[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
    STATE IMPEDIMENTS TO E-COMMERCE: CONSUMER PROTECTION OR VEILED 
                             PROTECTIONISM?
=======================================================================


                                HEARING

                               before the

                            SUBCOMMITTEE ON
                COMMERCE, TRADE, AND CONSUMER PROTECTION

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 26, 2002

                               __________

                           Serial No. 107-130

                               __________

      Printed for the use of the Committee on Energy and Commerce






 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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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
RICHARD BURR, North Carolina         BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
GREG GANSKE, Iowa                    BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING,          GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
TOM DAVIS, Virginia                  THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                 BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland     LOIS CAPPS, California
STEVE BUYER, Indiana                 MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California        CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire       JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky

                  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

FRED UPTON, Michigan                 EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 DIANA DeGETTE, Colorado
  Vice Chairman                      LOIS CAPPS, California
ED WHITFIELD, Kentucky               MICHAEL F. DOYLE, Pennsylvania
BARBARA CUBIN, Wyoming               CHRISTOPHER JOHN, Louisiana
JOHN SHIMKUS, Illinois               JANE HARMAN, California
JOHN B. SHADEGG, Arizona             HENRY A. WAXMAN, California
ED BRYANT, Tennessee                 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
MARY BONO, California                ANNA G. ESHOO, California
GREG WALDEN, Oregon                  JOHN D. DINGELL, Michigan,
LEE TERRY, Nebraska                    (Ex Officio)
ERNIE FLETCHER, Kentucky
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)















                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Atkinson, Robert, Vice President, Progressive Policy 
      Institute..................................................     7
    Cohen, Tod, Associate General Counsel, Global Policy, eBay, 
      Inc........................................................    12
    Cruz, Ted, Director, Office of Policy Planning, Federal Trade 
      Commission.................................................    33
    Sloan, David P., President, American Vintners Association....    17
    Zeidner, Joe, General Counsel, 1-800 Contacts................    22
Material submitted for the record:
    Duggan, Juanita D., CEO and EVP, Wine and Spirits Wholesalers 
      of Americe, letter to Hon. Cliff Stearns...................    44

                                 (iii)











    STATE IMPEDIMENTS TO E-COMMERCE: CONSUMER PROTECTION OR VEILED 
                             PROTECTIONISM?

                              ----------                              


                      THURSDAY, SEPTEMBER 26, 2002

              House of Representatives,    
              Committee on Energy and Commerce,    
                       Subcommittee on Commerce, Trade,    
                                   and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. Cliff Stearns 
(chairman) presiding.
    Members present: Representatives Stearns, Radanovich, Bass, 
and Towns.
    Staff present: Ramsen Betfarhad, majority counsel, Yong 
Choe, legislative clerk; and Jonathan J. Cordone, minority 
counsel.
    Mr. Stearns. Good morning. The Subcommittee on Commerce, 
Trade, and Consumer Protection will come to order.
    Welcome all of you, especially our witnesses to our hearing 
examining State impediments to e-commerce. This hearing is one 
of a number of hearings that the subcommittee has held on e-
commerce this Congress. The other hearings have included 
examination of cyber security, cyber fraud and crime, 
impediments to digital trade, electronic communications 
networks, supplier-owned on-line travel sites and on-line 
information privacy.
    I think it is important that the subcommittee and the full 
committee, as congressional custodians of the commerce clause 
be vigilant of and encourage interstate commerce in general and 
nascent forms of interstate commerce such as e-commerce, in 
particular.
    As times change, economic and political priorities change. 
Now and again, history is witness to new and innovative 
technologies that demand and bring about fundamental change in 
the way commerce takes places. Those fundamental economic 
changes then, in turn, require and indeed bring about needed 
legal and regulatory change. The internet and the commerce that 
transpires on the internet are such technologies and 
innovations respectively.
    Today, the value of on-line commercial activity at the 
business to business level is in excess of $1 trillion 
worldwide. While consumer transitions taking place online are 
maintaining double digit growth rates year after year, it is 
essential that the growth of e-commerce is not stymied by laws 
and/or regulations that were enacted or promulgated at a time 
when e-commerce was at best a figment of a few technologists' 
imagination.
    Many of those State laws and regulations did and may still 
have important consumer protection objectives as part of their 
rationale. I think it is imperative that every State carefully 
examine its laws and regulations that were intended to advance 
consumer protection, but now hinder e-commerce, albeit 
unintentionally.
    I am confident that States will find alternative legal and 
regulatory approaches that will not impede e-commerce and at 
the same time advance State consumer protection interests. We 
will hear this morning that that is exactly what Illinois did 
when it examined and ultimately revised its auction licensing 
rule so that the rule could be more responsive to a new 
business model, not really an auction house, called eBay. 
However, there seems to be a trend where new State laws are 
enacted and old ones are reinterpretated with the distinct 
objective of protecting parochial, local commercial interests 
from out of State on-line competitors. It is neither new nor 
unusual for local commercial interests to appeal to their local 
governmental authorities for relief from new competitors made 
possible by technology or innovation.
    Some of the greatest efficiencies accruing to the economy 
and the individual consumer from the internet and e-commerce 
has been in a dramatic reduction in the need for and cost of 
distribution.
    As such, many traditional industries in the business of 
being intermediaries or middlemen are faced with significant 
competition from on-line providers of such types of services. 
So the hearing today focuses on three such industries, contact 
lens, the wine and auction house industries. The current 
intermediaries in the first two industries, optometrists and 
wine distributors/retailers face potentially significant direct 
competition from on-line providers of the same distribution 
services. Auctioneers face a serious competitive challenge in 
eBay, not an auction house in the traditional sense, but a 
cybermall of sorts that allows sellers and buyers from around 
the world to come together and trade over 10 million listings 
for goods and services on a given day.
    In the context of their respective industries, today's 
witnesses will highlight some of the anti-competitive effects 
on their on-line businesses from State laws and regulations, 
some with clear protectionist intent, while most serve as a 
barrier to e-commerce because they are relics of a bygone era.
    There are many other industries where State laws and 
regulations either unintentionally or intentionally are 
impeding the growth of e-commerce. Some of those other 
industries are subject of a forthcoming workshop at the FTC. 
The Commission has schedule a 3-day workshop on the issue 
before us this morning starting October 8. The Commission 
hopes, among other things, to better understand particular 
State laws and regulations that impede e-commerce by having 
panels of experts address certain specific industries, 
including retailing, automobiles, cyber charter schools, real 
estate, mortgages, health care, pharmaceuticals, telemedicine, 
wine sales, auctions, contact lenses and funerals.
    Upon completion of the Commission inquiry including its 
review of all of the pertinent filings made with the 
Commission, the subcommittee hopes to have the FTC testify as 
to their findings in a subsequent hearing in the 108th 
Congress.
    So I look forward to our witnesses' testimony this morning 
and with that, I welcome the distinguished ranking member, Mr. 
Towns from New York.
    [The prepared statement of Hon. Clifford Stearns follows:]
Prepared Statement of Hon. Clifford Stearns, Chairman, Subcommittee on 
                Commerce, Trade, and Consumer Protection
    Good morning. I am pleased to welcome you all, especially our 
witnesses, to the Commerce, Trade and Consumer Protection subcommittee 
hearing examining State impediments to e-commerce. This hearing is one 
of a number of hearings that the subcommittee has held on e-commerce 
this Congress. The others hearings have included examinations of (1) 
cyber-security (2) cyber-fraud and crime (3) impediments to digital 
trade (4) electronic communications networks (5) supplier-owned online 
travel sites; and (6) online information privacy. I think it important 
that the subcommittee and the full committee, as Congressional 
custodians of the commerce clause, be vigilant of and encourage 
interstate commerce in general and nascent forms of interstate 
commerce, such as e-commerce in particular.
    As times change, economic and political priorities change. Now and 
again, history is witness to new and innovative technologies that 
demand and bring about fundamental change in the way commerce takes 
place. Those fundamental economic changes then in turn require and 
indeed bring about needed legal and regulatory change. The Internet and 
the commerce that transpires on the Internet are such technologies and 
innovations respectively. Today, the value of online commercial 
activity at the business-to-business level is in excess of one trillion 
dollars worldwide. While, consumer transactions taking place online are 
maintaining double-digit growth rates year after year.
    It is essential that the growth of e-commerce is not stymied by 
laws and/or regulations that were enacted or promulgated at a time when 
e-commerce was at best a figment of a few technologist's imagination. 
Many of those state laws and regulations did and may still have 
important consumer protection objectives as part of their rationale. I 
think it imperative that every state carefully examines its laws and 
regulations that were intended to advance consumer protections but now 
hinder e-commerce, albeit unintentionally. I am confident that states 
would find alternative legal and regulatory approaches that would not 
impede e-commerce and at the same advance state consumer protection 
interests. We will hear this morning that that is exactly what Illinois 
did when it examined and ultimately revised its auction licensing rule, 
so that the rule could be more responsive to a new business model, not 
really an auction house, called e-Bay. However, there seems to be a 
trend where new state laws are enacted and old ones are reinterpreted 
with the distinct objective of protecting parochial local commercial 
interests from out-of-state online competitors. It is neither new nor 
unusual for local commercial interests to appeal to their local 
governmental authorities for relief from new competitors made possible 
by technology or innovation.
    Some of the greatest efficiencies accruing to the economy and the 
individual consumer from the Internet and e-commerce has been in a 
dramatic reduction in the need for and cost of distribution. As such, 
many traditional industries in the business of being intermediaries or 
middleman are faced with significant competition from online providers 
of such distribution services. The hearing today focuses on three 
industries: (1) contact lens (2) wine and (3) auction houses. The 
current intermediaries in the first two industries, optometrists and 
wine distributors/retailers, face potentially significant direct 
competition from online providers of the same distribution services. 
While, auctioneers face a serious competitive challenge in e-Bay, not 
an auction house in the traditional sense, but a ``cybermall'' of sorts 
that allows sellers and buyers, from around the world, come together 
and trade over 10 million listings for goods and services on a given 
day. In the context of their respective industries, today's witnesses 
will highlight some of the anticompetitive effects on their online 
businesses from state laws and regulations, some with clear 
protectionist intent, while most serve as a barrier to e-commerce, 
because they are relics of a by-gone era.
    There are many other industries where state law and regulation, 
either unintentionally or intentionally, is impeding the growth of e-
commerce. Some of those other industries are subject of a forthcoming 
workshop at the FTC. The Commission has scheduled a three-day workshop 
on the issue before us this morning starting October 8th. The 
Commission hopes, among other things, to better understand the 
particular state laws and regulations that impede e-commerce by having 
panels of experts addressing certain specific industries, including: 
retailing, automobiles, cyber-charter schools, real estate/mortgages, 
health care/pharmaceuticals/telemedicine, wine sales, auctions, contact 
lenses, and funerals (caskets). Upon completion of the Commission 
inquiry, including its review of all the pertinent filings made with 
the Commission, the subcommittee hopes to have the FTC testify as to 
their findings in a subsequent hearing in the 108th Congress.
    I look forward to hearing the witnesses testimony.

    Mr. Towns. Thank you very much, Mr. Chairman. Holding this 
hearing, let me begin by welcoming all the witnesses that I'm 
delighted to see and we're glad to have you here and we're 
looking forward to your testimony.
    I understand that this is a hearing on State impediments of 
e-commerce, Mr. Chairman. Why are there no witnesses from a 
State regulator or a State attorney general? Should a State, at 
least one of them, should be here to defend their regulatory 
practice, at least one State. And many of the laws or practices 
of the States are set up to protect consumers. And the question 
we need to ask of ourselves is will our constituents save a few 
dollars on goods or services, is it worth the roll back of what 
many times are the protections as consumers? I'm interested to 
hear what our guests have to say about that.
    With many interests before us, I am sure many separate 
opinions will be put forth and let me say here are some of 
mine. I'm greatly intrigued by the fact that I can buy a putter 
to improve my golf game from someone anywhere in America 
through on-line auction services like eBay. As long as these 
services have a policy to protect buyers and sellers, why 
should they not be allowed to do business? At the same time I 
question whether someone should be able to simply order contact 
lenses over the internet and get them shipped to their house 
without a doctor's verification. I have problems with that. 
What if the prescription is bad? What if it hurts the eyes? 
What recourse does that person have? Sometimes having the 
doctor nearby is in the consumer's best interest, even if it 
costs a few dollars more.
    There seems to be a great rush to forget traditional brick 
and mortar businesses in favor of e-commerce. I am all for e-
commerce. I want to make that point very clear in every way, 
but let's not forget, Mr. Chairman, that in some parts of this 
country, there exists areas where e-commerce is but an urban 
legend or an old wive's tale. The digital divide is real and we 
need to keep some options open for those who do not yet have 
the opportunity to participate in e-commerce.
    I would like to thank you again for holding this hearing 
and to say to you that I think we need to hear from the States 
as well, but on that note, I yield back and I'm anxious and 
eager to hear from the witnesses.
    Mr. Stearns. I thank my colleague and I would tell him that 
our staff tried assiduously to get representation from the 
States and in fact, Mr. Dingell who is the ranking member of 
the full committee, his staff was trying to get members from 
the National Association of State Legislators to come. They 
were contacted. It was made clear to them what the itinerary 
and subject matter was here and they declined.
    We contacted the States attorney generals to see if they 
had an interest in coming. Now we're not clear why they didn't 
want to participate. We appreciate your attempt here to make 
sure the hearings are balanced and we get both sides and we, as 
you know, always try to do that and try to particularly try to 
give the Democrats every opportunity to get witnesses that they 
feel, so I'm just relaying to you what has been our efforts. 
Perhaps the efforts, instead of just 100 percent, should have 
been 200 percent, but any way, we did try and I regret, as you 
do, that we do not have an attorney general or perhaps some 
State legislators who would help us.
    For an opening statement, the gentleman from California, 
Mr. Radanovich.
    Mr. Radanovich. Good morning and thank you, Mr. Chairman, 
for having this hearing. Just a brief statement and I 
appreciate the Chairman's effort to get this issue on the table 
and I appreciate the fact that Mr. David Sloane of the American 
Business Association is invited to participate in this. It's no 
secret I have a small winery in California and I kind of find 
it difficult you can ship loaded weapons in between States, but 
you try to ship a bottle of Cabernet from California to 
Florida, you can go to jail and it's all part of the e-commerce 
and with this new technology that's coming forward, these are 
things, I think issues that need to be ironed out over time and 
I appreciate the fact that you're having this hearing and 
getting the issues on the table. So I just want to say thank 
you and I look forward to the testimony.
    Mr. Stearns. I thank my colleague. It's always nice to have 
someone, one of the members, who have actually--not only 
understand the problems, but have experienced it, so I think 
that's very helpful to have the gentleman from California.
    [Additional statements submitted for the record follows:]
    Prepared Statement of Hon. Charles F. Bass, a Representative in 
                Congress from the State of New Hampshire
    Thank you, Mr. Chairman, for holding this hearing. I am fascinated 
by this topic and the notion of state protectionism.
    There are several competing forces at work for me when thinking 
about this issue. First, are Internet based transactions inherently 
Interstate? Because of the network's connectivity and the packet 
switching protocols employed, we never know if an e-mail, a transferred 
file, or the bits making up an order on any E-Commerce site traveled 
across state lines.
    Because the data making up these transactions are broken up and 
transmitted through the network in a way that seeks out paths of least 
resistance and are then reconstituted at the other end, should a data 
bit that crosses a state line be thought of the same way as a good or 
service transacted through the mail across such borders? What if we are 
not sure of the vendor's or customer's actual location? Should we 
assume it Interstate? Why not International?
    If a physical product is delivered through the mail, it is easy 
enough to track, but what about electronically delivered products, such 
as music or software downloads? This of course has implications beyond 
product regulation, it also affects how we tax, account for economic 
activity, and think about matching needs for physical infrastructure 
with citizen and local tax bases.
    Second, what level of state oversight of the products and services 
sold over the Internet is appropriate given the international scope of 
the medium? Is there a compelling state interest in the types of 
regulations we are talking about? Or is the only purpose to protect an 
in-state product or enterprise? If the former is true, then we ought to 
tread more lightly. If it is the latter reason, then maybe we should no 
more tolerate that practice from the states then we do from foreign 
nations.
    New Hampshire is a low barrier state. We have no sales tax--which 
may be the ultimate coercive regulation, and we generally avoid 
infringing on the freedom for willing buys and willing sellers to 
interact directly.
    As I said, these are fascinating issues and I look forward to 
hearing from these panelists.
                                 ______
                                 
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Thank you, Mr. Chairman. I appreciate your calling this hearing, 
which involves a critical function of this Committee in the emerging 
digital age: which is to make sure that actions that affect electronic 
commerce, sometimes in the name of consumer protection, are not, in 
fact, anti-consumer actions to stifle such commerce by non-digital 
competitors.
    The timing of this hearing is important, as we see continued growth 
in the popularity of e-commerce and its importance in the American 
economy. Last month, the U.S. Census Bureau reported that second-
quarter online retail numbers showed a healthy 24% increase from the 
previous year--and these data do not include sales from online travel, 
finance, and ticketing sectors.
    As e-commerce continues to develop and mature, we will continue to 
face new and difficult public policy challenges. We certainly must 
determine what kind of new consumer protections are needed for this 
digital economy. An example of this is the debate occurring in this 
Subcommittee over the issue of information privacy.
    We also must recognize that some consumer protections enacted long 
ago are not applicable for this new medium. Many laws on the books were 
designed under different circumstances for vastly different purposes, 
and can now threaten the development of e-commerce, with minimal or no 
offsetting benefit to consumers.
    We should not forget that e-commerce produces fascinating new 
opportunities that will completely alter the way some businesses 
operate. By improving communications, reducing costs and time to 
market, minimizing inventories, improving consumer information and 
knowledge--just to name a few--the use of the Internet to conduct 
business can have substantial benefits for businesses and consumers 
alike.
    Of course, in the process, e-commerce will also displace some of 
the existing companies and firms that have played a valuable role in 
our economic fabric for many years. One way it can threaten old 
business set-ups is by cutting out the middle man--disintermediation, 
as some call it--by connecting consumers directly with the producers of 
goods and services, often across state lines.
    Now, in many cases there may be legitimate roles for middlemen in 
commerce. We examined some of these issues at a Subcommittee hearing on 
online travel services held a couple of months ago. But e-commerce can 
legitimately put those roles to the test, forcing them to prove their 
worth. And this is not a bad thing when it improves competition for 
certain goods and services. It can even enhance the middleman's role in 
some instances.
    The reaction of middlemen, faced with the e-commerce threat, can 
well be predicted: sit by and watch it happen, or fight. Our concern 
today involves one set of tools that businesses have to use against e-
commerce--state laws and state legislatures. If current middlemen use 
their political connections, entrenched position in the market, and the 
guise of ``consumer protection'' to influence state governments and 
regulators to protect them, then that's a problem--particularly when it 
affects interstate commerce.
    And so I am interested to learn how state governments are reacting 
to the development of e-commerce--both negatively and positively. 
States and State Attorneys General play a vital role protecting 
consumers. But states, just like the Federal government, can be 
influenced by entrenched incumbents seeking to protect their market 
position though new laws or reinterpreted laws instead of through new 
services.
    States' reactions to a middleman's quest for intervention to 
protect their position can be a telling sign of whether e-commerce will 
develop as we all hope. I expect our witnesses this morning will give 
us a good picture as to the reaction of states and ``disintermediated'' 
middlemen.
    Let me note that I understand there will be a detailed, three-day 
FTC workshop on this subject next month. Chairman Muris should be 
thanked for pushing forward with such a thoughtful examination. I am 
hopeful that this hearing will be a helpful starting point for that 
workshop and, in turn, that their work may assist us, should this 
Committee move to consider any remedies that may be necessary.
    I thank the Chairman and look forward to the testimony of the 
witnesses.

    Mr. Stearns. We welcome our first and only panel of Rob 
Atkinson, Vice President of Progressive Policy Institute; Mr. 
Tod Cohen, Associate General Counsel of Global Policy of eBay, 
Inc.; Mr. David P. Sloane, President of the American Vintners 
Association; Mr. Joe Zeidner, General Counsel for 1-800 
CONTACTS; and Mr. Ted Cruz, Director, office of Policy Plant, 
Federal Trade Commission. So I want to thank you for coming and 
let's start from my left and we'll go to my right.
    Mr. Atkinson, we welcome you.

  STATEMENTS OF ROBERT ATKINSON, VICE PRESIDENT, PROGRESSIVE 
POLICY INSTITUTE; TOD COHEN, ASSOCIATE GENERAL COUNSEL, GLOBAL 
    POLICY, eBAY, INC.; DAVID P. SLOAN, PRESIDENT, AMERICAN 
   VINTNERS ASSOCIATION; JOE ZEIDNER, GENERAL COUNSEL, 1-800 
 CONTACTS; AND TED CRUZ, DIRECTOR, OFFICE OF POLICY PLANNING, 
                    FEDERAL TRADE COMMISSION

    Mr. Atkinson. Thank you, Mr. Chairman, and members of the 
subcommittee. For those of you who don't know, I'm Vice 
President of the Progressive Policy Institute which is a think 
tank here in Washington. It's affiliated with the Democratic 
Leadership Council. For the last 4 or 5 years, one of our major 
missions has been to promote the growth of e-commerce because 
we see it as central to boosting productivity growth in the 
U.S. economy which we believe is central to boosting wages for 
American workers. And I think one of the key areas that we've 
looked at is this whole issue, as you articulated, how the 
middle man is fighting e-commerce.
    I think one thing I want to mention before we start is 
there's a myth out there that maybe e-commerce isn't as healthy 
as it might be because of the dot com crash. Reality is, 
according to the U.S. Census Bureau, just one portion of e-
commerce, e-commerce retail sales are growing 10 times faster 
in the last year than normal or regular retail sales are.
    Consumers are happy about this. They get lower prices, more 
convenience and more choice. There's one group though that's 
not happy and you've articulated that, a whole set of producers 
in the middle of that transaction between the ultimate consumer 
and the producer, these middle men are not happy. And rather 
than compete in the marketplace which is the normal way 
businesses respond to competition, many of these companies and 
their associations are going to States, to the courts, to 
Congress, to basically fight against this competition. You've 
mentioned many of them. Let me just mention two.
    One is you can all buy a computer today at Dell or Gateway 
and you can go directly to the manufacturer on-line and buy a 
computer and save hundreds of dollars by doing that. But you 
cannot buy a car on line. And I would just refer to Mr. Towns' 
comments. I think this is one of the critical areas where 
helping lower income people get on line, one of the major 
reasons they're not on line now is because it costs money to be 
on line. And if we can create an e-commerce system where they 
can save large amounts of money, for example, buying a car on 
line, you can save $2,000 or $3,000 or $4,000, if you could buy 
it directly from the manufacturer, we would see much more 
adoption of e-commerce by lower income individuals.
    Well, why are these companies doing that? Clearly, they're 
doing it for one simple reason. They don't want to compete. 
They want to be protected by government from competition.
    I want to address one issue which I think is the key policy 
issue here and that's are they really protecting the consumer 
or are they protecting themselves? If you look very carefully 
at the claims for consumer protection which we've done in a 
report called ``The Revenge of the Disintermediated,'' how the 
middle man is fighting e-commerce and hurting American 
consumers, it's pretty clear that the cases divide into two 
groups. There's one group of cases where the claims of consumer 
protection are essentially frivolous and have no validity. I 
would argue the contact lens case is one of those. State 
attorney generals basically argue that there is no harm for 
purchasing contacts on line if one has a prescription which is 
currently what we're trying, what we would like to see.
    In other cases there may be consumer issues. Wine sales is 
a good example. There is a legitimate concern in wine sales of 
underage drinking. But rather than just block all internet wine 
sales, the States that have allowed it have put in place 
underage signage requirements. You cannot deliver a bottle of 
wine to somebody unless they sign and show ID that they're over 
18 years of age or 21, whatever the drinking age is in that 
State.
    So it's clear that there are ways to protect consumers and 
PPI is not a libertarian organization. We don't believe that we 
should get rid of consumer protection. We need strong consumer 
protection, but what we need to do is make sure that it isn't 
set up in a way that limits e-commerce and limits any type of 
commerce.
    What can Congress do about this? I think there are really 
three things Congress can do. One is simply in your own 
deliberations and as cases come before Congress, resist the 
protectionist pleadings of these interest groups that come 
before you.
    I think the classic case is Orbitz. Orbitz' competitors in 
the on-line travel age space, as well as the travel agents 
themselves have been trying to get Congress to put political 
pressure on the administration to shut down Orbitz, close it 
down or to prohibit it or restrict it. The second thing and I 
support the FTC's efforts. The FTC is within the last year 
making strong cases at the State level in terms of their 
advocacy efforts and I know Ted will probably talk more about 
that and I think that's very important so that consumer voice 
gets in these debates at the State level.
    Finally, I think it's important to really seriously look at 
the issue of preemption of State laws or requiring States to 
develop their own uniform laws. I think preemption is critical 
in e-commerce. I know, Mr. Chairman, your privacy bill does 
that. When we're in a national economic system where we're 
crossing State borders, we simply can't have these conflicting 
laws. We could do that in a number of areas, for example, 
nonbank financial services now are regulated at the State 
level. Why not let them be regulated at the Federal level as 
well if companies want to compete in all 50 States. They're 
still regulated. There is still consumer protection, but 
they're not restricted at the State level.
    Automobile dealers is another example. Contact lenses, 
another example. Let the FTC make a ruling on contact lenses 
that is the same as eye glasses, require a prescription 
release.
    So again our goal here is to enhance or at least to 
maintain consumer protection, but to do it in a way that 
doesn't restrict legitimate e-commerce.
    Thank you very much. I'd be happy to take any questions.
    [The prepared statement of Robert Atkinson follows.]
  Prepared Statement of Robert Atkinson, Vice President and Director, 
    Technology and New Economy Project, Progressive Policy Institute
    Mr. Chairman, members of the Subcommittee, I am Rob Atkinson, Vice 
President and Director of the Technology and New Economy Project of the 
Progressive Policy Institute. PPI is a think tank whose mission is to 
define and promote a new progressive politics for America in the 21st 
century. It is a pleasure to testify before you on the issue of how 
middlemen are erecting legal and regulatory barriers to e-commerce. For 
several years, PPI has been keenly interested in promoting public 
policies to foster e-commerce, since we see it as a major driver of 
economic growth. However, we see the growth of laws and regulations 
that protect incumbent bricks-and-mortar companies from e-commerce 
competitors as a major threat to the growth of e-commerce.
    As Americans realize they can save money--often a lot of money--by 
buying everything from books and CDs to contact lenses and airline 
tickets over the Internet, e-commerce continues to grow.1 
Notwithstanding the recent dot-com shakeout, the U.S. Census Bureau 
reports that in the second quarter of 2002 e-commerce retail sales grew 
10 times faster than all retail sales. Almost 60 percent of American 
households are online and that number continues to grow.
    While e-commerce is a progressive force for economic growth, not 
everyone benefits from its lower prices, expanded consumer choice, and 
enhanced convenience. In particular, a host of brick-and-mortar 
retailers, distributors, brokers, and agents--all manner of 
intermediaries--are at risk from the tide of e-commerce. For example, 
15 percent of airline tickets are now purchased online, reducing the 
market share of bricks-and-mortar travel agents. But rather than 
compete fairly in the marketplace, travel agents and a host of other 
middlemen are seeking to erect all manner of barriers--including 
government legal actions, laws, and regulations--particularly at the 
state level, to hobble their online competitors. These are not just 
about intra-industry fights for competitive advantage; rather, they go 
to the heart of consumer welfare as protectionists in many industries 
limit consumer choice and keep more efficient competitors from the 
market. In a free market economy, consumers, not vested interests 
colluding and using the political process to impede competition, should 
decide how commerce is structured.
                    why domestic free trade matters
    In the old economy, people purchased most goods and services 
through companies or professionals located in their state. Even if 
people wanted to buy from out-of-state providers, with the exception of 
a small mail order catalogue industry, most consumers couldn't. Today, 
the rise of e-commerce enables Americans to buy a wide array of goods 
and services from sellers located in different states, all without 
going through a local middleman.
    Using the Internet to bypass these bricks-and-mortar middlemen can 
bring dramatic savings to consumers. Selling homes on the Internet can 
reduce agent commissions by half. Buying a car directly from the 
manufacturer is estimated to lead to savings of thousands of dollars. 
Selling corporate and municipal bonds directly over the Internet can 
eliminate most of the 2 percent to 5 percent commission charged by 
middlemen. Trading futures contracts through the Internet is at least 
50 percent cheaper than through bricks-and-mortar exchanges like the 
Chicago Board of Trade. Drawing up a will or other simple contract 
online can be 75 percent to 80 percent cheaper than using a lawyer. In 
short, e-commerce holds the key to boosting productivity growth in a 
host of industries.
    But e-commerce is important not just because it saves consumers 
money, but because it gives them more choices. Consumers are no longer 
dependent upon local businesses to stock the products or provide the 
services they want, they can use the Web to search the world and find 
what they need.
                        the middlemen fight back
    In PPI's report, The Revenge of the Disintermediated: How the 
Middleman is Fighting E-Commerce and Hurting American Consumers, I 
documented how incumbent companies in a wide range of industries--
including wine and beer wholesalers, auto dealers, music stores, travel 
agents, pharmacies, mortgage brokers, real estate agents, auctioneers, 
the U.S. Postal Service, lawyers, radiologists, and even college 
professors--are fighting against robust e-commerce competitors.
    While some of these battles are fought at the federal level, many 
are playing themselves out in the states because that is where many 
industries are regulated. In the old economy, where the buyer and 
seller met face-to-face in the same state, states were the logical 
nexus for applying these industry-specific consumer protection laws and 
regulations. However, many of these laws and regulations that may have 
not been a barrier when most commerce was intra-state now 
unintentionally hinder e-commerce. In other cases, middlemen have been 
able to convince state legislators and governors that in the face of 
new competition, new protections are needed. In all cases, the simple 
fact that national e-commerce businesses are subject to 50 different 
state laws can raise their costs of doing business significantly. Some 
illustrative cases at the state and federal level are:

 In Colorado, representatives of the bricks-and-mortar pharmacy 
        industry successfully lobbied to have legislation introduced to 
        make it illegal for pharmacy benefit manager programs to impose 
        lower co-pays for drugs purchased from pharmacies but through 
        mail order and web orders.
 In Maine, optometrists lobbied for a prohibition against 
        releasing prescriptions to their patients, to prevent consumers 
        from ordering contact lenses online.
 Texas, at the behest of car dealers and their trade groups, 
        stopped Ford Motor Co. from marketing used cars on the web, 
        despite potentially huge savings to consumers.
 Seventeen states require companies brokering a mortgage to 
        hire residents of the state and maintain a physical office 
        there.
 The National Customs Brokers and Forwarders of America have 
        fought against a proposal by the federal government to create 
        an International Trade Data System to electronically collect 
        all information for the federal government processing of trade.
 On anti-trust grounds, the travel agents and their trade 
        associations have lobbied Congress and the administration to 
        shut down Orbitz, the online travel site.
    States differ widely on the extent to which their laws and 
regulations hinder e-commerce. In PPI's report, The Best States for E-
Commerce, we ranked the states on 11 factors, including eight directly 
related to middleman resistance. The least restrictive states were 
Oregon, Utah, Indiana, and Louisiana. The most restrictive were South 
Carolina, New Mexico, Alabama, and somewhat surprisingly, California. 
But no state had a perfect record; all had at least one law or 
regulation that imposed barriers to e-commerce and consumer choice.
    These restrictions are costly. PPI estimates that American 
consumers annually pay a minimum of $15 billion more for goods and 
services as a result of such e-commerce protectionism by 
middlemen.2 Net Choice, a coalition of tech firms and 
associations that promotes consumer choice on the Internet, is drafting 
an analytical report on the costs to U.S. consumers of these barriers 
to be published in concurrence with the FTC workshop in October on this 
topic. I would anticipate that the reported costs will be even larger 
than PPI's preliminary, conservative estimates.
             consumer protection or producer protectionism?
    To listen to middlemen one might believe that without these laws 
consumers would be subject to the worst kinds of abuses. Wine 
wholesalers and retailers say that laws prohibiting wine sales on the 
Internet are needed to protect state tax revenues and limit underage 
drinking. Travel agents claim that they ``act as the public's 
representatives and help keep prices low,'' while providing the buying 
public with choice.3 Car dealers claim that cars are so 
complex that dealers are needed to protect the consumer.4 
Optometrists argue that buying contact lens' online will lead to eye 
damage. Pharmacists claim that without them, people will be buying 
inferior-quality drugs.
    The reality is that states can design regulatory regimes that 
protect consumers without squashing competition. States that allow 
direct purchases over the Internet require that wine or beer shipments 
use a carrier that requires proof of age upon delivery. States can 
require that patients present a valid prescription order to obtain a 
prescription from an online pharmacy, and can pass reciprocity laws 
giving consumers legal recourse to file suit against out of state 
doctors.
    In many cases, the claims of consumer risk are just a smokescreen 
for protectionism. For example, as the suit by 33 state attorneys 
general against the American Optometrist Association states, ``The 
industry has hidden behind claims of health concerns requiring that 
individuals get their contact lenses from certain professionals, but 
there is no scientific basis to that claim,'' since the lenses sold 
online are identical to those sold in the optometrist's 
office.5 Travel agents' argument that they provide consumers 
with more choice and unbiased fare selection than online services is 
simply not true. The fact that many consumer groups have opposed many 
of these protectionist practices, including the auto dealer franchise 
and contact lens restrictions, suggests that these laws and regulations 
are not designed to protect consumers, but rather to protect producers.
    If industries' claims of protecting consumers are a smoke-screen, 
what is their real motivation? It's much simpler: They seek to limit 
competition. For example, praising a decision by the state of Texas to 
prohibit Internet car sales by anyone other than car dealers, one Texas 
car dealer was quoted, in a moment of unusual forthrightness, as 
saying, ``...I hope they [Internet car dealers] never take over.'' 
6 The head of the Texas car dealers' association, in 
explaining his support of the restrictive franchise laws, stated that 
the association would always be about ``the property rights of its 
members. Don't expect us to change that.'' We shouldn't expect these 
groups to change. But we also shouldn't expect policymakers or the 
judiciary to protect the narrow interests of a select few in business 
over the broader interests of American consumers.
    The disintermediated rely on another argument to defend these laws; 
they claim that consumers don't really want to bypass the middleman and 
therefore there is no need to go to all the work to dismantle these 
protections. On the contrary, if they are right and consumers don't 
want to buy online (the experience suggests otherwise), then these 
companies have nothing to fear from a level playing field. The National 
Association of Automotive Dealers put forth perhaps the most creative 
defense. They claim that even if car manufacturers tried to sell cars 
directly to consumers online, ``they would still face a myriad of legal 
challenges and would run a great risk of breaking the law.'' 
7 But buying online directly from the manufacturer is 
against the law precisely because car dealers have pushed so hard to 
make it so.
    Finally, many tribunes of industries justifying protectionist 
regulatory regimes claim that while other industries may be 
protectionists, they are not. Robert J. Maguire, the chairman of the 
National Automobile Dealers of America states, ``For one thing, the 
role of the middleman is not the same from industry to industry. This 
is especially true of new car dealerships; their presence in the local 
community has long been recognized as ``in the public interest'' by 
state governments and the courts.'' At the end of the day, the fact 
that each of these laws or regulations has its own unique justification 
and call on the public interest does not mean that it's still not 
protectionist.
                         what can congress do?
    Some of these e-commerce battles, like that concerning Orbitz and 
online travel, are being waged at the national level. As a result, the 
first step Congress and the administration can take is to resist 
protectionist pleadings and oppose actions designed to protect the 
status quo against e-commerce competition. This requires thoroughly 
analyzing the claims made by incumbents regarding consumer harm or 
gain.
    But the federal government can also play an important role in 
helping to dissolve these state-level barriers. As the federal agency 
charged with protecting consumer rights, the Federal Trade Commission 
is well situated to weigh in on these debates at the state level. For 
example, the FTC recently provided formal comments to the Connecticut 
Board of Examiners for Opticians on a case regarding a restrictive 
interpretation of state laws related to the sale of contact lenses. The 
FTC can also file amicus briefs in court, as they did recently in 
federal district court in the matter of Powers v. Harris, which dealt 
with Oklahoma legislation that prevents anyone other than state-
licensed funeral directors, including online sellers, from selling 
caskets. As a result, Congress should support the FTC's e-commerce 
advocacy efforts.
    While it's important to try to convince states to repeal or modify 
their restrictive laws and regulations, at the end of the day, 
persuasion is likely to go only so far. For many states, the political 
forces for protection are strong and organized (in-state companies) 
while the beneficiaries of reform are diffuse (unorganized consumers) 
or not even in the state (e-commerce competitors). As a result, 
Congress should seriously consider creating on an industry-by-industry 
basis uniform national standards that enable e-commerce competitors to 
sell more easily in all 50 states. At one time it made sense for states 
to regulate local industries since all the activity was between sellers 
and buyers in the same state. The rise of national e-commerce makes 
this legacy regulatory framework a barrier to economic growth. As a 
result, Congress could require states to develop uniform model 
legislation that does not discriminate against e-commerce competitors. 
The Gramm-Leach-Bliley Financial Services Modernization Act used this 
approach to give states four years to have a uniform licensing 
requirement or reciprocity for insurance, and if they don't act, the 
federal system of insurance regulation would be imposed. This model 
could be applied to other areas. For example, Congress should also 
consider the possibility of requiring states to develop reciprocal 
licensing arrangements so that doctors licensed in any state could 
practice in any other, including practicing telemedicine.
    In some cases, Congress may need to let e-commerce companies doing 
business in areas currently regulated by states to be governed by new 
federal statutes. For example, most non-bank financial service 
providers are subject to state laws, and are not eligible for national 
licensing. Congress should consider developing a national standard 
based on best-in-class requirements that states currently impose. E-
commerce financial service companies would still have to abide by 
effective consumer protection laws, but they would have only one law to 
follow and it would be a law designed to promote e-commerce. There are 
other areas where a national standard makes sense. For example, the FTC 
should do what it did in 1979 for eyeglasses: simply say that 
prescriptions for contact lenses must be given to consumers, who can 
then choose where they want the prescription filled.
    Some will argue that such federal preemption violates states' 
rights. In our view, this is a misleading interpretation of the notion 
of states' rights. The framers of the Constitution respected the rights 
of states to govern internal activities, but made it clear that they 
could not restrict interstate commerce. James Madison wrote, ``Such a 
use of the power by Cong (sic) accords with the intention and 
expectation of the States in transferring the power over trade from 
themselves to the Govt. (sic) of the U. S.'' 8 Federalism 
for the New Economy is not a paean to unlimited state freedoms. Rather, 
it requires a new bargain between Washington and states: on the one 
hand giving states more flexibility and accountability in many areas, 
as the Leave No Child Behind Act did; and on the other, developing 
national e-commerce governing frameworks in areas such as digital 
signatures, privacy, SPAM, or e-commerce protectionism. In these cases, 
state preemption is required to create a vibrant cross-border e-
commerce marketplace.
                               conclusion
    The economic history of the United States is rife with business, 
labor, and professional organizations attempting to use the powers of 
government to protect their economic interests. During periods of rapid 
technological change, such as the present one, that produce new sets of 
winners and losers, political opposition to economic change increases 
significantly. It is incumbent upon policymakers at all levels of 
government, and in all branches, to resist the pressure from the 
disintermediated and ensure that e-commerce competitors are allowed to 
compete on a level playing field and not burdened with unfair and 
discriminatory rules, regulations, and laws.
    Thank you for the opportunity to appear before you.

                                 Notes:

    1 It should come as no surprise that a large number of 
dot.com companies are in trouble. Much of the investment made in the 
last few years was focused on attempts to become a market leader, 
beating out all the other companies. There are compelling historical 
parallels. The 1930s saw the bankruptcy of scores of automobile 
companies, but it was the takeoff point for the explosive growth of the 
auto industry. There is no reason to suspect that the current situation 
in e-commerce is any different. Moreover, the winners in e-commerce may 
not be the pure play dot.coms, but instead might be the ``clicks and 
mortar'' companies that use the Net to sell directly to consumers. In 
this case, pure-play dot.coms might not grow significantly, but e-
commerce would.
    2 Robert D. Atkinson, Revenge of the Disintermediated, 
Progressive Policy Institute, January 2001 at http://www.ppionline.org.
    3 Elizabeth Wasserman, ``Stuck in the Middle,'' Industry 
Standard (March 6, 2000). Wasserman quotes Paul Ruden.
    4 David Hyatt, ``Franchise Laws in the Age of the 
Internet,'' White Paper, National Automobile Dealers Association, 
McLean, VA, January, 2001.
    5 State of California, et al against The American 
Optometric Association, et, al, in United States District Court, 
Eastern District of New York, January 17, 1997.
    6 Robert Elder and Jonathan Weil, ``To Sell Cars in 
Texas, Online Firms Are Forced to Enter the Real World,'' The Wall 
Street Journal, January 26, 2000, Texas Journal, p. T1.
    7 NADA, op. cit.
    8 James Madison to Joseph C. Cabell, 18 Sept. 1828. 
http://press-pubs.uchicago.edu/founders/documents/
a1__8__3__commerces18.html.

    Mr. Stearns. Mr. Cohen?

                     STATEMENT OF TED COHEN

    Mr. Cohen. Mr. Chairman, Ranking Member Towns and members 
of the subcommittee, my name is Tod Cohen. I'm Associate 
General Counsel for Global Policy at eBay. Thank you for 
inviting eBay to comment on the problem of unnecessary and 
harmful State regulation of electronic commerce. We share the 
concern that much of this regulation does far less to protect 
the public than to protect entrenched monopolies and 
oligopolies. These regulations do not protect consumers, but 
penalize them.
    We applaud you, Mr. Chairman, for calling this hearing to 
shine a spotlight on this disturbing trend.
    eBay is the world's first and largest on-line trading 
community. Founded in September 1995, eBay has become the most 
popular shopping site on the internet. eBay brings together 
more than 50 million buyers and sellers from around the world 
to buy and sell practically anything. Last year, eBay users 
transacted over $10 billion in sales.
    Today, there are more than 10 million items for sale on our 
site and more than 1.5 million new listings a day. Sellers on 
eBay, to remain competitive, must charge prices that are 
competitive with both on and off line retailers. Such price 
competition is great for consumers, but troubling to the 
entrenched businesses that have been able to set prices 
unfairly for years without any repercussion. E-commerce forces 
them to face an unpleasant prospect: competition.
    In order to prevent or ``manage'' competition, these 
interests have used their allies in State and local government 
to apply existing laws and regulations to internet companies in 
a discriminatory manner. They justify these new, discriminatory 
barriers with spurious claims that e-commerce may harm 
consumers.
    My testimony today focuses on a few of the barriers that 
States have created and are considering that could inhibit the 
growth of e-commerce. Mr. Chairman, the introduction of your 
bill earlier this year, H.R. 2421, the ``Jurisdictional 
Certainty Over Digital Commerce Act'' points the way to a 
solution to this problem. H.R. 2421 would ensure a level 
playing field for e-commerce companies, thereby improving 
consumer choice.
    First, let me talk about State regulations that impact the 
goods that we sell on the site. They already demand time-
consuming and cumbersome efforts by our sellers to achieve 
compliance. The scope of goods and services on eBay alone is 
truly staggering, from BMWs to bulldozers, from antique 
furniture to high tech computers. Every single one of these 
sales could potentially be subject to regulation by one of the 
50 States or even a county or municipality, keeping up to date 
with these potential regulations and existing regulations is 
practically impossible. However, we do believe that it is 
essential to create a safe and legal marketplace.
    What is a constant struggle for eBay is completely beyond 
the resources of most of our sellers and other smaller e-
commerce companies. On eBay alone we have 69 categories of 
goods and services that are either prohibited, questionable or 
infringing. Prohibited items include tobacco, prescription 
drugs, lock picking devices and postage meters. Certain items 
that may be listed that are questionable include event tickets, 
autographs and antique slot machines. To educate our buyers and 
sellers, we provide hundreds and hundreds of pages of 
explanations of why each category is included and under what 
circumstances, if any, certain items can be sold. Many 
prohibited or questionable items are included only because of 
State laws. One area where State and local laws are extremely 
varied and confusing to consumers are event tickets. Other 
areas of inconsistent State regulations include travel 
packages, packaged seeds and antique slot machines.
    Now let me quickly turn to State auction laws that some 
would like to apply to eBay and our sellers. Even though we 
allow bidding for certain items on our site, eBay is neither an 
auctionsite nor an auction house, nor are our sellers 
auctioneers. We do not take possession of the goods, nor do we 
make any representation about the goods. We are essentially a 
cyber mall that is an unlimited number of store fronts where 
things can be sold and space to rent and sell their goods. We 
employ hundreds of individuals around the world to reduce fraud 
on our site. Nonetheless, some State regulators and entrenched 
middle men with whom they collaborate want to interpret State 
auction laws or pass new ones to regulate eBay, our sellers and 
other on-line marketplaces.
    The licensing regimes are outrageous. For example, in North 
Carolina, you are required to pass an examine to prove your 
auctioneering aptitude, but you cannot take the exam until you 
have completed a mandatory 80-hour course on auctioneering. The 
curriculum includes 16 hours or bid calling, voice control, 
proper breathing technique and the use and sequence of numbers. 
Supplemental courses include tobacco, heavy equipment and most 
important for internet sales, hygiene, personal appearance and 
body language, something our late night sellers really need to 
improve.
    Even more significant impediments would result because of 
substantive auction law provisions.
    We have been working with one State that has attempted to 
apply these laws to us, Illinois, and we were successful in 
working with their licensing group to pass a law this year that 
would restrict the regulations and switch from a licensing 
scheme to a registration scheme. Over all, several other State 
legislatures have also proposed bills that would have regulated 
eBay or our sellers. A patchwork of these inconsistent State 
laws regulating the internet will hinder competitive 
marketplaces such as eBay. To protect consumers and allow them 
to enjoy the maximum benefits, Congress needs to enact bills 
like H.R. 2421.
    Thank you for this opportunity to discuss these issues with 
the committee today. I'm available to answer any questions you 
may have.
    [The prepared statement of Tod Cohen follows.]
  Prepared Statement of Tod Cohen, Associate General Counsel--Global 
                           Policy, eBay Inc.
    Mr. Chairman and members of the Subcommittee: My name is Tod Cohen, 
and I am Associate General Counsel for Global Policy at eBay Inc. Thank 
you for inviting eBay to comment on the problem of unnecessary and 
harmful state regulation of electronic commerce. We share the concern 
that much of this regulation does far less to protect the public than 
to protect entrenched monopolies and oligopolies. The net result of 
these regulations is not to protect consumers, but to penalize them. We 
applaud you, Mr. Chairman, for calling this hearing to shine a 
spotlight on this disturbing trend.
    eBay is the world's first and largest online trading community. 
Founded in September 1995, eBay has become the most popular shopping 
site on the Internet when measured by total user minutes, according to 
Media Metrix. eBay brings together buyers and sellers from across the 
United States and around the world to facilitate the sale of goods and 
services by a diverse community of individuals and businesses. Last 
year, eBay users transacted over $10 billion in sales.
    The vision of Pierre Omidyar in creating eBay was to design the 
ultimate, efficient marketplace. Today, with over 50 million registered 
users worldwide and over 10 million listings, eBay is fulfilling that 
vision. Buyers and sellers purchase goods and services easily, quickly, 
and cheaply. Whether selling through a bidding process or fixed-price 
format, sellers on eBay must charge prices that are competitive not 
just with other eBay sellers, but also with other on and offline 
retailers. Similarly, retailers in the traditional ``brick-and-mortar'' 
world can no longer base their prices merely on what their local market 
dictates--they must now consider the price that consumers will pay on 
eBay and at other Internet sites.
    Such price competition is great for consumers, but troubling to the 
entrenched monopolists and oligopolists that have been able to set 
prices unfairly for years without repercussion. E-commerce forces them 
to face an unpleasant prospect: competition. In order to prevent or 
``manage'' competition, these ``middlemen'' have used their allies in 
state and local government to apply existing laws and regulations to 
Internet companies in a discriminatory manner and to enact laws and 
regulations that treat interstate e-commerce companies differently from 
offline intrastate companies. They justify these new, discriminatory 
barriers with spurious claims that e-commerce may harm consumers. Far 
too often, though, these claims simply seek to mask the fact that the 
middlemen are just trying to protect their ``turf.''
    My testimony today will focus on a few of the barriers that states 
have created that could inhibit the growth of e-commerce and the need 
for Congress to begin to examine in more detail the growing problem of 
unnecessary and harmful state regulation of e-commerce. Mr. Chairman, 
the introduction of your bill H.R. 2421, the ``Jurisdictional Certainty 
Over Digital Commerce Act'' points the way to a solution to this 
problem. By clearly prohibiting state regulation over commercial 
transactions of goods and services conducted over the Internet, H.R. 
2421 would ensure a level playing field for e-commerce companies, 
thereby improving consumer choice.
          i. the issue--state regulation of internet commerce
A. eBay's Efforts
    Already, certain state regulations demand time-consuming and 
cumbersome efforts by eBay and other e-commerce businesses to achieve 
compliance. These state regulations have the effect of penalizing 
consumers by limiting their access to goods and services offered online 
and increasing the prices consumers must pay. Moreover, these ``rules 
of the road'' do not fulfill their stated goal of increasing consumer 
protection.
    The scope of goods and services available for sale on the Internet 
is almost limitless. On eBay alone, sellers from around the world 
currently offer over 10 million items for sale--over a million new 
items a day. The range of items is staggering: from BMWs to bulldozers, 
from antique furniture to hi-tech computers, from the oldest 78s to the 
most recent DVDs. Currently, over 18,000 categories of goods and 
services are being bought and sold on eBay. Every single one of these 
sales could, potentially, be subject to regulation by one of the 50 
states, or even by a county or municipality. Keeping up to date with 
all of those potential regulations is impossible; nevertheless, we do 
our best to determine which federal and state laws apply to potential 
listings on our site because we believe that it is essential that we 
create a safe and legal marketplace.
    What is a constant struggle for eBay is completely beyond the 
resources of smaller e-commerce companies, many of which are eBay 
merchants. They cannot analyze and develop compliance strategies for 
the laws of the hundreds of jurisdictions where their customers reside. 
Compliance with myriad, often inconsistent state and local laws should 
not serve as a barrier to entry to participate in the electronic 
marketplace.
    In order to assist our sellers with the sale of certain goods, we 
created a list of ``Prohibited, Questionable and Infringing Items.'' 
This list is found at http://pages.ebay.com/help/community/png-
items.html. It includes 69 categories of goods and services that either 
(1) may not be listed on eBay (``prohibited items''), including things 
like credit cards, tobacco, prescription drugs, lock-picking devices 
and postage meters; (2) may be listed under certain conditions 
(``questionable items''), such as event tickets, antique slot machines 
and autographs; or (3) may be in violation of certain copyrights, 
trademarks or other rights (``infringing items''). Furthermore, in 
order to educate consumers, our site provides hundreds of pages of 
explanations of why each category is included and under what 
conditions, if any, certain items can be sold.
    Many of the items that are prohibited or questionable have been 
categorized that way because of state laws. For example, one area where 
state and local laws are extremely varied, confusing to consumers, and 
almost impossible to monitor, is the resale of tickets to entertainment 
events (including sporting events, concerts, and plays). In order to 
assist users and to promote lawful ticket sales, eBay has attempted to 
identify the states that regulate the re-sale of event tickets and to 
provide its users with that information. We have identified seventeen 
such states.
    State and local ticket regulations range from prohibitions against 
the sale of tickets at any price above face value to prohibitions 
against sales at a price of $5 or 25% (whichever is greater) above face 
value. When a seller in one of the regulated states attempts to sell an 
event ticket, an automated disclaimer is added to that seller's item 
description explaining the applicable state regulation to potential 
buyers. This process is a difficult and inefficient experience for both 
eBay and our users. eBay has to try to determine both the seller and 
buyer's respective states of residence based on their eBay registration 
and their billing information. Identifying the state of residence of 
those buyers can be impossible because we do not require buyers to 
verify their location (just as offline marketplaces do not require 
proof of residence from a person who enters their store).
    This is just one example of the numerous goods that are either 
prohibited or extremely hard to sell on the Internet simply because of 
inconsistent State regulations. Others include travel packages, 
packaged seeds and antique slot machines. In each case, inconsistent 
state regulation is undermining the ability of eBay to provide the 
ultimate efficient marketplace that our buyers and sellers seek and 
deserve.
B. Auction Laws
    Beyond the current plethora of state restrictions on the sale of 
specific goods, there is also the threat that states will try to 
regulate modes of commerce. For instance, while eBay is neither an 
auction site nor an auction house, the listings on its site are often 
referred to as ``auctions'' because of the bidding process for which 
eBay often offers an online venue. As a result, some state regulators, 
and the entrenched middlemen with whom they collaborate, want to 
interpret state auction laws as regulating eBay and other online 
marketplaces that involve bidding. Recognizing that in most cases these 
laws cannot be interpreted in that way, they are also pushing for new 
laws to hobble their new Internet competition. The passage of such laws 
will only harm consumers and protect inefficient business models. 
Furthermore, the harm to eBay, our army of entrepreneurs, and our 
millions of customers could be significant.
    Generally, auction laws require an auctioneer or auction house to 
obtain a license to conduct auctions. Obtaining such a license in all 
of the states with auction laws would be cumbersome and very costly. 
eBay and other online marketplaces potentially could do this; but 
millions of individual and small business eBay sellers certainly could 
not. Such licensing regimes could require every online seller to obtain 
state licenses (even in distant states) before he or she can sell goods 
on eBay.
    In addition, these licensing regimes can be remarkably burdensome. 
For example to obtain an auctioneer license in North Carolina you are 
required to pass an exam to prove your auctioneering ``aptitude.'' But, 
you cannot take the exam until you have completed a mandatory 80-hour 
course on auctioneering.
    The curriculum includes 16 hours of ``bid calling, voice control, 
proper breathing techniques and use and sequence of numbers . . .'' 
These arcane requirements make no sense for sellers trading goods and 
services over the Internet. Other core requirements include 8 hours of 
``Auction Law: Rules and Regulations,'' and a variety of supplemental 
courses in such subjects as ``Tobacco,'' ``Cattle & Livestock,'' 
``Heavy Equipment,'' ``Farm Machinery,'' and most important for 
Internet sales, ``Hygiene, Personal Appearance and Body Language.''
    Beyond licenses, more significant potential dangers arise because 
of substantive auction law provisions. The most onerous of those common 
provisions is the requirement that the auctioneer or auction house be 
responsible for the items being auctioned and thus liable for any 
misrepresentation of the items being auctioned. Such a requirement 
makes sense as applied to a classic auctioneer or auction house because 
they actually take possession of the goods that are being sold; they 
review the condition of the goods; they authenticate the origins of the 
goods; they make sure that the auctioned goods are what is being 
advertised. To comply, traditional auctioneers charge more than four to 
five times the price that eBay charges sellers. In addition, 
traditional auctioneers charge up to 10% of the final value to buyers. 
In all but the most limited circumstances, eBay costs buyers nothing.
    Applying this type of requirement to eBay, on the other hand, does 
not make sense because eBay does not conduct auctions. It never takes 
possession of the goods that are sold on its site nor does it make any 
representations about those goods. eBay is essentially a ``cybermall'' 
that has an unlimited number of storefronts where individuals and 
businesses can ``rent'' space to sell their goods and services. As a 
cybermall, eBay cannot be responsible for the representations that are 
made about the over one million new items that are listed each day and 
continue to remain a viable business. Requiring eBay to comply with 
state auction laws would simply destroy the benefits buyers and sellers 
derive from eBay. Moreover, the traditional purpose of state auction 
laws is to ensure that sellers receive the funds from the sale of their 
property; this is not a problem for eBay since sellers arrange for 
payment directly with buyers. Thus, perhaps most important of all, 
applying these laws would not protect buyers or sellers.
           ii. a possible resolution--the illinois compromise
    In late 1999, after the Illinois legislature amended the Illinois 
Auction Licensing Act to apply to the Internet, relevant state 
regulators contacted eBay to discuss the applicability of Illinois' 
auction laws to eBay. Earlier this year, after extensive discussions, 
the Illinois Office of Banks and Real Estate (``OBRE'') agreed to work 
with us to amend the Illinois law. Instead of trying to fit a new 
business model into an existing regulatory structure, OBRE worked with 
us to craft a separate category of company that was not regulated in 
the same way as traditional auctions. The new bill was passed on May 
23, 2002, and the governor signed it into law on August 15, 2002. 
Instead of a strict licensing requirement, the new law creates a simple 
registration scheme to allow individuals to contact businesses like 
eBay if problems arise.
                        iii. the threat remains
    While eBay would prefer not to register in states in which it is 
not physically located, we understand and respect the legitimate need 
of states to protect their citizens from bad actors. As a result, we 
are not here complaining about a statute like the Illinois registration 
act, as it does not threaten our business, our sellers, or e-commerce. 
We are, however, concerned about states that attempt to apply auction 
laws to eBay and that generally want to use state legislation and 
regulation to benefit their local businesses to the detriment of 
interstate e-commerce.
    In the past year alone, several state legislatures have proposed 
bills that arguably would have regulated eBay and eBay's sellers. For 
instance in Missouri, the legislature considered a bill that 
potentially could have regulated online sales. The proposed bill 
defined auctions so broadly that it could have potentially included 
sales by sellers on eBay. Likewise, California and New York both 
proposed revisions to their current laws that were broad enough that 
they could arguably have applied to eBay and eBay's sellers. While 
these bills were defeated, they serve as examples of state proposals 
that could have substantially impacted e-commerce. A patchwork of 
inconsistent state laws regulating the Internet will hinder competitive 
marketplaces such as eBay that result from this incredible medium.
    We recognize that much of this state regulation is vulnerable to 
legal challenge under several federal constitutional doctrines, as well 
as for inconsistency with applicable federal statutes, but expensive 
and interminable litigation is not the solution. In order to protect 
America's consumers and allow them to enjoy the maximum benefits from 
the competition that e-commerce can unleash, Congress needs to enact 
bills like H.R. 2421 that will prohibit state regulation over 
commercial Internet transactions.
    Thank you for this opportunity to discuss this issue with the 
Committee today. I am available to answer any questions you may have.

    Mr. Stearns. I thank the gentleman.
    Mr. Sloane?

                    STATEMENT OF DAVID SLOANE

    Mr. Sloane. Good morning, Mr. Chairman. My name is David 
Sloane. I'm President of the American Vintners Association, a 
national tarde association of over 650 wineries in 48 States. I 
want to commend you for holding this important hearing on State 
impediments to e-commerce and I want to commend the Federal 
Trade Commission for also doing this.
    The number of wineries in the United States has exploded in 
the past 25 years, rising from approximately 800 in 1975 to 
2700 today and wineries now exist in all 50 States. Because 
wineries bring much needed investment capital, stable 
employment and significant tourism to depressed rural 
economies, States have played an important role in helping the 
industry to develop. Unfortunately, however, America's wineries 
are also poster children for State impediments to e-commerce. 
Laws, in this case, which do more to protect the economic 
interest of in-state wholesalers than to further legitimate 
policy purposes such as preventing underage access or 
collecting taxes.
    Following the repeal of prohibition in 1933, most States 
adopted a mandatory three-tier system of distribution requiring 
producers to sell only through wholesalers who in turn sell to 
retailers. This system worked reasonably well until the 1980's 
when consumer demand for boutique wines began to gather 
momentum. Despite changing consumer tastes, wholesalers have 
generally been unwilling to take on and properly service 
smaller wineries with limited production capacity and demand, 
preferring to stick with established national brands that 
generate substantial sales volume.
    The requirement to sell through wholesalers flies in the 
face of an obvious reality. There are more than 25,000 labels 
nationwide and wholesalers simply will not commit the resources 
to servicing small wineries. Even in a large and vigorous 
market like Illinois, only about 525 American wine brands are 
available, about 2 percent of the total produced in the United 
States. Small wineries are then effectively locked out of the 
commercial mainstream.
    To remedy the problem, wineries have aggressively lobbied 
State legislatures to permit the interstate shipment of wine to 
consumers, an alternative market mechanism that has gained 
increasing currency with the advent of e-commerce. In all, some 
23 States now have laws or regulations permitting consumers to 
buy limited quantities of wine from out of State wineries.
    While wholesalers have been unwilling to represent small 
wineries, they have been more than willing to exercise their 
considerable political clout in State capitals across the 
country to oppose direct shipment and even to make it a crime. 
Under the guise of protecting citizens against the evils of 
alcohol, they have won enactment of felony statutes in five 
States, Florida, Georgia, Kentucky, Maryland and Tennessee, and 
misdemeanor statutes in another 18.
    Preventing underage access and collecting taxes are the 
primary justifications for State bans of interstate wine sales. 
However, experience in the States that do permit such commerce 
reveals the transparency of these arguments. With the exception 
of wholesale or orchestrated stings, we are not aware of any 
prosecutions involving the sale of wine to minors via the 
internet. Of course, the same cannot be said of the three-tier 
system where millions of illegal alcohol sales to minors are 
consummated every year.
    With respect to tax collection, States which allow the 
interstate shipment of wine to consumers report no appreciable 
decrease in excise tax collections from lost wine sales. In 
those States which make payment of excise taxes a condition of 
holding a direct shipping permit, wineries willingly make such 
payments. Given the cost of collecting State excise tax 
receipts on wine shipped from other States, however, some 
States forego such collections. The so-called reciprocal 
shipment States, those that allow consumers to buy from 
wineries in other States and vice versa, assume the revenue 
implications of direct shipping to be a wash.
    To seek redress, wineries and consumers have now challenged 
the constitutionality of State laws, banning the interstate 
shipment of wine in seven States, arguing that such 
discrimination is impermissible under the Commerce Clause, 
notwithstanding the powers granted to States under the 21st 
Amendment.
    Hopefully, this issue will soon be ripe for Supreme Court 
consideration. While we have not been successful in all of 
these cases, virtually every Federal judge that has examined 
this conflict has concluded that less extensive and intrusive 
mechanisms than the mandatory three-tier system could 
accomplish these State interests.
    Congress has a clear constitutional role to play in 
developing ground rules for when and how States may interfere 
with interstate commerce and because the internet greatly 
enhances the potential for remote commerce, it is imperative 
that action be taken soon. State barriers to on-line wine sales 
and rigid adherence to the three-tier system are impeding the 
successful development of the American wine industry and the 
potential benefit of that economic activity for depressed rural 
economies.
    By statute, the Congress should establish a test for 
balancing State interests with the basic and fundamental right 
to a national marketplace embodied in the Commerce Clause. In 
so doing, Congress can provide important guidance to the courts 
and to the States. In Central Hudson Gas Electric versus Public 
Service Commission, a 1980 Supreme Court case, the Supreme 
Court developed an excellent balancing test for a very similar 
purpose that the Congress should look to as it develops 
legislation to eliminate unnecessary barriers to all forms of 
e-commerce.
    The Central Hudson test requires one, the demonstration of 
a substantial State interest; two, a showing that the 
regulation or law in question directly advances the 
governmental interests; and three, that the regulation or law 
is not more extensive than necessary to serve the stated 
purpose. Such a law would help to mitigate the special interest 
political power of local businesses and ensure that parochial 
State interests do not supersede the national interest of free 
and unfettered commerce among the States.
    On behalf of America's small craft wineries, I urge this 
subcommittee to advance legislative to require States to meet 
such a standard so that these businesses can be freed to serve 
consumers without undue and unreasonable impediments.
    Thank you.
    [The prepared statement of David Sloane follows.]
   Prepared Statement of David Sloane, President, American Vintners 
                              Association
    Good morning, my name is David Sloane. I am President of the 
American Vintners Association, a national trade association with over 
650 wineries in 48 states. I want to thank and commend the Subcommittee 
for holding this hearing to examine state barriers to e-commerce, and 
whether such barriers serve rational policy purposes, or amount to 
economic protectionism.
    The number of wineries in the United States has exploded in the 
past 25 years, rising from approximately 800 in 1975 to over 2,700 
today. Indeed, as an article in USA Today recently observed, wineries 
are now a part of the rural farm economy in all 50 states. A large 
percentage of this growth has occurred in just the past twelve years. 
Since 1990, the industry has roughly doubled from 1,400 wineries to its 
current number.
    While California remains the premier winegrowing state--comprising 
roughly half the nation's wineries and over 90% of the production--
there are high concentrations of wineries (in rank order) in 
Washington, Oregon, New York, Ohio, Virginia, Pennsylvania, Texas, 
Missouri, Colorado, New Mexico, Illinois and Michigan. These states 
have a minimum of 30 wineries each, and the top three--Washington, 
Oregon and New York--have more than 150 apiece.
    States have played a major role in encouraging this remarkable 
growth because wineries bring much-needed investment capital, stable 
employment, and significant tourism to depressed rural economies. In 
fact, for every bottle of wine sold at a farm winery, there is an 
investment of approximately $50 in land, development, equipment and 
working capital. Suffice it to say, farm wineries are a living 
embodiment of the American ideal of entrepreneurial craft spirit.
                mandatory three-tier distribution system
    Unfortunately, America's wineries are also ``poster children'' for 
state impediments to e-commerce--laws in this case--which do more to 
protect the economic interests of in-state wholesalers than to further 
legitimate policy purposes, such as preventing underage access or 
collecting taxes.
    Following the repeal of Prohibition in 1933, most states adopted a 
mandatory three-tier system of distribution, requiring producers to 
sell only through wholesalers, who in turn sell to retailers. This 
system worked reasonably well until the 1980s, when consumer demand for 
``boutique'' wines began to gather momentum. Despite changing consumer 
tastes, wholesalers have generally been unwilling to take on, and 
properly service, smaller wineries with limited production capacity--
preferring to stick with national brands that generate substantial 
sales volume.
    This requirement to sell through wholesalers flies in the face of 
an obvious reality: Wholesalers do not sell, or properly service, the 
products of smaller wineries. There are too many labels nationwide--
some 25,000 in total. Even in a large and vigorous market like 
Illinois, only about 525 American brands are available--about 2 percent 
of the brands produced by U.S. wineries. The three-tier system just 
does not work for small wineries.
    As the number of brands and labels has proliferated, the challenge 
of securing wholesaler representation has become a crisis for small, 
and even medium-sized, wineries. This ``market access'' crisis is 
further exacerbated by the massive consolidation that has occurred 
within the wholesale tier. By some estimates, the number of wine and 
spirits wholesalers has declined from a high of 5,000 in the 1950s to 
less than 400 today.
                    the direct shipping alternative
    To remedy the problem, wineries have aggressively lobbied state 
legislatures to permit the interstate shipment of wine to consumers--an 
alternative market mechanism that has gained currency with the advent 
of e-commerce. The most functional form of direct shipment legislation 
has been the ``reciprocal'' shipment concept, which permits consumers 
to receive a small quantity of wine each month from wineries in other 
states affording the same reciprocal privilege to consumers within 
their own state.
    Thirteen states have enacted reciprocal shipment laws. Another nine 
states have enacted ``permit'' laws, which, to varying degrees, also 
facilitate the interstate shipment of wine to consumers. However, it is 
worth noting that several of these laws--whether because of permitting 
fees, burdensome paperwork requirements, or unwieldy purchasing 
mechanisms--have not been utilized. Indeed, a few such laws were 
drafted by wholesaler interests to placate state legislatures that were 
being pressured by consumers to do something. Additionally, a few 
states, and the District of Columbia, have made regulatory allowances 
for small wine shipments.
                         economic protectionism
    While wholesalers have been unwilling to represent small wineries, 
they have been more than willing to exercise their considerable 
economic and political clout in state capitals across the country to 
oppose direct shipment, and to make it a crime. Under the guise of 
``protecting citizens against the evils of alcohol,'' they have won 
enactment of felony statutes in five states (Florida, Georgia, 
Kentucky, Maryland and Tennessee), and misdemeanor statutes in another 
18 states.
    Indeed, as a direct consequence of wholesaler lobby campaigns, more 
than half of the states--including several with large populations--have 
effectively shut all but the top 100 wineries out of their markets by 
insisting that all products go through the mandatory three-tier system.
    These protectionist laws hurt wineries, to say nothing of 
consumers, in many ways. For example, they prevent wineries from 
selling and shipping wine to visiting tourists from states that 
prohibit interstate shipment; from including such consumers in their 
wine club offerings; and, from fulfilling gift orders to consumers from 
such states.
    Preventing underage access and collecting taxes are the primary 
justifications for state prohibitions against interstate wine sales. 
However, experience in the 23 states that do permit interstate wine 
sales to consumers reveals the transparency of these arguments. In 
fact, with the exception of wholesaler-orchestrated stings, we are not 
aware of any prosecutions involving the sale of wine to minors via the 
Internet. Of course, the same cannot be said of the three-tier system, 
where millions of sales to minors are consummated every year.
    With respect to tax collection, states which allow the interstate 
shipment of wine to consumers report no appreciable decrease in excise 
tax revenues from lost wine sales. In fact, a model law has been 
developed which protects both excise and sales taxes by licensing out-
of-state shippers, and requiring them to collect and forward these 
taxes.
    State statutes banning the direct shipment of wine protect the 
pecuniary interests of politically powerful in-state wholesalers, and 
raise an insurmountable barrier to the consummation of commerce between 
willing consumers and out-of-state sellers. This strange confluence is 
a product of raw local political power of precisely the sort that the 
Constitution seeks to discourage: ``[Each State] would pursue a system 
of commercial policy peculiar to itself . . . States might endeavor to 
secure exclusive benefits to their own citizens.'' (Federalist VII).
    The contention that these protectionist laws serve some legitimate 
policy purpose is merely a ruse, designed to mask blatant local 
favoritism. Virtually every Federal judge that has examined this 
conflict has concluded that less extensive and intrusive mechanisms 
than the mandatory three-tier system could accomplish legitimate state 
interests.
    There is a need for a safety valve, and that safety valve is to 
allow the limited direct shipment of wine to consumers. The Supreme 
Court has commented on the importance of a national marketplace for 
farmers and craftsmen: ``Our system, fostered by the Commerce Clause, 
is that every farmer and every craftsman shall be encouraged to produce 
by the certainty that he will have free access to every market in the 
Nation . . . Likewise, every consumer may look to the free competition 
from every producing area in the Nation to protect him from 
exploitation by any. Such was the vision of the Founders; such has been 
the doctrine of this Court which has given it reality.'' H. P. Hood & 
Sons, Inc. v. Du Mond, 336 U.S. 525 (1949) [Cited favorably in 1994 
West Lynn Creamery].
    Members of the American Vintners Association are both farmers and 
craftsmen.
                      congress can and should act
    Congress has a clear constitutional role to play in developing 
ground rules and boundaries for when and how states may interfere with 
interstate commerce--and because the Internet greatly enhances the 
potential of remote commerce, it is imperative that Congress act soon. 
State barriers to online wine sales, and rigid adherence to the three-
tier system are impeding the successful development of the American 
wine industry, and the significance of that economic activity for 
depressed rural economies. In addition, these laws are raising the ire 
of consumers, who fail to comprehend why they cannot order and take 
delivery of wine from their favorite winery.
    By statute, the Congress can and should balance the public policy 
needs of the states with the basic and fundamental right to a national 
marketplace embodied in the Commerce Clause. In doing so, it can also 
provide important guidance to the courts.
    In Central Hudson Gas and Electric v. Public Service Commission, 
447 U.S. 557 (1980), the Supreme Court developed an excellent balancing 
test for a very similar purpose that the Congress should consider as it 
looks to develop legislation to eliminate unnecessary barriers to e-
commerce. The Central Hudson test requires: 1) the demonstration of a 
substantial state interest; 2) a showing that the regulation or law in 
question directly advances the governmental interest; and, 3) that the 
regulation or law is not more extensive than necessary to serve the 
stated interest.
    It can be argued that every commercial regulation serves some 
legitimate policy concern or another. To mitigate the special interest 
political power of local businesses and to ensure that the concept of a 
national marketplace is not subverted or unreasonably attenuated, 
Congress should provide clear statutory guidance. Parochial state 
interests should not be allowed to supercede the national interest of 
free and unfettered commerce among the states.
    On behalf of America's small ``craft'' wineries, I urge this 
Subcommittee to advance legislation to require states to meet such a 
standard so that these businesses can be freed to serve consumers 
without undue and unreasonable impediments. Thank you.

    Mr. Stearns. I thank the gentleman.
    Mr. Zeidner?

                    STATEMENT OF JOE ZEIDNER

    Mr. Zeidner. Thank you. My name is Joe Zeidner. I'm General 
Counsel with 1-800 CONTACTS. I appreciate you allowing us to 
come here today.
    What I'd like to do, if it's okay, is just talk to you a 
little bit about our business. I have prepared something in 
writing, but----
    Mr. Stearns. We'll be happy to put it as part of the 
record, your written statement. By unanimous consent, so 
ordered.
    Mr. Zeidner. Contact lenses are perfect for e-commerce. 
They're small, light, easy to ship and they're exactly the same 
as the contact lenses you buy from your eye doctor. These 
lenses right here are the fastest growing portion of the 
industry. Daily lenses. You throw them away every day. This is 
a 3-month supply. Most popular right now is 2 week lenses. This 
is a 3-month supply right here. Monthly lenses comes in vials 
like this. This is a 3-month supply, if you wear them each 
month.
    Although there have been tremendous advances in the 
technology of contact lenses, there's also been tremendous 
advances in the distribution method of contact lenses. It used 
to be you'd only buy them from your eye doctor. Now you can buy 
from the internet, from mass retailers, pretty much anywhere 
you'd like to. However, there is a myriad of State laws and 
regulations that's been erected that stifle competition and 
don't allow consumers the right to choose? Why do you ask or 
would you ask or do we ask? Why are there laws and impediments 
in place that wouldn't allow people to be able to buy where 
they want to? Because there's an anomaly in health care. Eye 
care providers sell the products that they prescribe. And when 
they play both retailer and prescriber, there comes a natural 
conflict of interest that spins off a myriad of State laws and 
regulations that are intended both to protect the health of the 
consumers, but also to protect these retailers from 
competition.
    Originally, it was necessary to have eye care doctors sell 
what they prescribe. I don't know if you remember, but when 
contact lenses first came out they were hard lenses and they 
were made specifically for your eye. You might remember 
basketball games or movie theaters where they would stop 
everything and say stop, there's a contact lens on the floor. 
It's because it couldn't be replaced. It was custom made for 
your eye. That's no longer the case. These are made by the 
millions now. They're stamped out and they're the same every 
single time. There's 10,000 different parameter that people can 
wear, so they're perfect for centralized distribution.
    The retailer around the corner, the eye doctor who does 
your eye exam can't possibly carry all the different contact 
lenses in stock, but we can, with one centralized distribution 
facility.
    Today, there's no need to buy your contact lenses only from 
your eye doctor. You should be able to buy them from anywhere 
you want to, Cosco, Walmart, 1-800 CONTACTS or your eye doctor. 
However, there are State laws that have been put in place and 
regulations that have been put in place to stifle competition. 
They really fall into three main categories.
    First off, prescription release. In about half the States, 
believe it or not, you have no right to your contact lens 
prescription. Although there's a Federal law that requires 
mandatory release of your eyeglass prescription, you have no 
right, federally, and in about half the States, to your contact 
lens prescription. Once again, this is a throw back to the days 
of contact lenses being custom fit to your eye. Therefore, 
there would be no reason to give you a prescription.
    Second, and also as a spin off of that, in some States 
where you are allowed to have your prescription, you have to 
sign a waiver to get your own prescription or in other States 
you have to have an original hand-signed copy of your 
prescription, not a fax, not an e-mail, not a phone call, an 
original hand signed copy from your doctor before you can 
purchase from anyone else other than him. That's the first area 
where State laws impede competition in our industry.
    Second, the prescription date is sometimes by State law 
unduly short, without medical reason, to force you come back to 
your eye doctor for another exam and hopefully for your eye 
doctor to purchase contact lenses from him.
    I would like to submit for the record an article that was 
in a major optometry magazine that's called ``If You Can't Beat 
Mail Order, Joint Them.'' And in this article, I'll just read 
one quote, Dr. Goldberg, who is an emeritus fellow of the 
American Academy of Optometry says ``patients should obtain 
mail order lens replacement only during the service life of the 
lens prescription, therefore practitioners must limit the 
service life of a lens prescription.''
    I recommend a 6-month interval. Hard lenses were much more 
dangerous for your eye because you would wear them for many 
years at a time. These lenses you throw away every day, yet the 
profession is advocating that you come in every 6 months so 
that you come back in and buy your lenses from them. That's the 
second area of State law that we've seen that impedes 
competition.
    And probably the most insidious area is requiring the brand 
name on the prescription and prescribing a boutique or private 
label brand. The latest--if you're able to get a copy of your 
prescription and buy where you want, if you get a prescription 
for a brand that is only sold by your doctor's office, you 
really don't have any choice. That's where we're seeing a lot 
of the growth in the industry, is in the private label section.
    I'd also like to submit one other document for the record 
that was also in the Contact Lens Spectrum Magazine that's 
entitled ``Using Private Label Lenses to Keep Patients in the 
Practice.'' And in this article, the optometrist says ``we use 
private labeling a lot. I think that originally we were fitting 
lenses from Ciba, Bausch & Lomb and would get calls from 
patients and 1-800 CONTACTS asking us for their contact lens 
prescriptions. I wanted to use another strategy to prevent that 
from happening.
    Now when patients want to order a lens, they like the 
particular lens that we provide. It's a private label. So they 
can't get it anywhere else. It makes it a lot easier for them 
to come back to us. If they go to Walmart or COSCO or some 
place like that and ask do you have this lens, COSCO or Walmart 
or 1-800 would say yes, we do, but it's a different name on the 
box. This creates the problem within the patient's mind about 
whether or not it's the same lines. I often don't give the 
patients a choice. I don't say this is a private label lens. I 
just say this is the best lens for you. It's the one you should 
be wearing.''
    We think that this industry is ripe for congressional 
investigation. We think that there are health concerns with 
contact lenses and we completely agree with that. We just think 
that those concerns are not dependent on where you buy your 
contact lenses, that people's health should be balanced with 
their right to choose where to buy contact lenses. Thank you.
    [The prepared statement of Joe Zeidner follows.]
  Prepared Statement of Joe Zeidner, General Counsel, 1-800 CONTACTS,
    Mr. Chairman and Members of the Subcommittee, my name is Joe 
Zeidner, General Counsel for 1-800 CONTACTS. Our company sells 
replacement contact lenses to consumers through an Internet web site 
and a toll-free telephone number. I appreciate the opportunity to 
appear before the Subcommittee today.
    I commend you, Mr. Chairman, for holding this hearing to examine 
the impediments imposed by states on e-commerce. When it comes to 
contact lenses, this issue impacts the pocket books--and the ocular 
health--of a great many Americans. Today, thirty-five (35) million 
Americans wear contact lenses. While Americans of all ages wear 
contacts, our typical customer is female between the ages of twenty-
five (25) and forty-four (44). Americans spend more than $3.5 billion 
every year on contact lenses.
    In many instances, state laws and regulations on contact lenses, 
while cloaked as health measures, work to: (1) stifle competition--the 
driving force for innovation, efficiency, and customer service; (2) 
increase prices consumers pay for contact lenses; and (3) actually 
compromise, rather than promote, the ocular health of contact lens 
wearers.
    Before providing the Subcommittee with a more detailed analysis of 
these state laws and regulations, please allow me to note some things 
for the record.
    First, 1-800 CONTACTS respects the important role that eye care 
professionals play in our health care system. We are not a substitute 
for personal eye care. Each day, a growing number of eye care providers 
work cooperatively with us. We are encouraged by our recent experience 
in California where consumer groups and the California Optometric 
Association worked to craft legislation (signed earlier this week by 
Governor Davis) that protects the health of contact lens wearers, while 
allowing for fair competition.
    1-800 CONTACTS recognizes there are risks inherent in wearing 
contact lenses and strongly supports the retention of measures which 
legitimately protect consumer health.
    However, these risks are not related to where a consumer purchases 
replacement lenses. An investigation conducted by state attorneys 
general examining the contact lens industry concluded that,
        ``[P]urchasers from alternative channels have had no greater 
        ocular health problems than purchasers from ECPs [eye care 
        professionals]. Our multi-state investigation has failed to 
        reveal any study showing any correlation between compromised 
        ocular health and receipt of lenses through alternative 
        channels.''
    In addition, in settling anti-trust claims brought by 32 state 
attorneys general, the American Optometric Association specifically 
agreed that it gI22``shall not represent directly or indirectly that 
the incidence or likelihood of eye health problems arising from the use 
of replacement disposable contact lenses is affected by or causally 
related to the channel of trade from which the buyer obtains such 
lenses. Specifically, the AOA shall not represent directly or 
indirectly that increased eye health risk is inherent in the 
distribution of replacement disposable contact lenses by mail order or 
pharmacy or drug stores.''
    Perhaps the greatest threat to ocular health faced by contact lens 
wearers is caused by failing to dispose of contact lenses frequently 
enough. Doctors have reported that frequent replacement of lenses 
significantly reduces eye infections and inflammation among disposable 
contact lens wearers.
    The less expensive contact lenses are and the easier they are to 
obtain, the more frequently wearers will change their lenses. According 
to a McKinsey and Company survey, fifty-seven (57) percent of consumers 
would replace their lenses more frequently if lenses were cheaper. 
Thirty (30) percent of consumers listed cost savings as a reason for 
over-wearing lenses. Moreover, twenty-two (22) percent of consumers 
stated they wear lenses longer than they should because ``purchasing 
them is inconvenient.''
    Finally, while too many states have protectionist laws shielding 
vested interests from competition, a few states have adopted laws that 
should help their residents benefit from e-commerce. Some of these 
states, for example, have laws expressly authorizing the online 
purchase of contact lenses.
    Why would states want to impose barriers to e-commerce when it 
comes to sales of replacement contact lenses, especially when such 
barriers can threaten, rather than promote, consumer health? To answer 
this question, it helps to understand how the contact lens industry 
works.
         a brief history and overview of the contact lens market
    Originally contact lenses were custom made from rigid materials. 
Commonly called ``hard'' lenses, they required eye care professionals 
to engage in the labor-intensive practice of customizing the fit of 
lenses to each patient's eyes. As hard contacts were a customized item, 
consumers were effectively limited to purchasing them only from eye 
care professionals.
    Technological advances led to the introduction of ``soft'' contact 
lenses in the late 1980s. Unlike customized hard lenses, soft lenses 
are standardized, mass-produced commodities. The most popular soft 
contact lenses are disposable and are designed to be replaced every two 
weeks. The fastest growing segment of the industry are disposables that 
are replaced every day. Currently, soft lenses are worn by 
approximately 85 percent of all contact lens wearers. More than 90 
percent of the orders we ship are for disposable soft lenses.
    As the market moved towards mass-produced disposable lenses, 
consumers began to purchase their lenses from outlets other than the 
doctor who prescribed them. A variety of entities--pharmacies, mass 
merchandisers, and mail order companies--began selling replacement 
contact lenses directly to consumers.
    Contact lenses are perfect for centralized distribution. Boxes of 
contact lenses are small, light, and easy to ship and the product must 
be replaced regularly. Because of the wide spectrum of possible 
parameters, the product is just too unwieldy for the average eye care 
professional to maintain stocks sufficient to quickly meet all of their 
customers' needs.
    Companies with the ability to (1) centralize distribution, (2) 
store hundreds of thousands of different prescription parameters; (3) 
purchase in bulk; and (4) execute Internet and phone orders, can bring 
efficiencies to the market place--efficiencies which benefit consumers 
through lower prices and more convenient service. Once a customer has 
ordered from us, getting replacement lenses should be as easy for the 
customer as a couple of clicks .
    Unfortunately, the efficiencies of this business model (and the 
benefits it makes available to contact lens wearers) are in many states 
being thwarted by unnecessary regulations and statutes which shield 
vested interests from the competition and market efficiencies made 
possible by the advent of disposable soft lenses and the Internet.
    The introduction of soft disposable lenses did more than change the 
economics of the contact lens business--it also created a conflict of 
interest: Eye doctors sell the products they prescribe.
    There is no customization of disposable contacts. Consumers most 
often buy these mass-produced lenses four 6-packs at a time. Daily 
disposable customers commonly buy 180 or 360 lenses at a time.
    When contact lenses were custom made, it was necessary for eye care 
professionals to sell the lenses they fit on their own patients. With 
disposable, mass-produced, widely available soft lenses, it is no 
longer necessary for the prescriber to sell what they prescribe.
    As the market place transitioned to soft disposable lenses, the 
practices of eye care professionals remained the same. They retained 
the ability to both prescribe and sell contact lenses, creating a 
conflict of interest which has increased costs and restricted consumer 
choice.
    Comparing how contact lenses and prescription drugs are prescribed 
and sold helps illustrate how this conflict of interest impacts 
consumers.
    With prescription drugs, there are a number of protections which--
while not perfect--help preserve competition, promote innovation, and 
protect the consumer.
    For example, first, when a patient visits a family care physician, 
the patient knows the doctor is not going to sell what he or she 
prescribes. Second, the patient is entitled to receive a copy of the 
prescription, and can take it to any pharmacy the patient wishes. 
Third, when the patient gets to the pharmacy, he or she is often given 
the choice of a generic equivalent.
    These protections are not available to contact lens wearers. First, 
eye doctors do sell what they prescribe. Second, the patient is often 
not entitled to, and even more often does not receive, a copy of the 
prescription, and may not take it to a pharmacy because the doctor is 
the pharmacy. Third, not only are there no generic alternatives, 
consumers often don't have a choice of brands.
    With contact lenses, the eye doctor, not the patient, usually 
chooses the brand. There can be financial incentives for eye care 
professionals to prescribe certain brands. Many eye doctors do not 
prescribe brands unless they sell those brands in their store. In some 
cases, eye doctors prescribe private label brands sold only in their 
store and available nowhere else--leaving consumers to essentially pay 
a premium price for a generic product.
    The conflict of interest in the contact lens industry catches the 
consumer in the middle. When a consumer decides to purchase her 
contacts online, she must get permission from one supplier (her eye 
doctor) in order to purchase from another. There is a financial 
disincentive for eye doctors to give competitors permission to make a 
sale to their customers.
    Rather than update their laws and regulations to take into account 
the changes in how contact lenses are fit, manufactured, and sold, many 
states have adopted laws and regulations designed to preserve this 
conflict of interest and insulate eye care professionals from 
competition.
                    an analysis of state impediments
1. No Right to One's Own Prescription
    Having a contact lens wearer receive a copy of her own prescription 
is essential to promoting competition for replacement lenses. The 
prescription has been called the consumer's ``ticket'' to lower prices 
and better service.
    Yet in the majority of states, consumers have no right to copies of 
their own prescriptions. A survey conducted by The Detroit Free Press 
indicates that consumers in the Detroit region often have a difficult 
time obtaining their prescriptions. Of fifty (50) optometrists 
surveyed, only one would release contact lens prescriptions to patients 
after an exam. Fifty-four (54) percent of optometry offices stated that 
they never release contact lens prescriptions to patients.
    In some states, Americans have a right to their own contact lens 
prescription--but only if they ask for it. In these states, burdensome 
requirements are commonly used to frustrate the limited rights 
consumers do have. Under Illinois law, for example, consumers have a 
right to a copy of their prescription, but are required to request the 
release in writing.
    Finally, in the few states where contact lens wearers do have an 
automatic right, that right is often not enforced.
    Under federal law, every American has a right to a copy of his or 
her own eyeglass prescription. However, the rule setting forth this 
right does not extend to contact lenses because when the rule was 
adopted in 1978, contact lenses were custom-made. We support updating 
federal law to extend this rule, commonly known as the ``eyeglass 
rule,'' to include contact lenses.
2. Restrictions on Who May Sell Contact Lenses
    The laws of several states attempt to prohibit the sale of contact 
lenses over the Internet. In some states, these laws seek to grant 
monopolies to in-state eye care providers. We believe these laws are 
unconstitutional. Georgia law, for example, attempts to have contact 
lenses sold only in a face-to-face transaction with a state licensed 
eye care professional. Similarly, under New Mexico law, only state 
licensed physicians or optometrists would be allowed to sell contact 
lenses.
3. Use of Prescription Lengths to Stifle Competition
    Many states do not set a minimum period for the expiration of a 
contact lens prescription. Absent a medically reasonable minimum 
standard, eye care professionals can legally write unduly short 
prescriptions--in some cases as short as one day--to frustrate a 
consumer's ability to purchase replacement lenses from other sources.
    In a recent issue of Contact Lens Spectrum, Dr Joe Goldberg, an 
optometrist and Emeritus Fellow of the American Academy of Optometry 
described how prescription length can be used for competitive purposes:
        ``We can't eliminate mail order replacement businesses, but we 
        can use our professional ingenuity and patients' contact lens 
        prescriptions to challenge them.''
    He went on to note that:
        ``Patients should obtain mail order lens replacements only 
        during the service life of the lens prescription. Therefore, 
        practitioners must limit the service life of a lens 
        prescription.''
    Dr. Goldberg ultimately recommends that eye care providers write 
prescriptions for six months, a period substantially shorter than 
recommended by leading professional associations. The American Academy 
of Ophthalmology states that, ``While the optimal time limit for a 
contact lens prescription has not been clearly defined, most eye care 
professionals would recommend evaluation of the fit within two years, 
and the more conservative would advise one year.'' Similarly, for 
adults aged eighteen (18) to sixty (60), the American Optometric 
Association suggests an evaluation every one (1) to two (2) years.
    Mr. Chairman, I ask that the text of Dr. Goldberg's article be 
included in the record at the end of my testimony.
    On average, consumers spend approximately $100 for an eye exam. By 
attempting to force consumers to come in for frequent eye exams without 
medical justification, eye care providers can both compel consumers to 
spend money on unnecessary exams and at the same time enhance the eye 
doctor's ability to sell additional products.
4. Prescription by Brand
    Some states require that prescriptions for contact lenses be brand 
specific. These laws enable eye care professionals to write 
prescriptions for brands sold only to the doctors that prescribe them. 
An increasingly popular tactic is for eye care professionals to write 
prescriptions for exclusive store brands available only from the 
prescriber. Charles Hom, an optometrist in Walnut Creek, California, 
described this tactic in an issue of Contact Lens Spectrum, stating 
that:
        ``I often do not give the patients a choice. I don't say this 
        is a private label lens. I just say, `This is the best lens for 
        you. It's the one you should be wearing' ''
    As noted above, this tactic effectively forces consumers to buy 
generic lenses at premium prices.
    Mr. Chairman, I ask that the text of Dr. Hom's comments be included 
in the record.
5. Oversight by Self-Interested Boards of Optometry
    A state-afforded right to a prescription is still no guarantee the 
consumer will get her prescription. Enforcement of this right is 
generally left to state boards of optometry, comprised largely of 
optometrists.
    Recently, 1-800 CONTACTS and the Texas Optometry Board (``TOB'') 
entered into a legally enforceable agreement whereby the Board agreed 
to require optometrists to respond to 1-800 CONTACTS' efforts to verify 
that a customer's prescription is valid. In turn, 1-800 CONTACTS agreed 
to wait indefinitely for optometrists to verify prescriptions.
    Texas optometrists have failed to respond to these verification 
attempts more than half of the time. These refusals have generated more 
than 10,000 written complaints to the Texas Optometry Board in the last 
three months alone. Neither we, nor our customers, have received any 
response nor do we believe any action has been taken.
    California stands in marked contrast to Texas. State legislators, 
ophthalmologists, optometrists and consumer groups worked together to 
develop a regulatory system that protects consumer's health and 
promotes competition. In 1998, 1-800 CONTACTS agreed with the 
California Medical Board to implement a passive verification method for 
verifying prescriptions. Under this method, 1-800 CONTACTS communicates 
to the eye care provider in writing the exact prescription 
specifications received from the customer. It also informs the eye care 
provider that it will complete the sale based on this prescription 
unless the eye care provider advises it within a specific time period 
that the prescription is expired or incorrect.
    Earlier this week, Governor Davis signed legislation that 
essentially codified the passive verification agreement in place since 
1998. This law was supported by the California Optometric Association 
which stated that the law ``supports safe and responsible patient 
access to contact lens prescriptions'' and that the law ``strikes a 
reasonable balance between access and accountability.''
          recommendations: fair competition benefits consumers
    Contact lens wearers need and deserve the same protections that 
prescription drug purchasers and even eyeglass wearers have. Contact 
lenses have changed, but elements of the old system which forces 
consumers to purchase primarily from their prescriber have not. Without 
similar protections, contact lens wearers who try to purchase online 
and through other sources will continue to be impeded by state laws 
which frustrate competition and hurt consumers.
    As mentioned previously, pending federal legislation would open the 
market to competition and benefit 35 million Americans who wear contact 
lenses. We urge adoption of such legislation.
    Thank you for the opportunity to appear before the Subcommittee to 
share our views on these important issues. I would be happy to answer 
any questions you and the other Members of the Subcommittee may have.


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Mr. Stearns. I thank the gentleman.
    Mr. Cruz, welcome.

                      STATEMENT OF TED CRUZ

    Mr. Cruz. Thank you, Mr. Chairman.
    Mr. Stearns. We'd be glad to put your documents as part of 
the record. Just give them to the reporter.
    Mr. Cruz. Thank you. I'm Ted Cruz. I'm the Director of 
Office of Policy Planning at the Federal Trade Commission and 
I'm pleased to be here today to present the Commission's 
testimony. On behalf of the Commission, I'd like to thank the 
subcommittee for addressing this important issue and thank 
Chairman Stearns in particular for his leadership in addressing 
this issue which we believe has the potential to significantly 
impact the future of e-commerce.
    E-commerce has the potential to transform many 
relationships in our economic society and the economic boom 
that e-commerce has begun to bring in even with economic 
downturns promises to be very significant.
    In addition, the internet offers enormous personal freedom. 
What is interesting is that when many public policy analysts, 
when many policymakers think of the internet and they think of 
regulatory and legal issues concerning the internet, they often 
think of the very important issues concerning taxation and 
privacy, both of which are critically important. But in 
addition to that, there is the entire set of issues we are 
addressing here today, a set of issues that many analysts have 
not focused on how those issues are potentially impacting e-
commerce. And in particular, some observers have suggested that 
what we are seeing in the e-commerce sphere is an old pattern 
repeating itself. And that's a pattern of existing businesses 
appealing to government regulators for help to be an ally 
against potential new entrants, against potential new threats.
    And many of these commentators have suggested that what is 
happening when State and local regulations are being extended 
to e-commerce is exactly that.
    Indeed, Mr. Atkinson and his two very comprehensive reports 
that were issued on this analogy that pattern to what happened 
in 1919 over 80 years ago when what was then the powerhouse 
lobby association of this town, the Horse Association of 
America, along with their traditional partners, the Master 
Horseshoer National Protection Association an the National Hay 
Association, lobbied very effectively State and local 
governments to prohibit parking automobiles on public streets 
and they explained at the time that everyone knew public 
streets are where horses belong and these new fangled 
automobiles should not be crowding them off.
    That concern, the concerns that there were potential 
barriers to e-commerce led the Commission to create in August 
of last year an Internet Task Force which is a task force that 
has spent the past year studying and examining the possibility 
of these barriers. The task force has worked within the 
Commission to prepare four different comments that the FTC has 
filed that touch on these issues. The first was a staff comment 
that the staff of the Federal Trade Commission filed in the 
State of Connecticut before the Connecticut State Board of 
Opticians.
    There, the State Board of Opticians is considering 
additional regulations to the internet sales of contact lenses. 
And the FTC staff submitted a comment urging that as that Board 
considered those regulations, it also considered the effect on 
competition and that, while consumer protection concerns should 
be paramount, that those concerns should be protected in a 
manner that also allowed for competition so the consumers could 
receive the benefit of competition and the lower prices as an 
increased convenience that competition can bring.
    In addition, the Commission filed joint filings in the 
State of North Carolina and the State of Rhode Island, urging 
that those States not adopt proposals to require the physical 
presence of an attorney for every real estate closing and every 
real estate refinancing in the State. And finally, the 
Commission filed an amicus brief just this past money in 
Federal District Court, concerning litigation in the State of 
Oklahoma brought by an internet casket seller who is opposing 
restrictions by the State Funeral Board that only licensed 
funeral directors can sell a casket in the State of Oklahoma an 
din that brief, the Commission argued that the justification 
that the Oklahoma Board was asserting, namely that it was 
defending the FTC's funeral rule, mischaracterized the FTC's 
funeral rule because the purpose of the funeral rule was to 
allow and facilitate consumer choice and to assure through that 
choice that consumers were fully protected.
    As the Chairman mentioned, we're holding a workshop, 
October 8 through October 10, where we expect to hear panelists 
address all these issues and we look forward to learning more 
about the impacts on both sides of the potential impact of 
consumers of these possible restrictions.
    Thank you.
    [The prepared statement of Ted Cruz follows.]
 Prepared Statement of Ted Cruz, Director, Office of Policy Planning, 
                        Federal Trade Commission
                            i. introduction
    Mr. Chairman, I am Ted Cruz, Director of the Office of Policy 
Planning of the Federal Trade Commission.1 I am pleased to 
appear before the Subcommittee today to testify on behalf of the 
Commission regarding possible ``State Impediments to E-commerce.'' The 
Commission thanks the Subcommittee for addressing this important issue, 
which may have a significant impact on our nation's economy and on the 
growth of e-commerce. In particular, the Commission would like to thank 
Chairman Stearns for his leadership in this area, and for his foresight 
in addressing an issue that is critical to the future growth of e-
commerce.
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    \1\ The views expressed in this statement represent the views of 
the Commission. My oral statement and responses to questions you may 
have are my own and do not necessarily reflect those of the Commission 
or any individual Commissioner.
---------------------------------------------------------------------------
    The Internet boom, heralded by many as the next industrial 
revolution, is transforming society before our eyes. Even with recent 
economic downturns, it has immense potential as an engine for commerce. 
Moreover, the Internet also offers consumers enormous freedom. There 
are, of course, important policy disputes about taxation and privacy 
legislation. But, aside from those disputes, many think of the Internet 
as a virtually unfettered free market, a place spawning creativity and 
innovation and self-expression.
    Some observers have suggested, however, that this perception of 
unfettered competition may not be completely accurate. Instead, these 
observers assert that existing businesses are seeking to use government 
authority to impede new entrants from competing. In a number of 
instances, and in a number of states, pre-existing regulatory regimes 
have been extended to the Internet, and it bears examining whether 
particular regimes are pro-competitive and pro-consumer, or whether 
they eliminate cost savings or convenience without sufficient benefits 
to justify those losses.
              ii. ftc efforts to foster online competition
    In response to these concerns, in August 2001, the Federal Trade 
Commission formed an Internet Task Force to evaluate regulations and 
business practices that could potentially impede e-commerce. The Task 
Force grew out of the already-formed State Action Task Force, which had 
been analyzing the antitrust doctrine concerning state regulations 
generally, and out of the FTC's longstanding interest in the 
competition aspects of e-commerce.
    Over the past year, the Task Force has met with numerous industry 
participants and observers, including e-retailers, trade associations, 
and leading scholars, and has reviewed the relevant 
literature.2 The Task Force has been examining state 
regulations, often enacted for purposes unrelated to competition, that 
may have the effect of aiding existing bricks-and-mortar businesses at 
the expense of new Internet competitors. Of course, these regulations 
may be justified by consumer protection interests or other sound public 
policy. The Task Force also is considering whether and to what extent 
private companies may be curtailing e-commerce by employing potentially 
anticompetitive tactics, such as by collectively pressuring suppliers 
or dealers to limit sales over the Internet.
---------------------------------------------------------------------------
    \2\ In particular, the Progressive Policy Institute wrote two 
comprehensive reports analyzing the trend toward potentially 
anticompetitive efforts to restrict e-commerce. See Robert Atkinson, 
The Revenge of the Disintermediated (Jan. 2001) (first report of the 
Progressive Policy Institute) (``First PPI Report''); Robert Atkinson 
and Thomas Wilhelm, The Best States for E-Commerce (Mar. 2002) (second 
report of the Progressive Policy Institute) (``Second PPI Report'').
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    To further these efforts, and the important inquiry of the 
Subcommittee today, in October the FTC will host a public workshop that 
will focus on two types of possible barriers to ecommerce. One type 
consists of business conduct barriers that may arise when private 
parties employ potentially anticompetitive tactics, such as when 
suppliers or dealers apply collective pressure to limit online sales. 
The other type consists of state and local regulations, such as 
occupational licensing and physical office requirements, that may have 
pro-consumer and pro-competition goals, but that nevertheless may 
restrict the entry of new Internet competitors or hamper their 
operations.
    The workshop will take place at the FTC from October 8-10, 2002, 
and will include consumer advocates, industry representatives offering 
a variety of perspectives, academics, and state government 
representatives. The FTC is actively seeking perspectives and data from 
both supporters and critics of these possible restrictions, to 
understand better their full impact. We have four principal goals for 
the workshop: (1) to enhance the FTC's understanding of these issues, 
(2) to help educate policymakers about the effects on competition and 
consumers of restrictive state regulation, (3) to help educate private 
entities about the types of business practices that may or may not be 
viewed as problematic, and (4) to learn of additional avenues to 
promote competition through e-commerce.3
---------------------------------------------------------------------------
    \3\ See 67 Fed. Reg. 48,472 (2002). More information about the 
workshop is available at the homepage for the workshop, http://
www.ftc.gov/opp/ecommerce/anticompetitive/index.htm.
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            iii. online competition in different industries
    Each of the industries to be addressed at the FTC workshop has 
enormous potential for providing goods and services to consumers over 
the Internet and may be beginning to face significant barriers to 
expansion. A review of several of the industries follows.
A. Retailing
    E-commerce retail sales continue to expand rapidly. For example, in 
the second quarter of 2002, retail e-commerce sales increased 24.2 
percent, up to $10.2 billion, from the second quarter of 
2001.4 In contrast, all retail sales for the second quarter 
increased only 2.5 percent from the second quarter of 2001.5
---------------------------------------------------------------------------
    \4\ United States Department of Commerce News, 2nd quarter 2002 
release, Aug. 22, 2002, available at http://www.census.gov/mrts/www/
current.html.
    \5\ Id.
---------------------------------------------------------------------------
    Nonetheless, in some instances we have seen attempts to limit e-
retailing through conduct that raises antitrust issues. For example, in 
the late 1990s, a group of 25 Chrysler dealers in the Northwest 
threatened to refuse to sell certain Chrysler models, and to limit 
warranty service, unless Chrysler limited its supply of cars to an 
Internet seller. In 1998, the FTC filed an administrative complaint 
against the dealers.6 The complaint alleged that the dealers 
had formed an association B Fair Allocation System, Inc. (``FAS'') B 
for the purpose of restricting the number of vehicles available to 
competing dealers marketing, and offering lower prices, over the 
Internet. The matter was settled by a consent order which prohibited 
FAS from participating in, facilitating, or threatening any boycott of, 
or concerted refusal to deal with, any automobile manufacturer or 
consumer.7
---------------------------------------------------------------------------
    \6\ See Complaint in Fair Allocation System, No. C-3832 (1998), 
available at http://www.ftc.gov/os/1998/9810/9710065cmp.htm.
    \7\ See Consent Order in Fair Allocation System, No. C-3832 (1998), 
available at http://www.ftc.gov/os/1998/9810/9710065.do.htm.
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    Additionally, other reports B some published and some anecdotal B 
suggest that some distributors may have applied pressure to discourage 
their suppliers from selling online directly to consumers.8 
We intend to examine whether, and in what circumstances, this conduct 
may raise antitrust issues, or may address legitimate concerns about 
free riding and channel conflict. We hope to develop a better 
understanding of the conduct, and reasons for or against limiting 
retail sales over the Internet.
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    \8\ E.g., Doug Bartholomew, E-Commerce Bullies, industryweek.com, 
Sept. 4, 2000, at 51. See also First PPI Report at 14 (noting that, in 
a survey of 42 retail and manufacturing companies, 74 percent of the 
manufacturers reported that they do not sell online due to worries 
about how it might affect their other retail channels).
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B. Contact Lenses
    Competition has increased dramatically in the eye care marketplace 
since the 1970s. The most recent step in the evolution of this market 
is the development of stand-alone sellers of replacement contact 
lenses. Such firms do not fabricate lenses or fit them to the eye; they 
sell only replacement lenses for which the customer has already been 
fitted by an eye care professional. Unlike other eyewear sellers, their 
business consists simply of shipping to customers lenses that come from 
the manufacturer in sealed boxes labeled with the relevant 
specifications. Most of these businesses are located in a single state 
but ship orders to customers nationwide.
    On one hand, some studies suggest that such sellers may be able to 
provide consumers with substantial cost savings and with greater 
convenience from delivering lenses to the consumer's door. These 
factors may also induce consumers to replace their lenses more often, 
which could have significant ocular health benefits.
    On the other hand, some observers believe that online sales of 
contact lenses may threaten consumer health. For example, online 
purchases may reduce the number of times that a consumer visits an eye 
doctor. Some also suggest that state licensing and an in-state presence 
is necessary to allow a state to regulate effectively in order to 
maintain quality and truthfulness. Some states have enacted 
requirements that significantly restrict competition from online lens 
providers. In other states, regulatory boards are currently considering 
new requirements that might similarly restrict Internet sales.
    In March 2002, the FTC filed a staff comment before the Connecticut 
Board of Examiners for Opticians, which is currently considering 
whether to require stand-alone sellers of replacement contacts to 
obtain Connecticut optician and optical establishment licenses. Working 
with the Connecticut Attorney General's Office, the FTC staff comment 
argued that such a requirement ``would likely increase consumer costs 
while producing no offsetting health benefits,'' and that such a 
requirement in fact ``could harm public health by raising the cost of 
replacement contact lenses, inducing consumers to replace the lenses 
less frequently than doctors recommend.'' 9
---------------------------------------------------------------------------
    \9\ FTC Staff Comment Before the Connecticut Board of Examiners for 
Opticians (Mar. 27, 2002) available at http://www.ftc.gov/be/
v020007.htm. This comment expresses the views of the Bureau of Consumer 
Protection and the Office of Policy Planning of the Federal Trade 
Commission. The comment does not necessarily represent the views of the 
Commission or of any individual Commissioner. The Commission did, 
however, vote to authorize the Office of Policy Planning and the Bureau 
of Consumer Protection to submit the comment.
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C. Real Estate / Mortgages / Financial Services
    Consumers can now receive many professional and financial services 
online. Through the Internet, consumers can get advice from real estate 
agents, finance a house, or buy stocks through a broker. In addition to 
convenience, online real estate, mortgage, and financial companies have 
the potential to offer lower rates because, without a bricks-and-mortar 
infrastructure, they may have lower costs.
    A number of states have adopted regulations that may affect the 
provision of these services by online, out-of-state firms. In several 
states, companies must maintain an in-state office as a condition for 
licensing if the company makes, brokers, or services residential 
mortgage loans. Many other states require online mortgage brokers to 
get in-state licenses. Many of these regulations are designed to 
protect consumers from unscrupulous practices, and may indeed prove 
substantially beneficial to consumers. They may also, however, have the 
secondary effect of insulating local businesses from wider competition, 
or of allowing only national mortgage firms that already have physical 
offices in all states to sell online in all states.
    The Commission and the Department of Justice have expressed 
concerns regarding one type of state regulation of these services. The 
agencies jointly filed comments opposing proposals in both North 
Carolina and Rhode Island to require attorneys to be physically present 
for all real estate closings and refinancings. These regulations could 
seriously impede online mortgage lenders, who often rely on lay closers 
rather than on attorneys with a physical presence in the state. In 
letters to the North Carolina State Bar and the Rhode Island 
Legislature, we argued in favor of consumer choice, citing empirical 
evidence showing that non-lawyer closings can save consumers 
significant amounts of money, sometimes up to $400 per transaction, and 
can increase convenience for consumers, because non-lawyers often are 
more willing to travel and meet consumers after work.10
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    \10\ FTC/DOJ Letter to the Ethics Committee of the North Carolina 
State Bar re: State Bar Opinions Restricting Involvement of Non-
Attorneys in Real Estate Closings and Refinancing Transactions (Dec. 
14, 2001) available at http://www.ftc.gov/be/V020006.htm; Second FTC/
DOJ Letter to the Ethics Committee of the North Carolina State Bar 
(June 11, 2001) available at http://www.ftc.gov/os/2002/07/
nonattorneyinvolvment.pdf;
---------------------------------------------------------------------------
    FTC/DOJ Letter to the Rhode Island House of Representatives re: 
Bill Restricting Competition from Non-Attorneys in Real Estate Closing 
Activities (Mar. 29, 2002) available at http://www.ftc.gov/be/
v020013.pdf.
D. Casket Sales
    Because mark-ups on caskets can be significant, online casket 
purchases can potentially save consumers substantial sums of money. 
Additionally, online casket sellers also may be able to offer consumers 
a greater variety of choices, such as individualized caskets. Some 
states, however, require that casket purchases be made only through a 
licensed funeral director at a funeral home.
    On September 5, 2002, the Commission filed an amicus brief in 
federal district court in the matter of Powers v. Harris, 11 
in which an Internet-based casket seller challenged a state law that 
requires all sellers of funeral goods to be licensed funeral directors. 
The Commission's brief stated that the FTC's Funeral Rule was adopted, 
in part, to open casket sales to competition from sellers other than 
funeral directors and that the Rule protects consumers by promoting 
competition among providers of funeral goods, including independent 
online casket retailers.12
---------------------------------------------------------------------------
    \11\ Powers v. Harris, No. Civ. 01-445-F (W.D. Okla. filed Mar. 14, 
2001).
    \12\ FTC Amicus Brief in Powers v. Harris (August 29, 2002) 
available at http://www.ftc.gov/os/2002/09/okamicus.pdf.
---------------------------------------------------------------------------
E. Automobiles
    Automobiles represent one of the biggest investments for many 
households, both in terms of their purchase price and their importance 
to a family's daily life. A group of Yale economists have concluded 
that consumers who use Internet purchase referral services to buy a car 
pay on average 2% less than consumers who do not.13 
Moreover, the Consumer Federation of America (``CFA'') projects that if 
the restrictions currently imposed on Internet auto sales were removed, 
savings of 10% per vehicle are achievable over time.14 At 
today's prices, CFA estimates that this would amount to savings of 
$2,500 per car.15 Yet another study has concluded that 
expanded online auto purchases would especially benefit women and 
minorities.16
---------------------------------------------------------------------------
    \13\ Fiona Scott Morton, Florian Zettelmeyer, and Jorge Silva-
Risso, Internet Car Retailing, 49 J. Indus. Econ. 501, 502 (2001).
    \14\ Mark Cooper, A Roadblock on the Information Superhighway: 
Anticompetitive Restrictions on Automotive Markets 38 (Feb. 2002) 
available at .
    \15\ Id. at 37.
    \16\ Fiona Scott Morton, Florian Zettelmeyer, and Jorge Silva-
Risso, Consumer Information and Price Discrimination: Does the Internet 
Affect the Pricing of New Cars to Women and Minorities? (Oct. 2001) 
available at .
---------------------------------------------------------------------------
    On the other hand, many dealers argue that they have legitimate 
reasons for concern about manufacturer Internet sales. The National 
Automotive Dealers Association argues that franchise laws protect 
consumers against unscrupulous manufacturers.17 Dealers also 
argue that Internet sales unfairly undermine their businesses by 
letting online sellers ``free ride'' off the dealers' personal 
services. Further examination of these concerns would be valuable. 
Currently, all 50 states prohibit manufacturers and online sellers 
without a franchise presence from selling new cars directly to 
consumers.
---------------------------------------------------------------------------
    \17\ First PPI Report at 7.
---------------------------------------------------------------------------
F. Wine Sales
    Wine is a good example of how the Internet can permit fundamentally 
different business models to flourish. Through the Internet, many 
smaller vineyards, with limited distribution networks, can now market 
their wines to consumers around the country.18 Consumers 
also can potentially save money by buying online, avoiding markups by 
wholesalers and retailers.19
---------------------------------------------------------------------------
    \18\ See, e.g., Second PPI Report at 21.
    \19\ Id.
---------------------------------------------------------------------------
    On the other hand, many states limit or prohibit direct wine sales 
over the Internet. Under the common ``three tier'' distribution system, 
many states require that wine pass through a wholesaler or a retailer 
before reaching the consumer. These states, and many commentators, 
contend that the distribution system furthers the state's interest in 
taxation, advances the Twenty-First Amendment's important public policy 
goal of temperance, and helps prevent alcohol sales to minors.
    Lawsuits are pending in at least seven states regarding the direct 
shipment of wine. In Texas,20 North Carolina,21 
and Virginia,22 federal district courts recently struck down 
state restrictions on direct shipment of wine on dormant Commerce 
Clause grounds, while in Florida 23 and 
Michigan,24 federal district courts upheld such 
restrictions. All these decisions currently are on appeal. In New York 
25 and Washington state,26 lawsuits are pending 
in federal district courts.
---------------------------------------------------------------------------
    \20\ Dickerson v. Bailey, 212 F.Supp.2d 673 (S.D. Tex. 2002).
    \21\ Beskind v. Easley, 197 F.Supp.2d 464 (W.D. N.C. 2002).
    \22\ Bolick v. Roberts, 199 F.Supp.2d 397 (E.D. Va. 2002).
    \23\ Bainbridge v. Bush, 148 F.Supp.2d 1306 (M.D. Fl. 2001).
    \24\ Heald v. Engler, 00-CV-71438-DT (E.D. Mich. Sept. 28, 2001) 
(unpublished).
    \25\ See Swedenburg v. Kelly, 2000 WL 1264285 (S.D. N.Y. Sept. 5, 
2000).
    \26\ See Mast v. Long, No. CS-01-00298 (E.D. Wash.).
---------------------------------------------------------------------------
                       iv. additional industries
    At the public workshop, the Commission will also be examining other 
industries that may raise similar issues. Those industries include the 
following:

 Healthcare, Pharmaceuticals, and Telemedicine;
 Cyber-Charter Schools;
 Auctions; and
 Online Legal Services.
    The Commission expects to learn more about the existence of and 
relative costs and benefits of any restraints on online competition in 
these industries.
                             v. conclusion
    Thank you for this opportunity to share our views on competition 
and Internet commerce. We look forward to working with the public and 
with the Subcommittee in understanding these issues and in helping to 
give consumers the full benefits of online commerce.

    Mr. Stearns. I thank the gentleman. I'll start with my 
questions.
    President Ronald Reagan was asked what book out of all the 
books you've ever read has influenced you the most and I 
believe he said Frederick Bastiak's book on economics. There's 
a vignette in there in which the candlemakers' union is working 
as hard as they can to prevent the light bulb from becoming the 
omnipresent use in the society and how the candlemakers make 
all their arguments to convince the government to prevent their 
industry from becoming obsolete. And Mr. Bastiak goes to great 
length to show how successful these candlemakers are and all 
the ridiculous arguments they make, but this goes to the heart 
of the problem.
    In picking up your report, Mr. Atkinson, you have Joseph 
Schumpeter in which he says ``the resistance which comes from 
interests threatened by an innovation in the productive process 
is not likely to die out as long as the capitalist order 
persists.''
    So I guess this has been an age-old problem and obviously 
the light bulb succeeded and the candlemakers went into a 
different marketing strategy. Folks have mentioned my bill, 
H.R. 2421 as a prototype that we could use on a national level. 
Mr. Cruz, besides the examples of the fair allocation system 
incorporated in your testimony, has the FTC's internet task 
force found other cases where brick and mortar retailers have 
collaborated to restrict competition from e-commerce and if so, 
elaborate?
    Mr. Cruz. We have been actively looking for other 
instances. It's a situation where there are anecdotal reports, 
but there is little hard evidence that we have found. The Fair 
Allocation Systems case, as you mentioned, was a case the 
Commission brought and ultimately settled with a consent decree 
where there was--the complaint alleged a horizontal threatened 
boycott of Chrysler dealers against Chrysler if it continued to 
sell to a dealer that was selling over the internet.
    We are in the process of looking for similar instances. We 
are certainly concerned that they are occurring, but much of 
that depends upon consumer complaints and finding evidence of 
this conduct and so we're looking for that.
    Mr. Stearns. Mr. Atkinson, so you're advocating in your 
paper, you suggest that we in Congress could enhance e-commerce 
by creating ``an industry by industry basis uniform national 
standard that enable e-commerce competitors to sell more easily 
in all 50 States.''
    This would be quite difficult, wouldn't it, to go industry 
by industry to do this?
    Mr. Atkinson. Well, first of all, most industries aren't 
burdened by these laws because they're not regulated at the 
State level. There are a small number and I don't know the 
number, let's say 25 where this is a problem and many of those 
are--have somewhat ancillary regulations at the Federal level.
    Mr. Stearns. Is Florida one of those States?
    Mr. Atkinson. We did a report, the best States for e-
commerce and we ranked the States----
    Mr. Stearns. Why don't you give the top five States that 
are best.
    Mr. Atkinson. The best five States in order were Oregon, 
that's No. 1, Utah, Indiana, Louisiana and Iowa.
    Mr. Stearns. Where is California?
    Mr. Atkinson. Believe it or not, California was 47th and 
this is one of those surprises to us where California----
    Mr. Stearns. That's where Silicon Valley is.
    Mr. Atkinson. When it comes to e-commerce production, 
they're great, but California has an enormous array of legacy 
laws that make it difficult for California consumers to buy on 
line.
    Mr. Stearns. So Mr. Radanovich should move his winery to 
Oregon?
    Mr. Atkinson. Exactly.
    Mr. Stearns. Where is Florida?
    Mr. Atkinson. Florida is, I don't have the numbers here. It 
looks like they're about 35th. So a little bit of work to do.
    Mr. Stearns. Okay.
    Mr. Atkinson. These are really for any State--I talked to 
States and they said how can we move up and I said you can be 
No. 1 next year, all you have to do is repeal these 
protectionist laws next session. It's not all that difficult 
although politically we can say it's a little bit more 
difficult.
    Mr. Stearns. I have one more question. Mr. Cohen, you sort 
of indicate that H.R. 2421, the bill I have, that it might be a 
prototype. Do you think we can craft a bill to preempt other 
aspects of State regulation affecting e-commerce just in one 
fell swoop? That's what you think we can do?
    Mr. Cohen. It would my life much easier. It would make our 
lawyers' life----
    Mr. Stearns. You wouldn't have the balkanization of all 
these 50 States and all their laws.
    Mr. Cohen. They are amazing, the vulcanization. The 
packaged seed regulations, the event ticket regulations. I mean 
we've identified 17 different States that regulate the resale 
of tickets and innumerable number of localities and the 
absurdity is that certain States allow the resale of tickets 
for $1 over the listing, the face price. Certain other States 
allow it for $2. Certain other States, $3, some $4, some $5. 
Just the absurdities are amazing. So what we would probably 
recommend is a national standard and then work with people that 
may potentially claim that there are some reasons to allow 
States to regulate in some areas.
    The better thing is a national standard as the default and 
then work with industries that have a reasonable expectation 
for some State regulation.
    Mr. Stearns. Are there any industries you want to point 
fingers at this morning as middlemen?
    Mr. Cohen. Well, we do point out one of them is the auction 
regulators.
    Mr. Stearns. Any others besides the one in North Carolina?
    Mr. Cohen. Oh, there are many, many other States that 
regulate auctions that have similarly ridiculous standards for 
on-line auctions. Other industries that we have confronted are 
travel packages, very difficult to deal with.
    Mr. Stearns. Mr. Zeidner, do you think just a simple GAO 
study would be helpful in exposing many of the issues that you 
present today since we're not going to legislate too much this 
year. We're going to be through shortly. Even if we come back 
in December, this will be difficult to pass, but I mean, maybe 
in your particular case would help set the stage with a GAO 
audit on this.
    Mr. Zeidner. I agree. I think any type of investigation 
that can be done into first the threshold question of the 
framework that we find ourselves in of a person that prescribes 
something and sells the same thing they prescribe should be 
looked at. Although we also advocate and think that at the very 
least, people should have the right to their prescription which 
they don't have right now, but we do think there needs to be a 
comprehensive study because some of these things that I read to 
you, that's just the tip of the ice berg. There's a lot of 
different ways that competition can be thwarted.
    For example, even if you do get a copy of your 
prescription, let's say that that's a Federal law, what if you 
get a copy of a prescription that's for the Zeidner 55 because 
I have a big chain of contact lens stores and you can only buy 
it from me. It really hasn't done you a whole lot of good.
    Mr. Stearns. Okay, my questioning is compete. Mr. Towns?
    Mr. Towns. Thank you very much, Mr. Chairman. Let me begin 
with you, Mr. Sloane.
    Mr. Sloane. Yes sir.
    Mr. Towns. How would you enforce a law that requires proof 
of age at the time of delivery? Would UPS, FedEx? Who would be 
responsible for enforcing such a law?
    Mr. Sloane. Well, in fact, the Congress did pass a law 2 
years ago that allows States, gives States additional authority 
to be able to go after shippers or others that violation State 
law requirements for adult signatures, things of that nature. 
So there is an ability to enforce it, no question.
    Mr. Towns. Let's use New York as an example. Say a State 
like New York would lose, as a result of protectionist policy, 
do you have those kind of figures?
    Mr. Sloane. Well, I don't have those kind of figures. We 
can probably work it out and try to give you something.
    It's really more a question of the availability of the 
products. In other words, in a market place like New York, 
you've got a couple of major wholesalers and those wholesalers 
represent a select range of the top brands that you're always 
accustomed to, but good luck going around in the State of New 
York and trying to find retailers, for example, that carry 
wines that are produced in New York. And the reason is they 
can't get into the three-tier system. Wholesalers just don't 
want to carry those products. The selection issue is really the 
problem for us, more than a cost issue, but there are certainly 
cost implications as well.
    Mr. Towns. Thank you. Mr. Zeidner, are you saying my 
concern in reference to contact lenses, actually something I 
shouldn't have to be concerned with?
    Mr. Zeidner. No, I agree with you completely. In fact, I 
think it's a well-founded concern. We really would like to have 
a relationship with optometrists like pharmacies have with 
doctors. The problem we have is we're essentially, when we 
verify a prescription, maybe it would be helpful to you to 
explain how we go about selling contact lenses. When a person 
calls us they either have their prescription in their hand or 
their prescription is written right on the side of the box.
    There's basically three parameters. The base curve, the 
diameter and the power. So they can read us their prescription 
off the box. What we do is before we process an order, we have 
to have the doctor's name and phone number. We call on every 
single order during business hours to ask the doctor if this is 
correct, if the prescription information we've been given is 
correct. We wait a reasonable period of time and if we hear 
from the doctor, we cancel the order if he says it's expired, 
we don't ship it. If we hear from the doctor after we've 
shipped the order, we send a copy of what the doctor sent to us 
to the consumer and say you need to heed what your doctor said.
    The problem that we have is, as you can imagine, whenever 
you ask a competitor for the permission to make a sale, usually 
they're going to greet that with no response or try to stop us 
from doing it. So I think there is a valid health concern and 
we wish it was more like a pharmacy/doctor relationship. 
Unfortunately, we work within the framework where the person 
that prescribes also sells.
    Mr. Towns. Mr. Sloane, most opponents of wineries to sell 
liquor to consumers argue they are protecting their citizens 
against the evils of alcohol. Tell me what safeguards exist, 
that you would give say to shipping to a person alcohol. You do 
have people who will say the reason, in our State, we have this 
law is we're going to protect them against sin. What do you say 
to people?
    Mr. Sloane. There are certainly safeguards in the system to 
prevent underage people from buying alcohol over the internet. 
For one thing, somebody has got to use a credit card which 
there are verifications involved and that secondarily, there is 
typically an adult signature that's required to the product.
    Shippers don't simply leave a box of wine at somebody's 
doorstep and walk away. So there are verifications and as far 
as protection citizens against the evils of alcohol, anyone 
over the age of 21 is allowed to drink and it's a matter of 
personal choice and so that would be something that individuals 
would have to decide on their own, but it's certainly a legal 
product and people can go ahead and buy alcohol locally or 
through the internet.
    Mr. Towns. Mr. Cohen, let me just ask you quickly, take us 
through the Illinois State Auction Statute, how the State tried 
to alter it and how--what they had proposed would have affected 
eBay business. Could you take us through the whole process very 
quickly?
    Mr. Cohen. In September 1999, the Illinois legislature 
added three words ``and the internet'' to their auction 
licensing act. They have been trying to apply that and issue 
the regulation since January 2000. We started to work with--
we've been working with them the whole time and they continued 
and especially at the beginning of this year, had decided to 
issue regulations that would have required eBay and all of eBay 
sellers who did one of three things, either had physical 
property in Illinois, either or they were sellers based in 
Illinois or they offered items that Illinois residents could 
purchase, would have to get licenses for the State of Illinois 
to do their business on eBay.
    What we were confronted with, the issuance of the 
regulations and the issuance of notices that we were out of 
compliance, we contacted the Illinois regulators and asked to 
work with them to amend the statute to change the statute from 
a licensing act that would have basically ended our business in 
Illinois and the businesses of our users in Illinois and move 
to a registration scheme in which the only registration 
requirement is for eBay to file a registration statement, a 1-
page statement with the State of Illinois that tells Illinois 
residents who they're doing business with.
    Now the problem is if they had been successful and enforced 
the law, we had calculated that in their $1.5 million users of 
eBay in Illinois that do approximately $300 million in sales, 
transacting in Illinois, of that there are more than 3,300 
businesses in Illinois that sell more than $1,000 a month on 
eBay and of those 3,300 businesses, more than three quarters of 
them are people that make less than $75,000 a year. So they're 
the small business people of the country who would have been 
the most impacted by the licensing requirements. And that's why 
we fought and worked with them to come up with a better scheme 
that we think is a model for nationwide adoption.
    Mr. Stearns. I thank the gentleman. What we're going to try 
to do is finish up the hearing with the gentlemen from 
California and New Hampshire and then we'll conclude the 
hearing because we have three votes and I didn't want to keep 
you back here.
    The gentleman from California.
    Mr. Radanovich. Thank you very much. On the issue of 
underage drinkers buying products over the internet, it's a 
possibility for something like that to happen, but the fact of 
the matter is it's far, far easier for an underage drinker to 
get alcohol any other way and so it's just an option. That's 
why there's been no sign of abuse, in California, where it's 
legal to ship interstate all the time.
    Mr. Cruz, I really am interested in the examples of the 
candle and the horses. Over the years, we've obviously gone 
through these kinds of things before. How does this happen? Can 
you kind of chart a process through the future very briefly? 
How does this happen on issues of wine and the three-tiered 
system and shipping regulations? Do these things just take care 
of themselves over time? I noticed, Mr. Cohen, you're here with 
eBay, that eBay is arranging or sells wine over the internet 
and has made arrangements in 35 States where usually right now 
there is only about 12 or 13 reciprocal States where that's 
possible to happen through legal maneuvers within the States to 
be able to make it more available. Is that how this is going to 
happen?
    Mr. Cruz. I think the evolution of technology and of 
commerce is a difficult thing to stop. I think historically 
it's possible to slow it down and whenever there is change, 
there are people who are improving and people whose situation 
is not necessarily improving and those that stand to lose from 
the change, often can be expected to try to slow it down.
    But in terms of how these ultimately are addressed and let 
me throw a caveat that I think is important from the 
Commission's perspective, we are still very much in the 
evaluating mode. We are concerned that these restrictions in 
many of these industries are limiting competition, but we also 
understand that many of these restrictions have important 
consumer protection justifications and so we're trying to hear 
from experts about the various aspects of it and understand the 
aggregate impact, but often how it's changed is simply by light 
being shined on it and an understanding of what are the impacts 
on consumers and that hopefully in this instance will lead 
policymakers to move toward a situation that protects consumers 
more and promotes greater competition.
    Mr. Radanovich. Thank you.
    Mr. Stearns. The gentleman from New Hampshire.
    Mr. Bass. Very briefly, Mr. Cruz, is internet commerce 
interstate in your opinion inherently interstate?
    Mr. Cruz. Obviously, it doesn't by definition have to be. I 
mean one can, you know, you and I can engage in commerce within 
the same State over the internet, but by its very nature 
internet commerce is something that when it approaches any 
scale at all tends to be interstate and often international.
    Mr. Bass. Ergo, the only entity nationally that's going to 
be able to regulate is Congress. I just want to know if it 
would be all right if we have any further questions you folks 
would be willing to follow up in writing? I yield back.
    Mr. Stearns. I thank the gentleman. We want to thank the 
witnesses. We are going to adjourn the subcommittee and thank 
you again for your attendance. The subcommittee is adjourned.
    [Whereupon, at 11:08, the hearing was adjourned.]
    [Additional material submitted for the record follows:]

            Wine and Spirits Wholesalers of America
                           805 15th Street, N.W., Suite 430
                                             Washington, D.C. 20005
The Honorable Cliff Stearns, Chairman,
Commerce, Trade & Consumer Protection Subcommittee
Committee on Energy & Commmerce
U.S. House of Representatives
    Dear Chairman Stearns: I want to thank the Chairman and members of 
the Subcommittee for giving me the opportunity to present testimony 
about a remarkable American success story known as the three-tiered 
alcohol distribution system. I represent the Wine and Spirits 
Wholesalers of America, Inc. (WSWA), a national trade organization and 
the voice of the wholesale branch of the wine and spirits industry. 
Founded in 1943, WSWA represents more than 400 privately held, family 
owned and operated companies in 44 States, the District of Columbia, 
and Puerto Rico that hold State licenses to act as wine and/or spirits 
wholesalers.
    I don't know how many members of the Subcommittee have visited 
package store or tavern in your districts recently, but if you have, 
you witnessed one of the great consumer success stories of the 20th 
century. In virtually every store and tavern, the shelves are stocked 
with literally hundreds of quality brands of wine, spirits and beer.
    What is even more remarkable, considering the plethora of state and 
federal regulations and taxes applied these products--a burden which, I 
would add, at the federal level benefits imported spirits at the 
expense of domestic spirits, and which WSWA is working with Congress to 
change--the price for beverage alcohol products has remained 
consistently affordable for the average consumer over the past 69 
years. In fact, in many cases the pre-tax price has even declined when 
adjusted for inflation.
    The point I want to stress is that, for the average American 
consumer, there has never been better quality, variety and 
affordability in the beverage alcohol marketplace. I would venture to 
say that the majority of the consuming public is quite satisfied--or 
maybe even more accurately overwhelmed--with the quality and selection 
of brands available to them just around the corner from their house. In 
fact, even if a consumer opted to drink a different bottle of wine 
each-and-every day, it would take two years to sample the total number 
of wines available in the average marketplace.
    The overwhelming success, both in terms of value and variety, of 
today's marketplace can be traced back to the decision by state 
lawmakers at the end of Prohibition to establish the three-tiered 
system for the distribution of beverage alcohol--a decision which was 
theirs to make as a result of the ratification of the 21st Amendment in 
1933.
    The 21st Amendment is unambiguous in its enumeration of power to 
the states to regulate the importation and shipment of alcohol across 
its borders. And no Supreme Court or appellate court decision 
interpreting that amendment over the past 69 years has ever diminished 
that authority. The simple fact is, as noted by respected jurist Frank 
Easterbrook in a recent 7th Circuit opinion upholding Indiana's right 
to determine and regulate the channels of distribution, alcohol is not 
cheese--nor contact lenses--nor even auction sales for that matter.
    Principal among the reasons that the three-tiered system was 
established was consumer protection; it was determined that there 
should be an intermediary separating the supply and retail tiers to 
ensure that large suppliers with market power did not dominate 
individual retailers to the exclusion of other suppliers who might try 
to break into the market. In other words, the imposition of a mandatory 
wholesale tier served to blunt monopolistic supplier tendencies that 
had prevailed prior to Prohibition.
    However, the beauty of the three-tiered system is not limited to 
the benefits it obviously confers on consumers and the marketplace, or 
in its operation as a hedge against monopolistic supplier tendencies. 
The three-tiered system also functions as a partner with state 
regulatory systems that are designed to promote the core 21st Amendment 
concerns of the state--ensuring orderly market conditions, promoting 
temperance, including keeping alcohol out of the hands of minors--and 
collecting tax revenue. By requiring that every drop of alcohol pass 
through the licensed three-tiered system, states are assured that every 
bottle of alcohol is properly labeled, taxed, and sold only to 
responsible adults.
    In order to understand how the three-tiered system operates as a 
partner with the state and federal regulatory communities and serves 
the interests of consumer protection, I would ask you to follow a 
bottle as it flows through the three-tiered system.
    A supplier must obtain approval for the label from the BATF to 
ensure that it contains truthful and non-misleading information and 
that it contains mandatory health warnings. That bottle must then be 
sold to a state and federally licensed wholesaler who is responsible 
for maintaining and filing detailed records of each bottle brought into 
the state, pays the excise taxes due on the alcohol, and delivers the 
alcohol to a state licensed retail establishment. The retailer is 
responsible for paying over to the state the sales taxes generated by 
each sale, and is directly responsible for ensuring that alcohol does 
not fall into the hands of minors or other prohibited individuals. 
Since both the wholesaler and the retailer must be licensed by the 
state, they are fully accountable for any dereliction of their duties. 
They are subject to on-site inspections, auditing and compliance 
checks, and any violation can result in a loss of license, fines and 
other potentially more severe penalties.
    It is this responsible, consumer oriented state-run system that 
proponents of direct shipping of alcohol beverages seek to dismantle. 
To truly understand the dangerous unregulated alcohol distribution 
system that they suggest take the place of the three-tiered system, it 
is helpful to illustrate how direct to consumer sale would differ from 
the current model.
    First, there is no guarantee that sales would not be made to 
minors. Since states are unable to effectively monitor direct sales to 
consumers, there is no guarantee that the person ordering the alcohol 
is of age. Online systems, since they are not face-to-face, simply 
cannot ensure that sales are not made to minors. Most teenagers between 
the ages of 18 and 21 years of age (and many who are younger) possess 
credit cards allowing them to order online--others have the use of 
their parents' cards; there is no way for the online supplier to 
accurately verify the age of the person ordering.
    Moreover, there is no way to ensure that a minor does not 
ultimately receive a shipment of alcohol. The suppliers wash their 
hands of the alcohol once it leaves their premises, and there is no 
guarantee that the delivery service will require an I.D. upon 
delivery--or that they will not simply drop the box off at the door 
unattended.
    That is exactly what happened when scores of media outlets 
conducted stings over the past several years to determine the safety of 
direct sales. Those stings showed how easy it was for minors to order 
alcohol online--and how sloppy the carriers were who delivered the 
alcohol, often without checking I.D. and often just leaving the alcohol 
on the front doorstep. Perhaps more telling, a recent sting by the 
Michigan AG's office ensnared 79 different companies who illegally 
shipped 1,020 bottles of wine, 318 bottles of beer and 20 bottles of 
spirits, many of those sales going to underage buyers.
    Proponents of direct shipping alcohol beverages discount the 
implications of those stings, claiming they are somehow tainted and the 
product of wholesaler orchestration. While we would like to claim 
credit for these illuminating stings, wholesalers do not control the 
media nationwide and certainly do not control the Michigan Attorney 
General's office. But that really isn't the point; the fact is that the 
companies caught up in these stings either did not have adequate 
controls to avoid selling to minors, or that they simply didn't care if 
they did sell to minors.
    Direct shipping advocates also misconstrue the meaning of 
statistics from the states, attempting to compare the number of 
prosecutions for illegal face-to-face sales to minors when compared 
with the smaller number of direct to consumer transactions being 
prosecuted. However, the simple fact is that state budgetary 
constraints make costly Internet sting operations less favored than 
local compliance checks. In addition, it is the very nature of the 
three-tiered system that provides for the apprehension of those 
retailers who would sell to minors, a safeguard that is impossible to 
implement with respect to online sales--unless one relies on precisely 
the type of enforcement actions that the pro-direct shipping advocates 
denigrate.
    Second, when a bottle of alcohol is shipped direct to a consumer 
from a reciprocal state, the tax revenue that would normally have been 
collected by the receiving state wholesaler and retailer is lost. 
States depend on these taxes for a variety of vital programs, not the 
least of which is the funding of the regulatory agency itself. The 
states are already suffering from a dearth of tax income due to the 
recent recession and dive in stock market generated tax revenue. Should 
the reciprocal system that direct shipping advocates support actually 
go into effect, the states will take an even greater hit on their tax 
base.
    Some argue that a state could set up instead a licensed direct 
shipment statute similar to that which Louisiana has created. However, 
any such system ultimately relies upon ``the kindness of strangers.'' 
There is no way to conduct on-premises inspection of the books of these 
``licensees'' to determine the accuracy of their reports as there is 
with in-state entities--and there is no easy way to shut them down if 
violations occur. These companies often claim when caught that they are 
not subject to the jurisdiction of the receiving state, and the cost of 
court action to hold out-of-state interests accountable for any 
violation of their ``license'' would be prohibitive. It is simply much 
easier and much more cost efficient for the state to focus their 
compliance efforts on in-state interests than on out-of-state concerns.
    Third, the alleged cost savings from direct shipment are non-
existent--and in fact the price is often cheaper for the same bottle 
purchased locally. Why? Because the online suppliers do not list wine 
online at the wholesale price, they list it at the retail price. Thus, 
while the supplier captures the additional profits that would have 
accrued to the wholesaler, the retailer and the state, the consumer 
sees no differential in the price. Unless, of course, you add in the 
additional costs of shipping, in which case the consumer actually ends 
up paying more for the bottle than had the purchase gone through the 
three-tiered system in the first place.
    The proponents of direct shipping argue that wholesalers stifle 
competition and that wholesaler consolidation has contributed to the 
inability of some small wineries from accessing existing distribution 
channels. This argument does not pass the laugh test. You could have 
10,000 wholesalers in every state, but that would not correspondingly 
increase the amount of shelf space available in retail stores, which 
are glutted with hundreds of brands of wines.
    Further, there is nothing about the three-tiered system that could 
be considered unfairly restrictive of trade in the marketplace. No 
wholesaler's phone number is unlisted. No legitimate supplier is 
refused the opportunity to display and market his or her products at 
the wholesaler's annual convention. In fact, there are hundreds of 
imported wines that have managed to compete quite successfully in the 
American marketplace despite the wholesalers alleged monopolistic hold 
on the three-tiered system--a subject deliberately overlooked in 
proponent's arguments.
    Finally, no wine and spirit wholesaler would fail to market any 
quality wine for which there is a demand--they are consummate 
businessmen who have succeeded by understanding the rules of the 
market; you make profit by marketing and selling beverages that are in 
demand--period.
    Vintner trade groups highlight with pride the increase in U.S. 
wineries from 800 in 1975, to 1400 in 1995, to 2,700 today. However, at 
the same time, these groups fail to recognize that wine must answer to 
the same economic imperatives as other products, and that perhaps that 
growth was simply not sustainable and was based upon an ``irrational 
exuberance'' unrelated to the realities of the marketplace. Having thus 
failed to accurately assess the marketplace, those wineries now want to 
be rescued, overnight, by fundamentally altering a regulatory system 
that has successfully evolved to the benefit of our nation's consumers 
over the past 69 years. I would submit to the Subcommittee that it is 
not the federal government's job to bail out every group of 
entrepreneurs that ignores the realities of the marketplace and suffers 
the consequences.
    In addition, the Subcommittee should be aware that there have been 
several court decisions, including district court decisions in Florida, 
Michigan, and the 7th Circuit decision in the Bridenbaugh case, the 
highest court to have addressed the issue of direct shipping, which 
have upheld state rights under the 21st Amendment. Conversely, only a 
few have found to the contrary.
    However, if you read the decisions--instead of simply reading the 
won/loss columns--you would discover that the better reasoned decisions 
are the ones which uphold state laws and show deference to state 
concerns relating to temperance, maintaining an orderly marketplace, 
and ensuring tax revenue. They make sense both historically and 
legally. Prior to prohibition, states had a great deal of difficulty 
regulating traffic in alcohol originating in other states. Although the 
courts had no problem with a state licensing and regulating suppliers 
within their borders, those same courts consistently ruled that the 
dormant commerce clause prevented them from regulating imports from 
unlicensed out-of-state suppliers as an unlawful interference with 
interstate commerce.
    In response to those cases, Congress passed the Webb-Kenyon Act--
entitled ``An Act Divesting Intoxicating Liquors of Their Interstate 
Character in Certain Cases''--that was designed to cede federal 
commerce clause power to the states in an effort to provide them with 
the authority to effectively regulate the importation of alcohol. 
However, it wasn't until the end of prohibition that Congress passed, 
and the states ratified, the 21st Amendment, formalizing within our 
constitutional framework the delegation of commerce clause authority to 
the states in the area of alcohol importation and shipment.
    Once your understand that history, it becomes abundantly clear that 
the Webb-Kenyon Act and the 21st Amendment were designed to reverse 
discrimination that favored out-of-state suppliers, as Judge 
Easterbrook noted in his seminal opinion in the Bridenbaugh case. Prior 
to those enactments, it was in-state concerns that bore the burden of 
discriminatory regulation. Only they had to be licensed; only they had 
to pay taxes; and only they were accountable to the state. It was only 
upon passage of the 21st Amendment that the states were free to require 
that all suppliers, in state and out-of-state, be subject to their 
alcohol distribution regulatory frameworks.
    The proponents of direct shipping have applauded the decisions of 
courts in North Carolina, Virginia and Texas that have struck down as 
``discriminatory'' certain state laws prohibiting interstate direct 
shipping. But what would those cases accomplish if upheld on appeal? 
They would nullify the 21st Amendment and bring us back to the days 
when only in-state suppliers were required to be licensed, regulated 
and taxed. While the proponents of direct shipping may disagree with 
prohibitions on interstate direct shipments, it is duplicitous of them 
to fight against what they perceive as discriminatory barriers--while 
at the same time encouraging the courts to craft a remedy whose effect 
would be to effectively discriminate against in-state suppliers. And 
that is just what the courts rulings in North Carolina, Virginia and 
Texas would lead to ``unlicensed, untaxed and unaccountable out-of-
state suppliers competing on an uneven playing field with licensed, 
taxed and accountable in-state suppliers.
    You should also take note that Section 2 of the 21st Amendment 
unambiguously proclaims that:
        The transportation or importation into any state, territory, or 
        possession of the United States for delivery or use therein of 
        intoxicating liquors, in violation of the laws thereof, is 
        hereby prohibited.
    It does not make any distinction between wine, spirits and beer. 
Constitutionally, alcohol is alcohol. However, it is clear that the 
proponents of direct shipping want you to believe that wine is somehow 
different--that wine is just another agricultural product--not a 
socially sensitive product subject to potential abuse.
    Low production winemakers and other proponents of direct shipping 
like to point out the H.P. Hood case, in which the Supreme Court 
asserted ``every farmer and craftsman shall be encouraged to produce by 
the certainty that he will have free access to every market in the 
Nation.'' What they overlook in their enthusiasm is that the justices 
in the H.P. Hood case were not speaking about alcohol beverages! I am 
sure that vintners consider themselves simply farmers, but that doesn't 
mean the Supreme Court would ignore the high alcohol content of their 
product to place it in the same realm of consideration as wheat.
    I would remind the Subcommittee that in safe guarding the best 
interests of consumers, it is the legislature of each state that most 
directly speaks to the concerns and choices of its citizenry. This 
premise is clearly supported by the 21st Amendment when it comes to the 
distribution of alcohol beverages. In fact, some legislatures have 
found their citizenry to support such control in the distribution of 
alcohol beverages that they have authorized only the state government 
to act in the role of a wholesaler or retailer. Other states favor 
controlling the distribution of alcohol through the licensing of 
private companies. Still others have even legislated dry areas or 
prohibitions against Sunday sales. Despite these widely varied systems 
of distribution in the states, they all have one thing in common. They 
were created in legislatures, by virtue of the power granted to the 
states under the 21st Amendment.
    Unless the 21st Amendment is repealed, this Subcommittee should 
consider that unambiguous delegation of state authority and recognize 
that alcohol beverages are a product with a unique standing in the 
American culture and economy. As such, it is the firmly held opinion of 
the Wine and Spirits Wholesalers of America that the distribution of 
alcohol beverages does not belong in a forum debating federal 
intervention in other forms of non-constitutionally empowered state 
regulation. Thank you.
        Sincerely,
                                     Juanita D. Duggan, CEO and EVP
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