My name is Tod Cohen, and I am Associate General Counsel for Global Policy at eBay Inc.  Thank you for inviting eBay to comment on the problem of unnecessary and harmful state regulation of electronic commerce.  We share the concern that much of this regulation does far less to protect the public than to protect entrenched monopolies and oligopolies.   The net result of these regulations is not to protect consumers, but to penalize them.  We applaud you, Mr. Chairman, for calling this hearing to shine a spotlight on this disturbing trend.

eBay is the world's first and largest online trading community.  Founded in September 1995, eBay has become the most popular shopping site on the Internet when measured by total user minutes, according to Media Metrix.  eBay brings together buyers and sellers from across the United States and around the world to facilitate the sale of goods and services by a diverse community of individuals and businesses.  Last year, eBay users transacted over $10 billion in sales.

The vision of Pierre Omidyar in creating eBay was to design the ultimate, efficient marketplace.  Today, with over 50 million registered users worldwide and over 10 million listings, eBay is fulfilling that vision.  Buyers and sellers purchase goods and services easily, quickly, and cheaply.  Whether selling through a bidding process or fixed-price format, sellers on eBay must charge prices that are competitive not just with other eBay sellers, but also with other on and offline retailers.  Similarly, retailers in the traditional "brick-and-mortar" world can no longer base their prices merely on what their local market dictates - they must now consider the price that consumers will pay on eBay and at other Internet sites. 

Such price competition is great for consumers, but troubling to the entrenched monopolists and oligopolists that have been able to set prices unfairly for years without repercussion.  E-commerce forces them to face an unpleasant prospect: competition.  In order to prevent or "manage" competition, these "middlemen" have used their allies in state and local government to apply existing laws and regulations to Internet companies in a discriminatory manner and to enact laws and regulations that treat interstate e-commerce companies differently from offline intrastate companies.  They justify these new, discriminatory barriers with spurious claims that e-commerce may harm consumers.  Far too often, though, these claims simply seek to mask the fact that the middlemen are just trying to protect their "turf."

My testimony today will focus on a few of the barriers that states have created that could inhibit the growth of e-commerce and the need for Congress to begin to examine in more detail the growing problem of unnecessary and harmful state regulation of e-commerce.  Mr. Chairman, the introduction of your bill H.R. 2421, the "Jurisdictional Certainty Over Digital Commerce Act" points the way to a solution to this problem.  By clearly prohibiting state regulation over commercial transactions of goods and services conducted over the Internet, H.R. 2421 would ensure a level playing field for e-commerce companies, thereby improving consumer choice. 

I.       The Issue - State Regulation of Internet Commerce

A.      eBay's Efforts

Already, certain state regulations demand time-consuming and cumbersome efforts by eBay and other e-commerce businesses to achieve compliance.  These state regulations have the effect of penalizing consumers by limiting their access to goods and services offered online and increasing the prices consumers must pay.  Moreover, these "rules of the road" do not fulfill their stated goal of increasing consumer protection.

The scope of goods and services available for sale on the Internet is almost limitless.  On eBay alone, sellers from around the world currently offer over 10 million items for sale - over a million new items a day.  The range of items is staggering: from BMWs to bulldozers, from antique furniture to hi-tech computers, from the oldest 78s to the most recent DVDs.  Currently, over 18,000 categories of goods and services are being bought and sold on eBay.  Every single one of these sales could, potentially, be subject to regulation by one of the 50 states, or even by a county or municipality.  Keeping up to date with all of those potential regulations is impossible; nevertheless, we do our best to determine which federal and state laws apply to potential listings on our site because we believe that it is essential that we create a safe and legal marketplace.

What is a constant struggle for eBay is completely beyond the resources of smaller e-commerce companies, many of which are eBay merchants.  They cannot analyze and develop compliance strategies for the laws of the hundreds of jurisdictions where their customers reside.  Compliance with myriad, often inconsistent state and local laws should not serve as a barrier to entry to participate in the electronic marketplace.

In order to assist our sellers with the sale of certain goods, we created a list of "Prohibited, Questionable and Infringing Items."  This list is found at http://pages.ebay.com/help/community/png-items.html ebay.com/help/community/png-items.html .  It includes 69 categories of goods and services that either (1) may not be listed on eBay ("prohibited items"), including things like credit cards, tobacco, prescription drugs, lock-picking devices and postage meters; (2) may be listed under certain conditions ("questionable items"), such as event tickets, antique slot machines and autographs; or (3) may be in violation of certain copyrights, trademarks or other rights ("infringing items").  Furthermore, in order to educate consumers, our site provides hundreds of pages of explanations of why each category is included and under what conditions, if any, certain items can be sold. 

Many of the items that are prohibited or questionable have been categorized that way because of state laws.  For example, one area where state and local laws are extremely varied, confusing to consumers, and almost impossible to monitor, is the resale of tickets to entertainment events (including sporting events, concerts, and plays).  In order to assist users and to promote lawful ticket sales, eBay has attempted to identify the states that regulate the re-sale of event tickets and to provide its users with that information.  We have identified seventeen such states. 

 State and local ticket regulations range from prohibitions against the sale of tickets at any price above face value to prohibitions against sales at a price of $5 or 25% (whichever is greater) above face value.  When a seller in one of the regulated states attempts to sell an event ticket, an automated disclaimer is added to that seller's item description explaining the applicable state regulation to potential buyers.  This process is a difficult and inefficient experience for both eBay and our users.  eBay has to try to determine both the seller and buyer's respective states of residence based on their eBay registration and their billing information.  Identifying the state of residence of those buyers can be impossible because we do not require buyers to verify their location (just as offline marketplaces do not require proof of residence from a person who enters their store).

This is just one example of the numerous goods that are either prohibited or extremely hard to sell on the Internet simply because of inconsistent State regulations.  Others include travel packages, packaged seeds and antique slot machines.  In each case, inconsistent state regulation is undermining the ability of eBay to provide the ultimate efficient marketplace that our buyers and sellers seek and deserve.

B.                Auction Laws

Beyond the current plethora of state restrictions on the sale of specific goods, there is also the threat that states will try to regulate modes of commerce.  For instance, while eBay is neither an auction site nor an auction house, the listings on its site are often referred to as "auctions" because of the bidding process for which eBay often offers an online venue.  As a result, some state regulators, and the entrenched middlemen with whom they collaborate, want to interpret state auction laws as regulating eBay and other online marketplaces that involve bidding.  Recognizing that in most cases these laws cannot be interpreted in that way, they are also pushing for new laws to hobble their new Internet competition.  The passage of such laws will only harm consumers and protect inefficient business models.  Furthermore, the harm to eBay, our army of entrepreneurs, and our millions of customers could be significant.

Generally, auction laws require an auctioneer or auction house to obtain a license to conduct auctions.  Obtaining such a license in all of the states with auction laws would be cumbersome and very costly.  eBay and other online marketplaces potentially could do this; but millions of individual and small business eBay sellers certainly could not.  Such licensing regimes could require every online seller to obtain state licenses (even in distant states) before he or she can sell goods on eBay. 

In addition, these licensing regimes can be remarkably burdensome.  For example to obtain an auctioneer license in North Carolina you are required to pass an exam to prove your auctioneering "aptitude."  But, you cannot take the exam until you have completed a mandatory 80-hour course on auctioneering. 

The curriculum includes 16 hours of "bid calling, voice control, proper breathing techniques and use and sequence of numbers . . . ."  These arcane requirements make no sense for sellers trading goods and services over the Internet.  Other core requirements include 8 hours of "Auction Law: Rules and Regulations," and a variety of supplemental courses in such subjects as "Tobacco," "Cattle & Livestock," "Heavy Equipment," "Farm Machinery," and most important for Internet sales, "Hygiene, Personal Appearance and Body Language."

Beyond licenses, more significant potential dangers arise because of substantive auction law provisions.  The most onerous of those common provisions is the requirement that the auctioneer or auction house be responsible for the items being auctioned and thus liable for any misrepresentation of the items being auctioned.  Such a requirement makes sense as applied to a classic auctioneer or auction house because they actually take possession of the goods that are being sold; they review the condition of the goods; they authenticate the origins of the goods; they make sure that the auctioned goods are what is being advertised.  To comply, traditional auctioneers charge more than four to five times the price that eBay charges sellers.  In addition, traditional auctioneers charge up to 10% of the final value to buyers.  In all but the most limited circumstances, eBay costs buyers nothing.

Applying this type of requirement to eBay, on the other hand, does not make sense because eBay does not conduct auctions.  It never takes possession of the goods that are sold on its site nor does it make any representations about those goods.  eBay is essentially a "cybermall" that has an unlimited number of storefronts where individuals and businesses can "rent" space to sell their goods and services.  As a cybermall, eBay cannot be responsible for the representations that are made about the over one million new items that are listed each day and continue to remain a viable business.  Requiring eBay to comply with state auction laws would simply destroy the benefits buyers and sellers derive from eBay.  Moreover, the traditional purpose of state auction laws is to ensure that sellers receive the funds from the sale of their property; this is not a problem for eBay since sellers arrange for payment directly with buyers.  Thus, perhaps most important of all, applying these laws would not protect buyers or sellers. 

II.                A Possible Resolution -- The Illinois Compromise

In late 1999, after the Illinois legislature amended the Illinois Auction Licensing Act to apply to the Internet, relevant state regulators contacted eBay to discuss the applicability of Illinois' auction laws to eBay.  Earlier this year, after extensive discussions, the Illinois Office of Banks and Real Estate ("OBRE") agreed to work with us to amend the Illinois law.  Instead of trying to fit a new business model into an existing regulatory structure, OBRE worked with us to craft a separate category of company that was not regulated in the same way as traditional auctions.  The new bill was passed on May 23, 2002, and the governor signed it into law on August 15, 2002.  Instead of a strict licensing requirement, the new law creates a simple registration scheme to allow individuals to contact businesses like eBay if problems arise. 

III.               The Threat Remains

While eBay would prefer not to register in states in which it is not physically located, we understand and respect the legitimate need of states to protect their citizens from bad actors.  As a result, we are not here complaining about a statute like the Illinois registration act, as it does not threaten our business, our sellers, or e-commerce.  We are, however, concerned about states that attempt to apply auction laws to eBay and that generally want to use state legislation and regulation to benefit their local businesses to the detriment of interstate e-commerce.

In the past year alone, several state legislatures have proposed bills that arguably would have regulated eBay and eBay's sellers.  For instance in Missouri, the legislature considered a bill that potentially could have regulated online sales.  The proposed bill defined auctions so broadly that it could have potentially included sales by sellers on eBay.  Likewise, California and New York both proposed revisions to their current laws that were broad enough that they could arguably have applied to eBay and eBay's sellers.  While these bills were defeated, they serve as examples of state proposals that could have substantially impacted e-commerce.  A patchwork of inconsistent state laws regulating the Internet will hinder competitive marketplaces such as eBay that result from this incredible medium.

We recognize that much of this state regulation is vulnerable to legal challenge under several federal constitutional doctrines, as well as for inconsistency with applicable federal statutes, but expensive and interminable litigation is not the solution.  In order to protect America's consumers and allow them to enjoy the maximum benefits from the competition that e-commerce can unleash, Congress needs to enact bills like H.R. 2421 that will prohibit state regulation over commercial Internet transactions.

Thank you for this opportunity to discuss this issue with the Committee today.  I am available to answer any questions you may have.