[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
IMPEDIMENTS TO DIGITAL TRADE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
COMMERCE, TRADE AND CONSUMER PROTECTION
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MAY 22, 2001
__________
Serial No. 107-36
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
72-824 WASHINGTON : 2001
_______________________________________________________________________
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia BILL LUTHER, Minnesota
ED BRYANT, Tennessee LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Commerce, Trade, and Consumer Protection
CLIFF STEARNS, Florida, Chairman
NATHAN DEAL, Georgia EDOLPHUS TOWNS, New York
Vice Chairman DIANA DeGETTE, Colorado
ED WHITFIELD, Kentucky LOIS CAPPS, California
BARBARA CUBIN, Wyoming MICHAEL F. DOYLE, Pennsylvania
JOHN SHIMKUS, Illinois CHRISTOPHER JOHN, Louisiana
JOHN B. SHADEGG, Arizona JANE HARMAN, California
ED BRYANT, Tennessee HENRY A. WAXMAN, California
STEVE BUYER, Indiana EDWARD J. MARKEY, Massachusetts
GEORGE RADANOVICH, California BART GORDON, Tennessee
CHARLES F. BASS, New Hampshire PETER DEUTSCH, Florida
JOSEPH R. PITTS, Pennsylvania BOBBY L. RUSH, Illinois
GREG WALDEN, Oregon ANNA G. ESHOO, California
LEE TERRY, Nebraska JOHN D. DINGELL, Michigan,
W.J. ``BILLY'' TAUZIN, Louisiana (Ex Officio)
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Kovar, Jeffrey D., Chief U.S. Negotiator, Hague Convention
and Assistant Legal Advisor for Private International Law,
U.S. Department of State................................... 6
Richardson, Bonnie J.K., Vice President, Trade and Federal
Affairs, Motion Picture Association of America............. 17
Vradenburg, George, III, Executive Vice President, Global and
Strategic Policy, AOL/Time Warner.......................... 11
Waggoner, Debra L., Director, Public Policy, Corning, Inc.... 47
Wellbery, Barbara S., Partner, Morrison and Foerster, L.L.P.. 22
(iii)
IMPEDIMENTS TO DIGITAL TRADE
----------
TUESDAY, MAY 22, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Commerce, Trade,
and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m. in room
2322, Rayburn House Office Building, Hon. Cliff Stearns
(chairman) presiding.
Members present: Representatives Stearns, Deal, Shimkus,
Bryant, Pitts, Walden, Bass, Tauzin (ex officio), Towns,
Harman, and Gordon.
Staff present: Ramsen Betfarhad, majority counsel; David
Cavicke, majority counsel; Mike O'Rielly, majority professional
staff; William Carty, legislative clerk; and Bruce Gwinn,
minority counsel.
Mr. Stearns. Good afternoon. The subcommittee will come to
order. I want to particularly welcome all the witnesses today
to the Commerce, Trade, and Consumer Protection Subcommittee
hearing on digital trade.
I want to convey my special thanks to the Department of
State for enabling Mr. Kovar, our Chief Negotiator at the Hague
Convention, to testify today. I know you have had short notice,
but I appreciate sincerely your coming. I understand the
Department took on the tall order of acquiring all the
requisites approval in a short period of time. This type of
government agency responsiveness and efficiency is always
appreciated and remembered.
I am pleased that the committee is looking at an
increasingly significant component of our international trade,
namely digital trade. Let me just cite to a statement that I
received this morning to illustrate the importance of digital
trade. The statement, part of a daily email briefing on tech
issues by the Washington Association, reads, ``Did you know
that Forrester Research predicts worldwide Internet commerce,
both business-to-business and business-to-commerce, will hit
almost $7 trillion in the year 2004? North America represents a
majority of this trade, but its dominance will fade as some
Asian Pacific and Western European countries hit hypergrowth
over the next 2 years. There is no question that as e-commerce
grows digital trade, or international e-commerce, will grow
even faster.''
Digital trade issues raised in today's hearing, such as the
Hague Convention, classification of digitally delivered
products, the Safe Harbor, et cetera, are seemingly innocuous
and technical in nature, of interest to and worthy of
consideration by lawyers only. But they could and do impact the
growth of digital trade in profound ways.
It is incumbent on us to promote policies that advance
digital trade, as it holds great promise, not just for the
American economy but also the world economy as a whole. As
evidenced by some of the testimony we will hear today, digital
trade holds the real promise of providing people in
historically underserved nations with a real chance of
improving their economic standing and to do so at an
accelerated pace.
But that promise is all contingent on coordinated and
affirmative action on the part of the administration, Congress,
and industry, making sure that forces of global protectionism
and fragmentation don't take hold of digital trade. The risk of
national and/or regional policies having either intended or
unintended consequences stifling digital trade is ever present.
Vigilance and constructive engagement on all transnational
issues affecting digital trade must be maintained by all--the
administration, Congress, and industry.
Our hearing today signals the subcommittee and full
committee's commitment to such vigilance and constructive
engagement. Mr. Kovar's efforts at the Hague is indicative of
the administration's vigilance and constructive engagement. I
commend the State Department for its work on the Hague
Convention, and I urge greater vigilance and constructive
participation by the administration in all forms, regional or
multinational, where issues of import to digital trade are
being considered and negotiated.
Having been in Congress for a little over 12 years, I know
how difficult it is to advance a complete and public policy on
a national scale of this matter. There are always differing
opinions as to the best policy and, of course, differing
sensitivities to the policy. So I am very mindful that in the
international context any issue worth the paper it is written
on is engendered with great complexity. On international
matters, parties may not only have differing thoughts with
respect to an issue, but those different thoughts may be driven
by a completely different cultural, historic, and economic
world view from ours.
With that understanding, I want to emphasize that this
subcommittee's role in digital trade disputes shall be a
constructive one. Constructive engagement does not, however,
preclude active participation. My colleagues, we look forward
to working closely with the administration and industry to
advance the cause of digital trade, because it holds great
promise for all of us.
Mr. Shimkus for an opening statement.
Mr. Shimkus. Thank you, Mr. Chairman. I am glad we have
this great panel of folks to testify. I look forward to
hearing--its complex issue for us simple folks from southern
Illinois. I look forward to--I am having--I do have an
opportunity to travel to Europe at the end of this week as part
of the NATO Parliamentary Assembly that I am a member of. We
will be talking some trade issues with our fellow
parliamentarians that are members of the NATO Alliance.
So maybe there is something that I can learn here today and
talk to some of my colleagues from our transatlantic partners
that will be helpful in the discussions or at least throw
something new out on the table as far as an impediment. So I
look forward to your testimony, and I yield back my time, Mr.
Chairman.
Mr. Stearns. The gentleman from New Hampshire, Mr. Bass.
Mr. Bass. Thank you very much, Mr. Chairman, and I
appreciate this hearing. It is interesting; it is part of an
ongoing learning curve in this what is a very complicated
issue. I am looking forward to hearing from the witnesses, and
I have three observations or concerns, if I may.
First, I am concerned about mechanisms that national and
international law might use to compel private industry to
become tax collectors for foreign nations. The positions we
take on the applicability of State sales and use taxes in the
U.S. may have broad implications internationally.
Second observation, I am interested in the classification
of products as goods or services being dependent upon how the
product is delivered. While it may be premature to consider
this question, again, our answers may affect domestic policy in
unintended ways.
And, last, I am interested in related jurisdictional
questions regarding the location of the transaction and any
involved parties, how problems ought to be mediated and, where
necessary, adjudicated, and which treaty or convention
describes the rules.
I look forward to hearing the testimony, and I yield back
to the chairman.
Mr. Stearns. I thank the gentleman. The gentleman from
Tennessee?
Mr. Bryant. Thank you, Mr. Chairman. I, too, appreciate
your having this hearing, and I must apologize to the
panelists. We are also in a concurrent meeting that will start
at 2:30 for the Prescription Drug Task Force, and I am going to
be moving back and forth. And I don't have any statement for
the record other than as I came in I heard part of Mr. Shimkus'
statement that he hoped to learn something here. Having taught
him when he was at West Point, I am glad to hear he said that.
Open to learning something.
Mr. Stearns. I thank my colleagues. Let me start by just
introducing briefly the witnesses. Mr. Jeffrey Kovar, Chief
U.S. Negotiator, Hague Convention, and Assistant Legal Advisor
for Private International Law, U.S. Department of State. And I
want to thank you for participating on one panel. My concern
was we have both government and private industry on one panel
only because we have so many amendments today, we are going in
and out, and I thought it might be--to expedite this and at the
same time allow us a forum to talk to all of you on different
subjects. So I appreciate your assistance here and your
patience.
Mr. George Vradenburg, executive vice president, Global and
Strategic Policy, AOL/Time Warner. We have Ms. Bonnie
Richardson, vice president, Trade and Federal Affairs, Motion
Picture Association of America; Ms. Barbara Wellbery, partner,
Morrison and Foerster; and Ms. Debra Waggoner, director, Public
Policy, Corning, Inc.
Before I go, the distinguished ranking member, Mr. Towns?
Mr. Towns. Mr. Chairman, being that I was a little delayed,
detained there, I would just put my opening statement in the
record, and we just go right to the witnesses. Thank you for
your courtesy.
[The prepared statement of Hon. Edolphus Towns follows:]
Prepared Statement of Hon. Edolphus Towns, a Representative in Congress
from the State of New York
Thank you Mr. Chairman. I look forward to hearing from the panel
today.
I am heartened by the committee's willingness to discuss regulatory
and digital trade, and the impediments that our workers and businesses
face in today's marketplace.
While there are many sides of this debate that are ripe for
discussion such as consumer protection and un-metered access for
internet use, my primary focus is on intellectual property--and the
protection of that property from international and domestic pirates.
Intellectual Property as a traded good is one of America's greatest
assets. It is protected in the Constitution and we should afford the
producers of this material--software companies, record labels, artists,
and motion picture studios to name a few--the same protections on an
international level.
Let me be clear when I state that strong enforcement of existing
copyright law is needed immediately on an international level. We here
in the United States would not stand for a rogue nation to take our
oil, natural gas, or precious minerals from us--that would be theft
plain and simple. This is the same principle Mr. Chairman. If a
customer in Hong Kong would like to listen to Al Green, watch the
upcoming movie Pearl Harbor, or use Microsoft Excel, they should have
to pay for it just like they would pay for a barrel of oil from West
Texas or a Junior's Cheesecake from Brooklyn, New York.
Lastly Mr. Chairman, it is my hope that we can keep the internet
and the companies who compete on it, free from undue trade regulations
that may put our companies at competitive disadvantages over their
foreign counterparts. We should allow these companies' business models
to catch up with the forward moving technology.
The global economy is not coming; it is upon us and we should do
everything in our power to assist our companies who are competing in
this global economy.
Once again, thank you Mr. Chairman and I yield back the balance of
my time.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Over 300 million people around the globe are now connected to the
Internet. That is up from just 56 million in January of 2000. The
growth in Internet connectivity is astounding. This increased
connectivity for both individuals and companies has fueled economic
growth--here at home and globally. Unfortunately it has also sparked
protectionist responses from countries that misunderstand the role the
Internet and e-commerce can play in creating economic growth and
prosperity for their people. Further, these proposed responses or
regimes are often designed or created as hurried reactions by
intergovernmental organizations or blocks of countries with old-style
economies.
This hearing will highlight a few of the very important issues we
face in today's world of digital and global trade. I would like to
thank Chairman Stearns for beginning a dialogue on the fundamental
issues impacting international e-commerce. Make no mistake about it:
this Committee will tackle the difficult issues facing international
digital trade. We plan to interact with the relevant participants in
the new Administration and industry representatives to ensure that U.S.
competitiveness and U.S. companies are not harmed by misguided foreign
regimes. The U.S. Congress will not sit back and watch e-commerce
become hostage to old modes of thinking. For instance, this hearing
will examine issues relating to the WTO efforts on
classification, as well as the Hague Convention on Jurisdiction,
the Council of Europe's Cyber-Crime Treaty, and the so-called ``Model
Contract'' relating to the EU Data Protection Directive. These are
illustrative of the efforts by foreign governing bodies that can have a
profound impact U.S. companies and more generally, e-commerce.
The classification issue relates to the manner in which our trading
partners in the WTO address digitally delivered products. Periodicals,
music, movies and software no longer need to be packaged in cellophane
and shipped to stores, news stands or homes. They can now be delivered
over the Internet, decreasing costs and increasing convenience and
efficiency. And as we see greater gains in technology it will be more
than content that companies can deliver directly via the Internet.
While methods of delivery have changed, many of the products
delivered have stayed fundamentally the same. For example, software
packaged and purchased from a local retailer can also be purchased over
the Internet and delivered directly over the Internet. The products are
identical, yet a few of our trading partners have indicated a
preference to classify the latter as a service rather than a good under
the WTO classification system. Some have proposed a ``drop it on your
foot'' test for goods classification. This has serious trade
implications given the increased use of digital delivery for goods. It
means many products currently afforded the liberal treatment of goods
under GATT could be classified as services and therefore subjected to a
more restrictive--and possibly discriminatory--regime under GATS. It is
important that we take the lead to ensure classification remains
distinct from method of delivery. The Internet should facilitate trade,
not present an additional barrier.
I would also like to touch on another growing impediment to digital
trade. More and more we are seeing countries or groups of nations
develop legislative-like efforts which, in the context of digital
trade, take on extraterritorial effects. In March we held a hearing on
the EU Data Protection Directive and focused specifically on provisions
of the Directive that could slow transatlantic data flows. Today we
will take a closer look at the Safe Harbor and Model Contracts. Like
the Directive, neither appears to comport with U.S. business practice
and both ignore the benefits of information exchange. The Model
Contract is particularly troubling because its provisions are much
harsher than those of the Safe Harbor and have not been subject to
negotiation with the United States.
The new Administration has called on the EU to slow down, review
the model contract and reexamine how the EU views U.S. privacy laws. I
believe that this is the correct course and I look forward to working
with the new Administration on this topic.
In terms of the cyber crime treaty, many U.S. companies still see a
need to address some flaws with the proposed language. These issues
should be addressed. The Council of Europe should make an effort to fix
the issues before the document becomes a ``final'' final. I welcome the
new Administration's interest in working on this issue but more work
seems to be necessary.
For the Hague convention on jurisdiction, much more needs to be
learned before such a proposal moves forward. The U.S. government
should not be pressured to sign a bad document. The State Department
and others have expressed restraint regarding the convention. They have
shown a willingness to address existing flaws or walk away from the
process if necessary. I support this stance and I look forward to
working with them on this issue.
The United States is a world leader for several reasons. Not the
least of which is our ability to develop and embrace new technologies.
With the advent of the rail, followed by the auto and finally the
airplane, the geographical barriers to free flowing interstate commerce
were all but eliminated. With the development of telecommunications,
many of the same barriers were completely torn-down. We have only begun
to tap into the potential benefits the Internet can offer. I suggest
that our trade partners consider their long term economic development
before existing trade agreements are altered to fit near term
interests.
I again thank the Subcommittee Chair for having today's hearing. It
signals our interest in exploring these issues to ensure that the
Congress is well aware of the relevant efforts by foreign governing
bodies that can and will have an impact on e-commerce.
______
Prepared Statement of Hon. Jane Harman, a Representative in Congress
from the State of California
I'd like to offer my thanks to the Chairman and Ranking Member for
holding this hearing.
It is critical that the Congress--and in particular the members of
this Subcommittee, which is charged with overseeing trade and
commerce--thoroughly understand the impact trade regimes and regulatory
environments in other countries have on our companies and our
consumers.
Digital trade represents a tremendous opportunity for U.S.
companies. The real growth sector in digital trade is business-to-
business e-commerce. The global B2B market is expected to reach $8.5
trillion by 2005. In addition to the direct financial impact, the
growth of B2B can have the broadest impact on productivity in the
global economy as it allows American companies to reach customers and
suppliers around the world.
But in order to realize that potential, we need to set forth new
``rules of engagement'' that foster global digital trade and e-
commerce.
Let me lay out some of the issues that I hope the witnesses today
will address.
What are the next steps in protecting intellectual
property rights? The Internet creates the possibility of a virtually
limitless market for digital content, but it also creates the
possibility that music, movies and other products can be instantly and
illegally distributed to millions of people.
It seems to me that we have been seeing some progress on this issue
on two fronts:
--first, technology-based responses like better ``watermarking'' of
digital content are becoming increasingly effective and
sophisticated and,
--second, more and more countries are adopting global standards like
those set out in the World Intellectual Property Organization
treaties that the U.S. ratified in 1998.
But clearly we have a long way to go before companies are
comfortable putting their content on line and consumer demand is being
met.
Who has jurisdiction when laws are broken over the
Internet? The Hague Convention was intended to help address this
question, but concerns have been raised that it fails to adequately
take e-commerce and the Internet into consideration.
Should the WTO classify digital trade as ``goods'' or
``services?'' Goods receive the full protection of national treatment.
Services do not. The distinction is particularly relevant to the
entertainment industry, because the EU and Canada impose domestic
content requirements on services, but not on goods. But most digital
content falls somewhere between the two.
Is this the right time to push for digital trade to be put in one
or the other category, or would it be more advantageous to see a third,
hybrid category that recognizes unique digital characteristics.
How do to get more people around the world on-line? Most
Americans who are on-line now take flat-rate, unlimited access to the
Internet for granted. We also benefit from the cheapest telephone rates
in the world. Internet users in other countries pay for their access by
the minute.
I am eager to hear what the witnesses have to say and I stand ready
to work with you and others in the industry, with my colleagues on this
Committee and in Congress, and with the Administration on shaping a
trade and regulatory framework that helps put our companies at the
center of a thriving international trade in digital goods and services.
Mr. Stearns. I thank you. And, Mr. Kovar, we will start
with you.
STATEMENTS OF JEFFREY D. KOVAR, CHIEF U.S. NEGOTIATOR, HAGUE
CONVENTION AND ASSISTANT LEGAL ADVISOR FOR PRIVATE
INTERNATIONAL LAW, U.S. DEPARTMENT OF STATE; GEORGE VRADENBURG
III, EXECUTIVE VICE PRESIDENT, GLOBAL AND STRATEGIC POLICY,
AOL/TIME WARNER; BONNIE J.K. RICHARDSON, VICE PRESIDENT, TRADE
AND FEDERAL AFFAIRS, MOTION PICTURE ASSOCIATION OF AMERICA;
BARBARA S. WELLBERY, PARTNER, MORRISON AND FOERSTER, L.L.P.;
AND DEBRA L. WAGGONER, DIRECTOR, PUBLIC POLICY, CORNING, INC.
Mr. Kovar. Thank you, Mr. Chairman, and thank you, members
of the subcommittee, for inviting me to testify on behalf of
the Department of State.
I would like to tell you briefly about negotiations the
Department is leading at the Hague Conference on Private
International Law for a Convention on Jurisdiction and the
Recognition and Enforcement of Foreign Judgments. This is a
project that the United States initiated in 1992 to try to
level the international playing field for American litigants
and fill a major gap in the legal infrastructure of the global
marketplace.
The Hague Conference is the oldest organization in the
world for the harmonization of private law, and it is a largely
technical and non-political forum. The U.S. is a party to
several Hague Conventions in the area of judicial cooperation
and in family law.
At present, there is no effective international regime for
enforcing the judgments of national courts in transnational
legal disputes, and the United States is a party to no regional
or bilateral agreements providing the reciprocal of civil
judgments. If not addressed, the widening gap between the
increasingly global marketplace and the isolated national court
systems could eventually have an inhibiting or distorting
effect on the development of the world market.
Moreover, American litigants are generally at a
disadvantage, at least vis-a-vis many of our major trading
partners in developing countries. Federal and State courts in
the United States have a long tradition of enforcing foreign
judgments, but American judgment holders are very often not
able to enjoy equal enforceability abroad.
The Hague Convention negotiations, if successfully
concluded, hold out the promise of addressing these important
needs. The draft convention would establish three categories of
rules of jurisdiction in tort and contract for international
cases. One category of rules would be required in every State
that becomes a party to the convention, and your case under
that rule of jurisdiction would lead to enforcement of the
resulting judgment. Another category of rules would be
prohibited for cases covered by the convention, even if those
rules are currently provided under local law. And then the
third category of rules would be local rules that fall outside
of the convention, and enforcement under the convention would
not be available for resulting judgments.
It is not our preference in the U.S. to link enforcement of
judgments to harmonized rules of jurisdiction, but European law
approaches things this way, and our allies expect to restrict
some traditional U.S. practices as the cost of agreeing to
enforce U.S. judgments. Because U.S. courts are already largely
receptive to enforcing foreign judgments, we are left without
much leverage on this point.
As you might imagine, even without considering the special
jurisdictional problems raised by transactions carried out on
the Internet, agreeing on a common set of jurisdictional rules
that would apply in Federal and State courts in international
cases poses special difficulties for the U.S.
U.S. courts determine jurisdiction based on a due process
analysis, which focuses on the fairness to the defendant. Most
other countries in the world, by contrast, seek to establish
more objective-looking rules of jurisdiction, and the draft
provisions of the convention reflect this latter approach. It
is not easy to harmonize these different approaches to
jurisdiction, and countries are naturally wedded to their own
traditions.
On top of the traditional problems of harmonizing
jurisdiction, sudden rise of electronic commerce has added
immense new difficulties and uncertainties. The result has been
that the 1999 preliminary draft of the convention, which is now
available to everyone, is unfairly weighted against U.S.
jurisdictional practices, and it doesn't adequately take into
account electronic commerce and intellectual property
considerations. Given these concerns, the U.S. successfully
pressed to extend the Hague negotiations from their original
deadline of the fall of 2000.
The Hague Convention has held several meetings devoted to
electronic commerce issues raised by the draft convention,
including one meeting that focused on intellectual property
concerns. International experts have been invited to
participate in these meetings, and delegates have benefited
from their contributions. Delegations have also convened a
number of informal sessions over the last 9 or 10 months to try
to prepare the ground for the next formal negotiation round,
which is June 6 through 20 in the Hague. The schedule of
negotiations calls for one more formal round of negotiations
next year, but nothing has been scheduled yet.
Here at home, the Department of State has coordinated with
the Departments of Commerce, Justice, the Federal Trade
Commission, the Patent and Trademark Office, Copyright Office,
and other agencies. We have also reached out to business,
consumer, and legal groups engaged in these issues. Just last
week we convened two public all-day sessions at the Library of
Congress and the FTC to hear views from the private sector and
to prepare our negotiating positions for June.
The Department believes we must take an extremely careful
and deliberate approach in the Hague negotiations on issues
related to the Internet. The law is in flux in the United
States, and we have not found a consensus in the U.S. or
elsewhere on how to proceed on these issues. As a result, we
are continuing to consult widely to ensure that all the various
interests are heard. We hope very much that effective solutions
will emerge on the Internet jurisdiction issues, as well as on
many of the other extremely difficult and controversial aspects
of this draft convention.
We have a lot to gain from a successful convention, and we
are trying vigorously to reach the right balance of provisions
to enable us to achieve a convention to which the U.S. could
become a party.
We hope, Mr. Chairman, to be able to remain in close
contact with the subcommittee on these issues, and we thank you
very much for the interest you have shown. I would be happy to
answer any questions you might have.
[The prepared statement of Jeffrey D. Kovar follows:]
Prepared Statement of Jeffrey D. Kovar, Assistant Legal Adviser for
Private International Law, U.S. Department of State
Thank you Mr. Chairman and members of the Subcommittee for inviting
me to testify on behalf of the Department of State.
The Department is leading U.S. efforts at the Hague Conference on
Private International Law to negotiate a Convention on Jurisdiction and
the Recognition and Enforcement of Foreign Civil Judgments. The Hague
project--which was undertaken at the initiative of the United States in
1992--would create harmonized rules of jurisdiction in international
civil cases as well as common rules for recognizing and enforcing
abroad the resulting judgments. Most foreign judgments are already
recognized and enforced in the U.S. under state law, but most of our
trading partners do not usually grant the same treatment to U.S.
judgments. A successful convention would level the international
playing field for American litigants and fill a major gap in the legal
infrastructure of the global marketplace.
Although international commerce, trade, and communications are
accelerating at a breathtaking pace, and the growth of the Internet
promises to make boundaries less relevant for commerce, the judicial
settlement of transnational disputes remains largely confined to
national territories. There is no effective regime for coordinating and
enforcing the work of national courts in resolving transnational legal
disputes. If this widening gap between the global marketplace and the
isolated national court systems is not addressed, it could well slow
progress and inhibit growth in trade.
The Hague Convention negotiations, if successfully concluded, hold
out the promise of addressing this important need. In this testimony,
we will provide some history and background to the Hague negotiations,
including how the Convention would work, describe some of the major
obstacles facing our delegation, explain how we are addressing the
critical issues raised by electronic commerce, and give some sense of
what we think the road ahead looks like.
BACKGROUND
The recognition and enforcement of judgments from one legal system
to another has long been understood as a fundamental requirement for
fully integrated markets. Thus, the framers of the U.S. Constitution
included the Full Faith and Credit Clause to ensure that judgments from
one state would be enforceable in every other. In the same way, as part
of their movement toward a unified market several European countries
concluded a convention in 1968 to provide recognition and enforcement
of each other's judgments. This convention, called the Brussels
Convention, became a required ticket of admission to the Common Market
and then to the European Union. The Brussels Convention scheme was
extended to non-EU countries in Europe in 1988 through a companion
instrument called the Lugano Convention. It is now the subject of a
regulation of the European Commission, scheduled to come into force in
spring 2002.
For many countries the enforcement of foreign judgments is not a
matter of general law but is addressed through treaties. The United
States is not a party to any convention or bilateral agreement on the
recognition and enforcement of foreign judgments. We made an effort to
conclude a treaty with the United Kingdom in the 1970s, which failed
due to opposition in the UK toward the enforcement of U.S. tort
judgments in UK courts.
By contrast with the practice of most countries, however, the
United States has led the way in enforcing foreign country judgments on
the basis of comity. The Supreme Court embraced this approach over 100
years ago in the case of Hilton v. Guyot, 159 U.S. 113 (1895). The
National Conference of Commissioners on Uniform State Laws then
codified the common law standard in the Uniform Foreign Money Judgments
Recognition Act in the 1960's, which has been adopted in about \2/3\ of
the states. Judgments from countries with reliable legal systems are
now predictably enforceable in federal and state courts in the United
States under the common law or under the Uniform Act. Although the
Supreme Court in Hilton suggested that it was appropriate also to
require a showing of reciprocity in the country where the judgment was
rendered, this requirement is not included in most states' law.
Thus, while U.S. courts are perceived as the most open in the world
to the recognition and enforcement of foreign civil judgments in the
absence of a treaty obligation to do so, the ability of U.S. judgment
holders to enforce their judgments abroad is much more problematic.
Even in those countries that will, in principle, enforce foreign
judgments in the absence of a treaty, the reach of U.S. long-arm
jurisdiction, what they perceive to be ``excessive'' jury awards, and
punitive damages are sometimes considered reasons not to enforce U.S.
judgments. U.S. litigants deserve the same opportunity to have their
judgments enforced abroad as that enjoyed by foreign litigants in the
United States.
THE NEGOTIATIONS
The successful negotiation at the Hague Conference of a convention
on jurisdiction and the recognition and enforcement of foreign civil
judgments would be a huge step toward an international regime for
enforcing foreign court judgments. The negotiations, which have been
underway since 1996, involve more than 45 countries from around the
world, including virtually all major U.S. trading partners. The Hague
Conference is well known for producing the Conventions on Service of
Process and the Taking of Evidence Abroad, Abolishing the Requirement
of Legalization, and International Child Abduction to which we are a
party. Moreover, the Senate has given Advice and Consent to the Hague
Intercountry Adoption Convention, and Congress has enacted implementing
legislation for it. The Department of State is now preparing
implementing regulations prior to depositing our instrument of
accession. The Hague Conference has traditionally been a professional
and non-political forum of experts in the area of conflict of laws.
If successful, the Hague Jurisdiction and Enforcement of Judgments
Convention would establish a regime governing jurisdiction to sue
defendants from party states in tort and contract, and would improve
predictability in the enforcement of the resulting judgments. However,
the requirement that the Convention create uniform rules of
jurisdiction comes as a surprise to many Americans. It reflects the
approach of the EU Brussels Convention and a deep-seated feeling among
many other delegations that they do not wish to enforce U.S. judgments
unless we make our jurisdiction practices consistent with their view of
what constitutes appropriate international rules. Since litigants from
most developed countries have no substantial difficulties enforcing
judgments in the United States, their governments believe they have
substantial negotiating leverage over us. This would perhaps not be the
case if our states included reciprocity requirements in their law.
Agreeing on a rigid set of jurisdictional rules poses special
difficulties for the United States. Because the Due Process Clause puts
limits on the extension of jurisdiction over defendants without a
substantial link to the forum, the United States is unable to accept
certain grounds of jurisdiction as they are applied in Europe and other
countries. For example, we cannot, consistent with the Constitution,
accept tort jurisdiction based solely on the place of the injury, or
contract jurisdiction based solely on the place of performance stated
in the contract.
At the same time, civil law attorneys (and their clients) are
profoundly uncomfortable with jurisdiction based on doing business or
minimum contacts, which they believe is vague and unpredictable. They
feel strongly that certain aspects of U.S. jurisdictional practice must
be restricted under the Convention. Although this difference has been
partially reconciled by agreement to permit some grounds of
jurisdiction under national law to continue outside the Convention,
critical choices and hard negotiations remain. If the Convention is to
regulate jurisdiction in international litigation it must bridge vast
differences in approach toward general and specialized jurisdiction
among the various countries involved. It must also provide strong and
clear benefits to outweigh the inevitable concerns about giving up some
current litigation options in international cases.
Apart from a host of difficulties related to jurisdiction,
agreement must also be reached on how to handle a wide array of other
issues raised by this sweeping and ambitious project. Some of the
issues include: concurrent filings in the courts of more than one
state; forum non conveniens; provisional and protective measures;
injunctions and other non-monetary judgments; punitive, non-
compensatory and ``excessive'' damages; a lack of fairness or
impartiality in the judgment court; non-application to antitrust; and
scope of application to government litigation.
The fifth negotiating session in October 1999 produced a
preliminary draft text, and the original schedule called for a final
negotiating session in 2000. However, after extensive consultations
with industry and consumer groups, the private bar, and with government
litigators,1 the Department of State concluded that this
text is not close to being ratifiable in the United States and cannot
be an effective vehicle for final negotiations.
---------------------------------------------------------------------------
\1\ We have consulted with the American Bar Association, the
Association of Trial Lawyers of America, the American Law Institute,
the American Corporate Counsel Association, the American Society of
International Law, several consumer organizations, the Maritime Law
Association, trade associations and industry groups, bar associations
in Chicago and New York, federal agencies with substantial litigation
interests, and leading practitioners and academics. At the same time
there are other groups--such as state litigating agencies and attorneys
general and the banking industry--with which we have not yet been able
to meet directly on the convention.
---------------------------------------------------------------------------
Acutely aware of the need for more time, we successfully requested
the Hague Conference to extend the negotiations, and to split the final
session into two parts. The first session is scheduled to be held June
6-20 in the Hague. Over the last nine months we have met several times
in informal sessions with key foreign government delegations and
listened with them to the views of international private sector experts
and non-governmental organizations. The purpose of these sessions was
to prepare the way for the June meeting by seeking to find new
approaches to the most difficult issues facing the negotiations. Some
constructive ideas have emerged from these informal sessions, but we
are still far apart on many issues. If other delegations do not begin
to show more flexibility on many key provisions we will be unable to
achieve a convention that could attract sufficient support in the
United States.
ELECTRONIC COMMERCE ISSUES
When the Hague Convention negotiations were first proposed by the
United States in 1992, and when they began four years later, no one
predicted the immensely difficult issues that would suddenly arise from
the explosion of electronic commerce. The result, however, has been
that the Hague Convention has provided a forum to discuss at the
international level the tough issues involving jurisdiction over
Internet transactions. The fact that the Convention negotiators are
grappling with these issues has led to intense efforts around the world
to consider the problems raised in drafting international rules of
jurisdiction governing Internet transactions. In the U.S., as well, the
law is in flux and courts are struggling with applying traditional U.S.
jurisdiction rules to the Internet.
The Hague Conference has made an effort to facilitate the focus on
electronic transactions. The Conference organized a roundtable workshop
in Geneva in September 1999 and called special experts meetings in
Ottawa in February 2000 and February 2001 devoted to electronic
commerce issues raised by the draft Convention. Moreover, the Hague
Conference arranged with the World Intellectual Property Organization
to hold a special session on intellectual property issues raised by the
Convention this past January, with a special focus on IP issues raised
by electronic commerce.
The Department of State, working closely with the Departments of
Commerce and Justice, the Federal Trade Commission, the Copyright and
Patent and Trademark Offices, and other relevant agencies, has
consulted closely with concerned private sector interests in the
business and consumer communities on these difficult issues related to
the Internet. Just last week we held two day-long public meetings at
the Library of Congress and the FTC for which we had excellent
attendance. We have found no consensus on the electronic commerce and
intellectual property issues in the United States or elsewhere, and the
Department believes we must take an extremely careful and deliberate
approach in the Hague negotiations. We do not have firm views on the
proper outcome of these provisions, and are seeking to ensure that all
the various interests continue to be heard. We hope very much that
effective solutions will emerge that will enable the Convention to move
forward to a successful conclusion.
THE ROAD AHEAD
A carefully conceived and properly balanced Hague Convention would
represent a tremendous opportunity for many American litigants, and we
are trying vigorously to reach the right balance of provisions that
would enable us to achieve a convention to which the United States
could become a party. However, given the strong litigation orientation
of our society and the differences between our established jurisdiction
practices and those of many of the other participating countries at the
Hague, the Convention negotiations present special challenges. When you
add the enormous uncertainties raised by the growth of trade and
commerce on the Internet and complex choices for intellectual property
litigation, the obstacles can seem overwhelming. Nevertheless, the
promise is great, and we hope that we can ultimately succeed.
I will be leading the U.S. delegation to next month's negotiations
in the Hague. We will have a strong and diverse delegation, including
members from the Departments of State, Commerce, and Justice, as well
as the Federal Trade Commission, the U.S. Patent and Trademark Office,
and the U.S. Copyright Office. We will also have distinguished advisers
from private practice and academia, including representatives of the
American Bar Association, the Association of Trial Lawyers of America,
U.S. business, and U.S. consumer interests. Moreover, we expect to see
private sector interests strongly represented as observers at the
negotiations.
At the end of the June session decisions will be made at the Hague
Conference on how to proceed. If negotiations have not been refocused
in a manner that protects U.S. interests, we will evaluate our options.
When we return we will continue to reach out to as many groups,
associations, and experts as we can from the private and public sector
to make them aware of the draft Convention and seek their views on the
opportunities and difficulties it presents for us. It is only by
understanding as clearly as possible the litigation issues raised that
we can be in a position to attempt to achieve a balance of provisions
that could allow the United States to ratify and implement the final
Convention.
We hope, Mr. Chairman, to be able to remain in close contact with
the Subcommittee on these issues, and thank you very much for the
interest you have shown.
Mr. Stearns. Thank you.
Mr. Vradenburg?
STATEMENT OF GEORGE VRADENBURG III
Mr. Vradenburg. Chairman Stearns, Mr. Towns, members of the
subcommittee, I want to thank you for holding this important
hearing on digital trade.
AOL/Time Warner is committed to seeing the power of
information and the promise of connection brought to more
people around the world in the belief that greater information
and connectivity will drive individual opportunity, economic
prosperity, and increased knowledge.
The dispersion of information and communications technology
is driving economic development and social progress, not only
here in the United States but in lesser developed nations
around the world. Why is this? Because low-cost communications
reduces entry barriers to businesses, particularly small and
medium-sized enterprises, increases competition and innovation
among sellers, creates greater choice for consumers, and
enables more rapid dispersion of information.
We, as a company, want to make sure that no one is left
behind in this Internet century, and universal and affordable
communications and information worldwide is critical to this
objective. Our ability to achieve this objective depends very
much upon framing an international trade environment that will
empower users worldwide to enjoy the benefits of the Internet
revolution. We believe there are seven essential issues that we
must tackle together to extend e-commerce and the Internet to
create a global networked economy.
First and most important is a lowering of
telecommunications costs. Affordability can best be assured
throughout the world through privatization and competition in
telecommunications services, as well as by unmetered pricing
for Internet access services. Mr. Shimkus, you asked what you
might deliver to our transatlantic partners. It is this:
Metered or permanent pricing of Internet use is the enemy of
Internet adoption and usage. If people are watching the clock,
counting up fenigs or franks or whatever it is by the minute
for every minute that they are online, they will be worried
about large, metered monthly phone bills. They will spend less
time online or they won't go online at all or let their kids go
online to do such simple things as their homework.
The second critical issue is that markets for information
technology products and services must be open and accessible.
Particular emphasis should be placed on lowering trade barriers
on high tech capital goods and consumer devices, computer
software and online services so we can deliver more services to
more people at a more affordable basis.
Third, we advocate clear and effective protection for
intellectual property rights. Widespread investment in computer
software and diverse, local cultural products and services that
will drive Internet adoption and use worldwide requires that
the intellectual property in these essential creative works be
protected as they are in this country and to the DMCA.
Fourth, we support the free flow of goods and services
across a range of sectors that make up the e-commerce value
chain. This begins with lower tariffs on the goods and services
that form the building blocks of the Internet architecture, but
it also includes reducing barriers to advertising services,
financial services, billing and payment services, distribution
services, express delivery services, air transport, and customs
modernization--the full range of sectors that involve the e-
commerce value chain.
Fifth, governments around the world need to fashion a
neutral, simple, and efficient 21st century tax collection
system that works in a global networked economy. And you are
absolutely right--this has to do with State and local taxation
systems in this country just as it has to do with the EU VAT
system in Europe.
Sixth, we must be as committed to the free flow of
information and ideas as we are to the free flow of commerce.
While we recognize that national security and protection of
children may justify some regulation in this area, we urge that
limitations on the free flow of information and ideas, just
like limitations on the free flow of goods and services, be
adopted only after careful consideration, lest the social and
economic benefits of human exchange be lost or mitigated.
Finally, consumer confidence in the online medium must be
enhanced. Here we believe that industry has and should continue
to play a leadership role in developing and promulgating
standards and practices in data collection and in consumer
protection that will enhance consumer confidence in the online
medium.
How might we effectively advance this seven-point agenda?
We believe that America's digital trade agenda can best be
pursued through a multilateral, regional, and bilateral
approach. We are encouraged that the President has included a
number of the complements of this digital trade program in his
2001 trade agenda. To pursue this agenda effectively, AOL/Time
Warner believes it is important that the President and Congress
agree on terms for trade promotion authority. It is equally
essential that Congress continue its commitment to China's
accession to the World Trade Organization. Recognizing China's
importance to the growth and development of the global economy
is an essential step to bringing about the truly global
networked economic system I have outlined above.
The task of advancing a vision for digital trade for our
Nation and for the world is daunting, but the promise in
additional individual opportunity, economic prosperity, and
more knowledge dispersed among more people worldwide is well
worth the effort. We look forward to working with you to
achieve these important goals. Thank you very much, Mr.
Chairman.
[The prepared statement of George Vradenburg III follows:]
Prepared Statement of George Vradenburg, Executive Vice President, AOL
Time Warner
Chairman Stearns, Mr. Towns and Members of the Subcommittee. I want
to thank you for holding this important hearing on digital trade
issues. At AOL Time Warner, we believe that Congress and the
Administration, in partnership with the US business community, should
commit ourselves to advancing global economic prosperity and social
progress through a trade agenda that fosters the global electronic
exchange of information and commerce.
AOL Time Warner is the world's leading Internet-powered multi-media
company, with a stable of brands including AOL, Warner Bros, Warner
Music Group, HBO, Time Warner Cable, Time Inc. and the Turner Networks,
including CNN.
In this, the Internet Century, consumers worldwide are driving the
demand for greater choice and convenience. The AOL Time Warner company
is committed to the proposition that new combinations of skills,
technology, and talents are essential to create the innovations that
will respond to this global demand. Our company is responding with new
forms of content and delivery platforms, innovative services that will
make new consumer devices work together seamlessly, and new means to
``connect the dots'' to make technology easy-to-use for consumers. We
intend to bring the power of information and the promise of connection
to more people around the world. Our ability to achieve this goal
depends upon working with you, your colleagues in the Congress, and the
Administration to frame the international trade environment that will
enable consumers to take full advantage of the Internet revolution.
We believe that there are three powerful and related trends that
are fundamentally reshaping the global economy. The first is the
exponential growth in connectivity resulting from increased adoption of
information and communications technologies. The second is the
convergence of historically distinct communications systems and
consumer devices. And the third is the increasing use of electronic
communications as a channel for connecting consumers and companies and
driving international business and social communities. In the
aggregate, these forces are accelerating the process known as
globalization, a process that I believe promises economic and social
benefits to consumers, workers and citizens worldwide.
Today, more than 300 million people are online. By the year 2005,
more than 1 billion people will be connected to the Internet, more than
75 percent of them outside of North America. This technological
transformation is creating a networked global economy that is just
beginning to demonstrate that the Internet can be a powerful engine for
individual opportunity, economic prosperity and social progress.
Recently, a new study done by Caroline Freund of the Federal
Reserve Board and Diana Weinhold of the London School of Economics
determined just how big a difference the Web has made to trade. Looking
at trade flows among 56 countries from 1995 to 1999, for the first two
years, they found no impact from the Net. But starting in 1997, as Web
usage accelerated, they discovered that a 10 percent increase in the
number of a nation's Web sites would have led to a 1 percent rise in
its trade flows in 1998 and 1999. The impact was strongest for poorer
countries--suggesting that nations with fewer initial trade links can
reap larger relative gains from the Web, assuming they have made basic
infrastructure and technology investments.
The rapid growth of Internet usage in China also demonstrates that
the appetite for electronic networks as a tool for economic reform and
access to information extends well beyond the so-called developed
nations and is being embraced by nations and cultures that are not
employing traditional notions of ``capitalism'' and ``democracy'' in
their historic development.
And the benefits of electronic commerce and digitized trade extend
far beyond the immediate financial gain of the participants. Perceived
social and economic benefits of global electronic networks include:
stimulating new opportunities and investments in emerging
markets by reducing the costs and barriers to reaching
electronic consumers in developed markets;
extending global electronic markets to all nations and thus
bringing the benefits of choice and network economies of scope
and scale to all consumers;
providing people in historically underserved nations and areas
with increased access to education, health care and other
public services;
promoting greater and more rapid access to information for
children of all ages and in all nations; and
giving people everywhere the capability of promoting their
local industry and cultures without losing the benefits of
participation in the global economy.
These benefits create a win-win-win situation in which the same set
of actions--promoting increased digital communications and trade--
brings economic and social benefits to governments, industry and
individuals around the world. We have an obligation to act now to
deliver on the promise of these benefits, and to promote digitized
trade-friendly policies with our trading partners around the world.
We all know that adoption of the capability for increased digital
communications and trade around the world isn't going to happen on its
own. In fact, the opposite is true: absent affirmative action on our
part, global protectionism and fragmentation may take hold. If that
proves to be the case, the promise of economic opportunity and broader
knowledge of the world will pass too many by--the social and economic
repercussions of that neglect will not only be felt in the developing
world, we all will feel it.
In a world of increasing connection, our own economic and social
well being is inextricably tied to the economic and social progress of
other nations and peoples. A stable world order, characterized by peace
and prosperity, demands that we respond to the universal yearning for
economic opportunity and social connection.
The Framework for a Global Networked Society
At AOL Time Warner, we support a basic framework for a networked
global society, to bring the benefits of economic and social
connectivity, including economic prosperity, increased knowledge and
expanded trade, to everyone. That framework should include:
A recognition that current WTO obligations, rules, disciplines
and commitments should apply to e-commerce and acknowledgement
that electronically delivered goods and services should receive
no less favorable treatment under trade rules and commitments
than like products delivered in physical form.
An understanding that universal and affordable access for
consumers to basic and valued-added communications services is
critical to expanding the reach of electronic economic
opportunity.
An appreciation that all aspects of the e-commerce value chain
must be free from trade barriers in order to prevent the
weakest link from breaking the benefits of the chain.
A new approach to content development and protection that
safeguards the interests of the artists, while promoting the
development of local content and providing consumers with the
widest array of choice.
A commitment that no man, woman or child is left behind in the
Internet age. The age where economic and social ``divides''
should be put behind us. The Internet offers us a new
opportunity to extend economic opportunity to more people, and
we, as the champions of opportunity and freedom, should grab
the historic opportunity presented to us by this remarkable new
technology.
The Key Issues We Must Tackle to Create the Global Networked Society
There are six key sets of issues that we must collectively tackle
to ensure the creation of a global networked society.
First, and most important, is a lowering of telecommunications
costs. Consumers cannot gain access to the benefits of electronic trade
in commerce and ideas unless they can afford access to the basic means
of connection. Affordability can best be assured through privatization
and competition in telecommunications, a structure that requires
independent regulation of historic monopolies to assure cost-based
consumer pricing and interconnection rates. Just as important is the
pricing structure used. Research, as well as common sense, tells us
that metered pricing of Internet use is the enemy of Internet adoption
and usage; if people are ``watching the clock'' while they are online,
fearful of large metered monthly phone bills, they will spend less time
online or won't go online at all. For that reason, we support pro-
competitive telecommunications policy throughout the globe that will
result in affordable pricing for Internet access to all end users.
Second, the market for information technology products and services
must be more open and accessible. Ideally, we would like to see the
greatest variety of information and communications devices and services
available to the broadest possible audience. Particular emphasis should
be on lowering tariffs on high technology goods and software so that
more people in more countries can afford the technology they need to
get online and companies can build the state-of -the art networks
needed to bring the benefits of the Internet to all.
Third, we advocate clear and effective protection for intellectual
property rights. Widespread investment in computer software and the
other cultural products and services that will drive Internet adoption
and use worldwide requires that those essential ingredients to a
networked global economy be protected. At the same time, network
operators cannot be crippled with liability for the unknowing
transmission of infringing materials. Intellectual property concerns
can only be addressed on a global basis--In some countries, we have
made great strides in protecting intellectual property and balancing
the rights and obligations of content owners and online distributors.
An extension of this balance of protections in more countries, to more
people, will power local cultural industries and will bring a new
creative spirit to the non-English speaking Internet community
worldwide.
Fourth, we support the free flow of goods and services across a
range of sectors that make up the e-commerce value chain. This begins
with lower tariffs on the goods and services that form the building
blocks of the Internet architecture, and include reducing barriers to
advertising, financial services and internet billing and payments,
distribution of content--including movies and music, express delivery
services and customs modernization. We must address these ``barriers''
to e-commerce in a holistic and comprehensive fashion. Without such a
commitment, even one weak link in the e-commerce value chain can
undermine the potentially explosive growth of e-commerce and
productivity enhancement, new job creation and expanded consumer choice
and opportunity.
Fifth, to ensure that tax policy does not impede the tremendous
growth of e-commerce, governments around the world need to identify a
tax collection system that maintains market neutrality while still
addressing governments' legitimate need to fund public services. To
ensure that these interests are balanced, tax systems should not create
market distortions, discourage transacting business on the Internet or
impose greater administrative burdens on one type of supplier than on
another. The goal should be to achieve a simple, efficient, and fair
tax regime appropriate to a new global networked economy--a system that
promotes rather than stifles free trade.
Sixth, we must be as committed to the free flow of information and
ideas as we are to the free flow of commerce. Economic, social and
political innovation is the product of the exchange of ideas and
information. Human progress is measured not just by commerce and
technology, but by innovation in the systems for economic opportunity
and personal expression and understanding. We in this country will
benefit by an openness to greater information from and understanding of
the rest of the world, just as the remainder of the world will benefit
by a greater understanding of the principles of freedom and opportunity
we enjoy here. We recognize that traditional notions of national
security and, protection of children among others, may provide a
justification for national regulation in this area. And we believe that
private sector commitments to battle child pornography, share ideas on
the security of critical infrastructures and fostering local cultural
diversity can assist public administrations in advancing national
objectives in those areas. But we would urge that limitations on the
free flow of information and ideas, just like limitations on the free
flow of goods and services, should be adopted only after careful
consideration, lest the social or economic benefits of human exchange
not just on a local but also a global level be lost or mitigated.
Finally, consumer confidence in the online medium must be enhanced.
Here we believe that industry has and should continue to play a
leadership role in developing and promulgating standards and practices
that will enhance consumer confidence in the online medium. Online
users continue to be concerned about the privacy and security of their
personal information and about the integrity of online transactions.
Global business organizations, such as the Global Business Dialogue on
Electronic Commerce, recognize that our online business depends on the
confidence of consumers. We, and other electronic commerce businesses,
have adopted world class data collection and consumer protection
practices, and we are working collaboratively with governments to
ensure that consumer concerns are being appropriately addressed.
The Process for Achieving a Global Networked Society
These are what I believe are the essentials of a digital trade
agenda. Let me now briefly outline how we might collectively advance
this agenda.
We believe that America's digital trade agenda can best be pursued
through a multilateral, regional and bilateral approach. This includes
pursuing initiatives through the WTO, including a possible new round of
trade negotiations, and through regional venues such as the Free Trade
Agreement of the Americas and APEC. Digital trade can also be advanced
through bilateral initiatives.
We are encouraged that the President has included a number of the
components of our digital trade program in his 2001 Trade Agenda. We
urge the US government to pursue them in a comprehensive, holistic way
that brings together all the critical elements needed to advance global
e-commerce and trade. But merely articulating priorities and securing
congressional guidance on those priorities will not be enough.
AOL Time Warner believes strongly that our ability as a nation to
advance the digital trade agenda outlined above depends upon the
President's having Trade Promotion Authority from the Congress. Absent
a unified national commitment to a shared trade agenda, and the
necessary governance mechanism to assure that the President can advance
that agenda with confidence and authority, we risk losing a national
opportunity of great import. We believe the time has come for the
Congress and the President to collaborate closely to define trade
negotiation objectives of our country and to ensure a mechanism to
secure congressional approval of trade agreements that advance our
trade objectives. Trade Promotion Authority provides such a tool.
TPA is much more than simply a legal tool. It is a demonstration of
a shared commitment of the two branches of the US government
responsible for the conduct of commerce and trade that America is ready
to approach the rest of the world with a firm commitment to markets in
commerce and ideas and to deliver to American consumers, farmers and
businesses the economic and social benefits of a networked global
economy.
It is equally essential that Congress continue its commitment to
China's accession to the World Trade Organization. Recognizing China's
importance to the growth and development of the global economy is an
essential step to bringing about the global networked economic system
that I have outlined above. We recognize that the process of WTO
accession for China has proven to have taken longer than originally
contemplated; we recognize that there have been significant
developments in our relationship with China other than those relating
to trade; but inclusion of China into the world's trading regime
remains a critical component of bringing about the full economic and
social benefits of global economic and social integration.
The task of advancing a vision of digitized trade for our nation
and for the world is daunting, but the opportunity--to bring additional
opportunity, prosperity and knowledge to more people--is well worth the
effort. We look forward to working with you to achieve this important
goal.
Thank you.
Mr. Stearns. Yes, thank you.
Ms. Richardson?
STATEMENT OF BONNIE J.K. RICHARDSON
Ms. Richardson. Mr. Chairman, Congressman Towns, members of
the subcommittee, thank you all for devoting your time and your
attention----
Mr. Stearns. Ms. Richardson, you might just pull the
microphone up a little closer. Thanks.
Ms. Richardson. [continuing] to the important issues of
international trade in digital content.
I am testifying today on behalf of the Motion Picture
Association of America. We represent seven of the major
producers and distributors of filmed entertainment. Warner
Brothers is our member, as are Universal, Fox, Sony Picture,
Paramount, MGM, and the Walt Disney Company. The creative
industries are America's No. 1 export industry. We earn more
revenue abroad than autos and auto parts, than agriculture,
than aircraft. As my boss, Jack Valenti, is fond of saying,
``We are the jewel in America's trade crown.'' We also create
jobs in the United States at three times the rate of the rest
of the economy.
And our future belongs in digital content. The digital
world provides exciting new opportunities for the delivery of
filmed and digital entertainment, whether it is to cinemas, to
home consumers, whether it is a new way of bringing television
programming to consumers.
There are four issues that I would like to raise with you
in my testimony today. First of all, the importance of
protecting intellectual property on the Internet. Second, I
would like to touch, but only briefly, on the Hague Convention,
since I am surrounded by some of the world's experts on that
area. I would also like to touch upon the issues of cultural
diversity and cultural protectionism, and then touch briefly on
the classification debate of goods versus services in the WTO
and other trade contexts.
First, the intellectual property issue. As anyone who has
listened to my colleagues at the Motion Picture Association
could probably tell you, as well as I, Internet piracy is the
single biggest threat to our industry today. That is true in
the United States, and it is certainly true abroad. Piracy is
not a new problem. We have spent $1 billion or more over the
past 25 years in combating traditional forms of piracy. What is
new is that on the Internet, piracy can happen with a speed and
a scope that is really unparalleled.
There are some important new tools on how we can address
these threats to our livelihood, to the protection of the
content itself. First of all, at the end of 1996, the World
Intellectual Property Organization, WIPO, adopted two new
treaties that helped bring copyright standards into the digital
age. Congress, you, in your wisdom, over 2 years ago,
implemented those treaties into U.S. law in the Digital
Millennium Copyright Act. Unfortunately, many of our trading
partners have not acted as swiftly. We are still six countries
short of putting into place the WIPO Copyright Treaty and eight
countries short internationally of the implementation of the
Performances and Photograms Treaty. So one of our big
objectives, and we hope to achieve it by the end of the summer,
is to get those treaties into force.
There are some other ways that we are pursuing, with the
help of our Government, the improvement of international
standards for copyright protection. Some important work is
being done in the Free Trade Agreement negotiations in this
regard. And Congress, too, has supplied us with some very
important tools. The IP conditionality in the GSP Program, in
the Caribbean Basin Initiative, the Andean Trade Preference
Act, and the Africa Growth Opportunities Act give us important
way of impressing on our trading partners that these issues
matter. And certainly the annual priority setting that we can
do as a result of the provisions of Special 301 remain very
important to highlighting this issue in international trade.
On the Hague Convention, I welcomed the words of Mr. Kovar
that the e-commerce issues in the Hague Convention, as we
struggle to look at the issues of jurisdiction, must be dealt
with extremely carefully and deliberately. And we would agree
with that. We recognize that the Hague Convention can make
things better or it can make things worse. They are extremely
important issues that are at stake here, and they are very
complex issues, both in the copyright and in the e-commerce
world.
On cultural diversity and cultural protectionism, digital
networks have solved some of the old-fashioned problems. In the
Old World, there just wasn't enough shelf space. There might be
one cinema or one broadcaster that you could get in your
hometown, and when foreign governments confronted this problem,
they thought that the way to do it was to protect our country.
As we look at removing those barriers in the digital age or
keeping them off in the digital age, one of the issues we can
look at is the classification debate, and I am happy to answer
questions in that regard in the question and answer session.
[The prepared statement of Bonnie J.K. Richardson follows:]
Prepared Statement of Bonnie J.K. Richardson, Vice President, Trade &
Federal Affairs, Motion Picture Association of America
I would like to commend you, Mr. Chairman, and you, Congressman
Towns, and all the Members of this Subcommittee, for devoting your time
and attention to the international issues confronting the content
industries in the digital age.
I am testifying today on behalf of the Motion Picture Association
of America. MPAA is a trade association representing seven of the major
producers and distributors of filmed and digital entertainment for
exhibition in theaters, for home entertainment and for television. Our
members include Buena Vista Pictures Distribution, Inc. (A Walt Disney
Company), Metro-Goldwyn-Mayer Studios Inc., Paramount Pictures
Corporation, Sony Pictures Entertainment Inc., Twentieth Century Fox
Film Corporation, Universal City Studios, Inc., and Warner Bros., a
division of AOL Time Warner.
The Jewel in America's Trade Crown:
As many of you may already know, the content industries--movies,
television programming, home video, music publishing, computer games
and software--are America's most successful exporters. These copyright-
based industries generate more revenues internationally than any other
US industry--more than aircraft, more than agriculture, more than
automobiles and auto parts. We also create jobs in the United States at
three times the rate of the rest of the economy. As Jack Valenti,
President and CEO of the Motion Picture Association of America, is fond
of saying, the copyright industries are ``the jewel in America's trade
crown.''
Digital networks offer new opportunities for delivering our
entertainment products in international markets. In the next few
months, several movie studios will launch new, encrypted on-line
services. No one knows today which business model, or models, will
prove most successful in getting digitized entertainment content to
customers, but we may start to get some answers in the next few months.
The one thing I can tell you is that all of those business models
for the digital delivery of content--at home and abroad--depend on
successfully protecting the content against theft.
The Importance of Protecting Intellectual Property:
Internet piracy is the single biggest impediment to digital trade
today. Piracy of copyrighted materials is not a new problem. In the
last quarter century, MPAA and its associated anti-piracy organizations
have spent a billion dollars fighting video piracy and signal theft
around the world. At present, we have anti-piracy programs in over 80
countries. What is new in the fight against piracy in the Internet era
is the speed and ease with which our products can be stolen and
distributed illegally over digital networks. Today, Viant (a Boston-
based consulting firm) estimates that some 350,000 movies are being
downloaded illegally every day. By the end of the year, they estimate
that as many as one million illegal movie downloads will take place
every single day. The scale of the problem is unprecedented.
We have some new tools for combating copyright theft. At the end of
1996 the World Intellectual Property Organization (WIPO) adopted two
new treaties to bring copyright standards into the digital age. These
treaties clarify exclusive rights in the on-line world and prohibit
circumvention of technological protection measures for copyrighted
works. The United States Congress implemented those treaties over two
years ago in the Digital Millennium Copyright Act. Unfortunately, other
countries have not acted quite as swiftly, and the treaties are still
not in effect. Twenty-four countries have deposited their instruments
of ratification of the WIPO Copyright Treaty; 22 countries have
completed the ratification process for the WIPO Performances and
Phonograms Treaty. We hope to reach the 30-country mark before the end
of the summer so the treaties can enter into effect. Of course, even
after the treaties enter into force, we will continue working to get
all countries to adhere to these important principles. One of the
disturbing truths in the e-commerce world is that piracy flows to the
country where the levels of protection are the lowest; even the tiniest
country can be the source of extraordinary levels of damage.
Meanwhile, we support the efforts of the Administration to ensure
that the standards set in the WIPO treaties and the standards in the
Digital Millennium Copyright Act are incorporated into free trade
agreements, including those with Singapore, Chile, and the Free Trade
Agreement of the Americas.
Swift and vigorous enforcement of copyright laws by countries
around the globe is also essential. Tools provided by Congress for
ensuring effective enforcement of intellectual property laws remain
extremely important for ensuring that countries abroad provide
effective enforcement against piracy. These tools include Special 301
and other trade-related legislation, including the Generalized System
of Preference (GSP), the Caribbean Basic Economic Recovery Act, the
Caribbean Basin Trade Partnership Act, the Andean Trade Preferences
Act, and the African Growth Opportunities Act.
The Hague Convention
The Hague Convention is also attempting to tackle issues that are
very important to any company that engages in international commerce.
When laws are broken, which country or countries have jurisdiction over
the infractions and where can the judgments be enforced? The Hague
Convention is attempting to complete an international instrument to
address these questions in a global fashion.
The questions of jurisdiction are especially complex in the e-
commerce world. What factors should determine where a transaction or
resulting injuries took place? Is it where the company is
headquartered? Where the server is located? Where the customer is
located? Does it matter whether or not the service is being advertised
or directly marketed to customers in a particular country? Does the
language in which the service is being offered indicate intent, or lack
thereof, to conduct business in a particular country? What does it mean
to ``target'' activities toward a particular forum, and how do U.S.
notions of minimum contacts and purposeful availment work in the online
environment?
Because copyright theft is such a pervasive international problem--
particularly in the Internet environment--and because we rely on courts
around the world to help bring pirates to justice, the copyright
industries have been particularly concerned about the new rules being
formulated by the Hague Convention. A common-sense convention on
jurisdiction and the enforcement of foreign judgments could have some
benefit to the copyright industries in confronting global
infringements, and we support the United States' efforts to reach such
a common-sense solution. Unfortunately, the operative draft of the
Convention is painted with a broad brush that reflects the fact that
much of the discussion leading up to its creation occurred before the
advent of e-commerce. As a result, and by failing to squarely address
the types of difficult questions I just raised, the Draft Convention in
its current form threatens to do more harm than good.
Some who oppose the treaty have focused on copyright as an example
of why the Draft Convention is problematic. They point to differences
in national law and the possibility that a judgment rendered in a
foreign country based on foreign law will be enforced in the United
States. They suggest that the solution is simply to excise intellectual
property issues from this agreement. We do not view this as a good
solution. The fact is that today--even in the absence of a global
convention on jurisdiction--U.S. companies who engage in e-commerce
must deal with differences in national laws and can be called into
court in a foreign country to answer for acts that reach foreign
countries. (The Yahoo! case on the sale of Nazi memorabilia in France
is just one example). On top of that, the U.S. is quite liberal in its
recognition and enforcement of foreign judgments. This is happening
today.
It is important to keep in mind that the Hague Convention doesn't
try to resolve questions of substantive law. If substantive laws were
the main question, copyright issues would be easier to address
internationally than many other e-commerce related problems, such as
illegal content or privacy. There is a greater degree of harmonization
of copyright laws as a result of the Berne Convention and the WTO Trips
agreement than is the case in many other areas of law and policy. The
problem is jurisdiction: Will the Convention result in U.S. companies
finding themselves subject to jurisdiction in a forum where they would
not be subject to jurisdiction today, and would the Convention result
in the enforcement of judgments that today would not be enforced?
These issues of jurisdiction underlie all kinds of tort actions and
are of as much concern to other e-businesses as to the copyright
industries. The problems cannot be resolved simply by excising
intellectual property. The same questions remain with respect to cases
for defamation, for hate speech, for privacy violations, for unfair
trade practices, and for all other areas of non-harmonized law. We
agree with others that the current Draft Convention inadequately
addresses these questions, and we believe these questions must be
answered with respect to all areas of the law if the Convention is to
go forward.
Cultural Diversity/Cultural Protectionism:
Many countries around the world have a reasonable desire to ensure
that their citizens can see films and TV programs that reflect their
history, their cultures, and their languages. In the past, when their
towns might have had only one local cinema and received only one or two
TV broadcast signals, the motivation for foreign governments to set
aside some time for local entertainment products was understandable. In
today's world, with multiplex cinemas and multi-channel television, the
justification for local content quotas is much diminished. And, in the
e-commerce world, the scarcity problem has completely disappeared.
There is room on the Internet for films and video from every country on
the globe in every genre imaginable. There is no ``shelf-space''
problem on the net.
In addition to solving old scarcity problems, digital networks
offer exciting new opportunities for producers and consumers around the
globe. A consumer in small-town America with a taste for Japanese
samurai films will be able to access them via his home computer. An
American exchange student to Brazil will be able to continue her
addiction to Brazilian soap operas after returning home--by accessing
broadcasts streamed via the Internet to authorized viewers. E-commerce
offers the chance to enhance the diversity of cultural exchange in a
way that has never before been possible.
Because digital networks both solve the old scarcity problem and
lead to exciting new opportunities for creators around the globe to
reach out to new markets, local content quotas and other forms of
protectionist measures are completely inappropriate in the e-commerce
world. Fortunately, to date, we haven't seen any country adopt this
form of market-closing measure for digitally delivered content. We hope
this market will remain unfettered--and hope we can count on your
support as we work with our international trade partners to keep
digital networks free of cultural protectionism. Congressional
authorization of Trade Promotion Authority will also be very helpful in
empowering the Administration to negotiate these commitments in the WTO
and other trade agreements.
The Classification Debate:
I have been asked to address one of the more arcane issues of
digital trade--whether the delivery of content of e-commerce networks
should be considered trade in goods or trade in services or both. I am
happy to oblige, asking your indulgence while I dive into some fairly
deep and murky waters teeming with intimidating trade jargon.
First, though, I'd like to point out that this is not a new debate.
Even before the e-commerce era, MPAA had one foot in the world of goods
and one foot in the world of services. When we export a canister of
film, we are exporting a physical product, or a good, that is subject
to the rules of the General Agreement on Tariffs and Trade (the GATT.)
However, when a motion picture company produces a new film, or a
broadcaster broadcasts that film, these are services transactions
subject to the rules of the General Agreement on Trade in Services (the
GATS.)
Likewise, in the e-commerce world, some transactions involving the
digital delivery of motion picture images are so similar to trade in
goods that they clearly should benefit from the rules of GATT. Other
forms of digital delivery may be more akin to a services transaction
and may fall under the rules of the GATS.
Let me give you an example. If a consumer were to place a telephone
order for a DVD of the film ``Finding Forrester'' and have a copy of
that DVD delivered to his house on a UPS truck, that is a ``goods''
transaction. Likewise, if the same consumer ordering a copy of the same
DVD on his/her computer and had the same content delivered digitally
and downloaded from his computer to a write-able DVD--that is still a
``goods'' transaction. The only difference is that a digital network
instead of a delivery van provided the transportation from the retailer
to the consumer.
The classification issue is important primarily because the rules
for goods in the GATT differ from the rules for services in the GATS.
GATT (rules for trade in goods):
automatically provides national treatment on all imported
goods;
generally prohibits quotas and other forms of quantitative
restrictions, [except for theatrical screen quotas, which
countries may preserve]; and
permits tariffs on imported goods; the levels of tariffs are
negotiated and then ``bound.''
GATS (rules for trade in services):
provide national treatment and market access on a negotiated
basis sector by sector. (Unfortunately, only about 20 countries
have made any commitments in audiovisual services. We hope to
do improve on this in the current round of WTO services
negotiations. A similar problem may exist for computer
software, although more countries made more commitments in this
sector.);
permits countries that have made national treatment or market
access commitments to reserve the right to continue applying
some level of restrictions;
contains a non-binding moratorium encouraging countries not to
apply tariffs to e-commerce delivered services; and
permits negotiations on s domestic regulatory issues not
covered by GATT disciplines.
So, for example, if a digitally delivered DVD were exported to
Europe and classified as a good, that DVD would still be subject to the
existing EU tariff of 4.5%. And, we would also know that the DVD would
be free of other forms of discrimination, such as local content quotas
or discriminatory taxes. But, if that same digitally delivered good
were classified as a service, the EU would be able under international
trade agreements to adopt new quotas or discriminatory taxes--or even
to raise tariffs.
The United States must ensure that digital goods retain the level
of protection they currently enjoy under the GATT rules. It would be
completely unacceptable if products that are currently classified as
goods--motion pictures, magnetic tapes, DVDs, etc.--lost trade benefits
through a re-classification process. Simply because a new delivery
mechanism (digital networks) allows these products to be delivered
digitally does not justify establishing new trade barriers. We can't
risk opening the door to new quotas on digital products that would be
illegal today under current trade rules. Trade negotiations are
supposed to be trade liberalizing--they are not supposed to lead to
increased trade barriers.
MPAA agrees with the position of the Administration that is it
premature and unnecessary at the present time to resolve this
classification question. It is premature because the business models
for delivering entertainment content to consumers over digital networks
are still evolving. It is unnecessary because the rules and precedents
of the GATT regarding ``like products'' are so clear that we are
comfortable with the protection offered by the current GATT rules. We
feel confident that if any country today imposed a discriminatory
barrier against US films or videos or other forms of digital goods
traded over digital networks, the US could successfully challenge that
restriction and win in dispute settlement in the WTO.
I want to thank the members of this committee for your keen
interest in the barriers that affect digital commerce. The American
film, home entertainment and TV programming industry is the only
industry in America today that enjoys a positive balance of trade with
every country around the globe. Together with our colleagues in the
music, books and software industries, we are America's leading
exporter. With your continued vigilance and support, as you work with
the Administration and with foreign governments, you can ensure that
America's ``crown jewels'' continue to sparkle brightly in the digital
age.
Mr. Stearns. Ms. Wellbery?
STATEMENT OF BARBARA S. WELLBERY
Ms. Wellbery. Thank you. Chairman Stearns, Mr. Towns, and
members of the subcommittee, good afternoon. I am a partner in
the law firm or Morrison & Foerster. Before joining the firm, I
worked in the Department of Commerce as Counselor for
Electronic Commerce to the Under Secretary for International
Trade. There, I represented the Government in negotiations with
the European Commission on the Safe Harbor and in other
international negotiations. Since leaving the Government, I
have advised clients on a variety of electronic commerce
issues, including the Hague Convention and privacy.
I am pleased to have the opportunity to appear before you
today to address the Hague Convention and the Safe Harbor
Privacy Accord. Many in the information technology industry
have serious concerns with the convention. Their core concern
is that the convention would make web site operators and
Internet service providers more vulnerable to lawsuits around
the world and require U.S. courts to enforce the resulting the
foreign judgments. This could have damaging consequences for
the U.S. IT industry.
For example, the convention would allow companies to be
sued around the world for claims arising out of consumer
contracts. In addition, the convention would permit ISPs and
web site owners to be sued anywhere in the world for all kinds
of torts, including copyright infringement, privacy,
defamation, and in other countries, hate speech, since the
material could be accessed worldwide. And for the most part,
U.S. courts would have to enforce those judgments. As a result,
copyright owners could avoid the limitations on liability they
negotiated with U.S. service providers under the Digital
Millennium Copyright Act, by bringing suit against service
providers for copyright infringement in countries that have no
laws limiting service provider liability.
In addition, the convention would compound the problem
created by the French Yahoo decision. There, a French court
took jurisdiction and imposed penalties against Yahoo U.S.,
because a web site hosted by Yahoo auctioned Nazi memorabilia
and was accessible to users in France. The site's content was
illegal in France, yet legal in the United States. Under the
convention, U.S. courts could probably still refuse to enforce
such judgments on First Amendment grounds, but courts in other
countries would have to enforce them.
The result could be that the Internet is reduced to the
lowest common denominator where web sites avoid any but the
safest content for fear of offending someone and being hailed
into court. Alternatively, the Internet could be subject to as
many different standards of conduct as there are countries.
Jurisdiction is an extremely difficult question in the
context of electronic commerce. Simply applying the existing
rules, whether they be common or civil law rules, just doesn't
work. These rules turn on physical location and are limited by
geographical borders. But the Internet has no borders, and e-
commerce transactions provide none of the usual cues that tell
parties where the other is located, the contract was negotiated
or intangible goods or services delivered. It is therefore
premature to freeze current jurisdictional rules in an
international convention, particularly when the rules being
adopted borrow heavily from the more formalistic and rigid
civil law approach to jurisdiction. Those rules heighten the
risks to e-commerce. While they provide certainty, they may not
provide justice, since the defendant may not have had the
minimum contacts with the jurisdiction where the suit is
brought.
Despite the problems in the convention, I believe the U.S.
Government should remain very engaged in the convention
process. In that way, the U.S. Government will be able to urge
a constructive, problem-solving approach to the issues raised
by the convention and to ensure that the private sector is
fully involved.
U.S. Government efforts to address criticisms leveled
against the convention have already generated benefits. These
efforts, as Mr. Kovar said, have slowed the process and have
led to close consultation with all parts of the private sector.
This is particularly important in the e-commerce context where
technology and market applications evolve so quickly.
A similar approach was helpful in negotiations with the
European Commission on the EU Privacy Directive. The U.S. and
the EU have traditionally taken different approaches to
privacy, but when they realized the potentially disruptive
impact that the EU directive could have on trade between them,
both sides recognized the need to identify common ground and
develop ways to bridge those differences. The U.S. Government
consulted closely with all private sector stakeholders in
developing the Safe Harbor framework. Their input was
invaluable in developing a workable framework for U.S.
companies that as much as possible reflects actual business
practices.
Thank you again for the opportunity to appear before you
today, and I will be happy to answer any questions.
[The prepared statement of Barbara S. Wellbery follows:]
Prepared Statement of Barbara S. Wellbery
My name is Barbara Wellbery. I am a partner of Morrison & Foerster
and I practice in the firm's Washington, D.C. office. Before joining
the firm in December, 2000, I served in the Career Senior Executive
Service in the Department of Commerce for six and a half years, first
as Chief Counsel for the National Telecommunications and Information
Administration and then as Counselor for Electronic Commerce to the
Under Secretary for International Trade. I have six years of experience
in developing both domestic and international privacy policy. I also
participated in the White House Working Group on Electronic Commerce
from its inception until I left the Government. I also have extensive
experience in formulating policy on other key electronic commerce
issues, such as jurisdiction and consumer protection. I have
represented the U.S. Government in bilateral negotiations with the
European Commission on the safe harbor privacy accord and in a variety
of other bilateral and international negotiations including the
Organization for Economic Cooperation and Development, and the Asia
Pacific Economic Cooperation.
Since leaving the Government, I have advised U.S. multinational
companies on privacy issues and on other international issues arising
in the electronic commerce context. I have also been extensively
involved in meetings on The Preliminary Draft Convention on
Jurisdiction and Foreign Judgments in Civil and Commercial Matters
adopted by the Special Commission of the Hague Conference on Private
International Law Hague Convention (the ``Hague Convention''). I am
pleased to have the opportunity to appear before you today to discuss
impediments to digital trade and specifically the Hague Convention and
the safe harbor privacy accord.
Introduction
The Internet is a decentralized, borderless, global medium that
presents unique opportunities and challenges for both governments and
businesses around the world. As a global marketplace for both commerce
and ideas, it can empower citizens, democratize societies, and spur
business development by providing access to a worldwide network of
customers. These same attributes place a premium on a flexible legal
framework that is consistent domestically and internationally, since
actions taken by one government have the ability to affect the whole of
the Internet. Achieving such a legal framework is a long-term process
that requires continuing dialogue and diplomacy rather than
confrontation, identifying common ground despite divergent interests,
and building bridges instead of insisting on one way as the right way.
It also requires that all private sector stakeholders be given a place
at the ``table'' and included in the process or any resulting framework
may well prove unworkable.
The safe harbor accord is often hailed for demonstrating that such
an approach can work. In that instance, as discussed further below,
governments worked together to find common ground. They took a
constructive, problem solving approach, despite very different national
privacy regimes, involved the private sector extensively, and were able
to bridge their differences. It remains to be seen whether the
negotiations on the Hague Convention will take a similarly constructive
approach and yield similarly constructive results.
The Hague Convention
This hearing on the Hague Convention is particularly timely as the
first diplomatic convention in over 18 months is scheduled to take
place next month, from June 6 through June 20. The U.S. provided the
original impetus for the Hague Convention, proposing it in 1992. The
driving factor was the U.S. perception that U.S. courts typically
enforce foreign judgments, while foreign courts often do not enforce
U.S. judgments. The Hague Convention would provide international rules
on jurisdiction and recognition and enforcement of foreign judgments.
It concerns two aspects of jurisdiction over a foreign person or
company: (i) personal jurisdiction (can the foreign defendant be sued
in this court?); and (ii) enforcement (will a court in the defendant's
home country recognize and enforce the court's decision?). As a formal
matter, the Hague Convention does not address choice of law. As a
practical matter, however, if a court does exercise jurisdiction, there
is a strong likelihood that it will often find that its own law is the
applicable law, because each forum applies its own conflicts of law
rules. This often leads a court to apply its own law.
The current official draft of the Hague Convention, which was
adopted in October 1999, has met with significant opposition in the
U.S. from a variety of private sector quarters, sometimes for
conflicting reasons. A great deal of the opposition stems from the very
different approaches to jurisdiction taken by common law and civil law
countries and the fact that the 1999 preliminary draft borrows heavily
from the civil law approach to jurisdiction. At the core of the
electronic commerce community's concerns is the question of when it is
proper to assert jurisdiction over companies engaged in Internet
activities. Electronic commerce providers fear that the jurisdictional
rules contained in the Hague Convention, which would make web site
operators and Internet service providers more vulnerable to lawsuits
around the world, would stymie the development of electronic commerce.
The more formalistic approach to jurisdiction taken in civil law
countries heightens this risk.
U.S. courts focus on issues of due process--fairness to the
defendant as well as to the plaintiff--and determine jurisdiction on a
case by case basis. There are few rigid rules for determining
jurisdiction in the U.S. It cannot be said, for example, that a
consumer can always sue in his home jurisdiction. Instead, courts
generally look to whether a defendant has purposefully directed, or
targeted, its activities or performed some act, purposefully availing
itself of the privilege of conducting business in the forum. If so,
courts conclude that the defendant has thereby invoked the benefits and
protections of the forum's laws, has minimum contacts with the
jurisdiction, and could reasonably have anticipated being haled into
the forum. The same general approach is used to determine jurisdiction
for contract actions and tort actions, as well as for actions brought
by consumers against businesses.
The approach to jurisdiction in civil law countries is usually far
more formalistic than the U.S. approach. For contract actions, a
plaintiff can sue in the forum where the goods or services are provided
unless one party to the contract is a consumer. In those cases, the
consumer can sue where he resides if the defendant solicited business
through advertising (such as a web site) and the consumer took steps to
conclude the contract in that jurisdiction. For tort actions,
plaintiffs may sue where the harmful act or omission occurred or where
the injury arose. In each instance, if the relevant criteria are met,
courts may not deny jurisdiction on the grounds that it would be unfair
to the defendant. Although conventional wisdom holds that the civil law
approach to jurisdiction provides certainty at the expense of justice,
and the common law tradition provides justice at the expense of
certainty, in many, but not all contexts, they lead to the same result.
Electronic commerce creates challenges for both civil and common
law approaches to jurisdiction since both depend on the geographic
locations of the parties and relevant events. The Internet, however,
makes it difficult if not impossible to know for example where parties
are located, whether one is a consumer, where the contract was
negotiated, and in the case of intangible goods and services, the
physical location to which they are transmitted. U.S. courts have begun
to develop approaches to jurisdiction in the context of the Internet,
but U.S. law on these issues continues to evolve.1 And,
although the Hague Convention applies to electronic commerce
transactions and Internet service providers, it was drafted without
attention to the particular jurisdictional issues raised by electronic
commerce, and thus without recognition of the significant problems it
poses for the Internet and electronic commerce.
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\1\ To determine jurisdiction and whether an online company has
purposefully availed to itself of the benefits of doing business in a
particular jurisdiction through its web site, U.S. courts have
identified three categories of web sites (referred to as the ``Zippo
Continuum''). First, courts generally exercise personal jurisdiction
over businesses that enter directly into contracts through the Internet
with residents of the forum because in their view, purposeful availment
has occurred. Second, courts decline to exercise jurisdiction where a
defendant simply posts information on an Internet web site that is
accessible to users in their jurisdiction. Third, occupying a gray
area, are cases in which a user can exchange information with the host
computer but cannot directly enter into contracts through the Internet.
Many have criticized this approach as being outdated and irrelevant.
It appears now that U.S. and Canadian courts may be shifting to a
new test that focuses on an effects-based approach. See Michael Geist,
Is There a There There? Toward Greater Certainty for Internet
Jurisdiction, posted at http://aix1.uottawa.ca/~geist/
geistjurisdiction-us.pdf.
---------------------------------------------------------------------------
I will focus on two problems the Hague Convention creates for
electronic commerce and Internet service providers, which are
particularly critical.2 First, the Hague Convention would
lead to increased vulnerability to tort suits for Internet service
providers. (See Article 10 of the Hague Convention.) It would permit
suits for all kinds of torts, including copyright infringement,
privacy, defamation, and in other countries, hate speech, to be brought
wherever the act or omission occurred or where the injury arose. This
jurisdictional rule would allow a company with a web site to be sued,
for example, for copyright infringement anywhere its web site could be
accessed; an Internet service provider could be sued wherever it makes
the copyrighted work available. And yet in both instances, the company
may have had no contact at all with the jurisdiction in which the suit
is brought.
---------------------------------------------------------------------------
\2\ See also the paper entitled Preliminary Comments on the Hague
Conference on Private International Law attached to my testimony.
---------------------------------------------------------------------------
The Hague Convention would also allow copyright owners to avoid the
limitations on liability that were negotiated with U.S. service
providers under the Digital Millennium Copyright Act, by bringing suit
against the service provider for copyright infringement in countries
that have no laws limiting service provider liability. Although as
noted above, technically the choice of applicable law is independent of
the choice of forum, in fact the choice of a particular forum often
leads to application of that forum's laws. In addition, where the
service provider had no assets in the country in which suit was
originally brought, under the Hague Convention copyright owners would
be entitled to enforcement in the U.S. or any other signatory country
to the Hague Convention where the service provider has assets.
The Hague Convention compounds the problem created by the torts
provision by establishing that courts may also exercise jurisdiction to
order provisional measures, such as temporary restraining orders and
preliminary injunctions.3 While the Hague Convention also
limits the effect of such provisional measures to the territory of the
state in which the issuing court is located, that limitation may well
prove meaningless on the Internet. An injunction ordering removal of
material from a web site, at least at this time, cannot be limited
geographically: a temporary injunction entered by a foreign court
against a U.S. company would have to be enforced by a U.S. court,
despite the fact that the injunction exceeded in scope or failed to
meet the criteria established by Section 512(j) of the Digital
Millennium Copyright Act of 1998. Again, this would seem to undermine
the carefully balanced approach struck by the Act.4
---------------------------------------------------------------------------
\3\ See Article 13 of the Hague Convention.
\4\ It is not clear that differences between copyright laws would
rise to the type of public policy incompatibility U.S. courts would
consider under Article 28(1)(f) of the Hague Convention.
---------------------------------------------------------------------------
The torts provision could also encourage other countries to emulate
a troubling trend begun by the Yahoo France decision, in which a French
court exerted jurisdiction and imposed penalties against Yahoo, U.S.
because the Yahoo web site was accessible to users in France. The
site's content was considered illegal in France but legal in the U.S.
under the First Amendment. Other foreign courts have followed suit.
Recently, two courts in France and Germany held that web site
publishers who published material residing on servers outside of those
countries were nevertheless guilty of defamation and hate speech in
Germany and France merely because the material was accessible in those
countries. While surely U.S. courts would refuse to enforce such
judgments on First Amendment grounds, the Hague Convention would
nonetheless compound the problem. By requiring that those judgments be
enforced in other countries where U.S. companies have assets, U.S.
First Amendment principles could more easily be avoided. The result
could be that the Internet is reduced to the lowest common denominator,
where web sites avoid any but the safest content for fear of offending
someone and being haled into court.
The second critical problem the Hague Convention creates is that it
would subject web-based companies to suits arising out of consumer
contracts anywhere in the world. It would allow a consumer to sue in
his home jurisdiction so long as the defendant has directed his
activities to that state (through advertising) and the consumer has
taken steps necessary for the conclusion of the activity in that
State.5 The Hague Convention also limits enforcement of
choice of court clauses so that they may be enforced only when they are
entered into after the dispute has arisen or they allow the consumer to
bring proceedings in another court. The effect would be that a business
would be vulnerable to suit anywhere in the world that its web site is
accessible. And, because of the close connection between choice of
forum and choice of law, companies doing business on the web would not
only have to anticipate being haled into court around the world but
also being subjected to different and sometimes conflicting consumer
protection laws around the world. The result certainly would be that
companies would be reluctant to offer their goods and services over the
Internet for fear of being sued anywhere in the world and subjected to
the laws of more than 170 countries.6
---------------------------------------------------------------------------
\5\ See Article 7 of the Hague Convention. Plaintiffs are
considered consumers when they conclude a contract for a purpose
outside their trade or profession.
\6\ This discussion of the problems raised by the Hague Convention
is not exhaustive. The Hague Convention also raises many other problems
for electronic commerce, including problems arising out of trademark
and patent suits and the relationship to other international and
regional conventions.
---------------------------------------------------------------------------
If, as noted above, U.S. courts already enforce foreign judgments,
why would the Hague Convention be so problematic? The reasons are
fourfold. First, the statement--that U.S. courts typically enforce
foreign judgments--oversimplifies the current U.S. legal situation.
Foreign judgments are presumptively enforceable by U.S. courts, but
that general rule is subject to certain exceptions. For example, it is
well established that U.S. courts also examine, when raised by
defendants, claims that a foreign court lacked personal jurisdiction.
Particularly where the jurisdiction is not a common law jurisdiction,
courts will apply U.S. standards of minimum contacts in determining if
jurisdiction was proper. Yet, the Hague Convention would require U.S.
courts to enforce foreign judgments so long as they satisfy the
requisite jurisdictional tests established by the Hague Convention even
where sufficient contacts do not exist.7 Second, as noted
above, efforts by U.S. courts to adapt the minimum contacts doctrine to
the world of electronic commerce are still ongoing. Incorporating
current jurisdictional rules in the Hague Convention at this time would
freeze them in place prematurely since it is not yet clear that they
have fully evolved or that they work effectively in the electronic
commerce context.
---------------------------------------------------------------------------
\7\ The Hague Convention allows courts to refuse to enforce another
court's judgments where they result ``from proceedings incompatible
with fundamental principles of procedure of the State addressed, . .
.'' (Article 28(1)(c) of the Hague Convention). It is unknown at this
time, whether the Hague Convention will lead U.S. courts to interpret
procedural due process requirements differently than they now do.
---------------------------------------------------------------------------
Third, although it can be said that U.S. courts normally enforce
foreign judgments, U.S. courts have not enforced foreign judgments
arising out of the kinds of cases that arise in the electronic commerce
context. For example, the foreign copyright cases that have been
enforced have all involved situations where the defendant also clearly
had minimum contacts with the jurisdiction in which the original suit
was brought. But under the Hague Convention, U.S. courts would have to
enforce foreign judgments where, for example, an Internet service
provider had no contacts with the jurisdiction where the suit had been
brought except that a work it had transmitted could be accessed there.
Similarly, business to consumer transactions across borders were
rare before the Internet. There are therefore few if any cases of
foreign judgments being enforced by U.S. courts where they result from
suits brought by consumers in their home court against defendants with
no contacts in that jurisdiction. Finally, the principle that U.S.
courts will enforce foreign judgments does not appear to be well
recognized outside the U.S. and relatively few plaintiffs try to
enforce foreign judgments here. That obviously would change if the
Hague Convention were finalized and the U.S. were a party.
Given the many problems raised by the Hague Convention, it may be
tempting to advocate that the U.S. Government absent itself from the
Hague Convention. Nevertheless, based on my first hand experience in
working on behalf of the U.S. Government in international fora on a
variety of electronic commerce issues, I believe U.S. interests will be
better served for a variety of reasons if the U.S. Government remains
part of the Hague Convention process. Efforts on the Hague Convention
will likely continue with or without the U.S. Government. Continued
participation by the U.S. Government will allow it to influence the
Hague Convention, while disengaging will not. Nor can the U.S. avoid
the effects of the Hague Convention entirely if it does come into
effect. At a minimum, even if the U.S. is not a signatory to the Hague
Convention, foreign judgments against U.S. companies will be
enforceable in other countries that are signatories to the Hague
Convention.
U.S. Government efforts to address the criticisms leveled against
the Hague Convention by the U.S. private sector provide a further
illustration of why it is beneficial for the U.S. Government to remain
engaged in the process. First, the U.S. Government succeeded in slowing
down the process and was able to secure postponement of the diplomatic
conference, originally scheduled for last year, to this June. The U.S.
Government also takes a unique approach in consulting extensively with
all aspects of the private sector, which is particularly important in
the ecommerce context, where technology and market applications evolve
so quickly. It was also able to persuade other delegations to hold
several informal ``stocktaking'' meetings and to advocate successfully
including private sector experts from the electronic commerce,
intellectual property, consumer, and trial lawyer communities in these
meetings and in focusing attention on the problems the Hague Convention
raises for electronic commerce. Absent U.S. Government involvement,
private sector representatives would not have been included in these
meetings. These meetings produced new, informal drafts that attempt to
address the concerns discussed above. (The status of these drafts is
still entirely unclear; it is not known whether they or the preliminary
draft adopted in 1999 will form the basis for discussion at the June
diplomatic conference, nor do they resolve many of the concerns raised
by the electronic commerce community.) And, the U.S. Government
continues to press to ensure that both formal and informal meetings are
open to private sector participants.
Therefore, in my view the better approach is for the U.S.
Government to remain involved in the Hague Convention negotiating
process and to continue to urge participating countries to take a
constructive problem solving approach to the issues that succeeds in
bridging the differences in jurisdictional approaches rather than
relying so heavily on one particular legal tradition.
Safe Harbor Privacy Accord
Privacy provides another prime example of an issue that requires
countries to find common ground. Enormous amounts of information are
now used on a global basis. Many multinational companies ship all their
human resources data to one location for record keeping, benefits, and
payroll purposes. Credit card companies do the same with bankcard
information for billing purposes. Credit and insurance markets
increasingly operate on a global basis and require the transfer of
information about individuals across borders to evaluate their
creditworthiness or insurance risks. The inherently global nature of
the Internet further complicates the matter. Citizens of one country
may easily visit web sites in other countries, transferring personal
information across borders as they visit. But laws, which generally are
limited by nations' borders, have little effect in a medium without
borders. These problems are exacerbated when nation that have
longstanding differences on how to protect privacy adopt very different
approaches to dealing with these issues, as do the United States and
the European Union (EU). Traditionally, the U.S. has relied on self-
regulation and limited sector-specific legislation to protect privacy
while EU countries, which view privacy as a fundamental right, have
adopted broad, highly regulatory legislation that applies the same
rules to all industry sectors.
Given these longstanding differences, many U.S. companies were
concerned when the European Union adopted the Directive on Data
Protection, which requires that Member States enact laws prohibiting
the transfer of personal data to countries outside the European Union
that fail to ensure an adequate level of privacy protection. U.S.
companies feared that interruptions in data flows would result in the
suspension of businesses. Such across-the-board interruptions could
affect billions of dollars in trade each year and interfere with the
multinational companies' ability to pay and manage their employees as
well as with the routine activities carried out by investment bankers,
accountants, and pharmaceutical and travel companies. Just the threat
of action by European authorities left U.S. companies with a great deal
of uncertainty, while alternative, ad hoc approaches available to
satisfy the Directive's ``adequacy'' standard threatened to be
expensive and time consuming and thus suitable for larger companies
only.
In March 1998, against the backdrop of these different privacy
approaches and the serious consequences that could flow from them, the
United States and the EU took up the difficult challenge posed by their
different approaches to privacy. The goal of the United States
Government was to create easier, more streamlined option(s) for U.S.
companies transferring personal information from the EU to the U.S.,
particularly small and medium sized companies, and to ensure the
continued flow of data across borders. The EU's goal was to ensure its
citizens a high level of privacy protection. From the start, both sides
agreed to adopt both sets of goals. In recognition that any
interruptions in transborder data transfers could have a serious impact
on commerce, the EU and the U.S. began with an acceptance of their
differences and developed ways to bridge those differences. Initial
steps focused on identifying common ground in their different
approaches on which to build a solution.
This approach led to the ``safe harbor'' privacy accord. The safe
harbor builds on the U.S. self-regulatory approach to privacy and more
closely reflects the U.S. approach to privacy. U.S. companies may
decide voluntarily if they wish to adhere to the safe harbor framework.
If they so decide, they will be judged ``adequate,'' and data flows to
them from Europe will continue. It thus provides yet another option for
U.S. companies to meet the requirements of the EU Directive but in no
way limits their choices if they wish to take another approach for
complying with the Directive.
The safe harbor provides a number of important benefits to U.S.
firms. Most importantly, it offers U.S. companies that receive personal
information from Europe predictability and continuity as well as a more
streamlined and less expensive means of complying with the adequacy
requirements of the Directive. It creates a single privacy regime for
U.S. companies transferring personal information from the EU to the
U.S. (since all 15 Member States are bound by the safe harbor accord)
and eliminates the need for prior approval to begin data transfers to
the U.S. or makes such approval automatic.
Importantly, the safe harbor framework was developed by the U.S.
Government in close consultation with the U.S. private sector--industry
as well as privacy advocates. We posted drafts of documents for public
comment fours times during the two-year negotiation and held numerous
meetings with consumer advocacy and industry groups to obtain their
views on the draft documents. This input was invaluable in developing a
workable framework for U.S. companies, which as much as possible
reflects actual business practices, yet at the same time satisfies EU
privacy requirements.8 The U.S. Government also needs to be
engaged in discussions with other governments as they develop privacy
legislation.
---------------------------------------------------------------------------
\8\ The EU and U.S. approaches to privacy as well as the safe
harbor accord are more fully discussed in a paper I wrote entitled
Bridging the Difference: The Safe Harbor and Information Privacy in The
United States and the European Union. (A copy of this paper and another
paper, entitled, European Commission's Model Contractual Clauses:
Paving The Way For International Transfers Or A New Hurdle? on the EU's
model contractual clauses are attached to my testimony.)
---------------------------------------------------------------------------
Conclusion
If digital trade is to reach its full potential, it will require a
workable legal framework that is consistent across borders. Achieving
such a framework is both a long term and difficult goal, not least
because we each start with the view that our own way is the right way.
In addition, these ways are often deeply entrenched as a result of
centuries of differing legal traditions. It seems clear that this goal
will be achieved only if the U.S. Government and the U.S. private
sector are deeply engaged--both in international fora and bilaterally--
in discussions on the full range of issues that affect digital trade.
It is also critical to achieving this goal that the U.S. Government
continue to urge other governments to agree to inclusion of private
sector participants in all international discussions, including treaty
negotiations. Finally, all sides must be willing to work together to
identify common ground and bridge the differences in their approaches.
______
Preliminary Comments on the Hague Conference on Private International
Law
The Hague Conference on Private International Law has been
negotiating a Convention on jurisdiction and enforcement of foreign
judgments. The purpose of the Convention is to harmonize global rules
of jurisdiction and create predictable rules for the worldwide
enforcement of judgments. Discussions on this Convention began before
the growth of electronic commerce, and the Convention creates new
challenges in the Internet age. Consequently, the Convention, as
currently drafted, creates numerous areas of concern for the Internet
service providers and the entire information technology (``IT'')
industry. A brief overview of some of the business concerns and risks
posed by the draft Articles is discussed below.
Article 10--Torts
Article 10 sets forth jurisdictional rules governing where a
plaintiff can sue a defendant for actions in ``tort.'' Torts include
both physical torts, such as environmental offences and products
liability, and more troubling, intangible, content-related torts such
as hate speech, defamation, copyright infringement, unfair competition,
libel, etc. Article 10 as drafted would allow a plaintiff to bring a
tort action against a defendant in any country of the world where:
(a) the act that caused the injury occurred; or
(b) in which the injury arose unless the defendant establishes that the
person claimed to be responsible could not reasonably have
foreseen that the act could result in an injury in that state.
A plaintiff can also bring a tort action in any country in
which the act or injury may occur.
The rules governing jurisdiction in the Hague Convention apply to
electronic commerce. Therefore, if Article 10 became the rule, any
owner of a web page or service provider could be sued in another
country simply because ``injury arose'' there by virtue of its being
accessible over the Internet. The defendant would face difficulty
proving that is was not reasonably foreseeable that injury would not
occur in such country. Article 10 would have damaging, unintended
consequences on the U.S. IT industry:
The torts provision would lead to increased vulnerability
to tort suits for service providers. Copyright owners could bring suit
against the service provider for copyright infringement in countries
that have no laws limiting service provider liability. And, while the
choice of forum should be independent of the choice of applicable law,
in fact the choice of forum often leads to a choice of that forum's
laws because each forum's courts apply their own conflicts of law
rules.
The Convention would also obligate U.S. courts to enforce the
resulting judgment (unless they took the view that enforcement was
contrary to public policy, which they are generally reluctant to do)
Copyright owners could bypass the limitations on liability they
negotiated with U.S. service providers under the Digital Millennium
Copyright Act. The copyright owners could establish that injury arose
in any country of the world because the copyrighted work was accessible
via the Internet in such country. Even if the service provider had no
assets in that country, the Hague Convention would permit the copyright
owner to return to the U.S. or any other signatory to the Convention
and seek to have its judgment enforced against the providers' assets in
such country.
Article 10 could encourage other countries to emulate a
troubling trend begun by the Yahoo France decision, in which a French
court exerted jurisdiction and penalties against Yahoo U.S. because the
Yahoo website was posting content that was accessible to users in
France. The content was considered illegal in France and legal in the
U.S. under the First Amendment. Other courts have followed suit.
Recently, two courts in France and Germany held that website publishers
who published material residing on servers outside of those countries
were nevertheless guilty of defamation and hate speech in Germany and
France because the material was merely accessible in those countries.
While surely U.S. courts would refuse to enforce such judgments on
First Amendment grounds, the Convention would nonetheless compound the
problem by requiring that those judgments be enforced in other
countries where there might be assets. Defendants would also need to
expend unnecessary resources defending such enforcement actions. First
Amendment principles in the U.S. could easily be bypassed by loose
rules that encourage this type of jurisdiction grab.
All businesses could be subject to unnecessary lawsuits
around the world for ``torts'' such as reverse domain name hijacking,
unfair competition, or passing off.
Recommendation: The Convention should be modified to make clear
that network operators and Internet service providers, who are
providing Internet services on behalf of third parties, should not be
subject to jurisdiction from the overly broad jurisdictional concepts
that run throughout the Convention. Language should be added to Article
18: If an action in tort or delict is brought in the courts of a State
only on the basis that the injury arose there, those courts shall not
have jurisdiction over a defendant who is a service provider, when the
service provider's activity in connection with the injury is a) the
transmitting, routing, or providing connections for the material which
is alleged to have caused the injury; b) caching carried out through an
automatic process of the material which allegedly caused the injury; c)
the storage at the direction of a user of the material which allegedly
caused the injury; or d) the referring or linking of users to an online
location or providing other information location tools containing the
material which allegedly caused the injury.
Article 12--Exclusive Jurisdiction
This Article harms U.S. patent and trademark owners by permitting
any court of the world to exert exclusive jurisdiction over any
trademark or patent matter that have as their object the registration,
validity, nullity or infringement of such patent and trademarks.
Notably, copyrights owners successfully excluded copyrights from the
scope of exclusive jurisdiction under Article 12. Article 12 encourages
a ``jurisdictional grab'' by encouraging a party to file a suit simply
by objecting to the registration or validity of a trademark or patent,
and thereby grant that court exclusive jurisdiction over the dispute.
For example, if company A in country A sent a cease and desist letter
to company B in country B for violating its contract, company B could
simply bring an action alleging that Company A's trademark in country B
is invalid. The court is country B now has exclusive jurisdiction over
the contract dispute and the trademark dispute. Patent and trademark
rights differ in each country and are based on complicated intellectual
property case law regimes. Each country that registers trademarks and
patents within its own boundaries is closest to the facts and has the
best expertise to resolve disputes under its own national laws. It does
not make sense for countries that did not register such trademark or
patent to be ruling on the infringement or validity of patents and
trademarks granted by other countries.
Recommendation: As a matter of policy, trademarks and patents
should be excluded from the scope of exclusive jurisdiction in Article
12. There has been some discussion in recent Hague Convention meetings
about fixing Article 12 by clarifying that only the countries that
granted the registration of such patents or trademarks (or is the
country in which common law rights in the trademark rights arose),
should have exclusive jurisdiction to resolve all trademark and patent
disputes. There are still some significant questions as to whether this
proposed language adequately addresses the concerns of trademark and
patent owners with Article 12. This language should be studied in
detail, and if questions still arise, exclusion of all intellectual
property from the Convention may be the best remedy. Article 12 should
also be clarified to indicate that patent and trademark infringement
cannot arise in a country in the absence of the patent or trademark
owner intentionally directing the industrial property through the sale
of products or services to such country. In the recent Pro-C case, a
Canadian court found a U.S. trademark owner liable for infringement
merely because the mark was accessible to Canadian users although the
defendant did not direct products or services to users in Canada.
Article 13--Provisional and Protective Measures
This Article allows any court in which ``property'' is located to
order any provisional measures (such as injunctions), provided that the
enforcement was limited to the territory of that country. For example,
if a reproduction of a copyrighted work was considered ``property''
located in France because French citizens could access it in France,
the French court could order a broad injunction forcing the defendant
to stop transmitting the content in France. This article raises many of
the same concerns discussed with Article 12 above. In the Internet age,
property can be ``located'' anywhere. Provisional measures that
arguably are limited to the territory of one country have permanent
effects on global electronic commerce. For example, in the Yahoo France
case, the court ordered Yahoo U.S. to block the IP addresses of French
users, even though the content is considered legal in the U.S. and
there are technical problems implementing effective blocking.
Recommendation: This is exactly the type of dangerous outcome that
should be avoided in the Hague Convention. The provision on provisional
measures in Article 13 should be deleted or limited to tangible
property only. Alternatively, if the problems with Article 10 are
adequately addressed, there may be a similar resolution of the problems
articulated for Article 13.
Article 7
Article sets out rules for when a consumer may sue a defendant in
the courts where the consumer resides. Article 7 as drafted would allow
a consumer to sue in his home jurisdiction where:
--the claim is related to the defendant's trade or profession;
--the defendant has directed his activities to that state (through
means of publicity; and
--the consumer has taken steps necessary for the conclusion of the
activity in that State.
Plaintiffs are considered consumers when they conclude a contract
for a purpose outside their trade or profession.
Article 7 also states that choice of court clauses will be enforced
only when they are entered into after the dispute has arisen or they
allow the consumer to bring proceedings in another court.
Article 7 as drafted would allow a consumer (and perhaps a
business acting outside its trade or profession) to sue a business
wherever their website is accessible. It adopts a country of
destination approach to jurisdiction.
The major option for addressing this problem--choice of
forum clauses--would not be available until after the dispute had
arisen, increasing the vulnerability of businesses to class action
suits.
It is also unclear if the choice of court provision would
allow parties to designate alternative dispute resolution as an
alternative to litigation.
Recommendation: The fix could be either redrafting Article 7 so
that it provides for a country of origin approach or deleting the
provision entirely.
Company/Association Names: AT&T, Commercial Internet Exchange
(CIX), Computer & Communications Industry Association (CCIA), Verizon.
______
Bridging the Difference: The Safe Harbor and Information Privacy in The
United States and The European Union
Barbara S. Wellbery 1
---------------------------------------------------------------------------
\1\ Barbara Wellbery is a partner in the Washington office of
Morrison & Foerster LLP. She was previously Counsellor to the Under
Secretary for Electronic Commerce in the U.S. Department of Commerce.
While there, she was the chief architect and a principal negotiator of
the safe harbor privacy accord between the U.S. and the European Union.
The author would like to thank Rebecca Richards and Cynthia Rich for
their valuable assistance on this article.
---------------------------------------------------------------------------
introduction
Today's information technologies allow information to be collected,
compiled, analyzed, and delivered around the world more quickly and
inexpensively than ever before. Where it was once difficult, time-
consuming, and expensive to obtain and compile information, it is now
often available with a few simple clicks of a computer mouse. This
increased access to information facilitates personal and political
expression as well as commerce, education, and health care.
Information technologies are transforming the face of global
commerce. World trade involving information technologies and related
services and products (computer software, movies, sound recordings,
databases, and financial services, to name just a few) has grown
rapidly in the past decade and now accounts for over $120 billion of
U.S. exports alone.2 We are now said to live in an
``Information Economy.''
---------------------------------------------------------------------------
\2\ Digital Economy 2000, Department of Commerce p. 53.
---------------------------------------------------------------------------
Consumers benefit from the increased access to information. They
surf the ``Internet'' seeking all kinds of information. Thinking of
buying a house? You can shop for it on the Internet. Information is
available about neighborhoods, prices, and schools; you can even take a
virtual tour of the house while on-line.
Companies, too, benefit. They can create new markets as the
Internet allows them to reach potential customers easily and cheaply.
Increased access to information about customers can reduce marketing
and inventory costs, and allow better target advertising. As a result,
consumer information has become a ``hot'' commodity.
Not surprisingly, then, there is a growing demand for all kinds of
information. The great promise of the Information Age is, however, also
its greatest threat. The increased market for personal information,
coupled with the ability to collect and compile it easily, has led to
an enormous increase in the amount of information collected about
individuals as they conduct commercial transactions and cruise the Net.
Banks and credit card companies maintain information on financial
records, payment histories, where people shop, and what they buy.
Supermarkets and other retail stores track consumer purchases using
checkout scanners. As individuals peruse various sites on the Internet,
mouse clicks can be tracked , so-called ``cookies.'' Profiles can be
compiled not only of what people buy, but also of what they read, their
health concerns, and perhaps their political and sexual preferences as
well. Thus, information technologies increase the risks to privacy
exponentially.
Moreover, privacy issues are complicated by the fact that so much
information is now used on a global basis. Multinational companies may
ship all their personnel data to one location for record keeping,
benefits, and payroll purposes; credit card companies may do the same
with bankcard information for billing purposes. Credit and insurance
markets increasingly operate on a global basis and may require the
transfer of information about individuals across borders to evaluate
their creditworthiness or insurance risks. And, the inherently global
nature of the Internet further complicates the matter. Citizens of one
country may easily visit web sites in other countries, transferring
personal information across borders as they visit. But laws, which
generally are limited by nations' borders, may have little effect in a
medium without borders.
Many nations share concerns about the impact of the expansion of
electronic networks on information privacy. The United States and the
European Union (EU) are both addressing these concerns, but in markedly
different ways. This essay briefly examines the U.S. and EU approaches
to privacy, their differences and similarities, the disruptions in
global commerce the differences could cause, and one solution that has
been developed for bridging those differences.
THE EUROPEAN APPROACH TO PRIVACY PROTECTION
While the United States and EU generally agree on the underlying
principle that individuals should have the opportunity to control the
ways their personal information is used, the U.S. and the EU employ
very different means to achieve this goal. The EU's approach to privacy
grows out of Europe's history and legal traditions. In Europe,
protection of information privacy is viewed as a fundamental, human
right. The emphasis given to information privacy in Europe arises at
least in part from intrusions into information privacy that were at the
root of certain World War II abuses. Europe also has a tradition of
prospective, comprehensive lawmaking that seeks to guard against future
harms, particularly where social issues are concerned.
The EU began examining the impact of technology on society over a
fifteen years decade ago; the inquiry culminated in the adoption of a
directive in July 1995 specifically addressing information privacy
issues. The Council Directive on the Protection of Individuals With
Regard to the Processing of Personal Data and On the Free Movement of
Such Data (``Directive'') took effect in October 1998. Member states
were required to bring into force laws, regulations, and administrative
provisions to comply with the Directive by its effective date. Several
have not yet done so. Presently, six of the fifteen Member States are
being sued by the Commission for failure to implement measures within
the deadline established by the Directive.3
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\3\ http://europa.eu.int/comm/internal--market/en/media/dataprot/
law/impl.html.
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A quick review of its basic terms makes clear that, consistent with
European tradition, the Directive takes an overarching, highly
regulatory and inclusive approach to privacy issues. It has two basic
objectives: first, to protect individuals with respect to the
``processing'' of personal information (defined as information relating
to an identified or identifiable natural person); and second, to ensure
the free movement of personal information within the EU through the
coordination of national laws (Article 1).
The scope of the Directive is extraordinarily broad. It applies to
all processing of data, online and off line, manual as well as
automatic, and all organizations holding personal data. It excludes
from its reach only data used ``in the course of purely personal or
household activity'' (Article 3). The Directive establishes strict
guidelines for the processing of personal information. ``Processing''
includes any operations involving personal information, except perhaps
its mere transmission (Article 2). For example, copying information or
putting it in a file is viewed as ``processing.'' The substantive
aspects of the Directive's privacy protections are based on the
Guidelines on the Protection of Privacy and Transborder Flows of
Personal Data adopted by the Organization for Economic Cooperation and
Development (OECD) in 1980.
Data Quality. The Directive requires that all personal information
must be processed fairly and lawfully, so that, for example, a person
whose personal information is at issue knows that it is being collected
and used and must be informed of the proposed uses. Furthermore, the
use of personal information must be limited to the purpose first
identified and to other compatible uses, and no more information may be
collected than is required to satisfy the purpose of which it is
collected. In other words, the theory is that if a person provides
information to obtain telephone service, that information should not be
used to target that person for information about vacation trips, nor
should information relevant to a customer's interests in vacation trips
be required to get, for instance, telephone service. Information must
also be kept accurate and up to date (Article 6).
Legitimate Data Processing. The Directive sets forth rules for
``legitimate'' data processing. Most basically, this requires obtaining
the consent of the data subject before information is processed unless
specific exemptions apply (Article 7). In addition, certain information
must be provided to data subjects when their personal information is
processed (Article 10), such as whether they have rights to see the
data, to correct any information that is inaccurate, or to know who
will receive the data (Article 12).
Sensitive Data. ``Sensitive'' data, such as that pertaining to
racial or ethnic origins, political or religious beliefs, or health or
sex life, may not be processed at all unless such processing comes
within limited exceptions (Article 8).
Security. The Directive requires that ``appropriate technical and
organizational measures to protect data'' against destruction, loss,
alteration, or unauthorized disclosure or access be taken (Article 17).
Data Controllers. The Directive requires those processing data to
fulfill very specific requirements. Specifically, they must appoint a
``data controller'' responsible for all data processing, who must
register with government authorities (Article 19) and notify them
before processing any data (Article 18). Notification must at a minimum
include: the purpose of the processing; a description of the data
subjects; the recipients or categories of recipients to whom the data
might be disclosed; proposed transfers to third countries; and a
general description that would allow a preliminary assessment of
whether requirements for security of processing have been met (Article
19).
Government Data Protection Authorities. The Directive also mandates
a government authority to oversee data processing activities. Each
Member State must establish an independent public authority to
supervise the protection of personal data. These ``Data Protection
Commissions'' must have the power to: (1) investigate data processing
activities and monitor application of the Directive; and (2) intervene
in the processing and to order the blocking, erasure, or destruction of
data as well as to ban its processing. They must also be authorized to
hear and resolve complaints from data subjects and must issue regular
public reports on their activities (Article 28).
Transfers of Data Outside the EU. Most importantly from the U.S.
perspective, the Directive requires that Member States enact laws
prohibiting the transfer of personal data to countries outside the
European Union that fail to ensure an ``adequate level of [privacy]
protection'' (Article 25). Where the level of protection is deemed
inadequate, Member States are required to take measures to prevent any
transfer of data to the third country. Member States and their Data
Protection Commissions must inform each other when they believe that a
third country does not ensure an adequate level of protection.
What Constitutes Adequacy Under the Directive?
The aspect of the Directive that raises major questions for the
United States and other non-EU countries is the question of what
constitutes an ``adequate level of (privacy) protection.'' The
Directive provides some guidance on how adequacy is to be determined.
For example, the Directive states that the adequacy of the protection
offered by the recipient country shall be assessed in the light of all
the circumstances surrounding a data transfer. These include: (1)
nature of the data; (2) purpose and duration of the proposed processing
operation; (3) country of origin or the country of final destination;
(4) rules of law in force in the destination country and (5)
professional rules and security measures that apply within the
recipient country (Article 25). And, while there seems to be general
consensus that ``adequacy'' means less than ``equivalence,'' the
Directive leaves unspecified the substantive rules that in fact
constitute ``adequacy'' as well as the procedural means for achieving
it.
In June 1997, the European Commission's Working party on the
Protection of Individuals with Regard to the Processing of Personal
Data (``Working Party'') released a discussion paper entitled ``First
Orientations on Transfers of Personal Data to Third Countries ,
Possible Ways Forward in Assessing Adequacy.'' The Working Party paper
identifies two criteria essential to a finding of adequacy , the core
substantive rules and enforcement mechanisms. The substantive rules
identified in the paper closely track the Directive's requirements
discussed above. They include: (1) information must be processed for a
particular purpose and used only insofar as its use is not incompatible
with the purpose of its collection; (2) information must be accurate
and up to date and not excessive in relationship to the purposes for
which it is collected; (3) individuals must be provided with
information about the purpose of the collection; (4) organizational and
technical measures must be taken to keep the data secure; (5) data
subjects must be able to obtain copies of all data and have a right to
rectification if they are inaccurate, as well as to oppose processing;
and (6) transfers to third countries must be restricted unless they
provide an adequate level of protection. The enforcement mechanisms
must provide: (1) a good level of compliance; (2) support and help to
individual data subjects; and (3) appropriate redress. The Working
Party Paper also recognizes that legislation is not necessary for
adequate privacy protection so long as these goals are accomplished
through other means.
In issuing Transfers of Personal Data to Third Countries: Applying
Articles 25 and 26 of the EU Data Protection Directive, a more recent
report issued in July 1998, the Working Party elaborated further on the
criteria a self-regulatory regime had to meet to be considered
adequate. First, it reiterated that the substantive rules and
enforcement mechanisms identified in its July 1997 report must be met.
The self-regulatory regime must also be binding for all companies or
institutions to which personal data are transferred and provide for
adequate safeguards if data are passed on to non-members. In addition,
the privacy regime must be transparent and have mechanisms that
effectively ensure a good level of compliance. Individuals must be
ensured certain rights, such as easy access to an impartial and
independent body to hear complaints that can adjudicate breaches of the
code and provide a remedy and compensation, as appropriate. Finally,
there must be a guarantee of appropriate redress in cases of non-
compliance.
Neither paper issued by the Working Party, however, provides
guidance on how and where an ``adequate'' privacy law or program in a
third country might differ from the requirements of the Directive.
Until the European Union actually made ``adequacy'' findings and there
were specific examples to examine, exactly what would constitute
``adequacy'' under the Directive would remain unclear.
THE U.S. APPROACH TO PRIVACY PROTECTION
Legal and historical traditions have evolved quite differently in
the United States than in Europe, and the United States takes a
different approach to privacy issues from the EU's. The U.S. legal
tradition, rooted in concerns about governmental excesses, has led to a
preference for decentralized authority, a reluctance to regulate the
private sector absent demonstrated need, and generally greater concern
about government excess than about private sector excess. And, while
the U.S. Constitution establishes certain privacy protections for
individuals, such as the right to be free from warrantless searches, it
does not explicitly protect information privacy, nor has any such right
been inferred from the Constitution. In addition, a fundamental tenet
of American democracy + the First Amendment to the U.S. Constitution +
requires a balance between the privacy rights of individuals and the
benefits that stem from the free flow of information within and across
U.S. borders.
Accordingly, when the U.S. adopted a comprehensive privacy law--the
Privacy Act of 1974--it governed only the Federal Government's use of
citizens' personal information. Other federal privacy protection
statutes apply to specific government agencies or information, such as
income tax and census data. Neither federal nor state governments,
however, have adopted comprehensive information privacy protections
affecting private sector data use. (Some state constitutions, such as
those of California, Florida, and Hawaii, explicitly set forth a right
to information privacy without specifying any rights relating directly
to information privacy.)
In contrast, the information privacy laws that govern the private
sector in the United States were adopted either because of specific
instances of abuse, perceived market failure, or because particularly
sensitive information and/or groups were involved. There is also
concern that information privacy issues differ so across different
industry sectors that ``a one size fits all'' legislative approach
would lack the necessary precision to avoid interfering with the
benefits that flow from the free flow of information. For that reason,
too, the U.S. has adopted limited sector-specific privacy legislation.
As a result, a number of statutes cover the collection and use of
personal information in specific contexts, such as children's personal
information, information collected by telephone and cable companies and
credit bureaus, and financial, video rental and drivers' license
information. A brief review of three of these statutes makes clear that
privacy statutes in the U.S take different approaches and impose
different schemes for protecting privacy depending on the
circumstances.
Fair Credit Reporting Act
Congress enacted the Fair Credit Reporting Act (FCRA) in 1970 to
deal with widespread concerns about incorrect and widely disseminated
consumer credit reports. The FCRA governs disclosure of consumer credit
information by credit bureaus. It starts with the premise that
widespread availability of correct credit information to parties with a
real need for the information will benefit the U.S. economy. For this
reason, it provides consumers with a limited right to consent to the
use of their personal information.
The Act imposes strict regulations on who may use the credit
information and on ensuring that the information is accurate. It thus
limits the disclosure of credit information to businesses with a
legitimate need for the information and provides certain rights to
consumers when credit information is used to deny them an important
benefit. To help ensure accuracy, the Act requires that consumers have
access to information maintained about them and sets out fairly
prescriptive rules governing how access must be provided. The Act also
requires that the recipients of credit reports be identified, prohibits
the reporting of obsolete information, and provides a correction
process for inaccurate or incomplete information. And, if a consumer is
denied credit for personal, family, or household purposes or is denied
employment and the denial is based on information in a consumer report,
the entity receiving the report is required to notify the consumer and
identify the credit bureau that furnished the report in question. The
FCRA allocates enforcement responsibilities among a number of federal
agencies, primarily to the Federal Trade Commission.
Children's Online Privacy Protection Act
In October 1998, Congress passed the Children's Online Privacy
Protection Act (COPPA). The law applies to operators of commercial web
sites and online services that collect or maintain information from web
site or service visitors and users and prohibits the collection of
information from children under the age of 13 without verifiable
parental consent. It also provides for a safe harbor from privacy
liability where companies adhere to a self-regulatory program approved
by the Federal Trade Commission. The Federal Trade Commission, which
was charged with enforcing developing regulations under the statute,
issued implementing rules in April 2000.
These rules set out criteria for web site operators and online
services that are targeted to children or have actual knowledge that
the person from whom they seek information is a child. They require
notice of what personally identifiable information is being collected,
how it will be used, and whether it will be disclosed. Subject to
certain exceptions, a web site must notify parents that it plans to
collect information from their child and obtain parental consent before
it is collected, used, or disclosed. Conditions for more than
reasonably necessary information may not be placed on a child's
participation in online activities. In addition, parents must be
allowed to review information collected from the child, to have it
deleted, and to prohibit further collection. Finally, companies must
implement procedures to protect the confidentiality, security and
integrity of personal information collected from children.
Financial Modernization Act
More recently, in November 1999, the President signed into law the
Financial Modernization Act. The Act's primary purpose was to overhaul
the U.S. laws governing the financial services industry, but the
legislation also increased the level of financial privacy protections
afforded to consumers. The law requires financial institutions to
disclose clearly their privacy polices up front and annually, allowing
consumers to make informed choices about privacy protection. Financial
institutions must also inform consumers if they intend to share or sell
consumers' financial data either within the corporate family or to
third parties. Consumers are entitled to choice if a financial
institution plans to share information with unaffiliated third parties,
subject to certain exceptions. Enforcement is allocated among Federal
functional regulators (for example, the Office of the Comptroller of
the Currency, the Securities and Exchange Commission, and the Federal
Reserve Board), the Federal Trade Commission, and State insurance
authorities. The legislation directs these agencies to prescribe
regulations necessary for its implementation. Regulations have been
finalized for all federal regulators. Businesses must be in full
compliance by July 2001.
U.S. Self Regulatory Privacy Initiatives
Without broad, multi-sector information privacy laws, information
privacy protection in the United States has in large part relied on
voluntary adoption of self-regulatory codes of conduct by industry.
These codes take as their point of departure the same Guidelines on the
Protection of Privacy and Transborder Flows of Personal Data adopted by
the OECD as form the basis for the European Directive on Data
Protection. As long ago as 1983, 183 U.S. companies endorsed those
Guidelines. The U.S. Government has also repeatedly endorsed these
guidelines, most recently in October 1998, when the Clinton
Administration reiterated endorsement of those Guidelines as part of
the Ministerial Declaration on the Protection of Privacy on Global
Networks issued at the Ottawa Ministerial Conference.
Recent years have witnessed the growing importance of information
privacy in the United States and increasing concern, from both
consumers and Clinton Administration officials, about whether such
privacy is sufficiently protected. This concern has led to enactment of
additional sector-specific legislation. It has not, however, resulted
in any significant movement toward a European type regulatory approach
or law. Rather, the emphasis has been primarily on adoption and
implementation of more effective self-regulatory regimes to protect
privacy or on self-regulation with teeth.
Thus, when in 1997, the Clinton Administration released A Framework
for Global Electronic Commerce, which examines the policy issues raised
by the development of electronic commerce, it noted the growing
concerns about information privacy and recognized that, unless they
were addressed, electronic commerce would not develop to its full
potential. The report specifically recognized the high value Americans
place on privacy and recommended private sector efforts and
technological solutions to protect privacy. The report also identified
several factors suggesting that adopting comprehensive legislation
could harm the development of electronic commerce at this time.
The lack of national borders on the Internet has heightened
interest in self-regulation and technological solutions to problems
generally and to privacy concerns specifically. On the Internet,
national laws are difficult if not impossible to enforce. In addition,
since the Internet and electronic commerce are still rapidly evolving,
any legislated approach at best is likely to be outdated as soon as it
is adopted and at worst likely to stifle further development of these
media. As a result the view taken in the report is that government
should be a last, not a first, resort to fix problems. Accordingly, at
the time the report was issued, the President directed the Secretary of
Commerce and the Director of the Office of Management and Budget to
encourage private industry and privacy advocacy groups to develop and
adopt effective codes of conduct, industry-developed rules, and/or
technological solutions to protect privacy on the Internet.
Subsequent annual reports on electronic commerce issued by the
Clinton Administration confirmed the Administration's preference for
self-regulatory solutions to privacy protection. At the same time, the
Clinton Administration continued to recognize that sector-specific
privacy legislation may be appropriate in certain areas, such as where
the information is considered highly sensitive, as is the case with
children's and financial information, as discussed above. The Clinton
Administration also repeatedly cautioned that if industry did not
produce adequate privacy policies, government action will be needed to
safeguard legitimate privacy interests.
Since the issuance of the Clinton Administration's landmark
electronic commerce report in 1997, industry has undertaken concerted
efforts to create effective privacy protection via self-regulation.
More than 80 of the largest companies doing business on the Internet
and 23 business organizations that represent thousands of other
companies formed the Online Privacy Alliance (OPA) to promote privacy
on-line. The Online Privacy Alliance developed Guidelines for Effective
Privacy Policies, which outline protections for individually
identifiable information in an on-line or electronic commerce
environment. OPA has also produced guidelines for effective enforcement
of these policies.
Independent third party enforcement organizations such as the
BBBOnLine, TRUSTe, and CPA WebTrust have also been formed to provide
independent third party enforcement regimes that promote compliance
with information practice codes. For example, the Council of Better
Business Bureaus, a well-regarded, non-profit organization that helps
to resolve consumer complaints, established BBBOnLine as a privacy
program for online businesses. Businesses joining the program may
display a seal or trust mark to notify consumers that their web sites
follow fair information practices but only after they adopt privacy
policies that comport with the program's fair information practice
principles and complete an assessment indicating that they have
implemented those policies. Members must also submit to monitoring and
review by BBBOnLine and agree to participate in a consumer complaint
resolution system. The other enforcement programs include similar
requirements and also include the display of a seal or trust mark to
notify consumers. More than 1950 sites carry a privacy seal from a
trusted third party and more than additional 1200 sites have applied
for a seal from third-party enforcement services.
In what is perhaps a uniquely American approach to self-regulation,
enforcement of self-regulatory programs is backed up by Federal Trade
Commission (and other federal and state agency) enforcement. Section 5
of the Federal Trade Commission Act prohibits ``unfair and deceptive
acts or practices'' in or affecting commerce. Deceptive practices have
been defined to include representations, omission, or practices that
are likely to mislead reasonable consumers in a material fashion. The
FTC has repeatedly used its equitable powers under Section 5 to enforce
the provisions of privacy (and other self regulatory) policies against
companies failing to comply with the policies they have adopted even
where those policies have been adopted voluntarily. The operational
effect of these unfair and deceptive statutes is to make adoption by a
company of a privacy policy akin to adoption of a privacy law for that
particular company.
The FTC Act provides the FTC with authority to seek injunctive
relief against future violations of the statute as well as to provide
redress for injured consumers. And, the FTC can obtain substantial
penalties where its orders are violated. The FTC's (and other federal
and state agencies') unfair and deceptive authority and willingness to
use this authority to enforce self-regulatory policies helps to ensure
the effectiveness of self-regulation in the U.S. All fifty states plus
the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin
Islands have enacted laws similar to the Federal Trade Commission Act
to prevent unfair or deceptive acts. These are enforced by their
Attorneys General, adding additional resources to government
enforcement of self-regulation.
Evidence now exists that shows the United States' decentralized,
self-regulatory approach to privacy issues can be an effective means of
ensuring that individuals' personal information is adequately protected
in a globally networked environment. A 1999 Federal Trade Commission
survey involving a random sample of web sites found that the number of
privacy policies had risen from 14% in 1998 to 88% and that 100% of the
most popular group of web sites now have privacy policies. While only
8% of the random sample had privacy seals from one of the independent
third party enforcement groups, 45% of the most popular group did.
Other surveys also show that privacy self-regulation is working and
that businesses are taking effective steps to establish and post
privacy policies. For example, a Jupiter Communications study
determined that 70 percent of web sites in the United States that
collect information post a privacy policy linked to their home pages.
At the same time, there have been increasing calls for privacy
legislation in the U.S. In May, 2000, the Federal Trade Commission
called for legislation to protect privacy online based upon its most
recent report, which identified problems of ``free riders'' and poor
quality privacy policies. The report stated that the number of web
sites disclosing information practices had increased, but that the
quality of these information practices fell short. In addition, the
report noted that while the creation of the self-regulatory enforcement
programs has been a positive development, the number of participants to
date in these groups has been relatively small (8% of a random sampling
and 45% of the most popular sites). In part because these enforcement
programs have not been widely implemented, the FTC has concluded that
such efforts alone are not sufficient for ensuring adequate protection
of consume privacy online.
Several members of Congress have also introduced privacy
legislation in Congress to protect privacy, particularly in the areas
of online privacy, electronic surveillance, and medical and financial
record-keeping. While many of these bills are given little chance of
passage, at a minimum they indicate impatience with the pace of
adoption and dissatisfaction with the quality of private sector codes
of conduct. For example, in the first few months of this year alone,
there have been at least 18 bills proposing privacy legislation These
have ranged from the basic requirements that disclosure must be
provided with an opportunity to prohibit further interaction to more
stringent bills requiring affirmative consent in advance to collect and
disclose personally identifiable information. Even some industry
officials are, for the first time, urging Congress to pass limited
privacy laws. They are concerned that the lack of federal standards
will lead to a confusing patchwork of state regulations.
For its part, the Clinton Administration saw substantial progress
being made by the private sector, although it too believed more needed
to be done and more quickly. The new Administration, however, has yet
to articulate its policies in this area and whether it will also
encourage adoption by industry of effective privacy policies and
technological solutions.
Although the privacy situation in the U.S. is evolving, this much
is clear. While the U.S. is committed to ensuring personal privacy, it
does through a variety of means that reflect its deeply rooted
tradition of enhancing the free flow of information and avoiding
unnecessary government intervention in private affairs. In the first
instance, the U.S relies on private sector self-regulatory efforts
backed up by government enforcement to ensure that companies implement
their privacy policies. The government gets involved only where it
determines that the privacy rights of individuals are not otherwise
being sufficiently protected. The U.S. approach to privacy relies on an
amalgam of laws, codes of conduct, and technology to provide effective
privacy protection.
Given U.S legal traditions and history and the advantages of a
self-regulatory approach to privacy in an information economy, the
United States is unlikely at this time to abandon its self-regulatory
approach to privacy issues. And even if it were to adopt privacy
legislation in new and different situations, it is highly unlikely that
the United States would adopt the type of overarching, comprehensive,
highly regulatory and centralized approach to privacy that the European
Union has adopted.
SAFE HARBOR
Neither the EU or the U.S. appears likely to change significantly
its approach to privacy protection. Given these longstanding
differences, many U.S. organizations were concerned about the impact of
the ``adequacy'' standard on personal data transfers from the European
Community to the United States. Many feared an across the board
interruption in data flows. Such across the board interruptions could
affect as much as $120 billion in trade each year and interfere with
multinational companies' ability to pay and manage their employees and
with the routine activities carried out by investment bankers and
accountants and by pharmaceutical and travel companies. Others
dismissed fears of a complete interruption in data flows as unlikely,
pointing out that it would be potentially devastating for both
economies.
The more likely situation--of limited data flow interruptions
involving one industry sector or perhaps one company--posed similar
dangers, however, since it was feared they could easily evolve into a
trade war, depending on U.S. reactions and European counter reactions.
And, just the threat of action by European authorities left U.S.
companies with a great deal of uncertainty. Alternative, ad hoc
approaches available to satisfy the Directives ``adequacy'' standard
threatened to be expensive and time consuming and thus suitable for
larger companies only.
Against the backdrop of these different privacy approaches and the
serious consequences that could flow from them, the United States and
the EU took up the difficult challenge of bridging the differences in
their respective approaches to privacy. Toward that end, in March, 1998
the U.S. Department of Commerce initiated a high-level informal
dialogue with the European Commission Directorate for Internal Markets
to ensure the continued free flow of data. From the start, both sides
recognized that any interruptions in transborder data transfers could
have a serious impact on commerce between the EU and the US, and that
they thus needed to begin with an acceptance of their differences and
develop ways to bridge those differences. At the outset, therefore, the
two sides agreed on twin goals--of maintaining data flows between the
U.S. and EU while maintaining high standards of privacy protection and
worked to identify common ground on which to build a solution. The
dialogue revealed that there is much common ground between the two
sides on what constitutes effective privacy protection. Both the U.S.
and the European approaches, despite their differences, are based on
the 1981 OECD Privacy Guidelines.
This dialogue led in late 1998 to a proposal of a ``safe harbor''
for U.S. companies that adhere to a certain framework, the so-called
safe harbor framework. The safe harbor framework encompasses the safe
harbor principles and frequently asked questions (FAQs). U.S. companies
adhering to the framework will be judged adequate and data flows to
them from Europe will continue. The safe harbor principles more closely
reflect the U.S. approach to privacy, but at the same time would meet
the European Union Privacy Directive's requirements. The FAQs were
developed to provide further guidance to U.S. companies and to
elaborate on how various issues, such as enforcement, will work. Both
the principles and FAQs were developed in close consultation with the
European Commission and the U.S. public and both are considered
integral to an ``adequacy'' determination. Drafts of documents were
posted for U.S. public comment fours times during the two-year
negotiation, and numerous meetings were held by U.S. negotiators with
consumer advocacy and industry groups to obtain their views on the
draft documents.
Importantly, the dialogue also led to a standstill between the U.S.
and the EU in late 1998. The EU made a political commitment to the U.S.
not to interrupt data flows while the dialogue proceeded in good faith.
On March 14, 2000, the Department of Commerce and the European
Commission announced that they had reached a tentative conclusion to
the safe harbor dialogue. At the same time, the two sides agreed to
continue their discussions with respect to the financial services
sector, given the recent passage of the Financial Modernization Act and
the fact that the regulations had not yet been issued. On May 31, the
EU Member States voted unanimously to approve the safe harbor
arrangement
The safe harbor will provide a number of important benefits to U.S.
firms. Most importantly, it will provide predictability and continuity
for U.S. companies that receive personal information from Europe. All
15 Member States will be bound by the European Commission's finding of
adequacy. The safe harbor also streamlines the bureaucratic burdens
imposed by the Directive, by creating one privacy regime applicable to
U.S. companies, rather than 15. It also eliminates the need for prior
approval to begin data transfers to the U.S. or makes such approval
automatic. The safe harbor offers a simpler and less expensive means of
complying with the adequacy requirements of the Directive, which should
benefit all U.S. companies and particularly small and medium
enterprises.
An organization's decision to enter the safe harbor is entirely
voluntary. An organization that decides to participate in the safe
harbor, however, must publicly declare in its published privacy policy
statement that it adheres to the safe harbor and then it must do so. To
continue to be assured of safe harbor benefits, an organization needs
to self certify annually to the Department of Commerce in writing that
it adheres to the safe harbor's requirements. The Department of
Commerce will maintain a list of all organizations that file self-
certification letters and make both the list and the self-certification
letters publicly available.
Safe Harbor Requirements
Organizations must comply with seven privacy principles and the
FAQs to be compliant with the safe harbor.4 The principles
require the following:
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\4\ The principles, frequently asked questions and answers, as well
as other safe harbor documents can be located at www.export.gov/
safeharbor.
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Notice. Organizations must notify individuals about the purposes
for which they collect and use information about them. They must
provide information about how individuals can contact the organization
with any inquiries or complaints, the types of third parties to which
it discloses the information, and the choices and means the
organization offers for limiting its use and disclosure.
Choice. Organizations must give individuals the opportunity to
choose (opt out) whether their personal information may be disclosed to
a third party or to be used for a purpose incompatible with the purpose
for which it was originally collected or subsequently authorized by the
individual. For sensitive information, affirmative or explicit (opt in)
choice must be given if the information is to be disclosed to a third
party or used for a purpose other than its original purpose or the
purpose authorized subsequently by the individual.
Onward Transfer (Transfers to Third Parties). Where an organization
wishes to transfer information to a third party that is acting as an
agent 5, it may do so if it makes sure that the third party
subscribes to the safe harbor principles or is subject to the Directive
or another adequacy finding. As an alternative, the organization can
enter into a written agreement with such third party requiring that the
third party provide at least the same level of privacy protection as is
required by the relevant principles.
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\5\ It is not necessary to provide notice or choice when disclosure
is made to a third party that is acting as an agent to perform task(s)
on behalf of and under the instructions of the organization. The Onward
Transfer Principle, on the other hand, does apply to such disclosures.
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Access. Generally, individuals must be given access to personal
information about them that an organization holds and be able to
correct, amend, or delete that information where it is inaccurate.
Exceptions to this general rule are permitted where the burden or
expense of providing access would be disproportionate (unreasonable) to
the risks to the individual's privacy in the case in question, or where
the rights of persons other than the individual would be violated.
Security. Organizations must take reasonable precautions to protect
personal information from loss, misuse and unauthorized access,
disclosure, alteration and destruction.
Data Integrity. Personal information must be relevant for the
purposes for which it is to be used. An organization should take
reasonable steps to ensure that data is reliable for its intended use,
accurate, complete, and current.
Enforcement. Organizations must have readily available and
affordable independent recourse mechanisms that allow each individual's
complaints to be investigated and resolved and damages awarded where
the applicable law or private sector initiatives so provide. In
addition, the organization must establish procedures for verifying that
the commitments companies make to adhere to the safe harbor principles
have been implemented. Finally, the organization must remedy problems
arising out of a failure to comply with the principles. Sanctions must
be sufficiently rigorous to ensure compliance by the organization.
The FAQs provide further guidance that clarifies and supplements
the safe harbor principles on issues such as access, publicly available
information, and public record information as well as sector-specific
guidance for information processing by medical, pharmaceutical, travel,
and accounting firms. They also address how human resources information
will be handled under the safe harbor.
Safe Harbor Enforcement
Perhaps the most difficult difference to bridge in the safe harbor
dialogue was the issue of enforcement. While the EU's Working Group had
already determined in the abstract that self regulation was a valid
means to ``adequacy,'' accepting the adequacy of a particular self-
regulatory enforcement regime proved far more difficult. Adding to this
difficulty, was the complexity of the multi-layered approach to privacy
enforcement in the U.S., which relies on self-regulation, backed up by
FTC enforcement, sector specific laws, and recourse to lawsuits.
Ultimately, an understanding was reached on an enforcement
arrangement. In general, enforcement of the safe harbor will take place
in the United States in accordance with U.S. law and will be carried
out primarily by the private sector. The safe harbor provides for at
least three different ways to satisfy the enforcement principle. An
organization can join a self-regulatory privacy program that adheres to
the safe harbor's requirements. It can also develop its own self-
regulatory privacy policy that conforms to the safe harbor. And, an
organization can meet the safe harbor enforcement principle's
requirements if is subject to a statutory, regulatory, administrative
or other body of law (or rules) that effectively protects personal
privacy.
As part of their safe harbor obligations, organizations are
required to make available a dispute resolution system that will
investigate and resolve individual complaints and disputes and
procedures for verifying compliance. They are also required to remedy
problems arising out of a failure to comply with the principles.
Sanctions must be severe enough to ensure compliance by the
organization; they must include publicity for findings of non-
compliance and deletion of data in certain circumstances. They may also
include suspension from membership in a privacy program (and thus
effectively suspension from the safe harbor) and injunctive orders.
As noted above, the dispute resolution, verification, and remedy
requirements can be satisfied in different ways. For example, an
organization could comply with a private sector developed privacy seal
program that incorporates and satisfies the safe harbor principles. If
the seal program, however, only provides for dispute resolution and
remedies but not verification, then the organization would have to
satisfy the verification requirement in an alternative way.
Organization can also satisfy the dispute resolution and remedy
requirements through compliance with government supervisory authorities
or by committing to cooperate with data protection authorities located
in Europe.
Where an organization relies on self-regulation to ensure privacy
protection under the safe harbor, there must be a U.S. agency (state or
federal) with jurisdiction over the organization that will enforce the
safe harbor policies against that organization. The agency must also be
willing to take action under federal or state law prohibiting unfair
and deceptive acts where the company fails to comply with the safe
harbor or the organization is not eligible to join the safe harbor.
Depending on the industry sector, the Federal Trade Commission,
comparable U.S. government agencies, and/or the states will provide
overarching government enforcement of the safe harbor principles. An
annex to the safe harbor principles will contain a list of U.S.
enforcement agencies recognized by the European Commission. Third party
self regulatory programs, (such as BBB On-line, TRUSTe, and WEBTrust)
are also subject to enforcement under these unfair and deceptive
practice statutes in many if not most instances if they claim to be
enforcing the safe harbor framework for their safe harbor members but
do not.
Failure to Comply with Safe Harbor Requirements
If an organization persistently fails to comply with the safe
harbor requirements, it will no longer be entitled to benefit from the
safe harbor. Persistent failure to comply arises where an organization
refuses to comply with a final determination by any self regulatory or
government body or where such a body determines that an organization
frequently fails to comply with the requirements to the point where its
claim to comply is no longer credible. In these cases, the organization
must promptly notify the Department of Commerce of such facts. Failure
to do so may be actionable under the False Statements Act (18 U.S.C.
Sec. 1001). The Department of Commerce will indicate on the public list
it maintains of organizations self certifying adherence to the safe
harbor requirements any notification it receives of persistent failure
to comply and will make clear which organizations are assured and which
organizations are no longer assured of safe harbor benefits. An
organization applying to participate in a self-regulatory body for the
purposes of re-qualifying for the safe harbor must provide that body
with full information about its prior participation in the safe harbor.
CONCLUSION
This safe harbor arrangement has been called a major accomplishment
for both the U.S. and the EU. It comes at a time when trade
disagreements rather than agreements between the U.S. and Europe
dominate the news. The framework has also been labeled a landmark
accord for electronic commerce. It bridges the different approaches of
the US and the EU to privacy protection in a way that protects EU
citizens' privacy when it is transferred the U.S., maintains data
flows, and creates the necessary environment for electronic commerce.
And it will provide predictability for U.S. companies. At the same
time, the arrangement demonstrates EU recognition that a carefully
constructed and well-implemented system of self-regulation, as
advocated by the Clinton Administration, can protect privacy. It is a
creative and innovative vehicle, perhaps the first international
framework to rely on the private sector for its implementation. It thus
can serve as a model in other contexts as we seek to ensure the
development of seamless global environment for electronic transactions
The challenge in providing privacy protection in the Information
Economy is to balance appropriately the free flow of information
against the individual's right to privacy so we do not jeopardize the
benefits these new information technologies promise or trench on the
First Amendment. Whether the safe harbor will provide that balance
remains to be seen. Sufficient numbers of companies will have to join
the safe harbor and consumers will have to feel comfortable with how
their personal information is used and their ability to control its
use, if the safe harbor is ultimately to be judged a success.
______
European Commission's Model Contractual Clauses: Paving The Way For
International Transfers Or A New Hurdle?
by Barbara S. Wellbery and Rosa Barcelo 1
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\1\ Barbara Wellbery is a partner in the Washington, D.C. office of
Morrison & Foerster and may be reached at . Rosa
Barcelo (Ph.D) is an associate in the Brussels office of Morrison &
Foerster and may be reached at .
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INTRODUCTION
The European Union Data Protection Directive (the ``Directive'')
and Member State laws that implement the Directive set out certain
rules for ensuring privacy protection of personal
information.2 Article 25 of the Directive, which deals with
international transfers of private data, specifies that personal
information may be transferred to third countries only if the third
country in question ensures an adequate level of privacy
protection.3 The Directive does not define what is meant by
adequate privacy protection, although there appears to be consensus
that the adequacy standard does not require privacy protection
equivalent to that required by the Directive, but a lesser level of
privacy protection.
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\2\ Directive 95/46/EC on the protection of individuals with regard
to the processing of personal data and on the free movement of such
data, OJ L 281, 23 November 1995, pp. 31-50.
\3\ The Directive provides for several exceptions from this
requirement. See footnote 6.
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The Directive provides for several different ways of satisfying its
adequacy requirement. The European Commission (``Commission'') may find
that a third country or sector ensures an adequate level of protection
under Article 25 of the Directive.4 This was the ground used
by the Commission last July when it issued an adequacy determination
with respect to the safe harbor framework negotiated by the United
States Government and the European Commission.5
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\4\ Articles 25.6 and 31.2 of the Directive.
\5\ Commission Decision of 26 July 2000 pursuant to Directive 95/
46/EC of the European Parliament and the Council on the adequacy of the
protection provided by the safe harbor privacy principles and related
frequently asked questions issued by the US Department of Commerce, OJ
L 215, 25 August 2000, pp. 7-47.
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Companies in the United States that choose not to participate in,
or are not eligible for the safe harbor,6 but wish to
receive personal information from the European Union (``EU'') legally,
must identify an applicable exception in the Directive 7 or
use another means of establishing adequacy. Agreements entered into
between European Union exporters of personal information and importers
established elsewhere in the world are one legal basis contemplated by
the Directive for establishing adequacy.8 For many
companies, they are the preferred alternatives where an adequacy
determination by the European Commission is not available.9
The Directive contemplates two different kinds of agreements--ad hoc or
``one-off'' agreements and standard or model clauses--that may ensure
an adequate level of protection for data transfers.
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\6\ In order to be eligible for the safe harbor, organizations must
be subject to Section 5 of the Federal Trade Commission Act or must be
air carriers subject to 49 U.S.C. 41712. Because telecommunications
commission carriers and many financial services companies are not
subject to the Federal Trade Commission Act, they are not eligible to
join the safe harbor.
\7\ Article 26.1 of the Directive provides several exceptions from
the adequacy requirement. These permit the transfer to take place
without an adequacy determination where the information is necessary to
complete a contract between the company and the individual or the
individual has given his unambiguous consent.
\8\ Article 26.2 of the Directive.
\9\ Relying on the Directive's exceptions can prove cumbersome and/
or severally limit a company's use of personal information. For
example, under German law for the consent to constitute a valid legal
grounds for data transfer, such consent must be digitally signed. See
also footnote 8.
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The Commission has proposed draft model clauses,10 and
the Member States are in the process of considering those clauses and
may approve them in the near future. This article provides a brief
overview of the use of model clauses to satisfy the Directive's
adequacy requirement and analyzes the requirements of the proposed
model clauses. The article then reviews several concerns that industry
groups and the U.S. Government have identified about the model clauses,
as well as the EU procedure and timing for approving those model
clauses.
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\10\ See Draft Commission Decision pursuant to Article 26 (4) of
the Directive 95/46/EC on Standard Contractual Clauses for the Transfer
of Personal Data to Third Countries; .
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ESTABLISHING ADEQUACY THROUGH CONTRACTS
EU exporters of private data and importers located elsewhere in the
world may rely on ad hoc contracts to satisfy the Directive's adequacy
requirement.11 Under this approach, the agreements often
incorporate by reference the data protection law of the Member State in
which the data exporter is established. Because there are differences
among the data protection laws of the 15 EU Member States, companies
importing data from several Member States may find themselves having to
comply with as many different privacy regimes as there are EU countries
in which they do business.
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\11\ Article 26.2 of the Directive.
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In addition, the Member State authority in the country in which the
data exporting company is located ultimately decides whether a
particular agreement provides an adequate level of protection. The
procedure for obtaining Member State approval varies among Member
States, both in terms of the steps to be followed and the time frame.
Generally speaking, however, most Member States require approval of ad
hoc contracts by the data protection authorities in the Member State
from which the data is being transferred.12 Approval
generally takes a minimum of one to two months, if no issues arise
regarding the proper completion of the necessary forms or any aspects
of the proposed data transfer.
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\12\ The UK, Ireland and Sweden do not require approval of these
contracts by the data protection authorities; all other Member States
do.
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The Directive also contemplates model contractual clauses as one
means of providing adequate safeguards for the international transfer
of personal information.13 These clauses were expected to
offer a simpler and more streamlined approach to ensuring adequacy.
Because the same set of clauses could be used for the entire EU and
approval by Member State data protection authorities would not be
required,14 it was hoped that model clauses could facilitate
transfers of personal data to third countries that are not subject to
adequacy determinations. For example, if a multinational company with
offices and employees in each Member State wanted to use model clauses
as the legal ground to transfer personal information to the United
States, it could use the same model clauses for all the data transfers
from the 15 Member States. This would enable such companies to apply
one privacy regime for all the information they receive from the EU.
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\13\ Article 26.4 of the Directive.
\14\ Article 26.4 of the Directive
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review of proposed model contractual clauses
The proposed model contractual clauses (``model clauses'') consist
of ten clauses and several appendices. It is important to note that the
model clauses provide a minimum threshold; the contractual parties may
provide for additional conditions in their contracts if they wish to do
so.
The model clauses include the following requirements:
Obligations of the Data Exporter. The clauses require that the
data exporter comply with the requirements of the relevant data
protection law in the country where it is located up to the
time of the transfer,15 to inform the data subjects
``at least at the moment of the transfer'' that their data
could be transferred to a third country,16 to make
available upon request copies of the clauses to individuals
whose data is transferred, and to respond to inquiries from
such individuals and the data protection
authority.17 Several requirements imposed on the
data exporter appear to go beyond the requirements of the
Directive and/or national legislation, such as the obligation
to provide copies of the clauses to individuals whose data is
transferred.
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\15\ Model Clauses, Clause 4(a).
\16\ Model Clauses, Clause 4(b).
\17\ Model Clauses, Clause 4(c).
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Obligations of the Data Importer. The parties may decide
either that the data importer will comply with the privacy laws
of the country in which the data controller is established or
with the relevant provisions of any Commission adequacy
decision, as long as the data importer is based in the specific
third country to which the decision applies and is not covered
by the adequacy decision.18 The parties may also
elect to comply with the Mandatory Data Protection Principles,
which are annexed to the model clauses as the ``Annex to the
Contract. If the parties choose either the country in which the
data controller is established or the relevant provisions of
any Commission adequacy decision, however, the data importer
also must agree to comply with certain principles embodied in
the Mandatory Data Protection Principles. In particular, the
data importers must comply with the purpose limitation
requirement, restrictions on onward transfers, and rights of
access, rectification, deletion, and objection. These Mandatory
Data Protection Principles require, among other things, that
personal data be processed only for the specific purpose for
which they were transferred and not for any other
purpose,19 that the data be transferred to a third
party (established outside the EU) only where the importer has
either obtained the informed consent (opt in for sensitive
data, opt out for non-sensitive information) of the individual
or the third party becomes a party to the contract between the
data exporter and importer,20 and that the importer
give individuals right of access to their data, rights of
rectification, and deletion and objection.21
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\18\ Clause 5(c) of the Model Clauses.
\19\ Annex to the Contract, par. 1.
\20\ Annex to the Contract, par. 6.
\21\ Annex to the Contract, par. 5.
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These three Mandatory Data Protection Principles, purpose
limitation, access, and onward transfer, appear to require more than
the safe harbor principles require. For example, the safe harbor rules
allow the importer to use the data for different purposes from which
they were initially transferred, unless such purposes are incompatible
with the purpose for which the data were originally transferred. And,
the safe harbor access principle is subject to a proportionality or
reasonableness standard.22 Accordingly, data importers
relying on model clauses would be subject to greater restrictions on
their use and transfer of data than those data importers relying on the
safe harbor adequacy decision. It would appear that the model clauses
also go beyond other laws, which the Commission is about to consider as
affording an adequate level of protection,23 and may even be
more restrictive than the Directive.24
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\22\ See Safe Harbor Privacy Principles (2000), available at
.
\23\ For example, the Commission is expected to find the new
Canadian law adequate, although Canadian law does not incorporate an
explicit provision limiting onward transfers.
\24\ Indeed, according to Article 6 b of the Directive, data
controllers are entitled to use the collected data for purposes other
than those for which the data were initially collected, provided that
such secondary uses are not incompatible with the use for which the
data were initially collected. The Commission has not clarified why the
same principle can not be used in the context of the Model Clauses.
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In addition, data importers must agree to submit to audits of their
data processing facilities at the request of the data exporter and to
cooperate with data protection authorities in inquiries and abide by
their advice. Investigations may be carried out by the exporter itself
or by a body selected by the exporter ``in agreement with the
Supervisory Authority'' and composed of independent members with
required qualifications.25 The data importer also must
warrant that it is not subject to national legislation that restricts
compliance with the data protection principles beyond that which is
contemplated in Article 13 of the Directive.26 It also is
not clear that U.S. companies will be able to provide this warranty.
Article 13 lists several grounds, such as national security, defense,
public security, and protection of rights and freedoms of others, but
does not specifically list free speech rights, which in the U.S. may
limit compliance with data protection principles.27 It is
not clear at this time if the EU will view Article 13 as encompassing
the free speech rights guaranteed by the First Amendment to the U.S.
Constitution.
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\25\ Model Clauses, Clause 5.
\26\ Model Clauses, Clause 5(a).
\27\ U.S. West, Inc. v. FCC, 182 F.3d 1224 (10th Cir. 1999), cert.
denied, 2000 U.S. LEXIS 3811 (2000).
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Liability
Model Clause 6 establishes that importers and exporters will be
jointly and severally liable for breach of the conditions and
obligations imposed by the agreement. The Commission justifies the use
of the joint liability standard in light of the fact that it can be
very difficult for consumers to know who the responsible person is and
how to enforce the clauses against an importer located in another
country. Accordingly, Clause 6 allows importers to be exempt from
liability if they can prove that the data exporter is solely
responsible for any damage. Parties are free to agree on mutual
indemnification.
Applicable Law and Enforceability of the Clauses
Individuals whose data are transferred to a third country under the
model clauses have the rights of third party beneficiaries and may
enforce the privacy provisions of the contract against any of the
parties.28 The applicable law for determining damages will
be the law of the country where the individual resides.
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\28\ Kotschy, W., Model contracts for transborder flows: A way
forward, International Newsletter, Issue no. 56, December 2000, pp. 4-
10. The third party beneficiary clause will put the individual in a
position to enforce all or certain of the contractual obligations,
which to some extent is comparable with the rights that the individual
has according to his/her domestic law.
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Jurisdiction
The parties to the model contract must agree that if a dispute
arises that is not solved amicably, the data importer will accept the
courts of the Member State in which the aggrieved individual resides,
third party mediation, the data protection authorities where the data
exporter is located, and arbitration. The aggrieved individual has the
right to decide which of these to use to pursue his or her claim and
may elect to pursue his or her claim in more than one forum at the same
time.29
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\29\ Model Clauses, Clause 7.
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concerns about the proposed model clauses
Several different entities have expressed concerns with the model
clauses. These fall into two broad categories: substantive concerns and
procedural concerns. Any discussion of concerns about the Commission's
model clauses must begin with two basic points:
First, the Directive by its very terms restricts crossborder data
transfers, although these are essential for international business.
Therefore, it is crucial that the Commission identify mechanisms that
provide adequate privacy protection without imposing unnecessary
significant burdens and costs on data exporters and importers. If it
does not, the Directive ultimately either will damage the ability of EU
companies to engage in trade and realize the potential of electronic
commerce, and/or discourage the very compliance that the EU seeks to
engender.
Second, as noted above, the model contract clauses are intended for
use between data exporters located in the EU transferring data to data
importers that are not covered by a Commission adequacy determination.
Since the Commission has issued only three adequacy determinations thus
far 30 and is unlikely to issue decisions for more than a
limited number of countries in the medium term, model contract clauses
will be the only truly viable option for data transfers from the EU for
most of the world.31 For these reasons, at least, it is
essential that the model clauses provide a reasonable basis for
personal data transfers from the EU to other countries.
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\30\ Only Switzerland, Hungary and the companies that abide by the
safe harbor are considered as providing an adequate level of protection
for personal data transferred from the EU. The Commission has initiated
a procedure to assess whether Canadian law provides an adequate level
of protection, and it appears that it will conclude that it does
provide such protection.
\31\ Model Clauses, recital 5.
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Substantive Concerns
The major substantive concerns that have been raised with the model
clauses turn on their lack of usefulness for international data
transfers. For example, the Confederation of British Industry (``CBI'')
has noted eight general reservations about the standard clauses (in
addition to a long list of specific concerns). These concerns can be
summarized by the conclusion that the clauses cannot be used
commercially since they are unnecessarily burdensome and prescriptive.
CBI also is of the view that the model clauses impose too heavy a
burden on the data importer and, in some cases, impose requirements
that exceed those of the Directive.
The International Chamber of Commerce (``ICC'') also has identified
a long list of concerns about the model clauses. These include the
imposition of joint and several liability and jurisdictional submission
by the data importer. In the ICC's view, joint and several liability is
inappropriate in the data protection situation where responsibility for
a breach can be identified. In addition, joint and several liability
will discourage use of model clauses and/or reduce the certainty such
clauses could otherwise provide, as parties would have to negotiate
indemnification clauses individually. The ICC also takes the view that
jurisdictional submission should be a matter of last resort, to be
required only where absolutely necessary.
The United States Departments of Commerce and Treasury also have
identified several substantive concerns with the model clauses (while
noting that their list is not exhaustive). In a letter to the European
Commission, they indicated that model clauses might create several
adverse consequences for U.S. enterprises. The Commerce and Treasury
Departments stated that the model clauses could undermine last year's
agreement to permit use of the safe harbor principles for the
substantive privacy provisions in model contracts. Their letter also
noted that the model clauses appear to impose burdensome requirements
that exceed what was agreed by the Department of Commerce and the
European Commission.32
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\32\ The Department of Commerce has also sent to the European
Commission far more extensive comments on the model clauses. See DOC
Staff Comments on the Model Contract Provisions, January 16, 2001.
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In addition, and perhaps most basically, a major problem with the
model clauses is that they require more than adequacy. Instead, the
model clauses require privacy protection equivalent to that required by
the Directive. Companies either have to comply with Member State laws
or they have to ``top up'' beyond the adequacy decisions the European
Commission has rendered. Also, the model clauses obviously and
inexplicably disadvantage U.S. financial services companies and
telecommunications companies. These companies are unable to take
advantage of the safe harbor or other adequacy decisions. (See footnote
7.) And, assuming that the European Commission as expected issues an
adequacy determination with respect to the new Canadian privacy law,
the model clauses also would disadvantage those Canadian companies not
covered by the new privacy law. Those companies that do (or will) not
fit within those adequacy determinations either will have to rely on
other limited exceptions to the Directive, ad hoc contracts with their
time-consuming approval requirements, or more restrictive and
burdensome model contracts.
The proposed model clauses also fail to allow for one of the major
anticipated benefits of model clauses: one privacy regime for all
personal information being imported from the EU, regardless of where in
the world a company's offices are located. Instead, companies will have
to adhere to a number of different privacy regimes when they import
personal data from the EU. A U.S. company importing personal data from
EU countries will be faced with a patchwork of privacy requirements.
Personal information imported by a U.S. company from France to the
U.S., for example, may be handled in accordance with the safe harbor.
If that same company imports data from France but to Japan, it will
have to be handled in accordance with French privacy law. And if the
company imports personal information from other EU countries to Japan,
it will have to adhere to the privacy laws of each of those countries
while the personal data is handled in Japan. Yet companies increasingly
are global and information is now routinely shared on firm Intranets
and/or centralized in data bases in one location with access possible
from a company's offices around the world. It is difficult to see how
this patchwork of requirements can be effective, or will be enforced.
And, the EU has provided no indication of why such a cumbersome
approach is necessary or justified to provide the adequate privacy
protection required by the Directive.
Procedural Concerns
Serious concerns also have been raised about the transparency of
the process used by the Commission in adopting these clauses. The
European Commission has been working on draft model clauses for the
transfer of personal data to third countries since mid-2000. The first
version was posted on the Commission's web site for public consultation
in September 2000. From October through mid-January, the Commission
redrafted the draft clauses several times in light of comments and
suggestions made by representatives of Member States, the Working Party
29 on the Protection of Individuals,33 and interested
parties such as business and consumer associations. The latest draft
was completed on January 19, 2001. Although the draft had changed
dramatically in the interim, it was not made available to the public
until February 15, 2001, two working days before the Article 31
Committee's vote on the model clauses was scheduled to take
place.34 Accordingly, the ICC, for example, has taken strong
objection to the lack of transparency in the Commission's process and
has urged the Commission to initiate an open and broad process of
consultation.
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\33\ The Article 29 Committee is a committee composed of
representatives of the European Commission and the Member States and is
responsible, inter alia, for issuing opinions on the meaning of the
Directive. These opinions are designed to lead to a harmonized
application of the Directive throughout the EU. The opinion on the
standard model clauses is: Opinion 1/2001 on the Draft Decision on
Standard Contractual Clauses for the transfer of Personal data to third
countries under Article 26(4) of Directive 95/46, Adopted on 26th
January 2001, .
\34\ The Article 31 Committee is a committee composed of
representatives of Member States, usually officials of the Ministry of
Justice, as well as a representative of the Commission. This Committee
is competent to deliver opinions as to whether the legal regime of a
non-EU country ensures an adequate level of protection.
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NEXT STEPS
On February 19-20, 2001, the draft model clauses were submitted for
approval to the Article 31 Committee, a group of Member States
representatives. To everyone's surprise, the Article 31 Committee did
not approve the draft clauses. Officially, the result has been
attributed to the fact that some Member States felt they needed more
time to give proper consideration to the content of the draft clauses.
Unofficially, however, several Member State officials have acknowledged
concern about the process and its lack of transparency, as well as with
the substance of the clauses. The Article 31 Committee meets again at
the end of March 2001. If the Article 31 Committee approves the draft
clauses, the European Parliament will have one month to assess whether
the European Commission has exceeded its power in approving them. The
Parliament is not competent, however, to give an opinion on whether the
standard contractual clauses ensure an adequate level of protection or
not, although the Parliament may do so in any event as they did with
respect to the safe harbor. Upon completion of this procedure, the
Commission will adopt the decision and publish it in the Official
Journal. If approved at the March meeting of the Article 31 Committee,
the model clauses are expected to be operational by September 2001.
CONCLUSION
The European Commission and Member States have found that the safe
harbor and certain national laws provide adequate privacy protection.
These entities also are expected to issue an adequacy decision on the
new Canadian privacy law shortly. One would expect that those same
self-regulatory and legislative frameworks also would provide adequate
privacy protection when embodied in model clauses. Yet the model
clauses as proposed by the Commission would require a higher level of
privacy protection than is required by those adequacy decisions. Some
have claimed that they require privacy protection equivalent to that
required by the Directive. In some instances, the model clause
requirements seem to require even more than the Directive. Yet the
Commission has not explained why it would impose more restrictive
requirements upon those who use model clauses as legal grounds for data
transfers or why it believes it is permissible to go beyond the
adequacy decisions it has already rendered.
Indeed, during the safe harbor negotiations, many of the Member
State data protection authorities repeatedly indicated a clear
preference for model contracts and tried to turn the discussion from
the self-regulatory model embodied in the safe harbor to model clauses.
These authorities argued that the model clauses would provide greater
privacy protection since they did not rely on self regulation.
Therefore, it is particularly difficult to reconcile the approach on
model clauses being taken by the European Commission. The effect
(whether intentional or not) will be to penalize companies that rely on
them and to dissuade companies from using them.
Mr. Stearns. Ms. Waggoner?
STATEMENT OF DEBRA L. WAGGONER
Ms. Waggoner. Thank you.
Mr. Stearns. Welcome.
Ms. Waggoner. Chairman Stearns, Mr. Towns, thank you very
much for the opportunity to testify this afternoon. I am here
today on behalf of the Information Technology Industry Council,
ITI, and it represents members who are in the information
technology and leading the world in global e-commerce.
Mr. Vradenburg's testimony parallels much of what ITI is
about. They are a member in good standing, so we endorse much
of what his statement is. So I will be brief today, rather than
make you listen to the same key points.
Today there are 300 million people on the Internet, and by
2005, there will be over a billion people on the Internet. With
this global connectivity, digital trade is naturally becoming a
more important part of the global GDP. Chairman Stearns
mentioned that by 2004 b-to-b commerce and b-to-c commerce will
reach $7 trillion.
All of this will be important. It is important in a number
of sectors, both in software, in online music, and we hope
online video. But that assumes that there will be sufficient
broadband deployment to accommodate this growth in e-commerce.
Developed and developing nations are particularly aware
that telecommunications is the foundation of the Internet, and
the Internet is the foundation of e-commerce. As nations take
steps to make their telecom environment hospitable to spur
Internet and e-commerce growth, businesses and policymakers
face a significant challenge. Businesses must navigate myriad
national regulatory, technical, and operational environments,
while policymakers must build global consensus to encourage
digital trade.
Because the communications infrastructure is so important
to the Internet and e-commerce, efforts must be continued
globally to ensure telecommunications regulatory reform that
enhances competition and encourages broadband deployment so
that e-commerce can grow and flourish. Telecommunications
reform is particularly important in developing nations where
many countries are still in the process of privatization global
government monopolies. Further liberalization of trade and
services is particularly important to provide the
infrastructure, to support e-commerce, and to engage electronic
delivery of services. A great deal of potential e-business
activity will be found in the services sector, including
finance, telecommunications, logistics management, and
education, which are creating the reality of a global
infrastructure.
Finally, let me underscore a point raised earlier. We must
establish a strong foundation for digital trade by first
confirming that WTO obligations, rules, and disciplines apply
to e-commerce, especially the General Agreement on Tariff and
Trades, the General Agreement on Trade and Services, and strong
protection of intellectual property for goods and services in
accordance with the WTO TRIPS Agreement.
In closing, ITI applauds you, Mr. Chairman and members of
the committee, the State Department, and the Office of the
United States Trade Representative for recognizing the
importance of digital trade and the necessity of addressing it
in trade negotiations. As the U.S. moves ahead with bilateral,
regional or a new WTO round of trade negotiations, we recommend
the guiding principles outlined by ITI to provide a foundation
for moving forward. Thank you.
[The prepared statement of Debra L. Waggoner follows:]
Prepared Statement of Debra L. Waggoner, Director, Public Policy,
Corning Incorporated on behalf of the Information Technology Industry
Council
Thank you Mr. Chairman for inviting me to testify today on the
issue of Digital Trade. I am here today on behalf of the Information
Technology Industry Council (ITI), which represents the leading
providers of information technology products and services (a membership
list is attached). We advocate expanding economic growth through
innovation and support free-market policies. Our industry is truly
global, with more than 50% of member company revenues derived from
foreign sales. Our members had worldwide revenue of more than $633
billion in 1999 and employ more than 1.3 million people in the United
States. I chair ITI's International Committee, which has been engaged
in global e-commerce issues now for a number of years.
My message to you today is simple: e-commerce and digital trade are
reshaping the global economy; digital trade benefits all countries; and
we need to advance an agenda for Digital Trade Policy that promotes
growth, wealth creation and societal benefit. I want to provide you
with the broader context of the global networked economy and lay out an
agenda for digital trade policy. Owing to the global nature of our
industry, we want to pursue this digital trade agenda through all
available trade agreements ``whether bilateral, regional or
multilateral.
Trade Liberalization in a Networked Global Economy
Three powerful and related trends are fundamentally reshaping the
global economy: 1) the exponential growth in Internet connectivity, 2)
the convergence of content, interactivity, computer applications and
communications networks, and 3) the increasing use of electronic
commerce as a channel for conducting international business. Today,
more than 300 million people around the world are online; by 2005, one
billion people will be connected to the Internet, more than 75 percent
of them outside North America. This technological transformation is
creating a networked global economy that is just beginning to
demonstrate that e-commerce and the Internet can be powerful engines
for economic growth.
Recent economic data bear this out. Digital trade is becoming a
more important part of global GDP. For example, between 1999 and 2003
the market for electronically distributed software is projected to grow
from $500 million to approximately $15 billion. Online music revenues
are expected to grow from $850 million today to $4.3 billion by 2004.
The growth of online videos is expected to grow exponentially as well
if there is sufficient rollout of broadband communications platforms.
And business-to-business e-commerce is expected to grow from $403
billion in 2003 to over $7 trillion in 2004.
Digital trade presents a new opportunity to advance the goal of
expanded international trade in a converging, networked environment.
The Internet and electronic commerce can greatly facilitate trade,
providing a new means for conducting global commerce and delivering
digital goods and services to all parts of the world. Trade negotiators
must now ensure that new technologies, new business models, and new
products are available to consumers, businesses, and governments around
the world so these users can benefit from increased productivity,
competition, and choice. Existing trade agreements provide a good
foundation for this work but need to be expanded to address these new
realities. Trade negotiators must also protect against the creation of
new trade barriers in a sector that has flourished with little or no
regulation.
Digital Trade
Digital trade encompasses cross-border e-commerce transactions,
global e-business relationships, and the specific goods, services, and
intellectual property protections that act as enablers for these
transactions and relationships. A successful digital trade policy must
address all of these areas. Digital trade includes:
E-Commerce Transactions
Goods and services that can be ordered and delivered
electronically.
Goods and services that can be ordered electronically but are
delivered physically.
E-Business Relationships
Integrated international supply chains facilitated by global
networks.
Outsourcing arrangements that utilize global networks.
Business partnerships, joint ventures, and ``virtual
corporations'' enabled by these networks.
E-Commerce Enablers
Goods--Information technology (including computer hardware,
software, and communications equipment) is critical to building
and expanding the networks over which all digital trade is
conducted, so free trade in IT products is essential to
promoting digital trade.
Services--Many services are needed to enable an e-commerce
transaction, including telecommunication services, computer and
related services, financial services, advertising services,
distribution services, and express delivery services.
Collectively, these services are often referred to as the ``e-
commerce value chain.'' Liberalization across this value chain
is essential for ensuring seamless, cost effective and timely
business-to-business and business-to-consumer transactions.
Intellectual Property--If individuals and companies are to
provide their digital goods and services over the Internet,
then they must be assured that their intellectual property will
be protected in this new online environment.
Digital Trade Benefits All Countries
In the United States, the new economy has had a significant impact
on overall U.S. GDP and the U.S. balance of trade. Nearly two-thirds of
productivity gains can be traced to high-tech investments made over the
past five years. Specifically, information technology contributed over
one-third of economic growth since 1995, and IT exports amounted to
more than one-quarter of total U.S. exports in 1999.
Already there is evidence that the development of emerging
economies is being reshaped and energized by online trade. The
traditional model of infrastructure investment and international trade
is being complemented by electronic commerce. This is leading to a
dramatic expansion of opportunities for economic development, driven by
businesses creating new markets for innovative products and services
being made available electronically throughout the world. In
particular, evidence shows that businesses in every region of the world
can, by means of electronic commerce, dramatically reduce costs of
entry, maximize efficiency, and vastly expand distribution to
previously inaccessible markets.
An Agenda for Digital Trade Policy
To promote the growth of digital trade and to ensure that
electronic commerce benefits from trade liberalization, ITI proposes
the following digital trade agenda. This agenda should be pursued
through all available trade agreements, whether bilateral, regional, or
multilateral.
Guiding Principles for Digital Trade
Current WTO obligations, rules, disciplines and commitments,
namely the GATT, GATS and TRIPS agreements, should apply to e-
commerce.
Electronically delivered goods and services should receive no
less favorable treatment under trade rules and commitments than
like products delivered in physical form, and their
classification should ensure the most liberal treatment
possible.
Governments should refrain from enacting trade-related
measures that impede e-commerce.
When legitimate policy objectives require domestic regulations
that affect e-commerce, ensure that such regulations are
transparent, nondiscriminatory, and employ the least-trade-
restrictive means available.
Information Technology Tariffs and Non-Tariff Measures
Tariffs and non-tariff measures applied to information technology
products should be eliminated or phased out. Tariff and non-tariff
measures act as a counterproductive tax or burden that raises the cost
of the very technology needed to be competitive in the digital economy.
Countries that have not done so should sign and immediately
implement the Information Technology Agreement (ITA). In the context of
the ITA, governments and business must continually update the
definition of what constitutes an ``IT product'' to keep pace with
technological developments. Non-tariff measures, in particular
redundant testing and certification procedures, should be eliminated
where they exist.
Services Commitments
Trade in services negotiations, whether in the WTO or other venues,
offer an excellent opportunity to promote digital trade. Increased
liberalization of trade in services will play an important role in the
promotion of digital trade in several ways:
E-Commerce Value Chain: Improved market access and national
treatment commitments in the group of services sectors that are
necessary to initiate and complete an e-commerce transaction will
expand digital trade opportunities. Two particular elements of the
value chain deserve special mention:
Telecommunication Services: Telecommunication services provide
the network infrastructure that is a fundamental prerequisite
for digital trade. Competition in the provision of these
services is critical to the growth of digital trade. Full basic
telecommunications commitments, including implementation of the
pro-competitive Reference Paper principles, as well as full
value-added services commitments and protections against anti-
competitive behavior by incumbent telecommunications companies
in the value added services market are important objectives. On
the other hand, competitive value-added services, including
Internet services, should not be subjected to regulation
created for monopoly basic telecommunications markets.
Evolving IT Services: The Internet provides a new means for
delivering information technology services; and technologies
and business models are evolving much too rapidly for trade
classification discussions to keep pace. Trade negotiators
should seek ways to ensure that broadly defined or interpreted
market access commitments will enable cross-border trade in
evolving IT services. It is also important that unregulated IT
services not be viewed as a subset of regulated
telecommunication services.
Electronically Delivered Services: In addition to liberalizing
services that enable e-commerce transactions, trade negotiators should
seek improved market access and national treatment commitments for a
broad range of services that can be delivered electronically.
Intellectual Property Protection and Market Access
Intellectual property rights in goods and services traded on the
Internet should be afforded strong protection in accordance with the
WTO TRIPS Agreement and the WIPO Treaties. Without such protection,
content creators, service providers and users will be less likely to
realize the tremendous benefits of digital trade.
Greater market access for digitized software, music and videos will
go a long way toward helping to reduce piracy rates. Without market
access for legitimate products, our companies face difficult hurdles in
protecting their intellectual property. Market access for digitized
products will also be an important first step in promoting trade and
cultural diversity, since today's successful business models have been
ones that tailor the global reach of the Internet to local interests
and tastes.
Allowing U.S. Companies, Workers and Consumers to Continue to Lead &
Prosper
In closing, ITI is pleased that Members of Congress and the Office
of the U.S. Trade Representative recognize that digital trade is an
increasingly important component of international trade and are
actively addressing these issues in trade negotiations. We believe that
trade rules designed to ensure access to e-commerce markets will allow
American companies, workers and consumers to continue to lead and
prosper in the networked global economy. As our own market matures, the
U.S. IT industry is looking toward new markets, particularly those in
Latin America and developing countries in Africa and Southeast Asia.
While many of these countries realize the benefits that can accrue from
investment in IT infrastructure, they are hampered by domestic policies
that maintain high tariffs on IT products or by regulatory policies. As
the U.S. moves ahead with bilateral, multilateral or a new Round of WTO
trade negotiations, we would urge that the guiding principles outlined
above be a foundation for going forward.
Thank you, Mr. Chairman, and I would be happy to answer any
questions you might have.
Mr. Stearns. Let me open with the questions here. Ms.
Wellbery, you are probably, from the private sector, the expert
here on the Hague Convention, and we had, I think his name is
Dr. Rodata--Stefeno Rodata, who was the Chair that developed
the Internet privacy standards for the European community. And
he came here and testified, and then when I asked him, I said,
``Well how many people in America--what major large
corporations have signed up under the Safe Harbors that the
Clinton Administration had negotiated,'' he said 30. Well,
obviously, that is not a lot. And so my question to you, you
seem to indicate it is working, but we found only 30 large
corporations have signed up for the Safe Harbors. What is the
problem? Why haven't more signed up? Because then the Doctor
went on to say he is developing model contracts now to try and
bridge this gap and get individual companies to sign up.
Ms. Wellbery. I think since the hearing that you are
referring to, the number has gone up to somewhere over 40
companies that have signed up. But I agree that that is not a
lot of companies, and I think there is a number of reasons that
explains why that is the case.
First, I think it takes a long time to get companies'
privacy policies and practices in line with the requirements of
any privacy regime. We certainly know from our own domestic
experience with Gramm-Leach-Bliley that it has taken companies
a long time to come into compliance with that act. And a
similar kind of analysis of companies' practices and policies
needs to be done to come into compliance with the Safe Harbor
requirements.
I think a number of companies were also waiting to see what
the European Union was going to do about model contracts and
whether those would be a more appealing or attractive
alternative. I think the decision that was issued by the
commission makes clear that they are far more onerous than the
Safe Harbor, and so they are likely to be a far less attractive
option for U.S. companies.
In addition, I think that there are some companies that are
just doing the analysis wrong. They wonder why they would
subject themselves to liability before the FTC, but they ignore
the fact that by transferring information from Europe without a
legal basis, they are exposed to liability or at least their
European affiliated companies are exposed to liability in
Europe.
And then, finally, I think we have a little bit of
``Alphonse and Gaston'' here. Everybody is waiting for the
other company to go first, and I wonder if the fact that
Microsoft has now announced that it will be joining the Safe
Harbor will lead to a larger number of companies joining the
Safe Harbor. Thank you.
Mr. Stearns. Well, it is nice to have you here, because you
were chief negotiator. I mean you have been involved with it.
You know it more intimately than anybody, so we are always
puzzled why this thing hasn't take off. And the European Union
does not intend to enforce their policy for a while. Did they
ever tell you--do you have any indication when they are going
to start enforcing their policy?
Ms. Wellbery. Well, I think they are enforcing their laws
now. My law firm actually does monitor enforcement actions in
Europe.
Mr. Stearns. Okay.
Ms. Wellbery. Most of them have been against--in fact,
almost all but one have been against European companies. I am
only aware of one enforcement action that has been brought
against a U.S. company.
Mr. Stearns. Okay. Mr. Kovar, you have heard some of the,
not necessarily criticisms, but her comments in her opening
statement during this process. You might want to reply to any
portions that she had said about the Hague Convention.
Mr. Kovar. Thank you, Mr. Chairman. I think, as I indicated
in my statement, it is an extremely complex convention, and it
is made even more difficult by the need to fit the relatively
unknown quantity of Internet transactions into the
jurisdictional framework. And I don't have any answers on the
best way to do that. We are still listening.
I think, to respond to one point that I think was one of
the principal thrusts of Ms. Wellbery's statement, which is the
notion that perhaps somehow this convention would open up U.S.
courts in a new way to enforce judgments coming from abroad,
that is one area where we are not quite sure that that would be
the case. Right now, U.S. courts are basically wide open to
enforcing foreign judgments. And the enforcement section of
this treaty mirrors in many ways current U.S. law in all the
States. And for that reason, that is one concern that to us
doesn't seem to have as much weight behind it as some of the
other questions about what the jurisdictional rules should be.
Mr. Stearns. This is still a question that puzzled me in
the hearing we had with the European Union. So a company like
Microsoft signs up for the Safe Harbor. Does that mean that
when you develop model contracts, they will retroactively be
applied to or how do the model contracts in the Safe Harbor--
how does that work for companies?
Ms. Wellbery. There are a number of different options that
companies can use for exporting or, I guess a better to say it
is, for importing data from the EU to the U.S. There are
exceptions that are created in the EU directive. You can use
individual or one-off contracts, you can use model contracts,
you can use consent of the consumer, and you can use the Safe
Harbor. These are all alternatives.
And in negotiating the Safe Harbor, what we were trying to
do was to provide another alternative for U.S. companies that
hopefully would be a more streamlined, more efficient, and more
effective way of transferring data out of Europe to the U.S.
For example, when you use contracts--when you use one-off
contracts in Europe, I think it is 13 of the members--15 member
states require prior approval of those contracts. And these
prior approvals can take 1 to 2 months to obtain assuming that
you have all the information in the right places in the first
instance. If you don't have all that information correctly
there, it can take much longer. And the Safe Harbor does away
with those bureaucratic requirements.
Mr. Stearns. Ms. Waggoner, just briefly, just give us the
most significant trade barriers to digital delivery of goods,
in your opinion.
Ms. Waggoner. I think that for the IT industry, the most
difficult barrier is that of wrong action. Forbearance is
probably more important in this area. Right now we face few
barriers. I think intellectual property protection, making sure
that we have strong IP is probably a very important one.
Expanding coverage of the services agreements would be another.
But, again, I think we would urge forbearance, because it is
the danger of action in the wrong direction in this burgeoning
field that probably stands to harm us more than current action.
Mr. Stearns. Do no harm. My time is expired. Mr. Towns?
Mr. Towns. Thank you very much, Mr. Chairman. Let me just
start out by--Mr. Vradenburg, will AOL and Time Warner be
signing onto the Safe Harbor Agreement?
Mr. Vradenburg. We are looking at that----
Mr. Towns. Microsoft is on board.
Mr. Vradenburg. Excuse me.
Mr. Towns. Microsoft is on board.
Mr. Vradenburg. Well, we don't follow Microsoft in
everything, Mr. Towns.
We are looking at that issue right now. In fact, we believe
that we are substantially, if not totally, in compliance with
existing EU Data Protection Directive provisions in Europe
already. But there still are some useful things in taking
advantage of the Safe Harbor rules, and so we are looking at
that question right now. So I would suggest that some of this
is a matter of time. I think that there is an indication that
perhaps by July 1 a number of companies may well make a
decision on whether or not to take advantage of the Safe Harbor
guidelines or not.
Mr. Towns. Right. Thank you very much. Ms. Wellbery, sort
of following up, I guess, on the Chairman's question, the fact
that only 30 corporations have signed up, and you say, ``Well,
it takes a while.'' Why does it take so long?
Ms. Wellbery. Because I think when you work with companies,
they have been collecting information in many disparate ways,
and it is being stored in many disparate locations, and one of
the things you have to do when you start to develop a privacy
policy is to figure out all the ways in which you are
collecting information, where you are storing it, how you are
using it, and whether you are providing the required
opportunities for customers to opt out before you can put a
policy in place. And that can be, for a large organization,
extremely time-consuming. And then you also have to train your
employees so that they, in fact, are implementing the policy
that you say you have adopted. Once you say you have adopted
the policy, if you don't, then you are subject to liability. So
all of those things together can take quite a long time.
Mr. Towns. Thank you. Mr. Vradenburg, again, if common
sense says that unmetered pricing for Internet access promotes
greater Internet adoption and use, what is the problem
internationally?
Mr. Vradenburg. The problem here, Mr. Towns, is that in
many countries of the world, the national, usually government-
owned, telecommunications carrier charges by the minute for
local telephone calls. That is a system that they have built
over time that favors the national telecommunications carrier.
When the Internet has come along and now independent Internet
services are carried over the local phone company, say, for
example, in Germany, the local phone company makes some amount
of money for every minute that someone's online on AOL. So if
favors the national telephone carrier to be able to continue
metered pricing even though it may not be in the interest of
the adoption and the use of the Internet overall.
In Europe, the UK has a longstanding, independent
regulatory authority OFTEL, which is now moved to require
British Telecom to move toward flat-rate pricing. And as a
consequence, Internet adoption has quickly kicked up in the UK.
On the other hand, Germany has not adopted that policy.
Deutsche Telecom has refused to proceed with it. And as a
consequence, Internet adoption and use has slowed in Germany as
compared to other countries. That is a policy that favors
Deutsche Telecom, and the German government, of course, owns a
major stake in German telephone system, so that you are not
seeing an independent regulatory authority emerge in Germany to
require flat-rate pricing, as you have seen in the UK.
Now, in the United States we have made a decision sometime
ago, almost by accident at the FCC, that there would be no long
distance charges for enhanced services. So the reason that you
see flat-rate pricing in this country is that Internet calls
have been treated essentially as local calls and not Internet
calls. But every year you will see the phone companies coming
back to that issue with the FCC in this country seeking to
reclassify Internet calls into interstate calls and long
distance calls so that they can meter the cost of Internet
service in this country. But so far the FCC, in looking at this
issue periodically, over a number of years, has stuck to its
policy of assuring that Internet prices in the United States
are on a flat-rate basis.
Mr. Towns. All right. Thank you. Thank you very much. Mr.
Kovar, Ms. Richardson stated that the draft convention appears
to do more harm than good with respect to protecting
intellectual property, because it reflects that the discussion
pre-dates e-commerce. What is or what will the State Department
do to correct this and protect America's intellectual property,
which is over 4.9 percent of the gross national product?
Mr. Kovar. Thank you, Mr. Towns.
Mr. Towns. And I am going to ask Ms. Richardson to respond
when you are finished here.
Mr. Kovar. Oh, okay. Sure.
Mr. Towns. Go ahead.
Mr. Kovar. Sure. The current draft of the convention, which
dates back to 1999, has in it a provision that deals with
patents and trademarks that is pulled right out of the European
Convention of Enforcement of Judgments, called the Brussels
Convention. No one likes it in this country. It wouldn't work
well. And we have said that it is one of the major problems
with that text.
We don't know exactly yet what the right formulation is to
provide full protection for patented trademark interests. So
what we have been trying to do is to get patent and trademark
experts from all sides to help us understand what makes the
most sense. And in the same way in copyrights, which are
actually treated in a different section of the convention, in a
tort section. We have been grappling with exactly what is the
best legal system of jurisdiction to deal at the international
level with copyright protection. We don't have an answer to
that yet, but we are trying to pull in as many of the interest
groups as we can to help us find the right answers. Thank you.
Mr. Towns. Mr. Chairman, I know my time has expired, but I
called Ms. Richardson's name.
Mr. Stearns. We are going to have a second round here.
Mr. Towns. Okay. All right. Well, I am going to let her
respond to it.
Mr. Stearns. Yes, sure.
Ms. Richardson. I just wanted to briefly make clear that we
don't believe that the State Department is the enemy here. We
very much appreciated his remarks today where he said this
deserves careful consideration. If there is an enemy, it is
just momentum. This negotiation has been going on a long time.
A lot of the other countries out there think it is time to
conclude it, and the e-commerce issues and new issues, they do
deserve a lot of time and attention to sort them out. So as
long as we get that, we will be, I think, happy.
Mr. Towns. I thought I was going to start a fight.
Mr. Stearns. Thank you. The gentleman from Illinois.
Mr. Shimkus. Thank you, Mr. Chairman. And I was really
focused--I was going to focus on the net metering too. We had a
similar issue a couple years ago when the whole Internet
service began, and it was the local call versus, in rural
areas, the long distance call. The long distance calls were
metered out where the local calls were not. And for those who
tried to run businesses, when we talked about the ability to
stay at home and work, we couldn't do that at the time, because
we hadn't evolved to the issue of--we hadn't moved away from
the net metering and local call issue. Now I think we have done
that in this country, so I can understand that it is an issue
and that it will be an issue I will take up with my colleagues
when I go over there next week.
I want to briefly ask a response on the cultural content
restrictions. And really, in my notes, I would like, of course,
Ms. Richardson to respond to that. But also Mr. Vradenburg, Mr.
Kovar, if you can address, and then anybody else who wants to
throw in, and I think that will probably be enough of my time.
Talk to me about the cultural content restrictions.
Ms. Richardson. I am happy to kick that one off.
Historically----
Mr. Shimkus. Pull that mike close to your mouth. There you
go.
Ms. Richardson. Really since the trade system began in the
last forties, countries have been concerned about promoting
their culture, and there is nothing wrong with that. We are as
culturally diverse country as any on Earth, and we are proud of
cultural diversity. One of the things about e-commerce is that
it enhances cultural diversity. It solves the shelf space
problem and allows producers and creators to reach out to wide
audiences in a way that was never possible before.
Given that set of opportunities, it would be particularly a
shame, troublesome, a crime if countries were to impose the
kinds of cultural protectionism that they imposed in the Old
World on top of the e-commerce world. We haven't seen it yet,
and the best to get trade commitments to keep open markets open
is before cultural protectionism has set in. So that is our
goal.
Mr. Vradenburg. Mr. Shimkus, this may be another agenda
item when you visit Europe, because they are now embarking upon
a 1-year effort to review their Television without Frontiers
Directive.
Mr. Shimkus. And the French are really leading this
crusade, are they not?
Mr. Vradenburg. Historically, they have led the crusade,
and of course the existing restrictions in Europe are that 50
percent, if practicable, of material over their broadcasting
systems should be of European origin or at least not out-of-
Europe origin. They are now discussing two additional potential
restrictions. One is an investment quota, which basically would
require their outlets inside of Europe to invest a certain
percentage either of their revenues or of their programming
expenditures on European productions. That would be a step
beyond where they are today.
And the other restriction they are discussing is whether to
try to extend, if they can find a way to do so, these quota
restrictions onto the new media so that in fact video-on-demand
systems or rather new media delivered systems might have a
content restriction inside them. Both of those would clearly be
steps, in our view, in the wrong direction. And as Ms.
Richardson's pointed out, the irony here is that the Internet
now gives the opportunity to European nations and cultures to
distribute French products, Germany products, English products,
Swedish products without any constraint on the means of
distribution to American electronic consumers. So that in fact
they have more opportunities to distribute their products in
this country.
Going that direction of positively encouraging the adoption
of their cultural products worldwide clearly is a much more
productive way for the, we think, to develop not only their own
economy but also to enrich the cultural experiences of American
consumers, who now might have the opportunity to obtain access
to very narrowly culturally tailored products that otherwise
couldn't be managed on our American broadcast system or through
our theatrical distribution system, but which may now be
available through online distribution systems. So it seems to
us that a more positive approach to promoting cultures, as
opposed to trying to restrict other people's cultures, is now
in order.
Mr. Kovar. Cultural content restrictions by foreign
governments would not be enforceable under the Hague
Convention. The Hague Convention is intended to apply to
private types of lawsuits. To the extent that private
individuals seek to use private lawsuits to go after cultural
content that they don't like and that may be somehow prohibited
under local law, the convention would allow and would expect,
frankly, our courts not to enforce that based on our
traditional strong public policy in favor of First Amendment
rights.
Mr. Shimkus. Thank you very much. And, Mr. Chairman, I will
yield back my time.
Mr. Stearns. The gentlelady from California, Ms. Harman?
Ms. Harman. Thank you, Mr.----
Mr. Stearns. I am sorry, I beg your pardon, Mr. Gordon?
Sorry. The gentleman from Tennessee is first.
Ms. Harman. If he is first, he should be first.
Mr. Stearns. Yes.
Mr. Gordon. One quick question. I would like to learn more
about the service versus goods argument, Ms. Richardson. I
understand that within the content community that there is a
debate now or at least a division. Could you tell me what is
that division, and who is on first and second here?
Ms. Richardson. Well, sorting out where people are at any
given time is always a challenge, but I will certainly take a
stab at it. The debate is whether a digitally delivered good or
service should be benefiting from the rules of the GATT, which
governs straight----
Mr. Gordon. Yes, I understand that.
Ms. Richardson. Okay.
Mr. Gordon. What I am interested in is if there is a--I
understand there is a division within the content industry for
that reason that you are--that is basically telling our
negotiators not to move forward. So who is on first and second
here?
Ms. Richardson. All right. The EU is clearly on one extreme
end of this debate. They believe that all digital delivery of
content should be classified as a service.
Mr. Gordon. Right. Are our domestic content providers all
have the same position?
Ms. Richardson. I think they are all on the same general
page. We have----
Mr. Gordon. So what is the problem with--or do I
misunderstand that you collectively have asked our negotiators
not to move forward until there is a consensus opinion?
Ms. Richardson. The EU has said they will not move forward
until they get their way.
Mr. Gordon. Right, but----
Ms. Richardson. We have said----
Mr. Gordon. [continuing] my question, though, and maybe I
am--I am not trying to be tricky or anything----
Mr. Vradenburg. No. Mr. Gordon, I think you are going to
find most of the music and entertainment businesses in this
country on exactly the same page, that the classification ought
to be that of goods. The concern is moving forward and pressing
our U.S. Government to move forward when they might lose that
negotiating point with the European Union. This is more a
United States versus EU issue than it is any significant
division within our industries.
Mr. Gordon. Well, if the EU is basically winning by our
non-action, what do we have to lose by going forward?
Mr. Vradenburg. Well, I would take the view that in fact
the EU is pressing and insisting that the classification of
digitally delivered content be that of services and just taking
that view. So if we were to move forward and close the issue
now between the USG and the EU, it would be closed in the wrong
direction. So we are hopeful that if we move forward with the
marketplace, that we will find out that in fact most of the
products that are being delivered digitally in fact correspond
to and replace hard goods products, and thus the case for the
United States position will be stronger through time.
Mr. Gordon. So there is not a division then within our
content industry here in this country.
Ms. Richardson. I don't think there is a deep division.
There are people that understand their business models better
or less good who are more confident in drawing the line today.
But I think all of us believe that there are many goods
transactions, and there may be some services transactions.
Exactly where that line should be drawn is hard to say, because
the business models, at least in the film industry, are still
developing.
Mr. Gordon. Thank you. I would like to yield the rest of my
time.
Mr. Stearns. Well, we are going to break and come back for
more questions. Just, Mr. Gordon, I might also follow up on
what you just said. What about software? How is software
handled in terms of services or goods?
Ms. Richardson. I believe that they believe that they have
a foot in both camps, that the analog of a digitally delivered
product is a product. There may be some new kinds of software
services, but I am sorry, you should have spoken.
Ms. Waggoner. No, that is okay. I think that we would say
that there may be--they can be classified as both, and it
really depends on the business model and the circumstances. And
one way to begin to look at it, because this is still being
debated within the industry, is the difference between
purchasing something on a recurring cost basis or a non-
recurring cost basis. So I think that there are products that
are a good, and there are products that are service, and it is
very complex. And the industry, as it moves forward with new
business models, is going to have to sort this out.
Mr. Vradenburg. I think we can't lose sight of the fact
that this is not just a technical sort of debate here. There
are major potential trade consequences to the classification
issue, and clearly United States industries will be better off
with the greater of the classification of these digitally
delivered products as products, because there will be more
protection under existing trade rules.
Mr. Stearns. Okay. Well, the committee is going to come
back and reconvene. And we will take a break now. Just we have
two votes, so we have this vote, which is about 5 minutes left,
and then we have another 5 minutes, so we should be back in
about 12 minutes or so.
[Brief recess.]
Mr. Stearns. The subcommittee will come to order. We have
got a little time before the next vote, so I think we will
start here. And I think the next member in line is the
gentleman from New Hampshire. Mr. Bass is recognized.
Mr. Bass. Thank you very much, Mr. Chairman. Mr.
Vradenburg, during my opening statement, I outlined my interest
in being sure that we have considered these issues in the
whole, the whole issue--how they are related to our domestic
interstate trade policy and so forth. You seem to agree, at
least I caught a little nod. With respect to sales and use
taxes and products classifications, can you explain how you
think these matters are related?
Mr. Vradenburg. Yes. We had the opportunity to serve on the
Tax Commission that was formed by Congress a couple of years
ago. And during the course of the debates of that Commission,
it became clear that one of the critical elements in this
debate was whether or not States and localities--State and
locality taxing jurisdiction, from there are about 7,000 in
this country, could tax out of jurisdiction sellers. Sellers
that had no physical nexus to their jurisdiction and otherwise
weren't doing business in their jurisdiction, could they impose
a State or local sales or use tax obligation--collection
obligation on those companies? And that is, of course, to some
extent, the same debate that is going on with respect to Europe
now and out-of-European sellers.
We urged, in the context of the State and local sales tax
debate in this country, that there be a radical simplification
of the tax collection obligations associated with collecting
out-of-State seller transactions so that the costs of
collections on that of State businesses would be significantly
reduced. And then if that were the case, then in fact we could
contemplate a system where in-State sellers and out-of-State
sellers could pay equal State sales or use taxes, and there
wouldn't be any differential treatment of different modes of
distribution.
That same debate is now going on in Europe, where Europe at
least only has 15 taxing jurisdictions at the moment, is trying
to simplify their systems of taxation so that they can impose
on out-of-European sellers some tax collection obligation, even
though the seller is not within the boundaries of Europe.
Mr. Bass. Are you advocating--I just want to make clear
your first point--that we have some sort of a national sales
tax on Internet transactions?
Mr. Vradenburg. No, not at all. We urge the States to go
through a process of simplifying their State and local sales
tax system, because you will upon examination that inside a
State you may have 3 or 4 different rates, you may have 3 or 4
different classifications of the same product or service within
a State, and certainly between States, and you had a variety of
exemptions and administrative requirements. And so that most
big corporations in this country doing business in many States
will file over 100,000 State or local sales tax reports every
year.
So what we were urging to the States is that they radically
simplify their systems, that in fact the States adopt one rate
per State, that they have one audit per State, that they have a
single means by which they would classify goods or services
sold within their State, and that we have an acceptable default
rule on how to determine the residence of an Internet buyer so
that we would not be subjected to the possibility of paying
taxes in multiple States.
Mr. Bass. Is there any extension of that concept
internationally?
Mr. Vradenburg. Well, yes. The European Union is now
considering a single point of registration with respect to out-
of-European sellers. They have not yet settled on whether they
are going to agree to that and, if so, whether they are going
to have one or 15 different VAT tax rates depending upon the
jurisdiction of the buyer. And if they have 15, how in the heck
an Internet seller who may simply be selling to a credit card,
knowing he is selling somewhere in Europe, may not be able to
determine which jurisdiction they are selling in.
So Europe is at least beginning to think through how to
simplify their VAT collection tax systems. They are not there
yet. We still have issues with Europe. We are still discussing
the issue with Europe. But it is a species of the same issue as
we are confronting here in the United States.
Mr. Bass. I bought something in Europe last fall, but I
never knew, I never knew. I thought I was buying something in
America, and I didn't know that it came from Europe until I got
a--it arrived, and there was a--it was called the Stanley
Company--sounds American to me. Did I pay any taxes on that?
Mr. Vradenburg. You were probably obligated to pay a use
tax in the jurisdiction in which you reside.
Mr. Bass. I couldn't even read it. I didn't know what
jurisdiction it was.
One last question, because I am running out of time here.
If this committee were to--subcommittee, rather, were to make
some recommendations, either legislative or any other fashion,
concerning this issue--this is for any of you who wish to
comment on this--what should we do? I am sorry to be so vague,
but I am just curious to know, as we try to understand what is
a very complex issue, what role does this subcommittee have to
play?
Mr. Vradenburg. Well, I think the policy approach, how it
gets translated into a statute-governed, domestic transactions
or some position for the U.S. Government in international
negotiations for Europe, I don't comment on. But the challenge
here is to simplify the global system of tax collection. We
cannot, over a long period of time, treat sales over the
Internet differently than we treat physical sales within
jurisdictions. It is neither fair and equitable nor
appropriate. So at some point, we have to get to a system that
does not discriminate based upon the form of distribution what
the tax rate is.
But having said that, the costs of compliance to a company
that is located in Canada to comply with 7,000 different State
and local taxing jurisdictions in this country is overwhelming.
And as a consequence, as a practical matter, you are never
going to get tax compliance. So you need to simplify our
domestic system, the State and local sales taxes without
adopting a national sales tax but simplify it. And Europe has
to simplify the VAT tax collection system so that in fact an
Internet seller can register in one or a few places in the
world and pay a tax rate based upon the jurisdiction into which
his or her goods or services are sold.
Mr. Bass. Thank you, Mr. Chairman.
Mr. Stearns. Yes. The gentlelady from California, Ms.
Harman?
Ms. Harman. Thank you, Mr. Chairman. I would like to ask
unanimous consent to put my opening remarks, which I was unable
to deliver then, in the record.
Mr. Stearns. By unanimous consent, agreed upon.
Ms. Harman. And I apologize to the witnesses for missing
your testimony. As everyone knows, the scheduling around here
is very difficult. I also have been trying to figure out what
questions have been asked so that I don't repeat, but I have a
few that I think have not been asked yet.
Starting with Mr. Kovar, I would be interested if you could
just highlight for us any differences of approach to these
issues that this administration is taking over the
administration of your predecessors. I don't think you address
this in your testimony, and I don't think anyone has asked
about it. I just would offer a comment, which I make all the
time, which is that there are digital Members of Congress and
analog Members of Congress, and we are not divided by party; we
are divided by perspective. And I would like to hope that there
are lots of digital members in this administration who think
about these issues the way many of us do.
Mr. Kovar. The simple answer, Ms. Harman, is that I haven't
seen a real change at this point.
Ms. Harman. Does that mean you haven't seen any evidence of
a change yet or you predict the same focus will be kept?
Mr. Kovar. Well, I think I would be out of line if I tried
to predict. But so far the approach to these negotiations
hasn't changed since the new administration came in.
Ms. Harman. Okay. Well, let me say that I hope--I can't
recall every single thing the last administration did, but I
certainly saw some wrestling there with tough issues. Would
anyone on the panel like to comment? Have any of you noticed
something different that is either good or bad in terms of a
focus on some of these issues? No. Okay.
Moving along, I think a gut issue here, and it related to
the digital divide and to a lot of things we all worry about,
is how do we get more people around the world online? And I
think that is a goal everybody shares. What thoughts do you
have? It relates to cost of getting online. It relates to
access to equipment. I would love to hear an answer from my
good friend, Mr. Vradenburg.
Mr. Vradenburg. Thank you, Ms. Harman. The main issue is
cost for the sake of simplicity. Just as an American consumer
who may be analog but thinking about going digital, one of the
first questions asked is how much does it cost, and what is the
value of moving from analog to digital? I think the challenge
around the world is to extend information and communications
technology systems to make them more affordable and to sort of
blow them out, so to speak.
And that means getting privatization of national telephone
companies, getting increased competition to those phone
companies, intelligent, wireless spectrum policies on the part
of lesser developed countries on the view that, in fact,
electronic access to developed markets is going to be a lot
cheaper than is physical access to developed markets, and that
the lesser developed nations of the world and the developing
nations of the world should be finding ways to make more
universal and affordable their telecommunications systems.
Certainly, in my recent visits to China, there is an
enormous appetite on their part to do just that, to blow out
their telephone system to many more people, to make it more
affordable so that their electronic sellers can get access to
the electronic buyers here in this country.
Ms. Harman. Well, I totally agree with that answer. Are
there steps that we can take in terms of legislation or focus?
Are there world fora that we could encourage this committee,
this Congress, that would be useful? I mean should we be
gearing toward some sort of convention on this the way there is
WIPO and other conventions on other issues that relate to this
worldwide digital economy?
Mr. Vradenburg. Well, I would urge that Congress and
individual Congress men and women urge the United States Trade
Rep to make this a high item on his agenda. Beyond that, there
is a whole series, sectors of industries that are engaged in
the electronic commerce value chain whose costs and/or
competition would be enhanced--advertising services, financial
services, air transport services, express delivery services.
There are a whole range of sectors in the service sector,
which, if liberalized and the cost reduced as a consequence,
would significantly expand electronic commerce.
Ms. Harman. Other comments? Ms. Richardson.
Ms. Richardson. I would like to address that point too. As
George's testimony said, trade promotion authority gives the
administration tools to negotiate on our behalf. There are
mechanisms in the services agreement that can get to cost-based
issues for infrastructure. There are certainly mechanisms in
the trade system that can keep the content open.
One of the few things that customers are willing to spend
money for to help pay off the expensive cost of infrastructure
is entertainment. That cost can be artificially jacked up if
countries start putting content restrictions on delivery of
content over the Internet.
Ms. Waggoner. And I would just underscore that point as
well, and there are a number of bilateral agreements as well as
regional agreements and negotiations that are occurring. So as
we consider TPA, I think setting out clear negotiating
objectives to cover digital trade in some of these issues would
be very important.
Ms. Harman. Well, I see my time is up. I thank you all for
that answer. Mr. Chairman, I would just like to suggest that
part of our jurisdiction in this subcommittee, I believe, is to
perhaps make constructive suggestions to our administration
about proceeding with some of these things. If that happens, I
would see it as a win-win-win for our country, for other
governments, and for consumers around the world.
Mr. Stearns. You are welcome to stay. We are going to have
probably another second round here if members--the gentleman
from--Mr. Joe Pitts has left, okay.
Well, let me ask Mr. Kovar something, and I will take 5
minutes, and Mr. Bass and Ms. Harman, you are welcome to ask a
second round of questions. Here, June 6 is the negotiations you
start. Without putting yourself in some kind of secret
presentation here, can you sort of walk us through the changes
that the U.S. is seeking for this June 6 negotiation and what
changes, particularly in a broad sense, you might think are
necessary?
Mr. Kovar. Well, at the broadest sense, what we would like
to do is to replace the existing text, which is overreaching.
It tries to do too much.
Mr. Stearns. All of the existing text?
Mr. Kovar. Well, not all of it, but essentially the
jurisdiction section of it we think ought to be replaced with a
simpler approach to jurisdiction that doesn't try to do so
much. It would probably have fewer types of jurisdiction in the
required area where you actually get enforcement, and it would
have a narrower section on prohibited jurisdiction. And it
would allow for more flexibility in the middle for national
practices to continue. That is what we would really like to
see, is a new text to emerge where the jurisdiction provisions
are simpler.
We think on the recognition and enforcement side of the
convention that the convention is in pretty good shape. I mean
there is still work to be done there on individual things, but
that overall it is in pretty good shape. Then there is a number
of other issues that are related to the convention--the
connection between this convention and Europe law, whether we
need a mechanism for applying piece meal to different countries
depending on whether their legal systems are good enough, to
permit enforcement of their judgments. And those are issues we
would like to see start to be tackled in this June session. But
we think the jurisdiction aspects are the most important.
Mr. Stearns. We have recognized foreign judgments here in
the United States, but other countries sometimes are unwilling
to do so. How will the convention benefit U.S. companies and
consumers seeking to enforce judgments overseas?
Mr. Kovar. Well, we hope that we ultimately will get a
convention that has simpler rules of jurisdiction that can
attract widespread support, and that we can stop having such an
excessive focus on them. We won't raise as many difficult
problems as we have got today. And then we will be able to move
right to the recognition and enforcement side of the
convention, which is where we think we can level the playing
field for American litigants.
The enforcement side of the convention now has rules that
are very similar to the rules that are enforced in the State of
Florida, for example, or the State of Illinois, most States in
this country that have the Uniform Act or that use the common
law. And what we most hope to have is an international system
under this convention that applies those rules in most of the
major trading countries of the world.
Mr. Stearns. Ms. Waggoner, I understand that there is a WTO
Work Program on electronic commerce that was formed to examine
trade-related electronic commerce issues. I guess the question
is do you know what progress has been made in addressing the
concerns that you even mentioned in your testimony?
Ms. Waggoner. Yes. Well, given that we have not been able
to launch a new round, we have been in a holding pattern, we,
of course, continue to support that Work Program, and we are
looking forward to moving the agenda, and we continue to work
through ITI. We have been educating the WTO delegations on the
importance of e-commerce, and we continue to work with those
delegations to educate them, to help them push forward so we
can build support for a new round and for this component of the
new round.
Mr. Stearns. Tell me worst case scenario. Tell me what--you
mentioned in your testimony that the Government should refrain
from enacting trade-related measures that impede e-commerce.
What specifically things are you concerned about?
Ms. Waggoner. Well, I think one of the questions that we
have been talking about today is the issue of how to classify
an item.
Mr. Stearns. Problems.
Ms. Waggoner. So I think that if you classify prematurely
goods versus services, you could certainly damage the growth of
e-commerce. I think if you have a regulatory environment,
particularly in telecommunications, a regulatory environment
that hinders market growth but does not force privatization,
particularly in the developing nations, those things could
definitely hinder growth in new markets in the developing
countries.
Mr. Stearns. What about in the area of Latin America? How
crucial is the FTAA to opening up telecommunications in Latin
America?
Ms. Waggoner. I think it is very critical. I think that we
are going to have to have trade promotion authority in order to
force some of those recalcitrant countries to move. They are
unwilling to make concessions if they are not certain how they
are going to be treated when we bring the agreement back home.
So I think----
Mr. Stearns. You are talking about Fast Track?
Ms. Waggoner. Fast Track, that is correct.
Mr. Stearns. You don't think we can get it done without
Fast Track for the----
Ms. Waggoner. I think it is going to be difficult.
Mr. Stearns. That is a new name for it, trade----
Ms. Waggoner. Trade promotion authority.
Mr. Stearns. [continuing] promotion authority.
Ms. Waggoner. Correct.
Mr. Stearns. In the new terminology in Washington, when you
are trying to pass something, if you have trouble, you change
the name.
Ms. Waggoner. Change the name.
Mr. Stearns. Well, my time is expired. Mr. Towns?
Mr. Towns. Thank you very much, Mr. Chairman. Mr. Kovar,
what is the State Department doing to encourage other nations
to sign the WIPO Treaty's Copyright Act, which further protects
intellectual property? What are they doing? What is the State
Department doing?
Mr. Kovar. Mr. Towns, I am not the right person to answer
your question, and I apologize for that. I am sure it is
something that we are handling through the right channels, and
there are other agencies that are also involved, including the
Commerce Department.
Mr. Towns. Okay. Well, I accept that. I am just sitting
here thinking when we look at what is really going on and you
think about the problems around these issues that--we are not
letting anybody come in and steal our oil or steal our cash. We
just wouldn't allow it. And then when I looked and listened as
to what is going on here, I think that we have some serious
problems.
But let me ask you one other question. In light of your
remarks earlier about the critical importance of tax policy for
e-commerce, what do you think of the EU's proposed change to
their tax system with respect to e-commerce? I think Mr.
Vradenburg, really I wanted.
Mr. Vradenburg. Well, we don't think that yet it is
adequate. It is basically proposing that there be a single
point of registration, but still 15 different taxing rates.
They are not yet committing to move toward a harmonized VAT
rate across Europe, although I think that may be inevitable
because of their monetary integration. And they are not yet
undertaking to exempt smaller transactions or accumulate
smaller transactions. So there are a number of respects in
which we think that their proposals are inadequate in terms of
simplifying their system sufficiently to justify out-of-
jurisdiction--imposing tax collection obligations on out-of-
jurisdiction sellers.
This is a species, Mr. Towns, of a problem that is being
created by the Internet, or a challenge being created by the
Internet in a lot of areas. The Internet is global in
character. And as a consequence, there are people that are
outside the jurisdiction of any national government who are
either conducting electronic commerce transaction and thus not
within the jurisdictional reach of that government for tax
collection purposes or who may be doing something that is
committing a tort within a jurisdiction and in fact not within
the jurisdiction of any--the Nation in which the tort occurs.
So these issues are going to have to be dealt with, but
they are big issues. They are not issues which I think we can
deal with with tweaks to the existing system. Mr. Kovar here
has been handed the challenge of trying to deal with this issue
in the context of jurisdiction. We are trying to deal with it
in the context of taxes. We are also trying to deal with it,
obviously, in the context of copyright enforcement around the
world.
But this whole challenge of a global system of distribution
and communications, when each nation is, by definition, not
global in character, is a challenge we are going to confront
for the next 5 to 10 years, and we have to take the cautious
approach that my private sector colleagues on my left, your
right, are advocating with respect to jurisdiction.
But we have got to deal with these problems. We can't
ignore them. They are not going to go away; they are only going
to get worse. And so that we have to confront them head on. And
the tax issue is one that you have raised, Mr. Bass has raised,
and the jurisdiction is a question that all of the members of
the panels have raised. And they are very important issues that
we have to got to deal with.
Mr. Towns. What do you suggest that the Congress do at this
time?
Mr. Vradenburg. Well, on the domestic tax issue, where
clearly the Congress does have jurisdiction and is now
discussing the question of State and local taxation of Internet
sales, we would urge the Congress to embrace a revision of the
existing Internet Tax Freedom Act, which would encourage the
States to simplify their State and local taxation systems to
reduce the cost of tax collection on out-of-State sellers as a
component of the extension of the existing moratorium, which
bars Internet access taxes and also bars discriminatory
taxation of the Internet. So in that context, we would urge
that as Congress takes up this subject, as it must by the time
that the existing tax moratorium expires this October, confront
the issue of incenting the States to simplify their State and
local taxation system on this score.
Mr. Towns. All right. Thank you very much. I yield back.
Mr. Stearns. The gentleman from New Hampshire.
Mr. Bass. Yes, thank you, Mr. Chairman.
Mr. Towns. I yield back.
Mr. Stearns. Sure. Go ahead.
Mr. Bass. Thank you, Mr. Chairman. Mr. Kovar, will the
Hague Convention result in U.S. firms being subject to foreign
jurisdictions and facing enforcements or otherwise be regulated
in ways that they are not today?
Mr. Kovar. It shouldn't. Today, American corporations are
subject to jurisdiction around the world under local law, and
most countries' jurisdictional laws are, in some cases, broader
than American jurisdictional rules. And those same countries
are subject to enforcement of that judgment back home in the
various States of the United States. So if we get the
provisions right, it shouldn't really--it shouldn't change
things coming into the United States, but we hope it changes
things going out of the United States.
Mr. Bass. One final follow-up for Mr. Vradenburg, not for
you. You made reference in my earlier round about--or at least
some reference--about the issue of defining jurisdictions. But
some of the others of you, Ms. Wellbery and some of the others
have also mentioned, talked about this in your testimony. Is
there any easy solution, from your perspective, to the issue of
defining jurisdictions for e-commerce transactions?
Ms. Wellbery. I don't think there is any easy solution. Our
traditional means for defining jurisdiction are all based on
physical location, either of the actors or of the transaction
or where the goods were delivered. And none of those things are
necessarily relevant in the e-commerce world, because, as we
all know, there is no there there; it is happening in
cyberspace. And I think that is really--we are talking about
the same issue in a number of contexts--in the tax context, in
the jurisdiction context. The real problem is figuring out how
to identify where these transactions are taking place, and if
we can't, what system do we put in the place of the system we
used to use?
Mr. Bass. Well, if nobody else has any comments, I will
yield back.
Mr. Stearns. Okay. The gentleman yields back.
Let me just conclude by saying that the United Kingdom has
just come out with sort of, I guess, a bombshell talking about
the EU VAT Tax Directive. Were any of you familiar with that?
They have come out saying there should be no VAT tax on this.
Are you familiar with that, George? No? No. Okay. Well, I think
this goes to the heart of how difficult it is to see what we
are going to do. And this committee is going to try and have
some type of legislation dealing with continuing the moratorium
here until we figure it out.
A thought I had was the taxation on your telephone, your
wireless telephone, either whether it is abroad or whether it
is in the United States, we work that out. So that might be a
paradigm for someway to do this. In States like mine where we
have no State income tax, we rely heavily on sales tax. That
can't go on, because the bricks-and-mortars versus the bricks-
and-clicks are going to have a hard time. And so we somehow got
to come up with a solution to this, and I am sure Governor Jeb
Bush is going to be on top of us to--he won't be happy with
this moratorium, but, again----
Mr. Bass. Well, if the gentleman would yield----
Mr. Stearns. Yes.
Mr. Bass. [continuing] the obvious solution for Florida is
to not have either a sales or an income tax, like the great
Granite State of New Hampshire.
Mr. Stearns. That is a good possibility.
Well, I want to thank all of you for waiting while we voted
and also for attending. And I thank all of you in the audience.
The subcommittee is adjourned.
[Whereupon, at 4:03 p.m., the subcommittee was adjourned.]