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A suit filed by a Durham attorney hints at future battles over e-commerce.

Consumer Friendly? 

A case filed by a Durham attorney hints at a growing battle over regulation of e-commerce

Durham wine aficionado Donald Beskind likes his California pinot noirs. He used to order them over the phone, back in the days when his favorite small California wineries weren't yet set up for e-commerce. Now that they are, Beskind would like to buy through their Web sites and have the wines shipped to him. But direct shipment of wines from out-of-state producers to North Carolina consumers has been made a Class 1 felony.

The law that prevents direct shipment of wine and beer to consumers was approved in 1997 by the North Carolina General Assembly. Among the key backers was state House Minority Leader Leo Daughtry (R-Johnston), who is also co-owner of Mutual Distributing Co.--one of the largest beer and wine wholesalers in the state.

State legislators argued that the law was needed to prevent minors from buying beer and wine online. But Beskind, an attorney who teaches law at Duke University, sees the rule infringing on that most American of values: The right to consume.

The wine law has "changed my buying habits," he says. "Certainly there ought to be some way for me to get these wines [online], but apparently, there is not."

Last year, Beskind filed suit in federal court, challenging North Carolina's wine shipment statute on the grounds that it violates the Commerce Clause of the U.S. Constitution. The state counters that the law is justified by the 21st Amendment, which allows states to regulate liquor. A decision is expected later this year.

Beskind says his legal fight isn't about "unbridled consumerism." He's in favor of banning online purchases of dangerous products such as handguns, for example. But when it comes to ordering a few bottles of California wine over the Internet, he's a fan of the free market.

"It seems to me that there's a heavy burden on anyone who wants to limit that commerce," Beskind says.

Battles over how freely consumers can shop across state lines--especially in the age of e-commerce--aren't limited to wine sales, or North Carolina for that matter. The Texas State Bar is suing companies that sell Internet-based legal software for creating leases, wills and contracts online. New York and New Jersey have made it illegal for e-learning companies to deliver their services over the Internet. In Maine, it's illegal for consumers to have access to their optometry prescriptions, making online eyewear purchases difficult, if not impossible. And in New Hampshire, it's illegal to participate in online auctions without first taking an exam and paying an $85 licensing fee.

Nationally, the push for stricter interstate regulation of e-commerce is coming largely from wholesalers, retailers and distributors who say they want to "protect" online consumers from fraud and loss of privacy. But some consumer advocates warn that the real thrust of their proposals is protection of commercial "middlemen."

A report issued in January by the Progressive Policy Institute, a centrist Democratic think tank, estimates that Americans are paying at least $15 billion more each year for goods and services as a result of legislative efforts to slow e-commerce. Increasing state regulation "represents perhaps the biggest threat to the rapid and widespread digitization of the U.S. economy," writes Robert Atkinson, author of the report.

David Baumer, an attorney and cyberlaw expert at North Carolina State University, says consumers should consider who is behind proposed restrictions on e-commerce, since most "protectionist" efforts are organized along industry lines.

Challenging some of the restrictions placed on consumers by what Baumer calls the "iron triangle" that exists between regulated companies, the government and legislature "makes a lot of sense," he says. "There are public interest attorneys out there who would be interested in such a case."

North Carolina is just waking up to the debate over regulating e-commerce, says state Sen. Eric Reeves (D-Wake), head of the General Assembly's Joint Select Subcommittee on Information Technology.

"Right now, there's a real sense that this is a new marketplace," Reeves says. "And there should be time given to the proponents of self-regulation, provided that, in a general way, people aren't being hurt" by online sales practices.

North Carolina is participating with three other states in a pilot program to try to collect taxes on items purchased from out-of-state companies via the Internet. A moratorium on federal taxes on Internet purchases has been in place since 1998.

So far, the closest North Carolina has come to new restrictions on e-commerce was two years ago, when the North Carolina Auctioneering Licensing Board wanted to apply existing licensing laws to people posting items for sale on eBay and other online auction sites.

That would mean that in order to regularly auction off computer parts online, for example, a potential seller would need to take an exam and pay a licensing fee of $250 the first year, in addition to a $50 application fee and a $50 examination fee. New applicants would also have to submit to a criminal background check and provide a copy of their high-school diplomas. Selling to online auctions without a license would be a misdemeanor, punishable by fines of up to $2,000.

After the auctioneering board's proposal was publicized over the Internet and its switchboard began to light up with angry calls, the matter was referred to Reeve's technology subcommittee which, so far, has not taken it up.

Bob Hamilton, executive director of the N.C. Auctioneering Licensing Board in Raleigh, says the board was just trying to protect online auction enthusiasts. "You shouldn't be able to sell if you're not qualified," he says.

Similar arguments have been made by boards that regulate the delivery of health-care products. The North Carolina Board of Optometry, for example, favors existing regulation that requires online retailers such as 1800contacts.com and Lensmart.com to sell products only to consumers with prescriptions from a licensed optometrist. Under a bill approved during the current legislative session, the North Carolina Medical Practices Act--the law that regulates physicians--will now require anyone diagnosing or treating people via the Internet or a toll-free number to be licensed by the state.

While they acknowledge the need for consumer protections--especially when it comes to health-related products--some experts believe that moves to regulate e-commerce could lead to artificially high prices that will ultimately hurt consumers.

"The advantages of the Internet are being undermined by protectionism," says Baumer, the cyberlaw expert at N.C. State.

Michael Tobin, an Internet attorney with the Charlotte law firm of Kennedy, Covington, Lobdell & Hickman, says the key issue when it comes to e-commerce regulation is balance. "The struggle facing the law and society is finding the appropriate line between what people generally agree shouldn't be permitted and what is good business," he says.

That line's not always easy to draw. Take the case of auto sales. The National Auto Dealers Association has argued that buying a car online is too complicated for the average consumer, and all 50 states have recently enacted laws that prevent manufacturers from selling cars over the Internet.

Attempts to cut auto dealers out of the picture have met with stiff resistance. When Ford Motor Co. launched a service in Texas in 1988 that allowed consumers to reserve used and leased cars online, the state's Department of Transportation began fining Ford $10,000 a day for operating as an unlicensed dealer. Ford is now trying again in eight other states, including Georgia and California.

Brian Ek, a spokesman for Priceline.com in Norwalk, Conn., says his company's Web site has been a big draw for consumers who want a stronger negotiating position with car dealers. For a $50 fee, Priceline anonymously negotiates with dealers on behalf of online clients.

"We have a lot of first-time car buyers who come to us because they know they'll get a fair price," Ek says. "The price is locked in and the dealer can't change it." But state regulations prevent Priceline from selling cars directly to online consumers.

A study released in February by the Consumer Federation of America found that U.S. consumers are overpaying an average of $1,500 per car because of anti-competitive state regulations--including those covering e-commerce.

On the other hand, Kerri Powell, communications director for the N.C. Automobile Dealers Association, says the typical mark-up for online sales means that a person buying a car over the Internet will pay 6 percent more than what they'd get at a dealership.

So how do consumers decide when e-commerce regulations are in their favor? Rob Schofield is a staff attorney for the North Carolina Justice and Community Development Center in Raleigh, which advocates for low-income citizens. He believes regulation is needed for specific products and services--whether they are sold online or not.

"There are products like complicated financial transactions, investments and loans that require government involvement to protect consumers," says Schofield, whose organization helped win passage two years ago of a state law preventing "predatory lending" practices that target low-income citizens. "The consumer is not always in the position to have all the information so that it's a balanced transaction and they understand what they are getting into."

While he's concerned about such issues as Internet fraud, Brian Lamb, president of the Chapel Hill-based N.C. Consumers Council, says consumers should be wary of business-backed moves to restrict e-commerce.

"It's interesting when you hear business and industry saying we need regulation and legislation," Lamb says. "If you're saying we need to protect people from bad economic decisions and there's not a health or safety concern, then you have to ask whether this is self-interest regulation rather than helping consumers." EndBlock

  • A suit filed by a Durham attorney hints at future battles over e-commerce.

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