New legislation being rushed through the House has massive privacy and other problems for small sellers
The America COMPETES Act is currently being rushed through the House of Representatives with a full-court press by leadership to finalize the deal. The bill has become a monstrosity, weighing in at 2,900 pages laden with outsized spending proposals and a legislative wish list of unrelated measures. The must-pass nature of the bill has turned it into a Christmas tree adorned with pet projects and legislative propositions that may not be ready for prime time. One such bill is the Stopping Harmful Offers on Platforms by Screening Against Fakes in E-Commerce Act of 2021 (SHOP SAFE Act), buried on page 1,672.
The SHOP SAFE Act was introduced originally as a standalone bill to address concerns over the online sale of dangerous or harmful counterfeit goods. While perhaps well meaning, the SHOP SAFE Act as written is a clumsy cudgel that is costly, harmful to consumers and small businesses, and raises real concerns about privacy. In fact, the bill may do significant harm to smaller online sellers and marketplaces.
New regulatory compliance costs would make it more difficult to compete with the major online platforms that generate sufficient revenues and have the legal team to satisfy the proposed burdensome mandates. As the Electronic Frontier Foundation notes, “The current bill language could be interpreted to cover anything from Craigslist to Gmail—basically any online service that can play a role in advertising, selling, or delivering goods. This isn’t just some reach reading that we came up with; at least two anti-counterfeiting organizations supporting SHOP SAFE have urged Congress to make sure it applies even to Facebook Messenger and WhatsApp.” Indeed, the bill is so imprecise and poorly written that everyone is at risk: someone trying to sell a damaged Gucci on Poshmark, or someone selling an old bicycle on a messaging service. And everyone would have to show their government ID just to offer anything for sale online.
The SHOP SAFE Act overturns a longstanding legal precedent and creates a new contributory liability for platform owners and anywhere else goods are sold online, including email providers, forcing them to police third party vendors to ensure they are not selling counterfeit goods. Earlier, the court found that eBay was not liable for sales of counterfeit goods, especially since the company honored requests to take down items identified as counterfeit. The new law, in contrast, holds platforms liable for any seller who is selling counterfeit goods whether or not the platform knew.
The only way to avoid the new liability is for platforms to comply with an onerous and costly list of new mandates, beginning with the collection of data from third party sellers, including “government-issued identification, the identity, principal place of business, and contact information of the third-party seller.” Additional requirements to avoid new liabilities for platforms include taking “reasonable” steps—something undefined and unknown to platforms and sellers—to verify goods are authentic, having third parties attest that their products are not counterfeit, as well as a host of other burdensome mandates. Collecting and storing this data raises issues of data privacy and data security while also increasing costs of facilitating third-party sellers.
Perhaps one of the most significant cost-drivers of compliance would be the need to develop automated screening processes that also allow electronic notifications of counterfeit goods as well as a means to disable and remove such posts. This requirement in particular would be much harder for smaller platforms to fulfill. This entails developing search algorithms that are costly and imperfect. Indeed, algorithmic searches used in other areas, such as taking down pirated content under the Digital Millennium Copyright Act (DMCA), highlight some of the potential problems, including taking down legitimate products and the strategic use of take downs by competitors to raise the costs for their rivals. Systems created to comply with SHOP SAFE face similar challenges.
If firms have any chance of avoiding liability, they must pay for both these new screening systems as well as continued human oversight. This puts smaller platforms at a significant disadvantage that will make it more difficult to compete with larger platforms, which should raise the eyebrows of any legislators with an eye toward antitrust concerns. The legislation also creates a “three strikes” approach for banning sellers who are notified of three separate counterfeit listings in one year. Platforms are required to make sure such violators do not re-register on their sites.
Aside from the many costly new mandates this legislation imposes on e-commerce platforms, the bill itself is poorly constructed, with vague language referring to “reasonably proactive measures,” “reasonable investigation” and a number of other “reasonable” requirements that are never clarified. These will no doubt be the source of ongoing legal disputes that will further raise the costs of this proposed legislation.
It is not as if there are no laws to challenge the sale of illegal goods or harmful products; counterfeit goods existed long before the emergence of online platforms. This legislation is more about who should bear the burden of identifying and eliminating counterfeit goods. As noted by economist Ronald Coase, the duty of care is ideally imposed on the party that can avoid harm at the lowest cost. In the case of online sales of counterfeit products, it is by no means obvious that imposing that duty of care on the platforms is the Coasian solution. Rather, it may more accurately represent a wealth transfer from platforms to famous brands who are seeking legislation to shift their enforcement costs onto the platforms.
The SHOP SAFE language included in the America COMPETES Act imposes substantial new costs on digital sales platforms that may drive many from the market, leaving only larger platforms that have the resources to comply. This reduces competition and restricts consumer choice while driving costs up. None of these actions help America compete, which raises serious questions about its inclusion in the bill.
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