Commentary: The Net: How To Head Off Big Time Regulation

As E-commerce blossoms into a trillion-dollar business, there's only one thing that seems capable of slowing it down: politics. Worried about the Internet's potential to invade people's privacy, separate them from their money, and cause untold additional havoc, politicians around the globe are considering new laws to prevent the revolutionary communications channel from being misused. That impulse, in turn, is making many business executives worry that their dream of a frictionless, worldwide electronic marketplace will be ruined by a patchwork of inconsistent local regulations. Imagine how much harder life would be at if the company were forced to comply with everything from Kuwaiti decency standards to European privacy laws to Iowa sales taxes.

For the moment, companies have avoided this nightmare. But it could easily happen down the road, and that's why businesses have pleaded with government to let them police themselves. The Clinton Administration heard this message loud and clear--much to Corporate America's relief: In 1997, its resident cyberguru, Ira C. Magaziner, wrote "Framework for Global Electronic Commerce," a blueprint for Internet governance. Because of the Net's global reach and evolving technology, Magaziner argued that regulation should be kept to a minimum. In the few areas where rules were needed, such as privacy and taxation, he suggested that politicians bow out and let policy be made by such quasi-governmental groups as the World Intellectual Property Organization (WIPO) or the Organization for Economic Cooperation & Development (OECD).

While Magaziner's philosophy makes sense in theory, it's not working out as well in practice. Unlike traditional government, such quasi-governmental organizations operate outside the public eye and have few rules about due process. Their leaders aren't always required to talk to the press, open up their meetings, or let critics participate in their decision-making--and often they aren't even elected.

That's bad news. As a practical matter, this lack of transparency is making it harder for consumers to shape the way the Internet is governed--and much easier for big companies to dominate the process. Few people may be complaining right now, but as the Web becomes a bigger part of everyday life, they're likely to find this imbalance intolerable. Just as citizens demand accountability from officials making important decisions about highways, phone lines, and other key parts of the economic infrastructure, they're going to demand a voice in the governance of the Internet. And if they don't get it, they're apt to chuck Magaziner's vision of self-regulation and ask elected representatives to take charge of the Web--the exact thing business wanted to avoid.

WEB TRADEMARKS. The transparency problem shows up clearly in one of the first big Net policy dilemmas: cybersquatting. That's when a private speculator seizes a valuable corporate brand name on the Internet--say, ""--and sells it back to the company at an exorbitant price. Because Web addresses are critical to online branding, companies want to establish a rule that they are entitled to any domain names using their trademarks--no matter who gets there first.

But because the Net is used for more than just E-commerce, many consumer advocates say this rule would unfairly restrict the rights of schools, museums, political parties, and myriad other noncommercial Net users. If an astronomy club or a New Age religious sect is first to register "," they reason, why should the car company later be able to boot it off?

The group the Administration appointed to resolve this important dispute was WIPO, an arm of the U.N. But ever since the agency began considering the issue of cybersquatting last July, its deliberations have been attended mostly by multinational corporations such as Ford, Microsoft, and Time Warner--just about the only groups that could afford to have staffers study the technicalities of the issue, write formal comments, and go to public hearings in Sydney, Brussels, and elsewhere. In contrast, representatives of the Internet's many other constituencies "were grossly unrepresented," according to A. Michael Froomkin, a professor at University of Miami law school who was asked by WIPO to serve as a "public" advocate, months after the deliberations were well under way.

Unsurprisingly, WIPO's solution to the problem of cybersquatting is everything corporate trademark holders could have hoped for--and one Froomkin doubts would have been adopted if Magaziner, now a private consultant, had assigned the matter to a branch of the U.S. government. Under WIPO's plan, owners of Internet addresses will be forced to sign a contract obliging them to submit to mandatory arbitration if a corporate trademark holder alleges cybersquatting. Whoever loses this fight must pay the other side's legal fees.

This means that a jewelry company that spent $70 for the domain name ""--to take a hypothetical example--could face tens of thousands of dollars in liability if Procter & Gamble Co. charged it with trademark violation. Such an arrangement, says Froomkin, creates "enormous potential for `reverse domain name hijacking' in which wealthy parties could threaten to impose substantial costs on [challengers] unless they surrender without a fight." WIPO's final ruling, including the loser-pays provision, is due out on Apr. 30.

"MESSY WAY." WIPO's initial foray into Internet regulation, according to Froomkin, illustrates why companies want to keep traditional government away from online regulation: "Business has figured out that you can get what you want from [private] regulatory processes." Unlike WIPO, he says, traditional government has more checks and balances. "Democracy is a messy way of making decisions, but one of the reasons is that we try to ensure that different groups are heard."

Internet regulation is still in its infancy, but problems are cropping up in other areas, too. One of the most critical issues for online merchandisers is the extent to which they're liable for defective goods. Currently, many companies try to limit their responsibility by publishing one-sided contracts on their Web sites, then directing buyers to click on a button agreeing to the terms. But purchasers almost never plow through the legalese--and have no opportunity to negotiate for different terms--so the legality of these "point-and-click" contracts is doubtful.

One of the organizations the Magaziner Report suggests should resolve such issues is the National Conference of Commissioners on Uniform State Laws (NCCUSL), a 107-year-old organization based in Chicago that is devoted to creating "model laws." Many E-business giants have been lobbying the NCCUSL to declare point-and-click contracts legal--while a small band of public-interest lawyers has tried to halt the process. In April, the organization came out in favor of point-and-click contracts and announced plans to lobby states to pass such rules this fall. Scoffs Harvard Law School Professor Lawrence Lessig, a sharp critic of the White Paper: "You've had interested parties in closed meetings for the past three years making this code for Internet commerce tilted in their favor."

RIGHT DIRECTION. Issues such as electronic contracts and cybersquatting--not to mention Internet taxation and privacy--are simply too important to be dealt with in smoke-filled rooms. While Magaziner was right to recognize the limits of traditional government, the groups he favors will have to open up their decision-making processes if they are going to take a substantial role in governing online commerce. Otherwise, their policies won't seem fair and ultimately will be rejected by ordinary citizens, whose dependence on the Internet will become too great to accept second-rate governance.

One organization making headway in this regard is the Internet Corporation for Assigned Names & Numbers (ICANN), the group assigned to oversee the Net's address system. When ICANN was established last summer, it had bylaws fit "for a charity," says interim chairperson Esther Dyson. But in recent months, the organization has established conflict-of-interest rules, opened up some board meetings, and worked towards developing a mechanism to elect board members (table). The group has further to go, as Dyson acknowledges, but it's moving in the right direction. "Enough accountability can be built in to...make this process work," she predicts.

Let's hope she's right. No one really wants the alternative: traditional, cumbersome government regulation. Of course, more due process will slow down decision-making for groups like ICANN, but that's the price of democracy. The Net can't thrive any other way.

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