Jul 1 2007

E-Commerce should not be over-regulated

We wake up one morning and discover that a question we have been asking for the last decade or two may now be the wrong one.  The question was – how can we use law to enable businesses to use e-commerce? The question now seems to be: how can we shape law to support but to avoid over-regulating it? So, I am back.

I wanted to begin by being general on how things have changed over the years about the idea of “electronic commercial law.” Simply stated, courts and commercial parties have recognized that electronic commercial transactions and licensing are now a central part of commerce, but legislatures and agencies seem to want a regulatory world for this form commerce. We need to fight that tendency.

Electronic commerce refers to the use of digital systems to create or perform transactions and enforce rights in digital information. The term covers a wide variety of commercial practices that were once new in ordinary commerce: they are now staple elements of it.

What does that mean for law?

For contract law, the meaning should be simple. Contract law is a practical discipline that supports the marketplace and should respond supportively to changes in commercial methods and subject matter. We have a different transactional framework (licensing), a new subject matter (digital information), and a new way of doing business (electronic interactions). Contract law needs to continue to adjust to support this new environment.

The relationships have changed, not just the mechanics. Ethan Katsh once commented: “[A] new system of communication … leads to the creation of new relationships and, most importantly, changes our attitudes, expectations, and ways of thinking about law.” M. Ethan Katsh, The Electronic Media and the Transformation of Law 22 (1989). He was right. New relationships. New attitudes. New expectations. These are the grist for the mill of contract law and practice. The new technologies have fundamentally changed the character of relationships. These new relationships need to be governed by new supportive contract law themes, not by themes developed from an old, now gone era.

Where does all that leave contract law?

Contract law creates (or denies) legal obligations associated with voluntary interactions. When the interactions and their subject matter change, contract law serves the same function but its tools and outcomes must differ from the past.

In our world significant change seldom flows smoothly. While many embrace change, others resist it. Some of the resistance is due to what Lewellyn explained years ago: “You wake up then to the fact that the throne your subject matter once occupied is overshadowed”; that is a fearful situation for many. The costs imposed on commerce by reaction to that fear are extravagant and harmful.

In my view, rather than protecting the status quo, the role of law generally should be to establish a responsive body of rules that support change and that limit regulation to cases where actual clear abuse otherwise exists. This has been the tradition of U.S. commercial law. But it has not consistently been the way in which law related to electronic commercial transactions has evolved. Instead, we have seen an explosion of new law, often regulatory in nature, dealing with data security breaches, “spyware”, privacy policies, “spam”, etc. Too often, political arguments and interest group politics weigh in toward the view that the proper role of law is to regulate commerce, rather than to support it. Much of this lies simply in a grab for position enforced through law, rather than in the marketplace. Also, this stems in part from the regulators’ view that preexisting regulations were already inadequate to safeguard consumer interests and that the transition to a new commerce provides an opportunity to impose more extensive regulation. In addition, some believe that there are enhanced risks of abuse in e-commerce that require proactive regulation even before abuse actually occurs,

But when a regulatory approach is taken in a period of rapid social change, the result is an enormous expansion of new law and we pay a huge price for this. Its short-term effect lies in the creation of an often-bewildering array of new rules and regulations with which commercial entities must deal, and which seldom reflect sound or considered legal or social policy.

Digital media have enabled a wide range of new ways of doing business and new commercial subject matter. There are numerous instances in which the balance between technological capability to engage in new transactions, and legal infrastructure that permits or impedes implementing aspects of the new technologies is being drawn. We need to exercise care in such contexts.

The messages are simple ones



· Electronic commercial transactions have engaged a fundamental change in commercial and consumer relationships, expectations and subject matter. The relationship between a licensor and licensee, an access provider and its clients, and other modern information-based transactional relationships does not flow from models of relationships between the buyer and seller of a toaster or television set or from a desire to regulate and impede change.

· Electronic commerce might once have been reasonably treated as a small sub-part of contract law and commercial practice. That is no longer true. This is, indeed, modern commercial law and needs to be respected on its own terms with its own unique demands.

· The business of law in our market economy is not to comprehensively regulate and control, but to support technological and commercial evolution, limiting regulation to cases of proven and palpable abuse.



More on these themes later.

Ray
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