```

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

                      IMPEDIMENTS TO DIGITAL TRADE

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                COMMERCE, TRADE AND CONSUMER PROTECTION

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 22, 2001

                               __________

                           Serial No. 107-36

                               __________

      Printed for the use of the Committee on Energy and Commerce

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                   U.S. GOVERNMENT PRINTING OFFICE
72-824                     WASHINGTON : 2001

_______________________________________________________________________
 For sale by the Superintendent of Documents, U.S. Government Printing 
                                 Office
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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

        Subcommittee on Commerce, Trade, and Consumer Protection

                    CLIFF STEARNS, Florida, Chairman

NATHAN DEAL, Georgia                 EDOLPHUS TOWNS, New York
  Vice Chairman                      DIANA DeGETTE, Colorado
ED WHITFIELD, Kentucky               LOIS CAPPS, California
BARBARA CUBIN, Wyoming               MICHAEL F. DOYLE, Pennsylvania
JOHN SHIMKUS, Illinois               CHRISTOPHER JOHN, Louisiana
JOHN B. SHADEGG, Arizona             JANE HARMAN, California
ED BRYANT, Tennessee                 HENRY A. WAXMAN, California
STEVE BUYER, Indiana                 EDWARD J. MARKEY, Massachusetts
GEORGE RADANOVICH, California        BART GORDON, Tennessee
CHARLES F. BASS, New Hampshire       PETER DEUTSCH, Florida
JOSEPH R. PITTS, Pennsylvania        BOBBY L. RUSH, Illinois
GREG WALDEN, Oregon                  ANNA G. ESHOO, California
LEE TERRY, Nebraska                  JOHN D. DINGELL, Michigan,
W.J. ``BILLY'' TAUZIN, Louisiana       (Ex Officio)
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Kovar, Jeffrey D., Chief U.S. Negotiator, Hague Convention 
      and Assistant Legal Advisor for Private International Law, 
      U.S. Department of State...................................     6
    Richardson, Bonnie J.K., Vice President, Trade and Federal 
      Affairs, Motion Picture Association of America.............    17
    Vradenburg, George, III, Executive Vice President, Global and 
      Strategic Policy, AOL/Time Warner..........................    11
    Waggoner, Debra L., Director, Public Policy, Corning, Inc....    47
    Wellbery, Barbara S., Partner, Morrison and Foerster, L.L.P..    22

                                 (iii)

  

 
                      IMPEDIMENTS TO DIGITAL TRADE

                              ----------                              

                         TUESDAY, MAY 22, 2001

              House of Representatives,    
              Committee on Energy and Commerce,    
                       Subcommittee on Commerce, Trade,    
                                   and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m. in room 
2322, Rayburn House Office Building, Hon. Cliff Stearns 
(chairman) presiding.
    Members present: Representatives Stearns, Deal, Shimkus, 
Bryant, Pitts, Walden, Bass, Tauzin (ex officio), Towns, 
Harman, and Gordon.
    Staff present: Ramsen Betfarhad, majority counsel; David 
Cavicke, majority counsel; Mike O'Rielly, majority professional 
staff; William Carty, legislative clerk; and Bruce Gwinn, 
minority counsel.
    Mr. Stearns. Good afternoon. The subcommittee will come to 
order. I want to particularly welcome all the witnesses today 
to the Commerce, Trade, and Consumer Protection Subcommittee 
hearing on digital trade.
    I want to convey my special thanks to the Department of 
State for enabling Mr. Kovar, our Chief Negotiator at the Hague 
Convention, to testify today. I know you have had short notice, 
but I appreciate sincerely your coming. I understand the 
Department took on the tall order of acquiring all the 
requisites approval in a short period of time. This type of 
government agency responsiveness and efficiency is always 
appreciated and remembered.
    I am pleased that the committee is looking at an 
increasingly significant component of our international trade, 
namely digital trade. Let me just cite to a statement that I 
received this morning to illustrate the importance of digital 
trade. The statement, part of a daily email briefing on tech 
issues by the Washington Association, reads, ``Did you know 
that Forrester Research predicts worldwide Internet commerce, 
both business-to-business and business-to-commerce, will hit 
almost $7 trillion in the year 2004? North America represents a 
majority of this trade, but its dominance will fade as some 
Asian Pacific and Western European countries hit hypergrowth 
over the next 2 years. There is no question that as e-commerce 
grows digital trade, or international e-commerce, will grow 
even faster.''
    Digital trade issues raised in today's hearing, such as the 
Hague Convention, classification of digitally delivered 
products, the Safe Harbor, et cetera, are seemingly innocuous 
and technical in nature, of interest to and worthy of 
consideration by lawyers only. But they could and do impact the 
growth of digital trade in profound ways.
    It is incumbent on us to promote policies that advance 
digital trade, as it holds great promise, not just for the 
American economy but also the world economy as a whole. As 
evidenced by some of the testimony we will hear today, digital 
trade holds the real promise of providing people in 
historically underserved nations with a real chance of 
improving their economic standing and to do so at an 
accelerated pace.
    But that promise is all contingent on coordinated and 
affirmative action on the part of the administration, Congress, 
and industry, making sure that forces of global protectionism 
and fragmentation don't take hold of digital trade. The risk of 
national and/or regional policies having either intended or 
unintended consequences stifling digital trade is ever present. 
Vigilance and constructive engagement on all transnational 
issues affecting digital trade must be maintained by all--the 
administration, Congress, and industry.
    Our hearing today signals the subcommittee and full 
committee's commitment to such vigilance and constructive 
engagement. Mr. Kovar's efforts at the Hague is indicative of 
the administration's vigilance and constructive engagement. I 
commend the State Department for its work on the Hague 
Convention, and I urge greater vigilance and constructive 
participation by the administration in all forms, regional or 
multinational, where issues of import to digital trade are 
being considered and negotiated.
    Having been in Congress for a little over 12 years, I know 
how difficult it is to advance a complete and public policy on 
a national scale of this matter. There are always differing 
opinions as to the best policy and, of course, differing 
sensitivities to the policy. So I am very mindful that in the 
international context any issue worth the paper it is written 
on is engendered with great complexity. On international 
matters, parties may not only have differing thoughts with 
respect to an issue, but those different thoughts may be driven 
by a completely different cultural, historic, and economic 
world view from ours.
    With that understanding, I want to emphasize that this 
subcommittee's role in digital trade disputes shall be a 
constructive one. Constructive engagement does not, however, 
preclude active participation. My colleagues, we look forward 
to working closely with the administration and industry to 
advance the cause of digital trade, because it holds great 
promise for all of us.
    Mr. Shimkus for an opening statement.
    Mr. Shimkus. Thank you, Mr. Chairman. I am glad we have 
this great panel of folks to testify. I look forward to 
hearing--its complex issue for us simple folks from southern 
Illinois. I look forward to--I am having--I do have an 
opportunity to travel to Europe at the end of this week as part 
of the NATO Parliamentary Assembly that I am a member of. We 
will be talking some trade issues with our fellow 
parliamentarians that are members of the NATO Alliance.
    So maybe there is something that I can learn here today and 
talk to some of my colleagues from our transatlantic partners 
that will be helpful in the discussions or at least throw 
something new out on the table as far as an impediment. So I 
look forward to your testimony, and I yield back my time, Mr. 
Chairman.
    Mr. Stearns. The gentleman from New Hampshire, Mr. Bass.
    Mr. Bass. Thank you very much, Mr. Chairman, and I 
appreciate this hearing. It is interesting; it is part of an 
ongoing learning curve in this what is a very complicated 
issue. I am looking forward to hearing from the witnesses, and 
I have three observations or concerns, if I may.
    First, I am concerned about mechanisms that national and 
international law might use to compel private industry to 
become tax collectors for foreign nations. The positions we 
take on the applicability of State sales and use taxes in the 
U.S. may have broad implications internationally.
    Second observation, I am interested in the classification 
of products as goods or services being dependent upon how the 
product is delivered. While it may be premature to consider 
this question, again, our answers may affect domestic policy in 
unintended ways.
    And, last, I am interested in related jurisdictional 
questions regarding the location of the transaction and any 
involved parties, how problems ought to be mediated and, where 
necessary, adjudicated, and which treaty or convention 
describes the rules.
    I look forward to hearing the testimony, and I yield back 
to the chairman.
    Mr. Stearns. I thank the gentleman. The gentleman from 
Tennessee?
    Mr. Bryant. Thank you, Mr. Chairman. I, too, appreciate 
your having this hearing, and I must apologize to the 
panelists. We are also in a concurrent meeting that will start 
at 2:30 for the Prescription Drug Task Force, and I am going to 
be moving back and forth. And I don't have any statement for 
the record other than as I came in I heard part of Mr. Shimkus' 
statement that he hoped to learn something here. Having taught 
him when he was at West Point, I am glad to hear he said that.
    Open to learning something.
    Mr. Stearns. I thank my colleagues. Let me start by just 
introducing briefly the witnesses. Mr. Jeffrey Kovar, Chief 
U.S. Negotiator, Hague Convention, and Assistant Legal Advisor 
for Private International Law, U.S. Department of State. And I 
want to thank you for participating on one panel. My concern 
was we have both government and private industry on one panel 
only because we have so many amendments today, we are going in 
and out, and I thought it might be--to expedite this and at the 
same time allow us a forum to talk to all of you on different 
subjects. So I appreciate your assistance here and your 
patience.
    Mr. George Vradenburg, executive vice president, Global and 
Strategic Policy, AOL/Time Warner. We have Ms. Bonnie 
Richardson, vice president, Trade and Federal Affairs, Motion 
Picture Association of America; Ms. Barbara Wellbery, partner, 
Morrison and Foerster; and Ms. Debra Waggoner, director, Public 
Policy, Corning, Inc.
    Before I go, the distinguished ranking member, Mr. Towns?
    Mr. Towns. Mr. Chairman, being that I was a little delayed, 
detained there, I would just put my opening statement in the 
record, and we just go right to the witnesses. Thank you for 
your courtesy.
    [The prepared statement of Hon. Edolphus Towns follows:]

Prepared Statement of Hon. Edolphus Towns, a Representative in Congress 
                       from the State of New York

    Thank you Mr. Chairman. I look forward to hearing from the panel 
today.
    I am heartened by the committee's willingness to discuss regulatory 
and digital trade, and the impediments that our workers and businesses 
face in today's marketplace.
    While there are many sides of this debate that are ripe for 
discussion such as consumer protection and un-metered access for 
internet use, my primary focus is on intellectual property--and the 
protection of that property from international and domestic pirates.
    Intellectual Property as a traded good is one of America's greatest 
assets. It is protected in the Constitution and we should afford the 
producers of this material--software companies, record labels, artists, 
and motion picture studios to name a few--the same protections on an 
international level.
    Let me be clear when I state that strong enforcement of existing 
copyright law is needed immediately on an international level. We here 
in the United States would not stand for a rogue nation to take our 
oil, natural gas, or precious minerals from us--that would be theft 
plain and simple. This is the same principle Mr. Chairman. If a 
customer in Hong Kong would like to listen to Al Green, watch the 
upcoming movie Pearl Harbor, or use Microsoft Excel, they should have 
to pay for it just like they would pay for a barrel of oil from West 
Texas or a Junior's Cheesecake from Brooklyn, New York.
    Lastly Mr. Chairman, it is my hope that we can keep the internet 
and the companies who compete on it, free from undue trade regulations 
that may put our companies at competitive disadvantages over their 
foreign counterparts. We should allow these companies' business models 
to catch up with the forward moving technology.
    The global economy is not coming; it is upon us and we should do 
everything in our power to assist our companies who are competing in 
this global economy.
    Once again, thank you Mr. Chairman and I yield back the balance of 
my time.

    [Additional statements submitted for the record follow:]

 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce

    Over 300 million people around the globe are now connected to the 
Internet. That is up from just 56 million in January of 2000. The 
growth in Internet connectivity is astounding. This increased 
connectivity for both individuals and companies has fueled economic 
growth--here at home and globally. Unfortunately it has also sparked 
protectionist responses from countries that misunderstand the role the 
Internet and e-commerce can play in creating economic growth and 
prosperity for their people. Further, these proposed responses or 
regimes are often designed or created as hurried reactions by 
intergovernmental organizations or blocks of countries with old-style 
economies.
    This hearing will highlight a few of the very important issues we 
face in today's world of digital and global trade. I would like to 
thank Chairman Stearns for beginning a dialogue on the fundamental 
issues impacting international e-commerce. Make no mistake about it: 
this Committee will tackle the difficult issues facing international 
digital trade. We plan to interact with the relevant participants in 
the new Administration and industry representatives to ensure that U.S. 
competitiveness and U.S. companies are not harmed by misguided foreign 
regimes. The U.S. Congress will not sit back and watch e-commerce 
become hostage to old modes of thinking. For instance, this hearing 
will examine issues relating to the WTO efforts on
    classification, as well as the Hague Convention on Jurisdiction, 
the Council of Europe's Cyber-Crime Treaty, and the so-called ``Model 
Contract'' relating to the EU Data Protection Directive. These are 
illustrative of the efforts by foreign governing bodies that can have a 
profound impact U.S. companies and more generally, e-commerce.
    The classification issue relates to the manner in which our trading 
partners in the WTO address digitally delivered products. Periodicals, 
music, movies and software no longer need to be packaged in cellophane 
and shipped to stores, news stands or homes. They can now be delivered 
over the Internet, decreasing costs and increasing convenience and 
efficiency. And as we see greater gains in technology it will be more 
than content that companies can deliver directly via the Internet.
    While methods of delivery have changed, many of the products 
delivered have stayed fundamentally the same. For example, software 
packaged and purchased from a local retailer can also be purchased over 
the Internet and delivered directly over the Internet. The products are 
identical, yet a few of our trading partners have indicated a 
preference to classify the latter as a service rather than a good under 
the WTO classification system. Some have proposed a ``drop it on your 
foot'' test for goods classification. This has serious trade 
implications given the increased use of digital delivery for goods. It 
means many products currently afforded the liberal treatment of goods 
under GATT could be classified as services and therefore subjected to a 
more restrictive--and possibly discriminatory--regime under GATS. It is 
important that we take the lead to ensure classification remains 
distinct from method of delivery. The Internet should facilitate trade, 
not present an additional barrier.
    I would also like to touch on another growing impediment to digital 
trade. More and more we are seeing countries or groups of nations 
develop legislative-like efforts which, in the context of digital 
trade, take on extraterritorial effects. In March we held a hearing on 
the EU Data Protection Directive and focused specifically on provisions 
of the Directive that could slow transatlantic data flows. Today we 
will take a closer look at the Safe Harbor and Model Contracts. Like 
the Directive, neither appears to comport with U.S. business practice 
and both ignore the benefits of information exchange. The Model 
Contract is particularly troubling because its provisions are much 
harsher than those of the Safe Harbor and have not been subject to 
negotiation with the United States.
    The new Administration has called on the EU to slow down, review 
the model contract and reexamine how the EU views U.S. privacy laws. I 
believe that this is the correct course and I look forward to working 
with the new Administration on this topic.
    In terms of the cyber crime treaty, many U.S. companies still see a 
need to address some flaws with the proposed language. These issues 
should be addressed. The Council of Europe should make an effort to fix 
the issues before the document becomes a ``final'' final. I welcome the 
new Administration's interest in working on this issue but more work 
seems to be necessary.
    For the Hague convention on jurisdiction, much more needs to be 
learned before such a proposal moves forward. The U.S. government 
should not be pressured to sign a bad document. The State Department 
and others have expressed restraint regarding the convention. They have 
shown a willingness to address existing flaws or walk away from the 
process if necessary. I support this stance and I look forward to 
working with them on this issue.
    The United States is a world leader for several reasons. Not the 
least of which is our ability to develop and embrace new technologies. 
With the advent of the rail, followed by the auto and finally the 
airplane, the geographical barriers to free flowing interstate commerce 
were all but eliminated. With the development of telecommunications, 
many of the same barriers were completely torn-down. We have only begun 
to tap into the potential benefits the Internet can offer. I suggest 
that our trade partners consider their long term economic development 
before existing trade agreements are altered to fit near term 
interests.
    I again thank the Subcommittee Chair for having today's hearing. It 
signals our interest in exploring these issues to ensure that the 
Congress is well aware of the relevant efforts by foreign governing 
bodies that can and will have an impact on e-commerce.
                                 ______
                                 
 Prepared Statement of Hon. Jane Harman, a Representative in Congress 
                      from the State of California

    I'd like to offer my thanks to the Chairman and Ranking Member for 
holding this hearing.
    It is critical that the Congress--and in particular the members of 
this Subcommittee, which is charged with overseeing trade and 
commerce--thoroughly understand the impact trade regimes and regulatory 
environments in other countries have on our companies and our 
consumers.
    Digital trade represents a tremendous opportunity for U.S. 
companies. The real growth sector in digital trade is business-to- 
business e-commerce. The global B2B market is expected to reach $8.5 
trillion by 2005. In addition to the direct financial impact, the 
growth of B2B can have the broadest impact on productivity in the 
global economy as it allows American companies to reach customers and 
suppliers around the world.
    But in order to realize that potential, we need to set forth new 
``rules of engagement'' that foster global digital trade and e-
commerce.
    Let me lay out some of the issues that I hope the witnesses today 
will address.
     What are the next steps in protecting intellectual 
property rights? The Internet creates the possibility of a virtually 
limitless market for digital content, but it also creates the 
possibility that music, movies and other products can be instantly and 
illegally distributed to millions of people.
    It seems to me that we have been seeing some progress on this issue 
on two fronts:

--first, technology-based responses like better ``watermarking'' of 
        digital content are becoming increasingly effective and 
        sophisticated and,
--second, more and more countries are adopting global standards like 
        those set out in the World Intellectual Property Organization 
        treaties that the U.S. ratified in 1998.
    But clearly we have a long way to go before companies are 
comfortable putting their content on line and consumer demand is being 
met.
     Who has jurisdiction when laws are broken over the 
Internet? The Hague Convention was intended to help address this 
question, but concerns have been raised that it fails to adequately 
take e-commerce and the Internet into consideration.
     Should the WTO classify digital trade as ``goods'' or 
``services?'' Goods receive the full protection of national treatment. 
Services do not. The distinction is particularly relevant to the 
entertainment industry, because the EU and Canada impose domestic 
content requirements on services, but not on goods. But most digital 
content falls somewhere between the two.
    Is this the right time to push for digital trade to be put in one 
or the other category, or would it be more advantageous to see a third, 
hybrid category that recognizes unique digital characteristics.
     How do to get more people around the world on-line? Most 
Americans who are on-line now take flat-rate, unlimited access to the 
Internet for granted. We also benefit from the cheapest telephone rates 
in the world. Internet users in other countries pay for their access by 
the minute.
    I am eager to hear what the witnesses have to say and I stand ready 
to work with you and others in the industry, with my colleagues on this 
Committee and in Congress, and with the Administration on shaping a 
trade and regulatory framework that helps put our companies at the 
center of a thriving international trade in digital goods and services.

    Mr. Stearns. I thank you. And, Mr. Kovar, we will start 
with you.

 STATEMENTS OF JEFFREY D. KOVAR, CHIEF U.S. NEGOTIATOR, HAGUE 
      CONVENTION AND ASSISTANT LEGAL ADVISOR FOR PRIVATE 
INTERNATIONAL LAW, U.S. DEPARTMENT OF STATE; GEORGE VRADENBURG 
  III, EXECUTIVE VICE PRESIDENT, GLOBAL AND STRATEGIC POLICY, 
AOL/TIME WARNER; BONNIE J.K. RICHARDSON, VICE PRESIDENT, TRADE 
  AND FEDERAL AFFAIRS, MOTION PICTURE ASSOCIATION OF AMERICA; 
 BARBARA S. WELLBERY, PARTNER, MORRISON AND FOERSTER, L.L.P.; 
 AND DEBRA L. WAGGONER, DIRECTOR, PUBLIC POLICY, CORNING, INC.

    Mr. Kovar. Thank you, Mr. Chairman, and thank you, members 
of the subcommittee, for inviting me to testify on behalf of 
the Department of State.
    I would like to tell you briefly about negotiations the 
Department is leading at the Hague Conference on Private 
International Law for a Convention on Jurisdiction and the 
Recognition and Enforcement of Foreign Judgments. This is a 
project that the United States initiated in 1992 to try to 
level the international playing field for American litigants 
and fill a major gap in the legal infrastructure of the global 
marketplace.
    The Hague Conference is the oldest organization in the 
world for the harmonization of private law, and it is a largely 
technical and non-political forum. The U.S. is a party to 
several Hague Conventions in the area of judicial cooperation 
and in family law.
    At present, there is no effective international regime for 
enforcing the judgments of national courts in transnational 
legal disputes, and the United States is a party to no regional 
or bilateral agreements providing the reciprocal of civil 
judgments. If not addressed, the widening gap between the 
increasingly global marketplace and the isolated national court 
systems could eventually have an inhibiting or distorting 
effect on the development of the world market.
    Moreover, American litigants are generally at a 
disadvantage, at least vis-a-vis many of our major trading 
partners in developing countries. Federal and State courts in 
the United States have a long tradition of enforcing foreign 
judgments, but American judgment holders are very often not 
able to enjoy equal enforceability abroad.
    The Hague Convention negotiations, if successfully 
concluded, hold out the promise of addressing these important 
needs. The draft convention would establish three categories of 
rules of jurisdiction in tort and contract for international 
cases. One category of rules would be required in every State 
that becomes a party to the convention, and your case under 
that rule of jurisdiction would lead to enforcement of the 
resulting judgment. Another category of rules would be 
prohibited for cases covered by the convention, even if those 
rules are currently provided under local law. And then the 
third category of rules would be local rules that fall outside 
of the convention, and enforcement under the convention would 
not be available for resulting judgments.
    It is not our preference in the U.S. to link enforcement of 
judgments to harmonized rules of jurisdiction, but European law 
approaches things this way, and our allies expect to restrict 
some traditional U.S. practices as the cost of agreeing to 
enforce U.S. judgments. Because U.S. courts are already largely 
receptive to enforcing foreign judgments, we are left without 
much leverage on this point.
    As you might imagine, even without considering the special 
jurisdictional problems raised by transactions carried out on 
the Internet, agreeing on a common set of jurisdictional rules 
that would apply in Federal and State courts in international 
cases poses special difficulties for the U.S.
    U.S. courts determine jurisdiction based on a due process 
analysis, which focuses on the fairness to the defendant. Most 
other countries in the world, by contrast, seek to establish 
more objective-looking rules of jurisdiction, and the draft 
provisions of the convention reflect this latter approach. It 
is not easy to harmonize these different approaches to 
jurisdiction, and countries are naturally wedded to their own 
traditions.
    On top of the traditional problems of harmonizing 
jurisdiction, sudden rise of electronic commerce has added 
immense new difficulties and uncertainties. The result has been 
that the 1999 preliminary draft of the convention, which is now 
available to everyone, is unfairly weighted against U.S. 
jurisdictional practices, and it doesn't adequately take into 
account electronic commerce and intellectual property 
considerations. Given these concerns, the U.S. successfully 
pressed to extend the Hague negotiations from their original 
deadline of the fall of 2000.
    The Hague Convention has held several meetings devoted to 
electronic commerce issues raised by the draft convention, 
including one meeting that focused on intellectual property 
concerns. International experts have been invited to 
participate in these meetings, and delegates have benefited 
from their contributions. Delegations have also convened a 
number of informal sessions over the last 9 or 10 months to try 
to prepare the ground for the next formal negotiation round, 
which is June 6 through 20 in the Hague. The schedule of 
negotiations calls for one more formal round of negotiations 
next year, but nothing has been scheduled yet.
    Here at home, the Department of State has coordinated with 
the Departments of Commerce, Justice, the Federal Trade 
Commission, the Patent and Trademark Office, Copyright Office, 
and other agencies. We have also reached out to business, 
consumer, and legal groups engaged in these issues. Just last 
week we convened two public all-day sessions at the Library of 
Congress and the FTC to hear views from the private sector and 
to prepare our negotiating positions for June.
    The Department believes we must take an extremely careful 
and deliberate approach in the Hague negotiations on issues 
related to the Internet. The law is in flux in the United 
States, and we have not found a consensus in the U.S. or 
elsewhere on how to proceed on these issues. As a result, we 
are continuing to consult widely to ensure that all the various 
interests are heard. We hope very much that effective solutions 
will emerge on the Internet jurisdiction issues, as well as on 
many of the other extremely difficult and controversial aspects 
of this draft convention.
    We have a lot to gain from a successful convention, and we 
are trying vigorously to reach the right balance of provisions 
to enable us to achieve a convention to which the U.S. could 
become a party.
    We hope, Mr. Chairman, to be able to remain in close 
contact with the subcommittee on these issues, and we thank you 
very much for the interest you have shown. I would be happy to 
answer any questions you might have.
    [The prepared statement of Jeffrey D. Kovar follows:]

  Prepared Statement of Jeffrey D. Kovar, Assistant Legal Adviser for 
          Private International Law, U.S. Department of State

    Thank you Mr. Chairman and members of the Subcommittee for inviting 
me to testify on behalf of the Department of State.
    The Department is leading U.S. efforts at the Hague Conference on 
Private International Law to negotiate a Convention on Jurisdiction and 
the Recognition and Enforcement of Foreign Civil Judgments. The Hague 
project--which was undertaken at the initiative of the United States in 
1992--would create harmonized rules of jurisdiction in international 
civil cases as well as common rules for recognizing and enforcing 
abroad the resulting judgments. Most foreign judgments are already 
recognized and enforced in the U.S. under state law, but most of our 
trading partners do not usually grant the same treatment to U.S. 
judgments. A successful convention would level the international 
playing field for American litigants and fill a major gap in the legal 
infrastructure of the global marketplace.
    Although international commerce, trade, and communications are 
accelerating at a breathtaking pace, and the growth of the Internet 
promises to make boundaries less relevant for commerce, the judicial 
settlement of transnational disputes remains largely confined to 
national territories. There is no effective regime for coordinating and 
enforcing the work of national courts in resolving transnational legal 
disputes. If this widening gap between the global marketplace and the 
isolated national court systems is not addressed, it could well slow 
progress and inhibit growth in trade.
    The Hague Convention negotiations, if successfully concluded, hold 
out the promise of addressing this important need. In this testimony, 
we will provide some history and background to the Hague negotiations, 
including how the Convention would work, describe some of the major 
obstacles facing our delegation, explain how we are addressing the 
critical issues raised by electronic commerce, and give some sense of 
what we think the road ahead looks like.

                               BACKGROUND

    The recognition and enforcement of judgments from one legal system 
to another has long been understood as a fundamental requirement for 
fully integrated markets. Thus, the framers of the U.S. Constitution 
included the Full Faith and Credit Clause to ensure that judgments from 
one state would be enforceable in every other. In the same way, as part 
of their movement toward a unified market several European countries 
concluded a convention in 1968 to provide recognition and enforcement 
of each other's judgments. This convention, called the Brussels 
Convention, became a required ticket of admission to the Common Market 
and then to the European Union. The Brussels Convention scheme was 
extended to non-EU countries in Europe in 1988 through a companion 
instrument called the Lugano Convention. It is now the subject of a 
regulation of the European Commission, scheduled to come into force in 
spring 2002.
    For many countries the enforcement of foreign judgments is not a 
matter of general law but is addressed through treaties. The United 
States is not a party to any convention or bilateral agreement on the 
recognition and enforcement of foreign judgments. We made an effort to 
conclude a treaty with the United Kingdom in the 1970s, which failed 
due to opposition in the UK toward the enforcement of U.S. tort 
judgments in UK courts.
    By contrast with the practice of most countries, however, the 
United States has led the way in enforcing foreign country judgments on 
the basis of comity. The Supreme Court embraced this approach over 100 
years ago in the case of Hilton v. Guyot, 159 U.S. 113 (1895). The 
National Conference of Commissioners on Uniform State Laws then 
codified the common law standard in the Uniform Foreign Money Judgments 
Recognition Act in the 1960's, which has been adopted in about \2/3\ of 
the states. Judgments from countries with reliable legal systems are 
now predictably enforceable in federal and state courts in the United 
States under the common law or under the Uniform Act. Although the 
Supreme Court in Hilton suggested that it was appropriate also to 
require a showing of reciprocity in the country where the judgment was 
rendered, this requirement is not included in most states' law.
    Thus, while U.S. courts are perceived as the most open in the world 
to the recognition and enforcement of foreign civil judgments in the 
absence of a treaty obligation to do so, the ability of U.S. judgment 
holders to enforce their judgments abroad is much more problematic. 
Even in those countries that will, in principle, enforce foreign 
judgments in the absence of a treaty, the reach of U.S. long-arm 
jurisdiction, what they perceive to be ``excessive'' jury awards, and 
punitive damages are sometimes considered reasons not to enforce U.S. 
judgments. U.S. litigants deserve the same opportunity to have their 
judgments enforced abroad as that enjoyed by foreign litigants in the 
United States.

                            THE NEGOTIATIONS

    The successful negotiation at the Hague Conference of a convention 
on jurisdiction and the recognition and enforcement of foreign civil 
judgments would be a huge step toward an international regime for 
enforcing foreign court judgments. The negotiations, which have been 
underway since 1996, involve more than 45 countries from around the 
world, including virtually all major U.S. trading partners. The Hague 
Conference is well known for producing the Conventions on Service of 
Process and the Taking of Evidence Abroad, Abolishing the Requirement 
of Legalization, and International Child Abduction to which we are a 
party. Moreover, the Senate has given Advice and Consent to the Hague 
Intercountry Adoption Convention, and Congress has enacted implementing 
legislation for it. The Department of State is now preparing 
implementing regulations prior to depositing our instrument of 
accession. The Hague Conference has traditionally been a professional 
and non-political forum of experts in the area of conflict of laws.
    If successful, the Hague Jurisdiction and Enforcement of Judgments 
Convention would establish a regime governing jurisdiction to sue 
defendants from party states in tort and contract, and would improve 
predictability in the enforcement of the resulting judgments. However, 
the requirement that the Convention create uniform rules of 
jurisdiction comes as a surprise to many Americans. It reflects the 
approach of the EU Brussels Convention and a deep-seated feeling among 
many other delegations that they do not wish to enforce U.S. judgments 
unless we make our jurisdiction practices consistent with their view of 
what constitutes appropriate international rules. Since litigants from 
most developed countries have no substantial difficulties enforcing 
judgments in the United States, their governments believe they have 
substantial negotiating leverage over us. This would perhaps not be the 
case if our states included reciprocity requirements in their law.
    Agreeing on a rigid set of jurisdictional rules poses special 
difficulties for the United States. Because the Due Process Clause puts 
limits on the extension of jurisdiction over defendants without a 
substantial link to the forum, the United States is unable to accept 
certain grounds of jurisdiction as they are applied in Europe and other 
countries. For example, we cannot, consistent with the Constitution, 
accept tort jurisdiction based solely on the place of the injury, or 
contract jurisdiction based solely on the place of performance stated 
in the contract.
    At the same time, civil law attorneys (and their clients) are 
profoundly uncomfortable with jurisdiction based on doing business or 
minimum contacts, which they believe is vague and unpredictable. They 
feel strongly that certain aspects of U.S. jurisdictional practice must 
be restricted under the Convention. Although this difference has been 
partially reconciled by agreement to permit some grounds of 
jurisdiction under national law to continue outside the Convention, 
critical choices and hard negotiations remain. If the Convention is to 
regulate jurisdiction in international litigation it must bridge vast 
differences in approach toward general and specialized jurisdiction 
among the various countries involved. It must also provide strong and 
clear benefits to outweigh the inevitable concerns about giving up some 
current litigation options in international cases.
    Apart from a host of difficulties related to jurisdiction, 
agreement must also be reached on how to handle a wide array of other 
issues raised by this sweeping and ambitious project. Some of the 
issues include: concurrent filings in the courts of more than one 
state; forum non conveniens; provisional and protective measures; 
injunctions and other non-monetary judgments; punitive, non-
compensatory and ``excessive'' damages; a lack of fairness or 
impartiality in the judgment court; non-application to antitrust; and 
scope of application to government litigation.
    The fifth negotiating session in October 1999 produced a 
preliminary draft text, and the original schedule called for a final 
negotiating session in 2000. However, after extensive consultations 
with industry and consumer groups, the private bar, and with government 
litigators,1 the Department of State concluded that this 
text is not close to being ratifiable in the United States and cannot 
be an effective vehicle for final negotiations.
---------------------------------------------------------------------------
    \1\ We have consulted with the American Bar Association, the 
Association of Trial Lawyers of America, the American Law Institute, 
the American Corporate Counsel Association, the American Society of 
International Law, several consumer organizations, the Maritime Law 
Association, trade associations and industry groups, bar associations 
in Chicago and New York, federal agencies with substantial litigation 
interests, and leading practitioners and academics. At the same time 
there are other groups--such as state litigating agencies and attorneys 
general and the banking industry--with which we have not yet been able 
to meet directly on the convention.
---------------------------------------------------------------------------
    Acutely aware of the need for more time, we successfully requested 
the Hague Conference to extend the negotiations, and to split the final 
session into two parts. The first session is scheduled to be held June 
6-20 in the Hague. Over the last nine months we have met several times 
in informal sessions with key foreign government delegations and 
listened with them to the views of international private sector experts 
and non-governmental organizations. The purpose of these sessions was 
to prepare the way for the June meeting by seeking to find new 
approaches to the most difficult issues facing the negotiations. Some 
constructive ideas have emerged from these informal sessions, but we 
are still far apart on many issues. If other delegations do not begin 
to show more flexibility on many key provisions we will be unable to 
achieve a convention that could attract sufficient support in the 
United States.

                       ELECTRONIC COMMERCE ISSUES

    When the Hague Convention negotiations were first proposed by the 
United States in 1992, and when they began four years later, no one 
predicted the immensely difficult issues that would suddenly arise from 
the explosion of electronic commerce. The result, however, has been 
that the Hague Convention has provided a forum to discuss at the 
international level the tough issues involving jurisdiction over 
Internet transactions. The fact that the Convention negotiators are 
grappling with these issues has led to intense efforts around the world 
to consider the problems raised in drafting international rules of 
jurisdiction governing Internet transactions. In the U.S., as well, the 
law is in flux and courts are struggling with applying traditional U.S. 
jurisdiction rules to the Internet.
    The Hague Conference has made an effort to facilitate the focus on 
electronic transactions. The Conference organized a roundtable workshop 
in Geneva in September 1999 and called special experts meetings in 
Ottawa in February 2000 and February 2001 devoted to electronic 
commerce issues raised by the draft Convention. Moreover, the Hague 
Conference arranged with the World Intellectual Property Organization 
to hold a special session on intellectual property issues raised by the 
Convention this past January, with a special focus on IP issues raised 
by electronic commerce.
    The Department of State, working closely with the Departments of 
Commerce and Justice, the Federal Trade Commission, the Copyright and 
Patent and Trademark Offices, and other relevant agencies, has 
consulted closely with concerned private sector interests in the 
business and consumer communities on these difficult issues related to 
the Internet. Just last week we held two day-long public meetings at 
the Library of Congress and the FTC for which we had excellent 
attendance. We have found no consensus on the electronic commerce and 
intellectual property issues in the United States or elsewhere, and the 
Department believes we must take an extremely careful and deliberate 
approach in the Hague negotiations. We do not have firm views on the 
proper outcome of these provisions, and are seeking to ensure that all 
the various interests continue to be heard. We hope very much that 
effective solutions will emerge that will enable the Convention to move 
forward to a successful conclusion.

                             THE ROAD AHEAD

    A carefully conceived and properly balanced Hague Convention would 
represent a tremendous opportunity for many American litigants, and we 
are trying vigorously to reach the right balance of provisions that 
would enable us to achieve a convention to which the United States 
could become a party. However, given the strong litigation orientation 
of our society and the differences between our established jurisdiction 
practices and those of many of the other participating countries at the 
Hague, the Convention negotiations present special challenges. When you 
add the enormous uncertainties raised by the growth of trade and 
commerce on the Internet and complex choices for intellectual property 
litigation, the obstacles can seem overwhelming. Nevertheless, the 
promise is great, and we hope that we can ultimately succeed.
    I will be leading the U.S. delegation to next month's negotiations 
in the Hague. We will have a strong and diverse delegation, including 
members from the Departments of State, Commerce, and Justice, as well 
as the Federal Trade Commission, the U.S. Patent and Trademark Office, 
and the U.S. Copyright Office. We will also have distinguished advisers 
from private practice and academia, including representatives of the 
American Bar Association, the Association of Trial Lawyers of America, 
U.S. business, and U.S. consumer interests. Moreover, we expect to see 
private sector interests strongly represented as observers at the 
negotiations.
    At the end of the June session decisions will be made at the Hague 
Conference on how to proceed. If negotiations have not been refocused 
in a manner that protects U.S. interests, we will evaluate our options.
    When we return we will continue to reach out to as many groups, 
associations, and experts as we can from the private and public sector 
to make them aware of the draft Convention and seek their views on the 
opportunities and difficulties it presents for us. It is only by 
understanding as clearly as possible the litigation issues raised that 
we can be in a position to attempt to achieve a balance of provisions 
that could allow the United States to ratify and implement the final 
Convention.
    We hope, Mr. Chairman, to be able to remain in close contact with 
the Subcommittee on these issues, and thank you very much for the 
interest you have shown.

    Mr. Stearns. Thank you.
    Mr. Vradenburg?

               STATEMENT OF GEORGE VRADENBURG III

    Mr. Vradenburg. Chairman Stearns, Mr. Towns, members of the 
subcommittee, I want to thank you for holding this important 
hearing on digital trade.
    AOL/Time Warner is committed to seeing the power of 
information and the promise of connection brought to more 
people around the world in the belief that greater information 
and connectivity will drive individual opportunity, economic 
prosperity, and increased knowledge.
    The dispersion of information and communications technology 
is driving economic development and social progress, not only 
here in the United States but in lesser developed nations 
around the world. Why is this? Because low-cost communications 
reduces entry barriers to businesses, particularly small and 
medium-sized enterprises, increases competition and innovation 
among sellers, creates greater choice for consumers, and 
enables more rapid dispersion of information.
    We, as a company, want to make sure that no one is left 
behind in this Internet century, and universal and affordable 
communications and information worldwide is critical to this 
objective. Our ability to achieve this objective depends very 
much upon framing an international trade environment that will 
empower users worldwide to enjoy the benefits of the Internet 
revolution. We believe there are seven essential issues that we 
must tackle together to extend e-commerce and the Internet to 
create a global networked economy.
    First and most important is a lowering of 
telecommunications costs. Affordability can best be assured 
throughout the world through privatization and competition in 
telecommunications services, as well as by unmetered pricing 
for Internet access services. Mr. Shimkus, you asked what you 
might deliver to our transatlantic partners. It is this: 
Metered or permanent pricing of Internet use is the enemy of 
Internet adoption and usage. If people are watching the clock, 
counting up fenigs or franks or whatever it is by the minute 
for every minute that they are online, they will be worried 
about large, metered monthly phone bills. They will spend less 
time online or they won't go online at all or let their kids go 
online to do such simple things as their homework.
    The second critical issue is that markets for information 
technology products and services must be open and accessible. 
Particular emphasis should be placed on lowering trade barriers 
on high tech capital goods and consumer devices, computer 
software and online services so we can deliver more services to 
more people at a more affordable basis.
    Third, we advocate clear and effective protection for 
intellectual property rights. Widespread investment in computer 
software and diverse, local cultural products and services that 
will drive Internet adoption and use worldwide requires that 
the intellectual property in these essential creative works be 
protected as they are in this country and to the DMCA.
    Fourth, we support the free flow of goods and services 
across a range of sectors that make up the e-commerce value 
chain. This begins with lower tariffs on the goods and services 
that form the building blocks of the Internet architecture, but 
it also includes reducing barriers to advertising services, 
financial services, billing and payment services, distribution 
services, express delivery services, air transport, and customs 
modernization--the full range of sectors that involve the e-
commerce value chain.
    Fifth, governments around the world need to fashion a 
neutral, simple, and efficient 21st century tax collection 
system that works in a global networked economy. And you are 
absolutely right--this has to do with State and local taxation 
systems in this country just as it has to do with the EU VAT 
system in Europe.
    Sixth, we must be as committed to the free flow of 
information and ideas as we are to the free flow of commerce. 
While we recognize that national security and protection of 
children may justify some regulation in this area, we urge that 
limitations on the free flow of information and ideas, just 
like limitations on the free flow of goods and services, be 
adopted only after careful consideration, lest the social and 
economic benefits of human exchange be lost or mitigated.
    Finally, consumer confidence in the online medium must be 
enhanced. Here we believe that industry has and should continue 
to play a leadership role in developing and promulgating 
standards and practices in data collection and in consumer 
protection that will enhance consumer confidence in the online 
medium.
    How might we effectively advance this seven-point agenda? 
We believe that America's digital trade agenda can best be 
pursued through a multilateral, regional, and bilateral 
approach. We are encouraged that the President has included a 
number of the complements of this digital trade program in his 
2001 trade agenda. To pursue this agenda effectively, AOL/Time 
Warner believes it is important that the President and Congress 
agree on terms for trade promotion authority. It is equally 
essential that Congress continue its commitment to China's 
accession to the World Trade Organization. Recognizing China's 
importance to the growth and development of the global economy 
is an essential step to bringing about the truly global 
networked economic system I have outlined above.
    The task of advancing a vision for digital trade for our 
Nation and for the world is daunting, but the promise in 
additional individual opportunity, economic prosperity, and 
more knowledge dispersed among more people worldwide is well 
worth the effort. We look forward to working with you to 
achieve these important goals. Thank you very much, Mr. 
Chairman.
    [The prepared statement of George Vradenburg III follows:]

Prepared Statement of George Vradenburg, Executive Vice President, AOL 
                              Time Warner

    Chairman Stearns, Mr. Towns and Members of the Subcommittee. I want 
to thank you for holding this important hearing on digital trade 
issues. At AOL Time Warner, we believe that Congress and the 
Administration, in partnership with the US business community, should 
commit ourselves to advancing global economic prosperity and social 
progress through a trade agenda that fosters the global electronic 
exchange of information and commerce.
    AOL Time Warner is the world's leading Internet-powered multi-media 
company, with a stable of brands including AOL, Warner Bros, Warner 
Music Group, HBO, Time Warner Cable, Time Inc. and the Turner Networks, 
including CNN.
    In this, the Internet Century, consumers worldwide are driving the 
demand for greater choice and convenience. The AOL Time Warner company 
is committed to the proposition that new combinations of skills, 
technology, and talents are essential to create the innovations that 
will respond to this global demand. Our company is responding with new 
forms of content and delivery platforms, innovative services that will 
make new consumer devices work together seamlessly, and new means to 
``connect the dots'' to make technology easy-to-use for consumers. We 
intend to bring the power of information and the promise of connection 
to more people around the world. Our ability to achieve this goal 
depends upon working with you, your colleagues in the Congress, and the 
Administration to frame the international trade environment that will 
enable consumers to take full advantage of the Internet revolution.
    We believe that there are three powerful and related trends that 
are fundamentally reshaping the global economy. The first is the 
exponential growth in connectivity resulting from increased adoption of 
information and communications technologies. The second is the 
convergence of historically distinct communications systems and 
consumer devices. And the third is the increasing use of electronic 
communications as a channel for connecting consumers and companies and 
driving international business and social communities. In the 
aggregate, these forces are accelerating the process known as 
globalization, a process that I believe promises economic and social 
benefits to consumers, workers and citizens worldwide.
    Today, more than 300 million people are online. By the year 2005, 
more than 1 billion people will be connected to the Internet, more than 
75 percent of them outside of North America. This technological 
transformation is creating a networked global economy that is just 
beginning to demonstrate that the Internet can be a powerful engine for 
individual opportunity, economic prosperity and social progress.
    Recently, a new study done by Caroline Freund of the Federal 
Reserve Board and Diana Weinhold of the London School of Economics 
determined just how big a difference the Web has made to trade. Looking 
at trade flows among 56 countries from 1995 to 1999, for the first two 
years, they found no impact from the Net. But starting in 1997, as Web 
usage accelerated, they discovered that a 10 percent increase in the 
number of a nation's Web sites would have led to a 1 percent rise in 
its trade flows in 1998 and 1999. The impact was strongest for poorer 
countries--suggesting that nations with fewer initial trade links can 
reap larger relative gains from the Web, assuming they have made basic 
infrastructure and technology investments.
    The rapid growth of Internet usage in China also demonstrates that 
the appetite for electronic networks as a tool for economic reform and 
access to information extends well beyond the so-called developed 
nations and is being embraced by nations and cultures that are not 
employing traditional notions of ``capitalism'' and ``democracy'' in 
their historic development.
    And the benefits of electronic commerce and digitized trade extend 
far beyond the immediate financial gain of the participants. Perceived 
social and economic benefits of global electronic networks include:

 stimulating new opportunities and investments in emerging 
        markets by reducing the costs and barriers to reaching 
        electronic consumers in developed markets;
 extending global electronic markets to all nations and thus 
        bringing the benefits of choice and network economies of scope 
        and scale to all consumers;
 providing people in historically underserved nations and areas 
        with increased access to education, health care and other 
        public services;
 promoting greater and more rapid access to information for 
        children of all ages and in all nations; and
 giving people everywhere the capability of promoting their 
        local industry and cultures without losing the benefits of 
        participation in the global economy.
    These benefits create a win-win-win situation in which the same set 
of actions--promoting increased digital communications and trade--
brings economic and social benefits to governments, industry and 
individuals around the world. We have an obligation to act now to 
deliver on the promise of these benefits, and to promote digitized 
trade-friendly policies with our trading partners around the world.
    We all know that adoption of the capability for increased digital 
communications and trade around the world isn't going to happen on its 
own. In fact, the opposite is true: absent affirmative action on our 
part, global protectionism and fragmentation may take hold. If that 
proves to be the case, the promise of economic opportunity and broader 
knowledge of the world will pass too many by--the social and economic 
repercussions of that neglect will not only be felt in the developing 
world, we all will feel it.
    In a world of increasing connection, our own economic and social 
well being is inextricably tied to the economic and social progress of 
other nations and peoples. A stable world order, characterized by peace 
and prosperity, demands that we respond to the universal yearning for 
economic opportunity and social connection.
The Framework for a Global Networked Society
    At AOL Time Warner, we support a basic framework for a networked 
global society, to bring the benefits of economic and social 
connectivity, including economic prosperity, increased knowledge and 
expanded trade, to everyone. That framework should include:

 A recognition that current WTO obligations, rules, disciplines 
        and commitments should apply to e-commerce and acknowledgement 
        that electronically delivered goods and services should receive 
        no less favorable treatment under trade rules and commitments 
        than like products delivered in physical form.
 An understanding that universal and affordable access for 
        consumers to basic and valued-added communications services is 
        critical to expanding the reach of electronic economic 
        opportunity.
 An appreciation that all aspects of the e-commerce value chain 
        must be free from trade barriers in order to prevent the 
        weakest link from breaking the benefits of the chain.
 A new approach to content development and protection that 
        safeguards the interests of the artists, while promoting the 
        development of local content and providing consumers with the 
        widest array of choice.
 A commitment that no man, woman or child is left behind in the 
        Internet age. The age where economic and social ``divides'' 
        should be put behind us. The Internet offers us a new 
        opportunity to extend economic opportunity to more people, and 
        we, as the champions of opportunity and freedom, should grab 
        the historic opportunity presented to us by this remarkable new 
        technology.
The Key Issues We Must Tackle to Create the Global Networked Society
    There are six key sets of issues that we must collectively tackle 
to ensure the creation of a global networked society.
    First, and most important, is a lowering of telecommunications 
costs. Consumers cannot gain access to the benefits of electronic trade 
in commerce and ideas unless they can afford access to the basic means 
of connection. Affordability can best be assured through privatization 
and competition in telecommunications, a structure that requires 
independent regulation of historic monopolies to assure cost-based 
consumer pricing and interconnection rates. Just as important is the 
pricing structure used. Research, as well as common sense, tells us 
that metered pricing of Internet use is the enemy of Internet adoption 
and usage; if people are ``watching the clock'' while they are online, 
fearful of large metered monthly phone bills, they will spend less time 
online or won't go online at all. For that reason, we support pro-
competitive telecommunications policy throughout the globe that will 
result in affordable pricing for Internet access to all end users.
    Second, the market for information technology products and services 
must be more open and accessible. Ideally, we would like to see the 
greatest variety of information and communications devices and services 
available to the broadest possible audience. Particular emphasis should 
be on lowering tariffs on high technology goods and software so that 
more people in more countries can afford the technology they need to 
get online and companies can build the state-of -the art networks 
needed to bring the benefits of the Internet to all.
    Third, we advocate clear and effective protection for intellectual 
property rights. Widespread investment in computer software and the 
other cultural products and services that will drive Internet adoption 
and use worldwide requires that those essential ingredients to a 
networked global economy be protected. At the same time, network 
operators cannot be crippled with liability for the unknowing 
transmission of infringing materials. Intellectual property concerns 
can only be addressed on a global basis--In some countries, we have 
made great strides in protecting intellectual property and balancing 
the rights and obligations of content owners and online distributors. 
An extension of this balance of protections in more countries, to more 
people, will power local cultural industries and will bring a new 
creative spirit to the non-English speaking Internet community 
worldwide.
    Fourth, we support the free flow of goods and services across a 
range of sectors that make up the e-commerce value chain. This begins 
with lower tariffs on the goods and services that form the building 
blocks of the Internet architecture, and include reducing barriers to 
advertising, financial services and internet billing and payments, 
distribution of content--including movies and music, express delivery 
services and customs modernization. We must address these ``barriers'' 
to e-commerce in a holistic and comprehensive fashion. Without such a 
commitment, even one weak link in the e-commerce value chain can 
undermine the potentially explosive growth of e-commerce and 
productivity enhancement, new job creation and expanded consumer choice 
and opportunity.
    Fifth, to ensure that tax policy does not impede the tremendous 
growth of e-commerce, governments around the world need to identify a 
tax collection system that maintains market neutrality while still 
addressing governments' legitimate need to fund public services. To 
ensure that these interests are balanced, tax systems should not create 
market distortions, discourage transacting business on the Internet or 
impose greater administrative burdens on one type of supplier than on 
another. The goal should be to achieve a simple, efficient, and fair 
tax regime appropriate to a new global networked economy--a system that 
promotes rather than stifles free trade.
    Sixth, we must be as committed to the free flow of information and 
ideas as we are to the free flow of commerce. Economic, social and 
political innovation is the product of the exchange of ideas and 
information. Human progress is measured not just by commerce and 
technology, but by innovation in the systems for economic opportunity 
and personal expression and understanding. We in this country will 
benefit by an openness to greater information from and understanding of 
the rest of the world, just as the remainder of the world will benefit 
by a greater understanding of the principles of freedom and opportunity 
we enjoy here. We recognize that traditional notions of national 
security and, protection of children among others, may provide a 
justification for national regulation in this area. And we believe that 
private sector commitments to battle child pornography, share ideas on 
the security of critical infrastructures and fostering local cultural 
diversity can assist public administrations in advancing national 
objectives in those areas. But we would urge that limitations on the 
free flow of information and ideas, just like limitations on the free 
flow of goods and services, should be adopted only after careful 
consideration, lest the social or economic benefits of human exchange 
not just on a local but also a global level be lost or mitigated.
    Finally, consumer confidence in the online medium must be enhanced. 
Here we believe that industry has and should continue to play a 
leadership role in developing and promulgating standards and practices 
that will enhance consumer confidence in the online medium. Online 
users continue to be concerned about the privacy and security of their 
personal information and about the integrity of online transactions. 
Global business organizations, such as the Global Business Dialogue on 
Electronic Commerce, recognize that our online business depends on the 
confidence of consumers. We, and other electronic commerce businesses, 
have adopted world class data collection and consumer protection 
practices, and we are working collaboratively with governments to 
ensure that consumer concerns are being appropriately addressed.
The Process for Achieving a Global Networked Society
    These are what I believe are the essentials of a digital trade 
agenda. Let me now briefly outline how we might collectively advance 
this agenda.
    We believe that America's digital trade agenda can best be pursued 
through a multilateral, regional and bilateral approach. This includes 
pursuing initiatives through the WTO, including a possible new round of 
trade negotiations, and through regional venues such as the Free Trade 
Agreement of the Americas and APEC. Digital trade can also be advanced 
through bilateral initiatives.
    We are encouraged that the President has included a number of the 
components of our digital trade program in his 2001 Trade Agenda. We 
urge the US government to pursue them in a comprehensive, holistic way 
that brings together all the critical elements needed to advance global 
e-commerce and trade. But merely articulating priorities and securing 
congressional guidance on those priorities will not be enough.
    AOL Time Warner believes strongly that our ability as a nation to 
advance the digital trade agenda outlined above depends upon the 
President's having Trade Promotion Authority from the Congress. Absent 
a unified national commitment to a shared trade agenda, and the 
necessary governance mechanism to assure that the President can advance 
that agenda with confidence and authority, we risk losing a national 
opportunity of great import. We believe the time has come for the 
Congress and the President to collaborate closely to define trade 
negotiation objectives of our country and to ensure a mechanism to 
secure congressional approval of trade agreements that advance our 
trade objectives. Trade Promotion Authority provides such a tool.
    TPA is much more than simply a legal tool. It is a demonstration of 
a shared commitment of the two branches of the US government 
responsible for the conduct of commerce and trade that America is ready 
to approach the rest of the world with a firm commitment to markets in 
commerce and ideas and to deliver to American consumers, farmers and 
businesses the economic and social benefits of a networked global 
economy.
    It is equally essential that Congress continue its commitment to 
China's accession to the World Trade Organization. Recognizing China's 
importance to the growth and development of the global economy is an 
essential step to bringing about the global networked economic system 
that I have outlined above. We recognize that the process of WTO 
accession for China has proven to have taken longer than originally 
contemplated; we recognize that there have been significant 
developments in our relationship with China other than those relating 
to trade; but inclusion of China into the world's trading regime 
remains a critical component of bringing about the full economic and 
social benefits of global economic and social integration.
    The task of advancing a vision of digitized trade for our nation 
and for the world is daunting, but the opportunity--to bring additional 
opportunity, prosperity and knowledge to more people--is well worth the 
effort. We look forward to working with you to achieve this important 
goal.
    Thank you.

    Mr. Stearns. Yes, thank you.
    Ms. Richardson?

               STATEMENT OF BONNIE J.K. RICHARDSON

    Ms. Richardson. Mr. Chairman, Congressman Towns, members of 
the subcommittee, thank you all for devoting your time and your 
attention----
    Mr. Stearns. Ms. Richardson, you might just pull the 
microphone up a little closer. Thanks.
    Ms. Richardson. [continuing] to the important issues of 
international trade in digital content.
    I am testifying today on behalf of the Motion Picture 
Association of America. We represent seven of the major 
producers and distributors of filmed entertainment. Warner 
Brothers is our member, as are Universal, Fox, Sony Picture, 
Paramount, MGM, and the Walt Disney Company. The creative 
industries are America's No. 1 export industry. We earn more 
revenue abroad than autos and auto parts, than agriculture, 
than aircraft. As my boss, Jack Valenti, is fond of saying, 
``We are the jewel in America's trade crown.'' We also create 
jobs in the United States at three times the rate of the rest 
of the economy.
    And our future belongs in digital content. The digital 
world provides exciting new opportunities for the delivery of 
filmed and digital entertainment, whether it is to cinemas, to 
home consumers, whether it is a new way of bringing television 
programming to consumers.
    There are four issues that I would like to raise with you 
in my testimony today. First of all, the importance of 
protecting intellectual property on the Internet. Second, I 
would like to touch, but only briefly, on the Hague Convention, 
since I am surrounded by some of the world's experts on that 
area. I would also like to touch upon the issues of cultural 
diversity and cultural protectionism, and then touch briefly on 
the classification debate of goods versus services in the WTO 
and other trade contexts.
    First, the intellectual property issue. As anyone who has 
listened to my colleagues at the Motion Picture Association 
could probably tell you, as well as I, Internet piracy is the 
single biggest threat to our industry today. That is true in 
the United States, and it is certainly true abroad. Piracy is 
not a new problem. We have spent $1 billion or more over the 
past 25 years in combating traditional forms of piracy. What is 
new is that on the Internet, piracy can happen with a speed and 
a scope that is really unparalleled.
    There are some important new tools on how we can address 
these threats to our livelihood, to the protection of the 
content itself. First of all, at the end of 1996, the World 
Intellectual Property Organization, WIPO, adopted two new 
treaties that helped bring copyright standards into the digital 
age. Congress, you, in your wisdom, over 2 years ago, 
implemented those treaties into U.S. law in the Digital 
Millennium Copyright Act. Unfortunately, many of our trading 
partners have not acted as swiftly. We are still six countries 
short of putting into place the WIPO Copyright Treaty and eight 
countries short internationally of the implementation of the 
Performances and Photograms Treaty. So one of our big 
objectives, and we hope to achieve it by the end of the summer, 
is to get those treaties into force.
    There are some other ways that we are pursuing, with the 
help of our Government, the improvement of international 
standards for copyright protection. Some important work is 
being done in the Free Trade Agreement negotiations in this 
regard. And Congress, too, has supplied us with some very 
important tools. The IP conditionality in the GSP Program, in 
the Caribbean Basin Initiative, the Andean Trade Preference 
Act, and the Africa Growth Opportunities Act give us important 
way of impressing on our trading partners that these issues 
matter. And certainly the annual priority setting that we can 
do as a result of the provisions of Special 301 remain very 
important to highlighting this issue in international trade.
    On the Hague Convention, I welcomed the words of Mr. Kovar 
that the e-commerce issues in the Hague Convention, as we 
struggle to look at the issues of jurisdiction, must be dealt 
with extremely carefully and deliberately. And we would agree 
with that. We recognize that the Hague Convention can make 
things better or it can make things worse. They are extremely 
important issues that are at stake here, and they are very 
complex issues, both in the copyright and in the e-commerce 
world.
    On cultural diversity and cultural protectionism, digital 
networks have solved some of the old-fashioned problems. In the 
Old World, there just wasn't enough shelf space. There might be 
one cinema or one broadcaster that you could get in your 
hometown, and when foreign governments confronted this problem, 
they thought that the way to do it was to protect our country.
    As we look at removing those barriers in the digital age or 
keeping them off in the digital age, one of the issues we can 
look at is the classification debate, and I am happy to answer 
questions in that regard in the question and answer session.
    [The prepared statement of Bonnie J.K. Richardson follows:]

 Prepared Statement of Bonnie J.K. Richardson, Vice President, Trade & 
         Federal Affairs, Motion Picture Association of America

    I would like to commend you, Mr. Chairman, and you, Congressman 
Towns, and all the Members of this Subcommittee, for devoting your time 
and attention to the international issues confronting the content 
industries in the digital age.
    I am testifying today on behalf of the Motion Picture Association 
of America. MPAA is a trade association representing seven of the major 
producers and distributors of filmed and digital entertainment for 
exhibition in theaters, for home entertainment and for television. Our 
members include Buena Vista Pictures Distribution, Inc. (A Walt Disney 
Company), Metro-Goldwyn-Mayer Studios Inc., Paramount Pictures 
Corporation, Sony Pictures Entertainment Inc., Twentieth Century Fox 
Film Corporation, Universal City Studios, Inc., and Warner Bros., a 
division of AOL Time Warner.
The Jewel in America's Trade Crown:
    As many of you may already know, the content industries--movies, 
television programming, home video, music publishing, computer games 
and software--are America's most successful exporters. These copyright-
based industries generate more revenues internationally than any other 
US industry--more than aircraft, more than agriculture, more than 
automobiles and auto parts. We also create jobs in the United States at 
three times the rate of the rest of the economy. As Jack Valenti, 
President and CEO of the Motion Picture Association of America, is fond 
of saying, the copyright industries are ``the jewel in America's trade 
crown.''
    Digital networks offer new opportunities for delivering our 
entertainment products in international markets. In the next few 
months, several movie studios will launch new, encrypted on-line 
services. No one knows today which business model, or models, will 
prove most successful in getting digitized entertainment content to 
customers, but we may start to get some answers in the next few months.
    The one thing I can tell you is that all of those business models 
for the digital delivery of content--at home and abroad--depend on 
successfully protecting the content against theft.
The Importance of Protecting Intellectual Property:
    Internet piracy is the single biggest impediment to digital trade 
today. Piracy of copyrighted materials is not a new problem. In the 
last quarter century, MPAA and its associated anti-piracy organizations 
have spent a billion dollars fighting video piracy and signal theft 
around the world. At present, we have anti-piracy programs in over 80 
countries. What is new in the fight against piracy in the Internet era 
is the speed and ease with which our products can be stolen and 
distributed illegally over digital networks. Today, Viant (a Boston-
based consulting firm) estimates that some 350,000 movies are being 
downloaded illegally every day. By the end of the year, they estimate 
that as many as one million illegal movie downloads will take place 
every single day. The scale of the problem is unprecedented.
    We have some new tools for combating copyright theft. At the end of 
1996 the World Intellectual Property Organization (WIPO) adopted two 
new treaties to bring copyright standards into the digital age. These 
treaties clarify exclusive rights in the on-line world and prohibit 
circumvention of technological protection measures for copyrighted 
works. The United States Congress implemented those treaties over two 
years ago in the Digital Millennium Copyright Act. Unfortunately, other 
countries have not acted quite as swiftly, and the treaties are still 
not in effect. Twenty-four countries have deposited their instruments 
of ratification of the WIPO Copyright Treaty; 22 countries have 
completed the ratification process for the WIPO Performances and 
Phonograms Treaty. We hope to reach the 30-country mark before the end 
of the summer so the treaties can enter into effect. Of course, even 
after the treaties enter into force, we will continue working to get 
all countries to adhere to these important principles. One of the 
disturbing truths in the e-commerce world is that piracy flows to the 
country where the levels of protection are the lowest; even the tiniest 
country can be the source of extraordinary levels of damage.
    Meanwhile, we support the efforts of the Administration to ensure 
that the standards set in the WIPO treaties and the standards in the 
Digital Millennium Copyright Act are incorporated into free trade 
agreements, including those with Singapore, Chile, and the Free Trade 
Agreement of the Americas.
    Swift and vigorous enforcement of copyright laws by countries 
around the globe is also essential. Tools provided by Congress for 
ensuring effective enforcement of intellectual property laws remain 
extremely important for ensuring that countries abroad provide 
effective enforcement against piracy. These tools include Special 301 
and other trade-related legislation, including the Generalized System 
of Preference (GSP), the Caribbean Basic Economic Recovery Act, the 
Caribbean Basin Trade Partnership Act, the Andean Trade Preferences 
Act, and the African Growth Opportunities Act.
The Hague Convention
    The Hague Convention is also attempting to tackle issues that are 
very important to any company that engages in international commerce. 
When laws are broken, which country or countries have jurisdiction over 
the infractions and where can the judgments be enforced? The Hague 
Convention is attempting to complete an international instrument to 
address these questions in a global fashion.
    The questions of jurisdiction are especially complex in the e-
commerce world. What factors should determine where a transaction or 
resulting injuries took place? Is it where the company is 
headquartered? Where the server is located? Where the customer is 
located? Does it matter whether or not the service is being advertised 
or directly marketed to customers in a particular country? Does the 
language in which the service is being offered indicate intent, or lack 
thereof, to conduct business in a particular country? What does it mean 
to ``target'' activities toward a particular forum, and how do U.S. 
notions of minimum contacts and purposeful availment work in the online 
environment?
    Because copyright theft is such a pervasive international problem--
particularly in the Internet environment--and because we rely on courts 
around the world to help bring pirates to justice, the copyright 
industries have been particularly concerned about the new rules being 
formulated by the Hague Convention. A common-sense convention on 
jurisdiction and the enforcement of foreign judgments could have some 
benefit to the copyright industries in confronting global 
infringements, and we support the United States' efforts to reach such 
a common-sense solution. Unfortunately, the operative draft of the 
Convention is painted with a broad brush that reflects the fact that 
much of the discussion leading up to its creation occurred before the 
advent of e-commerce. As a result, and by failing to squarely address 
the types of difficult questions I just raised, the Draft Convention in 
its current form threatens to do more harm than good.
    Some who oppose the treaty have focused on copyright as an example 
of why the Draft Convention is problematic. They point to differences 
in national law and the possibility that a judgment rendered in a 
foreign country based on foreign law will be enforced in the United 
States. They suggest that the solution is simply to excise intellectual 
property issues from this agreement. We do not view this as a good 
solution. The fact is that today--even in the absence of a global 
convention on jurisdiction--U.S. companies who engage in e-commerce 
must deal with differences in national laws and can be called into 
court in a foreign country to answer for acts that reach foreign 
countries. (The Yahoo! case on the sale of Nazi memorabilia in France 
is just one example). On top of that, the U.S. is quite liberal in its 
recognition and enforcement of foreign judgments. This is happening 
today.
    It is important to keep in mind that the Hague Convention doesn't 
try to resolve questions of substantive law. If substantive laws were 
the main question, copyright issues would be easier to address 
internationally than many other e-commerce related problems, such as 
illegal content or privacy. There is a greater degree of harmonization 
of copyright laws as a result of the Berne Convention and the WTO Trips 
agreement than is the case in many other areas of law and policy. The 
problem is jurisdiction: Will the Convention result in U.S. companies 
finding themselves subject to jurisdiction in a forum where they would 
not be subject to jurisdiction today, and would the Convention result 
in the enforcement of judgments that today would not be enforced?
    These issues of jurisdiction underlie all kinds of tort actions and 
are of as much concern to other e-businesses as to the copyright 
industries. The problems cannot be resolved simply by excising 
intellectual property. The same questions remain with respect to cases 
for defamation, for hate speech, for privacy violations, for unfair 
trade practices, and for all other areas of non-harmonized law. We 
agree with others that the current Draft Convention inadequately 
addresses these questions, and we believe these questions must be 
answered with respect to all areas of the law if the Convention is to 
go forward.
Cultural Diversity/Cultural Protectionism:
    Many countries around the world have a reasonable desire to ensure 
that their citizens can see films and TV programs that reflect their 
history, their cultures, and their languages. In the past, when their 
towns might have had only one local cinema and received only one or two 
TV broadcast signals, the motivation for foreign governments to set 
aside some time for local entertainment products was understandable. In 
today's world, with multiplex cinemas and multi-channel television, the 
justification for local content quotas is much diminished. And, in the 
e-commerce world, the scarcity problem has completely disappeared. 
There is room on the Internet for films and video from every country on 
the globe in every genre imaginable. There is no ``shelf-space'' 
problem on the net.
    In addition to solving old scarcity problems, digital networks 
offer exciting new opportunities for producers and consumers around the 
globe. A consumer in small-town America with a taste for Japanese 
samurai films will be able to access them via his home computer. An 
American exchange student to Brazil will be able to continue her 
addiction to Brazilian soap operas after returning home--by accessing 
broadcasts streamed via the Internet to authorized viewers. E-commerce 
offers the chance to enhance the diversity of cultural exchange in a 
way that has never before been possible.
    Because digital networks both solve the old scarcity problem and 
lead to exciting new opportunities for creators around the globe to 
reach out to new markets, local content quotas and other forms of 
protectionist measures are completely inappropriate in the e-commerce 
world. Fortunately, to date, we haven't seen any country adopt this 
form of market-closing measure for digitally delivered content. We hope 
this market will remain unfettered--and hope we can count on your 
support as we work with our international trade partners to keep 
digital networks free of cultural protectionism. Congressional 
authorization of Trade Promotion Authority will also be very helpful in 
empowering the Administration to negotiate these commitments in the WTO 
and other trade agreements.
The Classification Debate:
    I have been asked to address one of the more arcane issues of 
digital trade--whether the delivery of content of e-commerce networks 
should be considered trade in goods or trade in services or both. I am 
happy to oblige, asking your indulgence while I dive into some fairly 
deep and murky waters teeming with intimidating trade jargon.
    First, though, I'd like to point out that this is not a new debate. 
Even before the e-commerce era, MPAA had one foot in the world of goods 
and one foot in the world of services. When we export a canister of 
film, we are exporting a physical product, or a good, that is subject 
to the rules of the General Agreement on Tariffs and Trade (the GATT.) 
However, when a motion picture company produces a new film, or a 
broadcaster broadcasts that film, these are services transactions 
subject to the rules of the General Agreement on Trade in Services (the 
GATS.)
    Likewise, in the e-commerce world, some transactions involving the 
digital delivery of motion picture images are so similar to trade in 
goods that they clearly should benefit from the rules of GATT. Other 
forms of digital delivery may be more akin to a services transaction 
and may fall under the rules of the GATS.
    Let me give you an example. If a consumer were to place a telephone 
order for a DVD of the film ``Finding Forrester'' and have a copy of 
that DVD delivered to his house on a UPS truck, that is a ``goods'' 
transaction. Likewise, if the same consumer ordering a copy of the same 
DVD on his/her computer and had the same content delivered digitally 
and downloaded from his computer to a write-able DVD--that is still a 
``goods'' transaction. The only difference is that a digital network 
instead of a delivery van provided the transportation from the retailer 
to the consumer.
    The classification issue is important primarily because the rules 
for goods in the GATT differ from the rules for services in the GATS.
    GATT (rules for trade in goods):

 automatically provides national treatment on all imported 
        goods;
 generally prohibits quotas and other forms of quantitative 
        restrictions, [except for theatrical screen quotas, which 
        countries may preserve]; and
 permits tariffs on imported goods; the levels of tariffs are 
        negotiated and then ``bound.''
    GATS (rules for trade in services):

 provide national treatment and market access on a negotiated 
        basis sector by sector. (Unfortunately, only about 20 countries 
        have made any commitments in audiovisual services. We hope to 
        do improve on this in the current round of WTO services 
        negotiations. A similar problem may exist for computer 
        software, although more countries made more commitments in this 
        sector.);
 permits countries that have made national treatment or market 
        access commitments to reserve the right to continue applying 
        some level of restrictions;
 contains a non-binding moratorium encouraging countries not to 
        apply tariffs to e-commerce delivered services; and
 permits negotiations on s domestic regulatory issues not 
        covered by GATT disciplines.
    So, for example, if a digitally delivered DVD were exported to 
Europe and classified as a good, that DVD would still be subject to the 
existing EU tariff of 4.5%. And, we would also know that the DVD would 
be free of other forms of discrimination, such as local content quotas 
or discriminatory taxes. But, if that same digitally delivered good 
were classified as a service, the EU would be able under international 
trade agreements to adopt new quotas or discriminatory taxes--or even 
to raise tariffs.
    The United States must ensure that digital goods retain the level 
of protection they currently enjoy under the GATT rules. It would be 
completely unacceptable if products that are currently classified as 
goods--motion pictures, magnetic tapes, DVDs, etc.--lost trade benefits 
through a re-classification process. Simply because a new delivery 
mechanism (digital networks) allows these products to be delivered 
digitally does not justify establishing new trade barriers. We can't 
risk opening the door to new quotas on digital products that would be 
illegal today under current trade rules. Trade negotiations are 
supposed to be trade liberalizing--they are not supposed to lead to 
increased trade barriers.
    MPAA agrees with the position of the Administration that is it 
premature and unnecessary at the present time to resolve this 
classification question. It is premature because the business models 
for delivering entertainment content to consumers over digital networks 
are still evolving. It is unnecessary because the rules and precedents 
of the GATT regarding ``like products'' are so clear that we are 
comfortable with the protection offered by the current GATT rules. We 
feel confident that if any country today imposed a discriminatory 
barrier against US films or videos or other forms of digital goods 
traded over digital networks, the US could successfully challenge that 
restriction and win in dispute settlement in the WTO.
    I want to thank the members of this committee for your keen 
interest in the barriers that affect digital commerce. The American 
film, home entertainment and TV programming industry is the only 
industry in America today that enjoys a positive balance of trade with 
every country around the globe. Together with our colleagues in the 
music, books and software industries, we are America's leading 
exporter. With your continued vigilance and support, as you work with 
the Administration and with foreign governments, you can ensure that 
America's ``crown jewels'' continue to sparkle brightly in the digital 
age.

    Mr. Stearns. Ms. Wellbery?

                STATEMENT OF BARBARA S. WELLBERY

    Ms. Wellbery. Thank you. Chairman Stearns, Mr. Towns, and 
members of the subcommittee, good afternoon. I am a partner in 
the law firm or Morrison & Foerster. Before joining the firm, I 
worked in the Department of Commerce as Counselor for 
Electronic Commerce to the Under Secretary for International 
Trade. There, I represented the Government in negotiations with 
the European Commission on the Safe Harbor and in other 
international negotiations. Since leaving the Government, I 
have advised clients on a variety of electronic commerce 
issues, including the Hague Convention and privacy.
    I am pleased to have the opportunity to appear before you 
today to address the Hague Convention and the Safe Harbor 
Privacy Accord. Many in the information technology industry 
have serious concerns with the convention. Their core concern 
is that the convention would make web site operators and 
Internet service providers more vulnerable to lawsuits around 
the world and require U.S. courts to enforce the resulting the 
foreign judgments. This could have damaging consequences for 
the U.S. IT industry.
    For example, the convention would allow companies to be 
sued around the world for claims arising out of consumer 
contracts. In addition, the convention would permit ISPs and 
web site owners to be sued anywhere in the world for all kinds 
of torts, including copyright infringement, privacy, 
defamation, and in other countries, hate speech, since the 
material could be accessed worldwide. And for the most part, 
U.S. courts would have to enforce those judgments. As a result, 
copyright owners could avoid the limitations on liability they 
negotiated with U.S. service providers under the Digital 
Millennium Copyright Act, by bringing suit against service 
providers for copyright infringement in countries that have no 
laws limiting service provider liability.
    In addition, the convention would compound the problem 
created by the French Yahoo decision. There, a French court 
took jurisdiction and imposed penalties against Yahoo U.S., 
because a web site hosted by Yahoo auctioned Nazi memorabilia 
and was accessible to users in France. The site's content was 
illegal in France, yet legal in the United States. Under the 
convention, U.S. courts could probably still refuse to enforce 
such judgments on First Amendment grounds, but courts in other 
countries would have to enforce them.
    The result could be that the Internet is reduced to the 
lowest common denominator where web sites avoid any but the 
safest content for fear of offending someone and being hailed 
into court. Alternatively, the Internet could be subject to as 
many different standards of conduct as there are countries.
    Jurisdiction is an extremely difficult question in the 
context of electronic commerce. Simply applying the existing 
rules, whether they be common or civil law rules, just doesn't 
work. These rules turn on physical location and are limited by 
geographical borders. But the Internet has no borders, and e-
commerce transactions provide none of the usual cues that tell 
parties where the other is located, the contract was negotiated 
or intangible goods or services delivered. It is therefore 
premature to freeze current jurisdictional rules in an 
international convention, particularly when the rules being 
adopted borrow heavily from the more formalistic and rigid 
civil law approach to jurisdiction. Those rules heighten the 
risks to e-commerce. While they provide certainty, they may not 
provide justice, since the defendant may not have had the 
minimum contacts with the jurisdiction where the suit is 
brought.
    Despite the problems in the convention, I believe the U.S. 
Government should remain very engaged in the convention 
process. In that way, the U.S. Government will be able to urge 
a constructive, problem-solving approach to the issues raised 
by the convention and to ensure that the private sector is 
fully involved.
    U.S. Government efforts to address criticisms leveled 
against the convention have already generated benefits. These 
efforts, as Mr. Kovar said, have slowed the process and have 
led to close consultation with all parts of the private sector. 
This is particularly important in the e-commerce context where 
technology and market applications evolve so quickly.
    A similar approach was helpful in negotiations with the 
European Commission on the EU Privacy Directive. The U.S. and 
the EU have traditionally taken different approaches to 
privacy, but when they realized the potentially disruptive 
impact that the EU directive could have on trade between them, 
both sides recognized the need to identify common ground and 
develop ways to bridge those differences. The U.S. Government 
consulted closely with all private sector stakeholders in 
developing the Safe Harbor framework. Their input was 
invaluable in developing a workable framework for U.S. 
companies that as much as possible reflects actual business 
practices.
    Thank you again for the opportunity to appear before you 
today, and I will be happy to answer any questions.
    [The prepared statement of Barbara S. Wellbery follows:]

               Prepared Statement of Barbara S. Wellbery

    My name is Barbara Wellbery. I am a partner of Morrison & Foerster 
and I practice in the firm's Washington, D.C. office. Before joining 
the firm in December, 2000, I served in the Career Senior Executive 
Service in the Department of Commerce for six and a half years, first 
as Chief Counsel for the National Telecommunications and Information 
Administration and then as Counselor for Electronic Commerce to the 
Under Secretary for International Trade. I have six years of experience 
in developing both domestic and international privacy policy. I also 
participated in the White House Working Group on Electronic Commerce 
from its inception until I left the Government. I also have extensive 
experience in formulating policy on other key electronic commerce 
issues, such as jurisdiction and consumer protection. I have 
represented the U.S. Government in bilateral negotiations with the 
European Commission on the safe harbor privacy accord and in a variety 
of other bilateral and international negotiations including the 
Organization for Economic Cooperation and Development, and the Asia 
Pacific Economic Cooperation.
    Since leaving the Government, I have advised U.S. multinational 
companies on privacy issues and on other international issues arising 
in the electronic commerce context. I have also been extensively 
involved in meetings on The Preliminary Draft Convention on 
Jurisdiction and Foreign Judgments in Civil and Commercial Matters 
adopted by the Special Commission of the Hague Conference on Private 
International Law Hague Convention (the ``Hague Convention''). I am 
pleased to have the opportunity to appear before you today to discuss 
impediments to digital trade and specifically the Hague Convention and 
the safe harbor privacy accord.

Introduction
    The Internet is a decentralized, borderless, global medium that 
presents unique opportunities and challenges for both governments and 
businesses around the world. As a global marketplace for both commerce 
and ideas, it can empower citizens, democratize societies, and spur 
business development by providing access to a worldwide network of 
customers. These same attributes place a premium on a flexible legal 
framework that is consistent domestically and internationally, since 
actions taken by one government have the ability to affect the whole of 
the Internet. Achieving such a legal framework is a long-term process 
that requires continuing dialogue and diplomacy rather than 
confrontation, identifying common ground despite divergent interests, 
and building bridges instead of insisting on one way as the right way. 
It also requires that all private sector stakeholders be given a place 
at the ``table'' and included in the process or any resulting framework 
may well prove unworkable.
    The safe harbor accord is often hailed for demonstrating that such 
an approach can work. In that instance, as discussed further below, 
governments worked together to find common ground. They took a 
constructive, problem solving approach, despite very different national 
privacy regimes, involved the private sector extensively, and were able 
to bridge their differences. It remains to be seen whether the 
negotiations on the Hague Convention will take a similarly constructive 
approach and yield similarly constructive results.

The Hague Convention
    This hearing on the Hague Convention is particularly timely as the 
first diplomatic convention in over 18 months is scheduled to take 
place next month, from June 6 through June 20. The U.S. provided the 
original impetus for the Hague Convention, proposing it in 1992. The 
driving factor was the U.S. perception that U.S. courts typically 
enforce foreign judgments, while foreign courts often do not enforce 
U.S. judgments. The Hague Convention would provide international rules 
on jurisdiction and recognition and enforcement of foreign judgments. 
It concerns two aspects of jurisdiction over a foreign person or 
company: (i) personal jurisdiction (can the foreign defendant be sued 
in this court?); and (ii) enforcement (will a court in the defendant's 
home country recognize and enforce the court's decision?). As a formal 
matter, the Hague Convention does not address choice of law. As a 
practical matter, however, if a court does exercise jurisdiction, there 
is a strong likelihood that it will often find that its own law is the 
applicable law, because each forum applies its own conflicts of law 
rules. This often leads a court to apply its own law.
    The current official draft of the Hague Convention, which was 
adopted in October 1999, has met with significant opposition in the 
U.S. from a variety of private sector quarters, sometimes for 
conflicting reasons. A great deal of the opposition stems from the very 
different approaches to jurisdiction taken by common law and civil law 
countries and the fact that the 1999 preliminary draft borrows heavily 
from the civil law approach to jurisdiction. At the core of the 
electronic commerce community's concerns is the question of when it is 
proper to assert jurisdiction over companies engaged in Internet 
activities. Electronic commerce providers fear that the jurisdictional 
rules contained in the Hague Convention, which would make web site 
operators and Internet service providers more vulnerable to lawsuits 
around the world, would stymie the development of electronic commerce. 
The more formalistic approach to jurisdiction taken in civil law 
countries heightens this risk.
    U.S. courts focus on issues of due process--fairness to the 
defendant as well as to the plaintiff--and determine jurisdiction on a 
case by case basis. There are few rigid rules for determining 
jurisdiction in the U.S. It cannot be said, for example, that a 
consumer can always sue in his home jurisdiction. Instead, courts 
generally look to whether a defendant has purposefully directed, or 
targeted, its activities or performed some act, purposefully availing 
itself of the privilege of conducting business in the forum. If so, 
courts conclude that the defendant has thereby invoked the benefits and 
protections of the forum's laws, has minimum contacts with the 
jurisdiction, and could reasonably have anticipated being haled into 
the forum. The same general approach is used to determine jurisdiction 
for contract actions and tort actions, as well as for actions brought 
by consumers against businesses.
    The approach to jurisdiction in civil law countries is usually far 
more formalistic than the U.S. approach. For contract actions, a 
plaintiff can sue in the forum where the goods or services are provided 
unless one party to the contract is a consumer. In those cases, the 
consumer can sue where he resides if the defendant solicited business 
through advertising (such as a web site) and the consumer took steps to 
conclude the contract in that jurisdiction. For tort actions, 
plaintiffs may sue where the harmful act or omission occurred or where 
the injury arose. In each instance, if the relevant criteria are met, 
courts may not deny jurisdiction on the grounds that it would be unfair 
to the defendant. Although conventional wisdom holds that the civil law 
approach to jurisdiction provides certainty at the expense of justice, 
and the common law tradition provides justice at the expense of 
certainty, in many, but not all contexts, they lead to the same result.
    Electronic commerce creates challenges for both civil and common 
law approaches to jurisdiction since both depend on the geographic 
locations of the parties and relevant events. The Internet, however, 
makes it difficult if not impossible to know for example where parties 
are located, whether one is a consumer, where the contract was 
negotiated, and in the case of intangible goods and services, the 
physical location to which they are transmitted. U.S. courts have begun 
to develop approaches to jurisdiction in the context of the Internet, 
but U.S. law on these issues continues to evolve.1 And, 
although the Hague Convention applies to electronic commerce 
transactions and Internet service providers, it was drafted without 
attention to the particular jurisdictional issues raised by electronic 
commerce, and thus without recognition of the significant problems it 
poses for the Internet and electronic commerce.
---------------------------------------------------------------------------
    \1\ To determine jurisdiction and whether an online company has 
purposefully availed to itself of the benefits of doing business in a 
particular jurisdiction through its web site, U.S. courts have 
identified three categories of web sites (referred to as the ``Zippo 
Continuum''). First, courts generally exercise personal jurisdiction 
over businesses that enter directly into contracts through the Internet 
with residents of the forum because in their view, purposeful availment 
has occurred. Second, courts decline to exercise jurisdiction where a 
defendant simply posts information on an Internet web site that is 
accessible to users in their jurisdiction. Third, occupying a gray 
area, are cases in which a user can exchange information with the host 
computer but cannot directly enter into contracts through the Internet. 
Many have criticized this approach as being outdated and irrelevant.
    It appears now that U.S. and Canadian courts may be shifting to a 
new test that focuses on an effects-based approach. See Michael Geist, 
Is There a There There? Toward Greater Certainty for Internet 
Jurisdiction, posted at http://aix1.uottawa.ca/~geist/
geistjurisdiction-us.pdf.
---------------------------------------------------------------------------
    I will focus on two problems the Hague Convention creates for 
electronic commerce and Internet service providers, which are 
particularly critical.2 First, the Hague Convention would 
lead to increased vulnerability to tort suits for Internet service 
providers. (See Article 10 of the Hague Convention.) It would permit 
suits for all kinds of torts, including copyright infringement, 
privacy, defamation, and in other countries, hate speech, to be brought 
wherever the act or omission occurred or where the injury arose. This 
jurisdictional rule would allow a company with a web site to be sued, 
for example, for copyright infringement anywhere its web site could be 
accessed; an Internet service provider could be sued wherever it makes 
the copyrighted work available. And yet in both instances, the company 
may have had no contact at all with the jurisdiction in which the suit 
is brought.
---------------------------------------------------------------------------
    \2\ See also the paper entitled Preliminary Comments on the Hague 
Conference on Private International Law attached to my testimony.
---------------------------------------------------------------------------
    The Hague Convention would also allow copyright owners to avoid the 
limitations on liability that were negotiated with U.S. service 
providers under the Digital Millennium Copyright Act, by bringing suit 
against the service provider for copyright infringement in countries 
that have no laws limiting service provider liability. Although as 
noted above, technically the choice of applicable law is independent of 
the choice of forum, in fact the choice of a particular forum often 
leads to application of that forum's laws. In addition, where the 
service provider had no assets in the country in which suit was 
originally brought, under the Hague Convention copyright owners would 
be entitled to enforcement in the U.S. or any other signatory country 
to the Hague Convention where the service provider has assets.
    The Hague Convention compounds the problem created by the torts 
provision by establishing that courts may also exercise jurisdiction to 
order provisional measures, such as temporary restraining orders and 
preliminary injunctions.3 While the Hague Convention also 
limits the effect of such provisional measures to the territory of the 
state in which the issuing court is located, that limitation may well 
prove meaningless on the Internet. An injunction ordering removal of 
material from a web site, at least at this time, cannot be limited 
geographically: a temporary injunction entered by a foreign court 
against a U.S. company would have to be enforced by a U.S. court, 
despite the fact that the injunction exceeded in scope or failed to 
meet the criteria established by Section 512(j) of the Digital 
Millennium Copyright Act of 1998. Again, this would seem to undermine 
the carefully balanced approach struck by the Act.4
---------------------------------------------------------------------------
    \3\ See Article 13 of the Hague Convention.
    \4\ It is not clear that differences between copyright laws would 
rise to the type of public policy incompatibility U.S. courts would 
consider under Article 28(1)(f) of the Hague Convention.
---------------------------------------------------------------------------
    The torts provision could also encourage other countries to emulate 
a troubling trend begun by the Yahoo France decision, in which a French 
court exerted jurisdiction and imposed penalties against Yahoo, U.S. 
because the Yahoo web site was accessible to users in France. The 
site's content was considered illegal in France but legal in the U.S. 
under the First Amendment. Other foreign courts have followed suit. 
Recently, two courts in France and Germany held that web site 
publishers who published material residing on servers outside of those 
countries were nevertheless guilty of defamation and hate speech in 
Germany and France merely because the material was accessible in those 
countries. While surely U.S. courts would refuse to enforce such 
judgments on First Amendment grounds, the Hague Convention would 
nonetheless compound the problem. By requiring that those judgments be 
enforced in other countries where U.S. companies have assets, U.S. 
First Amendment principles could more easily be avoided. The result 
could be that the Internet is reduced to the lowest common denominator, 
where web sites avoid any but the safest content for fear of offending 
someone and being haled into court.
    The second critical problem the Hague Convention creates is that it 
would subject web-based companies to suits arising out of consumer 
contracts anywhere in the world. It would allow a consumer to sue in 
his home jurisdiction so long as the defendant has directed his 
activities to that state (through advertising) and the consumer has 
taken steps necessary for the conclusion of the activity in that 
State.5 The Hague Convention also limits enforcement of 
choice of court clauses so that they may be enforced only when they are 
entered into after the dispute has arisen or they allow the consumer to 
bring proceedings in another court. The effect would be that a business 
would be vulnerable to suit anywhere in the world that its web site is 
accessible. And, because of the close connection between choice of 
forum and choice of law, companies doing business on the web would not 
only have to anticipate being haled into court around the world but 
also being subjected to different and sometimes conflicting consumer 
protection laws around the world. The result certainly would be that 
companies would be reluctant to offer their goods and services over the 
Internet for fear of being sued anywhere in the world and subjected to 
the laws of more than 170 countries.6
---------------------------------------------------------------------------
    \5\ See Article 7 of the Hague Convention. Plaintiffs are 
considered consumers when they conclude a contract for a purpose 
outside their trade or profession.
    \6\ This discussion of the problems raised by the Hague Convention 
is not exhaustive. The Hague Convention also raises many other problems 
for electronic commerce, including problems arising out of trademark 
and patent suits and the relationship to other international and 
regional conventions.
---------------------------------------------------------------------------
    If, as noted above, U.S. courts already enforce foreign judgments, 
why would the Hague Convention be so problematic? The reasons are 
fourfold. First, the statement--that U.S. courts typically enforce 
foreign judgments--oversimplifies the current U.S. legal situation. 
Foreign judgments are presumptively enforceable by U.S. courts, but 
that general rule is subject to certain exceptions. For example, it is 
well established that U.S. courts also examine, when raised by 
defendants, claims that a foreign court lacked personal jurisdiction. 
Particularly where the jurisdiction is not a common law jurisdiction, 
courts will apply U.S. standards of minimum contacts in determining if 
jurisdiction was proper. Yet, the Hague Convention would require U.S. 
courts to enforce foreign judgments so long as they satisfy the 
requisite jurisdictional tests established by the Hague Convention even 
where sufficient contacts do not exist.7 Second, as noted 
above, efforts by U.S. courts to adapt the minimum contacts doctrine to 
the world of electronic commerce are still ongoing. Incorporating 
current jurisdictional rules in the Hague Convention at this time would 
freeze them in place prematurely since it is not yet clear that they 
have fully evolved or that they work effectively in the electronic 
commerce context.
---------------------------------------------------------------------------
    \7\ The Hague Convention allows courts to refuse to enforce another 
court's judgments where they result ``from proceedings incompatible 
with fundamental principles of procedure of the State addressed, . . 
.'' (Article 28(1)(c) of the Hague Convention). It is unknown at this 
time, whether the Hague Convention will lead U.S. courts to interpret 
procedural due process requirements differently than they now do.
---------------------------------------------------------------------------
    Third, although it can be said that U.S. courts normally enforce 
foreign judgments, U.S. courts have not enforced foreign judgments 
arising out of the kinds of cases that arise in the electronic commerce 
context. For example, the foreign copyright cases that have been 
enforced have all involved situations where the defendant also clearly 
had minimum contacts with the jurisdiction in which the original suit 
was brought. But under the Hague Convention, U.S. courts would have to 
enforce foreign judgments where, for example, an Internet service 
provider had no contacts with the jurisdiction where the suit had been 
brought except that a work it had transmitted could be accessed there.
    Similarly, business to consumer transactions across borders were 
rare before the Internet. There are therefore few if any cases of 
foreign judgments being enforced by U.S. courts where they result from 
suits brought by consumers in their home court against defendants with 
no contacts in that jurisdiction. Finally, the principle that U.S. 
courts will enforce foreign judgments does not appear to be well 
recognized outside the U.S. and relatively few plaintiffs try to 
enforce foreign judgments here. That obviously would change if the 
Hague Convention were finalized and the U.S. were a party.
    Given the many problems raised by the Hague Convention, it may be 
tempting to advocate that the U.S. Government absent itself from the 
Hague Convention. Nevertheless, based on my first hand experience in 
working on behalf of the U.S. Government in international fora on a 
variety of electronic commerce issues, I believe U.S. interests will be 
better served for a variety of reasons if the U.S. Government remains 
part of the Hague Convention process. Efforts on the Hague Convention 
will likely continue with or without the U.S. Government. Continued 
participation by the U.S. Government will allow it to influence the 
Hague Convention, while disengaging will not. Nor can the U.S. avoid 
the effects of the Hague Convention entirely if it does come into 
effect. At a minimum, even if the U.S. is not a signatory to the Hague 
Convention, foreign judgments against U.S. companies will be 
enforceable in other countries that are signatories to the Hague 
Convention.
    U.S. Government efforts to address the criticisms leveled against 
the Hague Convention by the U.S. private sector provide a further 
illustration of why it is beneficial for the U.S. Government to remain 
engaged in the process. First, the U.S. Government succeeded in slowing 
down the process and was able to secure postponement of the diplomatic 
conference, originally scheduled for last year, to this June. The U.S. 
Government also takes a unique approach in consulting extensively with 
all aspects of the private sector, which is particularly important in 
the ecommerce context, where technology and market applications evolve 
so quickly. It was also able to persuade other delegations to hold 
several informal ``stocktaking'' meetings and to advocate successfully 
including private sector experts from the electronic commerce, 
intellectual property, consumer, and trial lawyer communities in these 
meetings and in focusing attention on the problems the Hague Convention 
raises for electronic commerce. Absent U.S. Government involvement, 
private sector representatives would not have been included in these 
meetings. These meetings produced new, informal drafts that attempt to 
address the concerns discussed above. (The status of these drafts is 
still entirely unclear; it is not known whether they or the preliminary 
draft adopted in 1999 will form the basis for discussion at the June 
diplomatic conference, nor do they resolve many of the concerns raised 
by the electronic commerce community.) And, the U.S. Government 
continues to press to ensure that both formal and informal meetings are 
open to private sector participants.
    Therefore, in my view the better approach is for the U.S. 
Government to remain involved in the Hague Convention negotiating 
process and to continue to urge participating countries to take a 
constructive problem solving approach to the issues that succeeds in 
bridging the differences in jurisdictional approaches rather than 
relying so heavily on one particular legal tradition.
Safe Harbor Privacy Accord
    Privacy provides another prime example of an issue that requires 
countries to find common ground. Enormous amounts of information are 
now used on a global basis. Many multinational companies ship all their 
human resources data to one location for record keeping, benefits, and 
payroll purposes. Credit card companies do the same with bankcard 
information for billing purposes. Credit and insurance markets 
increasingly operate on a global basis and require the transfer of 
information about individuals across borders to evaluate their 
creditworthiness or insurance risks. The inherently global nature of 
the Internet further complicates the matter. Citizens of one country 
may easily visit web sites in other countries, transferring personal 
information across borders as they visit. But laws, which generally are 
limited by nations' borders, have little effect in a medium without 
borders. These problems are exacerbated when nation that have 
longstanding differences on how to protect privacy adopt very different 
approaches to dealing with these issues, as do the United States and 
the European Union (EU). Traditionally, the U.S. has relied on self-
regulation and limited sector-specific legislation to protect privacy 
while EU countries, which view privacy as a fundamental right, have 
adopted broad, highly regulatory legislation that applies the same 
rules to all industry sectors.
    Given these longstanding differences, many U.S. companies were 
concerned when the European Union adopted the Directive on Data 
Protection, which requires that Member States enact laws prohibiting 
the transfer of personal data to countries outside the European Union 
that fail to ensure an adequate level of privacy protection. U.S. 
companies feared that interruptions in data flows would result in the 
suspension of businesses. Such across-the-board interruptions could 
affect billions of dollars in trade each year and interfere with the 
multinational companies' ability to pay and manage their employees as 
well as with the routine activities carried out by investment bankers, 
accountants, and pharmaceutical and travel companies. Just the threat 
of action by European authorities left U.S. companies with a great deal 
of uncertainty, while alternative, ad hoc approaches available to 
satisfy the Directive's ``adequacy'' standard threatened to be 
expensive and time consuming and thus suitable for larger companies 
only.
    In March 1998, against the backdrop of these different privacy 
approaches and the serious consequences that could flow from them, the 
United States and the EU took up the difficult challenge posed by their 
different approaches to privacy. The goal of the United States 
Government was to create easier, more streamlined option(s) for U.S. 
companies transferring personal information from the EU to the U.S., 
particularly small and medium sized companies, and to ensure the 
continued flow of data across borders. The EU's goal was to ensure its 
citizens a high level of privacy protection. From the start, both sides 
agreed to adopt both sets of goals. In recognition that any 
interruptions in transborder data transfers could have a serious impact 
on commerce, the EU and the U.S. began with an acceptance of their 
differences and developed ways to bridge those differences. Initial 
steps focused on identifying common ground in their different 
approaches on which to build a solution.
    This approach led to the ``safe harbor'' privacy accord. The safe 
harbor builds on the U.S. self-regulatory approach to privacy and more 
closely reflects the U.S. approach to privacy. U.S. companies may 
decide voluntarily if they wish to adhere to the safe harbor framework. 
If they so decide, they will be judged ``adequate,'' and data flows to 
them from Europe will continue. It thus provides yet another option for 
U.S. companies to meet the requirements of the EU Directive but in no 
way limits their choices if they wish to take another approach for 
complying with the Directive.
    The safe harbor provides a number of important benefits to U.S. 
firms. Most importantly, it offers U.S. companies that receive personal 
information from Europe predictability and continuity as well as a more 
streamlined and less expensive means of complying with the adequacy 
requirements of the Directive. It creates a single privacy regime for 
U.S. companies transferring personal information from the EU to the 
U.S. (since all 15 Member States are bound by the safe harbor accord) 
and eliminates the need for prior approval to begin data transfers to 
the U.S. or makes such approval automatic.
    Importantly, the safe harbor framework was developed by the U.S. 
Government in close consultation with the U.S. private sector--industry 
as well as privacy advocates. We posted drafts of documents for public 
comment fours times during the two-year negotiation and held numerous 
meetings with consumer advocacy and industry groups to obtain their 
views on the draft documents. This input was invaluable in developing a 
workable framework for U.S. companies, which as much as possible 
reflects actual business practices, yet at the same time satisfies EU 
privacy requirements.8 The U.S. Government also needs to be 
engaged in discussions with other governments as they develop privacy 
legislation.
---------------------------------------------------------------------------
    \8\ The EU and U.S. approaches to privacy as well as the safe 
harbor accord are more fully discussed in a paper I wrote entitled 
Bridging the Difference: The Safe Harbor and Information Privacy in The 
United States and the European Union. (A copy of this paper and another 
paper, entitled, European Commission's Model Contractual Clauses: 
Paving The Way For International Transfers Or A New Hurdle? on the EU's 
model contractual clauses are attached to my testimony.)
---------------------------------------------------------------------------
Conclusion
    If digital trade is to reach its full potential, it will require a 
workable legal framework that is consistent across borders. Achieving 
such a framework is both a long term and difficult goal, not least 
because we each start with the view that our own way is the right way. 
In addition, these ways are often deeply entrenched as a result of 
centuries of differing legal traditions. It seems clear that this goal 
will be achieved only if the U.S. Government and the U.S. private 
sector are deeply engaged--both in international fora and bilaterally--
in discussions on the full range of issues that affect digital trade. 
It is also critical to achieving this goal that the U.S. Government 
continue to urge other governments to agree to inclusion of private 
sector participants in all international discussions, including treaty 
negotiations. Finally, all sides must be willing to work together to 
identify common ground and bridge the differences in their approaches.
                                 ______
                                 
 Preliminary Comments on the Hague Conference on Private International 
                                  Law

    The Hague Conference on Private International Law has been 
negotiating a Convention on jurisdiction and enforcement of foreign 
judgments. The purpose of the Convention is to harmonize global rules 
of jurisdiction and create predictable rules for the worldwide 
enforcement of judgments. Discussions on this Convention began before 
the growth of electronic commerce, and the Convention creates new 
challenges in the Internet age. Consequently, the Convention, as 
currently drafted, creates numerous areas of concern for the Internet 
service providers and the entire information technology (``IT'') 
industry. A brief overview of some of the business concerns and risks 
posed by the draft Articles is discussed below.

Article 10--Torts
    Article 10 sets forth jurisdictional rules governing where a 
plaintiff can sue a defendant for actions in ``tort.'' Torts include 
both physical torts, such as environmental offences and products 
liability, and more troubling, intangible, content-related torts such 
as hate speech, defamation, copyright infringement, unfair competition, 
libel, etc. Article 10 as drafted would allow a plaintiff to bring a 
tort action against a defendant in any country of the world where:

(a) the act that caused the injury occurred; or
(b) in which the injury arose unless the defendant establishes that the 
        person claimed to be responsible could not reasonably have 
        foreseen that the act could result in an injury in that state. 
        A plaintiff can also bring a tort action in any country in 
        which the act or injury may occur.
    The rules governing jurisdiction in the Hague Convention apply to 
electronic commerce. Therefore, if Article 10 became the rule, any 
owner of a web page or service provider could be sued in another 
country simply because ``injury arose'' there by virtue of its being 
accessible over the Internet. The defendant would face difficulty 
proving that is was not reasonably foreseeable that injury would not 
occur in such country. Article 10 would have damaging, unintended 
consequences on the U.S. IT industry:
     The torts provision would lead to increased vulnerability 
to tort suits for service providers. Copyright owners could bring suit 
against the service provider for copyright infringement in countries 
that have no laws limiting service provider liability. And, while the 
choice of forum should be independent of the choice of applicable law, 
in fact the choice of forum often leads to a choice of that forum's 
laws because each forum's courts apply their own conflicts of law 
rules.
    The Convention would also obligate U.S. courts to enforce the 
resulting judgment (unless they took the view that enforcement was 
contrary to public policy, which they are generally reluctant to do) 
Copyright owners could bypass the limitations on liability they 
negotiated with U.S. service providers under the Digital Millennium 
Copyright Act. The copyright owners could establish that injury arose 
in any country of the world because the copyrighted work was accessible 
via the Internet in such country. Even if the service provider had no 
assets in that country, the Hague Convention would permit the copyright 
owner to return to the U.S. or any other signatory to the Convention 
and seek to have its judgment enforced against the providers' assets in 
such country.
     Article 10 could encourage other countries to emulate a 
troubling trend begun by the Yahoo France decision, in which a French 
court exerted jurisdiction and penalties against Yahoo U.S. because the 
Yahoo website was posting content that was accessible to users in 
France. The content was considered illegal in France and legal in the 
U.S. under the First Amendment. Other courts have followed suit. 
Recently, two courts in France and Germany held that website publishers 
who published material residing on servers outside of those countries 
were nevertheless guilty of defamation and hate speech in Germany and 
France because the material was merely accessible in those countries. 
While surely U.S. courts would refuse to enforce such judgments on 
First Amendment grounds, the Convention would nonetheless compound the 
problem by requiring that those judgments be enforced in other 
countries where there might be assets. Defendants would also need to 
expend unnecessary resources defending such enforcement actions. First 
Amendment principles in the U.S. could easily be bypassed by loose 
rules that encourage this type of jurisdiction grab.
     All businesses could be subject to unnecessary lawsuits 
around the world for ``torts'' such as reverse domain name hijacking, 
unfair competition, or passing off.
    Recommendation: The Convention should be modified to make clear 
that network operators and Internet service providers, who are 
providing Internet services on behalf of third parties, should not be 
subject to jurisdiction from the overly broad jurisdictional concepts 
that run throughout the Convention. Language should be added to Article 
18: If an action in tort or delict is brought in the courts of a State 
only on the basis that the injury arose there, those courts shall not 
have jurisdiction over a defendant who is a service provider, when the 
service provider's activity in connection with the injury is a) the 
transmitting, routing, or providing connections for the material which 
is alleged to have caused the injury; b) caching carried out through an 
automatic process of the material which allegedly caused the injury; c) 
the storage at the direction of a user of the material which allegedly 
caused the injury; or d) the referring or linking of users to an online 
location or providing other information location tools containing the 
material which allegedly caused the injury.

Article 12--Exclusive Jurisdiction
    This Article harms U.S. patent and trademark owners by permitting 
any court of the world to exert exclusive jurisdiction over any 
trademark or patent matter that have as their object the registration, 
validity, nullity or infringement of such patent and trademarks. 
Notably, copyrights owners successfully excluded copyrights from the 
scope of exclusive jurisdiction under Article 12. Article 12 encourages 
a ``jurisdictional grab'' by encouraging a party to file a suit simply 
by objecting to the registration or validity of a trademark or patent, 
and thereby grant that court exclusive jurisdiction over the dispute. 
For example, if company A in country A sent a cease and desist letter 
to company B in country B for violating its contract, company B could 
simply bring an action alleging that Company A's trademark in country B 
is invalid. The court is country B now has exclusive jurisdiction over 
the contract dispute and the trademark dispute. Patent and trademark 
rights differ in each country and are based on complicated intellectual 
property case law regimes. Each country that registers trademarks and 
patents within its own boundaries is closest to the facts and has the 
best expertise to resolve disputes under its own national laws. It does 
not make sense for countries that did not register such trademark or 
patent to be ruling on the infringement or validity of patents and 
trademarks granted by other countries.
    Recommendation: As a matter of policy, trademarks and patents 
should be excluded from the scope of exclusive jurisdiction in Article 
12. There has been some discussion in recent Hague Convention meetings 
about fixing Article 12 by clarifying that only the countries that 
granted the registration of such patents or trademarks (or is the 
country in which common law rights in the trademark rights arose), 
should have exclusive jurisdiction to resolve all trademark and patent 
disputes. There are still some significant questions as to whether this 
proposed language adequately addresses the concerns of trademark and 
patent owners with Article 12. This language should be studied in 
detail, and if questions still arise, exclusion of all intellectual 
property from the Convention may be the best remedy. Article 12 should 
also be clarified to indicate that patent and trademark infringement 
cannot arise in a country in the absence of the patent or trademark 
owner intentionally directing the industrial property through the sale 
of products or services to such country. In the recent Pro-C case, a 
Canadian court found a U.S. trademark owner liable for infringement 
merely because the mark was accessible to Canadian users although the 
defendant did not direct products or services to users in Canada.

Article 13--Provisional and Protective Measures
    This Article allows any court in which ``property'' is located to 
order any provisional measures (such as injunctions), provided that the 
enforcement was limited to the territory of that country. For example, 
if a reproduction of a copyrighted work was considered ``property'' 
located in France because French citizens could access it in France, 
the French court could order a broad injunction forcing the defendant 
to stop transmitting the content in France. This article raises many of 
the same concerns discussed with Article 12 above. In the Internet age, 
property can be ``located'' anywhere. Provisional measures that 
arguably are limited to the territory of one country have permanent 
effects on global electronic commerce. For example, in the Yahoo France 
case, the court ordered Yahoo U.S. to block the IP addresses of French 
users, even though the content is considered legal in the U.S. and 
there are technical problems implementing effective blocking.
    Recommendation: This is exactly the type of dangerous outcome that 
should be avoided in the Hague Convention. The provision on provisional 
measures in Article 13 should be deleted or limited to tangible 
property only. Alternatively, if the problems with Article 10 are 
adequately addressed, there may be a similar resolution of the problems 
articulated for Article 13.

Article 7
    Article sets out rules for when a consumer may sue a defendant in 
the courts where the consumer resides. Article 7 as drafted would allow 
a consumer to sue in his home jurisdiction where:

--the claim is related to the defendant's trade or profession;
--the defendant has directed his activities to that state (through 
        means of publicity; and
--the consumer has taken steps necessary for the conclusion of the 
        activity in that State.
    Plaintiffs are considered consumers when they conclude a contract 
for a purpose outside their trade or profession.
    Article 7 also states that choice of court clauses will be enforced 
only when they are entered into after the dispute has arisen or they 
allow the consumer to bring proceedings in another court.
     Article 7 as drafted would allow a consumer (and perhaps a 
business acting outside its trade or profession) to sue a business 
wherever their website is accessible. It adopts a country of 
destination approach to jurisdiction.
     The major option for addressing this problem--choice of 
forum clauses--would not be available until after the dispute had 
arisen, increasing the vulnerability of businesses to class action 
suits.
     It is also unclear if the choice of court provision would 
allow parties to designate alternative dispute resolution as an 
alternative to litigation.
    Recommendation: The fix could be either redrafting Article 7 so 
that it provides for a country of origin approach or deleting the 
provision entirely.
    Company/Association Names: AT&T, Commercial Internet Exchange 
(CIX), Computer & Communications Industry Association (CCIA), Verizon.
                                 ______
                                 
Bridging the Difference: The Safe Harbor and Information Privacy in The 
                  United States and The European Union
                    Barbara S. Wellbery 1
---------------------------------------------------------------------------
    \1\ Barbara Wellbery is a partner in the Washington office of 
Morrison & Foerster LLP. She was previously Counsellor to the Under 
Secretary for Electronic Commerce in the U.S. Department of Commerce. 
While there, she was the chief architect and a principal negotiator of 
the safe harbor privacy accord between the U.S. and the European Union. 
The author would like to thank Rebecca Richards and Cynthia Rich for 
their valuable assistance on this article.
---------------------------------------------------------------------------
                              introduction
    Today's information technologies allow information to be collected, 
compiled, analyzed, and delivered around the world more quickly and 
inexpensively than ever before. Where it was once difficult, time-
consuming, and expensive to obtain and compile information, it is now 
often available with a few simple clicks of a computer mouse. This 
increased access to information facilitates personal and political 
expression as well as commerce, education, and health care.
    Information technologies are transforming the face of global 
commerce. World trade involving information technologies and related 
services and products (computer software, movies, sound recordings, 
databases, and financial services, to name just a few) has grown 
rapidly in the past decade and now accounts for over $120 billion of 
U.S. exports alone.2 We are now said to live in an 
``Information Economy.''
---------------------------------------------------------------------------
    \2\ Digital Economy 2000, Department of Commerce p. 53.
---------------------------------------------------------------------------
    Consumers benefit from the increased access to information. They 
surf the ``Internet'' seeking all kinds of information. Thinking of 
buying a house? You can shop for it on the Internet. Information is 
available about neighborhoods, prices, and schools; you can even take a 
virtual tour of the house while on-line.
    Companies, too, benefit. They can create new markets as the 
Internet allows them to reach potential customers easily and cheaply. 
Increased access to information about customers can reduce marketing 
and inventory costs, and allow better target advertising. As a result, 
consumer information has become a ``hot'' commodity.
    Not surprisingly, then, there is a growing demand for all kinds of 
information. The great promise of the Information Age is, however, also 
its greatest threat. The increased market for personal information, 
coupled with the ability to collect and compile it easily, has led to 
an enormous increase in the amount of information collected about 
individuals as they conduct commercial transactions and cruise the Net. 
Banks and credit card companies maintain information on financial 
records, payment histories, where people shop, and what they buy. 
Supermarkets and other retail stores track consumer purchases using 
checkout scanners. As individuals peruse various sites on the Internet, 
mouse clicks can be tracked , so-called ``cookies.'' Profiles can be 
compiled not only of what people buy, but also of what they read, their 
health concerns, and perhaps their political and sexual preferences as 
well. Thus, information technologies increase the risks to privacy 
exponentially.
    Moreover, privacy issues are complicated by the fact that so much 
information is now used on a global basis. Multinational companies may 
ship all their personnel data to one location for record keeping, 
benefits, and payroll purposes; credit card companies may do the same 
with bankcard information for billing purposes. Credit and insurance 
markets increasingly operate on a global basis and may require the 
transfer of information about individuals across borders to evaluate 
their creditworthiness or insurance risks. And, the inherently global 
nature of the Internet further complicates the matter. Citizens of one 
country may easily visit web sites in other countries, transferring 
personal information across borders as they visit. But laws, which 
generally are limited by nations' borders, may have little effect in a 
medium without borders.
    Many nations share concerns about the impact of the expansion of 
electronic networks on information privacy. The United States and the 
European Union (EU) are both addressing these concerns, but in markedly 
different ways. This essay briefly examines the U.S. and EU approaches 
to privacy, their differences and similarities, the disruptions in 
global commerce the differences could cause, and one solution that has 
been developed for bridging those differences.

              THE EUROPEAN APPROACH TO PRIVACY PROTECTION

    While the United States and EU generally agree on the underlying 
principle that individuals should have the opportunity to control the 
ways their personal information is used, the U.S. and the EU employ 
very different means to achieve this goal. The EU's approach to privacy 
grows out of Europe's history and legal traditions. In Europe, 
protection of information privacy is viewed as a fundamental, human 
right. The emphasis given to information privacy in Europe arises at 
least in part from intrusions into information privacy that were at the 
root of certain World War II abuses. Europe also has a tradition of 
prospective, comprehensive lawmaking that seeks to guard against future 
harms, particularly where social issues are concerned.
    The EU began examining the impact of technology on society over a 
fifteen years decade ago; the inquiry culminated in the adoption of a 
directive in July 1995 specifically addressing information privacy 
issues. The Council Directive on the Protection of Individuals With 
Regard to the Processing of Personal Data and On the Free Movement of 
Such Data (``Directive'') took effect in October 1998. Member states 
were required to bring into force laws, regulations, and administrative 
provisions to comply with the Directive by its effective date. Several 
have not yet done so. Presently, six of the fifteen Member States are 
being sued by the Commission for failure to implement measures within 
the deadline established by the Directive.3
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    A quick review of its basic terms makes clear that, consistent with 
European tradition, the Directive takes an overarching, highly 
regulatory and inclusive approach to privacy issues. It has two basic 
objectives: first, to protect individuals with respect to the 
``processing'' of personal information (defined as information relating 
to an identified or identifiable natural person); and second, to ensure 
the free movement of personal information within the EU through the 
coordination of national laws (Article 1).
    The scope of the Directive is extraordinarily broad. It applies to 
all processing of data, online and off line, manual as well as 
automatic, and all organizations holding personal data. It excludes 
from its reach only data used ``in the course of purely personal or 
household activity'' (Article 3). The Directive establishes strict 
guidelines for the processing of personal information. ``Processing'' 
includes any operations involving personal information, except perhaps 
its mere transmission (Article 2). For example, copying information or 
putting it in a file is viewed as ``processing.'' The substantive 
aspects of the Directive's privacy protections are based on the 
Guidelines on the Protection of Privacy and Transborder Flows of 
Personal Data adopted by the Organization for Economic Cooperation and 
Development (OECD) in 1980.
    Data Quality. The Directive requires that all personal information 
must be processed fairly and lawfully, so that, for example, a person 
whose personal information is at issue knows that it is being collected 
and used and must be informed of the proposed uses. Furthermore, the 
use of personal information must be limited to the purpose first 
identified and to other compatible uses, and no more information may be 
collected than is required to satisfy the purpose of which it is 
collected. In other words, the theory is that if a person provides 
information to obtain telephone service, that information should not be 
used to target that person for information about vacation trips, nor 
should information relevant to a customer's interests in vacation trips 
be required to get, for instance, telephone service. Information must 
also be kept accurate and up to date (Article 6).
    Legitimate Data Processing. The Directive sets forth rules for 
``legitimate'' data processing. Most basically, this requires obtaining 
the consent of the data subject before information is processed unless 
specific exemptions apply (Article 7). In addition, certain information 
must be provided to data subjects when their personal information is 
processed (Article 10), such as whether they have rights to see the 
data, to correct any information that is inaccurate, or to know who 
will receive the data (Article 12).
    Sensitive Data. ``Sensitive'' data, such as that pertaining to 
racial or ethnic origins, political or religious beliefs, or health or 
sex life, may not be processed at all unless such processing comes 
within limited exceptions (Article 8).
    Security. The Directive requires that ``appropriate technical and 
organizational measures to protect data'' against destruction, loss, 
alteration, or unauthorized disclosure or access be taken (Article 17).
    Data Controllers. The Directive requires those processing data to 
fulfill very specific requirements. Specifically, they must appoint a 
``data controller'' responsible for all data processing, who must 
register with government authorities (Article 19) and notify them 
before processing any data (Article 18). Notification must at a minimum 
include: the purpose of the processing; a description of the data 
subjects; the recipients or categories of recipients to whom the data 
might be disclosed; proposed transfers to third countries; and a 
general description that would allow a preliminary assessment of 
whether requirements for security of processing have been met (Article 
19).
    Government Data Protection Authorities. The Directive also mandates 
a government authority to oversee data processing activities. Each 
Member State must establish an independent public authority to 
supervise the protection of personal data. These ``Data Protection 
Commissions'' must have the power to: (1) investigate data processing 
activities and monitor application of the Directive; and (2) intervene 
in the processing and to order the blocking, erasure, or destruction of 
data as well as to ban its processing. They must also be authorized to 
hear and resolve complaints from data subjects and must issue regular 
public reports on their activities (Article 28).
    Transfers of Data Outside the EU. Most importantly from the U.S. 
perspective, the Directive requires that Member States enact laws 
prohibiting the transfer of personal data to countries outside the 
European Union that fail to ensure an ``adequate level of [privacy] 
protection'' (Article 25). Where the level of protection is deemed 
inadequate, Member States are required to take measures to prevent any 
transfer of data to the third country. Member States and their Data 
Protection Commissions must inform each other when they believe that a 
third country does not ensure an adequate level of protection.
What Constitutes Adequacy Under the Directive?
    The aspect of the Directive that raises major questions for the 
United States and other non-EU countries is the question of what 
constitutes an ``adequate level of (privacy) protection.'' The 
Directive provides some guidance on how adequacy is to be determined. 
For example, the Directive states that the adequacy of the protection 
offered by the recipient country shall be assessed in the light of all 
the circumstances surrounding a data transfer. These include: (1) 
nature of the data; (2) purpose and duration of the proposed processing 
operation; (3) country of origin or the country of final destination; 
(4) rules of law in force in the destination country and (5) 
professional rules and security measures that apply within the 
recipient country (Article 25). And, while there seems to be general 
consensus that ``adequacy'' means less than ``equivalence,'' the 
Directive leaves unspecified the substantive rules that in fact 
constitute ``adequacy'' as well as the procedural means for achieving 
it.
    In June 1997, the European Commission's Working party on the 
Protection of Individuals with Regard to the Processing of Personal 
Data (``Working Party'') released a discussion paper entitled ``First 
Orientations on Transfers of Personal Data to Third Countries , 
Possible Ways Forward in Assessing Adequacy.'' The Working Party paper 
identifies two criteria essential to a finding of adequacy , the core 
substantive rules and enforcement mechanisms. The substantive rules 
identified in the paper closely track the Directive's requirements 
discussed above. They include: (1) information must be processed for a 
particular purpose and used only insofar as its use is not incompatible 
with the purpose of its collection; (2) information must be accurate 
and up to date and not excessive in relationship to the purposes for 
which it is collected; (3) individuals must be provided with 
information about the purpose of the collection; (4) organizational and 
technical measures must be taken to keep the data secure; (5) data 
subjects must be able to obtain copies of all data and have a right to 
rectification if they are inaccurate, as well as to oppose processing; 
and (6) transfers to third countries must be restricted unless they 
provide an adequate level of protection. The enforcement mechanisms 
must provide: (1) a good level of compliance; (2) support and help to 
individual data subjects; and (3) appropriate redress. The Working 
Party Paper also recognizes that legislation is not necessary for 
adequate privacy protection so long as these goals are accomplished 
through other means.
    In issuing Transfers of Personal Data to Third Countries: Applying 
Articles 25 and 26 of the EU Data Protection Directive, a more recent 
report issued in July 1998, the Working Party elaborated further on the 
criteria a self-regulatory regime had to meet to be considered 
adequate. First, it reiterated that the substantive rules and 
enforcement mechanisms identified in its July 1997 report must be met. 
The self-regulatory regime must also be binding for all companies or 
institutions to which personal data are transferred and provide for 
adequate safeguards if data are passed on to non-members. In addition, 
the privacy regime must be transparent and have mechanisms that 
effectively ensure a good level of compliance. Individuals must be 
ensured certain rights, such as easy access to an impartial and 
independent body to hear complaints that can adjudicate breaches of the 
code and provide a remedy and compensation, as appropriate. Finally, 
there must be a guarantee of appropriate redress in cases of non-
compliance.
    Neither paper issued by the Working Party, however, provides 
guidance on how and where an ``adequate'' privacy law or program in a 
third country might differ from the requirements of the Directive. 
Until the European Union actually made ``adequacy'' findings and there 
were specific examples to examine, exactly what would constitute 
``adequacy'' under the Directive would remain unclear.

                THE U.S. APPROACH TO PRIVACY PROTECTION

    Legal and historical traditions have evolved quite differently in 
the United States than in Europe, and the United States takes a 
different approach to privacy issues from the EU's. The U.S. legal 
tradition, rooted in concerns about governmental excesses, has led to a 
preference for decentralized authority, a reluctance to regulate the 
private sector absent demonstrated need, and generally greater concern 
about government excess than about private sector excess. And, while 
the U.S. Constitution establishes certain privacy protections for 
individuals, such as the right to be free from warrantless searches, it 
does not explicitly protect information privacy, nor has any such right 
been inferred from the Constitution. In addition, a fundamental tenet 
of American democracy + the First Amendment to the U.S. Constitution + 
requires a balance between the privacy rights of individuals and the 
benefits that stem from the free flow of information within and across 
U.S. borders.
    Accordingly, when the U.S. adopted a comprehensive privacy law--the 
Privacy Act of 1974--it governed only the Federal Government's use of 
citizens' personal information. Other federal privacy protection 
statutes apply to specific government agencies or information, such as 
income tax and census data. Neither federal nor state governments, 
however, have adopted comprehensive information privacy protections 
affecting private sector data use. (Some state constitutions, such as 
those of California, Florida, and Hawaii, explicitly set forth a right 
to information privacy without specifying any rights relating directly 
to information privacy.)
    In contrast, the information privacy laws that govern the private 
sector in the United States were adopted either because of specific 
instances of abuse, perceived market failure, or because particularly 
sensitive information and/or groups were involved. There is also 
concern that information privacy issues differ so across different 
industry sectors that ``a one size fits all'' legislative approach 
would lack the necessary precision to avoid interfering with the 
benefits that flow from the free flow of information. For that reason, 
too, the U.S. has adopted limited sector-specific privacy legislation. 
As a result, a number of statutes cover the collection and use of 
personal information in specific contexts, such as children's personal 
information, information collected by telephone and cable companies and 
credit bureaus, and financial, video rental and drivers' license 
information. A brief review of three of these statutes makes clear that 
privacy statutes in the U.S take different approaches and impose 
different schemes for protecting privacy depending on the 
circumstances.

Fair Credit Reporting Act
    Congress enacted the Fair Credit Reporting Act (FCRA) in 1970 to 
deal with widespread concerns about incorrect and widely disseminated 
consumer credit reports. The FCRA governs disclosure of consumer credit 
information by credit bureaus. It starts with the premise that 
widespread availability of correct credit information to parties with a 
real need for the information will benefit the U.S. economy. For this 
reason, it provides consumers with a limited right to consent to the 
use of their personal information.
    The Act imposes strict regulations on who may use the credit 
information and on ensuring that the information is accurate. It thus 
limits the disclosure of credit information to businesses with a 
legitimate need for the information and provides certain rights to 
consumers when credit information is used to deny them an important 
benefit. To help ensure accuracy, the Act requires that consumers have 
access to information maintained about them and sets out fairly 
prescriptive rules governing how access must be provided. The Act also 
requires that the recipients of credit reports be identified, prohibits 
the reporting of obsolete information, and provides a correction 
process for inaccurate or incomplete information. And, if a consumer is 
denied credit for personal, family, or household purposes or is denied 
employment and the denial is based on information in a consumer report, 
the entity receiving the report is required to notify the consumer and 
identify the credit bureau that furnished the report in question. The 
FCRA allocates enforcement responsibilities among a number of federal 
agencies, primarily to the Federal Trade Commission.

Children's Online Privacy Protection Act
    In October 1998, Congress passed the Children's Online Privacy 
Protection Act (COPPA). The law applies to operators of commercial web 
sites and online services that collect or maintain information from web 
site or service visitors and users and prohibits the collection of 
information from children under the age of 13 without verifiable 
parental consent. It also provides for a safe harbor from privacy 
liability where companies adhere to a self-regulatory program approved 
by the Federal Trade Commission. The Federal Trade Commission, which 
was charged with enforcing developing regulations under the statute, 
issued implementing rules in April 2000.
    These rules set out criteria for web site operators and online 
services that are targeted to children or have actual knowledge that 
the person from whom they seek information is a child. They require 
notice of what personally identifiable information is being collected, 
how it will be used, and whether it will be disclosed. Subject to 
certain exceptions, a web site must notify parents that it plans to 
collect information from their child and obtain parental consent before 
it is collected, used, or disclosed. Conditions for more than 
reasonably necessary information may not be placed on a child's 
participation in online activities. In addition, parents must be 
allowed to review information collected from the child, to have it 
deleted, and to prohibit further collection. Finally, companies must 
implement procedures to protect the confidentiality, security and 
integrity of personal information collected from children.

Financial Modernization Act
    More recently, in November 1999, the President signed into law the 
Financial Modernization Act. The Act's primary purpose was to overhaul 
the U.S. laws governing the financial services industry, but the 
legislation also increased the level of financial privacy protections 
afforded to consumers. The law requires financial institutions to 
disclose clearly their privacy polices up front and annually, allowing 
consumers to make informed choices about privacy protection. Financial 
institutions must also inform consumers if they intend to share or sell 
consumers' financial data either within the corporate family or to 
third parties. Consumers are entitled to choice if a financial 
institution plans to share information with unaffiliated third parties, 
subject to certain exceptions. Enforcement is allocated among Federal 
functional regulators (for example, the Office of the Comptroller of 
the Currency, the Securities and Exchange Commission, and the Federal 
Reserve Board), the Federal Trade Commission, and State insurance 
authorities. The legislation directs these agencies to prescribe 
regulations necessary for its implementation. Regulations have been 
finalized for all federal regulators. Businesses must be in full 
compliance by July 2001.

U.S. Self Regulatory Privacy Initiatives
    Without broad, multi-sector information privacy laws, information 
privacy protection in the United States has in large part relied on 
voluntary adoption of self-regulatory codes of conduct by industry. 
These codes take as their point of departure the same Guidelines on the 
Protection of Privacy and Transborder Flows of Personal Data adopted by 
the OECD as form the basis for the European Directive on Data 
Protection. As long ago as 1983, 183 U.S. companies endorsed those 
Guidelines. The U.S. Government has also repeatedly endorsed these 
guidelines, most recently in October 1998, when the Clinton 
Administration reiterated endorsement of those Guidelines as part of 
the Ministerial Declaration on the Protection of Privacy on Global 
Networks issued at the Ottawa Ministerial Conference.
    Recent years have witnessed the growing importance of information 
privacy in the United States and increasing concern, from both 
consumers and Clinton Administration officials, about whether such 
privacy is sufficiently protected. This concern has led to enactment of 
additional sector-specific legislation. It has not, however, resulted 
in any significant movement toward a European type regulatory approach 
or law. Rather, the emphasis has been primarily on adoption and 
implementation of more effective self-regulatory regimes to protect 
privacy or on self-regulation with teeth.
    Thus, when in 1997, the Clinton Administration released A Framework 
for Global Electronic Commerce, which examines the policy issues raised 
by the development of electronic commerce, it noted the growing 
concerns about information privacy and recognized that, unless they 
were addressed, electronic commerce would not develop to its full 
potential. The report specifically recognized the high value Americans 
place on privacy and recommended private sector efforts and 
technological solutions to protect privacy. The report also identified 
several factors suggesting that adopting comprehensive legislation 
could harm the development of electronic commerce at this time.
    The lack of national borders on the Internet has heightened 
interest in self-regulation and technological solutions to problems 
generally and to privacy concerns specifically. On the Internet, 
national laws are difficult if not impossible to enforce. In addition, 
since the Internet and electronic commerce are still rapidly evolving, 
any legislated approach at best is likely to be outdated as soon as it 
is adopted and at worst likely to stifle further development of these 
media. As a result the view taken in the report is that government 
should be a last, not a first, resort to fix problems. Accordingly, at 
the time the report was issued, the President directed the Secretary of 
Commerce and the Director of the Office of Management and Budget to 
encourage private industry and privacy advocacy groups to develop and 
adopt effective codes of conduct, industry-developed rules, and/or 
technological solutions to protect privacy on the Internet.
    Subsequent annual reports on electronic commerce issued by the 
Clinton Administration confirmed the Administration's preference for 
self-regulatory solutions to privacy protection. At the same time, the 
Clinton Administration continued to recognize that sector-specific 
privacy legislation may be appropriate in certain areas, such as where 
the information is considered highly sensitive, as is the case with 
children's and financial information, as discussed above. The Clinton 
Administration also repeatedly cautioned that if industry did not 
produce adequate privacy policies, government action will be needed to 
safeguard legitimate privacy interests.
    Since the issuance of the Clinton Administration's landmark 
electronic commerce report in 1997, industry has undertaken concerted 
efforts to create effective privacy protection via self-regulation. 
More than 80 of the largest companies doing business on the Internet 
and 23 business organizations that represent thousands of other 
companies formed the Online Privacy Alliance (OPA) to promote privacy 
on-line. The Online Privacy Alliance developed Guidelines for Effective 
Privacy Policies, which outline protections for individually 
identifiable information in an on-line or electronic commerce 
environment. OPA has also produced guidelines for effective enforcement 
of these policies.
    Independent third party enforcement organizations such as the 
BBBOnLine, TRUSTe, and CPA WebTrust have also been formed to provide 
independent third party enforcement regimes that promote compliance 
with information practice codes. For example, the Council of Better 
Business Bureaus, a well-regarded, non-profit organization that helps 
to resolve consumer complaints, established BBBOnLine as a privacy 
program for online businesses. Businesses joining the program may 
display a seal or trust mark to notify consumers that their web sites 
follow fair information practices but only after they adopt privacy 
policies that comport with the program's fair information practice 
principles and complete an assessment indicating that they have 
implemented those policies. Members must also submit to monitoring and 
review by BBBOnLine and agree to participate in a consumer complaint 
resolution system. The other enforcement programs include similar 
requirements and also include the display of a seal or trust mark to 
notify consumers. More than 1950 sites carry a privacy seal from a 
trusted third party and more than additional 1200 sites have applied 
for a seal from third-party enforcement services.
    In what is perhaps a uniquely American approach to self-regulation, 
enforcement of self-regulatory programs is backed up by Federal Trade 
Commission (and other federal and state agency) enforcement. Section 5 
of the Federal Trade Commission Act prohibits ``unfair and deceptive 
acts or practices'' in or affecting commerce. Deceptive practices have 
been defined to include representations, omission, or practices that 
are likely to mislead reasonable consumers in a material fashion. The 
FTC has repeatedly used its equitable powers under Section 5 to enforce 
the provisions of privacy (and other self regulatory) policies against 
companies failing to comply with the policies they have adopted even 
where those policies have been adopted voluntarily. The operational 
effect of these unfair and deceptive statutes is to make adoption by a 
company of a privacy policy akin to adoption of a privacy law for that 
particular company.
    The FTC Act provides the FTC with authority to seek injunctive 
relief against future violations of the statute as well as to provide 
redress for injured consumers. And, the FTC can obtain substantial 
penalties where its orders are violated. The FTC's (and other federal 
and state agencies') unfair and deceptive authority and willingness to 
use this authority to enforce self-regulatory policies helps to ensure 
the effectiveness of self-regulation in the U.S. All fifty states plus 
the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin 
Islands have enacted laws similar to the Federal Trade Commission Act 
to prevent unfair or deceptive acts. These are enforced by their 
Attorneys General, adding additional resources to government 
enforcement of self-regulation.
    Evidence now exists that shows the United States' decentralized, 
self-regulatory approach to privacy issues can be an effective means of 
ensuring that individuals' personal information is adequately protected 
in a globally networked environment. A 1999 Federal Trade Commission 
survey involving a random sample of web sites found that the number of 
privacy policies had risen from 14% in 1998 to 88% and that 100% of the 
most popular group of web sites now have privacy policies. While only 
8% of the random sample had privacy seals from one of the independent 
third party enforcement groups, 45% of the most popular group did. 
Other surveys also show that privacy self-regulation is working and 
that businesses are taking effective steps to establish and post 
privacy policies. For example, a Jupiter Communications study 
determined that 70 percent of web sites in the United States that 
collect information post a privacy policy linked to their home pages.
    At the same time, there have been increasing calls for privacy 
legislation in the U.S. In May, 2000, the Federal Trade Commission 
called for legislation to protect privacy online based upon its most 
recent report, which identified problems of ``free riders'' and poor 
quality privacy policies. The report stated that the number of web 
sites disclosing information practices had increased, but that the 
quality of these information practices fell short. In addition, the 
report noted that while the creation of the self-regulatory enforcement 
programs has been a positive development, the number of participants to 
date in these groups has been relatively small (8% of a random sampling 
and 45% of the most popular sites). In part because these enforcement 
programs have not been widely implemented, the FTC has concluded that 
such efforts alone are not sufficient for ensuring adequate protection 
of consume privacy online.
    Several members of Congress have also introduced privacy 
legislation in Congress to protect privacy, particularly in the areas 
of online privacy, electronic surveillance, and medical and financial 
record-keeping. While many of these bills are given little chance of 
passage, at a minimum they indicate impatience with the pace of 
adoption and dissatisfaction with the quality of private sector codes 
of conduct. For example, in the first few months of this year alone, 
there have been at least 18 bills proposing privacy legislation These 
have ranged from the basic requirements that disclosure must be 
provided with an opportunity to prohibit further interaction to more 
stringent bills requiring affirmative consent in advance to collect and 
disclose personally identifiable information. Even some industry 
officials are, for the first time, urging Congress to pass limited 
privacy laws. They are concerned that the lack of federal standards 
will lead to a confusing patchwork of state regulations.
    For its part, the Clinton Administration saw substantial progress 
being made by the private sector, although it too believed more needed 
to be done and more quickly. The new Administration, however, has yet 
to articulate its policies in this area and whether it will also 
encourage adoption by industry of effective privacy policies and 
technological solutions.
    Although the privacy situation in the U.S. is evolving, this much 
is clear. While the U.S. is committed to ensuring personal privacy, it 
does through a variety of means that reflect its deeply rooted 
tradition of enhancing the free flow of information and avoiding 
unnecessary government intervention in private affairs. In the first 
instance, the U.S relies on private sector self-regulatory efforts 
backed up by government enforcement to ensure that companies implement 
their privacy policies. The government gets involved only where it 
determines that the privacy rights of individuals are not otherwise 
being sufficiently protected. The U.S. approach to privacy relies on an 
amalgam of laws, codes of conduct, and technology to provide effective 
privacy protection.
    Given U.S legal traditions and history and the advantages of a 
self-regulatory approach to privacy in an information economy, the 
United States is unlikely at this time to abandon its self-regulatory 
approach to privacy issues. And even if it were to adopt privacy 
legislation in new and different situations, it is highly unlikely that 
the United States would adopt the type of overarching, comprehensive, 
highly regulatory and centralized approach to privacy that the European 
Union has adopted.

                              SAFE HARBOR

    Neither the EU or the U.S. appears likely to change significantly 
its approach to privacy protection. Given these longstanding 
differences, many U.S. organizations were concerned about the impact of 
the ``adequacy'' standard on personal data transfers from the European 
Community to the United States. Many feared an across the board 
interruption in data flows. Such across the board interruptions could 
affect as much as $120 billion in trade each year and interfere with 
multinational companies' ability to pay and manage their employees and 
with the routine activities carried out by investment bankers and 
accountants and by pharmaceutical and travel companies. Others 
dismissed fears of a complete interruption in data flows as unlikely, 
pointing out that it would be potentially devastating for both 
economies.
    The more likely situation--of limited data flow interruptions 
involving one industry sector or perhaps one company--posed similar 
dangers, however, since it was feared they could easily evolve into a 
trade war, depending on U.S. reactions and European counter reactions. 
And, just the threat of action by European authorities left U.S. 
companies with a great deal of uncertainty. Alternative, ad hoc 
approaches available to satisfy the Directives ``adequacy'' standard 
threatened to be expensive and time consuming and thus suitable for 
larger companies only.
    Against the backdrop of these different privacy approaches and the 
serious consequences that could flow from them, the United States and 
the EU took up the difficult challenge of bridging the differences in 
their respective approaches to privacy. Toward that end, in March, 1998 
the U.S. Department of Commerce initiated a high-level informal 
dialogue with the European Commission Directorate for Internal Markets 
to ensure the continued free flow of data. From the start, both sides 
recognized that any interruptions in transborder data transfers could 
have a serious impact on commerce between the EU and the US, and that 
they thus needed to begin with an acceptance of their differences and 
develop ways to bridge those differences. At the outset, therefore, the 
two sides agreed on twin goals--of maintaining data flows between the 
U.S. and EU while maintaining high standards of privacy protection and 
worked to identify common ground on which to build a solution. The 
dialogue revealed that there is much common ground between the two 
sides on what constitutes effective privacy protection. Both the U.S. 
and the European approaches, despite their differences, are based on 
the 1981 OECD Privacy Guidelines.
    This dialogue led in late 1998 to a proposal of a ``safe harbor'' 
for U.S. companies that adhere to a certain framework, the so-called 
safe harbor framework. The safe harbor framework encompasses the safe 
harbor principles and frequently asked questions (FAQs). U.S. companies 
adhering to the framework will be judged adequate and data flows to 
them from Europe will continue. The safe harbor principles more closely 
reflect the U.S. approach to privacy, but at the same time would meet 
the European Union Privacy Directive's requirements. The FAQs were 
developed to provide further guidance to U.S. companies and to 
elaborate on how various issues, such as enforcement, will work. Both 
the principles and FAQs were developed in close consultation with the 
European Commission and the U.S. public and both are considered 
integral to an ``adequacy'' determination. Drafts of documents were 
posted for U.S. public comment fours times during the two-year 
negotiation, and numerous meetings were held by U.S. negotiators with 
consumer advocacy and industry groups to obtain their views on the 
draft documents.
    Importantly, the dialogue also led to a standstill between the U.S. 
and the EU in late 1998. The EU made a political commitment to the U.S. 
not to interrupt data flows while the dialogue proceeded in good faith.
    On March 14, 2000, the Department of Commerce and the European 
Commission announced that they had reached a tentative conclusion to 
the safe harbor dialogue. At the same time, the two sides agreed to 
continue their discussions with respect to the financial services 
sector, given the recent passage of the Financial Modernization Act and 
the fact that the regulations had not yet been issued. On May 31, the 
EU Member States voted unanimously to approve the safe harbor 
arrangement
    The safe harbor will provide a number of important benefits to U.S. 
firms. Most importantly, it will provide predictability and continuity 
for U.S. companies that receive personal information from Europe. All 
15 Member States will be bound by the European Commission's finding of 
adequacy. The safe harbor also streamlines the bureaucratic burdens 
imposed by the Directive, by creating one privacy regime applicable to 
U.S. companies, rather than 15. It also eliminates the need for prior 
approval to begin data transfers to the U.S. or makes such approval 
automatic. The safe harbor offers a simpler and less expensive means of 
complying with the adequacy requirements of the Directive, which should 
benefit all U.S. companies and particularly small and medium 
enterprises.
    An organization's decision to enter the safe harbor is entirely 
voluntary. An organization that decides to participate in the safe 
harbor, however, must publicly declare in its published privacy policy 
statement that it adheres to the safe harbor and then it must do so. To 
continue to be assured of safe harbor benefits, an organization needs 
to self certify annually to the Department of Commerce in writing that 
it adheres to the safe harbor's requirements. The Department of 
Commerce will maintain a list of all organizations that file self-
certification letters and make both the list and the self-certification 
letters publicly available.
Safe Harbor Requirements
    Organizations must comply with seven privacy principles and the 
FAQs to be compliant with the safe harbor.4 The principles 
require the following:
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    \4\ The principles, frequently asked questions and answers, as well 
as other safe harbor documents can be located at www.export.gov/
safeharbor.
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    Notice. Organizations must notify individuals about the purposes 
for which they collect and use information about them. They must 
provide information about how individuals can contact the organization 
with any inquiries or complaints, the types of third parties to which 
it discloses the information, and the choices and means the 
organization offers for limiting its use and disclosure.
    Choice. Organizations must give individuals the opportunity to 
choose (opt out) whether their personal information may be disclosed to 
a third party or to be used for a purpose incompatible with the purpose 
for which it was originally collected or subsequently authorized by the 
individual. For sensitive information, affirmative or explicit (opt in) 
choice must be given if the information is to be disclosed to a third 
party or used for a purpose other than its original purpose or the 
purpose authorized subsequently by the individual.
    Onward Transfer (Transfers to Third Parties). Where an organization 
wishes to transfer information to a third party that is acting as an 
agent 5, it may do so if it makes sure that the third party 
subscribes to the safe harbor principles or is subject to the Directive 
or another adequacy finding. As an alternative, the organization can 
enter into a written agreement with such third party requiring that the 
third party provide at least the same level of privacy protection as is 
required by the relevant principles.
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    \5\ It is not necessary to provide notice or choice when disclosure 
is made to a third party that is acting as an agent to perform task(s) 
on behalf of and under the instructions of the organization. The Onward 
Transfer Principle, on the other hand, does apply to such disclosures.
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    Access. Generally, individuals must be given access to personal 
information about them that an organization holds and be able to 
correct, amend, or delete that information where it is inaccurate. 
Exceptions to this general rule are permitted where the burden or 
expense of providing access would be disproportionate (unreasonable) to 
the risks to the individual's privacy in the case in question, or where 
the rights of persons other than the individual would be violated.
    Security. Organizations must take reasonable precautions to protect 
personal information from loss, misuse and unauthorized access, 
disclosure, alteration and destruction.
    Data Integrity. Personal information must be relevant for the 
purposes for which it is to be used. An organization should take 
reasonable steps to ensure that data is reliable for its intended use, 
accurate, complete, and current.
    Enforcement. Organizations must have readily available and 
affordable independent recourse mechanisms that allow each individual's 
complaints to be investigated and resolved and damages awarded where 
the applicable law or private sector initiatives so provide. In 
addition, the organization must establish procedures for verifying that 
the commitments companies make to adhere to the safe harbor principles 
have been implemented. Finally, the organization must remedy problems 
arising out of a failure to comply with the principles. Sanctions must 
be sufficiently rigorous to ensure compliance by the organization.
    The FAQs provide further guidance that clarifies and supplements 
the safe harbor principles on issues such as access, publicly available 
information, and public record information as well as sector-specific 
guidance for information processing by medical, pharmaceutical, travel, 
and accounting firms. They also address how human resources information 
will be handled under the safe harbor.
Safe Harbor Enforcement
    Perhaps the most difficult difference to bridge in the safe harbor 
dialogue was the issue of enforcement. While the EU's Working Group had 
already determined in the abstract that self regulation was a valid 
means to ``adequacy,'' accepting the adequacy of a particular self-
regulatory enforcement regime proved far more difficult. Adding to this 
difficulty, was the complexity of the multi-layered approach to privacy 
enforcement in the U.S., which relies on self-regulation, backed up by 
FTC enforcement, sector specific laws, and recourse to lawsuits.
    Ultimately, an understanding was reached on an enforcement 
arrangement. In general, enforcement of the safe harbor will take place 
in the United States in accordance with U.S. law and will be carried 
out primarily by the private sector. The safe harbor provides for at 
least three different ways to satisfy the enforcement principle. An 
organization can join a self-regulatory privacy program that adheres to 
the safe harbor's requirements. It can also develop its own self-
regulatory privacy policy that conforms to the safe harbor. And, an 
organization can meet the safe harbor enforcement principle's 
requirements if is subject to a statutory, regulatory, administrative 
or other body of law (or rules) that effectively protects personal 
privacy.
    As part of their safe harbor obligations, organizations are 
required to make available a dispute resolution system that will 
investigate and resolve individual complaints and disputes and 
procedures for verifying compliance. They are also required to remedy 
problems arising out of a failure to comply with the principles. 
Sanctions must be severe enough to ensure compliance by the 
organization; they must include publicity for findings of non-
compliance and deletion of data in certain circumstances. They may also 
include suspension from membership in a privacy program (and thus 
effectively suspension from the safe harbor) and injunctive orders.
    As noted above, the dispute resolution, verification, and remedy 
requirements can be satisfied in different ways. For example, an 
organization could comply with a private sector developed privacy seal 
program that incorporates and satisfies the safe harbor principles. If 
the seal program, however, only provides for dispute resolution and 
remedies but not verification, then the organization would have to 
satisfy the verification requirement in an alternative way. 
Organization can also satisfy the dispute resolution and remedy 
requirements through compliance with government supervisory authorities 
or by committing to cooperate with data protection authorities located 
in Europe.
    Where an organization relies on self-regulation to ensure privacy 
protection under the safe harbor, there must be a U.S. agency (state or 
federal) with jurisdiction over the organization that will enforce the 
safe harbor policies against that organization. The agency must also be 
willing to take action under federal or state law prohibiting unfair 
and deceptive acts where the company fails to comply with the safe 
harbor or the organization is not eligible to join the safe harbor. 
Depending on the industry sector, the Federal Trade Commission, 
comparable U.S. government agencies, and/or the states will provide 
overarching government enforcement of the safe harbor principles. An 
annex to the safe harbor principles will contain a list of U.S. 
enforcement agencies recognized by the European Commission. Third party 
self regulatory programs, (such as BBB On-line, TRUSTe, and WEBTrust) 
are also subject to enforcement under these unfair and deceptive 
practice statutes in many if not most instances if they claim to be 
enforcing the safe harbor framework for their safe harbor members but 
do not.
Failure to Comply with Safe Harbor Requirements
    If an organization persistently fails to comply with the safe 
harbor requirements, it will no longer be entitled to benefit from the 
safe harbor. Persistent failure to comply arises where an organization 
refuses to comply with a final determination by any self regulatory or 
government body or where such a body determines that an organization 
frequently fails to comply with the requirements to the point where its 
claim to comply is no longer credible. In these cases, the organization 
must promptly notify the Department of Commerce of such facts. Failure 
to do so may be actionable under the False Statements Act (18 U.S.C. 
Sec. 1001). The Department of Commerce will indicate on the public list 
it maintains of organizations self certifying adherence to the safe 
harbor requirements any notification it receives of persistent failure 
to comply and will make clear which organizations are assured and which 
organizations are no longer assured of safe harbor benefits. An 
organization applying to participate in a self-regulatory body for the 
purposes of re-qualifying for the safe harbor must provide that body 
with full information about its prior participation in the safe harbor.

                               CONCLUSION

    This safe harbor arrangement has been called a major accomplishment 
for both the U.S. and the EU. It comes at a time when trade 
disagreements rather than agreements between the U.S. and Europe 
dominate the news. The framework has also been labeled a landmark 
accord for electronic commerce. It bridges the different approaches of 
the US and the EU to privacy protection in a way that protects EU 
citizens' privacy when it is transferred the U.S., maintains data 
flows, and creates the necessary environment for electronic commerce. 
And it will provide predictability for U.S. companies. At the same 
time, the arrangement demonstrates EU recognition that a carefully 
constructed and well-implemented system of self-regulation, as 
advocated by the Clinton Administration, can protect privacy. It is a 
creative and innovative vehicle, perhaps the first international 
framework to rely on the private sector for its implementation. It thus 
can serve as a model in other contexts as we seek to ensure the 
development of seamless global environment for electronic transactions
    The challenge in providing privacy protection in the Information 
Economy is to balance appropriately the free flow of information 
against the individual's right to privacy so we do not jeopardize the 
benefits these new information technologies promise or trench on the 
First Amendment. Whether the safe harbor will provide that balance 
remains to be seen. Sufficient numbers of companies will have to join 
the safe harbor and consumers will have to feel comfortable with how 
their personal information is used and their ability to control its 
use, if the safe harbor is ultimately to be judged a success.
                                 ______
                                 
  European Commission's Model Contractual Clauses: Paving The Way For 
                International Transfers Or A New Hurdle?
          by Barbara S. Wellbery and Rosa Barcelo 1
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    \1\ Barbara Wellbery is a partner in the Washington, D.C. office of 
Morrison & Foerster and may be reached at . Rosa 
Barcelo (Ph.D) is an associate in the Brussels office of Morrison & 
Foerster and may be reached at .
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                              INTRODUCTION

    The European Union Data Protection Directive (the ``Directive'') 
and Member State laws that implement the Directive set out certain 
rules for ensuring privacy protection of personal 
information.2 Article 25 of the Directive, which deals with 
international transfers of private data, specifies that personal 
information may be transferred to third countries only if the third 
country in question ensures an adequate level of privacy 
protection.3 The Directive does not define what is meant by 
adequate privacy protection, although there appears to be consensus 
that the adequacy standard does not require privacy protection 
equivalent to that required by the Directive, but a lesser level of 
privacy protection.
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    \2\ Directive 95/46/EC on the protection of individuals with regard 
to the processing of personal data and on the free movement of such 
data, OJ L 281, 23 November 1995, pp. 31-50.
    \3\ The Directive provides for several exceptions from this 
requirement. See footnote 6.
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    The Directive provides for several different ways of satisfying its 
adequacy requirement. The European Commission (``Commission'') may find 
that a third country or sector ensures an adequate level of protection 
under Article 25 of the Directive.4 This was the ground used 
by the Commission last July when it issued an adequacy determination 
with respect to the safe harbor framework negotiated by the United 
States Government and the European Commission.5
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    \4\ Articles 25.6 and 31.2 of the Directive.
    \5\ Commission Decision of 26 July 2000 pursuant to Directive 95/
46/EC of the European Parliament and the Council on the adequacy of the 
protection provided by the safe harbor privacy principles and related 
frequently asked questions issued by the US Department of Commerce, OJ 
L 215, 25 August 2000, pp. 7-47.
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    Companies in the United States that choose not to participate in, 
or are not eligible for the safe harbor,6 but wish to 
receive personal information from the European Union (``EU'') legally, 
must identify an applicable exception in the Directive 7 or 
use another means of establishing adequacy. Agreements entered into 
between European Union exporters of personal information and importers 
established elsewhere in the world are one legal basis contemplated by 
the Directive for establishing adequacy.8 For many 
companies, they are the preferred alternatives where an adequacy 
determination by the European Commission is not available.9 
The Directive contemplates two different kinds of agreements--ad hoc or 
``one-off'' agreements and standard or model clauses--that may ensure 
an adequate level of protection for data transfers.
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    \6\ In order to be eligible for the safe harbor, organizations must 
be subject to Section 5 of the Federal Trade Commission Act or must be 
air carriers subject to 49 U.S.C. 41712. Because telecommunications 
commission carriers and many financial services companies are not 
subject to the Federal Trade Commission Act, they are not eligible to 
join the safe harbor.
    \7\ Article 26.1 of the Directive provides several exceptions from 
the adequacy requirement. These permit the transfer to take place 
without an adequacy determination where the information is necessary to 
complete a contract between the company and the individual or the 
individual has given his unambiguous consent.
    \8\ Article 26.2 of the Directive.
    \9\ Relying on the Directive's exceptions can prove cumbersome and/
or severally limit a company's use of personal information. For 
example, under German law for the consent to constitute a valid legal 
grounds for data transfer, such consent must be digitally signed. See 
also footnote 8.
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    The Commission has proposed draft model clauses,10 and 
the Member States are in the process of considering those clauses and 
may approve them in the near future. This article provides a brief 
overview of the use of model clauses to satisfy the Directive's 
adequacy requirement and analyzes the requirements of the proposed 
model clauses. The article then reviews several concerns that industry 
groups and the U.S. Government have identified about the model clauses, 
as well as the EU procedure and timing for approving those model 
clauses.
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    \10\ See Draft Commission Decision pursuant to Article 26 (4) of 
the Directive 95/46/EC on Standard Contractual Clauses for the Transfer 
of Personal Data to Third Countries; /europa.eu.int/comm/
internal--market/en/media/dataprot/news/clauses.html>.
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                ESTABLISHING ADEQUACY THROUGH CONTRACTS

    EU exporters of private data and importers located elsewhere in the 
world may rely on ad hoc contracts to satisfy the Directive's adequacy 
requirement.11 Under this approach, the agreements often 
incorporate by reference the data protection law of the Member State in 
which the data exporter is established. Because there are differences 
among the data protection laws of the 15 EU Member States, companies 
importing data from several Member States may find themselves having to 
comply with as many different privacy regimes as there are EU countries 
in which they do business.
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    \11\ Article 26.2 of the Directive.
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    In addition, the Member State authority in the country in which the 
data exporting company is located ultimately decides whether a 
particular agreement provides an adequate level of protection. The 
procedure for obtaining Member State approval varies among Member 
States, both in terms of the steps to be followed and the time frame. 
Generally speaking, however, most Member States require approval of ad 
hoc contracts by the data protection authorities in the Member State 
from which the data is being transferred.12 Approval 
generally takes a minimum of one to two months, if no issues arise 
regarding the proper completion of the necessary forms or any aspects 
of the proposed data transfer.
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    \12\ The UK, Ireland and Sweden do not require approval of these 
contracts by the data protection authorities; all other Member States 
do.
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    The Directive also contemplates model contractual clauses as one 
means of providing adequate safeguards for the international transfer 
of personal information.13 These clauses were expected to 
offer a simpler and more streamlined approach to ensuring adequacy. 
Because the same set of clauses could be used for the entire EU and 
approval by Member State data protection authorities would not be 
required,14 it was hoped that model clauses could facilitate 
transfers of personal data to third countries that are not subject to 
adequacy determinations. For example, if a multinational company with 
offices and employees in each Member State wanted to use model clauses 
as the legal ground to transfer personal information to the United 
States, it could use the same model clauses for all the data transfers 
from the 15 Member States. This would enable such companies to apply 
one privacy regime for all the information they receive from the EU.
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    \13\ Article 26.4 of the Directive.
    \14\ Article 26.4 of the Directive
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              review of proposed model contractual clauses
    The proposed model contractual clauses (``model clauses'') consist 
of ten clauses and several appendices. It is important to note that the 
model clauses provide a minimum threshold; the contractual parties may 
provide for additional conditions in their contracts if they wish to do 
so.
    The model clauses include the following requirements:

 Obligations of the Data Exporter. The clauses require that the 
        data exporter comply with the requirements of the relevant data 
        protection law in the country where it is located up to the 
        time of the transfer,15 to inform the data subjects 
        ``at least at the moment of the transfer'' that their data 
        could be transferred to a third country,16 to make 
        available upon request copies of the clauses to individuals 
        whose data is transferred, and to respond to inquiries from 
        such individuals and the data protection 
        authority.17 Several requirements imposed on the 
        data exporter appear to go beyond the requirements of the 
        Directive and/or national legislation, such as the obligation 
        to provide copies of the clauses to individuals whose data is 
        transferred.
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    \15\ Model Clauses, Clause 4(a).
    \16\ Model Clauses, Clause 4(b).
    \17\ Model Clauses, Clause 4(c).
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 Obligations of the Data Importer. The parties may decide 
        either that the data importer will comply with the privacy laws 
        of the country in which the data controller is established or 
        with the relevant provisions of any Commission adequacy 
        decision, as long as the data importer is based in the specific 
        third country to which the decision applies and is not covered 
        by the adequacy decision.18 The parties may also 
        elect to comply with the Mandatory Data Protection Principles, 
        which are annexed to the model clauses as the ``Annex to the 
        Contract. If the parties choose either the country in which the 
        data controller is established or the relevant provisions of 
        any Commission adequacy decision, however, the data importer 
        also must agree to comply with certain principles embodied in 
        the Mandatory Data Protection Principles. In particular, the 
        data importers must comply with the purpose limitation 
        requirement, restrictions on onward transfers, and rights of 
        access, rectification, deletion, and objection. These Mandatory 
        Data Protection Principles require, among other things, that 
        personal data be processed only for the specific purpose for 
        which they were transferred and not for any other 
        purpose,19 that the data be transferred to a third 
        party (established outside the EU) only where the importer has 
        either obtained the informed consent (opt in for sensitive 
        data, opt out for non-sensitive information) of the individual 
        or the third party becomes a party to the contract between the 
        data exporter and importer,20 and that the importer 
        give individuals right of access to their data, rights of 
        rectification, and deletion and objection.21
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    \18\ Clause 5(c) of the Model Clauses.
    \19\ Annex to the Contract, par. 1.
    \20\ Annex to the Contract, par. 6.
    \21\ Annex to the Contract, par. 5.
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    These three Mandatory Data Protection Principles, purpose 
limitation, access, and onward transfer, appear to require more than 
the safe harbor principles require. For example, the safe harbor rules 
allow the importer to use the data for different purposes from which 
they were initially transferred, unless such purposes are incompatible 
with the purpose for which the data were originally transferred. And, 
the safe harbor access principle is subject to a proportionality or 
reasonableness standard.22 Accordingly, data importers 
relying on model clauses would be subject to greater restrictions on 
their use and transfer of data than those data importers relying on the 
safe harbor adequacy decision. It would appear that the model clauses 
also go beyond other laws, which the Commission is about to consider as 
affording an adequate level of protection,23 and may even be 
more restrictive than the Directive.24
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    \22\ See Safe Harbor Privacy Principles (2000), available at 
safeharbor>.
    \23\ For example, the Commission is expected to find the new 
Canadian law adequate, although Canadian law does not incorporate an 
explicit provision limiting onward transfers.
    \24\ Indeed, according to Article 6 b of the Directive, data 
controllers are entitled to use the collected data for purposes other 
than those for which the data were initially collected, provided that 
such secondary uses are not incompatible with the use for which the 
data were initially collected. The Commission has not clarified why the 
same principle can not be used in the context of the Model Clauses.
---------------------------------------------------------------------------
    In addition, data importers must agree to submit to audits of their 
data processing facilities at the request of the data exporter and to 
cooperate with data protection authorities in inquiries and abide by 
their advice. Investigations may be carried out by the exporter itself 
or by a body selected by the exporter ``in agreement with the 
Supervisory Authority'' and composed of independent members with 
required qualifications.25 The data importer also must 
warrant that it is not subject to national legislation that restricts 
compliance with the data protection principles beyond that which is 
contemplated in Article 13 of the Directive.26 It also is 
not clear that U.S. companies will be able to provide this warranty. 
Article 13 lists several grounds, such as national security, defense, 
public security, and protection of rights and freedoms of others, but 
does not specifically list free speech rights, which in the U.S. may 
limit compliance with data protection principles.27 It is 
not clear at this time if the EU will view Article 13 as encompassing 
the free speech rights guaranteed by the First Amendment to the U.S. 
Constitution.
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    \25\ Model Clauses, Clause 5.
    \26\ Model Clauses, Clause 5(a).
    \27\ U.S. West, Inc. v. FCC, 182 F.3d 1224 (10th Cir. 1999), cert. 
denied, 2000 U.S. LEXIS 3811 (2000).
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Liability
    Model Clause 6 establishes that importers and exporters will be 
jointly and severally liable for breach of the conditions and 
obligations imposed by the agreement. The Commission justifies the use 
of the joint liability standard in light of the fact that it can be 
very difficult for consumers to know who the responsible person is and 
how to enforce the clauses against an importer located in another 
country. Accordingly, Clause 6 allows importers to be exempt from 
liability if they can prove that the data exporter is solely 
responsible for any damage. Parties are free to agree on mutual 
indemnification.
Applicable Law and Enforceability of the Clauses
    Individuals whose data are transferred to a third country under the 
model clauses have the rights of third party beneficiaries and may 
enforce the privacy provisions of the contract against any of the 
parties.28 The applicable law for determining damages will 
be the law of the country where the individual resides.
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    \28\ Kotschy, W., Model contracts for transborder flows: A way 
forward, International Newsletter, Issue no. 56, December 2000, pp. 4-
10. The third party beneficiary clause will put the individual in a 
position to enforce all or certain of the contractual obligations, 
which to some extent is comparable with the rights that the individual 
has according to his/her domestic law.
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Jurisdiction
    The parties to the model contract must agree that if a dispute 
arises that is not solved amicably, the data importer will accept the 
courts of the Member State in which the aggrieved individual resides, 
third party mediation, the data protection authorities where the data 
exporter is located, and arbitration. The aggrieved individual has the 
right to decide which of these to use to pursue his or her claim and 
may elect to pursue his or her claim in more than one forum at the same 
time.29
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    \29\ Model Clauses, Clause 7.
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               concerns about the proposed model clauses
    Several different entities have expressed concerns with the model 
clauses. These fall into two broad categories: substantive concerns and 
procedural concerns. Any discussion of concerns about the Commission's 
model clauses must begin with two basic points:
    First, the Directive by its very terms restricts crossborder data 
transfers, although these are essential for international business. 
Therefore, it is crucial that the Commission identify mechanisms that 
provide adequate privacy protection without imposing unnecessary 
significant burdens and costs on data exporters and importers. If it 
does not, the Directive ultimately either will damage the ability of EU 
companies to engage in trade and realize the potential of electronic 
commerce, and/or discourage the very compliance that the EU seeks to 
engender.
    Second, as noted above, the model contract clauses are intended for 
use between data exporters located in the EU transferring data to data 
importers that are not covered by a Commission adequacy determination. 
Since the Commission has issued only three adequacy determinations thus 
far 30 and is unlikely to issue decisions for more than a 
limited number of countries in the medium term, model contract clauses 
will be the only truly viable option for data transfers from the EU for 
most of the world.31 For these reasons, at least, it is 
essential that the model clauses provide a reasonable basis for 
personal data transfers from the EU to other countries.
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    \30\ Only Switzerland, Hungary and the companies that abide by the 
safe harbor are considered as providing an adequate level of protection 
for personal data transferred from the EU. The Commission has initiated 
a procedure to assess whether Canadian law provides an adequate level 
of protection, and it appears that it will conclude that it does 
provide such protection.
    \31\ Model Clauses, recital 5.
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Substantive Concerns
    The major substantive concerns that have been raised with the model 
clauses turn on their lack of usefulness for international data 
transfers. For example, the Confederation of British Industry (``CBI'') 
has noted eight general reservations about the standard clauses (in 
addition to a long list of specific concerns). These concerns can be 
summarized by the conclusion that the clauses cannot be used 
commercially since they are unnecessarily burdensome and prescriptive. 
CBI also is of the view that the model clauses impose too heavy a 
burden on the data importer and, in some cases, impose requirements 
that exceed those of the Directive.
    The International Chamber of Commerce (``ICC'') also has identified 
a long list of concerns about the model clauses. These include the 
imposition of joint and several liability and jurisdictional submission 
by the data importer. In the ICC's view, joint and several liability is 
inappropriate in the data protection situation where responsibility for 
a breach can be identified. In addition, joint and several liability 
will discourage use of model clauses and/or reduce the certainty such 
clauses could otherwise provide, as parties would have to negotiate 
indemnification clauses individually. The ICC also takes the view that 
jurisdictional submission should be a matter of last resort, to be 
required only where absolutely necessary.
    The United States Departments of Commerce and Treasury also have 
identified several substantive concerns with the model clauses (while 
noting that their list is not exhaustive). In a letter to the European 
Commission, they indicated that model clauses might create several 
adverse consequences for U.S. enterprises. The Commerce and Treasury 
Departments stated that the model clauses could undermine last year's 
agreement to permit use of the safe harbor principles for the 
substantive privacy provisions in model contracts. Their letter also 
noted that the model clauses appear to impose burdensome requirements 
that exceed what was agreed by the Department of Commerce and the 
European Commission.32
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    \32\ The Department of Commerce has also sent to the European 
Commission far more extensive comments on the model clauses. See DOC 
Staff Comments on the Model Contract Provisions, January 16, 2001.
---------------------------------------------------------------------------
    In addition, and perhaps most basically, a major problem with the 
model clauses is that they require more than adequacy. Instead, the 
model clauses require privacy protection equivalent to that required by 
the Directive. Companies either have to comply with Member State laws 
or they have to ``top up'' beyond the adequacy decisions the European 
Commission has rendered. Also, the model clauses obviously and 
inexplicably disadvantage U.S. financial services companies and 
telecommunications companies. These companies are unable to take 
advantage of the safe harbor or other adequacy decisions. (See footnote 
7.) And, assuming that the European Commission as expected issues an 
adequacy determination with respect to the new Canadian privacy law, 
the model clauses also would disadvantage those Canadian companies not 
covered by the new privacy law. Those companies that do (or will) not 
fit within those adequacy determinations either will have to rely on 
other limited exceptions to the Directive, ad hoc contracts with their 
time-consuming approval requirements, or more restrictive and 
burdensome model contracts.
    The proposed model clauses also fail to allow for one of the major 
anticipated benefits of model clauses: one privacy regime for all 
personal information being imported from the EU, regardless of where in 
the world a company's offices are located. Instead, companies will have 
to adhere to a number of different privacy regimes when they import 
personal data from the EU. A U.S. company importing personal data from 
EU countries will be faced with a patchwork of privacy requirements. 
Personal information imported by a U.S. company from France to the 
U.S., for example, may be handled in accordance with the safe harbor. 
If that same company imports data from France but to Japan, it will 
have to be handled in accordance with French privacy law. And if the 
company imports personal information from other EU countries to Japan, 
it will have to adhere to the privacy laws of each of those countries 
while the personal data is handled in Japan. Yet companies increasingly 
are global and information is now routinely shared on firm Intranets 
and/or centralized in data bases in one location with access possible 
from a company's offices around the world. It is difficult to see how 
this patchwork of requirements can be effective, or will be enforced. 
And, the EU has provided no indication of why such a cumbersome 
approach is necessary or justified to provide the adequate privacy 
protection required by the Directive.

Procedural Concerns
    Serious concerns also have been raised about the transparency of 
the process used by the Commission in adopting these clauses. The 
European Commission has been working on draft model clauses for the 
transfer of personal data to third countries since mid-2000. The first 
version was posted on the Commission's web site for public consultation 
in September 2000. From October through mid-January, the Commission 
redrafted the draft clauses several times in light of comments and 
suggestions made by representatives of Member States, the Working Party 
29 on the Protection of Individuals,33 and interested 
parties such as business and consumer associations. The latest draft 
was completed on January 19, 2001. Although the draft had changed 
dramatically in the interim, it was not made available to the public 
until February 15, 2001, two working days before the Article 31 
Committee's vote on the model clauses was scheduled to take 
place.34 Accordingly, the ICC, for example, has taken strong 
objection to the lack of transparency in the Commission's process and 
has urged the Commission to initiate an open and broad process of 
consultation.
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    \33\ The Article 29 Committee is a committee composed of 
representatives of the European Commission and the Member States and is 
responsible, inter alia, for issuing opinions on the meaning of the 
Directive. These opinions are designed to lead to a harmonized 
application of the Directive throughout the EU. The opinion on the 
standard model clauses is: Opinion 1/2001 on the Draft Decision on 
Standard Contractual Clauses for the transfer of Personal data to third 
countries under Article 26(4) of Directive 95/46, Adopted on 26th 
January 2001, /europa.eu.int/comm/internal--market/en/media/
dataprot/wpdocs/wp38en.html>.
    \34\ The Article 31 Committee is a committee composed of 
representatives of Member States, usually officials of the Ministry of 
Justice, as well as a representative of the Commission. This Committee 
is competent to deliver opinions as to whether the legal regime of a 
non-EU country ensures an adequate level of protection.
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                               NEXT STEPS

    On February 19-20, 2001, the draft model clauses were submitted for 
approval to the Article 31 Committee, a group of Member States 
representatives. To everyone's surprise, the Article 31 Committee did 
not approve the draft clauses. Officially, the result has been 
attributed to the fact that some Member States felt they needed more 
time to give proper consideration to the content of the draft clauses. 
Unofficially, however, several Member State officials have acknowledged 
concern about the process and its lack of transparency, as well as with 
the substance of the clauses. The Article 31 Committee meets again at 
the end of March 2001. If the Article 31 Committee approves the draft 
clauses, the European Parliament will have one month to assess whether 
the European Commission has exceeded its power in approving them. The 
Parliament is not competent, however, to give an opinion on whether the 
standard contractual clauses ensure an adequate level of protection or 
not, although the Parliament may do so in any event as they did with 
respect to the safe harbor. Upon completion of this procedure, the 
Commission will adopt the decision and publish it in the Official 
Journal. If approved at the March meeting of the Article 31 Committee, 
the model clauses are expected to be operational by September 2001.

                               CONCLUSION

    The European Commission and Member States have found that the safe 
harbor and certain national laws provide adequate privacy protection. 
These entities also are expected to issue an adequacy decision on the 
new Canadian privacy law shortly. One would expect that those same 
self-regulatory and legislative frameworks also would provide adequate 
privacy protection when embodied in model clauses. Yet the model 
clauses as proposed by the Commission would require a higher level of 
privacy protection than is required by those adequacy decisions. Some 
have claimed that they require privacy protection equivalent to that 
required by the Directive. In some instances, the model clause 
requirements seem to require even more than the Directive. Yet the 
Commission has not explained why it would impose more restrictive 
requirements upon those who use model clauses as legal grounds for data 
transfers or why it believes it is permissible to go beyond the 
adequacy decisions it has already rendered.
    Indeed, during the safe harbor negotiations, many of the Member 
State data protection authorities repeatedly indicated a clear 
preference for model contracts and tried to turn the discussion from 
the self-regulatory model embodied in the safe harbor to model clauses. 
These authorities argued that the model clauses would provide greater 
privacy protection since they did not rely on self regulation. 
Therefore, it is particularly difficult to reconcile the approach on 
model clauses being taken by the European Commission. The effect 
(whether intentional or not) will be to penalize companies that rely on 
them and to dissuade companies from using them.

    Mr. Stearns. Ms. Waggoner?

                 STATEMENT OF DEBRA L. WAGGONER

    Ms. Waggoner. Thank you.
    Mr. Stearns. Welcome.
    Ms. Waggoner. Chairman Stearns, Mr. Towns, thank you very 
much for the opportunity to testify this afternoon. I am here 
today on behalf of the Information Technology Industry Council, 
ITI, and it represents members who are in the information 
technology and leading the world in global e-commerce.
    Mr. Vradenburg's testimony parallels much of what ITI is 
about. They are a member in good standing, so we endorse much 
of what his statement is. So I will be brief today, rather than 
make you listen to the same key points.
    Today there are 300 million people on the Internet, and by 
2005, there will be over a billion people on the Internet. With 
this global connectivity, digital trade is naturally becoming a 
more important part of the global GDP. Chairman Stearns 
mentioned that by 2004 b-to-b commerce and b-to-c commerce will 
reach $7 trillion.
    All of this will be important. It is important in a number 
of sectors, both in software, in online music, and we hope 
online video. But that assumes that there will be sufficient 
broadband deployment to accommodate this growth in e-commerce.
    Developed and developing nations are particularly aware 
that telecommunications is the foundation of the Internet, and 
the Internet is the foundation of e-commerce. As nations take 
steps to make their telecom environment hospitable to spur 
Internet and e-commerce growth, businesses and policymakers 
face a significant challenge. Businesses must navigate myriad 
national regulatory, technical, and operational environments, 
while policymakers must build global consensus to encourage 
digital trade.
    Because the communications infrastructure is so important 
to the Internet and e-commerce, efforts must be continued 
globally to ensure telecommunications regulatory reform that 
enhances competition and encourages broadband deployment so 
that e-commerce can grow and flourish. Telecommunications 
reform is particularly important in developing nations where 
many countries are still in the process of privatization global 
government monopolies. Further liberalization of trade and 
services is particularly important to provide the 
infrastructure, to support e-commerce, and to engage electronic 
delivery of services. A great deal of potential e-business 
activity will be found in the services sector, including 
finance, telecommunications, logistics management, and 
education, which are creating the reality of a global 
infrastructure.
    Finally, let me underscore a point raised earlier. We must 
establish a strong foundation for digital trade by first 
confirming that WTO obligations, rules, and disciplines apply 
to e-commerce, especially the General Agreement on Tariff and 
Trades, the General Agreement on Trade and Services, and strong 
protection of intellectual property for goods and services in 
accordance with the WTO TRIPS Agreement.
    In closing, ITI applauds you, Mr. Chairman and members of 
the committee, the State Department, and the Office of the 
United States Trade Representative for recognizing the 
importance of digital trade and the necessity of addressing it 
in trade negotiations. As the U.S. moves ahead with bilateral, 
regional or a new WTO round of trade negotiations, we recommend 
the guiding principles outlined by ITI to provide a foundation 
for moving forward. Thank you.
    [The prepared statement of Debra L. Waggoner follows:]

   Prepared Statement of Debra L. Waggoner, Director, Public Policy, 
 Corning Incorporated on behalf of the Information Technology Industry 
                                Council

    Thank you Mr. Chairman for inviting me to testify today on the 
issue of Digital Trade. I am here today on behalf of the Information 
Technology Industry Council (ITI), which represents the leading 
providers of information technology products and services (a membership 
list is attached). We advocate expanding economic growth through 
innovation and support free-market policies. Our industry is truly 
global, with more than 50% of member company revenues derived from 
foreign sales. Our members had worldwide revenue of more than $633 
billion in 1999 and employ more than 1.3 million people in the United 
States. I chair ITI's International Committee, which has been engaged 
in global e-commerce issues now for a number of years.
    My message to you today is simple: e-commerce and digital trade are 
reshaping the global economy; digital trade benefits all countries; and 
we need to advance an agenda for Digital Trade Policy that promotes 
growth, wealth creation and societal benefit. I want to provide you 
with the broader context of the global networked economy and lay out an 
agenda for digital trade policy. Owing to the global nature of our 
industry, we want to pursue this digital trade agenda through all 
available trade agreements ``whether bilateral, regional or 
multilateral.

Trade Liberalization in a Networked Global Economy
    Three powerful and related trends are fundamentally reshaping the 
global economy: 1) the exponential growth in Internet connectivity, 2) 
the convergence of content, interactivity, computer applications and 
communications networks, and 3) the increasing use of electronic 
commerce as a channel for conducting international business. Today, 
more than 300 million people around the world are online; by 2005, one 
billion people will be connected to the Internet, more than 75 percent 
of them outside North America. This technological transformation is 
creating a networked global economy that is just beginning to 
demonstrate that e-commerce and the Internet can be powerful engines 
for economic growth.
    Recent economic data bear this out. Digital trade is becoming a 
more important part of global GDP. For example, between 1999 and 2003 
the market for electronically distributed software is projected to grow 
from $500 million to approximately $15 billion. Online music revenues 
are expected to grow from $850 million today to $4.3 billion by 2004. 
The growth of online videos is expected to grow exponentially as well 
if there is sufficient rollout of broadband communications platforms. 
And business-to-business e-commerce is expected to grow from $403 
billion in 2003 to over $7 trillion in 2004.
    Digital trade presents a new opportunity to advance the goal of 
expanded international trade in a converging, networked environment. 
The Internet and electronic commerce can greatly facilitate trade, 
providing a new means for conducting global commerce and delivering 
digital goods and services to all parts of the world. Trade negotiators 
must now ensure that new technologies, new business models, and new 
products are available to consumers, businesses, and governments around 
the world so these users can benefit from increased productivity, 
competition, and choice. Existing trade agreements provide a good 
foundation for this work but need to be expanded to address these new 
realities. Trade negotiators must also protect against the creation of 
new trade barriers in a sector that has flourished with little or no 
regulation.

Digital Trade
    Digital trade encompasses cross-border e-commerce transactions, 
global e-business relationships, and the specific goods, services, and 
intellectual property protections that act as enablers for these 
transactions and relationships. A successful digital trade policy must 
address all of these areas. Digital trade includes:

E-Commerce Transactions
 Goods and services that can be ordered and delivered 
        electronically.
 Goods and services that can be ordered electronically but are 
        delivered physically.
E-Business Relationships
 Integrated international supply chains facilitated by global 
        networks.
 Outsourcing arrangements that utilize global networks.
 Business partnerships, joint ventures, and ``virtual 
        corporations'' enabled by these networks.
E-Commerce Enablers
 Goods--Information technology (including computer hardware, 
        software, and communications equipment) is critical to building 
        and expanding the networks over which all digital trade is 
        conducted, so free trade in IT products is essential to 
        promoting digital trade.
 Services--Many services are needed to enable an e-commerce 
        transaction, including telecommunication services, computer and 
        related services, financial services, advertising services, 
        distribution services, and express delivery services. 
        Collectively, these services are often referred to as the ``e-
        commerce value chain.'' Liberalization across this value chain 
        is essential for ensuring seamless, cost effective and timely 
        business-to-business and business-to-consumer transactions.
 Intellectual Property--If individuals and companies are to 
        provide their digital goods and services over the Internet, 
        then they must be assured that their intellectual property will 
        be protected in this new online environment.

Digital Trade Benefits All Countries
    In the United States, the new economy has had a significant impact 
on overall U.S. GDP and the U.S. balance of trade. Nearly two-thirds of 
productivity gains can be traced to high-tech investments made over the 
past five years. Specifically, information technology contributed over 
one-third of economic growth since 1995, and IT exports amounted to 
more than one-quarter of total U.S. exports in 1999.
    Already there is evidence that the development of emerging 
economies is being reshaped and energized by online trade. The 
traditional model of infrastructure investment and international trade 
is being complemented by electronic commerce. This is leading to a 
dramatic expansion of opportunities for economic development, driven by 
businesses creating new markets for innovative products and services 
being made available electronically throughout the world. In 
particular, evidence shows that businesses in every region of the world 
can, by means of electronic commerce, dramatically reduce costs of 
entry, maximize efficiency, and vastly expand distribution to 
previously inaccessible markets.

An Agenda for Digital Trade Policy
    To promote the growth of digital trade and to ensure that 
electronic commerce benefits from trade liberalization, ITI proposes 
the following digital trade agenda. This agenda should be pursued 
through all available trade agreements, whether bilateral, regional, or 
multilateral.

Guiding Principles for Digital Trade
 Current WTO obligations, rules, disciplines and commitments, 
        namely the GATT, GATS and TRIPS agreements, should apply to e-
        commerce.
 Electronically delivered goods and services should receive no 
        less favorable treatment under trade rules and commitments than 
        like products delivered in physical form, and their 
        classification should ensure the most liberal treatment 
        possible.
 Governments should refrain from enacting trade-related 
        measures that impede e-commerce.
 When legitimate policy objectives require domestic regulations 
        that affect e-commerce, ensure that such regulations are 
        transparent, nondiscriminatory, and employ the least-trade-
        restrictive means available.

Information Technology Tariffs and Non-Tariff Measures
    Tariffs and non-tariff measures applied to information technology 
products should be eliminated or phased out. Tariff and non-tariff 
measures act as a counterproductive tax or burden that raises the cost 
of the very technology needed to be competitive in the digital economy.
    Countries that have not done so should sign and immediately 
implement the Information Technology Agreement (ITA). In the context of 
the ITA, governments and business must continually update the 
definition of what constitutes an ``IT product'' to keep pace with 
technological developments. Non-tariff measures, in particular 
redundant testing and certification procedures, should be eliminated 
where they exist.

Services Commitments
    Trade in services negotiations, whether in the WTO or other venues, 
offer an excellent opportunity to promote digital trade. Increased 
liberalization of trade in services will play an important role in the 
promotion of digital trade in several ways:
    E-Commerce Value Chain: Improved market access and national 
treatment commitments in the group of services sectors that are 
necessary to initiate and complete an e-commerce transaction will 
expand digital trade opportunities. Two particular elements of the 
value chain deserve special mention:

 Telecommunication Services: Telecommunication services provide 
        the network infrastructure that is a fundamental prerequisite 
        for digital trade. Competition in the provision of these 
        services is critical to the growth of digital trade. Full basic 
        telecommunications commitments, including implementation of the 
        pro-competitive Reference Paper principles, as well as full 
        value-added services commitments and protections against anti-
        competitive behavior by incumbent telecommunications companies 
        in the value added services market are important objectives. On 
        the other hand, competitive value-added services, including 
        Internet services, should not be subjected to regulation 
        created for monopoly basic telecommunications markets.
 Evolving IT Services: The Internet provides a new means for 
        delivering information technology services; and technologies 
        and business models are evolving much too rapidly for trade 
        classification discussions to keep pace. Trade negotiators 
        should seek ways to ensure that broadly defined or interpreted 
        market access commitments will enable cross-border trade in 
        evolving IT services. It is also important that unregulated IT 
        services not be viewed as a subset of regulated 
        telecommunication services.
    Electronically Delivered Services: In addition to liberalizing 
services that enable e-commerce transactions, trade negotiators should 
seek improved market access and national treatment commitments for a 
broad range of services that can be delivered electronically.

Intellectual Property Protection and Market Access
    Intellectual property rights in goods and services traded on the 
Internet should be afforded strong protection in accordance with the 
WTO TRIPS Agreement and the WIPO Treaties. Without such protection, 
content creators, service providers and users will be less likely to 
realize the tremendous benefits of digital trade.
    Greater market access for digitized software, music and videos will 
go a long way toward helping to reduce piracy rates. Without market 
access for legitimate products, our companies face difficult hurdles in 
protecting their intellectual property. Market access for digitized 
products will also be an important first step in promoting trade and 
cultural diversity, since today's successful business models have been 
ones that tailor the global reach of the Internet to local interests 
and tastes.

Allowing U.S. Companies, Workers and Consumers to Continue to Lead & 
        Prosper
    In closing, ITI is pleased that Members of Congress and the Office 
of the U.S. Trade Representative recognize that digital trade is an 
increasingly important component of international trade and are 
actively addressing these issues in trade negotiations. We believe that 
trade rules designed to ensure access to e-commerce markets will allow 
American companies, workers and consumers to continue to lead and 
prosper in the networked global economy. As our own market matures, the 
U.S. IT industry is looking toward new markets, particularly those in 
Latin America and developing countries in Africa and Southeast Asia. 
While many of these countries realize the benefits that can accrue from 
investment in IT infrastructure, they are hampered by domestic policies 
that maintain high tariffs on IT products or by regulatory policies. As 
the U.S. moves ahead with bilateral, multilateral or a new Round of WTO 
trade negotiations, we would urge that the guiding principles outlined 
above be a foundation for going forward.
    Thank you, Mr. Chairman, and I would be happy to answer any 
questions you might have.

    Mr. Stearns. Let me open with the questions here. Ms. 
Wellbery, you are probably, from the private sector, the expert 
here on the Hague Convention, and we had, I think his name is 
Dr. Rodata--Stefeno Rodata, who was the Chair that developed 
the Internet privacy standards for the European community. And 
he came here and testified, and then when I asked him, I said, 
``Well how many people in America--what major large 
corporations have signed up under the Safe Harbors that the 
Clinton Administration had negotiated,'' he said 30. Well, 
obviously, that is not a lot. And so my question to you, you 
seem to indicate it is working, but we found only 30 large 
corporations have signed up for the Safe Harbors. What is the 
problem? Why haven't more signed up? Because then the Doctor 
went on to say he is developing model contracts now to try and 
bridge this gap and get individual companies to sign up.
    Ms. Wellbery. I think since the hearing that you are 
referring to, the number has gone up to somewhere over 40 
companies that have signed up. But I agree that that is not a 
lot of companies, and I think there is a number of reasons that 
explains why that is the case.
    First, I think it takes a long time to get companies' 
privacy policies and practices in line with the requirements of 
any privacy regime. We certainly know from our own domestic 
experience with Gramm-Leach-Bliley that it has taken companies 
a long time to come into compliance with that act. And a 
similar kind of analysis of companies' practices and policies 
needs to be done to come into compliance with the Safe Harbor 
requirements.
    I think a number of companies were also waiting to see what 
the European Union was going to do about model contracts and 
whether those would be a more appealing or attractive 
alternative. I think the decision that was issued by the 
commission makes clear that they are far more onerous than the 
Safe Harbor, and so they are likely to be a far less attractive 
option for U.S. companies.
    In addition, I think that there are some companies that are 
just doing the analysis wrong. They wonder why they would 
subject themselves to liability before the FTC, but they ignore 
the fact that by transferring information from Europe without a 
legal basis, they are exposed to liability or at least their 
European affiliated companies are exposed to liability in 
Europe.
    And then, finally, I think we have a little bit of 
``Alphonse and Gaston'' here. Everybody is waiting for the 
other company to go first, and I wonder if the fact that 
Microsoft has now announced that it will be joining the Safe 
Harbor will lead to a larger number of companies joining the 
Safe Harbor. Thank you.
    Mr. Stearns. Well, it is nice to have you here, because you 
were chief negotiator. I mean you have been involved with it. 
You know it more intimately than anybody, so we are always 
puzzled why this thing hasn't take off. And the European Union 
does not intend to enforce their policy for a while. Did they 
ever tell you--do you have any indication when they are going 
to start enforcing their policy?
    Ms. Wellbery. Well, I think they are enforcing their laws 
now. My law firm actually does monitor enforcement actions in 
Europe.
    Mr. Stearns. Okay.
    Ms. Wellbery. Most of them have been against--in fact, 
almost all but one have been against European companies. I am 
only aware of one enforcement action that has been brought 
against a U.S. company.
    Mr. Stearns. Okay. Mr. Kovar, you have heard some of the, 
not necessarily criticisms, but her comments in her opening 
statement during this process. You might want to reply to any 
portions that she had said about the Hague Convention.
    Mr. Kovar. Thank you, Mr. Chairman. I think, as I indicated 
in my statement, it is an extremely complex convention, and it 
is made even more difficult by the need to fit the relatively 
unknown quantity of Internet transactions into the 
jurisdictional framework. And I don't have any answers on the 
best way to do that. We are still listening.
    I think, to respond to one point that I think was one of 
the principal thrusts of Ms. Wellbery's statement, which is the 
notion that perhaps somehow this convention would open up U.S. 
courts in a new way to enforce judgments coming from abroad, 
that is one area where we are not quite sure that that would be 
the case. Right now, U.S. courts are basically wide open to 
enforcing foreign judgments. And the enforcement section of 
this treaty mirrors in many ways current U.S. law in all the 
States. And for that reason, that is one concern that to us 
doesn't seem to have as much weight behind it as some of the 
other questions about what the jurisdictional rules should be.
    Mr. Stearns. This is still a question that puzzled me in 
the hearing we had with the European Union. So a company like 
Microsoft signs up for the Safe Harbor. Does that mean that 
when you develop model contracts, they will retroactively be 
applied to or how do the model contracts in the Safe Harbor--
how does that work for companies?
    Ms. Wellbery. There are a number of different options that 
companies can use for exporting or, I guess a better to say it 
is, for importing data from the EU to the U.S. There are 
exceptions that are created in the EU directive. You can use 
individual or one-off contracts, you can use model contracts, 
you can use consent of the consumer, and you can use the Safe 
Harbor. These are all alternatives.
    And in negotiating the Safe Harbor, what we were trying to 
do was to provide another alternative for U.S. companies that 
hopefully would be a more streamlined, more efficient, and more 
effective way of transferring data out of Europe to the U.S.
    For example, when you use contracts--when you use one-off 
contracts in Europe, I think it is 13 of the members--15 member 
states require prior approval of those contracts. And these 
prior approvals can take 1 to 2 months to obtain assuming that 
you have all the information in the right places in the first 
instance. If you don't have all that information correctly 
there, it can take much longer. And the Safe Harbor does away 
with those bureaucratic requirements.
    Mr. Stearns. Ms. Waggoner, just briefly, just give us the 
most significant trade barriers to digital delivery of goods, 
in your opinion.
    Ms. Waggoner. I think that for the IT industry, the most 
difficult barrier is that of wrong action. Forbearance is 
probably more important in this area. Right now we face few 
barriers. I think intellectual property protection, making sure 
that we have strong IP is probably a very important one. 
Expanding coverage of the services agreements would be another. 
But, again, I think we would urge forbearance, because it is 
the danger of action in the wrong direction in this burgeoning 
field that probably stands to harm us more than current action.
    Mr. Stearns. Do no harm. My time is expired. Mr. Towns?
    Mr. Towns. Thank you very much, Mr. Chairman. Let me just 
start out by--Mr. Vradenburg, will AOL and Time Warner be 
signing onto the Safe Harbor Agreement?
    Mr. Vradenburg. We are looking at that----
    Mr. Towns. Microsoft is on board.
    Mr. Vradenburg. Excuse me.
    Mr. Towns. Microsoft is on board.
    Mr. Vradenburg. Well, we don't follow Microsoft in 
everything, Mr. Towns.
    We are looking at that issue right now. In fact, we believe 
that we are substantially, if not totally, in compliance with 
existing EU Data Protection Directive provisions in Europe 
already. But there still are some useful things in taking 
advantage of the Safe Harbor rules, and so we are looking at 
that question right now. So I would suggest that some of this 
is a matter of time. I think that there is an indication that 
perhaps by July 1 a number of companies may well make a 
decision on whether or not to take advantage of the Safe Harbor 
guidelines or not.
    Mr. Towns. Right. Thank you very much. Ms. Wellbery, sort 
of following up, I guess, on the Chairman's question, the fact 
that only 30 corporations have signed up, and you say, ``Well, 
it takes a while.'' Why does it take so long?
    Ms. Wellbery. Because I think when you work with companies, 
they have been collecting information in many disparate ways, 
and it is being stored in many disparate locations, and one of 
the things you have to do when you start to develop a privacy 
policy is to figure out all the ways in which you are 
collecting information, where you are storing it, how you are 
using it, and whether you are providing the required 
opportunities for customers to opt out before you can put a 
policy in place. And that can be, for a large organization, 
extremely time-consuming. And then you also have to train your 
employees so that they, in fact, are implementing the policy 
that you say you have adopted. Once you say you have adopted 
the policy, if you don't, then you are subject to liability. So 
all of those things together can take quite a long time.
    Mr. Towns. Thank you. Mr. Vradenburg, again, if common 
sense says that unmetered pricing for Internet access promotes 
greater Internet adoption and use, what is the problem 
internationally?
    Mr. Vradenburg. The problem here, Mr. Towns, is that in 
many countries of the world, the national, usually government-
owned, telecommunications carrier charges by the minute for 
local telephone calls. That is a system that they have built 
over time that favors the national telecommunications carrier. 
When the Internet has come along and now independent Internet 
services are carried over the local phone company, say, for 
example, in Germany, the local phone company makes some amount 
of money for every minute that someone's online on AOL. So if 
favors the national telephone carrier to be able to continue 
metered pricing even though it may not be in the interest of 
the adoption and the use of the Internet overall.
    In Europe, the UK has a longstanding, independent 
regulatory authority OFTEL, which is now moved to require 
British Telecom to move toward flat-rate pricing. And as a 
consequence, Internet adoption has quickly kicked up in the UK. 
On the other hand, Germany has not adopted that policy. 
Deutsche Telecom has refused to proceed with it. And as a 
consequence, Internet adoption and use has slowed in Germany as 
compared to other countries. That is a policy that favors 
Deutsche Telecom, and the German government, of course, owns a 
major stake in German telephone system, so that you are not 
seeing an independent regulatory authority emerge in Germany to 
require flat-rate pricing, as you have seen in the UK.
    Now, in the United States we have made a decision sometime 
ago, almost by accident at the FCC, that there would be no long 
distance charges for enhanced services. So the reason that you 
see flat-rate pricing in this country is that Internet calls 
have been treated essentially as local calls and not Internet 
calls. But every year you will see the phone companies coming 
back to that issue with the FCC in this country seeking to 
reclassify Internet calls into interstate calls and long 
distance calls so that they can meter the cost of Internet 
service in this country. But so far the FCC, in looking at this 
issue periodically, over a number of years, has stuck to its 
policy of assuring that Internet prices in the United States 
are on a flat-rate basis.
    Mr. Towns. All right. Thank you. Thank you very much. Mr. 
Kovar, Ms. Richardson stated that the draft convention appears 
to do more harm than good with respect to protecting 
intellectual property, because it reflects that the discussion 
pre-dates e-commerce. What is or what will the State Department 
do to correct this and protect America's intellectual property, 
which is over 4.9 percent of the gross national product?
    Mr. Kovar. Thank you, Mr. Towns.
    Mr. Towns. And I am going to ask Ms. Richardson to respond 
when you are finished here.
    Mr. Kovar. Oh, okay. Sure.
    Mr. Towns. Go ahead.
    Mr. Kovar. Sure. The current draft of the convention, which 
dates back to 1999, has in it a provision that deals with 
patents and trademarks that is pulled right out of the European 
Convention of Enforcement of Judgments, called the Brussels 
Convention. No one likes it in this country. It wouldn't work 
well. And we have said that it is one of the major problems 
with that text.
    We don't know exactly yet what the right formulation is to 
provide full protection for patented trademark interests. So 
what we have been trying to do is to get patent and trademark 
experts from all sides to help us understand what makes the 
most sense. And in the same way in copyrights, which are 
actually treated in a different section of the convention, in a 
tort section. We have been grappling with exactly what is the 
best legal system of jurisdiction to deal at the international 
level with copyright protection. We don't have an answer to 
that yet, but we are trying to pull in as many of the interest 
groups as we can to help us find the right answers. Thank you.
    Mr. Towns. Mr. Chairman, I know my time has expired, but I 
called Ms. Richardson's name.
    Mr. Stearns. We are going to have a second round here.
    Mr. Towns. Okay. All right. Well, I am going to let her 
respond to it.
    Mr. Stearns. Yes, sure.
    Ms. Richardson. I just wanted to briefly make clear that we 
don't believe that the State Department is the enemy here. We 
very much appreciated his remarks today where he said this 
deserves careful consideration. If there is an enemy, it is 
just momentum. This negotiation has been going on a long time. 
A lot of the other countries out there think it is time to 
conclude it, and the e-commerce issues and new issues, they do 
deserve a lot of time and attention to sort them out. So as 
long as we get that, we will be, I think, happy.
    Mr. Towns. I thought I was going to start a fight.
    Mr. Stearns. Thank you. The gentleman from Illinois.
    Mr. Shimkus. Thank you, Mr. Chairman. And I was really 
focused--I was going to focus on the net metering too. We had a 
similar issue a couple years ago when the whole Internet 
service began, and it was the local call versus, in rural 
areas, the long distance call. The long distance calls were 
metered out where the local calls were not. And for those who 
tried to run businesses, when we talked about the ability to 
stay at home and work, we couldn't do that at the time, because 
we hadn't evolved to the issue of--we hadn't moved away from 
the net metering and local call issue. Now I think we have done 
that in this country, so I can understand that it is an issue 
and that it will be an issue I will take up with my colleagues 
when I go over there next week.
    I want to briefly ask a response on the cultural content 
restrictions. And really, in my notes, I would like, of course, 
Ms. Richardson to respond to that. But also Mr. Vradenburg, Mr. 
Kovar, if you can address, and then anybody else who wants to 
throw in, and I think that will probably be enough of my time. 
Talk to me about the cultural content restrictions.
    Ms. Richardson. I am happy to kick that one off. 
Historically----
    Mr. Shimkus. Pull that mike close to your mouth. There you 
go.
    Ms. Richardson. Really since the trade system began in the 
last forties, countries have been concerned about promoting 
their culture, and there is nothing wrong with that. We are as 
culturally diverse country as any on Earth, and we are proud of 
cultural diversity. One of the things about e-commerce is that 
it enhances cultural diversity. It solves the shelf space 
problem and allows producers and creators to reach out to wide 
audiences in a way that was never possible before.
    Given that set of opportunities, it would be particularly a 
shame, troublesome, a crime if countries were to impose the 
kinds of cultural protectionism that they imposed in the Old 
World on top of the e-commerce world. We haven't seen it yet, 
and the best to get trade commitments to keep open markets open 
is before cultural protectionism has set in. So that is our 
goal.
    Mr. Vradenburg. Mr. Shimkus, this may be another agenda 
item when you visit Europe, because they are now embarking upon 
a 1-year effort to review their Television without Frontiers 
Directive.
    Mr. Shimkus. And the French are really leading this 
crusade, are they not?
    Mr. Vradenburg. Historically, they have led the crusade, 
and of course the existing restrictions in Europe are that 50 
percent, if practicable, of material over their broadcasting 
systems should be of European origin or at least not out-of-
Europe origin. They are now discussing two additional potential 
restrictions. One is an investment quota, which basically would 
require their outlets inside of Europe to invest a certain 
percentage either of their revenues or of their programming 
expenditures on European productions. That would be a step 
beyond where they are today.
    And the other restriction they are discussing is whether to 
try to extend, if they can find a way to do so, these quota 
restrictions onto the new media so that in fact video-on-demand 
systems or rather new media delivered systems might have a 
content restriction inside them. Both of those would clearly be 
steps, in our view, in the wrong direction. And as Ms. 
Richardson's pointed out, the irony here is that the Internet 
now gives the opportunity to European nations and cultures to 
distribute French products, Germany products, English products, 
Swedish products without any constraint on the means of 
distribution to American electronic consumers. So that in fact 
they have more opportunities to distribute their products in 
this country.
    Going that direction of positively encouraging the adoption 
of their cultural products worldwide clearly is a much more 
productive way for the, we think, to develop not only their own 
economy but also to enrich the cultural experiences of American 
consumers, who now might have the opportunity to obtain access 
to very narrowly culturally tailored products that otherwise 
couldn't be managed on our American broadcast system or through 
our theatrical distribution system, but which may now be 
available through online distribution systems. So it seems to 
us that a more positive approach to promoting cultures, as 
opposed to trying to restrict other people's cultures, is now 
in order.
    Mr. Kovar. Cultural content restrictions by foreign 
governments would not be enforceable under the Hague 
Convention. The Hague Convention is intended to apply to 
private types of lawsuits. To the extent that private 
individuals seek to use private lawsuits to go after cultural 
content that they don't like and that may be somehow prohibited 
under local law, the convention would allow and would expect, 
frankly, our courts not to enforce that based on our 
traditional strong public policy in favor of First Amendment 
rights.
    Mr. Shimkus. Thank you very much. And, Mr. Chairman, I will 
yield back my time.
    Mr. Stearns. The gentlelady from California, Ms. Harman?
    Ms. Harman. Thank you, Mr.----
    Mr. Stearns. I am sorry, I beg your pardon, Mr. Gordon? 
Sorry. The gentleman from Tennessee is first.
    Ms. Harman. If he is first, he should be first.
    Mr. Stearns. Yes.
    Mr. Gordon. One quick question. I would like to learn more 
about the service versus goods argument, Ms. Richardson. I 
understand that within the content community that there is a 
debate now or at least a division. Could you tell me what is 
that division, and who is on first and second here?
    Ms. Richardson. Well, sorting out where people are at any 
given time is always a challenge, but I will certainly take a 
stab at it. The debate is whether a digitally delivered good or 
service should be benefiting from the rules of the GATT, which 
governs straight----
    Mr. Gordon. Yes, I understand that.
    Ms. Richardson. Okay.
    Mr. Gordon. What I am interested in is if there is a--I 
understand there is a division within the content industry for 
that reason that you are--that is basically telling our 
negotiators not to move forward. So who is on first and second 
here?
    Ms. Richardson. All right. The EU is clearly on one extreme 
end of this debate. They believe that all digital delivery of 
content should be classified as a service.
    Mr. Gordon. Right. Are our domestic content providers all 
have the same position?
    Ms. Richardson. I think they are all on the same general 
page. We have----
    Mr. Gordon. So what is the problem with--or do I 
misunderstand that you collectively have asked our negotiators 
not to move forward until there is a consensus opinion?
    Ms. Richardson. The EU has said they will not move forward 
until they get their way.
    Mr. Gordon. Right, but----
    Ms. Richardson. We have said----
    Mr. Gordon. [continuing] my question, though, and maybe I 
am--I am not trying to be tricky or anything----
    Mr. Vradenburg. No. Mr. Gordon, I think you are going to 
find most of the music and entertainment businesses in this 
country on exactly the same page, that the classification ought 
to be that of goods. The concern is moving forward and pressing 
our U.S. Government to move forward when they might lose that 
negotiating point with the European Union. This is more a 
United States versus EU issue than it is any significant 
division within our industries.
    Mr. Gordon. Well, if the EU is basically winning by our 
non-action, what do we have to lose by going forward?
    Mr. Vradenburg. Well, I would take the view that in fact 
the EU is pressing and insisting that the classification of 
digitally delivered content be that of services and just taking 
that view. So if we were to move forward and close the issue 
now between the USG and the EU, it would be closed in the wrong 
direction. So we are hopeful that if we move forward with the 
marketplace, that we will find out that in fact most of the 
products that are being delivered digitally in fact correspond 
to and replace hard goods products, and thus the case for the 
United States position will be stronger through time.
    Mr. Gordon. So there is not a division then within our 
content industry here in this country.
    Ms. Richardson. I don't think there is a deep division. 
There are people that understand their business models better 
or less good who are more confident in drawing the line today. 
But I think all of us believe that there are many goods 
transactions, and there may be some services transactions. 
Exactly where that line should be drawn is hard to say, because 
the business models, at least in the film industry, are still 
developing.
    Mr. Gordon. Thank you. I would like to yield the rest of my 
time.
    Mr. Stearns. Well, we are going to break and come back for 
more questions. Just, Mr. Gordon, I might also follow up on 
what you just said. What about software? How is software 
handled in terms of services or goods?
    Ms. Richardson. I believe that they believe that they have 
a foot in both camps, that the analog of a digitally delivered 
product is a product. There may be some new kinds of software 
services, but I am sorry, you should have spoken.
    Ms. Waggoner. No, that is okay. I think that we would say 
that there may be--they can be classified as both, and it 
really depends on the business model and the circumstances. And 
one way to begin to look at it, because this is still being 
debated within the industry, is the difference between 
purchasing something on a recurring cost basis or a non-
recurring cost basis. So I think that there are products that 
are a good, and there are products that are service, and it is 
very complex. And the industry, as it moves forward with new 
business models, is going to have to sort this out.
    Mr. Vradenburg. I think we can't lose sight of the fact 
that this is not just a technical sort of debate here. There 
are major potential trade consequences to the classification 
issue, and clearly United States industries will be better off 
with the greater of the classification of these digitally 
delivered products as products, because there will be more 
protection under existing trade rules.
    Mr. Stearns. Okay. Well, the committee is going to come 
back and reconvene. And we will take a break now. Just we have 
two votes, so we have this vote, which is about 5 minutes left, 
and then we have another 5 minutes, so we should be back in 
about 12 minutes or so.
    [Brief recess.]
    Mr. Stearns. The subcommittee will come to order. We have 
got a little time before the next vote, so I think we will 
start here. And I think the next member in line is the 
gentleman from New Hampshire. Mr. Bass is recognized.
    Mr. Bass. Thank you very much, Mr. Chairman. Mr. 
Vradenburg, during my opening statement, I outlined my interest 
in being sure that we have considered these issues in the 
whole, the whole issue--how they are related to our domestic 
interstate trade policy and so forth. You seem to agree, at 
least I caught a little nod. With respect to sales and use 
taxes and products classifications, can you explain how you 
think these matters are related?
    Mr. Vradenburg. Yes. We had the opportunity to serve on the 
Tax Commission that was formed by Congress a couple of years 
ago. And during the course of the debates of that Commission, 
it became clear that one of the critical elements in this 
debate was whether or not States and localities--State and 
locality taxing jurisdiction, from there are about 7,000 in 
this country, could tax out of jurisdiction sellers. Sellers 
that had no physical nexus to their jurisdiction and otherwise 
weren't doing business in their jurisdiction, could they impose 
a State or local sales or use tax obligation--collection 
obligation on those companies? And that is, of course, to some 
extent, the same debate that is going on with respect to Europe 
now and out-of-European sellers.
    We urged, in the context of the State and local sales tax 
debate in this country, that there be a radical simplification 
of the tax collection obligations associated with collecting 
out-of-State seller transactions so that the costs of 
collections on that of State businesses would be significantly 
reduced. And then if that were the case, then in fact we could 
contemplate a system where in-State sellers and out-of-State 
sellers could pay equal State sales or use taxes, and there 
wouldn't be any differential treatment of different modes of 
distribution.
    That same debate is now going on in Europe, where Europe at 
least only has 15 taxing jurisdictions at the moment, is trying 
to simplify their systems of taxation so that they can impose 
on out-of-European sellers some tax collection obligation, even 
though the seller is not within the boundaries of Europe.
    Mr. Bass. Are you advocating--I just want to make clear 
your first point--that we have some sort of a national sales 
tax on Internet transactions?
    Mr. Vradenburg. No, not at all. We urge the States to go 
through a process of simplifying their State and local sales 
tax system, because you will upon examination that inside a 
State you may have 3 or 4 different rates, you may have 3 or 4 
different classifications of the same product or service within 
a State, and certainly between States, and you had a variety of 
exemptions and administrative requirements. And so that most 
big corporations in this country doing business in many States 
will file over 100,000 State or local sales tax reports every 
year.
    So what we were urging to the States is that they radically 
simplify their systems, that in fact the States adopt one rate 
per State, that they have one audit per State, that they have a 
single means by which they would classify goods or services 
sold within their State, and that we have an acceptable default 
rule on how to determine the residence of an Internet buyer so 
that we would not be subjected to the possibility of paying 
taxes in multiple States.
    Mr. Bass. Is there any extension of that concept 
internationally?
    Mr. Vradenburg. Well, yes. The European Union is now 
considering a single point of registration with respect to out-
of-European sellers. They have not yet settled on whether they 
are going to agree to that and, if so, whether they are going 
to have one or 15 different VAT tax rates depending upon the 
jurisdiction of the buyer. And if they have 15, how in the heck 
an Internet seller who may simply be selling to a credit card, 
knowing he is selling somewhere in Europe, may not be able to 
determine which jurisdiction they are selling in.
    So Europe is at least beginning to think through how to 
simplify their VAT collection tax systems. They are not there 
yet. We still have issues with Europe. We are still discussing 
the issue with Europe. But it is a species of the same issue as 
we are confronting here in the United States.
    Mr. Bass. I bought something in Europe last fall, but I 
never knew, I never knew. I thought I was buying something in 
America, and I didn't know that it came from Europe until I got 
a--it arrived, and there was a--it was called the Stanley 
Company--sounds American to me. Did I pay any taxes on that?
    Mr. Vradenburg. You were probably obligated to pay a use 
tax in the jurisdiction in which you reside.
    Mr. Bass. I couldn't even read it. I didn't know what 
jurisdiction it was.
    One last question, because I am running out of time here. 
If this committee were to--subcommittee, rather, were to make 
some recommendations, either legislative or any other fashion, 
concerning this issue--this is for any of you who wish to 
comment on this--what should we do? I am sorry to be so vague, 
but I am just curious to know, as we try to understand what is 
a very complex issue, what role does this subcommittee have to 
play?
    Mr. Vradenburg. Well, I think the policy approach, how it 
gets translated into a statute-governed, domestic transactions 
or some position for the U.S. Government in international 
negotiations for Europe, I don't comment on. But the challenge 
here is to simplify the global system of tax collection. We 
cannot, over a long period of time, treat sales over the 
Internet differently than we treat physical sales within 
jurisdictions. It is neither fair and equitable nor 
appropriate. So at some point, we have to get to a system that 
does not discriminate based upon the form of distribution what 
the tax rate is.
    But having said that, the costs of compliance to a company 
that is located in Canada to comply with 7,000 different State 
and local taxing jurisdictions in this country is overwhelming. 
And as a consequence, as a practical matter, you are never 
going to get tax compliance. So you need to simplify our 
domestic system, the State and local sales taxes without 
adopting a national sales tax but simplify it. And Europe has 
to simplify the VAT tax collection system so that in fact an 
Internet seller can register in one or a few places in the 
world and pay a tax rate based upon the jurisdiction into which 
his or her goods or services are sold.
    Mr. Bass. Thank you, Mr. Chairman.
    Mr. Stearns. Yes. The gentlelady from California, Ms. 
Harman?
    Ms. Harman. Thank you, Mr. Chairman. I would like to ask 
unanimous consent to put my opening remarks, which I was unable 
to deliver then, in the record.
    Mr. Stearns. By unanimous consent, agreed upon.
    Ms. Harman. And I apologize to the witnesses for missing 
your testimony. As everyone knows, the scheduling around here 
is very difficult. I also have been trying to figure out what 
questions have been asked so that I don't repeat, but I have a 
few that I think have not been asked yet.
    Starting with Mr. Kovar, I would be interested if you could 
just highlight for us any differences of approach to these 
issues that this administration is taking over the 
administration of your predecessors. I don't think you address 
this in your testimony, and I don't think anyone has asked 
about it. I just would offer a comment, which I make all the 
time, which is that there are digital Members of Congress and 
analog Members of Congress, and we are not divided by party; we 
are divided by perspective. And I would like to hope that there 
are lots of digital members in this administration who think 
about these issues the way many of us do.
    Mr. Kovar. The simple answer, Ms. Harman, is that I haven't 
seen a real change at this point.
    Ms. Harman. Does that mean you haven't seen any evidence of 
a change yet or you predict the same focus will be kept?
    Mr. Kovar. Well, I think I would be out of line if I tried 
to predict. But so far the approach to these negotiations 
hasn't changed since the new administration came in.
    Ms. Harman. Okay. Well, let me say that I hope--I can't 
recall every single thing the last administration did, but I 
certainly saw some wrestling there with tough issues. Would 
anyone on the panel like to comment? Have any of you noticed 
something different that is either good or bad in terms of a 
focus on some of these issues? No. Okay.
    Moving along, I think a gut issue here, and it related to 
the digital divide and to a lot of things we all worry about, 
is how do we get more people around the world online? And I 
think that is a goal everybody shares. What thoughts do you 
have? It relates to cost of getting online. It relates to 
access to equipment. I would love to hear an answer from my 
good friend, Mr. Vradenburg.
    Mr. Vradenburg. Thank you, Ms. Harman. The main issue is 
cost for the sake of simplicity. Just as an American consumer 
who may be analog but thinking about going digital, one of the 
first questions asked is how much does it cost, and what is the 
value of moving from analog to digital? I think the challenge 
around the world is to extend information and communications 
technology systems to make them more affordable and to sort of 
blow them out, so to speak.
    And that means getting privatization of national telephone 
companies, getting increased competition to those phone 
companies, intelligent, wireless spectrum policies on the part 
of lesser developed countries on the view that, in fact, 
electronic access to developed markets is going to be a lot 
cheaper than is physical access to developed markets, and that 
the lesser developed nations of the world and the developing 
nations of the world should be finding ways to make more 
universal and affordable their telecommunications systems.
    Certainly, in my recent visits to China, there is an 
enormous appetite on their part to do just that, to blow out 
their telephone system to many more people, to make it more 
affordable so that their electronic sellers can get access to 
the electronic buyers here in this country.
    Ms. Harman. Well, I totally agree with that answer. Are 
there steps that we can take in terms of legislation or focus? 
Are there world fora that we could encourage this committee, 
this Congress, that would be useful? I mean should we be 
gearing toward some sort of convention on this the way there is 
WIPO and other conventions on other issues that relate to this 
worldwide digital economy?
    Mr. Vradenburg. Well, I would urge that Congress and 
individual Congress men and women urge the United States Trade 
Rep to make this a high item on his agenda. Beyond that, there 
is a whole series, sectors of industries that are engaged in 
the electronic commerce value chain whose costs and/or 
competition would be enhanced--advertising services, financial 
services, air transport services, express delivery services. 
There are a whole range of sectors in the service sector, 
which, if liberalized and the cost reduced as a consequence, 
would significantly expand electronic commerce.
    Ms. Harman. Other comments? Ms. Richardson.
    Ms. Richardson. I would like to address that point too. As 
George's testimony said, trade promotion authority gives the 
administration tools to negotiate on our behalf. There are 
mechanisms in the services agreement that can get to cost-based 
issues for infrastructure. There are certainly mechanisms in 
the trade system that can keep the content open.
    One of the few things that customers are willing to spend 
money for to help pay off the expensive cost of infrastructure 
is entertainment. That cost can be artificially jacked up if 
countries start putting content restrictions on delivery of 
content over the Internet.
    Ms. Waggoner. And I would just underscore that point as 
well, and there are a number of bilateral agreements as well as 
regional agreements and negotiations that are occurring. So as 
we consider TPA, I think setting out clear negotiating 
objectives to cover digital trade in some of these issues would 
be very important.
    Ms. Harman. Well, I see my time is up. I thank you all for 
that answer. Mr. Chairman, I would just like to suggest that 
part of our jurisdiction in this subcommittee, I believe, is to 
perhaps make constructive suggestions to our administration 
about proceeding with some of these things. If that happens, I 
would see it as a win-win-win for our country, for other 
governments, and for consumers around the world.
    Mr. Stearns. You are welcome to stay. We are going to have 
probably another second round here if members--the gentleman 
from--Mr. Joe Pitts has left, okay.
    Well, let me ask Mr. Kovar something, and I will take 5 
minutes, and Mr. Bass and Ms. Harman, you are welcome to ask a 
second round of questions. Here, June 6 is the negotiations you 
start. Without putting yourself in some kind of secret 
presentation here, can you sort of walk us through the changes 
that the U.S. is seeking for this June 6 negotiation and what 
changes, particularly in a broad sense, you might think are 
necessary?
    Mr. Kovar. Well, at the broadest sense, what we would like 
to do is to replace the existing text, which is overreaching. 
It tries to do too much.
    Mr. Stearns. All of the existing text?
    Mr. Kovar. Well, not all of it, but essentially the 
jurisdiction section of it we think ought to be replaced with a 
simpler approach to jurisdiction that doesn't try to do so 
much. It would probably have fewer types of jurisdiction in the 
required area where you actually get enforcement, and it would 
have a narrower section on prohibited jurisdiction. And it 
would allow for more flexibility in the middle for national 
practices to continue. That is what we would really like to 
see, is a new text to emerge where the jurisdiction provisions 
are simpler.
    We think on the recognition and enforcement side of the 
convention that the convention is in pretty good shape. I mean 
there is still work to be done there on individual things, but 
that overall it is in pretty good shape. Then there is a number 
of other issues that are related to the convention--the 
connection between this convention and Europe law, whether we 
need a mechanism for applying piece meal to different countries 
depending on whether their legal systems are good enough, to 
permit enforcement of their judgments. And those are issues we 
would like to see start to be tackled in this June session. But 
we think the jurisdiction aspects are the most important.
    Mr. Stearns. We have recognized foreign judgments here in 
the United States, but other countries sometimes are unwilling 
to do so. How will the convention benefit U.S. companies and 
consumers seeking to enforce judgments overseas?
    Mr. Kovar. Well, we hope that we ultimately will get a 
convention that has simpler rules of jurisdiction that can 
attract widespread support, and that we can stop having such an 
excessive focus on them. We won't raise as many difficult 
problems as we have got today. And then we will be able to move 
right to the recognition and enforcement side of the 
convention, which is where we think we can level the playing 
field for American litigants.
    The enforcement side of the convention now has rules that 
are very similar to the rules that are enforced in the State of 
Florida, for example, or the State of Illinois, most States in 
this country that have the Uniform Act or that use the common 
law. And what we most hope to have is an international system 
under this convention that applies those rules in most of the 
major trading countries of the world.
    Mr. Stearns. Ms. Waggoner, I understand that there is a WTO 
Work Program on electronic commerce that was formed to examine 
trade-related electronic commerce issues. I guess the question 
is do you know what progress has been made in addressing the 
concerns that you even mentioned in your testimony?
    Ms. Waggoner. Yes. Well, given that we have not been able 
to launch a new round, we have been in a holding pattern, we, 
of course, continue to support that Work Program, and we are 
looking forward to moving the agenda, and we continue to work 
through ITI. We have been educating the WTO delegations on the 
importance of e-commerce, and we continue to work with those 
delegations to educate them, to help them push forward so we 
can build support for a new round and for this component of the 
new round.
    Mr. Stearns. Tell me worst case scenario. Tell me what--you 
mentioned in your testimony that the Government should refrain 
from enacting trade-related measures that impede e-commerce. 
What specifically things are you concerned about?
    Ms. Waggoner. Well, I think one of the questions that we 
have been talking about today is the issue of how to classify 
an item.
    Mr. Stearns. Problems.
    Ms. Waggoner. So I think that if you classify prematurely 
goods versus services, you could certainly damage the growth of 
e-commerce. I think if you have a regulatory environment, 
particularly in telecommunications, a regulatory environment 
that hinders market growth but does not force privatization, 
particularly in the developing nations, those things could 
definitely hinder growth in new markets in the developing 
countries.
    Mr. Stearns. What about in the area of Latin America? How 
crucial is the FTAA to opening up telecommunications in Latin 
America?
    Ms. Waggoner. I think it is very critical. I think that we 
are going to have to have trade promotion authority in order to 
force some of those recalcitrant countries to move. They are 
unwilling to make concessions if they are not certain how they 
are going to be treated when we bring the agreement back home. 
So I think----
    Mr. Stearns. You are talking about Fast Track?
    Ms. Waggoner. Fast Track, that is correct.
    Mr. Stearns. You don't think we can get it done without 
Fast Track for the----
    Ms. Waggoner. I think it is going to be difficult.
    Mr. Stearns. That is a new name for it, trade----
    Ms. Waggoner. Trade promotion authority.
    Mr. Stearns. [continuing] promotion authority.
    Ms. Waggoner. Correct.
    Mr. Stearns. In the new terminology in Washington, when you 
are trying to pass something, if you have trouble, you change 
the name.
    Ms. Waggoner. Change the name.
    Mr. Stearns. Well, my time is expired. Mr. Towns?
    Mr. Towns. Thank you very much, Mr. Chairman. Mr. Kovar, 
what is the State Department doing to encourage other nations 
to sign the WIPO Treaty's Copyright Act, which further protects 
intellectual property? What are they doing? What is the State 
Department doing?
    Mr. Kovar. Mr. Towns, I am not the right person to answer 
your question, and I apologize for that. I am sure it is 
something that we are handling through the right channels, and 
there are other agencies that are also involved, including the 
Commerce Department.
    Mr. Towns. Okay. Well, I accept that. I am just sitting 
here thinking when we look at what is really going on and you 
think about the problems around these issues that--we are not 
letting anybody come in and steal our oil or steal our cash. We 
just wouldn't allow it. And then when I looked and listened as 
to what is going on here, I think that we have some serious 
problems.
    But let me ask you one other question. In light of your 
remarks earlier about the critical importance of tax policy for 
e-commerce, what do you think of the EU's proposed change to 
their tax system with respect to e-commerce? I think Mr. 
Vradenburg, really I wanted.
    Mr. Vradenburg. Well, we don't think that yet it is 
adequate. It is basically proposing that there be a single 
point of registration, but still 15 different taxing rates. 
They are not yet committing to move toward a harmonized VAT 
rate across Europe, although I think that may be inevitable 
because of their monetary integration. And they are not yet 
undertaking to exempt smaller transactions or accumulate 
smaller transactions. So there are a number of respects in 
which we think that their proposals are inadequate in terms of 
simplifying their system sufficiently to justify out-of-
jurisdiction--imposing tax collection obligations on out-of-
jurisdiction sellers.
    This is a species, Mr. Towns, of a problem that is being 
created by the Internet, or a challenge being created by the 
Internet in a lot of areas. The Internet is global in 
character. And as a consequence, there are people that are 
outside the jurisdiction of any national government who are 
either conducting electronic commerce transaction and thus not 
within the jurisdictional reach of that government for tax 
collection purposes or who may be doing something that is 
committing a tort within a jurisdiction and in fact not within 
the jurisdiction of any--the Nation in which the tort occurs.
    So these issues are going to have to be dealt with, but 
they are big issues. They are not issues which I think we can 
deal with with tweaks to the existing system. Mr. Kovar here 
has been handed the challenge of trying to deal with this issue 
in the context of jurisdiction. We are trying to deal with it 
in the context of taxes. We are also trying to deal with it, 
obviously, in the context of copyright enforcement around the 
world.
    But this whole challenge of a global system of distribution 
and communications, when each nation is, by definition, not 
global in character, is a challenge we are going to confront 
for the next 5 to 10 years, and we have to take the cautious 
approach that my private sector colleagues on my left, your 
right, are advocating with respect to jurisdiction.
    But we have got to deal with these problems. We can't 
ignore them. They are not going to go away; they are only going 
to get worse. And so that we have to confront them head on. And 
the tax issue is one that you have raised, Mr. Bass has raised, 
and the jurisdiction is a question that all of the members of 
the panels have raised. And they are very important issues that 
we have to got to deal with.
    Mr. Towns. What do you suggest that the Congress do at this 
time?
    Mr. Vradenburg. Well, on the domestic tax issue, where 
clearly the Congress does have jurisdiction and is now 
discussing the question of State and local taxation of Internet 
sales, we would urge the Congress to embrace a revision of the 
existing Internet Tax Freedom Act, which would encourage the 
States to simplify their State and local taxation systems to 
reduce the cost of tax collection on out-of-State sellers as a 
component of the extension of the existing moratorium, which 
bars Internet access taxes and also bars discriminatory 
taxation of the Internet. So in that context, we would urge 
that as Congress takes up this subject, as it must by the time 
that the existing tax moratorium expires this October, confront 
the issue of incenting the States to simplify their State and 
local taxation system on this score.
    Mr. Towns. All right. Thank you very much. I yield back.
    Mr. Stearns. The gentleman from New Hampshire.
    Mr. Bass. Yes, thank you, Mr. Chairman.
    Mr. Towns. I yield back.
    Mr. Stearns. Sure. Go ahead.
    Mr. Bass. Thank you, Mr. Chairman. Mr. Kovar, will the 
Hague Convention result in U.S. firms being subject to foreign 
jurisdictions and facing enforcements or otherwise be regulated 
in ways that they are not today?
    Mr. Kovar. It shouldn't. Today, American corporations are 
subject to jurisdiction around the world under local law, and 
most countries' jurisdictional laws are, in some cases, broader 
than American jurisdictional rules. And those same countries 
are subject to enforcement of that judgment back home in the 
various States of the United States. So if we get the 
provisions right, it shouldn't really--it shouldn't change 
things coming into the United States, but we hope it changes 
things going out of the United States.
    Mr. Bass. One final follow-up for Mr. Vradenburg, not for 
you. You made reference in my earlier round about--or at least 
some reference--about the issue of defining jurisdictions. But 
some of the others of you, Ms. Wellbery and some of the others 
have also mentioned, talked about this in your testimony. Is 
there any easy solution, from your perspective, to the issue of 
defining jurisdictions for e-commerce transactions?
    Ms. Wellbery. I don't think there is any easy solution. Our 
traditional means for defining jurisdiction are all based on 
physical location, either of the actors or of the transaction 
or where the goods were delivered. And none of those things are 
necessarily relevant in the e-commerce world, because, as we 
all know, there is no there there; it is happening in 
cyberspace. And I think that is really--we are talking about 
the same issue in a number of contexts--in the tax context, in 
the jurisdiction context. The real problem is figuring out how 
to identify where these transactions are taking place, and if 
we can't, what system do we put in the place of the system we 
used to use?
    Mr. Bass. Well, if nobody else has any comments, I will 
yield back.
    Mr. Stearns. Okay. The gentleman yields back.
    Let me just conclude by saying that the United Kingdom has 
just come out with sort of, I guess, a bombshell talking about 
the EU VAT Tax Directive. Were any of you familiar with that? 
They have come out saying there should be no VAT tax on this. 
Are you familiar with that, George? No? No. Okay. Well, I think 
this goes to the heart of how difficult it is to see what we 
are going to do. And this committee is going to try and have 
some type of legislation dealing with continuing the moratorium 
here until we figure it out.
    A thought I had was the taxation on your telephone, your 
wireless telephone, either whether it is abroad or whether it 
is in the United States, we work that out. So that might be a 
paradigm for someway to do this. In States like mine where we 
have no State income tax, we rely heavily on sales tax. That 
can't go on, because the bricks-and-mortars versus the bricks-
and-clicks are going to have a hard time. And so we somehow got 
to come up with a solution to this, and I am sure Governor Jeb 
Bush is going to be on top of us to--he won't be happy with 
this moratorium, but, again----
    Mr. Bass. Well, if the gentleman would yield----
    Mr. Stearns. Yes.
    Mr. Bass. [continuing] the obvious solution for Florida is 
to not have either a sales or an income tax, like the great 
Granite State of New Hampshire.
    Mr. Stearns. That is a good possibility.
    Well, I want to thank all of you for waiting while we voted 
and also for attending. And I thank all of you in the audience. 
The subcommittee is adjourned.
    [Whereupon, at 4:03 p.m., the subcommittee was adjourned.]
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