Prepared Statement of the Honorable Andrew J. Pincus to the

Subcommittee on Courts and Intellectual Property

of the House Judiciary Committee

June 29, 2000, 10:00 AM

Thank you for the opportunity to testify today. As you know, the global nature of the Internet gives rise to important jurisdictional issues. In fact, almost every major policy area in electronic commerce raises these issues. From tax to content restrictions, and intellectual property to standards, the policies and approaches adopted in individual countries or regions are likely to have an impact on persons located outside those countries or regions. Broadly speaking, these jurisdictional problems can be divided into three categories: (1) issues related to the prescription or establishment of rules and policies; (2) issues concerning the ability of courts to decide cases; and (3) issues related to the enforcement of judicial and other decisions.

In my statement this morning, I will make some general observations on jurisdiction and electronic commerce. I will also describe a few of the Administration's activities and initiatives in this area, as a means of demonstrating how we are working to overcome jurisdictional problems in the online global marketplace. In addition, I will comment on the draft Hague Convention on jurisdiction and the recognition of foreign judgments, and provide our preliminary views on the implications of that draft text for electronic commerce.

GENERAL OBSERVATIONS

Jurisdictional issues relating to cross border commerce are not new; in our global economy there already is a very considerable amount of cross-border trade. As a general matter, however, this trade consists of business-to-business transactions. In that context, choice of law and choice of forum clauses generally are employed to address many - but not all - jurisdictional issues. The relatively limited number of regulatory regimes applicable in the business-to-business context also helps reduce the number of jurisdictional issues.

Electronic commerce will expand greatly the number of international business-to-business transactions - and open that field to small and medium companies. It also enables cross border business-to-consumer transactions on a global scale.

As a general matter, our goal should be to apply the same jurisdictional principles to on-line and off-line commerce. In some contexts, this should be relatively straightforward. For example, the "minimum contacts" principle that governs adjudicative jurisdiction is being applied by courts to electronic transactions, as my colleague from the Department of Justice will discuss.

The situation is more complex with respect to prescriptive jurisdiction - questions of which country's (or state's ) law applies to a particular transaction. The choice of law clauses that have been employed in the business-to-business context may be less effective with respect to consumer transactions (depending on the applicable law), either because such clauses may be invalid with respect to consumer transactions or because they may not reach the regulatory statutes and regulations - for example, consumer protection laws - that apply in the consumer context. The growth of these types of electronic transactions therefore may place considerable stress on existing jurisdictional principles, and may justify some revision of those approaches.

A considerable amount of analysis is now underway with respect to these issues, both in governments and in the private sector. Because of the large number of substantive areas of law that may be affected, and the complexity of the question, our view is that we should not rush to judgment. Each substantive legal area must be analyzed on its own terms, and it is essential that we consider alternatives to existing choice-of-law rules.

Speed has the benefit of creating certainty, but that benefit will be small indeed if the legal principle chosen has the effect of thwarting the development of this new medium of commerce. Caution and experimentation - although frustrating because they do not produce clarity in the short term - make much more sense because they are more likely to lead to approaches that will allow electronic commerce to realize its full potential.

The following are just a few examples of the Administration's efforts to minimize or eliminate the jurisdictional problems that arise in the context of cross-border electronic transactions.

CONSUMER PROTECTION

In 1998, the President directed Secretary Daley, in consultation with the Federal Trade Commission and other relevant agencies, to "foster appropriate consumer confidence in electronic commerce by working to ensure effective consumer protection online." He indicated that this should "include exploring opportunities for global cooperation to enforce consumer protection laws and facilitating partnerships between industry and consumer advocates to develop redress mechanisms for online consumers."

In working to implement this directive, we have observed that the Internet has great potential to boost the growth of international consumer transactions. At the same time, as I noted earlier, it raises some of the most difficult challenges regarding jurisdiction and choice of law. For example, when a dispute arises in an international consumer transaction, what law applies to the transaction and which court should hear the dispute?

Consumer groups, such as the Transatlantic Consumer Dialogue (TACD), have argued for a "country of destination" approach to these issues, whereby the applicable law and appropriate forum would be that of the consumer. Often, as part of this proposal, they indicate that courts should generally not enforce choice of law and choice of forum clauses in consumer contracts. They consider that this is the best means to protect consumers in cyberspace.

Many online merchants have argued for precisely the opposite - a "country of origin" approach - in which the law and forum would be that of the seller. As part of their proposal, these businesses argue that courts should enforce choice of law and choice of forum clauses in consumer contracts. They consider that this is the best means for providing merchants with certainty as to the rules governing their transactions.

We see problems with both approaches. A country of destination approach would place a tremendous regulatory burden on merchants, especially small and medium-sized enterprises. It would require them to know and comply with the laws of hundreds of jurisdictions, and defend suit in locations all across the globe. Also, in certain circumstances, it may be advantageous to consumers to allow them to agree to choice of law or forum clauses, such as cases where they could obtain discounted prices or other benefits. For these and other reasons, a pure country of destination approach might not be the best means of promoting global consumer transactions.

At the same time, we see problems with a country of origin approach. This could lead to a "race to the bottom," in which businesses locate in jurisdictions where there are little or no consumer protections. Moreover, if we consider it is a difficult task for businesses to know and understand the laws of foreign jurisdictions, it would likely be unfair to expect consumers to understand these laws in all circumstances. In addition, it could effectively deny consumers any remedy since they might need to travel to a distant jurisdiction to seek a remedy for a low value purchase. Finally, it might even interfere with the ability of governments to protect their citizens.

Given the difficulties we see with both approaches, we believe there must be a third way. In particular, we consider that private sector codes of conduct, combined with effective alternative dispute resolution mechanisms, have the potential to resolve online consumer disputes in a manner that is efficient, fair, cost-effective and really practical. While this will likely not be a "magic bullet" that solves all the problems, this might be the best approach for addressing the great majority of them.

Accordingly, the Administration is working to facilitate and promote the development of fair and effective self-regulatory mechanisms. In close consultation with the Federal Trade Commission, we participated in a process at the Organization for Economic Cooperation and Development (OECD) that produced guidelines for the protection of online consumers in December of 1999. These guidelines set benchmarks for consumer protection on a global basis.

In early June 2000, we also worked with the Federal Trade Commission to sponsor a workshop on alternative dispute resolution for online transactions. The workshop brought together consumer groups, businesses, governments and other stakeholders, from both domestic and foreign organizations and locations, to discuss and consider how to promote the further development of ADR for online transactions. The workshop demonstrated that there is a wide variety of private sector efforts already underway. In addition, it showed that the best approach to ADR for a particular transaction might vary depending on the value or type of transaction at issue. Over the coming months, we intend to continue this important dialogue with all interested stakeholders.

We have also been pleased to see that the private sector is already taking steps to establish codes of conduct for online consumer transactions. For example, the online division of the Better Business Bureau, BBBOnline, is working to finalize a code of online business practices, including certain requirements for the resolution of consumer complaints. In addition, the Electronic Commerce and Consumer Protection Group, whose members include some of the leading companies in online commerce, have issued a code of best practices which also includes provisions for the establishment of ADR mechanisms.

Ultimately, strong codes of conduct, backed by practical and effective ADR systems, can potentially obviate some of the difficult jurisdictional issues that arise in the context of online consumer transactions. They can boost consumer confidence, increase certainty for businesses, and clear the way for a more seamless environment for global consumer transactions. We look forward to continuing to work with all interested stakeholders on these important issues. And we will, of course, continue to explore other mechanisms for promoting consumer confidence in Internet transactions.

COMMERCIAL LEGAL FRAMEWORK ISSUES

Another area that raises important jurisdictional issues relates to the development of a uniform commercial legal framework for global electronic transactions. President Clinton and Vice President Gore, in issuing the Framework for Global Electronic Commerce in July 1997, noted that "[m]any businesses and consumers are still wary of conducting extensive business over the Internet because of the lack of a predictable legal environment governing transactions." As part of the Administration's effort, President Clinton directed Secretary Daley to "work with the private sector, State and local governments, and foreign governments to support the development, both domestically and internationally, of a uniform commercial legal framework that recognizes, facilitates, and enforces electronic transactions worldwide."

The process of developing an appropriate commercial legal framework for global electronic transactions primarily involves revising and updating traditional legal requirements for paper contracts, handwritten signatures, and other physical documentation. In very general terms, there are two different approaches that governments have taken to revising these legal requirements.

The first is a market-based approach that recognizes there are many different technologies and methods for producing electronic documentation. It revises legal requirements for physical documentation, but does not confer any legal benefits on particular technologies or methods. This approach is represented by the recently enacted bipartisan federal legislation called the Electronic Signatures in Global and National Commerce Act (E-SIGN). It is also represented by the model state legislation, the Uniform Electronic Transactions Act (UETA), and by an international model law issued by the United Nations Commission on International Trade Law (UNCITRAL) in 1996.

The second approach involves greater government involvement. It consists of establishing detailed regulations that specify the technology and implementation model that must be used in order to obtain a legal benefit, such as a presumption of validity. In particular, these detailed regulations generally focus on the method for authenticating or signing an electronic document. This legislative approach is represented by a few state laws, a 1997 German law, and several other foreign laws. We consider these detailed regulations to be unnecessary at this time. Moreover, they have the potential to disrupt the operation of commercially significant systems that use different authentication methods and models. They also could deter the growth and development and use of innovative and more efficient authentication methods and models.

The important question for commercial actors is how do these two approaches interrelate? Specifically, when commercial entities wish to engage in electronic transactions across jurisdictions that take different approaches to this issue, how can they have certainty that their transactions will be recognized and enforced in all the relevant locations?

We have developed a policy that answers this question and promotes the recognition and enforcement of electronic transactions on a worldwide basis. At its core, this policy reflects the reality that the vast majority of authentication in use in the market today occurs in contract-based or "closed systems." Closed systems are arrangements in which parties are already related to each other in some way, and they conduct electronic transactions under a mutually-agreed authentication system. Sophisticated versions of this model are found in sectors ranging from manufacturing to the banking and financial services industries where commercial parties establish the technological approach they will rely on as well as their rules for operating, assigning risk and settling disputes.

Our policy identifies four steps that every government should take to ensure the recognition and enforcement of these closed systems, and thereby ensure the free flow of cross-border electronic transactions. In particular, governments should: (1) eliminate paper-based legal barriers to electronic transactions by implementing the relevant provisions of the 1996 UNCITRAL Model Law on Electronic Commerce; (2) reaffirm the rights of parties to determine for themselves the appropriate technological means of authenticating their transactions; (3) ensure any party the opportunity to prove in court that a particular authentication technique is sufficient to create a legally binding agreement; and (4) treat technologies and providers of authentication services from other countries in a non-discriminatory manner.

These steps can be taken both by governments that adopt a market-based approach to these issues, and by governments that adopt a regulatory approach. Once widely incorporated into national and regional laws, these principles will form the uniform legal framework that is needed to ensure the recognition and enforcement of electronic transactions on a worldwide basis.

These principles have been adopted and approved in a variety of multilateral and bilateral contexts. In October 1998, the OECD Ministers approved a Declaration on Authentication for Electronic Commerce affirming these principles. Further, the Global Business Dialogue on Electronic Commerce (GBDe), a global private sector initiative, has issued recommendations to governments that strongly embrace this approach. In addition, we entered joint statements affirming these principles with several important trading partners, including France, Colombia, Japan, Jordan, the Netherlands, Korea, Ireland, Australia, Chile, Egypt, and the United Kingdom.

SAFE HARBOR

Another set of fundamental jurisdictional issues relates to national policies on data protection. In the Framework for Global Electronic Commerce, President Clinton and Vice President Gore established a priority to "ensure that differing privacy policies around the world do not impede the flow of data on the Internet." In particular, they noted with concern that "the European Union (EU) has adopted a Directive that prohibits the transfer of personal data to countries that, in its view, do not extend adequate privacy protection to EU citizens."

The EU Directive establishes a comprehensive regulatory scheme governing the handling of personal information by all industry sectors and organizations in Europe. It also contains a particularly significant provision, as noted by the President and Vice President, which prohibits the transfer of personal data to third countries unless the third country in question provides "adequate" protection for that data. U.S. industry expressed uncertainty about the application of this "adequacy" standard to the United States, since we do not have comprehensive privacy legislation like the Directive. The U.S. approach relies on a mix of sector-specific laws and regulations, combined with effective industry self-regulation.

In an effort to bridge the gap between our different approaches to privacy, and provide U.S. businesses with assurance of continued data flows from Europe, the Department of Commerce and the European Commission have developed a fully enforceable, self-regulatory framework to satisfy the Directive's adequacy requirement. The framework is called the "safe harbor," and very recently the EU Member States, acting through the committee established by Article 31 of the Directive, voted unanimously to approve the safe harbor as an "adequate" system.

The safe harbor is an entirely voluntary arrangement - no U.S. organization is required to participate. It is one of several approaches that U.S. firms may wish to use to be assured of continued data flows from Europe. On a broader level, the safe harbor is a creative and innovative vehicle that helps to bridge the gap between the EU and U.S. approaches to data protection. In this regard, the safe harbor can likely serve as a model in other contexts as we seek to ensure the development of a seamless global commercial environment for electronic transactions.

HAGUE CONVENTION ON JURISDICTION

As a final matter, I will provide a few comments on the draft Hague treaty on the recognition and enforcement of foreign judgments. As Mr. Kovar mentioned earlier, the Commerce Department recently began participating in the process to review the electronic commerce implications of this draft convention.

Since the convention was first proposed in 1992, the importance of electronic commerce has grown substantially. Forecasters are now predicting even greater growth, and some predictions are that the value of business-to-business transactions will exceed $2 trillion by 2003. Soon, electronic transactions may be so pervasive that the concept of "e-business" fades, and people just refer to it as "business." Thus, while transacting business through the Internet might not have been a significant issue during the earlier stages of the Hague discussions, global markets and industries are now overwhelmingly headed in this direction. It is now critical for all member countries in the Hague to consider carefully the implications of this draft treaty for electronic transactions. Indeed, over time, those are likely to be the bulk of the transactions it would regulate.

We consider there might be substantial benefits for the United States to conclude a treaty on this topic. Greater recognition of U.S. judgments abroad might be commercially important to U.S. persons. U.S. persons might also gain considerably if foreign practices of "exorbitant" jurisdiction were scaled back. Also, global commerce might benefit from a more efficient and rational means for allocating judicial resources and enforcing court judgments in foreign countries.

But at this time, there is much work to be done. Our initial review indicates that many of the current rules are targeted to the offline world, and would make little sense online. For example, the treaty establishes separate provisions governing contracts that involve "goods" and those that involve "services." This raises an unnecessary and very complex classification issue as to whether or under what circumstances digitally delivered products are "goods" or "services." Several international fora are currently struggling with this divisive and difficult issue, due to treaty provisions adopted well before the advent of Internet.

The draft also establishes several jurisdictional tests that are based on the place where an action or activity occurred. For example, the current rules provide that an action in contract can be brought in the State where the goods were "supplied." Setting aside the classification issue of goods verses services, Internet transactions often don't have an obvious place of supply. For example, a U.S. company might send a software product through a server in Canada to a company located in Japan. This analysis might be even further complicated by other factors, such as that the seller might not even know where the buyer is located.

In addition, the draft raises difficult public policy issues. For example, it establishes essentially a "country of destination" approach to consumer contracts. As mentioned earlier, consumer groups and certain online businesses have very different views on this issue, and we see problems with both of their approaches. It is not likely that this issue can be easily resolved in the near term. At the very least, we may need to give alternative dispute resolution mechanisms, and private sector self-regulatory initiatives, more time to mature before resolving this issue in the text of a treaty.

One of the positive elements of the draft is that it recognizes the importance of party autonomy in the context of business-to-business transactions. The draft rules would enforce choice of forum clauses in these transactions. For years, respect for party autonomy in the merchant to merchant context has been a critical tool for overcoming jurisdictional issues in the offline world. This same respect for party autonomy will continue to be a critical ingredient for handling jurisdictional issues in the online world. As such, we are pleased to see this element in the draft convention, and consider it is important to advocate for this approach in a variety of settings outside the Hague treaty.

Overall, given the developments with electronic transactions and other issues, we will need to work very hard to forge a consensus both domestically and internationally on the appropriate shape and structure of a treaty on issues as complex and difficult as personal jurisdiction and the recognition of foreign judgments. We note, for example, that the European Union has had considerable difficulty reaching consensus within Europe on how these issues should be handled in a draft EU regulation on jurisdiction. Our firm hope is that Hague member countries will allow sufficient time for the negotiations, and will not feel constrained to push for a premature conclusion of the process. Such flexibility will likely be indispensable to creating a meaningful opportunity to develop a set of rules that deserve and enjoy widespread international support.

Thank you for asking me to testify this morning. I would be glad to answer any questions.