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Vol. 72, No. 6, June 1999

Regulating Electronic Commerce

By Michael K. McChrystal,
William C. Gleisner III, and Michael J. Kuborn

hen it comes to money talking, electronic commerce is the hottest topic of conversation among venture capitalists in the Silicon Valley as well as among government officials in Washington, D.C. Internet companies remain the darlings of investors, attracting 72 percent of the nearly $2 billion invested last year in start-up companies in the Silicon Valley.¹ And in Washington on Nov. 30, 1998, while awaiting his trial on impeachment charges, President Clinton was able to praise "the broad bipartisan coalition of members of Congress" that helped the administration move forward on its framework for global electronic commerce.²

In Wisconsin electronic commerce recently was given a boost by a court of appeals decision. In Walgreen Co. v. Wisconsin Pharmacy Examining Board³ a pharmacy was censured by the Pharmacy Examining Board for accepting prescriptions by email. Section 450.11(1) of the Wisconsin Statutes⁴ permits pharmacies to accept prescriptions from physicians in a writing signed by the physician or orally, over the phone. The pharmacy board concluded that an email transmission of a prescription is a writing and therefore must be signed. The court of appeals disagreed, based on the "simple facts of computer transmission." The court characterized the computer communication this way: "The prescription is put into a computer as text and the message is then electronically transmitted to the pharmacy's terminal, much as a telephone call - or a facsimile - would be." As such, it is more akin to a telephoned prescription and need not be signed. The court even noted the superiority of sending in prescriptions by email: "Computer transmission presents an advantage over an oral prescription order ... where the listener must record the order on paper - by greatly reducing the risk of misunderstanding because the prescription appears in written form on the pharmacy's terminal." As this case suggests, electronic commerce often provides an awkward fit under existing rules designed for other modes of commerce.

Electronic commerce has been variously defined, as this federal government definition acknowledges:

"Definitions of electronic commerce vary considerably, but generally, electronic commerce refers to all forms of commercial transactions involving organizations and individuals that are based upon the processing and transmission of digitized data, including text, sound, and visual images. It also refers to the effects that the electronic exchange of commercial information may have on the institutions and processes that support and govern commercial activities. These include organizational management, commercial negotiations and contracts, legal and regulatory frameworks, financial settlement arrangements, and taxation, among many others. The goal of electronic commerce is the creation of a new kind of commercial environment in an electronic milieu, in which many of the separate 'steps' that normally intervene between a buyer and a seller in a commercial transaction can be integrated and automated electronically, thus minimizing transaction costs."⁵

The contemporary paradigm for e-commerce increasingly involves consumer transactions on the Internet, but older methods of electronic commerce also are included, such as electronic fund transfers and credit card transactions.

Electronic commerce has the potential to change the organizational framework for doing business. Smaller firms, perhaps organized in a less hierarchical fashion and using employees working from remote locations, may assume a larger role. Information and communication services become even more central in the e-commerce economy than in the traditional economy. Capital costs are different. The skills sought in the workforce and the terms of workers' employment also may prove to be quite different. In short, e-commerce is likely to be different from business as we know it. And this, of course, has serious legal ramifications.

A recent survey discloses that more than half of consumers regard privacy and security in electronic commerce as their biggest concerns.⁶ Businesses and governments also are concerned about how those issues will be addressed, technologically and legally. Other key legal issues include fraud (that is, authenticating the identity of parties to a transaction), taxation, the protection of intellectual property, jurisdiction of courts, and the regulation of electronic marketing (for example, "spam").

Privacy

Electronic transactions create a more enduring record or trail than face-to-face cash transactions. Electronic records can be compiled to contain some of the most intimate details of a person's private life. They can be used (or transferred to others) for marketing or other purposes that may invade the consumer's privacy.

Unlike the European Union (E.U.), which comprehensively regulates the collection and use of personal data, our approach legally consists of a hodge-podge of industry-specific legislation, common law principles, and commercial codes of conduct. Electronic commerce is economically attractive, in large part, because information flows so freely. Many consumers, though, avoid electronic transactions because of a fear that their privacy will be inadequately protected, both as a matter of commercial practices and the inadequacy of legal protections.

Authenticating the Identity of the Parties

When credit card transactions occur on the Internet, consumers need to know that they are providing their card numbers to someone they can trust, and sellers need to know that consumers are who they claim to be. The use of passwords and "PINs" provide some protection, but because electronic communications can be illegally intercepted, most experts agree that greater protection is needed. Electronic authentication technologies, also called electronic (or digital) signatures, rely on various forms of encryption to establish the identities of transacting parties and provide heightened security.

Encryption technology and digital signatures are steadily achieving legal recognition. Recent legislation in Wisconsin establishes that if an electronic signature meets standards of uniqueness, security, and verifiability, it will be given legal recognition equivalent to a handwritten signature.⁷ Many states have adopted comparable legislation.⁸ As better electronic signature technologies and practices come into more common use, the problem of authentication may be substantially solved, at least for nonroutine transactions and transactions involving frequent trading partners.

Encryption

Encryption also enhances the security of electronic communications. Currently, though, encryption is the subject of heated debate in political and legal circles. Many business concerns have joined with privacy advocates in criticizing Department of Commerce regulations that forbid "the transfer of certain encryption software outside the United States. Unless very difficult precautions are taken, posting software on the Internet is an export."⁹ The purpose of these prohibitions is to impede access by terrorists and other criminals to communication software that would inhibit or destroy the government's ability to intercept and interpret communications. Strong encryption would enable criminals to conspire under the government's very nose. On the other hand, strong encryption also would permit individuals and businesses to engage in more secure electronic commerce. The challenge is to strike the right balance.

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