Consumer Protection and the Internet

Adam Angyalosi
BA IB Year 2
Market Regulation and Consumer Protection
Essay #2
05/01/2011
E-commerce today

Electronic commerce, or e-commerce, as it is commonly known, is the technique of

selling goods or services through an electronic media, most of the time though, the
term refers specifically to internet trading. Throughout the last decade, e-commerce
has taken a significant share of the economic activities conducted all along the world:
buying something on a website has become such an everyday activity as visiting the
little convenience store next door.

According to the U.S. Census Bureau, e-commerce activity increased between 2007
and 2008 at a higher rate than total economic activity in three out of four dominant
economic sectors (those being manufacturing, wholesale, retail and service
businesses). The „E-Stats” report of the Census Bureau1 also showed that
manufacturers and wholesalers used e-commerce much more extensively, than the
retail and service industries.

As a result, business-to-business trading has taken a large share of total e-

commerce activity in that timeframe, with 92 percent of all transactions conducted in
a B-to-B environment. These data might suggest that consumer protection in e-
commerce should receive a higher emphasis on B-to-B regulations, but later on, we
will see that the unique characteristics of this trading environment make B-to-C, and,
most importantly, C-to-C transactions a significant issue to consider, even with their
lower share in the activities conducted.

We have already taken a look at the share of the various sectors inside total e-
commerce, but how does e-commerce activities stack up as a share of total
transactions inside each sector?

According to the aforementioned 2008 study, electronic trading was most dominant in
the manufacturing sector, taking up 39 percent of all shipments, a share which has

1
’E-Stats’ (http://www.census.gov/econ/estats/2008/2008reportfinal.pdf)
been continuously increasing since 2003. Dropping behind, wholesalers took the
second place with their e-commerce activity taking up 20.6 percent of all sales.

Retailers and Selected Service Industries were the least reliant on electronic trading,
with their shares of 3.6 and 2.1 percent respectively. However, we must point out that
their growth rates from the previous year – 3.3 and 14.1 percent – are showing an
increasing trend in sales, especially in the case of the service industries.

Looking back, what can we say in general about the presence of e-commerce in the
economy? It is clear that as of now, e-commerce takes up a small share of the
market, with some emerging importance in B-to-B relationships, with only nominal
shares in retail activities. However, the trends and growth patterns point to additional
increases in all of these categories, making e-commerce a very important method of
doing business for future considerations.

However, the real question is still unanswered: what should and what can consumer
protection regulation do when dealing with e-commerce?

E-commerce from a consumer protection standpoint

Internet transactions are theoretically considered the same as a business conducted

in more „traditional”, offline manners: goods or services are exchanged between a
selling and buying party, most commonly in return for a sum of money transferred
from one actor to the other. Consumer law is present all the same: misleading your
customers is condemned no matter if it is done through paper-based advertising, in
your store or on your website and through e-mail messages.

However, the unique trading environment of the internet allows prospective frauds to
circumvent regulations and take advantage of loopholes in some ways that weren’t
feasible in the past.
The first of these special characteristics is what Howells calls the „democratization of
entrepreneurship”2: e-commerce presents aspiring traders with significantly lowered
barriers of entry, as setting up a website and online catalogue of products can be
achieved by only a fraction of what it would cost to rent store space and commence
daily retail operations in an offline environment. Some argue that customers
effectively become producers.3

Moreover, trading on the internet doesn’t only lower the startup costs, but with the
availability of a wide range of search tools and trading portals, marketing and
advertising also becomes cheaper, and customers can occasionally find you based
solely on product information provided, with no additional marketing spending
necessary.

These factors result in large numbers of smaller sellers entering the market: although
the website doesn’t give out exact figures, some argue that the online auction site
eBay.com has tens of millions of sellers worldwide.4

Going back to the aforementioned topic of marketing, it is also worth mentioning that
internet advertising removes the intermediaries we became used to existing (e.g.
television and radio channels and broadcasters, advertising agencies), which means
decreasing the number of levels of regulation and supervision a misleading
advertisement would have to pass through before getting out to costumers.

Finally, we must also mention the problems associated with the anonymity and low
cost of online communications: since sending out spam messages through e-mail
has very small costs (especially marginal costs are close to zero), and the anonymity
of the medium greatly reduces the risks of getting caught, frauds can try carrying out

2
Howells, G. [2010]: ’Handbook of research on international consumer law’ (pp.333)
3
Swire, P. [2006]: ’The Internet and the Future of Consumer Protection’ (pp. 10)
4
’ Number of Ebay Sellers’ (http://www.numberof.net/number-of-ebay-sellers/)
scams that would be normally so unrealistic, that the small number of people fooled
by them would make their use unpractical.

With all these intricacies and special features of the internet trading environment
reviewed, we must next take a look at how the presence of these unique
circumstances might influence the role of the regulator in this situation.

The role of the regulator on the Internet

The first guess of an uneducated spectator would most logically be that the increased
ease of scamming and consumer deception on the internet coupled with the lack of
intermediary channels which would normally serve as part of the regulation
framework, a much stricter role and presence of consumer protection measures
would be required.

There are lots of claims supporting this argument: apart from the difficulties
mentioned earlier, the relative novelty of the medium also holds the danger of
customers being unfamiliar with and unprepared for common methods of deception,
leaving it up solely to the regulator to protect them.

Also, some additional problems arise with the elimination of geographical barriers.
Product authenticity, for example, is difficult to determine when an electronic
storefront offers only a photograph of the goods before we make an irreversible
purchase.

This characteristic of the internet also results in a much larger share of retail trading
across borders, which calls for a higher degree of cooperation and standardization
between the regulative bodies of individual countries. The EU, for one, has already
passed a directive which promotes the cooperation of the various consumer
protection agencies of individual member states.
There is, however, some debate concerning whether this approach of increased
regulation is the most appropriate one. Some argue that the internet offers so many
sources of free information for prospective customers that the role of the regulator
becomes minimal: with various websites available which offer ratings of individual
sellers and transactions in multiple categories, along with product review portals,
buyers have a wide range of tools at their disposal to efficiently protect themselves
against any deception and fraud.

However, this elimination of information asymmetry still raises a question about how
much effort from consumers should be required: even though they possess the
necessary tools, is it really fair to leave them to fend for themselves or is it the
responsibility of regulators to watch out for scammers even if consumers could take
care of this task on their own?

Finally, a third approach argues that offline and online transactions shouldn’t be
viewed as two separate categories, as they are closely linked, and the role of the
regulator should vary from case to case, depending on the specific circumstances
which pertain to that particular occurrence.

In the following sections, I will attempt to dissect the framework of e-commerce from
a regulative point of view, trying to identify what specific measures and rules are
warranted from a policy maker to successfully control this industry.

Specific issues regarding consumer protection and the internet

Naturally, we will start this methodical analysis by looking at the most fundamental
legal issue concerning business transactions, i.e. the various contracting methods
through which e-commerce activities might be conducted and what kind of different
approaches these warrant when compared to everyday offline retailing.
Imagine walking into a grocery store to buy a carton of milk. In order to complete that
small purchase, the vendor presents you with a multiple-page contract detailing the
terms you should follow in order to enter into business with him. After reading
through all the conditions, you signal your acceptance by banging once on the desk,
then exit the store with your newly acquired beverage.

Sounds rather silly, doesn’t it? This situation is almost impossible to imagine when
talking about offline transactions, but it is essentially what happens with almost every
internet purchase: most e-commerce websites have a very detailed and lengthy list of
„terms and conditions”, to which the customer usually agrees with clicking their
mouse, an ordinary activity which usually carries no legally bonding significance.

One problem with this practice is that usually the terms are located at a different
section of the website than on which the purchases are made – very often a
customer accepts a long list of policies without even being aware of them. In general,
business law differentiates between three types of contracting practices:

The first of these is that of shrink-wrap contracts, which refers to the oft-occurring
fashion of presenting contract terms to the customer only after the purchase has
been made (hence the name, which refers to the offline occurrence of the matter,
with terms of business being packaged inside the box of a product).

Between 1996-1999, the National Conference of Commissioners on Uniform State

Laws (NCCUSL) has produced a proposal called the Uniform Computer Information
Transactions Act (UCITA), a legislation aimed to standardize electronic contracting
procedures inside the US. However, out of the fifty states, only two – Maryland and
Virginia – accepted the act, which was welcomed with general controversy. 5

Most people argued that many measures of the UCITA helped large businesses and
the government at the expense of consumers, with statutes that, for example, would

5
UCITA Online (http://www.ucitaonline.com/)
have codified shrink-wrap agreements by making customers legally obligable to be
bound by whatever terms they accepted without being presented to them.6

As of now, the case of shrink-wrap contracts is a highly controversial and unclear

area of regulations, as it is difficult to see to which degree these agreements are
enforceable, and consumers are especially endangered to frauds when they are
dealing with this type of online contracts.

The second case is that of click-wrap contracts: in this type of contracting, the buyer
is given the terms and conditions of the transaction prior to making the purchase, and
has to perform some kind of action, most usually clicking a button with their mouse
(hence the name) to signal that they accept those terms.

This type of e-commerce contracting is the most transparent and the one which most
closely resembles traditional, offline retailing, and although there are a few
differences – the entirety of the list of terms is usually only accessible via scrolling or
some other additional action and the legally binding effect of a simple click with a
mouse is often not evident for consumers – this method requires the least alterations
to consumer protection policies.

In the EU, for example, the E-Commerce Directive ensures that there are no
unintended acceptance of contracts by simply requiring confirmation of entering into
contracts with an additional click.7

The last type of agreements, browse-wrap contracting, is a mixture of these two

practices, with the terms being presented on the website prior to the purchase, but at

6
’ Burmeister, R.: UCITA: "Shrink-wrap" license agreements ’
( http://news.cnet.com/UCITA--Shrink-wrap-license-agreements/2009-1081_3-
276012.html)
7
Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on
certain legal aspects of information society services, in particular electronic commerce, in
the Internal Market, 2000 OJ L178/1, http://ec.europa.eu/internal_market/e-
commerce/directive_en.htm, Art. 11(1).
a space separate from that used to making purchases. Customers can easily enter
into business without encountering the terms, as there is no explicit confirmation
necessitated and navigation of the website is possible without ever seeing the
conditions of the company.

This practice is similar to shrink-wrap contracting from a legislative viewpoint, as

courts have trouble deciding whether buyers can be legally bound by the terms when
they didn’t actively and knowingly encounter and accept them.

At the beginning of the 1990s, when e-commerce started emerging, there have been
various controversies and debates over whether the statutes and laws that had been
used to govern traditional contracting policies are applicable to business transactions
conducted online.

The first of these issues was that of whether a business procedure which involves
neither papers, neither ink, can be bound by laws which refer to terms „in writing”, „on
paper” and which require a signature to make a contract enforceable?

Since then, there have been a wide number of statutes and legislations passed, both
in the US and in the EU, which were aimed at making this issue more transparent
and easily standardizable: the Uniform Electronic Transactions Act (UETA), and its
federal counterpart, the Electronic Signatures in Global and National Commerce Act
(ESIGN), for example, make it clear in American law, that electronic text can be
considered „written” and that electronic signatures hold the same legally binding
characteristics than their ink and paper based equals.

„(a) A record or signature may not be denied legal effect or

enforceability solely because it is in electronic form.
(b) A contract may not be denied legal effect or enforceability solely
because an electronic record was used in its formation.
(c) If a law requires a record to be in writing, an electronic record
 satisfies the law.
(d) If a law requires a signature, an electronic signature satisfies the
law.”8

Statutes like this, concerning electronic contracts and the magnitude to which they
can be upheld legally, are often considered to be a double-edged sword: on one
hand, they standardize and clear up the various legal issues and grey area
associated with e-commerce, and thus actually facilitates and encourages the
expansion of the sector.

On the other hand, by making electronic contracts universally enforceable, these

legislations create new problems from a customer protection standpoint: numerous
issues can arise which would make frauds possible, thanks to the fundamental
differences between electronic and paper-based record keeping.

Opening an electronic document, for example, requires a compatible software. If the

format of the document is an older, outdated one, it might be possible that one or
more of the parties engaged in the transaction are unable to access the terms of the
business.

A loss of storage data is also a looming danger: paper-based contracts can be

relatively safely stored in designated areas, while hard drives and disks are often
prone to malfunctions, and the entirety of contracts can be lost if there is no backup
of the data present.

Last, but not least, we must also mention electronic signatures, which are much
easier to forge than their traditional counterparts: if electronic signatures present
legally binding, enforceable agreements, it seems relatively simple to enter into a
contract in someone else’s name, with their resources to prove the fraud being
extremely limited.

8
’Uniform Electronic Transactions Act’ [1999], § 7
Some of the aforementioned statutes do contain some provisions which try to
alleviate these issues: ESIGN, for example, has a part pertaining to notifications
toward consumers, explicitly requiring that buyers agree and be notified of policies
regarding e-mail notifications (the underlying danger here is that of people changing
e-mail addresses often, and thus losing important information and notifications
regarding their past contracts) (15 USC § 7001(c)).

Furthermore, ESIGN states that some messages of emphasized importance

(cancellations, defaults) are to be sent via regular mail, in order to ensure customers’
receipt of these notices (15 USC § 7003(b)). This being only one of few examples, it
must be noted that similar provisions exist in other markets as well.

Another notable aspect of the unclear legislations concerning e-commerce is that of

the presence of non-human intermediaries and agents in the most basic activities
conducted on the market.

It must be pointed out that interfacing with electronic agents was something
customers regularly did before the development of the internet: soda vending
machines or the ticket printers located at subway stops are good examples of buyers
interacting with an electronic intermediary.

In these cases, the other party of the contract is the operator of the machinery, and
the transaction goes down with the mediation of the electronic equipment. The United
Nations passed specific legislation pertinent to such situations in 1996, with the
Guide to Enactment of the Model Law on Electronic Commerce, which states that

„Data messages that are generated automatically by computers

without direct human intervention should be regarded as ’originating’
from the legal entity on behalf of which the computer is operated.”9
9
United Nations Commission on International Trade Law (1999), Model Law on Electronic
Commerce with Guide to Enactment 1996,
http://www.uncitral.org/pdf/english/texts/electcom/05-89450_Ebook.pdf
However, the aforementioned examples relate to cases in which the electronic agent
in question is a relatively simple piece of machinery, designed to fulfill only one highly
automated purpose. What happens if we try to apply these statutes to modern
computers and the internet?

The first problem we must face is that with internet transactions, no geographical
limitations and barriers should apply. As such, there are actually multiple electronic
intermediaries present, and the customer physically interfaces with only his own
computer, which may happen at a place far away from the seller and the server on
which their online ecosystem is located.

This makes it hard to determine exactly which legal jurisdiction the case should fall
under, and as such, it would be hard to fairly assess any legal claims from the
parties, unless the pertinent laws are common and standardized, something which
both the EU and the US seek to achieve internally, but which has not been
excessively promoted in international connections between the two sectors.

Another problem arising with the UN statute is that it was written with very simple
computer systems in mind. Today, it is not entirely infeasible to create a website or
system which is able to „learn” and adapt to various circumstances, making it
extremely difficult to determine how a legal case should view these electronic
storefronts in terms of data originating with or without human intervention, and
whether the operator of the machinery and the website can be made responsible for
information generated by a self-learning algorithm.

ESIGN and UETA can be attributed to these cases in the US, and they do an
acceptable job at addressing problems about the lack of human interaction in a
transaction. In Europe, however, there is still a significant grey area concerning this
issue, and policy makers have some work to do before customer protection can
sufficiently account for the common problems raised about internet commerce.
Conclusion

Although e-commerce is far from taking over the majority of business transactions in
any sector, it is undeniable a rapidly spreading form of doing business, and as such,
must be approached with emphasized concern and importance, especially in this
early stage of its existence.

The relative novelty of e-commerce makes it a highly lucrative area for prospective
scammers and frauds, as consumers are still uneducated about the specific
characteristics of this practice and the dangers and legal issues stemming from them.

As such, it is up to policy makers to devise a system of consumer protection rules

which adequately serve to shield all actors from taking unfair advantage of the
electronic marketplace, however, the elimination of geographical boundaries and the
often international nature of such trades make this very difficult.

In the US, two important legislations are in effect: UETA and ESIGN account for
specific contract types and the adaptation of contractual legislations from paper-
based to contract to electronic ones. These statutes also address to some extent the
loopholes and controversies arising from the increasing complexity and self-operation
of computer systems.

The EU’s policy framework is compatible with that of America in most cases, but
there is still some work needed to achieve complete clarity and standardization.

However, it must also be noted that some argue that internet transactions eliminate
the need for a legislator: as the asymmetry of information is removed, consumers
have access to such a magnitude of pertinent information that they are theoretically
able to protect themselves from any scams. The question, however, is not whether
buyers have the ability to counter fraudulent activities, but if this is really their
responsibility, or that of legislators. The answer seems the latter: but in that case,
policy makers still have some work to do.
Bibliography

• Directive 2000/31/EC of the European Parliament and of the Council of 8 June

2000 on certain legal aspects of information society services, in particular
electronic commerce, in the Internal Market, 2000 OJ L178/1,
http://ec.europa.eu/internal_market/e-commerce/directive_en.htm, Art. 11(1).
• E-Stats (http://www.census.gov/econ/estats/2008/2008reportfinal.pdf)

• Howells, G [2010].: ’Handbook of research on international consumer law’

• Number of Ebay Sellers’ (http://www.numberof.net/number-of-ebay-sellers/)
• Burmeister, R.: UCITA: "Shrink-wrap" license agreements
(http://news.cnet.com/UCITA--Shrink-wrap-license-agreements/2009-1081_3-
276012.html)
• Swire, P. [2006]: ’The Internet and the Future of Consumer Protection’

• UCITA Online (http://www.ucitaonline.com/)

• Uniform Electronic Transactions Act [1999], § 7
• United Nations Commission on International Trade Law (1999), Model Law on
Electronic Commerce with Guide to Enactment 1996,
http://www.uncitral.org/pdf/english/texts/electcom/05-89450_Ebook.pdf