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Comments of the Competitive Enterprise Institute to the Department of State Concerning its Proposed Rulemaking Amending Apartmen

Regulatory Comments and Testimony

Title

Comments of the Competitive Enterprise Institute to the Department of State Concerning its Proposed Rulemaking Amending Apartmen

COMMENTS OF THE COMPETITIVE ENTERPRISE INSTITUTE TO THE DEPARTMENT OF STATE CONERNING ITS PROPOSED RULEMAKING AMENDING APARTMENT INFORMATION VENDOR RULES

I.D. No. DOS-24-05-00003-P (June 15, 2005)

 

The Competitive Enterprise Institute (“CEI”) hereby submits this comment regarding the Notice of Proposed Rulemaking that proposes to amend the rules regulating apartment information vendors (“AIV”). CEI is a non-profit public policy organization that works on a broad range of regulatory issues, including telecommunications and technology policy. CEI has a long history of promoting consumer welfare by analyzing alternatives to government regulation of electronic commerce.[1]

CEI agrees with the Department of State’s recognition that the rules governing AIVs need updating. Property owners and consumers exchange rental and sale information in ways that dramatically differ from pre-Internet methods. Online apartment information services provide consumers with an increased level of convenience, control, and customization. The NPRM rightly recognizes that existing rules that require hard-copy contracts, written listing submissions from landlords before distribution and multiple filing notices with the Department conflict with these consumer benefits.

However, the proposed rulemaking does not go far enough to recognize the ways in which information itself is a product, to be bought and sold like any physical product or dwelling. It also fails to fully allow web-based apartment information sites to function efficiently online, as parts of the proposed rules still require too much hard copy documentation. Finally, the DOS should work with the legislature to craft legislation that protects consumers though strong enforcement of laws against fraudulent practices, instead of burdening AIVs with upfront rules that limit consumer benefits.     

Mandatory Contract and Escrow Provisions Fail to Recognize that Information is a Saleable Product in Itself

Information is more important to the economy than ever before. Yet proposed Sections 190.1 and 190.2 are serious impediments to the free flow of apartment availability information.

The NPRM defines the customer experience much too narrowly by relying on terms such as “advance fee” and “escrow.” Section 190.2(a) states that an AIV shall not collect a fee “prior to a customer obtaining an apartment.” This language equates customer satisfaction only with the rent or lease of an apartment. However, today’s “information age” highlights the value of information itself and the role it plays in consumer education.

Travel sites such as Orbitz and Travelocity aggregate and compare airline route and pricing information. Product sites such as Pricegrabber.com compare product prices. Automobile sites such as Cars.com and Edmunds provide model and pricing data, shopping advice and detailed car reviews. These sites generally do not charge consumers directly but generate revenues through advertisements and “clickthroughs” from consumers to other websites (such as the product maker’s website).

Online AIVs are another business model for the sale of information, mostly through subscription services. Consumers subscribe to receive real property information in many forms – listing availability, neighborhood location, and viewable photographs of the apartment provide advanced services over a static listing of available rentals. A consumer’s ability to compare, become educated and modify his or her specified profiles is where the real value lies.

The end-goal should be analyzed as the sale of information and not the acquisition of a property. In light of this, mandated escrow agreements and refunds seem unfair and unwarranted. Consumers that prefer such an arrangement can certainly gravitate toward those AIVs that will offer such provisions in their contracts. However, mandating that escrows and refunds be a part of every contract will be in many cases an unnecessary cost of business passed onto consumers.

The Proposed Rules Still Treat Online Apartment Information Sites Unfairly

Online companies package and disseminate information in new ways that respond to consumer’s needs. But old laws have the unfortunate tendency to create problems with new ways of transacting business.[2] This has been true with the old AIV law. The proposed rules, while an improvement, still retain requirements that burden online commerce with little or no consumer benefit.

As an example, Sections 190.1 and 190.2 require actual or electronic signatures. However, businesses and consumers communicate their desire to form a relationship in a multitude of ways. For communications over the Internet, consumers almost always show their assent to contractual terms by clicking “I Accept” or other similar language evidencing agreement. The AIV rules must recognize that a binding contract is formed when this online assent occurs. Indeed, courts of law routinely uphold these “clickwrap” agreements to be legally binding agreements.[3]

The Department of State Should Recommend that the Apartment Information Vendor License be Eliminated or Made Optional

Section 6 of the section entitle “Regulatory Flexibility Analysis” states that there will be no adverse economic impact of this rule. This may be true if the only comparison is with the previous rule. However, the rule itself has significant economic impacts, and therefore the Department of State should instead revisit the entirety of the rules de novo.

One possible route is to make obtaining an AIV license voluntary. If the rules truly provide relevant consumer safeguards and good business practices, AIVs will have an incentive to be licensed to gain an advantage over their unlicensed competitors. Consumers could view licensure as a “good housekeeping” seal of approval. Updated information on each company could be located on a Department of State website. An AIV license would be a de facto mandate for those companies wanting to win over consumers. As counterintuitive as it may seem, a voluntary license may be the best route toward the legislative objective of encouraging licensed operation as specified in Section 2 of the Regulatory Impact Statement.

Whether or not the Department of State implements the proposed rules, it is hoped that it will at least initiate a dialogue with the legislature about the need for fundamental reform of AIV law. As the expert agency for implementing and enforcing the AIV statute, the Department of State can work with the legislature to craft legislation that protects consumers though strong enforcement of laws against fraudulent practices, instead of burdening AIVs with upfront rules that prescribe a method of conducting business that limits consumer choice.

The homepage of the New York State Assembly has a description of the power of the Internet as an information tool. It states that:

Our nation's founders could never have envisioned the scope and breadth of the opportunities the Internet would provide to a participatory democracy. Your representatives … are excited to enhance the public's connection … by making this site available to you.[4]

The participatory democracy of the rental marketplace, where consumers vote with their hard earned dollars, is still at risk of underutilizing the scope and breadth of Internet-based AIVs – even after this well-intended rulemaking. Public policy should not interfere with the ability of web-based companies to provide maximum benefit to consumers.

Conclusion

For the foregoing reasons, the proposed rules should not be enacted into law. CEI encourages the Department of State to continue its inquiry into the changed business dynamics of AIVs due to new information technology. The rise of the Internet creates new ways to enhance consumer welfare that are not reflected in the proposed rulemaking. AIV regulations should be less prescriptive so that the law reflects today’s commerce and remains open to future developments in the ways that businesses provide and consumers obtain information.

Respectfully submitted,

Braden Cox

Technology Counsel

 

[1] CEI has commented upon laws that disproportionately burden online businesses more than traditional “brick and mortar” companies. In particular, CEI has commented on the following: a federal Department of Transportation rulemaking that affected online travel sites; proposed regulations that would mandate background checks for persons listed on Internet dating services; and on the AIV law that is the subject of this proposed rulemaking.

[2] This was the case in California, where a federal court struck down a California law that required websites like ForSaleByOwner.com to obtain a real estate broker’s license to publish real estate advertising and information. The decision represents an important extension of free speech protections guaranteed by the First Amendment to online publishers.

[3] Including a federal court in New York. See Robert Novak, d/b/a Pets Warehouse and Petswarehouse.com v. Overture Services, Inc. Civ. 02-5164 (DRH) (WDW) (E.D.N.Y. 2004). Also see DeJohn v. The TV Corporation International, 245 F.Supp. 2d 913 (C.D. Ill. 2003).