Principle: Ambivalent Perspectives The fair trading principle should be a matter of interpretation for consumers and traders in both online and off-line transactions. For consumers, the fair trading principle has the role of protecting their legitimate expectations against deceptive and wrongful business practices. For traders, the fair trading principle should be seen from the perspective of ‘economic efficiency,’ as a form of protection against unfair competition. However, fair trading is not only about protecting consumers or ensuring economic efficiency. Within the framework of national law, this principle has a wider scope than just consumer protection. For the purpose of this study, the following sections explore the fair trading principle from the perspective of consumer protection in relation to the ‘economic efficiency’ aspect of unfair competition. 8.2.1 From the consumer’s perspective As was demonstrated in a previous chapter, many commercial practices in online consumer transactions are characterised by misleading advertising, unfair standard terms and an unequal balance of knowledge between consumer and traders vis-à-vis certain complex products18 or sophisticated online dispute resolution procedures. Consumers usually are not able to counteract the unfairness of these commercial practices. Due to the imbalance of knowledge or bargaining power, the successful appliance of the fair trading principle would require that traders respond to the consumer’s reasonable expectations by avoiding tilting the risks against the consumers. Whilst the acceptability of the risk and the consumer’s legitimate expectations are both subjective elements, a lesser degree of risk in electronic commercial practices ought not to be a reason for considering such commercial practices less unfair. For example, a consumer who suffers a detriment whilst investing a small amount of money as a result of misleading information provided by an online bank should be considered as suffering from an unfair commercial practice regardless of the minimal aspect of the risks taken by the consumer. Or, to take the example of a business which advertises its product, a ‘miraculous vitamin’ which according to the ad, enriches the bloodstream with a supplemental oxygen cure and prevents serious diseases such as cancer, heart disease, and lung disease, when expertise proves that the product is nothing more than salt water.19 Could we assume in this case that advertising and delivering such products are less unfair because they do not present risks for consumer safety or because there is clear evidence that they do not deserve credibility? As it was remarked in an EC study on consumer protection: it is a matter of research to know whether the legitimate expectations of the EU Information Society consumer could function as an overall guideline in the law of commercial communications. A criterion like this could for instance at first sight be of considerable value in determining the borderline between forbidden surreptitious advertising and consumer information on the Internet.20

Certainly, the level of fairness, which a person is entitled to expect, should be the same as one which simply presents such risks as acceptable and consistent with a

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high standard of protection. The ECJ assessed fairness in the field of misleading advertising by reference to the ‘legitimate expectations of the consumer.’ In the case Gut Springenheide and Rudolf Tusky v. Amt für Lebensmittelüberwachung, the ECJ considered that: ‘In order to determine whether a statement (…) is liable to mislead the purchaser, the national Court must take into account the presumed expectations which it evokes in an average consumer (…).’21 Finally, from the consumers’ perspective, the fair trading principle draws attention to a multitude of matters which range from raising trading standards to removing errant traders from the marketplace and improving consumer redress.22 Apart from unfair trading practices, consumers are affected by unfair competition. For consumers, from an economic point of view, unfair competition results in fewer products and services being offered and in charging more than would be the case where there is effective competition. The consequence is that consumers pay more than it costs to produce the products or services and end up by switching to goods which are more expensive to produce.23 Finally, the consumer is not only protected by a general body of law but also by specific legislation which prohibits business practices which deprive the consumer of the offsetting benefits of competition, resulting in a higher quality and better prices and in a greater choice of products and services.24 A consumer, who is seeking injunctive relief under competition law, should prove that the business practices complained of are characterised by anticompetitive behaviour. From a legal perspective, these practices are difficult to detect and to prove.25 As Ramsay remarks the diffuse nature of economic losses from unfair or deceptive practices make consumer action unlikely. Furthermore, the fact that the consumer may not have received a completely worthless product, the well-documented phenomenon of ‘cognitive resonance’ (the rationalising of the benefits of a bad transaction) and the view of many consumers that selling is a ‘game’ may all create further barriers to individuals’ taking action.26 Meanwhile, the discrete nature of unfair competition practices makes the ability of the competition or consumer authorities to monitor such behaviour difficult. 8.2.2 From the trader’s perspective Just like consumers, traders may have a common interest to trade fairly. Under this aspect, the principle of fair trading is strictly related to the concept of ‘unfair competition’ which refers to those traders who attract consumers by counteracting the pressure of fair competition through anti-competitive methods of trade. National laws and European anti-competition rules regulate unfair competition. Article 81(1) of the EU Treaty27 prohibits agreements which impede on fair competition. Article 81(3) provides that Article 81(1) may be declared inapplicable when improving the production or distribution of goods or promoting technical and economic progress, while allowing consumers a fair share of the resulting benefit, and which does not impose on the undertakings concerted restrictions which are not indispensable to the attainment of these objectives nor afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. Anticompetitive practices are specific for those companies which have a certain market power. Traders react against unfair competition practices especially when a

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part of their market is threatened. Furthermore, both at the European and at national level, competition authorities supervise by ensuring that a merger does not result in excessive market power and that consumers can benefit from a competitive environment in terms of quality, price, choice and innovation. For example, the European Commission fined several Austrian banks for fixing the interest rate for deposits to the detriment of consumers.28 In SAS and Maersk Air, the European Commission fined these airline companies for operating a market-share agreement on airline tariffs between Copenhagen and Stockholm that was detrimental to consumers.29 By its nature, the electronic marketplace targeting consumers is expected in the future to increase unfair competition. 30 For example, in electronic commerce, business can easily change products and services prices seen by consumers over the Internet. It is expected that the number of competition cases with consumer implications would increase in the area of price discrimination31 and predatory behaviour.32 Weiss and Mehrotra commenting on traditional unfair competition notes that in the past, many businesses segmented their consumer markets in the hope of charging different prices. However, the transactions were prohibitive due to the costs of gathering personal information and monitoring purchasing habits so as to measure a consumer’s willingness to pay. Now, with the advent of the electronic marketplace, businesses are able to obtain all sorts of information provided by Internet users – and some information not explicitly provided – at a minimal cost. Similarly, new technology allows e-commerce companies to change prices with only a minimal amount of delay and effort.33 The uncertainty around these unfair commercial practices is today debateable. For example, customers of Amazon.com were deceived when learning that the online mega-store was charging different customers different prices for the same DVD movies.34 The justification of the unfairness of this commercial practice can be found in that most legal systems require traders to treat all consumers on the same basis.35 These practices affect not only consumers but might create risks of unfair competition between different competing companies. 8.3 Fair Trading National Models Fair trading principle depends upon ‘the circumstances of time, dominating legal theory, the different value patterns which prevail, and the political attitudes which take precedence.’36 It is questionable whether a principle dominated by national legal patterns would redress the balance of power between consumers and traders within the context of an electronic market already characterised by the clash of national rules. Looking for a fair trading model at international level requires the analysis of the current fair trading trends in the UK and in the US. The chapter encompasses the institutional aspects of controlling and monitoring fairness in commercial transactions. It analyses some aspects of UK and US models of protecting consumers against unfair commercial practices.

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8.3.1 UK legal system The UK fairness model based on Part 8 of the Enterprise Act37 replaced Part III of the Fair Trading Act 1973 and the Stop Now Orders (EC Directive) Regulations 2001 in relation to the UK. Part 8 applies to a wide range of UK consumer protection legislation and also applies to the legislation of the European Member States implementing those European Directives specified in the Injunctions Directive. Part 8 of the Enterprise Act entered into force on 1 April and 20 June 2003. This piece of legislation should be understood in relation to the necessity of developing new measures for enforcing consumer protection at local and European level. Part 8 classifies breach of legislation in two categories of infringements: domestic and/or Community infringement. Domestic infringements concern a wide range of UK laws incorporated in the Statutory Instrument made under Part 8. Community infringements relate acts or omissions that breach the European Member States legislation and other provisions implementing the European Directives listed in Schedule 13 to the Act. Through this legislation, the ‘Community infringement’ is recognised at the same level of enforcement as the ‘domestic infringement.’ This similarity demonstrates the need to ensure the local consumer the largest European area of consumer protection. The supervising authority of consumer policy is the Office of Fair Trading (OFT), which monitors the market with the aim of identifying potential issues which could pose problems for consumers. Most of the OFT’s responsibilities under the Fair Trading Act (FTA) were repealed with the commencement of the Enterprise Act. The Office of Fair Trading would have enforcement responsibility for action taken in the UK in respect of either type of infringement, including the responsibility for the coordination of action by all enforcers. The OFT has the obligation to publish advice and guidelines on how the consumer protection provisions of the Act will work. The enforcement process is based on the following categories of enforcers: general enforcers, namely the OFT, the Trading Standards Service in Great Britain and the Department of Enterprise, Trade and Investment in Northern Ireland (DETI) together with enforcers designated by the Secretary of State, and Community enforcers.38 Under Part 8, Section 214, the enforcer must not make an application for an enforcement order unless he has engaged in appropriate consultation with the business infringing consumer protection legislation, with a view to getting the infringement stopped without the need to go to court. The enforcer may decide to accept undertakings from the business that it will stop the infringing conduct. The enforcer can apply for an Enforcement Order to the High Court or County Court (or Court of Session or Sheriff in Scotland) if, after a period of two weeks the business will not give undertakings. In the cross-border consumer transactions, Section 243 of Part 8 of the Enterprise Act enables the OFT to disclose information to overseas public authorities which will allow civil proceedings and the investigation of crime. Besides, Part 8 provides the general enforcers and designated enforcers which are public bodies, the power to introduce action against European traders that infringe European consumer protection legislation. An important aspect of the enforcement which requires the proactive action of the OFT, is for example, the case where no Community enforcer

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exists, or none is willing to take action. In this situation, the OFT can consider initiating proceedings in another Member State by following the legislative and judicial procedures of the host state. According to the provisions of the UK White Paper, the OFT should promote the core principles39 and encourage good practice by keeping them up to date, approve or reject codes of conduct and publicise these decisions; publish the benefits of the overall scheme to consumers and the benefits of dealing with businesses that comply with approved codes; provide and market a seal of approval for approved codes so that consumers can see whether a trader is committed to code standards; and remove the seal from codes that fail to deliver. Indeed, under Part 8 of the Enterprise Act, one of the key functions of the OFT is to promote good practice by giving its approval to (or withdrawing approval from) consumer codes of practice.40 A code of practice is eligible for approval by the OFT if it is intended to regulate the conduct of businesses that supply goods or services to consumers, with a view to safeguarding or promoting the interests of consumers. The UK regulatory model at both institutional and substantive level circumscribes ‘fair trade’ as a process in continuing evolution. Under the pressure of this evolution, there are a large number of organisations coping with the new needs of a fair deal for consumers. Among these organisations, the Financial Services Authority (FSA)41 tries to identify areas where unfairness may arise for retail customers and which may require specific attention. The FSA approach42 is aimed at maintaining efficient, orderly and clean financial markets and helping retail consumers to achieve a fair deal.43 The FSA has decided to promote the use of plain language and discourage unnecessary jargon in retail financial services consumer material (…); to consider whether in addition to existing regulatory requirements relating to the sale of products to retail customers, there are products which, because of their inherent complexity or opacity, are unsuitable for sale to mass market retail customers; (…) to review what mandatory information should be provided to retail customers after the point of sale and what the relevant costs and benefits might be, with a view to further consultation on any rules and guidance (…); (…) promoting consumers’ understanding of the choices available to them through: use of comparative information tables; other consumer education (…); to reinforce the introduction of the new regulatory regime relating to complaints with focused action on compliance with the new rules etc. (...).44 The entire set of factors mentioned above is based on the consideration of fundamental rationales for consumer protection such as the asymmetry of information between consumers and traders as well as on the risk of unequal bargaining power between consumers and traders. It represents a revisited map for fair trading adapted to the complexity of the financial electronic market today. Finally, despite the doctrinal discussion regarding the acceptance of general principals such as ‘fair trading’ or ‘good faith,’ the English legal system reveals first of all the need for a pragmatic way of enforcement against the unfair commercial or contractual practices. 8.3.2 US legal system As was specified in a previous chapter, the fairness of the commercial practices under US law is regulated by Section 5 of the Federal Trade Commission Act45

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(‘FTC Act’), which prohibits both unfair and deceptive acts or commercial practices.46 Under this Section, unfairness has been defined as follows: [whether] the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition (…). [T]he Commission may consider established public policies as evidence (…) [but] public policy considerations may not serve as a primary basis for such determination.47

Can we infer from these provisions, that substantial injury can be established by the fact that consumers are not in a position to negotiate the standardised terms and condition and that they do not have real choice when dealing with the traders? A definite reply to this question is difficult as many practices can be regarded as unfair according to the particularities of each contextual consumer transaction. Nevertheless, it should be noted that substantial consumer injury that causes distortion of consumer choice could result not only from ‘positive actions’ (misrepresentation, misleading actions) but also from ‘negative actions,’ consisting of the omission of the information to which a consumer is entitled. This omission creates a distorted and inaccurate image of the risks in which consumers might be involved. For example, not disclosing the safety risks of ‘fuel geysering’ could be considered as an omission, which may be found unfair even though it is not deceptive;48 or, the renting of cars without informing consumers about prior recall actions could also constitute a case of unfairness.49 The FTC has approached ‘fairness’ for the first time in the Pfizer case.50 This case was relating to the advertising of the product ‘UN-BURN’ which had not been tested scientifically. According to the doctrine established by this case, advertisers must have a ‘reasonable basis’51 for believing the claims are true. Claims for which the advertiser can provide no reasonable basis risk being considered as deceptive and unfair under Section 5 of the FTC Act: [G]iven this imbalance of knowledge and resources between a business enterprise and each of its consumers, economically it is more rational, and imposes far fewer costs on society, to require a manufacturer to confirm his affirmative product claims rather than impose a burden upon each individual consumer to test, investigate or experiment for himself. The manufacturer has the ability, the time and the resources to undertake such information by testing or otherwise – the consumer usually does not…52

In the case of F.T.C. v. Rapp,53 the theory of potential injury was justified on the bases of the misuse of the information. In this case, an information broker had impersonated customers of financial institutions in order to obtain and sell their financial information.54 The information broker’s actions were based on deception but finally it was considered that consumers who were the bank’s customers suffered the primary injury. In addition to the deception aspect involved by the information broker, the FTC considered that the disclosure of private financial information obtained through the deception was unfair. An interesting question posed by this case is whether the invasion of privacy causes substantial injury. In this case, the invasion of privacy did not involve monetary harm or safety or health risks. The FTC views on this point were divergent. Commissioner Orson Swindle

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dissented, arguing that due to the additional evidence of injury, the requirements of the 1994 Amendments to the statute55 were not fulfilled. ‘Merely to “posit” that substantial consumer injury “could” flow from the disclosure of private financial information does not satisfy the statute’s requirement that the challenged practice “cause” or be likely to cause substantial injury to consumers.’56 The majority of the FTC’s views argued ‘disclosure of private financial information obtained through such dubious methods could easily result in significant harm to consumers.’57 In F.T.C. v. Pereira,58 the defendants located in Portugal and Australia allegedly made unauthorised copies of various websites, including those of Paine Webber and the Harvard Law Review. The defendants used Internet technology frauds such as ‘pagejacking’ (directing the browser to an unwanted web site) and ‘mouse trapping’ (keeping the browser there against the user’s will). The FTC alleged that defendants had violated Section 5 of the FTC Act by deceiving and misleading consumers when pagejacking websites and misleading consumers. The FTC also alleged that defendants had engaged in illegal and unfair practices when the mouse trapped consumers and preventing them from leaving defendants’ sites. All the cases demonstrate that ‘unfairness’ can never be defined with precision.59 There are only some patterns of unfairness that can be discerned from the legal cases mentioned above. These patterns are based first on the identification of the substantial consumer injury that causes distortion of consumer choice. Usually, the FTC grounds substantial injury on the basis of monetary harm, health or safety risks. Second, the identification of unfairness supposes the analysis of the manner in which a commercial practice provides benefits that offset the substantial consumer injury or to competition that offset the harm. According to Azcuenaga, FTC Commissioner, most business practices provide a mixture of costs and benefits for consumers. In considering whether a practice generates substantial consumer injury, the FTC considers not only costs of the consumers but also the procompetitive aspects of a particular practice, which is a benefit that would be lost if the government takes regulatory action.60 Finally, determining the unfairness of a commercial practice requires the analysis of whether consumers could reasonably avoid the injury. That means on the one side, that consumers should be able to make informed purchasing decisions and on the other side, that consumers in the market can switch to another product without incurring substantial cost.61 From an institutional perspective, it should be noted that the US FTC in charge of monitoring unfair commercial practices contributes significantly to the protection of consumers against these types of commercial practices. Thus, the FTC is endowed with a rulemaking power aimed to ‘define with specificity acts or practices which are unfair or deceptive.’62 The FTC promulgated rules will have the force and effect of law. Their violation would lead to unfair or deceptive practice. In enforcing fairness, the FTC could make use of its rulemaking power, take administrative action, or seek equitable relief.63 However, it seems that the FTC is placing more emphasis on administrative action. As remarked by Reich, ‘the US experience shows that, even though the concept of an independent regulatory agency is well established, substantial limitations on its powers through congressional oversight and judicial review are unavoidable.’64 Furthermore, Reich suggests that ‘if the EU wants to enact a duty to trade fairly or a general fairness standard for – commercial

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practices affecting the internal market, the taking into account of US experiences, including a closer look at FTC practice may be useful.’65 CONCLUSIONS The consecration of fair trading at international level cannot be made by duplication of the US or UK model. The brief analysis of these two legal models described above may serve as a way for considering the manner in which the promotion of fair trading principle at the international level should address the diversity of regulatory models of fairness at the national level. It will also support finding solutions for a fair trading international principle. NOTES 1

H.M. Watt, ‘Evidence of an Emergent European Legal Culture: Public Policy Requirements of Procedural Fairness Under the Brussels and Lugano Conventions’, Texas International Law Journal, Vol. 36, 2001, p. 539. 2 R. Coleman, Director, European Commission, ‘The need for action, Hearing on the Green Paper on Consumer Protection’, 7 December 2001. 3 The ‘power shopping’ method could be defined as an accumulation of customers that is gathered through the Internet in order to buy goods or services at a reduced price that is granted by providers of the goods or services provided that a sufficient quantity has been ordered. It is unclear how such practices will be treated in all the Member States. (Green Paper on European Union Consumer Protection, European Commission, Brussels, 2.10.2001, 531 final COM(2001) 398, p. 8.) 4 J. Murray, Director BEUC, ‘Communication to the European Commission Workshop on Unfair Commercial Practices’, January 2003, available at: www.europa.eu.int. 5 E.A. Farnsworth, ‘Duties of good faith and fair dealing under the Unidroit Principles, relevant international conventions and national laws’, Tulane Journal of International and Comparative Law, Spring, 1995, The Eason-Weinmann Colloquium on International and Comparative Law. 6 German Code Civil (Burgerliches Gesetzbuch [BGB] §242). 7 E.A. Farnsworth, ‘Duties of good faith and fair dealing under the Unidroit Principles, relevant international conventions and national laws’, Tulane Journal of International and Comparative Law, Spring, 1995, The Eason-Weinmann Colloquium on International and Comparative Law. 8 Art. 1382-1384 French Code Civil. 9 Article 6:162 of the ‘Burgerlijk Wetboek’. 10 The Report of UK Financial Services Authority examined the concept of ‘fairness’ in the English law and broke it down into a number of identifiable elements which go to make up ‘fair’, and types of conduct which are indicative of acting fairly. (UK Financial Services Authority, ‘Treating Customers fairly after the point of sale’, June 2001.) 11 See section on ‘Precautionary aspect of the Fair Trading Principle’ of this chapter. Precautionary aspect of the fair trading principle provides traders with a prescriptive list of what they should do or not do in order to meet consumers’ expectations. 12 See section on ‘Remedial aspect of the Fair Trading Principle’ of this chapter. The remedial aspect of the fair trading principle is relating to the litigation context between consumer and trader in online consumer transactions and it concerns the duty of traders

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to offer consumer satisfaction in the post-contractual stage of online consumer transactions. As J. Kaufman Winn and C. Ellison remarked ‘[a]ny law that shifts the risk of fraud or error losses from online transactions away from technology providers and online merchants to consumers creates a moral hazard problem and will produce economically inefficient outcomes.’ J. Kaufman Winn and C. Ellison, ‘Regulating the Use of Electronic Authentication Procedures by US Consumers in the Global Electronic Marketplace’, US. Perspectives on Consumer Protection in the Global Electronic Marketplace, Comment P994312 to the Federal Trade Commission March 26, 1999. G. Abbamonte, ‘Harmonisation through a Framework directive’, available at: http://www.europa.eu.int/comm/consumers/policy/developments/. The Green Paper on Consumer Protection advances the idea of developing a Framework Directive on fair commercial practices and the development of a legal instrument for cooperation between enforcement authorities. P. Schlechtriem, ‘The Growing Importance of European Law and How It Affects Teaching and Research in the Field of the Private Law of Obligations’ (Torts, Contracts and Restitution), Texas International Law Journal, Vol. 36, 2001, p. 535. J. Murray, Director BEUC, ‘Communication to the European Commission Workshop on Unfair Commercial Practices’, January 2003. For example, in the area of financial services, the UK Financial Services Authority remarks that financial services products ‘are intangible, often involving the performance of a service by someone else who is much more expert, with a benefit for the consumer some time in the future and an expectation of something being delivered, with an element of risk and a future value and cost which may be difficult to foresee, especially for the consumer.’ UK Financial Services Authority, ‘Treating customers fairly after the point of sale’, June 2001. US Case involving false claims for “Vitamin O” – Rose Creek Health Products, Inc. (E.D. Wa. filed March 11, 1999). Commission Enforcement Actions Involving the Internet and Online Services, available at: www.ftc.gov, October 2001. M. de Vries, Corien Prins, E. Hondius, J. Kabel and M. de Cock Buning, Final Report Study on Consumer Law and the Information Society, 17 August 2000, available at: http://www.europa.eu.int/. See C-210/96 (Gut Springenheide and Rudolf Tusky v. Amt für Lebensmittelüberwachung). UK OFT Discussion Paper, ‘A General Duty to Trade Fairly’, 1986, see also G. Howells and S. Weatherill, Consumer Protection Law, Dartmouth, 1995, p. 521. O. Odudu, ‘Article 81(3), Discretion and direct effect’, European Competition Law Review, 2002, 23(1), pp. 17-25. V. Korah, An Introductory Guide to EC Competition Law and Practice (7th ed., Hart, Oxford, 2000) pp. 9-10; R.G. Price, ‘Market Power and Monopoly Power in Antitrust Analysis’ (1989) 75 Cornell Law Review, 190-217 at 204-205. See for example, the submission from BEUC in the Competition Cases: COMP/M.1852 – Time Warner/EMI; COMP/M.1485 – America Online Inc/Time Warner Inc. BEUC opposed the merger between AOL and Time Warner for reasons relating to the degree of vertical integration which restrict competition severely in the relevant markets. Its opposition is based on the following arguments: ‘1. Data-bases on customers’ buying, and browsing behaviour and other characteristics in themselves offer a market advantage to those who control or can access such information. In terms of customer/client numbers and in terms of the range of information on each customer to which it has access, AOL already has an unrivalled advantage in the electronic marketplace. The Time Warner database is also a source of competitive advantage. Access to the two databases, and/or the capacity to aggregate or process information in the databases, even in part,

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Cyber Consumer Law and Unfair Trading Practices would confer an unrivalled, and unbeatable, competitive advantage. In the event that the EMI/TW joint venture were approved that competitive advantage will be multiplied. 2. The data protection and privacy issue is relevant even on strict competition criteria. In assessing the proposed merger, the Commission is of course required to consider the potential impact on consumers. We argue that the combination of data-bases implied in the merger(s) together with new possibilities of data processing and cross-processing would in this case a) Significantly infringe on the privacy of millions of consumers and b) Shift the balance of power in the seller-consumer relationship towards the seller, because of the huge disparity in information between the two parties.’ (BEUC/281/2000 The European Consumers’ Organisation 11/9/2000.) I. Ramsay, Consumer Protection, Text and Materials, Law in context, Weidenfeld and Nicolson, London, 1989, p. 167. Article 81(1) EU Treaty, ‘The following shall be prohibited as incompatible with the common market; all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, market, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage have no connection with the subject of such contracts. 1. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.’ Commission Decision in case COMP/36.571 – PO/Österreichische Banken (‘Lombard’) (Avabank AG, Bank Austria AG, BAWAG, CA-BV, Erste Österreichisch, FPÖ, Giro Credit Bank AG, OeKB, Postsparkasse, Raiffeisenbank), not published. See Press release IP/02/844, Commission fines eight Austrian banks in ‘Lombard Club’ cartel case, 11 June 2002, available on the RAPID database, http://europa.eu.int/rapid. Commission Decision of 18 July 2001, case COMP.D.2 37.444 – SAS and Maersk Air COMP.D.2 37.386 – Sun-Air v. SAS and Maersk Air, OJ L265/15 dd.5.10.2001. ‘E-Commerce and its implications for competition policy’, UK OFT 308, Discussion Paper 1, August 2000. ‘Price discrimination’ is when a seller is charging consumers ‘with different prices for the same commodity or discriminating in the provision of allowances – compensation for advertising and other services – may be violating the competition rules. This kind of price discrimination may hurt competition by giving favoured customers an edge in the market that has nothing to do with the superior efficiency of those customers.’ (‘Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws’), http://www.ftc.gov/bc/compguide/index.htm. ‘Predation is the strategic behaviour where an undertaking deliberately incurs short term losses in order to eliminate a competitor so as to be able to charge excessive prices in the future.’ UK Competition Act 1998 (CA98) guideline Market Definition, UK OFT 403. R.M. Weiss and A.K. Mehrotra, ‘Online Dynamic Pricing: Efficiency, Equity and the Future of E-commerce’, available at: http://www.vjolt.net/vol6/issue2/v6i2-a11Weiss.html. ‘Amazon.com Varies Prices of Identical Items for Test’, Wall St. J., Sept. 7, 2000, at B19. For example, as suggested by Balto taking into account the US law, the RobinsonPatman Act ‘requires that sellers treat all competing customers on the same basis, unless there is some recognized legal justification for different treatment.’ (D.A. Balto,

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‘Emerging Antitrust Issues in Electronic Commerce’, Speech Before 1999 Antitrust Institute (Nov. 12, 1999).) N. Reich, ‘A Model for Effective Consumer Protection in a Unifying European Market?’ in Institut für Europaisches Wirtschafts und Verbraucherrecht e.V Study, 2001, p. 29. ‘Enterprise Act 2002’, The Stationery Office Limited, available at: http://www.hmso.gov.uk/acts/acts2002/20020040.htm. See also OFT Guidelines, ‘Overview of the Enterprise Act, the competition and consumer protection’, published by the Office of Fair Trading, 2003; OFT Guidelines, ‘Enforcement of consumer protection legislation’, 2003. Section 213 of the Enterprise Act 2002. For example, the White Paper mentions as core principles for e-commerce codes, the fact that the consumers will see: ‘an e-hallmark which cannot be used by unauthorised traders: – guaranteeing that its users are legitimate traders – assuring that the trader will not use marketing techniques that take advantage of children or other vulnerable consumers; clear, accurate and not misleading information about: – goods and services – price, including taxes – delivery costs – returns policy – other contractual rights – how to order (and how not to order); confirmation of the contract; assurance that payments can be made safely and, where necessary, communications kept secure; arrangements for protecting personal data; how to avoid unsolicited e-mail; how to contact the trader including a terrestrial address and telephone number.’ (Modern markets: confident consumers, Report of the UK Department of Trade and Industry, available at http://www.dti.gov.uk/consumer/whitepaper). Further information on consumer codes of practice is available in Core criteria for consumer codes of practice – guidance for those drawing up codes of practice, OFT352, published in May 2002; and The OFT’s Consumer codes of practice regime, OFT631, published in February 2003. The Financial Services Authority (FSA) is an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. It is financed by the financial services industry. ‘Treating customers fairly after the point of sale’, Financial Services Authority, Discussion paper, June 2001, http://www.fsa.gov.uk. ‘A New Regulator for the new Millennium’, Financial Services Authority, Discussion paper 2000, available at: http://www.fsa.gov.uk. ‘Treating customers fairly after the point of sale’, Financial Services Authority, Discussion paper, June 2001, available at: http://www.fsa.gov.uk, pp. 6-9. 15 U.S.C. §45(a). Federal Trade Commission Act Amendments of 1994, Pub. L. No. 103-312, §9, 108 Stat. 1691, 1695 (codified as amended at 15 U.S.C. §45(a). Federal Trade Commission also enforces a variety of antitrust laws as part of its mission to maintain competition. Section 5 of the FTC Act the Commission to prohibit practices that violate the Sherman Act or the Clayton Act relating to unfair competition practices. 15 U.S.C. §45(n)(1994). International Harvester Co, 104 FTC 949 (1984). In Budget Rent-a-Car, 113 FTC 1109 (1990). Pfizer case (81 FTC 23, 64, 1973). According to the Pfizer case, ‘a reasonable basis’ is determined on a case-by-case basis by analysing the following six factors: 1. The type of claim; 2. the benefits if the claim is true; 3. the consequences if the claim is false; 4. the ease and cost of developing substantiation for the claim; 5. the type of product; and 6. the level of substantiation experts in the field would agree is reasonable. (See Lesley Anne Fair and Matthew Gold, ‘Understanding Electronic Contracting: The Impact of Regulations, New Laws & New

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Cyber Consumer Law and Unfair Trading Practices Agreements. FTC Advertising Enforcement’, Practising Law Institute Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series PLI Order No. G0-00XW, April–May, 2002.) Pfizer case (81 FTC 23, 64, 1973). No. 99-WM-783, 1999 F.T.C. LEXIS 112 (D.Colo. filed Apr. 21, 1999) (stipulated consent agreement and final order entered June 23, 2000). No. 99-WM-783, 1999 F.T.C. LEXIS 112 (D.Colo. filed Apr. 21, 1999) (stipulated consent agreement and final order entered June 23, 2000). Thomas B. Leary, Commissioner with the Federal Trade Commission remarks that ‘Commissioner Swindle’s views on this issue may have been influenced by the Commission’s policy statement on unfairness, issued in 1980 and largely codified by the 1994 Amendments, which suggests that privacy invasions that merely cause some discomfort or embarrassment may not be actionable,’ in ‘Unfairness and the Internet’, 2000, available on www.ftc.gov. No. 99-WM-783, 1999 F.T.C. LEXIS 112 (D.Colo. filed Apr. 21, 1999) (stipulated consent agreement and final order entered June 23, 2000). No. 99-WM-783, 1999 F.T.C. LEXIS 112 (D.Colo. filed Apr. 21, 1999) (stipulated consent agreement and final order entered June 23, 2000) Thomas B. Leary, Commissioner with the Federal Trade Commission, 2000, available on www.ftc.gov. FTC v. Carlos Pereira, d/b/a atariz.com, Civil Action No. 99-1367-A (E.D. Va. Filed Sept. 14, 1999). T.B. Leary, ‘Unfairness and the Internet’, see www.ftc.gov.us. M.L. Azcuenaga, Commissioner FTC, ‘The Role of advertising and advertising regulation in the free market’, 1997, available at: www.ftc.gov. M.L. Azcuenaga, Commissioner FTC, ‘The Role of advertising and advertising regulation in the free market’, 1997, available at: www.ftc.gov. 15 USC §§2301-2312 The rulemaking provision is based on the following principles: ‘First, it provides that rules promulgated by the FTC ... will have the force and effect of law. Second, because of the new significance of the FTC rules, the (law) imposes certain new standards in FTC rulemaking procedures to assure that all premises for these rules – which will have a potentially pervasive and deep effect – are soundly based ...’ (Institut für Europaisches Wirtschafts und Verbraucherrecht e.V, Study for Health & Consumer Protection DG, 2000, p. 36). Sec. 13(b), 15 USC §53. N. Reich, ‘FTC – A Model for Effective Consumer Protection in a Unifying European Market?’, in a study produced by Institut für Europaisches Wirtschafts und Verbraucherrecht e.V for Health & Consumer Protection DG, 2001, available at: www.europa.eu.int. N. Reich, ‘FTC – A Model for Effective Consumer Protection in a Unifying European Market?’, in a study produced by Institut für Europaisches Wirtschafts und Verbraucherrecht e.V for Health & Consumer Protection DG, 2001, available at: www.europa.eu.int.

Chapter 9

Fair Trading Principle – The Starting Point for Online Consumer Law in Europe? INTRODUCTION In the electronic marketplace, cross-border dimensions change the old boundaries between national, European and international law. We are facing a new trend of globalisation: international and national law merge in one unified framework; our conceptions of consumer law are also changing. The premise of globalisation, either at the traditional or online market level, claims for a reliable framework able to deter unfair commercial practices. Recomposing a new legal landscape able to dismantle unfair commercial practices in cyberspace is a daunting task. As remarked by Reich: [e]verybody will agree that commercial practices should be ‘fair’ towards the consumer (and the competitor), but what exactly does ‘fairness’ mean in a specific setting? Are unsolicited Tele- or internet-marketing activities (spams) fair only if the consumer has consented beforehand (so-called ‘opt-in’ approach), or does ‘fairness’ merely require an effective procedure to oppose this type of marketing (so-called ‘opt-out’ approach), or should there be no state regulation at all, leaving the standard setting to self-regulation and the broad principles of civil and criminal law?1

Based on the study conducted by Hans W. Micklitz,2 the European Commission Green Paper on Consumer Protection3 has proposed a Framework Directive including a general clause which prohibits engaging in unfair commercial practices. Following the consultation process4 on the Green Paper and based on ‘Extended Impact Assessment’,5 the European Commission considered that a Directive harmonising EU Member States’ rules on unfair commercial practices will change the landscape of consumer protection. On June 18, 2003 the Commission of the European Communities adopted a proposal for a Directive concerning unfair business to consumer commercial practices in the internal market. The proposed Directive on unfair commercial practices provides one set of common rules with the aim of replacing the widely diverging national rules and regulations. As such, consumers should be guaranteed the same protection against unfair business practices and wherever they make a purchase in the European Union. The Directive as proposed by the European Commission advances the ‘principle of country of origin’ according to which compliance with the law in their EU country of establishment would have automatically guaranteed traders, the freedom of providing services without worrying about breaking the rules. The Council6 agreed

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on its common position on the basis of a presidency compromise text. The text issued after the Council’s common position proposes the removal of the principle of country of origin. The Irish Presidency considered that since the proposal harmonised member states rules on unfair commercial practices, there was no need for the principle of country of origin. The proposed Directive outlines a general clause in order to determine whether a commercial practice is unfair. Outside the lists of misleading and aggressive practices, the unfairness of a practice can be determined by performing a simple assessment, determining firstly whether a trader has acted with professional diligence, and then whether the practice materially distorted or was likely to materially distort the economic behaviour of an average consumer. The proposed text lists unfair practices which it categorises as being either misleading or aggressive. A positive list of ‘best practices’ would have been appropriate for encouraging positive action to promote a fair business environment and to establish a high level of harmonisation. The aim of this chapter is to provide a brief overview of the evolutionary aspects of the fair trading principle within the context of the international and global European context. This overview is necessary for exploring whether the European concept of ‘fair trading’ as imagined by the European Commission can apply to the global electronic market. In comparison with the traditional market, the application of fair trading to the electronic marketplace poses many new challenges regarding its philosophy, its classical conceptual basis and its enforcement. 9.1 General Overview of the Fair Trading Principle in the International and Global European Context In order to provide a general overview of the fair trading principle, the chapter outlines some of its evolutionary aspects in the international context. The chapter starts first by identifying the origin of fair trading at the international level. Second, it continues by analysing how European law have borrowed from the area of international law, the rationale of the fair trading principle. 9.1.1 The inception of the principle of fair trading At the origin, the principle of fair trading was related to the requirement of competition laws that firms can compete on a level playing field. As the study by the Institut für Europaisches Wirtschafts und Verbraucherrecht e.V7 suggests, the common concepts of Fair Trading – usually symbolised by the notion of ‘unfair competition’ – are much more oriented to protect competitors from each other rather than to secure the autonomy of the decision-making of private consumers and the workability of competition as a whole. The role of fair competition is to keep markets open and competitive in order to achieve lower prices, increase choice, and improve product quality for the benefit of the consumer. For example, it can be inferred from European competition rules8 that the consumer is assumed to receive a fair share of those benefits that flow from the particular type of agreement that may obtain an exemption under Article 81(3). In a general context, this means that

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the consumer should obtain a fair share of the market’s benefits so long as the market remains competitive. The history of fair trading in the European Union has its origins in European national laws. The principle of fair trading can be found in most European Member States’ laws.9 It can be perceived under different types of wording10 which range from bonos mores (Austria, Germany, Greece and Portugal), fair commercial practices (Belgium, Italy, Luxembourg and Spain), good marketing practices (Denmark, Finland and Sweden), unlawfulness (Netherlands) and fault (France). All these considerations demonstrate that fairness is certainly not a uniform concept. At international level, the fair trading principle dates from 1883. The principle is mentioned for the first time in Article 10 of the Paris Convention on the protection of intellectual property rights. It refers to an obligation on the signatory States to take appropriate measures to ensure fair trading as well as to the definition of what might be understood by fair trading. At the international self-regulatory level, another method for regulating unfair practices is by applying the principle of fair trading to the area of advertising and marketing rules. The International Chamber of Commerce11 (ICC) International Code of Advertising Practice which was first issued in 1937, and revised in 1949, 1955, 1966, 1973 and 1987, provide that advertisements should not contain any statement or visual presentation which directly or by implication, omission, ambiguity or exaggerated claim is likely to mislead the consumer, in particular with regard to characteristics such as: nature, composition, method and date of manufacture, range of use, efficiency and performance, quantity, commercial or geographical origin or environmental impact; the value of the product and the total price actually to be paid; delivery, exchange, return, repair and maintenance; terms of guarantee; copyright and industrial property rights such as patents, trade marks, designs and models and trade names; official recognition or approval, awards of medals, prizes and diplomas; the extent of benefits for charitable causes. Advertisements should not misuse research results or quotations from technical and scientific publications. Statistics should not be so presented as to exaggerate the validity of advertising claims. Scientific terms should not be used to falsely ascribe scientific validity to advertising claims.12 Furthermore, according to Article 2 of ICC International Code of Direct Marketing, ‘[A]ll direct marketing activities should deal fairly with consumers. Activities should be so designed and conducted to avoid giving ground for reasonable complaint. (…) The fulfilment of any obligation arising from a direct marketing activity should be equitable, prompt and efficient.’13 It follows from this brief overview, that the origin of the principle of fair trading is related both to areas of competition law and to misleading advertising practices. 9.1.2 The evolution of the principle of fair trading in the European Union Mapping out the evolutionary aspects of the fair trading principle in the European Union demonstrates that the principle of fair trading is not the result of a doctrinal consideration14 but rather of a social and economic reality oscillating between the lack of political impetus and the difficulties of the lawmaking process at European Union level.

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9.1.2.1 Lack of Political Impetus of the European Union A study commissioned by the European Commission, undertaken by the Institute of European Business of Cologne, headed by Hans W. Micklitz, explained the difficulties encountered when imposing the principle of fair trading at European Union level. The study provides that ‘piecemeal rules and unsystematic references to a presupposed though obscure principle of fair trading demonstrate the lack of the necessary political impulse to get to grips with the real challenge: the elaboration of a general legislative framework.’15 In the legal gloom generated by the scepticism of the Member States towards the integration process at that time, only one single project was completed through the adoption in 1984 of the Directive on Misleading Advertising.16 Other projects of harmonisation incorporating the fair trading principle were postponed progressively until the promulgation of the Unfair Contract Terms Directive,17 of the Misleading Advertising Directive,18 or under the Safety and Liability Product Directives.19 With the proposal for Unfair Commercial Practices Directive, the principle of fair trading seems to enter into a new revitalising era. The proposed Directive would have to be more than simply a general principle regulating business–consumer commercial practices. It addresses the main differences in national rules on commercial practices which affect the operation of the Internal Market. 9.1.2.2 The Difficulties of the European Lawmaking Process Delays in the recognition of the principle of fair trade by its incorporation into an EU Directive are also due to the particularities of the European Union’s lawmaking process. This process has been generally criticised as being a source of disharmonisation. Thus, it was considered that since Directives are not based on a common and general structure of private law, but are instead issued in order to remedy certain unsatisfactory conditions impairing the functioning of the current market, or are designed to improve the protection of consumers in certain areas, they are regarded by academic lawyers, at best, as mere – and often unwanted – alien supplements to the existing domestic laws and, at worst, better to be ignored.20 Certainly, in a Europe characterised by a multicultural environment, achieving uniformity in an area dominated essentially by political views is much more difficult that we might imagine. Controversial European policy files that lie forgotten in the bottom of a drawer, could later be brought out at a moment of diminished national pressure and opposition. The European Commission’s proposal to set up a framework based on the duty of fair trade, can be seen from this dithering political perspective. That does not mean that the European lawmaking process has reached its level of perfection but rather that there is an urgent need to find a suitable solution to the lack of consumers’ confidence in the Internal Market. This imperative need to find new solutions for consumer protection has not escaped critics of the technique of the lawmaking process at the EU level which are handled by different Directorates-General of the European Commission. The consequence of this fragmented lawmaking process might risk creating inconsistent legal rules, which later will simply not fit in with the structures of national rules. The launching of the EC Communication on European Contracts21 followed by the

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Green Paper on Consumer Protection illustrates the overlapping of the European Commission’s actions. Probably that one single action might have been sufficient to articulate a single view on connected matters. The difficulty in articulating a unified vision for consumer protection law in Europe is in fact supplemented by the complexity of consumer law which relies on rules and principles which range to a multitude of substantive legal areas from privacy and contracts, to professional regulation and unfair commercial practices. 9.2 Fair Trading Principle – As Regulatory Principle in the Internal Market With the Amsterdam Treaty, EU consumer protection has achieved the right to be taken into account when other Community policies are considered.22 However, the current consumer protection landscape is characterised by significant disparities. Each EU Member State has adopted consumer protection rules in order to comply with European Union Directives as well as with OECD and WTO guidelines, UNCITRAL and the Council of Europe’s principles. These disparities are translated in inconsistent definitions and in a heterogeneous approach on a large number of issues. Due to the lack of space, the analysis of the development of the European Union Consumer Policy goes beyond the purpose of this study.23 This subsection is confined to explaining the fair trading model from the perspective of the existing approach as projected by the proposal for a Directive of the European Parliament and of the Council concerning unfair business-to-consumer commercial practices in the Internal Market.24 9.2.1 The proposal for a directive on unfair commercial practices In order to enforce consumer protection in the European Union, the Green Paper on Consumer Protection advances the idea of developing a Framework Directive on fair commercial practices and the development of a legal instrument for co-operation between enforcement authorities. Following to the consultation process25 on the Green Paper and based on ‘Extended Impact Assessment,’26 the European Commission concluded that a Directive harmonising EU Member States’ rules on unfair commercial practices was the best policy option. The philosophy behind the proposed Directive27 lies in the fact that the trader might take undue advantage of the weak bargaining position of the consumer and his level of knowledge. The emergence of electronic commerce in today’s society has changed the methods of doing business by the lack of territoriality presence and intermediary’s business relationships, by the existence of ‘virtual shops’ and the possibility of advertising products without any costs. Unfair commercial practices are much easier to commit in the electronic marketplace due to the new technologies. ‘Eliminate viruses on your computer today for FREE,’ ‘Debt Got you down? Free aid,’ ‘Are you anxious about your debt?,’ ‘Get a Cell Phone with Accessories at No Cost,’ are some of the typical message used to draw consumers in to pretended fair commercial practices. The proposed directive covers the electronic market context. It also covers direct selling, publishing activities, consumer sales, property sales, financial consumer services, advertising, package

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travel, timeshare and transport. Within this large context, the proposed Directive aims to introduce a high common level of consumer protection by establishing a single, common, general prohibition of unfair commercial practices distorting consumers’ economic behaviour. The proposed Directive explains that it will apply where there are no specific provisions regulating unfair commercial practices in sectoral legislation. Where such specific provisions do exist, they will take precedence over the framework directive.28 This section confines itself to a brief analysis of the main functional principles at the origin of the proposed Directive as well as of the evolution of these principles after the political agreement reached by the Competitive Council29 providing for full harmonisation. It also examines some aspects of its impact in the context of electronic market. 9.2.1.1 Functional Principles The proposed directive as originally proposed by the Commission is based on the principle of country of origin. After the Council’s agreement, the principle of country of origin was removed. Therefore, Member States will have to ensure that traders comply with the rules on unfair commercial practices on their territory. In this context, the Commission will have an important role to accomplish by monitoring the transposition and application of its impact in Internal Market. 9.2.1.1.1 From principle of country of origin to ‘full harmonisation’ The proposed Directive fully harmonises EU requirements relating to unfair business-toconsumer commercial practices. In the context of the proposed Directive as originally proposed by the Commission, ‘maximum harmonisation’ means a high level of protection, not the lowest common denominator, and respect for the conditions for the application of mutual recognition and of the country of origin.30 ‘Maximum harmonisation’ is seen from the perspective of its benefits for the Internal Market and cross border trade and as a method for tackling differences in national laws caused by the use of minimum clauses. As Commissioner Byrne argues, the ‘minimum clauses were driven by the partial nature of EU measures when set against the many national legal systems that contain general clauses or principles for consumer protection. Rather than address these differences at source, the minimum clauses swept them under the carpet.’31 The proposed Directive did not choose the alternative of ‘minimum harmonisation’ advanced by the Green Paper on Consumer Protection. Within cross-border contexts characterised by ‘competing’ national sovereignties, the Member States are tempted to rely on ‘minimum clauses.’ Member States dread that Directives not based on ‘minimum clauses,’ are meant to gravitate towards a poor level of consumer protection. In their temptation to offer the best consumer protection and with the belief that this can be achieved only by working alone, through a ‘minimum harmonisation’ approach, national governments would risk perpetrating a non-confident environment so long as the existing cross-border complaint-handling and litigation unsatisfactorily disregard consumers’ rights. A Directive accompanied by ‘minimum clauses’ is meant to reach a minimum level of harmonisation whilst complementing high national standards of protection. A large number of consumer protection Directives

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allow Member States to introduce rules that are stricter than agreed upon by the Directives.32 For example, whilst the Misleading Advertising Directive includes an extended definition of the notion of ‘misleading advertising,’ the Directive allows Member States to retain or adopt additional consumer protection measures and this means that barriers to cross-border trade still persist. According to the principle of country of origin, as originally proposed traders have to comply only with the requirements of the country of origin. The application of principle of the ‘country of origin’ allows businesses to sell and advertise in all Europe in the same way as to their national consumers. For example, companies based in Belgium must respect the Belgium legal framework in the area of unfair commercial practices. However, a company offering services in Belgium but based in a foreign country would not be obliged to respect the Belgian legislation. In cases of litigation, which often will be written in a foreign language, the Belgian judge should consider the legislation of the ‘country of origin’ where the company is based. The principle of ‘country of origin’ also prevents other Member States from imposing additional requirements on traders operating on the basis of free movement of goods and freedom to provide services.33 In this sense, the application of the principle of ‘country of origin’ might constitute a disadvantage for those companies located in countries where the national marketing rules are much stricter in comparison with the national legal framework of other European countries. In its new version, after the political agreement reached by the Competitiveness Council, the text of the directive has received a fundamental amendment by removing the ‘country of origin’ principle and so by providing for full harmonisation. That means that traders complying with the provisions of the directive do so not just in their own national context but on EU-level. Consequently, there is no need for mutual recognition; the same rules apply in all EU Member States. The wording of Article 4 on the ‘Internal Market’ also changed: ‘Member States shall neither restrict the freedom to provide services nor restrict the free movement of goods for reasons falling within the field approximated by this Directive.’34 In the context of ‘full harmonisation,’ Member States will have a duty to ensure the rules on unfair commercial practices are enforced and that traders in their jurisdiction who infringe them are punished. The duty to pursue ‘rogue traders’ would apply equally to all consumers regardless their domicile in a EU Member State. Certain industries criticised the removal of the ‘principle of country of origin’ on the grounds that to provide in order cross-border services traders will be obliged to understand the national rules of each EU Member State. The Directive will go now back to the European Parliament for a second reading in autumn 2004. While it is expected that business organisations will plead for the inclusion of the principle of the country of origin, it is doubtful that the European Parliament will accept it since the proposed directive includes a new paragraph in Article 3 which states a six year derogation to full harmonisation with the possibility of extension for a limited period.35 9.2.1.1.2 Objective test The proposed Directive covers businesses’ behaviour in relation to transactions with consumers where this affects consumers’ economic behaviour. In its Explanatory Memorandum, the proposed Directive specifies that:

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these unfair commercial practices generate a market failure by impairing the consumer’s ability to make choices which are informed and therefore efficient. This distortion of consumers’ preferences is detrimental to the collective interests of consumers even if a specific consumer affected by the practice does not suffer a financial loss.36

According to the Explanatory Memorandum, a transactional decision would not only include a decision about whether to buy, and from which supplier, but also the decision to exercise rights under a contract; or to either continue or terminate a commercial relation with a supplier. It does not cover businesses dealings with other businesses, contract law and matters of taste, decency, health and safety of products. The exclusion of ‘taste’ and ‘decency’ makes clear that the test of unfairness will not be assessed through a subjective test. A subject test means that the personal claims with regard to the tangible qualities of a product such as taste, style, political views, aesthetics, are taken into account when considering an unfair commercial practice. A judge would have difficulty in applying a subjective test since the subjective claims cannot be proved or disproved. According to Article 5, the proposed Directive would apply an objective test by considering the objective claims of the average consumers with regard to tangible qualities or performance of products which can be measured against the recognised standards of professional diligence. 9.2.1.1.3 Commercial practices before and after sale The proposal applies the provisions of the Directive to commercial practices both before and after sale. The trader will consequently need to ensure that commercial practices after sale meet the same fairness standards as commercial practices before sale. The Explanatory Memorandum states that the absence of after-sale services would not be considered in itself considered unfair unless the trader’s conduct would lead the average consumer to have materially different expectations about the after-sale service available. The proposed directive exemplifies that there is no obligation for a trader to offer a dedicated technical support online. However, if the trader makes claims that he will provide such a facility and then does not do so, the practice is misleading and thus unfair. According to Article 3, the directive shall apply to unfair commercial practices, before and after a commercial transaction in relation to any product. That does not exclude actions against unfair commercial practices arising in connection with a contract. For example, an unfair contractual clause inserted into a contract may provide grounds for alleging an unfair business practice, although the plaintiff’s claim can be justified on the basis of the regulatory framework with regard to the Unfair Terms in Consumer Contracts.37 ‘Commercial practices’ are defined as ‘any act, omission, course of conduct or representation, commercial communication including advertising and marketing, by a trader, directly connected with the promotion, sale or supply of a product to consumers.’38 It can be inferred from this definition that a consumer must not show that a practice has a repetitive character. A ‘practice’ may be established by one single conduct. The expression ‘directly connected’ is susceptible to many interpretations in electronic commerce where the Internet provider (IP) can perform a wide range of

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functions combining for example publication with ‘direct’ interactive commercial transactions. For example, an IP who makes an advertisement ‘directly connected with the promotion, sale or supply of a product’ and deemed to be unfair commercial practice might be liable whether or not the plaintiff demonstrates that all three conditions39 provided by Article 5 of the proposed Directive are satisfied. The Directive leaves open the question of whether an IP can be held liable to a standard of ‘trader’ or whether it should be exempt from all liability with regard to the content of the third parties. The IPs may simultaneous exercise the role of conduits, distributors, and content providers. Having the role of conduit would not constitute an alibi for the IP to avoid liability for content and for distribution. In the electronic marketplace where many unfair practices are related to the accuracy of information, the types of liabilities are very complex and in connection with the standards of IP professional diligence. The standard of liability with respect to the content of the third parties would be determined by the level of control exercised by an IP over the information content. 9.2.1.2 General Prohibition of Unfair Commercial Practices The unfairness of commercial practices constitutes a complex term, circumscribed by a factual context and open to varying interpretations. While it is difficult to provide a definition of all unfair practices, the European Commission discerned some patterns for defining with precision the unfairness of commercial practices. The proposal of the Directive contains a general prohibition which covers unfair commercial practices. It establishes three cumulative conditions for determining whether a practice is unfair. These conditions are elaborated in Article 5 as following: 1 the practice must be contrary to the requirements of professional diligence; 2 the benchmark consumer to be considered in assessing the impact of the practice is the ‘average’ consumer established by the ECJ; 3 the practice must materially distort or be likely to materially distort consumers’ economic behaviour. The unfairness of a commercial practice is not defined according to the defendant’s intention of detrimental effect on the consumer’s behaviour but rather according to the objective result of the transaction. The result of the transaction is in the function of the materiality of economic distorted behaviour. To prevail on a claim of unfair commercial practice, a plaintiff must demonstrate that all three conditions established by the ‘general clause’ are satisfied. If a practice is considered contrary to professional diligence it will only be unfair if the other conditions of the general prohibition are also met. An example of practice which might be covered by the general prohibition is for example, the amendment made unilaterally by a trader to a consumer’s contract. Unilateral modifications of the contracts should be admitted only when these are agreed by both parties. Otherwise, they may be contrary to the requirements of professional diligence in that where a consumer has already agreed the terms and conditions of the contract, this agreement represents the consumer’s deal as to price and product quality. In

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addition, by demonstrating the infringement of requirements of professional diligence, in this case, the plaintiff would implicitly show that the trader’s conduct materially distorted the consumer’s economic behaviour by imposing on him nonnegotiated terms and conditions. 9.2.1.2.1 Requirements of professional diligence In general terms, ‘professional diligence’ requires fundamental legal and factual circumstances in relation to a consumer transaction decision. According to Article 2(j), ‘professional diligence’ means the measure of ‘special skill and care’ exercised by a trader commensurate with honest market practice and/or the general principle of good faith in the trader’s field of activity. A trader may wonder about the specific skill and care measures that must be implemented in order to avoid any allegation of unfair commercial practice. The proposed Directive cannot require traders to implement specific skills and care. In order to respond to the objectives established by the Directive, traders would be obliged to implement specific legal standards provided by professional codes. The implementation codes’ process is approached in the Explanatory Memorandum which provides that: In some Member States there is a tradition of using codes of conduct to define norms or standards of behaviour for traders which are not prescribed in legislation. These can be used either to show in greater detail how to apply legislative requirements (e.g. how to explain complex concepts in ways that consumers can understand) or in areas where there are no specific legal requirements (e.g. aspects of after-sales care).40

Moreover, ‘professional diligence’ should be exercised in accordance with generally recognised standards of business practice ‘in his field of activity’. The expression ‘in his field of activity’ raises questions when considering the variety of standards of business practice from one trade sector to another, or even the diversity within the same trade sector when the standards are determined by the socioeconomic and cultural context in which a trader operates. In the electronic marketplace, this definition would look for solutions in regard to the uncertainty or inexistence of an established general standard of professional diligence. In order to prevail against the claim of online unfairness, traders would need to adopt emerging standards from regulated industries or requirements of normal market practice existing in the off-line environment and finally to adhere to professional codes. Such codes would be helpful to traders as well as to national authorities in determining the requirements of professional diligence in a particular sector. The requirement of diligence in electronic commerce is also important since the online traders are evolving into a sort of catalogue of products which produces much more content information rather than distribution. In this sense, the implementation of the proposed directive would have an important impact on quantitative and qualitative information presented on the websites. It would advance the quality of the information presented on the website allowing the consumer the possibility of identification, checking and receiving appropriate information. Another question on the particular aspects of professional diligence in the electronic marketplace is relating to the lack of experience of online traders. Many specific online companies may not have many years’ experience. Lack of experience

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might be an argument for online traders who defend the plaintiff’s claim and attempt to prove a good faith conduct. Until now, consumer protection enforcement was mainly directed to misleading practices in respect of the traditional obligation of ‘good faith’ purchase. Nevertheless, there are many other practices which for the time being are not caught by professional diligence rules. Despite the existence of complete legal frameworks, the lack of disclosure of information continues to be the rule on the Internet. The lack of disclosure of information, the existence of incomprehensible or changed terms and conditions, the distribution of information (that should help the consumer make a reasoned transaction decision) after the consumer has paid, the defects in computer programs which ironically are resolved by ‘sending reports’ (which appears on the computer screen) are some of the most obvious unfair practices in the electronic marketplace. Instead of constituting causes of actions, these practices turn out to be progressively unnoticeable for an average consumer who might believe that they are accepted industry practice. Furthermore, the proposed directive leaves open the question of the infringement of the professional diligence in its connection with a certain type of liability. We can wonder for example, if an allegation of professional negligence would be sufficient to make a claim for unfair trading practice. In addition to the infringement of professional negligence, the consumer should prove that the offended commercial practice materially distorted his economic behaviour. In order to prevent significant imbalances in the rights and obligations of consumers on the one hand and sellers and suppliers on the other hand, the European Parliament in its co-decision procedure (first reading), amended the text of Article 2 by including the term of ‘good faith’ as required by Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts.41 Thus, the amendment proposed extends the contractual principal of good faith to precontractual and post-contractual transactions. Within the context of Article 2 on ‘professional diligence,’ the principle of good faith goes beyond its traditional interpretation of bona fide42 of the purchaser. In relation to professional diligence applied to unfair commercial practices, the principle of ‘good faith’ means the observance of commercial standards of fair dealing. The similarity between good faith and fair dealing is outlined in the common law system by Lord Bingham in Interfoto Library Ltd v. Stiletto Ltd for whom good faith is ‘in essence a principle of fair and open dealing.’ Lord Bingman remarks that: In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as ‘playing fair,’ ‘coming clean’ or ‘putting one’s cards face upwards on the table’. It is in essence a principle of fair and open dealing (…).43

From this perspective, the proposed Directive attempts to fashion a standard of ‘good faith’ based on professional diligence. Its approach represents a step further in the development of the principle of ‘good faith’ performance by its incorporation

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as a standard of professional diligence and its extension to unfair commercial practices. The standard for unfair practices includes the concept of average consumer. 9.2.1.2.2 Average consumer With respect to the notion of ‘consumer,’ the Council proposed the removal of the definition ‘average consumer’ from its Article 2. The notion of consumer returns however to the notion of ‘average consumer’ as codified by the European Court of Justice.44 The Directive takes as a benchmark the average consumer as interpreted by the European Court of Justice but makes provision to prevent the exploitation of consumers whose characteristics make them particularly vulnerable to unfair commercial practices. In Recital 13 of the proposed directive, it is stated: ‘Where a commercial practice is specifically aimed at a particular group of consumers, such as children, it is desirable that the impact of the commercial practice is assessed from the perspective of the average member of that group. The average consumer test is not a statistical test. National courts and authorities will have to exercise their own faculty of judgement, having regard to the case law of the European Court of Justice, to determine the typical reaction of the average consumer in a given case.’45 Considering the average consumer benchmark, Commissioner David Byrne said: ‘It is essential to codify clearly in the Directive what is already Community law established by the European Court of Justice in several judgements in the fields of misleading advertising and intellectual property. This Directive is now bringing about harmonisation. We therefore need to codify the average consumer benchmark. It is the only way to ensure that the same criteria are used EU-wide by courts and enforcers to consider, for example, whether an advertisement is misleading. The Directive will give guidance as to how to do so, while retaining flexibility based on social, cultural or linguistic factors, as already set out by the Court.’46 According to the European Court of Justice and national courts, the average consumer should be reasonably well informed and reasonably observant and circumspect, rather than the vulnerable or atypical consumer. When a commercial practice is specifically targeted at a particular group of consumers, the judge should evaluate the effect of this practice on the average member of that group rather than the effect on consumers as a whole. At the same time, the judge should apply this term only in relation with the circumstances peculiar to every case and by taking into account relevant social, cultural or linguistic characteristics of targeted groups. Whether or not a commercial practice distorts the consumer economic behaviour depends on the views of an ‘average consumer.’ The consumer’s view on products is naturally a very subjective one. The consumer’s view varies in function with education, experience and age. If an unfair commercial practice targets children or other vulnerable groups, the unfairness would be difficult to avoid. In their concern to protect vulnerable purchasers, the European Parliament proposed an amendment to target special categories of consumers. The amendment stated that ‘especial account shall be taken of particularly vulnerable individual circumstances connected with motherhood, childhood, disability and advanced age.’47 The Council in its common position preferred to express concern towards the vulnerable by adding an new paragraph to Article 3 which states that commercial

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practices which reach the generality of consumers, but are likely to materially distort the economic behaviour of only a group of consumers who are particularly vulnerable to the practice or the underlying product because of their mental or physical infirmity, age or credulity in a way which the trader could reasonably be expected to foresee, shall be assessed from the perspective of the average member of that group. This is without prejudice to the common and legitimate advertising practice of making exaggerated statements or statements which are not meant to be taken literally. The definition of ‘average consumer,’ as established by the European Court of Justice, reasonably well informed and reasonably observant and circumspect, requires a proactive attitude of the consumer determined to identify the misleading character of an advertisement. When considering the concept of ‘reasonably circumspect consumer,’ national courts apply a similar approach. For example, in ‘Scanner Advertisement’48 the German Supreme Court (BGH) considered that a reasonably circumspect consumer should have realised that the picture included in the advertisement ‘Mustek Scanner Color,’ which represented a more expensive scanner, did not correspond in reality to the product advertised. In Krombacher,49 the court held that the advertisement where a brewer promised to pay for the safekeeping of one square metre of African rainforest per beer crate sold, could influence the consumer’s decision to buy the product. As the advertisement did not make any mention of the manner in which the brewer would preserve the rainforest, the advertisement was considered misleading. It follows from these cases that an ordinary consumer as decided by a German Court is a person relatively welleducated and trained. Would this definition prevail in cyberspace? In online consumer transactions, consumers should be experienced in using and sorting the information. Would consumers have the right to be ignorant in this fast-moving environment? Whilst it is true that the use of information technology requires certain abilities, the goal of consumer protection law should not be confined to the protection of well-informed and reasonably observant consumers. It can be inferred from these practical and legal considerations as well as from the arguments developed in the first part of this study,50 that the notion of ‘average consumer’ raises many questions both in the online and off-line marketplace. 9.2.1.2.3 Distortion of consumer’s economic behaviour Legal application of unfairness focuses on individual freedom by protecting the consumer’s economic behaviour in making rational informed transactional decisions. Thus, a practice will materially distort the economic behaviour of the average consumer if it significantly impairs the consumer’s ability to make an informed decision and thereby causes the consumer to take a transactional decision that he would not have taken otherwise.51 The issue of what ‘significant’ distortion means, is not addressed by the proposal. How ‘significant’ should the impairment be in order to consider a commercial practice as unfair? The imprecision of the term ‘significant’ might lead a trader to consider that its practice did not significantly impair the consumer’s transactional decision. ‘Significant impairs’ is relating to the ‘materiality’ of a claim in relation to the product’s performance, price, features, safety, and is important to a consumer’s decision to buy or use the product.

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Examples of material claims are representations about a product’s performance, features, safety, price, or effectiveness. The definition of ‘distortion of consumer economic behaviour’ in fact reduces the cause of the detrimental distortion to the omission or misleading/aggressive commercial information which leads consumers to make informed decisions when purchasing goods and services. The notion of ‘distortion’ is related to the ‘reasonable expectations of an average consumer.’52 Would these reasonable expectations of an average consumer be different when shopping over the Internet? The reasonable expectations of an ‘average consumer’ are dependent on the medium in which the transaction takes place. There are situations when the consumers could be deceived in their reasonable expectations by projecting their own traditional experience to a neutral online environment. In determining the unfairness of commercial practices it is important to take into consideration the perceptions of the consumers, and investigate their understanding about the rules of Internet communication. For example, in the electronic marketplace, consumers will not have the possibility to examine or test online products. Let us take the example of a consumer who would like to buy a woollen coat and instead he/she receives a coat made mainly of polyester. Or, the example of a consumer who in line with his/her view on Human Rights, wants to have a coat made in France and instead he/she receive one made in another country that violates these rights. Furthermore, suppose that a consumer orders the coat because he/she believes that the price advertised by the trader corresponds to a woollen coat, which can be bought in the high street. When receiving the coat, the consumer realises that the price advertised does not correspond with the woollen product but with a coat made in polyester. In these hypothetical situations, traders may be suspected of unfair commercial practices if they do not clearly and conspicuously state that each textile or wool item advertised or offered for sale was either imported or not.53 One might wonder, how many traders would provide this type of information? How many consumers would realise that this type of practice could perhaps be unfair? While in the high street shop, a trader is exempted of the obligation to provide this type of information, in online transactions, he must provide disclosure information that responds to a new standard of diligence. 9.2.1.3 Burden of Proof In order to be effective, a claim for unfair commercial practices should not be conceived to increase the plaintiff’s burden of proof. The burden of proof is reversed in the case of a trader who makes a factual claim about a product, which he is unable to substantiate.54 A trader claiming that his product has no side effects or has been tested clinically or scientifically, is in a far better position to prove the accuracy of such claims, for instance by supplying research findings. As the proposed Directive constitutes an additional means of protection against unfair commercial practices, it should help to reduce the regulatory burden of common or civil law placed on the plaintiff. According to the amendments proposed by the European Parliament in the codecision procedure:

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the procedural instruments of the reversal of the burden of proof and of legal presumptions ought also to extend to any arbitration proceedings that may be laid down in a code of conduct, in order to make the code genuinely competitive with the court and administrative proceedings laid down as the normal means of recourse.55

If a commercial practice is found to be either ‘misleading’ or ‘aggressive’ it will automatically be unfair, without any further reference to the test of unfairness contained in Article 5. If the practice is neither ‘misleading’ nor ‘aggressive,’ the clause of ‘general prohibition’ (Article 5) will determine whether it is unfair. 9.2.1.4 Misleading and Aggressive Practices The proposed directive refers to two specific types of unfair commercial practice: misleading and aggressive practice. • Misleading practice According to the provisions of Article 6(1), the traders will be prohibited from taking misleading actions or making misleading omissions.56 According to this requirement, traders have a duty to disclose and not to omit ‘material’ information necessary for an average consumer when making an informed transactional decision. The requirements of information encompass a wide range of requirements more or less ‘material’ which range from the main characteristics of the product57 to the need for a service, part, replacement or repair; from the nature, attributes and rights of the trader or his agent to the claims about the product which the trader cannot substantiate and the consumer’s rights or the risks he may face. The information material is important to a consumer’s decision whether to buy or use a product, such as when it involves cost, purpose, safety, efficacy, quality, performance, durability or warranties of the product.58 Materiality exists even in the case of the omission. By omitting the information, an advertiser or trader would determine specific consumer behaviour, which in most case might be detrimental to the consumer. The proposed Directive supplements the obligation of information by a duty to substantiate factual claims. Trader substantiation advertising would help to determine the product’s attributes. If a trader makes a factual claim about a product, which he is unable to further substantiate, this will be taken into account by a judge when determining whether the trader engaged in any misleading and thus unfair commercial practice.59 Article 6(2) provides a ‘misleading’ standard for a commercial practice which causes or is likely to cause the average consumer to take a transactional decision that he would not otherwise have taken. The commercial practice is misleading if it creates confusion with regard to the marketing of a product, trade marks, trade names and other distinguishing marks of a competitor. That means that the article would allow competitors to inform enforcement authorities about the existence of misleading commercial practices which create confusion towards consumers. A commercial practice is also misleading when it does not comply with commitments contained in codes of conduct by which the trader has undertaken

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to be bound; a commitment given to a public authority to cease an unfair commercial practice is also considered under this Directive. The Explanatory Memorandum60 specifies that misleading consumers or treating them aggressively is considered in themselves to be distortions of consumer behaviour rather than legitimate influence and, as such, contrary to the requirements of professional diligence. A misleading will always violate the requirements of professional diligence and significantly impair the consumer’s ability to make an informed decision. For this reason there is no separate reference to the professional diligence test or the ‘distortion’ element of the ‘material distortion’ definition. • Aggressive practices According to the proposed Directive, a practice may be deemed aggressive, namely by harassment, coercion and undue influence. This duty prohibits businesses from engaging in aggressive selling which exploits special characteristics or circumstances of the consumer. Thus, taking advantage of a specific situation or misfortune of the consumer such as a bereavement or serious illness in his family or anxieties about personal security or debt might be unfair practice. In its present form, the proposed Directive approaches aggressive commercial practices as a whole. It provides several criteria for determining when a commercial practice becomes aggressive such as: (a) its timing, nature or persistence; (b) the use of threatening or abusive language or behaviour; (c) the use by the trader of any specific misfortune or circumstance of such gravity as to impair the consumer’s judgement, of which the trader is aware, to influence the consumer’s decision with regard to the product; (d) any onerous or disproportionate non-contractual barriers established by the trader where a consumer wishes to exercise rights under the contract, including rights to terminate a contract or to switch to another product or another trader; (e) any threat to take any action that cannot legally be taken.61 The proposed Directive only defines ‘undue influence.’ Undue influence involves a trader exploiting a position of power in a way which significantly limits the consumer’s ability to make an informed decision. In this sense, it is considered that businesses, which suggest that the consumer cannot leave the premises until the contract is signed; or prolonged personal visits by sales representatives who ignore requests to leave, are some examples of ‘undue influence.’ The proposed Directive specifies in the Explanatory Memorandum that offering an incentive to a consumer, such as a free bus to an out-of-town store, or refreshments while shopping, would not constitute undue influence because, as indicated above, it would not impair the consumer’s ability to make an informed transactional decision. The Directive does not provide specific legal definition for aggressive commercial practices such as coercion and harassment. Coercion occurs when a trader uses physical or mental force to persuade a consumer to make a commercial decision. For example, ‘illegal tying’ products occurring when a trader agrees to sell one product only if the consumer agrees to buy a second product, might be a form of coercion exercised by a trader on a consumer. The coercion can be established if an average consumer is significantly impaired in

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his freedom of choice of another product than the ‘tied product.’ ‘Significantly’ means that the average consumer has no alternative other than that of buying the ‘tied product.’ Harassment in commercial practices might be defined as the conduct of a trader directed at a consumer that causes substantial emotional distress and serves no legitimate purpose. Harassment may occur for example when a consumer receives harassing e-mail while having difficulties in tracking its origin. Sometimes, the harassment conduct would be perpetrated by using public access e-mail address. In this case, the consumer would have no alternative but to sue the Internet Service Provider. According to the provisions of Article 6(2) of the proposed Directive, ‘A commercial practice shall also be regarded as misleading where […] non compliance by the trader with commitments contained in codes of conduct by which the trader has undertaken to be bound.’62 One might consider that this provision could be a disincentive for traders to join codes of conduct. The main arguments supporting this view rely on the fact that ‘the Directive’s manner of incorporating codes of conduct within a legal enforcement structure63 may lead to double standards between signatories and non-signatories with respect to legal exposure.’64 This argument is controversial if we consider that in general the national codes are designed to comply with national legislation and that selfregulatory codes are used to bring added value by supporting traders to apply legislative principles on a day to day basis. However, the assumption of ‘double standards’ of protection can be argued when the development of codes rather than laying down minimum compliance requirements, go beyond the provisions of the national legislation by providing a higher level of consumer protection. 9.2.1.5 Likely to Materially Distort Consumers’ Economic Behaviour The proposed Directive regulates the impression that a commercial practice might convey to the consumer. That means for example, that a judge should take into account the impression left by advertising on a consumer and not necessarily the material appearance of the offended advertising. Furthermore, in order to assess how the offended commercial advertising is likely to materially distort consumers’ economic behaviour, the judge should have recourse to statistics, scientific reports, consumer surveys etc. However, a commercial practice will not be considered as unfair if it will be misunderstood by a consumer or if it can have many different interpretations. 9.2.1.6 Blacklist of Commercial Practices The proposed Directive provides explicitly in Annex 1 some standards of unfair commercial practices which will apply in all Member States. These standards are presented in the form of a short blacklist of commercial practices which shall in all circumstances be regarded as unfair. In order to facilitate their invocation in a lawsuit, the annex should be implemented entirely in the text of the implementing legislation. The list would be indicative for the national judge who would need to provide substantial content to these standards in connection with their national

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realities. Certainly, it would not impede the judges or administrative authorities from considering emergent form of unfair commercial practices by the application of the general prohibition clause. One might argue that these standards would produce an important counter-effect of requiring too much imagination in the judges’ minds which leads to diverging interpretations. The application of mutual recognition shall minimise ‘the possibility of such diverging interpretations and, in any event, prevent differing interpretations creating a barrier to trade.’65 Moreover, the Green Paper on Consumer Protection made reference to non-binding practical guidance to be developed in user-friendly language for the benefit of consumers or businesses, judges and enforcement officials.66 Annex 1 includes the following examples of unfair commercial practices: ‘Misleading commercial practices (1) Claiming to be a signatory to a code of conduct when the trader is not. (1a) Displaying a trust mark, quality mark or equivalent without having obtained the necessary authorisation. (2) Claiming that a code of conduct has an endorsement from a public or other body which it does not have. (2a) Claiming that a product has been approved, endorsed or authorised by a public or private body when it has not or making such a claim without complying with the terms of the approval, endorsement or authorisation. (3) Making an invitation to purchase products at a specified price if there are reasonable grounds for believing that the trader will not be able to offer for supply or to procure another trader to supply, those products or equivalent products at that price for a period that is, and in quantities that are reasonable having regard to the product and price offered (bait advertising). (4) Making an invitation to purchase products at a specified price and then: a) refusing to show the advertised item to consumers, or b) refusing to take orders for it or deliver it within a reasonable time, or c) disparaging the product, or d) demonstrating a defective sample of it with the intention of promoting a different product (bait and switch). (5) Falsely stating that the product will only be available for a very short time in order to elicit an immediate decision and deprive consumers of sufficient opportunity or time to make an informed choice. (6) Undertaking to provide after-sales service to the consumer and then making such service available only in a language other than the one which the trader used in communications with the consumer prior to a transaction without clearly disclosing this to the consumer before the consumer is committed to the transaction. (7) Stating that a product can legally be sold when it cannot. (7a) Presenting rights given to consumers in law as a distinctive feature of the trader’s offer. (8) Using editorial content in the media to promote a product where a trader has paid for the promotion without making that clear in the content (Advertorial). (9) Falsely arguing that the personal security of the consumer or his family is at risk if the consumer does not purchase the product.

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(10) Establishing, operating or promoting a pyramid promotional scheme where a consumer gives consideration for the opportunity to receive compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the sale or consumption of products. (11) Failing to provide the information stipulated in the Annex of the Regulation on Sales Promotion or providing information which is false, unclear or ambiguous in fulfilment of the requirements in the Annex. (12) Claiming that the trader is about to cease trading or move premises when he is not. (13) Claiming that products are able to facilitate winning in games of chance. (14) Falsely claiming that a product is able to cure illnesses, dysfunction or malformations. (14a) Passing on materially inaccurate information on market conditions or on the possibility of finding the product with the intention of inducing the consumer to acquire the product at conditions less favourable than normal market conditions. (14b) Claiming in a commercial practice to offer a competition or prize promotion without awarding the prizes described or a reasonable equivalent. (14c) Describing a product as ‘gratis,’ ‘free,’ ‘without charge’ or similar if the consumer has to pay anything other than the unavoidable cost of responding to the commercial practice and collecting or paying for delivery of the item. (14d) Including in marketing material an invoice or similar document seeking payment which gives the consumer the impression that he has already ordered the marketed product when he has not. Aggressive commercial practices (1) Creating the impression that the consumer cannot leave the premises until the contract is signed or the payment made. (2) Conducting prolonged and/or repeated personal visits to the consumer’s home ignoring the consumer’s request to leave. (3) Making persistent and unwanted solicitations by telephone, fax, e-mail or other remote media. (4) Requiring a consumer who wishes to claim on an insurance policy to produce documents which could not reasonably be considered relevant as to whether the claim was valid in order to dissuade the consumer from exercising his contractual rights. (5) Including in an advertisement a direct appeal to children to persuade their parents or other adults to buy advertised products for them. This provision is without prejudice to Article 16 of Directive 89/552/EEC on television broadcasting. (6) Demanding immediate or deferred payment for or the return or safekeeping of products supplied by the trader, but which were not solicited by the consumer except where the product is a substitute supplied in conformity with Article 7(3) of Directive 97/7/EC (distance selling) (inertia selling). (7) Explicitly informing the consumer that if he does not buy the product or service, the trader’s job or livelihood will be in jeopardy. (8) Creating the impression that the consumer has already won a prize without needing to make a purchase when in fact the opportunity to win the prize or the award of the prize are dependent on the consumer buying a product.

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(9) Requiring a consumer who wishes to claim on an insurance policy to produce documents which could not reasonably be considered relevant as to whether the claim was valid in order to dissuade the consumer from exercising his contractual rights. (10) Advertising to children in a way which implies that their acceptance by their peers is dependent on their parents buying them a particular product. This provision is without prejudice to Article 16 of Directive 89/552/EEC on television broadcasting. (11) Demanding payment for products supplied by the trader, but which were not solicited by the consumer (inertia selling).’ The European Parliament considers it important to ensure that the list of practices is regularly updated in view of the fact that the market evolves and new unfair practices are continually arising. This will favour consumers in particular, by lightening the burden of proof applicable under the general clause of prohibition contained in Article 5.67 The list could be amended through the normal legislative process in the same way as any other part of the Directive. 9.2.1.7 Codes of Conduct and Enforcement ‘Code of conduct’ is defined as an agreement or set of rules not imposed by law, regulation or administrative provision of a member state which defines the behaviour of traders who undertake to be bound by the code in relation to one or more particular commercial practices or business sectors.68 The proposal of the Directive encourages the development of codes of conduct solely as an optional add-on. Article 10 provides that the Directive does not exclude the control which Member States may encourage, of unfair commercial practices by code owners of national or Community level codes. The recourse to such bodies established by codes is in addition to the court or administrative proceedings. Article 11 of the proposed Directive states that: Member States shall ensure that adequate and effective means exist to combat unfair commercial practices and for the compliance with the provisions of this Directive in the interest of consumers. Such means shall include legal provisions under which persons or organisations regarded under national law as having a legitimate interest in combating unfair commercial practices may: take legal action against such unfair commercial practices; and/or bring such unfair commercial practices before an administrative authority competent either to decide on complaints or to initiate appropriate legal proceedings.

That provision would allow class actions which are legal proceedings under which one party, or a group of parties, may sue as representatives of a larger class. While allowing flexibility, Article 11 provides that Member States shall confer upon the courts or administrative authorities powers enabling them to order the cessation or the prohibition of unfair commercial practices. The decisions of courts or administrative organisations are independent of proving actual loss or damage of intention or negligence on the part of the trader. The enforcement requires that

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Member States set up accelerated procedures in order to effectively allow the interim or definitive cessation of an unfair practice. Paragraph 3 of Article 11 states criteria for establishing independent administrative authorities as following: (a) be composed so as not to cast doubt on their impartiality; (b) have adequate powers, where they decide on complaints, to monitor and enforce the observance of their decisions effectively; (c) normally give reasons for their decisions. Where powers are exercised exclusively by an administrative authority, this authority shall provide reasons for its decision. The decision should not be final giving the possibility for judicial review in case of unreasonable exercise of powers by this authority. The impact of the proposed Directive is enhanced by a proposal for a Regulation on consumer protection cooperation69 which establishes a network of public enforcers. The aim of this proposal is to ensure that enforcement authorities can cooperate efficiently with their counterparts in other Member States and to contribute to raising the standard of enforcement through common projects and the exchange of best practice on a wide range of information, education and representation activities. The proposed Directive stipulates that Member States must have competent authorities in the area of consumer protection endowed with enforcement powers that involve a minimum of common investigation and enforcement powers. The proposal provides a framework of mutual assistance rights and obligations for enforcement authorities to use when dealing with cross-border infringements. The resulting network is designed to give national enforcement authorities a solution to deal quickly with the most serious rogue traders. 9.2.1.8 Sanctions Article 13 provides that ‘Member States shall lay down penalties for infringements of national provisions adopted in application of this Directive and shall take all necessary measures to ensure that these are enforced. These sanctions must be effective, proportionate and constitute a deterrent.’ The Explanatory Memorandum70 specifies that the provisions of Article 13 require Member States to ensure the Directive’s effect in accordance with the ruling of the Court in case C68/88 (Commission v. Greece). In this case, the European Court of Justice71 establishes minimum conditions for ensuring the effectiveness of sanctions in case of infringements of Community law. According to the ECJ, whilst the choice of sanctions remains within the Member States’ discretion, they must ensure in particular that infringements of Community law are penalised under conditions, both procedural and substantive, which are analogous to those applicable to infringements of national law. In any event, sanctions should be effective, proportionate and dissuasive. Moreover, the national authorities must proceed, with respect to infringements of Community law, with the same diligence as that which they bring to bear in implementing corresponding national laws.72 While the provisions of Article 13 compel Member States to take effective measures that require effective, proportionate and deterrent sanctions, it would not lead to the adoption by the Member States of varying enforcement measures. This Directive is without prejudice to the determination of the types of damage which may be caused by an unfair commercial practice and their quantification.73 Some

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Member States would allow the possibility of obtaining equitable relief consisting of an injunction against the offending commercial practice while other Member States would allow monetary damages. Varying rules may risk encouraging rogue traders to become established in countries endowed with feeble enforcement legal systems. The European Parliament in its co-decision procedure (first reading), proposed that provision should also be made to ensure that compensation may be obtained for losses caused by an unfair commercial practice in such a way as to guarantee the widest possible protection for consumers in the internal market.74 9.3 Outlines for a Fair Trading Principle The acceptance of fairness in the European law through the proposal for Unfair Commercial Practices Directive represents a likely stage of the normal development of the fair trading principle. The following section provides some complementary basis for the development of this model in the context of the electronic market. 9.3.1 A deontology of fair trading? In the world of medical professionals it is considered that ‘the standard of conduct [is] one of “good medical practice,” which is to say, what is customary and usual in the profession.’75 In the world of lawyers, the duties of the lawyers ‘do not begin and end with faithful performance of what he is instructed to do so far as the law permits. A lawyer must serve the interests of justice as well as those whose rights and liberties he is trusted to assert and defend (…).’76 If a lawyer must serve the interests of justice of his client and if a doctor must take care of health patients, why not recognise that a trader should support consumers to benefit from their practices? Why not assume that a trader may be bound to comply with his own professional rules? Could this approach be a solution for instilling fair trading in online consumer transactions? In the business-to-consumer commercial relationship, both parties are responsible for their judgements ‘but because one party is in a more advantageous position, he has special obligations to the other. The weaker party depends on the stronger and in ways in which the other does not and so must trust the stronger party. (…) the client depends on the professional for much of the information on which he [the client] gives or withholds consent.’77 The special obligations of traders circumscribed by a principle of fair trading ‘must treat customers fairly throughout the term of the commercial relationship and not just when making the sale.’78 But how could a Code of Deontology on Fair Trading effectively provide appropriate indications able to guide traders in their commercial practices. Let us revert to the example imagined by Trotter Hardy79 of a mortgage finance company keeping extensive financial records about the credit of thousands of clients on a computer in its office. Suppose that the information records were stolen from the bank’s information system, one might wonder if the bank does not have a deontological obligation to provide effective notice to customers about this unexpected event. In order to comply with a fair trading principle, the bank would probably be obliged to inform its customers. From this perspective, a deontology of

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fair trading would help to set the basis for a high level of fairness that protects the information which is stolen in cyberspace just as when the information is stolen offline. From a practical perspective, a Code of Deontology of Fair Trading would first clarify the debateable trader definition. The definition of a trader is subject to many interpretations. In general, the trader is supposed to have specialised knowledge of business practices. Even if the traders were not necessarily great experts, they would still be responsible for a certain minimum of duties with regard to their conduct in commercial practices. There will be some difficulties in determining a trader’s definition. From this perspective, a Code of Deontology on Fair Trading might bring some clarification on the question of whether a trader is acting in a personal or ‘mercantile’ capacity/meaning. Secondly, a Code of Deontology on Fair Trading would bestow on traders knowledge and responsibility for their profession. It would enable traders to establish a common basis for their profession, leading ineluctably to the improvement of the traders’ profession profile. It would provide guidance to the traders’ conduct that would foster high consumer protection standards. Certainly, establishing such a Code would not be an easy task. In general, a Code of Conduct supports a variety of purposes and it targets varied audiences, it covers professions that by their nature are not so heterogeneous as the trader’s profession. However, whilst one may argue on the limited regulatory function of a code, at the simplest level, a Code of Fair Trade will step forward the deontology of fairness by embodying a moral commitment of service towards the consumer. The electronic marketplace brings new dimensions to the duty of trading fairly that goes beyond the traditional model practised by a local merchant. Coping with the new cyberspace risks, it requires drawing a basis for a new deontology of fair trading which involves a new professionalisation of the business-to-consumer commercial relationship. The following section of this chapter shows that regulatory elements supporting a deontology of fairness are already in place. In order to step forward to a common fair trading principle, a code or international convention should set uniform interpretations of fairness principle on an ethical universal basis. It should be based on the following twofold aspects of the fair trading principle: the precautionary and remedial aspect of fair trading principle. 9.3.1.1 Precautionary Aspect of the Fair Trading Principle The precautionary aspect of fair trading principle provides traders with a prescriptive list of what they should do or not do in order to meet consumers’ expectations. For example, the UK Financial Services Authority describes fairness or fair trading as: honesty, openness and transparency; disclosure, as necessary on an on-going basis, to the customer of material information; honouring of representations, assurances, and guarantees where this leads to a legitimate expectation in the mind of the customer; treating like situations alike and differentiating appropriately between different situations; acting impartially and reasonably, having regard only to relevant issues and not taking into account irrelevant issues.80

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The precautionary aspect of the fair trading principle requires traders to take action in order to avoid the risk of unfair commercial practices. It is about the prevention of traders that limit the probability of occurrence of unfair online practices that can be detrimental to consumers? The precautionary aspect requires the approach of fundamental questions such as: to what extent would traders be prepared to cope with the risk of seeing their practices invalidated with effect ab initio; to what extent would they take the risk of claims for damages? Perhaps the best way to illustrate the precautionary aspect of fair trading principle in the electronic marketplace is to refer to the following self-regulatory legal models. 9.3.1.1.1 ICC guidelines on advertising and marketing on the internet A first example that illustrates the precautionary aspect of fair trading is the ICC Guidelines on Advertising and Marketing on the Internet (1998). The Internet Advertising Guidelines cover a wide range of ethical issues, including protection of users’ personal data, messages directed at children, and the varied sensitivities of global audiences. For example, it provides that: [a]dvertising and marketing on the Internet, World Wide Web, and online services should reflect the highest standards of ethical conduct … Responsible advertisers and markets should recognize that it is in their own interest to observe self-disciplinary guidelines specifically adapted to electronic or interactive advertising and marketing.81

According to the ICC guidelines, the advertisers and marketers should disclose the reason for collecting personal information on users, and confine their use of the information to their stated purpose. The guidelines also recommend that marketers should take reasonable precautions to safeguard the security of their data files; the users should have the opportunity to refuse transfer of their personal data to other advertisers except when required by law. Advertisers are also encouraged to post their privacy policy statements clearly on their on-line sites. Unsolicited commercial messages should not be sent to those users who request not to receive them. Advertisers and marketers should respect the role of particular electronic news groups, forums or bulletin boards as public meeting places which may have rules and standards as to acceptable commercial behaviour. The ICC guidelines, in its Article 6, provide that advertisers and marketers offering goods or services to children online should not exploit the natural credulity of children or the lack of experience of young people and should not strain their sense of loyalty; not contain any content which might result in harm to children; identify material intended only for adults; encourage parents and/or guardians to participate in and/or supervise their children’s online activities; encourage young children to obtain their parent’s and/or guardian’s permission before the children provide information online, and make reasonable efforts to ensure that parental consent is given; provide information to parents and/or guardians about ways to protect their children’s privacy online. Furthermore, given the global reach of electronic networks, and the variety and diversity of possible recipients of electronic messages, advertisers and marketers should be especially sensitive regarding the possibility that a particular message might be perceived as pornographic, violent, racist or sexist.

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9.3.1.1.2 Australian code on ‘Building Consumer Sovereignty in Electronic Commerce’ Another example that illustrates the precautionary aspect of fair trading principle is the Australian code on Building Consumer Sovereignty in Electronic Commerce: A Best Practice Model for Business.82 The provisions of this code are very much in line with the precautionary aspect of the fairness. Under the title ‘Fair Business Practices,’ the code prescribes businesses not to engage in conduct that is misleading or deceptive or is likely to mislead or deceive; not to make false or misleading representations about the goods or services they supply; not to engage in unconscionable conduct; make sure that the goods supplied correspond with the description of the goods; ensure that the goods supplied are of merchantable quality and fit for any purpose made known to the supplier by the consumer; and ensure that services supplied will be rendered with due care and skill; be reasonably fit for any purpose specified; and achieve any result which the consumer makes known.83 The precautionary aspect of the fair trading principle is based on compliance with the rules that police parties’ behaviour and impose special care according to the specificity of the medium in which the commercial practices take place. The precautionary aspect of fairness is, finally, about the traders’ obligations to instil conditions for the best commercial practices. 9.3.1.2 Remedial Aspect of the Fair Trading Principle The fair trading principle does not apply in pre-contractual and contractual stages of online consumers transactions only. Whilst these stages can be approached from a precautionary perspective, the remedial aspect of the fair trading principle arises in the after sale stage of online consumers’ transactions. In its report on ‘Consumer detriment,’84 the UK Office of Fair Trading remarks that when consumers do take their concerns or complaints directly to businesses only just over a third are clearly satisfied with the results. The remedial aspect of the fair trading principle relates to the litigation context between consumer and trader in online consumer transactions and it concerns the duty of traders to offer consumer satisfaction in the postcontractual stage of online consumers’ transactions. The ability of technology to create a major ‘selling point’ to anyone, the capacity to conduct business activities in a jurisdiction with no physical location or participation in the economic life might deny the right of foreign consumers through obstructive behaviour. Foreigner consumers will have difficulties in pursuing complaints, whilst rogue traders might take advantage of this situation by simply not responding to consumers’ complaints and therefore avoiding any possibility of providing compensation to consumers. Unfair commercial practices arising in the post-contractual stage may increase the level of stress of consumers when traders do not react to their complaints. Sometimes, the rogue traders prefer to exploit consumers, calculating that the risk of prosecution or civil action and the level of any punishment will be lower than the benefits of their activity.85 The remedial side of the fair trading principle should allow the authorities in charge of ensuring consumer protection to take action against unfair commercial practices directed towards consumers. It requires approaching questions such as: Would fair trading require a real test and evidence of the causation issues? How can

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a consumer effectively demonstrate that an advertising campaign produces substantial injury to him/her? Would the burden of proof of unfairness lie on the consumer or on the trader? Would the burden of proof tilt the balance of power in favour of the traders who have much more financial resources than consumers? Would the existence of a causal link imply high standards of evidence? Would it be feasible for a consumer to provide evidence of a causal link existing between an advertising campaign and harmful injury? Proving evidence of the immediate injury would certainly require scientific studies. What happens if the ‘injury’ occurs later or is scattered in time, or if it seems to be the result of a combination of these causes? There are risks that cannot always be ascertained by science but they may come out through their potential effects on the legitimate consumer’s interests. These issues are not of mere academic interest. Providing precise and clear answers to these questions would be of practical importance for courts, consumers and traders doing business online. CONCLUSIONS The role of the proposed Directive on Unfair Commercial Practices is to bring about ‘full harmonisation’ with a high level of consumer protection simplification; and, where possible, deregulation of existing provisions should be prioritised; removal of the principle of mutual recognition and control by the country of origin (Internal Market principles); and a balance between legal certainty and adaptability to market circumstances. This means that the legislation would provide a sufficient level of detail both to genuinely harmonise consumer protection, and to provide certainty for business and consumers. The proposed Directive is phrased in terms of actions that are unfair – in other words an obligation not to trade unfairly, rather than a duty to trade fairly.86 The Follow-up Communication to the Green Paper on EU Consumer Protection87 was proposing a framework Directive on the basis of a general clause composed of two core elements: the ‘unfairness of the practice;’ and a ‘consumer detriment test.’ The proposed directive has improved its configuration. Its main structure is now based on a general prohibition clause, on two specific examples of unfair commercial practices – misleading and aggressive practices – and an indicative and non-exhaustive list in the annex of unfair commercial practices. With the advent of the electronic marketplace, the traditional view about the role of the principle of fair trading in completing legal systems changes. Within the current legal context characterised by the chaotic nature of rules and the clash of competing national sovereignties, there is a need to establish a clear international framework for the fair trading principle that provides certainty and amounts to a safety net for online consumer transactions. If the proposed directive were to be based on the principle of the country of origin in the context of the international electronic market it would have little relevance. In the international electronic marketplace characterised by unpredictability of local law and by cultural differences, the proposed directive remains a ‘local’ legal framework. The directive ‘will require a wholesale appraisal and reformulation of national trade practice law of both a horizontal and vertical character.’88 There is no doubt that the directive will constitute a catalyst allowing interaction between

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different European legal systems. While this process would contribute to interpret national concepts according to European standards of consumer protection, it will probably not cover the need of unified image and predictability of the electronic market in its entirety. The electronic marketplace involves many practical extraterritorial issues which from a legal perspective, require unified interpretation and predictability in judicial enforcement. The law remains a primary mechanism for the regulation of unfair commercial practices. Nevertheless, the adoption of legal solutions at the local area will be only a new layer of burden on the honest traders rather than impeding on the unfair rogue commercial practices. Enforcement initiatives that achieve mutual benefit from the present legal framework in the area of electronic commerce would require setting up an independent consumer agency endowed with the necessary expertise to monitor and restrict cyber consumer unfair practices. NOTES 1

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N. Reich, ‘FTC – A Model for Effective Consumer Protection in a Unifying European Market?’, in a study produced by Institut für Europaisches Wirtschafts und Verbraucherrecht e.V for Health & Consumer Protection DG, 2001, available at: www.europa.eu.int. Study for Health & Consumer Protection DG, 2000, Dr. Fritz A. Bultmann (Vorstand Verbraucherschutzverein e. V. Berlin), Prof. Geraint Howells (University of Sheffield), Prof. Dr. Jürgen Keßler (Fachhochschule für Technik und Wirtschaft Berlin), Prof. Dr. Hans-W. Micklitz (Universität Bamberg, Head of VIEW), Malek Radeideh (Researcher at VIEW), Prof. Dr. Norbert Reich (Universität Bremen), Prof. Jules Stuyck (Katholieke Universiteit Leuven) Dennis Voigt (Researcher at VIEW). Green Paper on European Union Consumer Protection, Brussels, 2.10.2001, COM (2001) 531 final. Follow-up Communication to the Green Paper on EU Consumer Protection, European Commission, Brussels, 11.6.2002, COM(2002) 289 final. See the Extended Impact Assessment for a discussion of the sources of evidence used. GFA study available at http://europa.eu.int/comm/consumers/cons_int/safe_shop/ fair_bus_pract/index_en.htm. Proposal for a Directive of the European Parliament and of the Council concerning unfair business-to-consumer practices in the Internal Market and amending Directives 84/450/EEC, 97/7/EC and 98/27/EC (the Unfair Commercial Practices Directive), Outcome of proceedings of Council, Interinstitutional File:2003/0134 (COD), 25 May 2004. Study of the Institut für Europaisches Wirtschafts und Verbraucherrecht e.V, Study for Health & Consumer Protection DG, 2000, vol. II, p. 57. Article 81(3) EU Treaty. See Study of the Institut für Europaisches Wirtschafts und Verbraucherrecht e.V, Study for Health & Consumer Protection DG, 2000, vol II ‘At the end of the 19th century – The law of “Fair Trading” (or in other terms: the law of “Unfair Competition”) that developed as a result of industrialisation and the liberalisation from restrictive mercantile trading rules, was relatively “narrow minded”. There was one main purpose for competition law, whether it was based on the General Clauses of the civil code as in France or Italy, or on a specific statute directed against “Unfair Competition” as in Germany – and its aim was: to protect competitors – and that means traders – from each

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Cyber Consumer Law and Unfair Trading Practices other and against unfair marketing practices, in this way constructing the legal order of the (national) markets as a level playing field for enterprises. A by-product of this was a kind of consumer protection, e.g. as a result of the prohibition of misleading advertising, in other words a mere “reflex” accepted by the lawmaker but not intended’ p. 57. For example, in Austria (Article 1 of the Bundesgesetz gegen den unlauteren Wettbewerb), Greece (Article 1 of the Act on Unfair Competition) Portugal (Article 260, para 1 Codigo da Propriedade Industrial), Germany (§1 Gesetz gegen unlautern Wettbewerb), Belgium (Article 93 and 94, Loi sur les pratiques du commerce et sur l’information et la protection du consommateur), Italy (Article 2598 Codice Civile), Luxembourg (Article 16 Loi du 27 Novembre 1986 réglementant certaines pratiques commerciales et sanctionant la concurrance déloyale), Spain (Article 5 Ley Competencia Desleal and Article 6(b) Ley General de Publicidad), France (Art. 13821384 Code Civil), Netherlands (Article 6:162 of the ‘Burgerlijk Wetboek’), Denmark (§1 Marketing Practices Act), Finland (Consumer Protection Act, part 2 §1), Sweden (Article 4, para 1 of the Marketing Act). In UK law, fairness is known under the ‘unconscionability’ and ‘equity’ terms as a means of ensuring balance and fairness in commercial transactions. The Green Paper on European Union Consumer Protection refers to a recent report by the UK Financial Services Authority, ‘Treating Customers fairly after the point of sale’ (June 2001) which examined the concept of ‘fairness’ in English law and broke it down into a number of identifiable elements which go to make up ‘fair’, and types of conduct which are indicative of acting fairly. In US law, the FTC Act specifies that an unfair act or practice is one that causes or is likely to cause substantial injury to consumers that is not reasonably avoidable and is not outweighed by countervailing benefits to consumers or competition. 15 U.S.C. §45(n). ICC was founded in 1919. ICC brings together thousands of member companies and associations from over 140 countries. The headquarters are located in Paris. Article 5, ICC International Code of Advertising Practice (1997 Edition). The ICC rules are considerable important in the marketing practice rules of the Scandinavian countries. See ‘The Feasibility of a General Legislative Framework on Fair Trading’, 2000. The study was produced by Institut für Europaisches Wirtschafts und Verbraucherrecht e.V for Health & Consumer Protection DG. It cites Anne-Dorte Bruun Nielsen, ‘Analysis of the possibility of introducing a general clause on good market behaviour into Community law’, – Report prepared for the Nordic Council of Ministers, Manuscript February 2000 who underlined that greater emphasis on ICC rules is placed in Sweden than has been the practice in Denmark. Revised ICC International Code of Direct Marketing, 2001. In the studies commissioned by the European Commission to the Europaisches Wirtschafts und Verbraucherrecht, available on the website of the European Commission, the history of the fair trading in European Union is related to the name of Eugen Ulmer: ‘In 1965s, Eugen Ulmer proposed the application of the fair trade principle to the field of competition law.’ The study cites another study commissioned by the European Commission to E. Ulmer (Das Recht des unlauteren Wettbewerbs in den Mitgliedstaaten der EWG, vol 1.Vergleichende Darstellung mit Vorschlägen zur Rechtsangleichung, 1965) – in English ‘Study on the harmonisation of competition law commissioned by the European Commission’. For an updated analysis of national models of fairness, please see the study commissioned by the European Commission to Reiner Schulze and Hans Schulte-Nölke, ‘Analysis of National Fairness Laws Aimed at Protecting Consumers in Relation to Precontractual Commercial Practices and the Handling of Consumer Complaints by Business’. ‘The Feasibility of a General Legislative Framework on Fair Trading’ Study was

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produced by Institut für Europaisches Wirtschafts und Verbraucherrecht e.V for Health & Consumer Protection DG., 2001. Directive 84/450/EEC of 10.9.84 relating to the approximation of the laws, regulations and administrative provisions of the Member States concerning misleading advertising. OJ L 250, 1984. Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, OJ L 95/29, 1993. Directive 97/55/EC of the European Parliament and of the Council of 6 October 1997 amending Directive 84/450/EEC concerning misleading advertising so as to include comparative advertising, OJ L290 of 23.10.97. Directive 2001/95/EC of the European Parliament and of the Council 3 December 2001 on general product safety. Official Journal of the European Communities 15.1.2002 L 11/4, Council Directive 92/59/EEC of 29 June 1992 on general product safety, OJ L 228, 11.8.1992, p. 24. P. Schlechtriem, ‘The Growing Importance of European Law and How it Affects Teaching and Research in the Field of the Private Law of Obligations (Torts, Contracts and Restitution)’, Texas International Law Journal, vol. 36: 531. COM(2001) 398 final, Communication from the Commission to the Council and the European Parliament on European Contract, Brussels, 11.07.2001, This Communication was launched by the DG Internal Market. EU Treaty, Article 153 §1 provides that the Community ‘in order to promote the interests of consumers and to ensure a high level of consumer protection, shall contribute to protecting the health, safety and economic interests of consumers, as well as to promoting their right to information ... in order to safeguard their interests’. Following §2 ‘consumer protection requirements shall be taken into account in defining and implementing other Community policies and activities’. For an analysis of the European Union Consumer Policy (including the harmonisation issues and the ‘rule of reason’), please see Consumer Protection Law, by G. Howells and S. Weatherill, Dartmouth, 1995; EC law, by S. Weatherill and P. Beaumont, Penguins Books, 2000; ‘Private international law – electronic commerce – country of destination principle’, Study by G. Howells, Dr R. Lane, J.D. McClean, P. Torremans and Charlotte Waelde, European Parliament Study 2000, available at: www.europa.eu.int; T. Wilhelmsson, ‘Is There a European Consumer Law – and Should There be One?’ Centro di Studi e ricerche di dritto comparato e straniero, Rome 2000; M. Van Huffel, ‘Consumer Protection in Electronic Commerce: A General Overview’, Article presented at the occasion of the 4th ECLIP workshop in Palma de Mallorca on March 1999 etc. Proposal for a Directive of the European Parliament and of the Council concerning unfair business-to-consumer commercial practices in the Internal Market and amending directives 84/450/EEC, 97/7/EC and 98/27/EC (the Unfair Commercial Practices Directive) Brussels, 18.6.2003, COM (2003) 356 final, 2003/0134 (COD). Green Paper on Consumer Protection, adopted in October 2001, COM (2001) 531, Follow-up Communication to the Green Paper on EU Consumer Protection, European Commission, Brussels, 11.6.2002, COM(2002) 289 final. See ‘Extended Impact Assessment for a discussion of the sources of evidence used’, GFA study available at: http://europa.eu.int/comm/consumers/cons_int/safe_shop/ fair_bus_pract/index_en.htm. Proposal for a Directive of the European Parliament and of the Council concerning unfair business-to-consumer commercial practices in the Internal Market and amending directives 84/450/EEC, 97/7/EC and 98/27/EC (the Unfair Commercial Practices Directive), Brussels, 18.6.2003, COM (2003) 356 final, 2003/0134 (COD).

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28 Commercial practices which are regulated by the Distance Selling Directive, Consumer Credit Directive, Directive on contracts negotiated away from business premises, Timeshare Directive, Package Travel Directive, Price Indications Directive are some of the directives which regulate commercial practices and which can take precedence over the framework directive. 29 Proposal for a Directive of the European Parliament and of the Council concerning unfair business-to-consumer practices in the Internal Market and amending Directives 84/450/EEC, 97/7/EC and 98/27/EC (the Unfair Commercial Practices Directive), Outcome of proceedings of Council, Interinstitutional File:2003/0134 (COD), 25 May 2004. 30 D. Byrne, European Commissioner for Health and Consumer Protection, ‘From National Legislation to a Framework Directive on Fair Commercial Practices’, Workshop on Unfair Commercial Practices, Brussels, 22 January 2003, p. 4. 31 D. Byrne, European Commissioner for Health and Consumer Protection, ‘From National Legislation to a Framework Directive on Fair Commercial Practices’, Workshop on Unfair Commercial Practices, Brussels, 22 January 2003, p. 3. 32 Directive 85/577/EEC on Contracts negotiated away from Business Premises (Art.8), Directive 87/102/EEC on Consumer Credit (Art.15), Directive 90/314/EEC on Package Travel (Art.8), Directive 94/47/EC on Timesharing (Art.11), Directive 97/7/EC on Distance Contracts (Art.14), 99/44/EC on Sales of Consumer Goods (Art.8) and Directive 93/13/EC on Unfair Terms (Art.8)). 33 According to the principle of freedom to provide services, a trader may carry on an economic activity in a stable and continuous way in one or more Member States without being subject to any discriminatory or restrictive measures which could not be justified by reasons of general interest. See Keck and Mithouard, joined cases C-267/91 & C268/91 [1993] ECR 1-6097. 34 Article 4 of the Directive on Unfair Commercial Practices. 35 See Article 5.a ‘For a period of six years from the date referred to in Article 18, first subparagraph, Member States shall be able to apply national provisions within the field approximated by this Directive which are more restrictive or prescriptive than this Directive and which implement directives containing minimum harmonisation clauses. These measures must be essential to ensure that consumers are adequately protected against unfair commercial practices and must be proportionate to the attainment of this objective. The review referred to in Article 17a may, if considered appropriate, include a proposal to prolong this derogation for a further limited period’ (Proposal of Directive on Unfair Commercial Practices, after the Council agreement, 25 May 2004). 36 Proposal for a Directive of the European Parliament and of the Council concerning unfair business-to-consumer commercial practices in the Internal Market and amending directives 84/450/EEC, 97/7/EC and 98/27/EC (the Unfair Commercial Practices Directive) Brussels, 18.6.2003, COM (2003) 356 final, 2003/0134 (COD). 37 Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, Official Journal L 95, 21.04.1993. 38 Article 2(j). 39 Article 5(2). 40 Recital 72. 41 Draft Report on the proposal for a European Parliament and Council directive concerning unfair business-to-consumer commercial practices in the Internal Market and amending Directives 84/450/EEC, 97/7/EC and 98/27/EC (the Unfair Commercial Practices Directive) (COM(2003) 356 – C5-0288/2003 – 2003/0134(COD)) Committee on Legal Affairs and the Internal Market, Rapporteur: Fiorella Ghilardotti, 19 November 2003, p. 8.

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42 This is the definition traditionally used for good faith purchase. 43 In Interfoto Library Ltd v. Stiletto Ltd [1988] 2 WLR 615, 620. 44 For more information on this topic, please see chapter 1, sub-chapter 1.1.2.1.1. relating to the notion of ‘consumer’. 45 Recital 13. 46 See Commission applauds Council agreement on unfair commercial practices: EU to ban pressure selling IP/04/658, 18/05/2004. 47 Draft Report on the proposal for a European Parliament and Council directive concerning unfair business-to-consumer commercial practices in the Internal Market and amending Directives 84/450/EEC, 97/7/EC and 98/27/EC (the Unfair Commercial Practices Directive) (COM(2003) 356 – C5-0288/2003 – 2003/0134(COD)) Committee on Legal Affairs and the Internal Market, Rapporteur: Fiorella Ghilardotti, 19 November 2003, p. 6. 48 ‘Scanner Advertisement’ (BGH, Judgment of 20 December 2001, NJW-RR 2002, 11221124). 49 Krombacher, LG Siegen, Judgment of 25 June 2002, Germany. 50 See chapters 1 to 7 relating to the rationales for cyber consumer protection. 51 Article 2, §f. 52 In order to determine if a commercial practice is unfair, the Court of Justice of the European Communities take into consideration the ‘presumed expectations of an average consumer who is reasonably well informed and reasonably observant and circumspect.’ See for example, Verband Sozialer Wettbewerb e.V v Clinique Laboratoires SNC and Estée Lauder Cosmetics GmbH, C-315/92 [1994] E.C.R. I-317 and Estée Lauder v Lancaster, C-220/98, judgment 13 January 2000 (2000) E.C.R. I-nyr., Mars, C-470/93 [1995] E.C.R. I923. 53 See for example, the US FTC, Commission Enforcement Actions Involving the Internet and Online Services available at: www.ftc.gov. Last Update: 10/01/01 Mislabelled clothes in online catalogs, Wal-Mart Stores, Inc. File No. 992 3007, Burlington Coat Factory Warehouse Corp. File No. 992 3002, Delia’s Inc., File No. 992 3008, Woolrich, Inc., File No. 992 3003, Gottschalks, Inc., File No. 992 3004, Bugle Boy Industries, Inc., File No. 992 3009. 54 Article 6(1f). 55 Amendment 14, Article 12, paragraph 1a (new). 56 See for an example of misleading advertising by omission, the case SFR v. Union Fédérale des Consommateurs «Que Choisir», the Tribunal de Grande Instance de Nanterre,624 considered that advertisement of a provider of mobile phone services who advertised a fixed monthly phone rate for a period of 18 months without mentioning that the standard contract terms contains a clause enabling the provider to raise the monthly rate during the duration of the contract., was misleading advertising by omission. (Affaire SA SFR (.SFR Française du Radiotéléphone) v/Union Fédérale des Consommateurs «Que Choisir», Judgment of the Tribunal de Grande Instance de Nanterre, Jugement of 15 Octobre 2001 was confirmed by the decision of the ‘Cour d’Appel’ de Versailles, e chambre 1 ère section, Arrêt N° 335, 16 mai 2002, R.G. N° 01/07363). 57 The characteristics of the products includes ‘availability, benefits, risks, execution, composition, accessories, after-sale customer assistance and complaint handling, method and date of manufacture or provision, delivery, fitness for purpose, usage, quantity, specification, geographical or commercial origin or the results to be expected from its use, or the results and material features of tests or checks carried out on the product’ (see Article 6). 58 As discussed in chapter 6 on Disclosure of information, the European Union is endowed with a reliable legal framework which provides the obligation of information for traders in their commercial transactions.

202 59 60 61 62 63 64 65 66 67

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75 76 77 78 79 80 81 82 83 84 85

Cyber Consumer Law and Unfair Trading Practices Recital 69. Recital 57. Article 9. Article 6(2), p. 25. Article 6(2). Directive concerning unfair business-to-consumer commercial practices, Position Paper of the European Association of Communication Agencies (EACA), 15 November 2003. UK DTI, ‘The Unfair Commercial Practices Directice’, Consultation on a draft EU Directive COM (2003) 356, July 2003, p. 19 available at: http://www.dti.gov.uk/ccp/ consultpdf/unfaircon.pdf. Green Paper on European Union Consumer Protection, European Commission, Brussels, 2.10.2001, 531 final COM(2001) 398, pp. 11 and 15. Draft Report on the proposal for a European Parliament and Council directive concerning unfair business-to-consumer commercial practices in the Internal Market and amending Directives 84/450/EEC, 97/7/EC and 98/27/EC (the Unfair Commercial Practices Directive) (COM(2003) 356 – C5-0288/2003 – 2003/0134(COD)) Committee on Legal Affairs and the Internal Market, Rapporteur: Fiorella Ghilardotti, 19 November 2003, p. 8. Article 2(g). Proposal for a Regulation of the European Parliament and of the Council on cooperation between national authorities responsible for the enforcement of consumer protection laws (‘the regulation on consumer protection cooperation’), Brussels, 18.7.2003, COM(2003) 443 final, 2003/0162 (COD). Note 78, p. 16. Judgment of 21/09/1989, Commission/Greece (Rec.1989, p. 2965). Judgment of 21/09/1989, Commission/Greece (Rec.1989, p. 2965). Article 3. Draft Report on the proposal for a European Parliament and Council directive concerning unfair business-to-consumer commercial practices in the Internal Market and amending Directives 84/450/EEC, 97/7/EC and 98/27/EC (the Unfair Commercial Practices Directive) (COM(2003) 356 – C5-0288/2003 – 2003/0134(COD)) Committee on Legal Affairs and the Internal Market, Rapporteur: Fiorella Ghilardotti, 19 November 2003, p. 7. W. Page Keeton et al., Prosser and Keeton on The Law of Torts 189 (5th ed. 1984). Code of Conduct for Lawyers in the European Union, available at: www.ccbe.org. M. Bayles, Professional Ethics, Belmont, CA.: Wadsworth, 1981. ‘Treating customers fairly after the point of sale’, Financial Services Authority, Discussion paper, June 2001, available at: http://www.fsa.gov.uk. I. Trotter Hardy, ‘The Proper Legal Regime For Cyberspace’, University of Pittsburgh Law Review, 1994. ‘Treating customers fairly after the point of sale’, Financial Services Authority, Discussion paper, June 2001, p.13, available at: http://www.fsa.gov.uk. ICC Guidelines on Advertising and Marketing on the Internet (1998). The Guidelines and the Australian ‘E-commerce Best Practice Model’ available at: http://www.ecommerce.treasury.gov.au. ‘Building Consumer Sovereignty in Electronic Commerce. A Best Practice Model for Business’, Minister for Financial Services & Regulation, May 2000, p. 4, available at: http://www.treasury.gov.au. ‘Consumer Detriment’. OFT Report 296, Office of Fair Trading, 2000. Modern markets: confident consumers, Report of the UK Department of Trade and Industry, available at http://www.dti.gov.uk/consumer/whitepaper.

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86 ‘Follow-up Communication to the Green Paper on EU Consumer Protection’, Brussels, 11.6.2002, COM(2002) 289 final. 87 ‘Follow-up Communication to the Green Paper on EU Consumer Protection’, Brussels, 11.6.2002, COM(2002) 289 final, p. 16. 88 G. Howells, ‘Proposed Directive on Unfair Commercial Practices’, available at http://www.iacl.ca/researchpapers.htm.

Chapter 10

General Conclusion An adequate cyber consumer law could not exist properly without taking into account the real international dimension of consumers’ commercial relationships. On the basis of the analysis of the main electronic market failures drawn-up above, it can be concluded that the architecture of cyber consumer law such as it can be observed today remains incomplete and fragmentised, and that there is a tremendous lack of unified and comprehensive legal infrastructure surrounding consumers. The failures of the electronic market are translated into a fragmentation of national rules on consumer protection. The existence of these failures demonstrates that the electronic market does not work properly with reference to online consumer transactions. As was argued in this study, the existence of electronic market failures as well as the peculiarities of the electronic marketplace requires coordinated governmental intervention in the field of consumer protection law at international level. From this perspective, one of the objectives of this study was to look at the issue of adopting similar solutions and interconnecting similar principles at international level. The study concludes that a workable cyber consumer law requires common rules that allow the global electronic marketplace to function effectively as a single large system. One might doubt the possibility of adopting similar solutions at the level of the electronic marketplace, since this area involves a high consideration of the national legal diversity, which requires forgetting our traditional conceptions based on traditional legal systems arising from the territorial marketplace. Looking for similar solutions is also quite contradictory with those views that advocate that consumers should be protected by similar legislation and principles to those existing in the traditional market. Similar legal frameworks for both electronic and traditional markets do not mean that consumers would take advantage of a similar standard of protection. As cyberspace is a medium that continually produces new electronic market failures, its functioning needs to be regulated through a specific legal framework. The reliability of this legal framework should be tested through its ability to deal with this new range of failures linked directly to the virtual aspect of the electronic marketplace: to its interactivity and high speed of information flow confronting consumers over the Internet. Formulating viable proposals able to cope with a paradoxical coexistence between the diversity of legal national rules and a proclaimed common legal framework is no doubt a daunting task. My proposals are limited in scope based on several assumptions such as the fact that the fair trading principle might be an issue responsive to consumer protection in the electronic marketplace. At national level, this assumption is largely embraced by different legal systems. The adoption of a fair trading principle might be the final long-term solution for consumers’ problems. Undoubtedly, this proposal cannot be expected to solve related problems, such as

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the need for an international infrastructure or issues of international sovereignty. Nevertheless, as the fair trading principle exists in many different legal systems for different reasons, which do not necessarily serve to regulate the totality of B2C commercial relationship, the crux of the matter is to identify the main areas of unfairness and to adopt a common legal framework based on the fair trading principle in online consumer transactions. The conclusions of this study can therefore be confined to the following considerations: dealing efficiently with consumer protection issues in the electronic marketplace requires the alleviation of the main electronic market failures by the promotion of a legal framework tailored to the need of borderless and technological peculiarities of the electronic marketplace and to the emerging unfair commercial practices. The aim of the first part of my conclusion is to demonstrate that the global electronic market for consumer transactions is characterised by new forms of electronic market failures. These failures range from unequal bargaining power peculiar to the standardised online consumer contracts, licence agreements, contracts concluded by electronic agents to asymmetry of information arising from misleading advertising online, lack of disclosure of information and online dispute resolution. The electronic marketplace creates conditions for the standardisation of online contracts embodied in mass-market transactions. The emergence of licence agreements and the multiplication of the role of electronic agents change our traditional view of unequal bargaining power based on the lack of negotiation between the consumer and trader. There is a transition from the contract-as-consent model to the contract-as-technological assent model. ‘Technological assent,’ encompassing the whole range of ‘clicking or breaking’…clicking on a button, breaking the shrink-wrap or commencing to use information seems to erode the importance of the express assent of consumers in online transactions. In this contextual technological environment, the electronic marketplace changes the nature of the relationship between consumers and traders in a variety of ways, whereas the consequences of the balance of bargaining power between consumer and trader differ considerably from those existing in the traditional marketplace. The emergence of the electronic marketplace enhances the ability of traders to decide on dominant standardised terms and conditions. In this context, consumers do not have the possibility to make online transactions regarding comparable products and services on the basis of different terms and conditions. Furthermore, whilst information technology should continue its rôle in creating solutions that are effective for consumers, the growing disparity between consumer knowledge and the characteristics of technological environment creates new rationales for consumer protection. In this context, we can conclude that there is a need for a legal framework that balances the prevalence of information technology on consumer protection and alleviates the unequal bargaining power between consumers and the technological interface of the electronic marketplace. This is especially relevant for the areas of contracts concluded by the electronic agents. In contracts concluded by the electronic agents, the imbalance of bargaining power between consumers and businesses arising from the standardised terms is enhanced by the lack of consumers’ technical ability to program, control and

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substantiate the electronic agents’ behaviour. In order to participate within the electronic marketplace, the consumers would need to acquire professional knowledge and abilities similar to those existing in a B2B commercial relationship where the contracting parties often dispose of negotiating terms and conditions or obtain favourable terms and conditions. Even if a certain ‘rapprochement’ between B2B and B2C might occur in future, this situation will not totally eliminate the new risks of unequal bargaining power emerging from the malfunctioning of electronic agents, their defectiveness, or the limited warranties of the programmer of the electronic agent. As in the traditional market, when contracting via electronic agents, consumers will not be repeat players, they will be interested in attractive one-shot deals and not in embarking on a future working relationship with traders or their agents. Another area of unequal bargaining power approached by this study is relating to the online disputes resolution (ODR) in consumers’ transactions. Whilst the growth of online commerce involves the existence of adequate online redress mechanisms and effective disclosure of information about them, it has been observed that many commercial websites fail to respond to consumer needs for effective information about online redress mechanisms. The majority of the websites do not contain any information about ODR procedures and do not appear to provide any information about ODR providers, training, licensing, and selection of lawyers or neutrals, monitoring or auditing of performance, and enforcement of ODR decisions is often insufficient. The attention is focused on the regulation of ODR providers’ activities and not on the disclosure of information on ODR directly by the traders. It has been concluded that the provision of information should lie with the trader’s responsibility to make the process of dispute resolution comprehensible to consumers. The disclosure of information on websites will better support consumers to make informed decisions about ODR providers and procedures. As consumers should have the liberty to choose between several ODR providers, they should be able to exercise this opportunity from the trader’s website and not by doing timeconsuming researches to find the best ODR procedure or provider. After looking for a product or service that meets their expectations, and after collecting and comparing this general information, consumers will rarely spend time to gather preliminary information about ODR procedures via different professional ODR providers. Disclosure of information is another key issue approached by the study. It refers to the identity and possibly the address of the supplier; the characteristics of the goods or services and their price; delivery costs; the arrangements for payment, delivery or performance; the existence of a right of withdrawal; the period for which the offer or the price remains valid and the minimum duration of the contract, where applicable; the cost of using the means of distance communication. In Europe, the disclosure of information is now mandatory in online consumer transactions. Prior to the conclusion of any distance contract, the consumer must be provided with clear and comprehensive information concerning his/her transaction. The information required must comply with the principles of good faith in commercial transactions and the principles governing the protection of minors. Consumer contracts formed in violation of these standards for disclosing information are deemed void. The study concludes that consumers remain in a weak position due to the asymmetries

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of information arising from the fact that they should deal with companies which provide vague or misleading information or when the quality does not correspond with the description provided on the web pages. In addition to disclosure of information, online misleading advertising is another aspect of the asymmetry of information between consumer and marketer (or trader) in the electronic marketplace. This type of asymmetry, which is exacerbated by the particularities of online misleading advertising, leads to the conclusion that consumer interests are highly vulnerable. The following conclusion can be inferred from the analysis of the current EU and US legal and self-regulatory misleading advertising online: there is a need for international cooperation between selfregulatory and governmental institutional structures in order to resolve consumers’ problems relating to misleading advertising and ensure fair competition between cross-border companies. This would allow the possibility for consumers to enforce their rights against misleading advertising arising beyond the national borders of their countries. The second part of my conclusion lies in the proposal of counteracting divergent failures arising in the borderless environment of the electronic marketplace through a unified global legal framework. With the advent of the electronic marketplace, the traditional view about the role of the principle of fair trading in completing legal systems changes. Within the current legal context of electronic commerce characterised by the chaotic nature of rules and the clash of competing national sovereignties, a proposal for an Unfair Commercial Practice Directive based on the principle of country of origin would have little relevance for consumers worldwide. In the context of the international electronic market, characterised by unpredictability of local law and by cultural differences, the proposed Directive remains a ‘local’ legal framework. Whilst it can be considered that the fair trading principle might be an adequate principle for regulating consumer protection in its relation with the Internal Market, within the electronic marketplace, its effectiveness encounters difficulties. Problems may arise relating to the unified interpretation of concepts in the effective application of this principle, such as: ‘unfair commercial practices,’ ‘distort economic behaviour,’ ‘reasonable expectations of average consumer,’ ‘vulnerable consumers’ etc. A unified approach at international level would help to lessen the significant semantic differences in the application of the fair trading principle in different stages of the B2C commercial relationships. Furthermore, the electronic marketplace brings new dimensions to the duty of trading fairly that goes beyond the traditional model practised by a local merchant. A unified approach of fair trading requires drawing a basis for a new deontology of fair trading which involves a new professionalisation of the business-to-consumer commercial relationship. The study demonstrates that regulatory elements of national or self-regulatory models that support a deontology of fairness are already in place. The third part of my conclusion relates to the technological characteristics of the electronic marketplace and lies in the proposition of counteracting divergent failures through a separation of cyber consumer law from business technological regulation1 of the electronic marketplace and its approach as a separate branch of law. These issues are not of mere academic interest. Providing precise and clear answers to these questions would have a real impact on the development of cyber consumer

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legislation and legal principles. The systematisation of off-line and online protection law under one legal framework limits the possibility of a specific approach to consumer needs in cyberspace. It creates the impression that the consumer is confronted with the same type of risks either in the physical world or in cyberspace. Consequently, under a common legal framework, the parties would be allowed to allocate risks in the same way as in the tangible environment despite the fact that the consumer is not controlling such risks in the same way as in the physical world. It seems that whilst consumer protection in the 1960s was fashioned by its external environment, cyber consumer protection today is challenged by internal conditions linked to the technological nature of the Internet. Given the current underdeveloped state of technology now available to consumers, it is impossible for them to exercise real control over the technological aspects of the electronic marketplace. The peculiarities of the electronic marketplace and their impact on consumer protection require continuity in the formulation of a law adapted to suit the new needs of consumer protection. Meanwhile, determining the rationales of cyber consumer law, identifying new areas of unfairness in the B2C commercial relationship and exploring the need to provide solutions for the inadequacy of cyber consumer law, represent some of the major issues which would determine the way in which the legal community will design the future architecture of consumer law. NOTE 1

In the off-line consumer context, T. Wilhelmsson suggests ‘there is an obvious need for some separation of consumer relations from pure business relations.’ (T. Wilhelmsson, ‘Is There a European Consumer Law – and Should There be One?’ Centro di Studi e ricerche di dritto comparato e straniero, Rome 2000, p. 3.)

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Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on electronic commerce) (OJ L 171, 17.7.2000, p. 1). Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees (OJ L 171, 7.7.1999, p. 12). Directive 1999/250 Legal Protection of Computer Programs (O.J. L 122, 1999, pp. 42-46). Directive 97/67/EC of the European Parliament and the Council of 15.12.97 on common rules for the development of the internal market of Community postal services and improvement of quality of service (OJ L015 of 21.01.98, p. 25, corrigendum: OJ L023 of 30.01.98, p. 39). Directive 97/55/EC of the European Parliament and of the Council of 6 October 1997 amending Directive 84/450/EEC concerning misleading advertising so as to include comparative advertising (OJ L290 of 23.10.97). Directive 97/7/EC of the European Parliament and the Council on the protection of consumer interests in respect of distance contracts (OJ L144 of 04.06.97, p. 1923 COM (97) 353 final). Directive 95/46 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, (OJ No L 281, 23.11.1995) Directive 93/13/EEC on unfair terms in consumer contracts (OJ L 95/29, 21.04.1993). Directive 92/59/EEC on general product safety (OJ L 228, 11.8.1992, p. 24). Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises (OJ L 137, 31/12/1985). Directive 84/450/EEC relating to the approximation of the laws, regulations and administrative provisions of the Member States concerning misleading advertising (OJ L 250, 1984). Proposal for a Directive of the European Parliament and of the Council concerning unfair business-to-consumer commercial practices in the Internal Market and amending directives 84/450/EEC, 97/7/EC and 98/27/EC (the Unfair Commercial Practices Directive) Brussels, 18.6.2003, COM (2003) 356 final, 2003/0134 (COD). 2.2 EU Recommendations, Communications, Green Papers Commission Recommendation of 4 April 2001 on the principles for out-of-court bodies involved in the consensual resolution of consumer disputes (OJ L 109, 19.4.2001, p. 56). Commission Recommendation 98/257/EC of 30 March 1998 on the principles applicable to the bodies responsible for out-of-court settlement of consumer (OJ L115, 17.4.1998, pp. 31-34). Commission Recommendation 97/489/EC concerning Transactions by Electronic Payment Instruments and in particular the Relationship between Issues and Holder (OJ L208, 2.08.1997, pp. 52-58).

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Commission Communication on ‘widening consumer access to alternative dispute resolution’, Brussels, 4.4.2001, COM (2001) 161. Commission Communication on ‘the out-of-court settlement of consumer disputes’, COM (1998) 198. Commission Communication on ‘Financial services: enhancing consumer confidence’ – Follow-up to the Green Paper on ‘Financial services: meeting consumers’ expectations’, COM (1997) 309 final. Commission proposal for regulatory framework for distance selling of financial services, 14.10.1998, COM(1998) 468. Commission Working Document on the creation of a European extra-judicial network (EEJ-Net) (SEC (2000) 405). Communication from the Commission to the Council and the European Parliament on European Contract, Brussels, 11.07.2001, COM (2001) 398. Communication from the Commission to the Council and the European Parliament concerning a New Legal Framework for Payments in the Internal Market (Consultative Document), COM(2003) 718 final, Brussels, 2 December 2003. Council Resolution of 25 May 2000 (OJ C 155, 6.6.2000). e-Europe 2002 Action Plan, approved by the European Council at Santa Maria da Feira in June 2000 (http://europa.eu.int/information_society/eeurope/ action_plan/index_en.htm). Follow-up Communication to the Green Paper on EU Consumer Protection, European Commission, Brussels, 11.6.2002, COM (2002) 289 final. Green Paper on alternative dispute resolution in civil and commercial law, European Commission, Brussels, 19.04.2002, COM (2002) 196. Green Paper on European Union Consumer Protection, European Commission, Brussels, 2.10.2001, 531 final COM (2001) 398. Green Paper on Commercial Communications in the Internal Market, European Commission, Brussels, COM (1996) 192 final. 2.3 General Reports on Consumer Protection Commission on European Contract Law, Study Group on a European Civil Code Communication on European Contract Law, Joint Response of the Commission on European Contract Law and the Study Group on a European Civil Code, November 2001. Consumer Policy in the United Kingdom as Compared with the other Member States of the European Union, European Commission Doc. XXIV (99)UK.3 (orig. FR), July 1999. The OECD Guidelines Three Years Later, Report by the Committee on Consumer Policy on the Guidelines for Consumer Protection in the Context of Electronic Commerce, 3 February 2003. http://www.oecd.org. ‘Study on the harmonisation of competition law commissioned by the European Commission’, study commissioned by the European Commission to E. Ulmer, (Das Recht des unlauteren Wettbewerbs in den Mitgliedstaaten der EWG, vol 1. Vergleichende Darstellung mit Vorschlägen zur Rechtsangleichung, 1965).

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Study of the Institut für Europaisches Wirtschafts und Verbraucherrecht e.V, Study for Health & Consumer Protection DG, 2000, vol II. Dr. Fritz A. Bultmann (Vorstand Verbraucherschutzverein e. V. Berlin); Prof. Geraint Howells (University of Sheffield); Prof. Dr. Jürgen Keßler (Fachhochschule für Technik und Wirtschaft Berlin); Prof. Dr. Hans-W. Micklitz (Universität Bamberg, Head of VIEW); Malek Radeideh (Researcher at VIEW); Prof. Dr. Norbert Reich (Universität Bremen); Prof. Jules Stuyck (Katholieke Universiteit Leuven); Dennis Voigt (Researcher at VIEW), 2000, Berlin. Study on Consumer Protection, Marc de Vries, PricewaterhouseCoopers N.V., Professor Corien Prins (with the cooperation of Simone van der Hof and Miriam van Dellen), Tilburg University Professor Ewoud Hondius, Professor Jan Kabel, Madeleine de Cock Buning, Utrecht University, Final Report Study on Consumer Law and the Information Society, 17 August 2000. Study of the Lexi Fori identifies best practice in the use of soft law and analyses how this best practice can be made to work for consumers in the European Union, available at: www.europa.int. Study of the EC on ‘The Unfair Terms Directive, Five Years on Evaluation and future perspectives’, 1999, available at: www.europa.int. 2.4 ECJ Legal Cases and Commission Decisions Benincasa v. Dentalkit, C-269/95, [1997] E.C.R. I-3767. Brenner and Holler v. D.W. Reynolds, C-318/93, [1994] E.C.R. I-4275. Cassis de Dijon (Rewe-Zentral-AG vs. Bundesmonopolverwaltung für Branntwein), [1979] Case 120/78 ECR, 649 ECJ, 20.02.1979. Commission v. Germany ‘Sauce Hollandaise’, C-51/94 [1995] E.C.R. I-3299. Commission v. UK, C-207/83 [1985] E.CR. 1201. Dansk supermarked v. Imerco, C-58/ 80 [1981] E.C.R. 181. Estée Lauder v. Lancaster, C-220/98, judgment [2000]E.C.R. I-nyr. C-220/98 ECR I-117. GB-Inno-BM v. CCL decision, 1990 ECR I – 667 para. 18. Gut Springenheide and Rudolf Tusky v. Amt für Lebensmittelüberwachung (1998), C-210/96 [1998] E.C.R. I-4657 Case C-210/96. Industrie Diensten Groep v. Beele Handelmaastschzppij, C-6/81 [1982] E.C.R. 707. Keck and Mithouard, C-267 & 268/91 [1993] E.C.R. I-6097. Konsumentenombudsmannen v.Agostini Förlag and TV-Shop i Sverige, Joint cases C-34/95, C-35/95 and C-36/95 [1997] ECR, I-3843. Mars, C-470/93 [1995] E.C.R. I923. Mietz v. Intership Yachting Sneek, C-99/96, [1999] E.C.R., I-2277. Oosthoek, C-286/81 [1982] E.C.R. 4575. Pall corp. v Dahlhausen, C-283/89 [1990] E.C.R.I-4827. Robertson, C-220/81 [1982] E.C.R. 2349. Shearson v. T.V.B., C-89/91, [1993] E.C.R. 1993, I-139. Verband Sozialer Wettbewerb e.V v. Clinique Laboratoires SNC and Estée Lauder Cosmetics GmbH, C-315/92 [1994] E.C.R. I-317. Yves Rocher, C-156/91 [1993] E.C.R. I-2361).

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Commission Decision in case COMP/36.571 – PO/Österreichische Banken (‘Lombard’) (Avabank AG, Bank Austria AG, BAWAG, CA-BV, Erste Österreichisch, FPÖ, Giro Credit Bank AG, OeKB, Postsparkasse, Raiffeisenbank), not published. 11 June 2002, available on the RAPID database, http://europa.eu.int/rapid. Commission Decision, case COMP.D.2 37.444 – SAS and Maersk Air COMP.D.2 37.386 – Sun-Air v. SAS and Maersk Air, OJ L265/15 dd.5.10.2001. 3 INTERNATIONAL SELF-REGULATORY MODELS AND CONVENTIONS Alternative Dispute Resolution & e-Confidence P 4 http://mediate.com/articles/ econfidence.cfm. The Arbitration Rules for the Resolution of Consumer Related Disputes of 15th March 2001, http://www.adr.org/index2.1.jsp. Council of Europe, European Convention providing a Uniform Law on Arbitration, 1966 http://conventions.coe.int/Treaty/EN/cadreprincipal.htm. Convention of New York on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958. ICC Guidelines on Advertising and Marketing on the Internet (1998). International Chamber of Commerce – ICC Conciliation Rules (Rules of arbitration of the International Chamber of Commerce (in force as from 1 January 1998) http://www.iccwbo.org/court/english/arbitration/rules.asp. OECD – Guidelines for Consumer Protection in the Context of Electronic Commerce (OECD-1999), available at http://www.oecd.org/dsti/sti/it/consumer/. OECD – Guidelines on the Protection of Privacy and Transborder Flows of Personal Data 05-01-1999 (http://www.oecd.org/dsti/sti/it/secur/prod/PRIV-EN.HTM). Uncitral Conciliation Rules Uncitral Conciliations Rules, General Assembly Resolution 35/52 http://www.uncitral.org/en-index.htm), adopted in July 1980. Uncitral Model Law on Electronic Commerce www.un.org.at/unicitral/ electcom/ml-ec.htm. WIPO Meditation and Arbitration Rules of 1 October 1994. 4 NATIONAL LEGISLATION AND REPORTS 4.1 National Legislation 4.1.1 European Union Countries Austria (Article 1 of the Bundesgesetz gegen den unlauteren Wettbewerb). Belgium (Article 93 and 94 Loi sur les pratiques du commerce et sur l’information et la protection du consommateur). Denmark (§1 Marketing Practices Act). Fair Trading Act 1973, 1977 Unfair Contract Terms Act. Finland (Consumer Protection Act, part 2 §1).

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France (Art. 1382-1384 Code Civil). Germany (§1 Gesetz gegen unlautern Wettbewerb, Burgerliches Gesetzbuch [BGB] §242). Greece (Article 1 of the Act on Unfair Competition). Italy ( Article 2598 Codice Civile). Portugal (Article 260, para 1 Codigo da Propriedade Industrial). Luxembourg (Article 16 Loi du 27 Novembre 1986 réglementant certaines pratiques commerciales et sanctionant la concurrance déloyale). Netherlands (Article 6:162 of the ‘Burgerlijk Wetboek’). Spain (Article 5 Ley Competencia Desleal and Article 6(b) Ley General de Publicidad). Sweden ( Article 4, para 1 of the Marketing Act). UK ‘Enterprise Act 2002’, The Stationery Office Limited, available at: http://www.hmso.gov.uk/acts/acts2002/20020040.htm, T. UK Stop Now Orders Regulations, 2002, see www.oft.gov.uk). United Kingdom ‘Enterprise Act 2002’, The Stationery Office Limited, available at: http://www.hmso.gov.uk/acts/acts2002/20020040.htm, T consumer provisions. 4.1.2. US Legislation Official Comments to the UCITA, available at http://www.ucitaonline.com/ ucita.html. Restatement (Second) of Contracts §1 to 177 (1981). Restatement Second of Contracts §24 (1981). Restatement (Second) of Contracts, §153a. Restatement (Second) of Contracts §211A (1981). Revision of Uniform Commercial Code Article 2-Sales, Reporter’s Interim Draft For Comment (Nov. 1999) http://www.law.upenn.edu/bll/ulc/ucc2/ ucc21199.htm. Revision of Uniform Commercial Code Article 2 – Sales, draft March, 2000, available at http://www.law.upenn.edu/bll/ulc/ucc2/2300.htm. U.C.C. Revision of Uniform Commercial Code, available at: http://www.law.upenn.edu/bll/ulc/ucc2/ucc21199.htm. Uniform Commercial Code, §2-201 (1995). Uniform Computer Information Transactions Act (1999) http://law.upenn.edu/ bll/ulc/ucita/cita10st.htm. (Uniform Computer Information Transactions Act (Last Revisions or Amendments Completed Year 2002, National Conference of Commissioners on Uniform State Laws)), (the ‘UCITA’). United States Uniform Electronic Transaction Act (UETA), 1999, available at: http:// www.law.upenn.edu/library/ucl.htm. US Can-Spam Act of 2003 (‘Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003’,) available at: http://www.spamlaws.com/ federal/108s877nov22.html.

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4.2. National Reports, Guidelines, Codes Australia Australian Report of the Electronic Commerce Expert Group to the AttorneyGeneral, ‘Electronic Commerce: Building the Legal Framework’, March 1998, available at: http://www.law.gov.au/aghome/advisory/eceg/single.htm. ‘Building Consumer Sovereignty in Electronic Commerce. A Best Practice Model for Business’, Minister for Financial Services & Regulation, May 2000, p. 4, available at: http://www.treasury.gov.au. ‘Dispute Resolution in Electronic Commerce’, Discussion Paper, Australia Consumer Affairs Division, The Treasury, October 2001. The Guidelines and the Australian “E-commerce Best Practice Model” available at: http://www.ecommerce.treasury.gov.au. France France BVP, Advertising Verification Bureau (Bureau de Vérification de la Publicité), is an advertising self-regulation organisation in France. For more information see: http://www.bvp.org. United Kingdom Department of Trade and Industry (DTI), ‘The Unfair Commercial Practices Directice’, Consultation on a draft EU Directive COM (2003) 356, July 2003. DTI, Report ‘Modern markets: confident consumers’, available at http://www.dti.gov.uk/consumer/whitepaper. FSA (Financial Services Authority), ‘Comparative Information for Financial Services’, October 1999. FSA, ‘Informing Consumers: a review of product information at the point of sale’, November 2000. FSA Discussion paper, ‘A New Regulator for the new Millennium’, 2000, http://www.fsa.gov.uk. FSA Discussion paper, ‘Treating customers fairly after the point of sale’, June 2001, available at: http://www.fsa.gov.uk. FSA Progress Report 2, ‘Building the New Regulator’ (Feb 2002). FSA Better Informed Consumers (Consumer Research 1). ITC Advertising Standards Code revised in September 2002, available at: www.itc.org.uk/itc_publications/codes_guidance/advertising_standards_practice 2/index.asp. National Consumer Council Response to EC Communication on Consumer Protection, COM (2002) 289 final dated June 2002. National Consumer Council, ‘E-Commerce and Consumer Protection’, August 2000 (www.ncc.org.uk/pubs/pdf/ecommerce.pdf). National Consumer Council, ‘Models of self-regulation, An overview of models in business and the profession’, September 1999.

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OFT Guidelines, ‘Overview of the Enterprise Act, the competition and consumer protection’, Published by the Office of Fair Trading, 2003. OFT Guidelines, ‘Enforcement of consumer protection legislation’, 2003. OFT’s ‘Consumer codes of practice regime’, OFT 631, February 2003. OFT, ‘Core criteria for consumer codes of practice – guidance for those drawing up codes of practice’, OFT 352, May 2002. OFT Discussion Paper, ‘E-Commerce and its implications for competition policy’, August 2000. OFT Report, ‘Consumer Detriment’, OFT Report 296, Office of Fair Trading, 2000. OFT’s Report on Consumer Detriment, outlining A Model for Total Consumer Detriment, February 2000. OFT Discussion Paper, ‘E-Commerce and its implications for competition policy’, UK OFT 308, August 2000. OFT White Paper, ‘Modern markets: confident consumers’, 1999. OFT Research, ‘Consumer Affairs: the way forward’, September 1998. OFT Research, ‘Competition Act – guideline Market Definition’, OFT 403, 1998. OFT Report, ‘Consumer Detriment under Conditions of Imperfect Information’, August 1997. OFT Research, ‘Predatory Behaviour’ in UK Competition Policy, Paper 5, 1994. OFT Research, ‘Market definition in UK competition policy’, February 1992. OFT Research, ‘Assessment of Individual Agreements and Conduct’, OFT 414. OFT Research, ‘Guideline on Vertical Agreements and restraints’, OFT 419. OFT Discussion Paper, ‘A General Duty to Trade Fairly’, UK OFT Discussion Paper, 1986. OFT 1993, Revision of Part III, Fair Trading Act 1973. UK Code of Practices (BSI BIP 0008:2004) available at: http://www.bsiglobal.com. United States American Bar Association (‘ABA’) Report on Jurisdiction in Cyberspace Project empaneled under the title, ‘Transnational Issues in Cyberspace: A Project on the Law Relating to Jurisdiction,’ 1998. Dept. of Health and Human Services, ‘The Effects of the Mass Media on the Use and Abuse of Alcohol’, by the U.S. Dept. of Health and Human Services, Public Health Service, National Institutes of Health, National Institute of Alcohol Abuse and Alcoholism, at v (1995). Federal Trade Commission Act Amendments of 1994, Pub. L. No. 103-312, §9, 108 Stat. 1691, 1695 (codified as amended at 15 U.S.C. §45. FTC Report on ‘Guidelines on Internet Advertising’ www.keylaw.com/FTC/Rules/ ftc0005001.htm, May 2000. FTC Rules and Guides Online, ‘Dot Com Disclosures: Information about Online Advertising’, May 2000. FTC Report on ‘Advertising and Marketing on the Internet: Rules of the Road’, 2000, available at www.ftc.gov. FTC Report on ‘Advertising & Marketing of Dial-Around and Other Long-Distance Services to Consumers’, available at www.ftc.gov.

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FTC Jewellery Guides, ‘Guides for the Jewellery, Precious Metals, and Pewter Industries’ available at www.ftc.gov. FTC Report on ‘Privacy Online: Fair Information Practices in the Electronic Marketplace’, Report to Congress, May 2000. FTC Report on ‘Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws’, available at: http://www.ftc.gov/bc/compguide/ index.htm. FTC Report on ‘Enforcement Actions Involving the Internet and Online Services’, available at: www.ftc.gov, October 2001. 5 NATIONAL LEGAL CASES 5.1 UK Legal Cases Beta Computers (Europe) Ltd v. Adobe Systems (Europe) Ltd, 1996 SLT 604; 1996 SCLR 587. Davies v. Sumner [1984] 3 All ER 831. Devlin v. Hall [1990] RTR 320. DSG Retail Ltd v. Oxfordshire County Council, No. CO 4793/00, Neutral Citation Number: [2001] EWHC Admin 253, High Court of Justice Queen’s Bench Division (Divisional Court) Dixon. Kensington and Chelsea Borough Council v. Riley [1973] RTR 122, Crim LR 133. R&B Customs Brokers v. United Dominion Trust [1988] 1 All ER 847. UK ASA adjudication of 10th May 2000 in Lineone. UK ASA adjudication Freemoney Ltd, 14th of March 2001. UK ASA adjudication of 9th January 2002, 888 Casino. UK OFT v. TLD Network Ltd., Quantum Management (GB) Ltd. (www.oft.gov) http://www.oft.gov.uk/News/Press+releases/2002. 5.2 US Legal Cases American Libraries Association v. Pataki, 969 F. Supp. 160 (S.D.N.Y.1997). America Online, Inc. v. Superior Court, 90 Cal. App. 4th 1 (2001). Arizona Retail Sys. Inc. v. The Software Link Inc., 831 F. Supp. 759 (D. Ariz. 1993). Beck’s North America, Inc, File No. C-3859, 1999 F.T.C. LEXIS 40, (Mar. 25, 1999). Brower v. Gateway, 246 A.D.2d 246, 676 N.Y.S.2d 569 (1st Dept. 1998). Budget Rent-a-Car, 113 FTC 1109 (1990). BUY.Com, Inc, C-3978, available at: http://www.ftc.gov/opa/2000/06/comp629.htm. Caspi v. Microsoft Network, L.L.C., 732 A.2d 528 (N.J. App. Div. 1999). CMO Distribution Centers of America, Inc File No. 982 3180 (April 2000). Dell Computer Corporation, Docket No. C-3888 (final consent Aug. 6, 1999). Delia’s Inc., File No. 992 3008. EHP Products, Inc. File No. 982 3181 (April 2000). Enforma Natural Products Inc. Civil Action No.: 04376JSL(CWx) (C.D. Cal. filed April 25, 2000).

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Equipment Center Inc. v. Monteleone 524 A.2d; 1172 (1987). Groff v. America Online, Inc., No. PC 97-0331, 1998 WL 307001 (R.I. Super. May 27, 1998). Hare, No. 98-8194-CIV (S.D. Fla. Sept. 8, 1998). Hewlett-Packard Co, File No. 002-3220, available at http://www.ftc.gov/os/ 2001/04/index.htm#3. Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.). Hotmail Corp. v. Van$ Money Pie, Inc., 2000 U.S. Dist. LEXIS 10729, 1998 WL 388389 (N.D. Cal. Apr. 16, 1998). International Harvester Co, 104 FTC 949 (1984). Klocek v. Gateway, Inc., 104 F. Supp. 2d 1332 (D.Kansas 2000). Lane Labs-USA, Inc., No. 00 CV 3174 (D.N.J. June 28, 2000). Lieschke v. RealNetworks, Inc., Nos. 99 C 2774, 99 C 7380, 2000 WL 198424 (N.D.Ill. Feb. 11, 2000). Michael D. Miller d/b/a Natural Heritage Enterprises, File No. 992 3225 (April 2000). Micron Electronics, Inc., Docket No. C-3887 (final consent Aug. 6, 1999). Microsoft Corp. File No. 002-3331, available at: http://www.ftc.gov/os/2001/04/ index.htm#3. Mislabeled clothes in online catalogs, Wal-Mart Stores, Inc. File No. 992 3007. Moretti & Perlow Law Office v. Aleet Associates, 668 F. Supp. 103, 107 (D.R.I.1987). Office Depot, Inc., C-3977, available at: http://www.ftc.gov/opa/2000/06/comp629.htm. Patterson v. ITT Consumer, Financial Corp., 18 Cal. Rptr.2d 563 (Cal. Ct. App. 1993). People v. Lipsitz, 663 N.Y.S. 2d 468 (Sup. Ct. N.Y. Co., 1997). Pereira d/b/a atariz.com, Civil Action No. 99-1367-A (E.D. Va. Filed Sept. 14, 1999). Pfizer case (81 FTC 23, 64, 1973). Pollstar v. Gigmania, Ltd., 170 F.Supp.2d 974 (E.D.Cal. 2000). ProCD, Inc. v. Zeidenberg 86 F.3d 1447 C.A.7 (Wis.), 1996. RealNetworks, Inc., Privacy Litigation, 2000 WL 631341 (N.D. Ill.). Register.com, Inc. v. Verio, Inc., 126 F. Supp.2d 238, (S.D.N.Y. 2000). Reno v. ACLU, 929 F. F 117 S.Ct. 2329 (1997). R.J. Reynolds, File No. 932-3162 (Joint Statement of Commissioners Mary L. Azcuenaga, Deborah K. Owen, and Roscoe B. Starek, III)(June 6, 1994). Specht v. Netscape Communications Corp., 150 F. Supp. 2d 585 (S.D.N.Y. July 5, 2001). Step-Saver Systems, Inc. v. Wyse Technology, 939 F. 2d 91 (3rd Cir. 1991). Stomp, Inc. v. NeatO, LLC, 61 F.Supp.2d 1074 (C.D.Cal. 1999). Szetela v. Discover Bank, Cal. Ct. App., 4th App. Dist., G029323, 4/22/02. Ticketmaster Corp. v. Tickets.com, Inc., No. CV 99-7654 (C.D.Cal. Mar. 27, 2000). Thompson Medical Co, 104 FTC 648 at 839, 1984. TLD Network Ltd., Quantum Management (GB) Ltd., TBS Industries Ltd., Thomas Goolnik, and Edward Harris Goolnik (Northern District of Illinois, Eastern Division), No. 020-1475(N.D.Ill., 3/11/02) FTC File No. 012 3237. United States v. Katz, 389 U.S. 347, 1967.

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Value America, Inc., C-3976, http://www.ftc.gov/opa/2000/06/comp629.htm. Vault Corp. v. Quaid Software Ltd., 847 F.2d 255 (5th Cir. 1988). ‘Vitamin O’ – Rose Creek Health Products, Inc., (E.D. Wa. filed March 11, 1999) Commission Enforcement Actions Involving the Internet and Online Services www.ftc.gov Last Update: October 2001. Williams v. America Online, Inc., 2001 WL 1356825. Weaver v. American Oil Co, 276 Ne 2ed, 1971. Woolrich, Inc., File No. 992 3003, Gottschalks, Inc., File No. 992 3004. Zubulake v. UBS Warburg (Zubulake I), 217 F.R.D. 309 (S.D.N.Y. 2003). Zubulake v. UBS Warburg (Zubulake III), 216 F.R.D. 280 (S.D.N.Y. 2003). Zubulake v. UBS Warburg (Zubulake IV), 220 F.R.D. 212 (S.D.N.Y. 2003). 5.3 Other Legal Cases Affaire SA SFR (.SFR Française du Radiotéléphone) v/Union Fédérale des Consommateurs «Que Choisir», Judgment of the Tribunal de Grande Instance de Nanterre, Jugement of 15 Octobre 2001, France. Cour de Cassation Cass. 12 October 2000 (Saint-Brice NV/Etat belge), J.L.M.B. 2001, 188. Judgment of the ‘Cour d’Appel’ de Versailles, chambre 1 ère section, Arrêt N° 335, 16 mai 2002, R.G. N° 01/07363, France. Krombacher, LG Siegen, Judgement of 25 June 2002, Germany. SA coopérative compagnie financière du crédit mutuel de Bretagne v Association Fédération d’Ille et Vilains, Court d’Appel Rennes, March 2000. Scanner Advertisement, BGH, Germany, Judgment of 20 December 2001, NJW- RR 2002, 1122-1124. 6 PRIVATE SELF-REGULATORY MODELS 6.1 Code of Conduct on E-commerce and Consumer Protection AgV Verbraucherpolitik, Arbeitsgemeinschaft der Verbraucherverbände e.V.Deutschland; Konvention zur Anbieterkennzeichnung im Elektronischen Geschäftsverkehr mit Endverbrauchern vom 15.12.1999 (http://www.agv.de/ politik/verbraucherrecht/polkonvent.htm). American Bar Association Task Force on E-Commerce & Alternative Dispute Resolution (Draft Preliminary Report & Concept Paper; May 2001) (http://www.law.washington.edu/ABA-eADR/drafts/2001.05.21draft.html). BBB Code of Advertising, http://www.bbb.org/advertising/adcode.asp. Bundesministerium für Justiz, Schutz vor den Tücken des ‘Kleingedruckten’, Information über die Rechte des Verbrauchers, (Stand Oktober 1999) (http://www.bmj.bund.de/publik/brosch.htm). Canadian Code of Practice for Consumer Protection in Electronic Commerce, Consultation Draft February 22, 2001 (http://strategis.ic.gc.ca/SSI/ca/ principlese.pdf).

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The Canadian Principles of Consumer Protection for Electronic Commerce (http://strategis.ic.gc.ca/SSG/ca01180e.html). Code of Online Business Practices, available at: http:// www.bbbonline.org/ code/code.asp. CSA International, Toronto: Model Code for the Protection of Personal Information (Privacy Code CSA Standard CAN/CSA-Q830-96) (http://www.mediaawareness.ca/eng/issues/priv/laws/csacode.htm). Electronic Commerce and Consumer Protection Group / Guidelines for Merchantto-Consumer Transaction (http://www.ecommercegroup.org/guidelines.htm). Electronic Commerce and the New Zealand Consumer – A Status Report. And a proposed New Zealand Model Code for Consumer Protection in Electronic Commerce (http://www.consumer-ministry.govt.nz/dp_ ecommerce_statusreport.htm). FEDMA Code on E-Commerce & Interactive Marketing (http://www.fedma.org/ img/db/Code_of_conduct_for_e-commerce.pdf). ICC International Code of Advertising Practice (1997), available at http://www.iccwbo.org/home/statements_rules/rules/1997/advercod.asp. Initiative for Privacy Standardization in Europe (ISPE) Working Draft document on the role of standardization following the Directive 95/46 EC on privacy and Data protection (www.cenorm.be/isss/projects/dataprotection/ISPE/Cover.htm). International Standards Accreditation Board ISAB: The International E-Commerce Standard for Security, Privacy and Service (Business to Consumer) IES: 2000 (B2C) (http://www.csia.com.au/standards/b2c/b2c_page_1.asp). Internet Industry Privacy Code Of Practice – A Code for Industry Co-Regulation in the Area of Privacy (Consulation Draft 1.0, 14 August 2001) (http://www.iia.net.au/IIA_PrivacyCode(EUdraft).pdf). Japanese Industrial Standard Requirements for Compliance Programs on Personal Information Protection (JIS Q 15001:1999) (http://www.jipdec.or.jp/ security/privacy/JISQ15001-e.html). The Nordic Consumer Ombudsmen’s position paper to trading and marketing on the Internet and in similar communication systems (http://econfidence.jrc.it/ default/page.gx?_app.page=entity.html&_app.action=entity&_entity.object=EC _FORUM0000000000000C65&_entity.name=nordic.doc). Revised ICC International Code of Direct Marketing, 2001. Resolution der Internationalen Liga für Wettbewerbsrecht (LIDC, Ligue International du Droit de la Concurrence), St. Malo 30.9.2000. TüV/ Verbraucherzentrale Nord-Rhein Westfalen: Qualitätskriterien für den Wareneinkauf im E-Commerce, Rev. 01.2 vom 24.10.2000 (Verbraucherzentrale Nord-Rhein Westfalen) (http://www.vz-nrw.de/SES82415506/doc167A). UNICE General Principles and specific Guidelines for Generic Codes of Practice for the sale of Goods and Services to Customers on the Internet (24.1./5/1 vom 19.12.2000) (http://www.unice.org/C125679E00338D8B/AllDocuments SearchEng/E67336523B4E93 FF).

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6.2 Other E-trust Initiatives Alternative disputes resolution, Global Business Dialogue on Electronic Commerce, September 26, 2000, http://www.gbde.org. Belgian webtrader code of conduct (http://www.budget-net.com/bnet/ webtradersite/code_uk.html). Better Web (http://www.pwcbetterweb.com/). Bonitrus (http://www.bonitrus.com/service_ttrader_de.asp). The Danish WebSeal Scheme (www.e-fokus.dk). ECODIR (Electronic Consumer Dispute Resolution Platform): http://www.ecodir.org. ECOM (Japan) Guidelines for Transactions between Virtual Merchants and Consumers (http://www.ecom.or.jp/ecom_e/report/full/wg14/guidline1.0.htm). Electronic Commerce and Consumer Protection Group: www.ecommercegroup.org/ guidelines.htlm. Global Business Dialogue initiative (www.gbde.org). Geprüfter Online -Shop (http://www.shopinfo.net/). Labelsite (Fédération des Entreprises du Commerce et de la Distribution et Fédération des Entreprises de Vente à Distance) (http://www.labelsite.org/). Mediation Room.com, http://www.themediationroom.com. The Netherlands Trust in E-Commerce initiative (www.ecp.nl). S@fer-shopping (http://www.safer-shopping.de/). Singapore CASETRUST initiative (www.casetrust.com.sg). SquareTrade, Dispute Resolution Services www.squaretrade.com. Stiftung Warentest (Massnahmenkatalog zur Beurteilung der existierenden Gütesiegel). Trusted Shops (http://www.trustedshops.de/de/home/index.html). Trusted Site (http://www.trusted-site.de/). Transatlantic Business Dialogue, http://www.tabd.com. Transatlantic Consumer Dialogue, http://www.tacd.org. TRUSTe, an organisation founded by CommerceNet and the Electronic Freedom Foundation, http://www.etrust.org/. Tüv-Online-Check (www.tuev-online-check.de; www.sicher-einkaufen-im-internet.de). U.K. TrustUK initiative (www.trustuk.org.uk). U.K. WebTrader Initiative (http://whichwebtrader.which.net/webtrader/ code_of_practice.html). U.S. BBBOnline initiative (www.bbbonline.org). Webtrader, http://www.budget-net.com/webtradersite/reseau_be.html). WebTrader Partnerprogram Netherlands (www.consumentenbond.nl). WebTrust initiative (http://www.aicpa.org/webtrust/index.htm). ‘Which? Consumer Association’ and the UK Chartered Institute of Arbitrators are illustrative of online arbitration (The ODR schema ‘Which? Consumer Association’ at http://www.arbitrators.org/WebTrader/index.htm.

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7 INTERNATIONAL ORGANISATIONS, INTERNATIONAL CONSUMER ORGANISATIONS Alliance for Global Business, Discussion Paper of the Alliance for Global Business, ‘On Trade-Related Aspects of Electronic Commerce In Response to The WTO’s E-Commerce Work Programme’, April 1999, p. 41. BEUC Submission from BEUC in the Competition Cases: COMP/M.1852 – Time Warner/EMI; COMP/M.1485 – America Online Inc/Time Warner Inc. (BEUC/281/2000 The European Consumers’ Organisation 11/9/2000). BEUC, J. Murray, Director BEUC, ‘Communication to the European Commission Workshop on Unfair Commercial Practices’, January 2003 available at: www.europa.eu.int. Chartered Institute of Arbitrators, Arbitration rules (2000 Edition) http://www.arbitrators.org/Materials/Arb/rules.htm. Consumers’Association, Response to the Commission’s Follow-up Communication to the Green Paper on EU Consumer Protection [COM (2002) 289 final, 11.6.2002]. Consumers International Organization, ‘Disputes in Cyberspace in 2001: Update of ODR for consumers in cross-border disputes’, available at: http://www.ombuds.org/cyberweek2002/library/cireport.pdf. EEA EFTA, Response to the Commission’s Follow-up Communication to the Green Paper on EU Consumer Protection [COM (2002) 289 final, 11.6.2002]. ERICA (European Research in Consumers Affairs), Response to the Commission’s Follow-up Communication to the Green Paper on EU Consumer Protection [COM (2002) 289 final, 11.6.2002] http://www.net-consumers.org/erica/ index.htm. Eurochambres Position Paper On the Commission’s Follow-Up Communication to the Green Paper on EU Consumer Protection [COM (2002) 289 final, 11.6.2002]. European Advertising Standards Alliance (EASA) submission on the Follow-up Communication to the Green Paper on EU Consumer Protection [COM (2002) 289 final, 11.6.2002]. European Consumer Law Group, ECLG’s first paper on the EU Green Paper on Consumer Protection (COM (2001) 531 final, 2-10-2001. European Mail Order and Distance Selling Trade Association, Position Paper 15 January 2002, Follow-up Communication to the Green Paper on EU Consumer Protection, [COM (2002) 289 final, 11.6.2002]. Federation of European Direct Marketing (FEDMA) comments on the Commission’s follow-up Communication to the Green Paper on Consumer Protection [COM (2002) 289 final, 11.6.2002]. ICC response to the European Commission ‘Follow-up Communication to the Green Paper on Consumer Protection’ [COM (2002) 289 final, 11.6.2002]. Law Society of Scotland, Memorandum of Comments by the Law Society of Scotland on the Follow-up Communication to the Green paper on EU Consumer Protection, [COM (2002) 289 final, 11.6.2002]. The Mediation Information & Resource Center (MIRC) – Alternative Dispute Resolution or Consumer Transactions in the Borderless Online Marketplace, Submission by The Mediation Information & Resource Center (MIRC) to the US FTC, 2000.

References

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OECD, ‘Legal Provisions related to Business-to-Consumer Alternative Dispute Resolution (ADR) in relation to Privacy and Consumer Protection’, July 2002. OECD, ‘Consumers in the Online Marketplace: The OECD Guidelines Three Years Later’, Report by the Committee on Consumer Policy on the Guidelines for Consumer Protection in the Context of Electronic Commerce, 3 February 2003, available at www.oecd.org. World Federation of Advertisers, WFA Position Paper: Communication from the Commission, Follow-up to the Green Paper on EU Consumer Protection [COM (2002) 289 final, 11.6.2002].

Index Advertising Standards Authority (UK) 147 Advertising ix, x, 137 Bait 142 BBB Code of Advertising 153 Children 169, 192, 189, 190, 194 Directive on Misleading Advertising 174, 179, 180-183 Economic behaviour 176, 177 Enforcement viii, 6, 21, 24, 29, 38-40, 59, 88, 91, 101-103, 118, 123, 131, 134, 135, 138, 140, 143-148 European Advertising Standards Alliance 234 FTC Report on ‘Guidelines on Internet Advertising 40, 228, 229 ICC Guidelines on Advertising and Marketing on the Internet 194, 202 ICC International code of advertising practice 232, 234 ITC Advertising Standards Code 227 Jewellery products xii Misleading xii, xiv, xv, 1, 6,17, 19, 22, 38, 40, 102, 123, 124, 126, 130, 132, 134, 137, 138-145, 147-151, 153, 160, 164, 165, 169, 172, 174, 177, 178, 181, 183-186, 195-199, 201, 206, 208, 222 ODR xi, 87-89, 91-100, 111, 207, 218, 233, 234 Unsolicited commercial communication 13, 118, 138, 139, 141, 142, 145, 146 Agency (theory of) 20, 26, 27, 72, 80, 81, 85, 47, 97 Aggressive practices 172, 185, 186, 196 Alternative Dispute Resolution 87, 88, 89, 102, 102, 108, 109, 111, 112, 225, 234, 235 Ambiguous presentation of terms and conditions xi, 48, 49 Arbitration 51, 54, 57-60, 62, 88, 89, 1-93, 107, 112, 113, 146, 185, 216, 219, 225, 233, 234 American Arbitration Association (AAA) 102, 103 Arbitration Rules for the Resolution of Consumer Related Disputes 102, 112, 225 Binding arbitration procedures 113 Chartered Institute of Arbitrators, Arbitration rules 233, 234 Fair arbitration hearing 102, 104 ICC Court of Arbitration 102 Mandatory arbitration clauses 102 Online Arbitration 92, 98, 109, 112, 233 ‘Which? Consumer Association’ 92, 109, 233 Virtual Magistrate project 109 Article 13 Brussels Convention 14 Article 6:162 ‘Burgerlijk Wetboek’ 166, 198, 226

Article 4, Distance Selling Directive 14, 35, 118, 200 Article 6, Distance Selling Directive 65 Article 7, Directive on Electronic Commerce xvi, 82, 107, 11, 132, 152, 222 Article 2, ICC International Code of Direct Marketing, 173, 198, 232 Article 5, ICC International Code of Advertising Practice 173, 198, 232 Article 5, Rome Convention 14, 111, 221 Article 81 of the EU Treaty 168 Article 153 §1 of the EU Treaty 199 Article 38, paragraph 1, of the Statute of the International Court of Justice 109 Association of Australian Competition and Consumer Commission 134, 135, 148 Asymmetry of information xi, xii, 115, 116, 127-129, 150, 163, 206, 208 Australian code on ‘Building Consumer Sovereignty in Electronic Commerce’ 195 Authoritarian process of designing terms and conditions xi, 47 Automated Settlement Systems 92, 93, 111 Average consumer 17, 105, 120, 160, 172, 178-187, 201, 208 Bargaining power (unequal, equal) vii, ix, xi, 3, 7, 9, 18, 45, 46, 49, 53, 54, 62, 63, 64, 69, 70-72, 75-81, 87, 88, 90, 92, 94-98, 101-104, 106, 116, 130, 163, 206, 207 From a traditional to a technological model of unequal bargaining power vii, ix, xi, 206, 207 Proposals for alleviating unequal bargaining power 79-81 BBB Code of Advertising 231, 153 BBOnLine 121 Blacklist of Commercial Practices 187 Bona fide 181 British Codes of Advertising and Sales Promotion 146 Browse-wrap agreement xi, 49, 55, 56 Burden of proof 7, 9, 97, 98, 146, 157, 184, 185, 190, 196 Business-to-business 7, 9, 13 Business-to-consumer xv, xvi, 90, 92, 109, 11, 192, 193, 197, 199, 200-202, 208, 216, 222, 235 Business-to-government 7, 13 Click-wrap agreement 54, 55, 100 Code of Conduct 36, 142, 146, 185, 188, 190, 193, 102, 231, 232

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Codes of Conduct and Enforcement 141, 142 Code of Conduct on e-commerce and consumer protection 231 Coercion 186 Commercial communications xii, 6, 7, 13, 116, 118, 131, 138, 139, 141-146, 152, 159, 222 Green Paper on Commercial Communications 152, 223 Directive on Electronic Commerce xvi, 82, 107, 111, 132, 142, 152, 221 Commercial practices v, x, xi, xii, xiii, xiv, xv, xvi, 5, 25, 38, 87, 105, 115, 118, 120, 129, 137, 140, 142, 143, 146, 155, 156, 157, 158, 159, 161, 163-167, 169, 171-176, 178, 181, 182, 184-190, 192-206, 208, 212, 218, 222, 227, 234 Burden of proof 7, 9, 97, 98, 146, 184, 190, 196 Commercial practices before and after sale 178 Proposal for a Directive on Unfair Commercial Practices 175 Consumer Average consumer 160, 172, 178, 179, 181, 182, 183, 184, 185, 187, 201, 208 Consumer-to-consumer relationship 13 Notion of ‘consumer’ within the cyberspace context 7 Consumer contract 8, 14, 68, 100 Consumer International Organization 99 Consumer protection 14, 15, 17-20, 26, 29, 36, 39, 40, 42, 45, 51-55, 63-65, 123, 127, 131-134, 138, 146, 148, 149, 151, 153-159, 162, 164, 166-171, 174-177, 181, 187, 188, 191, 193, 196-203, 205, 206, 209, 212, 217-228, 232, 233, 234, 235 Green Paper xiv, xv, xvi, 89, 90, 107-109, 111, 151, 152, 166, 167, 171, 175, 176, 196-199, 202, 203, 223, 234, 235 OECD 2, 12, 42, 90, 109-111, 131, 121-123, 132, 133, 175, 223, 225, 235 Consumers’ lack of knowledge – electronic agents x, 75, 78 Contract Contract of adhesion 64 Contract-as-consent model 45, 63, 68, 206 Contract-as-product model 65 Contracts for the Sale of Physical Goods 48 Contracts for the Supply of Digitised Products 48, 49 Contracts for the Supply of Services 10, 48 Control of Misleading Advertisements Regulations 1988 (UK) 147, 148, 153 Convention of New York on the Recognition and Enforcement of Foreign Arbitral Awards 188, 225 Cookies 39, 40, 156 Customary cyber consumer law 91, 109 Cyber Consumer Law ‘Infrastructure’ iii, x, 1, 11 CyberSettle 94, 99, 111 Cyberspace ix, x, xii, xv, xvi, 1-5, 8, 10, 12, 13, 17, 45, 46, 62, 65, 68, 70, 73, 91,92, 94, 99, 106, 110, 212, 213, 215, 217-220, 228, 234

Detriment Consumer detriment xvi, xi, 195, 196, 202, 228 Economic detriment 145 ODR xi, 97-93, 95-106, 109, 111, 207, 218, 234 Deontology of fair trading xv, 193, 208 Diligence (professional) 29, 36, 146, 178, 179, 180-182, 184, 186, Requirements of professional diligence 29, 179, 180, 186 Directive on privacy and electronic communications 39, 221 Director General of Fair Trading (UK) 125,126, 147, Disclosure of Information 103, 115-117, 119, 121, 123-126, 130-133, 181, 201, 206-208 Distance Marketing of Financial Services Directive 117 Distance Selling Directive 14, 35, 65, 118, 199 Distortion of consumer’s economic behaviour 40, 147, 176, 182-184, 187, 208 likely to materially distort consumers’ economic behaviour 172, 179-181, 183, 187, Dot Com Disclosures: Information about Online Advertising 123, 133, 228 Due process 97, 104, 107, 109, 110, 112, 113, 220 Duty to trade fairly 165, 167, 196, 228 ECODIR 93, 108, 110, 233 Electronic agents x, xi, xv, 2, 6, 11, 62, 63, 69, 70-86, 206, 207, 221 Agents for e-commerce 82 Practical aspects of electronic agents in online consumer transactions xi, 64, 69, 70 search information agents 70 Proposals for alleviating unequal bargaining power arising from the conclusion of the contracts via (through) electronic agents 79-81 Watcher agents 82 Electronic error 72 Electronic Commerce Directive 89, 117, 118, 132 Electronic Commerce and Consumer Protection Group (‘E-Commerce Group’) 14, 90, 109, 132, 232, 233 Electronic marketplace v, x, xi, xiv, xv, 1-5, 7, 9, 11-13, 15, 18-22, 38-40, 47-49, 62-64, 69, 70, 76-85, 87, 88, 105, 115-117, 123, 124, 128-130, 134, 140, 149-151, 155-157, 161, 167, 171, 172, 175, 179-181, 184, 193, 196, 197, 205-209, 219, 229 Electronic marketplace as B2C commercial relationship 7 Electronic marketplace as electronic commerce 2 Particularities of the global electronic marketplace 24 Perfect Electronic Marketplace 18 Electronic market failure 19, 38, 63 Equity 85, 100, 157, 168, 198, 220 European Extra-Judicial Network ‘EEJ-Net’ 108, 223 Fair Information Practices in the Electronic Marketplace – US 19, 39, 229

Index Fair trading principle Fair Trading Principle – as legal norm 156 Fair Trading – as regulator principle xv, 158 Fair Trading – From the consumer’s perspective 159 Fair Trading – From the trader’s perspective 160 Fair Trading National Models 161 Fair Trading – precautionary aspect 193 Fair Trading – remedial aspect 195 Fairness (Unfairness) xv, 46-48, 50, 81, 87, 97, 100, 102-106, 143, 152, 157, 159, 160-166, 170, 171, 178-180, 182, 183, 184, 185, 192, 193, 195, 196,198, 206, 208, 209, 218, 220 Fairness in ODR procedures 103 False domain names 148 Federal Trade Commission FTC US FTC Report on ‘Advertising and Marketing of Dial-Around and Other Long-Distance Services to Consumers’ 228 FTC Report on ‘Advertising and Marketing on the Internet: Rules of the Road’ 40, 153, 228 FTC Report on ‘Guidelines on Internet Advertising’ 125, 132, 133, 228 FTC Rules and Guides Online, ‘Dot Com Disclosures: Information about Online Advertising’ 123, 133, 228 FIN-NET Financial Services Complaints Network 108 Full harmonisation 142, 143, 176, 177, 196 General prohibition of unfair commercial practices 176, 179 GBDe (Global Business Dialogue on e-commerce) 91, 109, 233 Good faith 100, 101, 118, 156, 163, 166, 180, 181, 201, 207, 214, 220 Green Paper on Consumer Protection xiv, 167, 175-188, 199 Green Paper on Alternative Dispute Resolution in Civil and Commercial Law 88, 107, 109-111, 223 Harassment (commercial practices) 186, 187 Hyperlinks 68, 103, 117, 123, 125, 126, 131, 138, 140 Infrastructure of cyber consumer law 1 Internal Market 43, 82, 89, 107, 111, 113, 131, 132, 142, 149, 152, 155, 166, 171, 173-177, 192, 196, 199, 200, 201, 208, 222, 223 International Chamber of Commerce (ICC) ICC Guidelines on Advertising and Marketing on the Internet 194, 202, 225 ICC International Code of Advertising Practice 144, 153, 173, 198, 232 International Code of Practice on Direct Marketing 144 Internet Services 1, 4 ITC Advertising Standards Code 227 Japan Fair Trade Commission 123 Jewellery products xii

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Jurisdiction xiii, xvi, 7, 25, 26, 48, 62, 91, 100, 101, 149, 195, 221, 228 Labelling websites 180 Laissez-faire views 18 Legitimate expectations 159, 160 Levelling the balance of unequal bargaining power in online consumer transactions concluded via electronic agents 75 Listserv 4-5 Mandatory ODR clauses xi, 88, 94, 95, 99, 100, 101 Mediation (online) 88, 89, 92, 93, 96, 107, 110, 112, 213, 216, 233, 234 Metatags 140 Minimum harmonisation 176, 200 Misleading advertised prices 21 Misleading domain names xii Misrepresentation 164 Mouseover 140 National Advertising Division 147 Netiquette x Netizens x Non–negotiability of terms and conditions 55 Objective test 177, 178 OECD – Guidelines for Consumer Protection in the Context of Electronic Commerce 109, 123, 133, 223, 225 Online arbitration 92, 98, 109, 233 Online dispute resolution – ODR v, x, xi, 1, 53, 87, 88, 91, 93, 95, 97, 99, 101, 103, 105-113, 139, 159, 206, 211, 214, 215-218 One-way ODR clauses 102 Uncertain or unreasonably ODR fees 102 Online mediation 93, 6, 110, 216 Online misleading advertising xii, xv, 38, 40, 137-147, 149-151, 153, 208 Online subscriptions without delivering the specified products or services xii ‘Opt-out’ ‘Opt-in’ 13, 21, 40, 37, 141, 145, 171 Paris Convention on the protection of intellectual property rights 173 Payment security system 117 Power shopping xvi, 156, 166 Precautionary aspect of the fair trading principle 157, 166, 193-195 Price discrimination 168, 217, 129 Price dispersion xii, 127, 134, 218, Principle of country of origin 171, 172, 176, 177, 208, 172, 176, 177, 208 Privacy x, 1, 5-7, 17-21, 24, 34-36, 38-40, 48, 54, 60, 67, 84, 87, 90, 95, 109, 111, 128, 140, 135, 142, 143, 145, 153, 164, 168, 170, 175, 194, 211, 216, 217, 219-221, 225, 229, 230, 232, 235 Case study: privacy 20 Directive on privacy and electronic communications 221 Federal Trade Commission report on ‘Privacy

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Online: Fair Information Practices in the Electronic Marketplace’ 19, 20, 39, 143 Internet Industry Privacy Code of Practice – A Code for Industry Co-Regulation in the Area of Privacy 232 OECD Report on ‘Legal Provisions related to Business-to-Consumer Alternative Dispute Resolution in relation to Privacy and Consumer Protection’ 92, 109 OECD – Guidelines on the Protection of Privacy and Transborder Flows of Personal Data 225 Procedural unfairness 104, 106 Professional diligence 146, 172, 178, 179-182, 186 Prominence 125 Proximity and placement 133 Rationales for cyber consumer protection x, xii, 1, 17, 39, 45, 62, 64, 98, 127, 201 Real time remote computer utilization (such as ‘Internet Relay Chat’) 4 Real time remote computer utilization (such as ‘telnet’) 4 Redress costs 94, 98, 99 Reliability of electronic records 24, 29, 30, 31, Remedial aspect of the fair trading principle 166, 195 Sanctions 147, 191 Self-regulation 24, 39, 40, 41, 121, 134, 138, 143, 147, 150, 153, 157, 171, 219, 227 Self-regulatory Proprieties of the Electronic Marketplace 79 Seller 1, 7, 10-12, 39, 51, 54, 57, 62, 98, 100, 117, 127, 168 Selling misleading domain names xii Service provider 54, 117, 118, 135, 140, 187 Shrink-wrap Agreements 49-51, 52, 66, 102, 214 SquareTrade 93, 110, 216, 233 Standardisation of online contracts v, xi, 45, 206 Definition, particularities, functions 45-47, 49, 51, 53, 55, 62-67 Substantial injury 143, 164, 165 Substantiated 23, 35, 144 Technological assent 206, 63 Technological interface of the electronic marketplace 64, 206 Technological defectiveness and reduced technical capacities of electronic agents 69, 74, 77, 78 Terms and conditions xi, xii, xiii, 27, 29, 35, 45-49, 51-53, 55, 56, 63, 69-72, 74-78, 80, 81, 83, 87, 94, 97, 100, 101, 195, 112, 115, 117, 119, 120, 122, 124, 126, 127, 133, 80, 181, 206, 207, 212 Ambiguous presentation of terms and conditions xi, 48, 49 Non–negotiability of terms and conditions 55 Standardised terms and conditions xi, xiii, 47, 48, 56, 63, 65, 71, 72, 206 Terms or conditions different from those specified by the consumer 71, 75

Unfair standardised terms and conditions xiii, 71, 71 Transatlantic Business Dialogue 91, 109, 113, 233 Transatlantic Consumer Dialogue 91, 109, 113, 233 UNCITRAL 46, 88, 107, 175, 225 UNCITRAL Conciliation Rules 88, 225 Uncertain or unreasonably ODR fees 102 Unconscionability 54, 60, 100, 167, 198 Undue influence 186 Unequal bargaining power when concluding contracts via electronic agents 206 Unfair commercial practices x, xii, xiii, xiv, xv, xvi, 6, 38, 115, 118, 142, 143, 146, 157, 158, 161, 167, 171, 172, 174-179, 182, 184, 187, 188, 190, 192, 194-203, 206, 212, 222, 238 Unfair competition xiv, 159, 161, 169, 197, 198, 226 Unfair Contracts Terms Directive 14 Unlawfulness 157, 173, 214 Uniform Commercial Code (UCC) 10, 13-15, 66, 212 Uniform Computer Information Transactions Act (UCITA) 8-10, 14, 15, 68, 71, 72, 75, 82, 83, 84, 218, 226 Uniform Electronic Transactions Act (UETA) 29, 41, 42, 73, 78, 82, 93, 226 United Kingdom xv, 8, 92, 223, 226, 227 Proposal of Directive on Unfair Commercial Practices, 200 UK arbitration 233 UK Chartered Institute of Arbitrators 92, 107, 233, 234 UK credit law 8 Usenet newsgroups and chat rooms 5 United States xv US ADR or ODR 88 US Section 101(15) of the Uniform Computer Information Transactions Act (UCITA) 10 US Section 202(a) of the Uniform Computer Information Transactions Act (UCITA) 71 US Section 112(b) of the Uniform Computer Information Transactions Act (the UCITA) 75 US Uniform Electronic Transaction Act (UETA) 78, 82, 83, 226 U.S. Federal Trade Commission FTC Report on ‘Advertising and Marketing of Dial-Around and Other Long-Distance Services to Consumers’ 228 FTC Report on ‘Advertising and Marketing on the Internet: Rules of the Road’ 140, 153, 228 FTC Report on ‘Guidelines on Internet Advertising’ 125, 132, 133, 228 FTC Rules and Guides Online, ‘Dot Com Disclosures: Information about Online Advertising’, 123, 133, 228 Virtual Magistrate project 109 Virtual organisation of companies 17, 25, 38 WIPO Meditation and Arbitration Rules 88, 225 Which? Consumer Association 92, 109, 233