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E-commerce was supposed to add competition to the marketplace and drive down prices for consumers, but things have not worked out that way in some industries. Instead, a legal and legislative imbroglio has begun over whether “bricks and mortar” companies are pushing to outlaw online-commerce competitors improperly. During the last five years, businesses in many industries have successfully pressured state governments to extend existing consumer-protection laws and enact new laws so as to effectively prohibit online competition from out-of-state rivals. The result is that consumers are being forced to pay $15 billion to $32 billion more per year to buy products and services offline, according to Rep. Cliff Stearns, R.-Fla., who recently oversaw hearings on the issue as chairman of the House Subcommittee on Commerce, Trade and Consumer Protection. The Federal Trade Commission (FTC) also recently launched an investigation into the matter, and courts around the country are split on the constitutionality of the consumer-protection laws that restrict online commerce. The most highly contested laws are those that prohibit the direct sale of wine through the Internet. It’s likely that one of the cases affecting the wine industry will wind its way to the U.S. Supreme Court. FTC HEARINGS The FTC held public hearings from Oct. 8 to Oct. 10 concerning state limits on e-commerce. The agency received testimony from more than 70 witnesses, and it examined state laws affecting online sales in 10 industries, including wine, automobiles, legal services, prescription contact lenses, pharmaceuticals, caskets and real estate. Approximately half of the states currently prohibit direct shipments of wine from producers to consumers, according to Clint Bolick, vice president of the Institute for Justice in Washington, D.C. All 50 states have enacted laws making it illegal to sell cars online unless the seller is a franchised dealer who has a physical presence in the state. At the FTC workshop, “there was widespread agreement across industries and across ideological perspectives that these sorts of restrictions are an important issue,” said Ted Cruz, director of the FTC’s Office of Policy Planning. “It was also striking how similar the underlying policy disputes were from industry to industry. Industries that one might not think of as being connected — such as wine sales, financial industries and casket sales — offered very similar arguments by proponents and opponents of these state laws.” On one side, online-commerce advocates testified that restrictive state laws didn’t promote consumer protection: they just protected middlemen from competition, limited consumer choice and kept prices high. On the other side, however, no one attempted to defend restrictions on online commerce in general. Instead, representatives from individual industries argued that the specific state laws affecting their industry were needed to protect consumers from possibly unscrupulous out-of-state companies. Automobile dealers argued, for example, that consumers would have difficulty in asserting their rights under state consumer-protection laws against out-of-state car sellers. Liquor wholesalers claimed that if it were legal to order wines on the Internet directly from out-of-state wineries, states would find it difficult to keep minors from buying alcohol online. After reviewing the evidence presented at the workshop, the FTC will decide what steps to take next. “The commission is still in an evaluating mode,” said Cruz. “Many of these state restrictions may well be justified by important public policy concerns. But there may be ways to achieve those concerns without restricting e-commerce.” The FTC hearing came several weeks after Stearns’ subcommittee held a hearing on how state consumer-protection laws are impeding online commerce in three industries: contact lenses, wine and auction houses. At the hearing, Stearns urged states to take a second look at their laws. “It is imperative for the states to examine their laws and regulations that were intended to provide consumer protection but now hinder e-commerce,” he said. Stearns pointed to Illinois, which had passed a rule requiring many state residents who wanted to sell items on eBay to register with the state as auctioneers. Public pressure forced the state to revise its rule, so that only eBay needed to register as an auctioneer. Stearns plans to hold further hearings on state restrictions on e-commerce in Congress’ next session. Some aren’t waiting for Congress and the FTC to act. In the last few years, a number of businesses and consumers have brought lawsuits challenging restrictive state laws, saying that they impede the free flow of interstate commerce and thus violate the dormant-commerce clause of the U.S. Constitution. For instance, in March 2001, an Internet casket retailer brought suit in the federal district court in Oklahoma, challenging an Oklahoma law that allows caskets to be sold to state residents only by state-licensed funeral directors. Last month, the FTC filed an amicus brief in support of the online retailer. The suit, Powers v. Harris, No. 5:01cv445, is ongoing. WINE SALE LAWS Most of the lawsuits to date have concerned state laws that restrict direct Internet sales of wine. The 7th U.S. Circuit Court of Appeals and two federal district courts (in Michigan and Florida) have upheld the state laws as valid under the 21st Amendment, which repealed prohibition and gave states the authority to regulate liquor sales. Three U.S. district courts (in Texas, North Carolina and Virginia) have struck down state laws for violating the commerce clause. All these rulings, except for the 7th Circuit decision, are currently on appeal. Because of the split in the courts’ rulings, the matter is expected to wind up at the U.S. Supreme Court. One legal expert who has studied the issue closely believes that these state laws ought to be struck down, but fears the Supreme Court may see things differently. “This is a very states’ rights-oriented court,” said Susan Lorde Martin, professor of business law at Hofstra University. She indicated that with its current composition, the court may well find that the states can control alcohol in just about any way they want.

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