TCS Daily

Let the Free Market Resolve Online Complaints, Privacy Concerns

By James K. Glassman - December 18, 2000 12:00 AM

A private network could best handle consumer complaints for international transactions, says Duncan MacDonald, former general counsel for credit card operations at Citibank who is advising the American Institute for Contemporary German Studies on the creation of such a system. But, he tells Tech Central Host James Glassman, "we are only going to get these dispute resolution mechanisms off the ground if we get the lawyers and the governments out of the way." MacDonald further argues the Constitution provides the best privacy protection while many privacy proposals may violate the First Amendment.

James K. Glassman: In an article about online privacy for the Competitive Enterprise Institute, you wrote: "Competition forces entrepreneurs to listen to consumer demands and supply what they want." You're now involved with developing a private online dispute resolution network for international e-commerce transactions. But smart companies have their own customer service departments to deal with complaints? So, where is the demand for this system going to come from?

Duncan MacDonald: As a matter of fact, the proposal by the American Institute for Contemporary German Studies, which I am working with, is to develop an online system for trans-Atlantic e-commerce transactions that would mimic a customer service department. It's needed because the bet is that consumers are not using trans-Atlantic commerce to the full extent that they should because they have some fears. One of the fears is that if something goes wrong that they want to know that across national borders they are going to be able to get some remedy.

Glassman: What kind of remedies would this new network provide?

MacDonald: The remedy could be any of what we call the 4-Rs - refund, repair, replacement or rectification, or something like that. Now, people may not trust a customer service department in a foreign jurisdiction. If you're a consumer in Hamburg, Germany, for example, and you want to buy from somebody in Minneapolis, you have in the back of your head the thought that if something goes wrong, how do I reverse this thing and protect myself. The same thing applies if you are in Miami and you're going in the other direction. So the thought is to have a third-party neutral, a private system out there that is going to have an understanding with both parties going in that if there is something wrong they'll honor the decision of the third party. That's the reason for proposing this network.

Glassman: Who's involved in this network and how will it work?

MacDonald: Let me back up a little. I'm doing this with a think-tank at Johns Hopkins University, but it is connected very much with Germany. One of the roles is to help promote trade between the United States and Germany. So, we have a list of a number of German multinational companies that work in the United State and a number of American companies that look in the other direction. The proposal was to create a kind of a helix, if you will, or a two-part joint venture. One part of the helix, or venture, is to get some German and American companies that are online and deal with consumers to agree to third-party alternative dispute resolution, or ADR. At the same time, the second helix, or venture, is to connect some universities in the United States and Germany that already have created dispute resolution systems. We then intertwine the companies together with the universities, with the universities playing the role of a neutral party to mediate disputes.

Glassman: Why use universities rather than a private business?

MacDonald: Part of the reason that we propose universities as opposed to private parties for this is, for one thing, that we simply want to do a test on it. The thought is that it is easier to walk away from universities. Secondly, the thought is that consumers are not at all familiar with what neutrals do and what ADR is all about And if they see XYZ company is the a neutral, we suspect that is going to create a brand identity problem for them. But if we can in some way suggest to a consumer in the United States that they can use the University of Texas Law School as a neutral, or somebody in Germany can use Frankfurt University, that they will more quickly understand and breach that gulf and have enough sense or confidence to go forward with transactions.

Glassman: Do you see any role for the government in handling this?

MacDonald: Absolutely none. In fact I was at a conference in The Hague this week that was put on by the OECD (Organization for Economic Cooperation and Development) and the International Chamber of Commerce, and part of the reason for the conference was to talk about online dispute resolution and to invite various parties that are starting to look at it. Virtually every proposal that had been brought there, whether it was a government proposal coming out of Australia or Japan or private parties like Square Trade in San Francisco and so on, all were set up as quasi-legal systems. What I argued, in a radical departure from all these things, is that we are only going to get these dispute resolution mechanisms off the ground if we get the lawyers and the governments out of the way. That's because all the lawyers and government do is argue about whose law applies, how can things be enforced, how do you protect consumers without a myriad of other laws, etc., etc. And my argument is that companies on their own should reach across borders and create joint ventures. That's legal. Companies on their own could even agree to combine their back-office customer service departments to provide joint customer service. But because there are some customer service disputes that are just intractable, not quickly resolvable, or where consumers want some way to vent their concerns, why not go to a third party who will look at it the way a customer service department normally looks at it, but as a third party, not staff?

Glassman: Is there evidence consumers want this?

MacDonald: There's a bet, based on some of the studies we've done, that by doing so we will pick up a large percentage of consumers who otherwise would either abandon the transaction, go into the legal system or not use e-commerce any more. And we think that the number would be high. The whole idea is to get away from using lawyers and getting ground down on legal considerations.

Glassman: It is remarkable to me that the Europeans, especially the Germans, would be interested in this kind of idea. Why are they?

MacDonald: The reason why the German regulator types, the university types and others are interested in it is because, if the consumer is not happy with the decision or recommendation of the neutral, that consumer will have a right to go into the legal system.

Glassman: Why not make the arbitration totally binding?

MacDonald: The only reason we are saying we are willing to concede that is that at the end of the day, if it is a trans-border transaction, consumers have no options to go over to the other system. We are the only game in town. That's because the legal enforcement system, whether in the United States or Germany, doesn't work. It's too expensive, it's slow, it's uncertain, and that is doubly so if you're in Germany buying from somebody in the United States or, vice versa, someone in Miami looking to Dusseldorf.

Glassman: A big issue nowadays is privacy, which can be very contentious. Would your network deal with privacy disputes raised by consumers?

MacDonald: As a matter of fact, the original proposal derives from some work I was doing across borders on data protection. I proposed several years ago that we think of some cross-border online system to deal with disputes, and now I am applying that to the e-commerce side.

The Europeans are obsessive about privacy. And it just seems to us that we have to throw in the privacy disputes to buy more support, especially from the privacy advocates in Europe. It also makes it easier for us to sell it to everybody. It is working that way. It gets back to the point I made a second ago: Some people would look at it and say, "Wait a second. You're giving away the shop. You're going to have all these crazies in Europe asserting privacy claims." But my view is that that depends on the blueprints for the system and the standards that you have put in place to define what a dispute is and when someone can invoke it.

I know from my experience with Citibank, where we processed the information for about five million consumers -- European consumers and South Dakotans, too -- and I don't think a consumer ever raised a hand complaining about an invasion of privacy. Europeans simply can't get enough privacy protection, and yet you have scores of major companies, such as Citibank, that their experience is not one consumer ever raises a hand, ever says there is a dispute, and ever asks for a remedy. You say to yourself that consumers just probably have a bigger comfort zone than you think. But say you get two or three complaints a year; the next question is what kind of remedy would they be looking for? My view is that in creating the architecture for this system that the neutrals will have to understand there are some things they'll just have to say they can't decide.

Glassman: On the issue of privacy and business, you discussed in your article that the best privacy protection is the First Amendment. Under the Griswold v. Connecticut decision 35 years ago against government interference in the distribution of information about contraception, the First Amendment protection was basically a protection against government invading people's privacy. In other words, you seemed to say that government was the biggest threat to privacy rather than business. Is that correct?

MacDonald: Unequivocally in history it has been public organizations, whether governmental, religious or whatever, that have always been the greatest violators of privacy. That's because their power is centralized. In an economy, especially a free economy, power is fragmented and diffused, so there is always the possibility that somebody is going to checkmate somebody else. Consumers have choices. They can run and deal with other players and so on. But I would argue that Griswold was a strange decision in the sense that whatever it meant 35 years ago, just by nature of precedents by the Supreme Court and constitutional jurisprudence, it arguably means something different today. I believe it was a business case back in the 1960s, but everybody at the time viewed it as a social-political case. Today I am saying that it should arguably be looked at as an economic decision.

Glassman: Could you explain that a little bit more, so people can better understand what Griswold was all about?

MacDonald: Connecticut had a law back in the 1960s that prevented virtually anybody from providing information about birth control mechanisms, contraceptives in particular. And Planned Parenthood and some doctors started giving that to patients and to consumers. And they were doing that literally on a business basis, certainly in the case of the doctors. The state prosecuted them for violating a criminal law. The case went up to the Supreme Court of the United States, and what the court, in all the separate opinions of its justices, essentially said was that there was a privacy right that emanates from the Constitution and that protects what these guys were doing. I looked back at this and found that it was a business decision, but what came out of it was mainly social jurisprudence. You got Roe vs. Wade on abortion, another decision on pornography. And what it did was open up a Pandora's Box, which, not withstanding the desires of some, can't be closed anymore. My view, though, is that the business community ought to seize on it and use it as an argument against government interfering in their operations.

Glassman: Are you worried that you might be a little late on this?

MacDonald: Very late.

Glassman: Why, because lawyers are already starting to sue online companies, or what?

MacDonald: I look at the privacy debate and say to myself that the emotional side of it seems to have been won, but there is a lot of despair in the air. And an awful lot of people, especially policy makers policy makers sit back - including, if I am not mistaken, even Justice Sandra Day O'Connor and Chief Justice William Rehnquist - and start talking about how they are worried about their own privacy rights. And I think that the privacy advocates have everybody convinced that something terrible is happening, or is going to happen to them. It's never defined what that's going to be, but they have won the emotional debate and they are affecting policy and arguably law. There already has been legislation on the state level and the national level on privacy in financial services going back 30 years. And there is now some evidence that defenses are starting to be put saying there are constitutional issues. I am involved in another project at a major think-tank. We're putting together a conference on privacy and the Constitution, it's going to involve leading constitutional scholars, leading law firm practitioners, the kind that would be defending or prosecuting cases like these, and to force consideration of constitutional issues. Because my thought is that if you get all the old-line constitutional scholars, like Burt Neuborne from New York University, they are going to have to say on this what they said in the past on the commercial free speech case with the left. And that is effect is that in order to protect our view of free speech, we have to open the door on the commercial side. And I'm saying to them, "You've got to beat the system on that. You did the right thing on the commercial free speech thing, you have to be consistent on this privacy issue because it is exaggerated."

Glassman: O.K. Let me just ask you my last question. You also provide legal counsel to I-Privacy. What is it?

MacDonald: I'm an outside general counsel. There are a lot of folks that do those things. They had asked me to do that and I'm doing it. I-Privacy is a company that provides software tools for consumers to protect their privacy online. So it's the private approach versus the government approach. It is one of those things where you hope against hope that the government does not try to impose a protection that does not protect. As we talked about in the beginning, these entrepreneurs listen and they develop tools that do protect consumers.

Glassman: Well, thank you, Duncan MacDonald.

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