The Voice of the eCommerce Industry

NetChoice Takes a Plane to Maine to Testify—Againe

Yesterday, NetChoice joined the Center for Democracy & Technology and the Maine Civil Liberties Union (and PFF, who submitted written testimony) before the Maine legislature to oppose a bill that would restrict how health-related products can me marketed to minors under age 17.

The bill, LD 1677, is a repeal and replacement for current law passed last year that was the subject of strong opposition from the online industry. As I previously blogged, NetChoice was a lead plaintiff in last year’s lawsuit to enjoin the law. Though well intentioned, this law was overly-broad and wrought with constitutional concerns. As a result, Attorney General Mills agreed not to enforce the statute. In October last year, NetChoice joined others in testifying before Maine Joint Standing Committee on the Judiciary regarding this law. In short, the conclusion of all parties involved was that the current legislation could not stand and that the legislature should move to quickly repeal.

So we all arrived in Augusta, ready for the next round – after all, this bill is #9 on the NetChoice iAWFUL list! But when we arrived, we were treated to a surprise amendment from the bill sponsor and this became the focus for discussion and testimony. Here’s the amended prohibition:

A person may not knowingly collect and use personal information collected on the Internet from a minor residing in this State for the purposes of pharmaceutical marketing prescription drugs to that minor, unless the minor specifically requests that information about the prescription drug be provided to them

John Morris at CDT gave great testimony and generally welcomed the amendment. However, he cautioned the committee that it should make sure that website intermediaries would not have liability for merely displaying ads. Or for displaying ads to minors that have previously registered with the site, and the ad display was unrelated to the information contained in the registration.

While the bill’s language is better for online companies, it remains to be proved why it’s needed in the first place. There seems to be a sweeping fear among many people that advertising is bad and tries to persuade us to do things we don’t need. Magnify this fear times ten when it comes to advertising and children, and pharmaceuticals.

I understand the thoughts that we’re an overly-medicated society, but that view often ignores the many benefits of modern medicine. Regardless, when it comes to prescription drug marketing and children, there are firm checks and balances in place with what parents must consent to and what doctors will ethically prescribe.

Keep your eyes and ears open for next week’s work session on Tuesday. That’s when there will be a vote, and we’ll see whether I need to board another plane to Maine, not that it’s that much of a pain.

-Braden Cox

Like a Kid in a Candy Store, Parental Supervision Still Needed for FTC Rulemakings

Congress gets dinged a lot for slowing down innovation, but sometimes that is just what the doctor ordered. Thirty-five years ago, a Democratically controlled Congress passed the Magnuson-Moss Act in an attempt to check a hyperactive FTC.

Like a kid set loose in a candy store, the FTC at the time had gone on a binge of overreaching and harmful regulation. The core enabler of this action is the exceptionally broad mandate bestowed on the agency to regulate all “unfair” consumer activity. Unlike regulating the structural stability of bridges or safety in food, “fairness” is a subjective concept.

Congress’ prudent action to place special restrictions on FTC rulemaking [15 U.S.C. Sect. 57a(b)(2)(A)] was in direct response to the agency’s overreach and regulation of activities that would have included advertising children’s products – in essence, acting like a kid in a candy store. Magnuson-Moss was the equivalent of putting the candy behind the counter, providing Congress and courts control over how much candy was appropriate. 

Now, 35 years later, the FTC has that 'unfairness feeling' again. In a NY Times interview last month, FTC Chairman Jon Leibowitz signaled his intent to change standard marketing tactics of disclosure and opt-out, by requiring users to opt-In for collection of information for targeting ads.   They are concerned about what's "fair" in advertising, but we know that low rates of opt-in will reduce ad revenue. If the change were put into effect, free online services might have to charge a "fare" to users.

At the same time, the FTC is seeking to shed what the Chair called "medieval restrictions" on its rulemaking powers.  A change that would allow the FTC to move quickly to require opt-in. Taken together, these threats to online services and e-commerce are #1 on the 2010 iAWFUL list.

Earlier in the 111th Congress, legislation was passed in the House to reform financial services regulatory mechanisms. The bill expanded FTC rulemaking authority, even though the FTC wasn't blamed for failing to regulate trade that contributed to the financial crisis.

A similar Senate bill addressing financial regulatory reform did not change FTC rulemaking powers.  Fortunately, at a Senate Commerce hearing on February 4, several Senators challenged Chairman Leibowitz as he made the case for an expedited rulemaking process.

The specific purpose of the Magnuson-Moss Act was to enact safeguards that restrain the FTC’s ability to unilaterally deem certain practices “unfair” and, in turn, to expand its authority in many areas including banning broad categories of advertising.

These safeguards include important procedures that allow for enhanced stakeholder participation, require a detailed evidentiary record before the FTC can create new rules, and enable courts to scrutinize rulemakings as a valuable check to ensure proper process and evidentiary support.     

The current process through which the FTC promulgates rules, as established by the long standing Magnuson-Moss Act, is a proven and effective vehicle for the regulation of business that provides the Commission with authority to punish businesses that act in a deceptive manner.

Chairman Leibowitz argued that his agency strains to make timely rules. But Congress has demonstrated time and again that when it wants the FTC to move quickly, it will direct the FTC to do so. For example, both the COPPA and CAN-SPAM laws gave the FTC rulemaking authority – under the expedited APA process [5 U.S.C. Sect 553] – allowing the FTC to issue regs quickly.

The bottom line is that new regulations are not necessary to hold legitimate businesses accountable for their actions. Outlaws who spam and scam are STILL spamming and scamming after the FTC issued regulations.  

A new era of increased regulatory promulgation at the FTC would harm law-abiding competitors and consumers while failing to address those who operate outside the law. To address these individuals, aggressive enforcement seems more relevant than expanded regulation.

This is why the FCC’s campaign for an expedited rulemaking process is the equivalent of handing a child the keys to a candy store, and the reason why it tops the 2010 iAwful list.

New Year, New Slate of “AWFUL” Internet Laws

It was an awfully bad snowfall that paralyzed Washington, DC last week. While we may curse Old Man Winter, ‘tis the season for snow.  Unfortunately, it’s also the season for bad legislation – and we have to to worry about digging out the Internet from a pile of bad proposed state and federal laws.

Today NetChoice released its first iAWFUL list of 2010, taking stock of the most serious legislative threats facing the global Internet. The Internet Advocates’ Watchlist for Ugly Laws (iAWFUL) is our top ten – or more accurately, “bottom ten” – list of the worst proposed Internet laws in America.

For the first time since we started keeping the iAWFUL list in 2009, a federal proposal has taken the infamous number one spot. The Federal Trade Commission is telling Congress to scrap long-established checks on its already extensive power. The FTC wants the power to impose burdensome regulations on communications between online retailers and consumers without answering to Congress.

State legislatures have typically had a monopoly on proposing the most outrageous and extreme burdens on Internet commerce and communication, but this effort in Congress has the potential to do serious damage to the Internet and innovation throughout the nation.

When Congress passed the Magnuson-Moss Act in 1975, it recognized that a more transparent rulemaking process must temper the FTC’s exceptionally broad consumer protection powers over all forms of trade and commerce. A repeal of Magnuson-Moss rules would let the FTC create new restrictions on longstanding retailer relationships that deliver free and targeted benefits to consumers.

But while a federal measure may have taken over the top spot on our list, statehouses from Hawaii to Virginia own the next nine spots on this year’s iAWFUL.

Colorado, Illinois, Maryland, New Mexico, Virginia, and Vermont also made the iAWFUL list for their attempts to force out-of-state advertisers to collect and file sales tax returns for sales to their residents.

Online companies and content providers are still experimenting with new models for advertising and distribution. State laws that use online advertising as a proxy for an in-state sales representative will stunt the growth of new business models and distort the evolution of Internet marketing.

But we don’t keep the iAWFUL list just to remind ourselves of all the bad laws out there. We keep it to rally the efforts of advocates around the country working to protect the Internet. In that respect, the real story of the iAWFUL list is not what’s on it, but what fell off.

The top legislation on the August 2009 iAWFUL release was a Maine bill attempting to restrict marketing to teens online. But in response to the publicity created by iAWFUL – and thanks to a lot of hard work by Internet advocates -- Maine's House and Senate Judiciary committees unanimously recommended repeal of the law in the next legislative session.

Another high-profile item on the last iAWFUL –trio of federal bills regarding organized retail crime, made a remarkable improvement and fell from the Top 10. Again, thanks to the efforts of NetChoice and other Internet advocates, lawmakers began to get the message that law enforcement needed resources – not new laws – to fight organized retail crime.

The name of iAWFUL says it all. This is a list of ugly, ugly laws. But anytime we get tired of sorting, ranking and listing them, we remind ourselves that iAWFUL is a key tool to blunting their dangerous effects.

Call it our snow shovel to dig the Internet out from a blizzard of bad legislation.

[photo above: AP Photo/Evan Vucci]

Privacy Is Not About the Size of the Pipes

Is privacy a broadband issue? We think not. Privacy is based on what consumers care about, not the speed of the pipe.

NetChoice filed comments today with the FCC, which were in response to the agency’s request for comments on online privacy issues. The FCC asked for comments on the use of personal information, identity management services and privacy protections across broadband applications. The questions raised in the request were drafted entirely by the Center for Democracy and Technology, and are an attempt to inject the privacy debate into discussion of the National Broadband Plan.

Our comments took a nuanced approached—we focused our response on the appropriateness of this inquiry as it relates to Internet privacy issues. While we assert that the FCC doesn’t have the legal authority if it were to act, we focus the bulk of our comments on how the FTC has already  established jurisdiction and occupies the online privacy issue area. We also highlight how the FCC’s ability to regulate broadband pipes as infrastructure does not convey jurisdiction to regulate that which flows over the pipes as information. Importantly, privacy is not a broadband issue:  the privacy policies of the ends (consumers and online services) are not defined by the middle (the speed of the communications pipe).

In short, our comments state:

• NetChoice members care about the privacy of our customers
• The exchange of data between and among users and online services create valuable opportunities for socially beneficial business models
• The FTC has already established jurisdiction, including in the areas of reviewing behavioral advertising practices, COPPA and adherence to privacy policies
• NetChoice will continue to engage on privacy matters at the state and federal level. Privacy is an important issue not because it is specific to broadband; rather, because privacy is a consumer-driven expectation that must be met regardless of transmission technology.

-Braden Cox

Beyond Privacy Policies to Policy Prescription: The New Unfairness Doctrine at the FTC

Last year there was discussion of a possible (now unlikely) return of the FCC's "Fairness Doctrine" that used to apply to broadcasters. This year, we should all be aware of the FTC's stepped-up rhetoric toward an "Unfairness Doctrine" for privacy--an increased effort toward enforcing the "unfair" part of Section 5 of the FTC Act, which prohibits unfair or deceptive practices. 

Historically, the approach of the FTC toward privacy has been one of notice and consent and to hold companies to the word of their privacy policies -- if companies say one thing and then do another, the FTC goes after them for being deceptive. This is the "deceptive" part of the FTC's power to enforce the law against unfair or deceptive commercial practices.

For privacy, we really haven't seen the "unfair" part being enforced. But if public comments from high-ranking officials is any indicator (and it is), that's about to change.

A recent New York Times article summarizes its interview with FTC Chairman Jon Leibowitz and David Vladeck, chief of the FTC’s Bureau of Consumer Protection. It's another insight into how aggressive the commission wants to be toward privacy.

Advise-and-consent “depended on the fiction that people were meaningfully giving consent,” Mr. Vladeck said. “The literature is clear” that few people read privacy policies, he said.

But even if people did read privacy policies, Vladeck still doesn't think it is fair that people give consent to data practices, often in exchange for free services:

There is also a problem with companies conflating consent, Mr. Vladeck said. For example, if a Web site asks people to agree to a transaction and to let their data be sold in one form. “I don’t necessarily think that’s fair,” Mr. Vladeck said.

The FTC wants to make things less "unfair" by flipping upside-down the way that most users consent to information collection and use:

“Philosophically, we wonder if we’re moving to a post-disclosure era and what that would look like,” Mr. Vladeck said. “What’s the substitute for it?”

He said the commission was still looking into the issue, but it hoped to have an answer by June or July, when it plans to publish a report on the subject. Mr. Leibowitz gave a hint as to what might be included: “I have a sense, and it’s still amorphous, that we might head toward opt-in,” Mr. Leibowitz said. [emphasis added]

Requiring opt-in is a radical departure from the FTC's prior focus, which has been directed at the consequences of the use and misuse of consumer information. And it will lead to a radical reversal of the participation rates of users in sharing data for targeted advertising.

Behavioral economists teach us that defaults matter. An overwhelming majority of people do not affirmatively select a different option if there's a default presented to us.

A default of opt-in means that consumers will likely not share their information. While this may in fact be the goal of the FTC, the effect will be the transformation of free services to fee services online. And requiring opt-in does nothing to incentivize data brokers and other companies that share data to engage in good practices.

-Braden Cox

Making A Federal Case out of Facebook's Customer Relations

We've all heard someone use the phrase "making a federal case out of" something. Often it's used when people overreact--as in stop making a federal case out of this! And that's the  reaction we should have to the complaint filed by EPIC, Center for Digital Democracy, and others with the FTC. Because they have literally made a federal consumer protection case out of what should be a a customer relations issue between Facebook and its users.

Facebook's users are quick and vocal about Facebook's privacy practices. And Facebook has been quick to respond. The Facebook blog on privacy highlights all its recent undertakings to respond to privacy concerns, including the Facebook Site Governance page, the Statement of Rights and Responsibilities, an open letter and other blog posts from Facebook founder Mark Zuckerberg. There's even Facebook Principles that highlight the site's mission. How many other companies have been so transparent and responsive? 

Indeed, you could say that Facebook has been the gold standard of responding to consumers. In this most recent change to privacy settings, users were prompted to revisit their privacy settings. Facebook made some recommended changes based on where it sees its service going. Users (like me) could change these if they wanted.

And change is what the Internet and new web services are all about. Forcing Facebook or any other online site to perpetually maintain original settings prevents new and innovative business models and services (just ask Microsoft about how backward compatibility makes Windows innovation so difficult). Web 2.0 services like Facebook have to experiment with the ways that users publish and share information. If these sites go too far, their customers will leave--which is the best check on privacy compared to any law or regulation.

So that's why I'm disappointed why these privacy groups are complaining to the FTC. There's a high bar of specificity for FTC action, so it would have been far better to petition the Facebook community and let them unleash whatever fury they have. But my hunch is that these complaining groups don't think that the FTC will actually do anything here. After all, making a federal case of actions by high visibility companies makes for a good publicity opportunity even if there's no sound legal case.

Unfortunately--now that it's a federal case--customer relations is now confused with consumer protection.

Lawsuits and Enforcement, not Legislation: Balancing Social Media and Consumer Protection

What are the consumer protection issues of online social media sites and what's the right regulatory balance? That was the focus of today's Northern Virginia Technology Council (NVTC) event called "Social Media and Consumer Protection: Finding a Balance" that featured Tim Sparapani of Facebook, Pablo Chavez of Google, and Ari Schwartz of the Center for Democracy and Technology (CDT).

But the event wasn't about consumer protection (in the traditional sense), it was about privacy. Privacy online is today's issue du jour, whether it is marketing to children or collecting and sharing data for targeted ads. The FTC has devoted a series of roundtable discussions toward privacy, with the first one beginning Dec. 7.

Privacy's getting so hyped-up that I believe it to be the next "online safety" sort of issue where isolated and particularized incidents become sensationalized in the media and among regulators, creating counterproductive techno-panics that other commentators have described. This shift is apparent as many policymakers and advocacy groups become increasingly hostile toward targeted online advertising.

But are social media and privacy at odds such that there needs to be a "balance"--whatever that entails? While this question was never explicitly asked, it is clear that Ari Schwartz would say "yes" because he asserts that consumers don't know what information is being collected and that users need help to gain control over their own data.

Ari acknowledged that when it comes to privacy, lawsuits would be filed and that the courts might rule differently on whether social media sites or their advertiser would be liable, depending on the circumstances. The case-by-case approach in the courts is something that many pro-market advocates would support--but it flies in the face of CDT's public comments for next week's FTC Privacy Roundtable.

A cornerstone recommendation in CDT's comment is that "[t]he FTC should encourage Congress to pass general consumer privacy legislation that is based on a full set of Fair Information Practices. Self-regulation cannot adequately protect consumer privacy when it is not girded by legal standards and more direct oversight from the FTC." It's a sweeping statement that ignores the unintended consequences of a general, one-size-fits-all privacy law.

The Maine law regulating "predatory" marketing to children that passed this year is a great case study on the pitfalls of general privacy regulation. The law prohibits the collection of personal and "health-related" information from minors without parental permission, and bans outright its use in marketing to teens.

Because the law was not specific to a particular harm, it was way overbroad. Legitimate advertising and information sharing was now illegal, violating the free speech rights of both advertisers and teenagers. Thankfully, a legislative committee voted in October to recommend repeal of the law.

You often hear privacy advocates rail against the sectoral approach of the U.S. toward privacy, where we have particular laws specific to financial and health care information. They'd rather see a European model of general consumer privacy regulation. But there's no one-size-fits-all to something that is as highly contextual and personal as one's privacy. 

At the event we heard Pablo Chavez say how hard it is to convince consumers to click on display ads. Online publishers and service providers are constantly thinking of new ways to show relevant and compelling advertising to consumers. It is this experimentation and innovation that, by making ads more relevant, keep paying for the free services we all use on the 'Net. When this experimentation goes too far and some consumers get harmed--which will undoubtedly happen as it does in any other commercial context--consumers can sue and the FTC can enforce.

Perhaps I'm reading too much into Ari's acknowledgment that litigation and FTC enforcement will likely figure this out. CDT is an influential and respected organization, so it would be nice to see them acknowledge the pitfalls of a one-size-fits-all solution and talk more about how targeted enforcement can help to weed out any bad actors in targeted advertising. I hope CDT might agree that we need more FTC enforcement and private lawsuits, not new legislation.

Braden Cox

What about the Children? The Emerging Case for a "Child Exception" to First Amendment Protections

What to do about the influences of media and advertising on children? Generally, the saying goes that where you stand depends on where you sit--but that was not apparent at today's event on children and media.

There were 4 seats (plus moderator) at the panel on "Media, Kids, and the First Amendment" that was co-hosted by Georgetown Law School and Common Sense Media--a professor, lobbyist, FCC regulator, and attorney general. Surprisingly, while there was common ground to be shared, only the lobbyist was truly advocating on behalf of a strong First Amendment.

The Professor: Angela Campbell. She doesn't see a need for differing legal analysis for broadcast TV or the Internet. Media is media. But she also would like to see all laws meant to protect children be subject to intermediate scrutiny by a court, not strict scrutiny (so that more regulations could be passed). She also thinks the fleeting expletives case (the Fox case) is a joke. Where does she sit? Mostly on the side of Free Speech. Some laws are necessary to protect children, but we need to focus on the harm and weigh the costs of passing law versus not passing law. But her call for intermediate scrutiny is troubling for free speech advocates.

The Lobbyist: Dan Brenner. He worries about laws regulation communications as being vague (what does "indecent" mean?) and overbroad (makes legitimate speech unlawful). The Maine predatory marketing law that NetChoice has engaged in is an example of being both vague and overbroad.  Where does he sit? Firmly on the side of Free Speech. Dan made a powerful case that regulators have better things to do than worry about the occasional F-word or wordrobe malfunction on TV.   

The Attorney General: Douglas Gansler. He trumped up the AG agreement with MySpace, talked up age verification as a way to solve our online ills, said Criagslist was running a virtual brothel with its adult ads, and talked about how Maryland teaches Internet safety in the schools. Where does he sit? On the other side of Free Speech. AG Gansler was disappointing. He talked tough on crime and forcing industry into "voluntary" agreements to effectuate his agenda. But it wasn't clear he had identified the harms. Statements such as "everyone agrees" or "you know it when you see it" just aren't nuanced enough coming from a state's highest ranking law enforcer.  

The FCC Regulator: Kim Matthews. She described the FCC's August report on Child Safe Viewing Act and the recent NOI about empowering parents and protecting kids. Where does she sit? It is hard to tell which side. Despite the fact that Kim works at the FCC (which is not known for its 1st Am sensitivities) she came across very evenhandedly. In response to my question about regulating health-related information, she said that kids rely on the Internet for valuable health information and that we shouldn't cut-off that access.    

Overall, it was the lobbyist Dan Brenner that was carrying the fist amendment flag. And while it is his clients that would be regulated, ultimately he's carrying the flag for citizens that would lose out if there were more speech restrictions. And while this was a panel devoted to the role of government, educational efforts and parental involvement are the first line of defense to what people might consider content and marketing not suited to kids. There has to be a better way at protecting children and preserving free speech than just passing more laws. 

Internet Advertising Picking-up -- Just Won't be Display Ads

Two recent trends evidence the importance of targeted Internet advertising--more money going toward Internet ads, and fewer people that click on display banner ads.

First, the good news is that Internet advertising is rebounding (or at least seeing a reversal in the the decline of ad $). Tough economic times has decreased ad dollars among all marketing mediums. But online ads will be the first to see new demand from marketers. And some online companies are weathering the bad economy just fine. Google's ad revenue rose 7 percent in the third quarter.

Compare with McClatchy (the U.S.'s 3rd largest newspaper company), where according to the AP article print advertising plunged 32 percent in the third quarter, but its online ad sales increased 3 percent. 

So ad dollars are increasing. Where will money be spent? On targeted ads.

comScore released a study earlier this month that showed most people don't click on display advertisements. As someone who never does either, I don't find this surprising. According to comScore:

The act of clicking on a display ad is experiencing rapid attrition in the current digital marketplace,” said Linda Anderson, comScore VP of marketing solutions and author of the study. “Today, marketers who attempt to optimize their advertising campaigns solely around the click are assigning no value to the 84 percent of Internet users who don’t click on an ad.

This is huge. Online companies rely on advertisements to pay the bills and will need to better target ads to their users if they want to stay in business.

If we want to see the next generation of online content and services, then we need to stay vigilant to convince members of Congress (Boucher) and the FTC not to impose more restrictions on interest-based advertising, such as opt-in requirements.

-Braden Cox

Maine Committee Does the Right Thing, Recommends Repeal of Marketing Law

Sometimes legislators vote along political party interests, sometimes in their self interest, and as we saw in Maine--sometimes legislators will have the constitutional interests of free speech and the commerce clause in mind.

NetChoice traveled to Augusta last week to testify at a joint judiciary committee hearing of the Maine legislature. Our mission: persuade the committee members to repeal the Predatory Marketing Act, which became law just two months ago--and a law so bad that it ranked #1 on NetChoice's iAWFUL top ten list of worst legislation.

The law's potentially sweeping (negative) impact is a big deal. So big that the Maine legislature met out-of-session to re-consider it. It dedicated a webpage to the hearing and received over 30 comments from various interests, including comments from NetChoice.

The Act seriously restricts the exchange of information between Web 2.0 services and their users by making it unlawful to knowingly collect or receive health-related or personal information for marketing purposes from a minor, without first obtaining verifiable parental consent. In effect, the Act restricts advertising that is most relevant to user interests.

We arrived confident but with a "tail between our legs" feeling -- after all, we had just sued the state of Maine and agreed to a court order that said very favorable words about our chances to win on the merits. In the court case, NetChoice was joined by Reed Elsevier, the Maine Independent Colleges Association, and the Maine Press Association in calling for an injunction against the law, arguing that it tramples First Amendment rights while wreaking havoc with interstate commerce.

So here we were, with but a day or two to show how the existing law broadly harms a number of online services. We urged the Committee that any law should focus on actual harm to minors, without prohibiting the legitimate marketing and advertising that makes free content and Web 2.0 services possible. In addition to NetChoice, the committee heard from constitutional scholars, companies, and providers of health-related services.

The committee carefully considered all the testimony, but the right response was evident. Even the bill sponsors agreed that the law needed to be fixed (though there was disagreement as to how much). The committee unanimously recommended to repeal the existing law.

Although there still seems to be a lot of ambiguity about the original intent of the bill, the committee agreed that there are concerns with some marketing practices of healthcare products that are targeted to minors, and that the primary focus of the original bill  was the collection and transfer of personal information of minors for healthcare product marketing. Changes to the bill broadened the bill (it was already very broad) which made it obvious that the bill was unconstitutional and not fixable in present form.

The committee made the following recommendations:

• Leadership should find the earliest available opportunity to allow removal of the entire existing statute
• Should the bill be introduced, there may be ways to make it constitutional if it only applies to the personal information of children 12 and under, follows the requirements of COPPA, is narrowly tailored, and is based on full public hearings to create a sound public record and clear legislative intent.

So we're on track to see the law repealed sometime in January. But we'll also see the introduction of a new bill at that time, too. It is likely that enforcement of existing federal and state laws can address a great deal of the marketing tactics of concern to the bill sponsors.

Still, even after careful consideration of existing laws, there may be some unsavory marketing practices that fall through the gaps of existing regulation. NetChoice and its member companies stand ready to help craft legislation to close those gaps while preserving Maine residents’ access to helpful information and valued online services.

-Braden & Steve

The Worst Internet Laws in America, Take Two

Back in June, we introduced iAWFUL (the Internet Advocates' Watchlist for Ugly Laws) as part of a broader effort to push back against America's worst Internet legislation. Two months have passed, and while many of the bills in the top 10 have changed, they remain every bit as AWFUL.

Earlier today NetChoice unveiled the first major update of iAWFUL, which lists the 10 worst Internet bills/laws in America. The updated list includes five new items, with new laws in the top 2 slots.

But before I get to the truly AWFUL measures in the new list, it's worth mentioning a few that fell off the list, in large part thanks to the pressure that Internet advocates exerted through iAWFUL:

#2 on the June iAWFUL list was a California bill that would have forced unworkable technical restrictions on the posting of photos to social networking pages. The bill's sponsor responded by working with Internet advocates to fix problems with the measure.

#3 on the June iAWFUL list was a bill in Connecticut that would have required sales tax collection by out-of-state businesses that pay commissions to in-state affiliates. The Governor heard our concerns about the impact on in-state publishers and school charities, and has thus far kept this measure off the table in budget negotiations.

#5 on the June iAWFUL list was a Connecticut bill to let police conduct searches of homes where goods were being stored by online dealers – without having to obtain a search warrant. Thanks to iAWFUL publicity, this bill stalled in the House.

This is what iAWFUL is all about: creating positive change through informed advocacy.

Now for the bad news. For every measure that fell off the iAWFUL list, we found a truly AWFUL replacement.

Toping the list is a Maine law that will limit teens’ access to online services and expose valuable websites to a rash of lawsuits. At the end of its last session, the Maine legislature voted to require Web sites to obtain “verifiable parental consent” before asking Maine teenagers to enter just their name and age.

As is so often the case with bad Internet legislation, it seems to have been drafted without any consideration to the unintended consequences it would impose on important, socially valuable websites that provide content, communications and commerce for millions of consumers.

Web sites have no workable way to obtain "verifiable parental consent," so the real impact of the legislation is that teenagers in Maine will be denied access to valuable online tools and services ranging from college finders to the companies that sell class rings. And given the borderless nature of the Internet, its impact could be felt far outside of Maine. On a list of bad laws, this Maine measure takes the top spot.

Another new law follows closely at #2 in the new iAWFUL list. New York City is set to impose its 20% tax rate on hotel reservation service fees charged by travel agents and online travel websites. The city already rakes in 20% on the hotel room charges, but now they want 20% of any fees collected by travel agents, too. As I wrote last month, this is awful for hotels, travelers, and agents who’d have to start filing returns in every city that followed the New York’s iAWFUL example.

Beating back bad Internet laws is like playing whack-a-mole. There always seems to be a new one rearing its AWFUL head.

--Steve DelBianco

The full iAWFUL list for August-2009 is posted here and below:

1. Maine Predatory Marketing Law – What’s wrong? Creates an unprecedented prohibition on collecting information about and marketing to teenagers. At the very end of its session, the Maine legislature passed a sweeping law that regulates a company’s marketing and data collection practices.  Ostensibly modeled from the federal Children’s Online Privacy Protection Act, the Maine law (10 MRSA c.1055) requires “verifiable parental consent” before any company collects or receives personal information of anyone under 18 years old . This law will impact all sorts of websites where teenagers can provide their names and other personal information. It also flat-out prohibits using that information for marketing products to minors. The law imposes strict liability that would prevent common marketing practices used to serve teens information on colleges, test prep services, class rings, etc. Moreover, the law enables private rights of action and sets minimum statutory damages that will encourage frivolous lawsuits where there is no actual harm whatsoever. The law becomes effective on September 12, 2009, but we’re advocating for a stay to examine constitutional questions and unintended consequences. See http://www.mainelegislature.org/legis/bills/bills_124th/chapters/PUBLIC230.asp

2. Hotel Taxes on Online Travel Companies. What’s wrong? Travel sites are being threatened with the wrong tax rate in the wrong jurisdiction.  Local governments want to levy their hotel occupancy taxes on service fees charged by online travel websites.  New York City recently passed an ordinance to impose its 20% tax on these fees, a move that’s opposed by over 100 NYC hotels and by the American Society of Travel Agents. The state of Florida also considered bills to tax service fees as hotel rentals. This is the wrong approach. Service fees should not be taxed the same as a hotel room charge.  If these service fees were to be taxed at all, they would be taxed as a service rendered to the traveler booking the room -- a new tax that would have to be levied by the jurisdiction where the traveler resides. See http://blog.netchoice.org/2009/07/discount-hotel-rooms-a-great-deal-for-you-but-a-disappointment-for-tax-collectors.html

3. New Jersey Social Networking Bill (A 3757) – What’s wrong? It turns social networking sites into social networking police. This bill requires social networking websites to promptly review user allegations of harassment and abusive language, and to provide a report of the result of any review "upon request" from the user. Many sites already have “report abuse” buttons and they already revoke abusive users. However, faced with adverse publicity and cost of lawsuits, many websites will be forced to lower the bar for kicking-off users. This isn’t confined to websites based in New Jersey—it will regulate any website, anywhere, that can be used by New Jersey residents. For more information, see http://blog.netchoice.org/2009/04/new-jersey-bill-requires-myspace-to-be-mypolice.html

4. Revenue Rulings by Colorado and Washington State Tax Administrators Create New Digital Download Taxes – What’s wrong? Discriminates against goods and services sold online versus offline. The Colorado Department of Revenue recently issued a ruling that would impose sales tax on any service or subscription where users can download or print documents or web pages. Services aren’t taxed in Colorado, but this ruling makes them taxable if the service is provided online. Just emailing a document to a customer would make an otherwise nontaxable service into a taxable digital good.

In addition, the Washington Department of Revenue issued a draft rule that taxes all digital products, regardless of how they are accessed (downloaded, streamed, subscription service, networking, etc.). Washington broadly defines “digital good” to encompass a variety of things, even digital schematics of a lawnmower transferred electronically to a repair shop! What’s more troubling is that the ruling suggests that payments for displaying online advertising would suddenly become a taxable event.

5. North Carolina Digital Downloads Tax Bill (HB 558/S 487) – What’s Wrong? Discourages the Greenest Way to Purchase Music and Other Content. This bill would discourage the most environmentally friendly way for consumers to purchase movies, music, and software by applying a sales tax to the digital download of these goods. The bills would also place local businesses that sell these goods at a disadvantage to out-of-state competitors. For more information, see http://blog.netchoice.org/2009/06/yes-north-carolina-lets-be-fair-about-digital-downloads.html

6. North Carolina Tickets Tax Bill (SB 99) – What’s wrong? Taxes the Internet (and only the Internet) resale of tickets. SB 99 violates federal law because it explicitly targets Internet—and only Internet—ticket sales. The Internet Tax Freedom Act Amendment Acts of 2007 (Public Law No: 110-108) provides a moratorium through November 1, 2014 on any “multiple or discriminatory taxes on electronic commerce.” This law bars federal, state and local governments from imposing discriminatory Internet-only taxes such as bit taxes, bandwidth taxes, and email taxes. It also prohibits the sort of prima facie discrimination exhibited by SB 99—“Reselling or offering to resell admission tickets on the Internet…”). For more information, see http://blog.netchoice.org/2009/05/north-carolina-bill-could-be-first-law-to-be-a-multiple-or-discriminatory-tax-on-the-internet.html

7. Federal & State Bills on Organized Retail Crime – What’s wrong? They create unwarranted, extraordinary burdens on online marketplaces. Federal: The Combating Organized Retail Crime Act of 2009 (S 470), the Organized Retail Crime Act of 2009 (HR 1173) and the E-Fencing Enforcement Act of 2009 (HR 1166). State: Massachusetts HB 1344. These bills would mandate online and off-line marketplaces to investigate suspicious sales, place disclosure requirements on online marketplaces, impose obligations upon online marketplaces to police small retailers absent evidence of criminal activity. The Massachusetts bill provides for the forfeiture of any property used or intended to be used to commit or facilitate a violation, and is so broad that it could encompass a company's servers and domain names. For more information, see http://blog.netchoice.org/2009/02/everything-old-is-new-again-big-retailers-going-after-ecommerce-again.html

8. Massachusetts Online Advertising Bill (HB 313) – What’s wrong? It threatens the viability of new business models on the Web. Massachusetts seeks to regulate “online preference marketing” in which information is stored from consumers’ online searches and used by advertisers to target specific advertisements toward them. But there is nothing nefarious or dangerous to consumers about advertising that is more relevant to them. The bill is unnecessary because industry is already working toward self-regulatory best practices. Consumers—not legislators—should decide whether or not this type of service succeeds in the marketplace.

9. North Carolina Advertising Nexus Proposal. What’s wrong? Unconstitutionally expands sales tax burdens to out-of-state businesses. North Carolina is the latest state (after New York and Rhode Island) to rule that Internet advertising triggers a nexus for sales tax collection and remitting obligations for out-of-state businesses. States think that they are expanding their revenue base, but they are wrong—fewer advertising dollars would flow to in-state publishers and websites. Online companies and content providers are still experimenting with new models for advertising and distribution. State laws that use Internet advertising as a proxy for an in-state sales representative will stunt the growth of new business models and distort the evolution of Internet marketing.

10. New York Online Employment Services Taxation Issue – What’s wrong? Discriminates against services provided over the Internet. The New York Tax Department asserts that online job-seeking and resume services may be subject to sales taxation. New York currently taxes “information services” and maintains that the providing of employment information falls within this definition. We disagree. Online companies fulfill the traditional role of a "headhunter" (which is a non-taxable service) only using non-traditional means. The fact that information is provided or utilized digitally does not change the fact that their service is designed to establish an employment relationship between an employer and a job seeker. 

Nothing Nice on This List -- Introducing iAWFUL, a NetChoice Initiative

Some of the biggest threats to the Internet have always come from well-meaning lawmakers looking to "fix" it. And lately, there’s been a whole lot of fixin’ efforts going on.

At NetChoice, we've always been committed to challenging legislation that threatens our vibrant industry. Today more than ever, we need a more unified and systemic approach to combat bad legislation.

That's why we've created iAWFUL, the Internet Advocates Watchlist for Ugly Laws. 

iAWFUL identifies America's 10 worst legislative and regulatory proposals targeted at the Internet. Through iAWFUL, NetChoice will urge citizens to join the fight to defeat bills and proposals that threaten the future of ecommerce and online communication. The list will be continually updated to reflect the most immediate dangers, based on regulatory severity and likelihood of passage.

While misguided Internet legislation is nothing new, the threat that such legislation poses has increased dramatically. The latest breed of legislative proposals are among the most restrictive we've ever seen; they can crop up anywhere, as state lawmakers increasingly take the lead; and they threaten an Internet that increasingly lies at the heart of global commerce and communications.

State-based legislative efforts account for the majority of entries on iAWFUL, a stark indication of the growing push in statehouses to regulate and tax nearly every aspect of online behavior.

Topping the inaugural iAWFUL list is New Jersey's Social Networking Bill (A 3757), which would require the operators of social networking sites to aggressively police their users. In addition to stifling the free exchange of information and communication on social networking sites, the proposed bill would impose a massive burden -- particularly on smaller, upcoming services that lack the resources to take on such an unnecessary and invasive task.

We encourage anybody who cares about the Internet, really to head on over to the iAWFUL site, check the full list, suggest laws that should be included, and join the fight to uphold innovation and Internet freedom. 

North Carolina Targets Digital Goods

 In the Whack-a-Mole game that digital  goods taxation  has become, North Carolina is the latest state in which  proposed legislation has popped up.  Right now, North    Carolina’s House and  Senate are considering bills HB  558 and S 487, bills which would create a new  sales tax  on digitally downloaded goods such as books, consumer  information services, and music, such as iTunes  downloads. as well as expand tax burdens on retailers who seek to advertise on North Carolina properties, via an “affiliate nexus” bill.

 NetChoice has been heavily engaged in these debates, both in North Carolina and around the country. Taxation of digital goods is 1) bad for the environment - digital  downloads don’t require a drive to the store, delivery vans, plastics, paper, or packaging; 2) bad for consumers already struggling to make ends meet in a deteriorating  economy, especially one in which online information and services can be used to help them stretch their already-thin dollars; and 3) encourages the scourge of digital piracy --  people should be encouraged to download content legally. Taxing it and making it more expensive only serves to drive more people to readily available, illegal copies of music and movies.

And bills which seek to require any out-of-state retailer that uses a network of affiliates to drive traffic via advertisements on North Carolina-based websites to collect North Carolina sales taxes, would have the unintended consequence of reducing ad revenues for North Carolina companies, including media outlets, without increasing sales tax collections.

Maryland, Virginia, and New York have all flirted with the idea of imposing onerous taxes on innovative, green, and growing component of the economy. Ultimately, they all decided that the negatives outweighed the benefits, and changed or abandoned their plans. NetChoice will do its best to make sure North Carolina joins them.

Photo credit to terren in Virginia via Flickr

State legislators seem to be always looking out for the kids. That is, until they stop looking out for the kids

In a yet another misguided attempt to grab tax revenues, there’s a Connecticut bill (SB 806) designed to increase collection of sales taxes when Connecticut residents purchase from out-of-state retailers.  The law re-defines what it means to be a “retailer” in the state, and creates a presumption of nexus when an out-of-state company advertises through Connecticut websites.

Unfortunately, it has momentum and, worse, it comes loaded with unintended consequences.  Let’s look at one.

For years, kids around the country have been collecting box-tops from cereal and snack boxes as an easy way to raise money for school trips and new school equipment. Box Tops for Education has raised over a hundred million dollars -- by collecting just a few cents on every box top.

Now, this fundraising function has gone online, with the Box Tops Marketplace, to generate commissions when parents shop at their favorite e-commerce websites. Here’s the Box Tops Marketplaces webpage:

The Box Tops Marketplace has grown to over a hundred participating websites, offering parenting essentials such as pet supplies, shoes, books, clothing, and household goods.

Online stores that participate in the Box Top Marketplace stores give a percentage of sales to support good causes, including several based here in Connecticut.

Thing is, few of the online stores participating in Box Tops Marketplace have any physical presence in Connecticut, and are therefore not required to collect, file, and remit the state’s sales tax on purchases made by Connecticut residents. Would the out-of-state retailers in Box Tops Marketplace continue to work with Connecticut schoos and PTAs if the state enacts SB 806? Or would they follow the example of nearly 200 retailers who simply stopped their online advertising in New York after that state enacted a similar law?

Keep in mind that online and catalog retailers can avoid the unreasonable burden of collecting and remitting remote state sales taxes by cutting-off their ad spending with Connecticut websites. And Connecticut consumers could still buy from these out-of-state retailers who stop advertising on statebased websites. That means SB 806 could have the unintended consequence of reducing ad revenue for Connecticut-based groups like the schools in this example – without increasing sales tax collections.

The Minnesota Affiliate Nexus Tax, or, “How to Kill Online Advertising in One Easy Step”

It seems unfortunately appropriate that, on the same day that millions of Americans are writing tax checks and hustling to the Post Office, we revisit the suddenly tax-happy state of Minnesota, where another Internet tax bill is now being considered by the legislature.

Last week, we jumped into the fray opposing a pair of bills that would apply sales tax to environmentally-friendly digitally downloaded goods.  Today, we take aim at SF 282, which re-defines what it means for a business to have a “nexus” (or physical presence) in the state to include affiliates who advertise on in-state websites to drive traffic to an out-of-state retailer. 

Under SF 282, out-of-state retailers harm Minnesota businesses, particularly local media websites, who depend upon Internet advertising to pay for valuable information and services provided free-of-charge to Minnesota residents.

Consider the case of Minnesota Public Radio/American Public Media. MPR/APM is one of the nation’s premier public media companies, and is the largest station-based producer of programming heard every day by over 16 million listeners of national public radio. It also employs about 500 people in the St. Paul area. To support its Minnesota employees and operations, MPR depends heavily on advertising revenue from both broadcast and online media.

Here’s a screen image of MPR/APM’s home page.

 

One of the participating advertisers shown above is Amazon.com. Another is ArkivMusic.com, a Pennsylvania-based distributor of classical music. MPR is the largest producer of classical music programs in the nation, so ArkivMusic is a natural fit with MPR’s Shop & Support program.

Neither of these advertisers has a physical presence in Minnesota, so neither is presently required to collect, file, and remit the state’s sales tax on purchases made by Minnesotans.

SF 282 would change all of that. So, if these retailers do what more than 200 did in New York when a similar bill was passed – stopped their online advertising – what does this mean for the future of Minnesota-based businesses that rely on online advertising?  In this economy, where every advertising dollar counts, it won’t be a good thing.

Remember, Minnesota consumers could still buy from Amazon, ArkivMusic, and other out-of-state retailers who stop advertising on Minnesota websites. That means SF 282

could have the unintended consequence of reducing ad revenue for Minnesota companies like MPR, without increasing sales tax collections. In no event would new money flow into Minnesota; any incremental sales tax collected just moves from the

Minnesota purchaser to the state treasury, at a time when households are being squeezed by a struggling economy. To the contrary, fewer advertising dollars would flow to Minnesota publishers and websites who employ and serve Minnesotans today.

We are working to educate Minnesota legislators about why this kind of tax is an “all pain, no gain” proposition for state citizens.