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81–963CC 2002

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/house

2

COMMITTEE ON ENERGY AND COMMERCE 

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman 

MICHAEL BILIRAKIS, Florida 

JOE BARTON, Texas 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

JAMES C. GREENWOOD, Pennsylvania 

CHRISTOPHER COX, California 

NATHAN DEAL, Georgia 

RICHARD BURR, North Carolina 

ED WHITFIELD, Kentucky 

GREG GANSKE, Iowa 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES ‘‘CHIP’’ PICKERING, Mississippi 

VITO FOSSELLA, New York 

ROY BLUNT, Missouri 

TOM DAVIS, Virginia 

ED BRYANT, Tennessee 

ROBERT L. EHRLICH, Jr., Maryland 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

ERNIE FLETCHER, Kentucky 

JOHN D. DINGELL, Michigan 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RALPH M. HALL, Texas 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, Jr., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

PETER DEUTSCH, Florida 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

TOM SAWYER, Ohio 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

KAREN MCCARTHY, Missouri 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

THOMAS M. BARRETT, Wisconsin 

BILL LUTHER, Minnesota 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

CHRISTOPHER JOHN, Louisiana 

JANE HARMAN, California 

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 

NATHAN DEAL, Georgia 

Vice Chairman 

ED WHITFIELD, Kentucky 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

JOHN B. SHADEGG, Arizona 

ED BRYANT, Tennessee 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

ERNIE FLETCHER, Kentucky 

W.J. ‘‘BILLY’’ TAUZIN, Louisiana 

(Ex Officio) 

EDOLPHUS TOWNS, New York 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

CHRISTOPHER JOHN, Louisiana 

JANE HARMAN, California 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

BART GORDON, Tennessee 

PETER DEUTSCH, Florida 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

JOHN D. DINGELL, Michigan, 

(Ex Officio) 

(II) 

3

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) 

(1)

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. 

2

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 ecommerce 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. 

3

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 bygone 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, cyberVerDate Jan 31 2003 09:00 Feb 24, 2003 Jkt 010199 PO 00000 Frm 00007 Fmt 6633 Sfmt 6621 W:\DISC\81963 81963
4

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 ecommerce, 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 

5

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. 

6

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 

7

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 

8

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 ecommerce 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 online 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.]

9

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 bricksand-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 intraindustry 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 protecVerDate Jan 31 2003 09:00 Feb 24, 2003 Jkt 010199 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 W:\DISC\81963 81963
10

tion 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 ecommerce. 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 ecommerce 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 inferiorquality 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. 

11

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. 

12

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. 4David Hyatt, ‘‘Franchise Laws in the Age of the Internet,’’ White Paper, National Automobile 

Dealers Association, McLean, VA, January, 2001. 5State 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/a1l8l3lcommerces18.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 

13

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 inconVerDate Jan 31 2003 09:00 Feb 24, 2003 Jkt 010199 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 W:\DISC\81963 81963
14

sistent 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. 

15

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 ecommerce 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 

16

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 tick- ets 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 

17

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 ecommerce. 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 

18

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 socalled 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. 

19

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. 

20

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. 

21

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. 

22

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. 

23

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. 

24

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 twentyfive (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.’’

25

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. 

26

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 custommade. 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. 

27

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.’’

28

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.

29


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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. 

34

1The 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. 

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 Ecommerce.’’ 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. 

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 

35

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’’). 3See 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. 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. 

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 alreadyformed 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. 

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

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

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 dealVerDate Jan 31 2003 09:00 Feb 24, 2003 Jkt 010199 PO 00000 Frm 00039 Fmt 6633 Sfmt 6621 W:\DISC\81963 81963
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6See Complaint in Fair Allocation System, No. C-3832 (1998), available at http://www.ftc.gov/

os/1998/9810/9710065cmp.htm. 7See Consent Order in Fair Allocation System, No. C-3832 (1998), available at http://

www.ftc.gov/os/1998/9810/9710065.do.htm. 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). 9FTC 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. 

ers.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

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. 

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 standalone 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

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 

37

10FTC/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; 11Powers v. Harris, No. Civ. 01-445-F (W.D. Okla. filed Mar. 14, 2001). 12FTC Amicus Brief in Powers v. Harris (August 29, 2002) available at http://www.ftc.gov/os/

2002/09/okamicus.pdf. 13Fiona Scott Morton, Florian Zettelmeyer, and Jorge Silva-Risso, Internet Car Retailing, 49 

J. Indus. Econ. 501, 502 (2001). 14Mark Cooper, A Roadblock on the Information Superhighway: Anticompetitive Restrictions 

on Automotive Markets 38 (Feb. 2002) available at <http://www.consumerfed.org/ 

internetautosales.pdf>. 15 Id. at 37. 16Fiona 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 <http://www.yale.edu/law/leo/papers/ scottmorton.pdf>. 17First PPI Report at 7. 

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

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

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

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 manuVerDate Jan 31 2003 09:00 Feb 24, 2003 Jkt 010199 PO 00000 Frm 00041 Fmt 6633 Sfmt 6621 W:\DISC\81963 81963
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18See, e.g., Second PPI Report at 21. 19 Id. 20Dickerson 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). 25See Swedenburg v. Kelly, 2000 WL 1264285 (S.D. N.Y. Sept. 5, 2000). 26See Mast v. Long, No. CS-01-00298 (E.D. Wash.). 

facturers and online sellers without a franchise presence from selling new cars directly to consumers. 

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

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. 

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.’’ 

39

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. 

40

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 

41

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 

42

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 licensVerDate Jan 31 2003 09:00 Feb 24, 2003 Jkt 010199 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 W:\DISC\81963 81963
43

ing 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. 

44

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.

45

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 threetiered 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 

46

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 outof-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 upVerDate Jan 31 2003 09:00 Feb 24, 2003 Jkt 010199 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 W:\DISC\81963 81963
47

hold 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 WebbKenyon 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 

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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