July 26-27, 1999
Montreal, Canada

The EU Proposes a New Legal Framework for Electronic Commerce

David Church, Partner
Mike Pullen, Associate

Dibb Lupton Alsop, Brussels

Introduction

The global infrastructure for electronic commerce is very new and is currently undergoing rapid growth. This can be seen from a number of indicators including the share price of internet companies. It is still not clear how electronic commerce will be regulated as it is a virtual medium which transcends national borders. The regulation of electronic commerce has been discussed in international forums such as the WTO, the OECD, and WIPO. Over the next decade advances in electronic commerce will affect almost every aspect of life. A wide range of products from books to pharmaceuticals are already available on line. Furthermore new technology is making it possible to pay for goods and services over the internet. This is leading to a system of virtual money which can be stored on smart cards and other technologies which provides the basis of electronic commerce.

On the 18th November 1998, the European Commission ("Commission") proposed legislation in the form of a draft directive ("Directive") designed to create a legal framework for electronic commerce within the EU. The aim of the legislation is to facilitate cross border e-commerce transactions.

The Directive incorporates the fundamental principles of the internal market, country of origin and mutual recognition. These principles have been reaffirmed by the European Court of Justice ("ECJ") in a number of cases involving the free movement of goods and services beginning with the landmark Cassis de Dijon case.

If the Directive is adopted on the basis of the country or origin principle it will mean that businesses using e-commerce will only have to deal with one law (that of the country in which they are established) rather than up to 15 different laws of the EU Member States. This is due to the fact that the concept of mutual recognition obliges EU Member States to accept that the laws of other Member States provide a level of protection equal to their own law even if the laws of the other Member States are different or less restrictive of certain activities.

The Main Elements of the Directive

The Directive makes proposals in the following areas:-

1. The establishment of electronic commerce service providers

   The Directive aims to address the current legal uncertainty surrounding the issue of establishment by providing a definition of the State of establishment in line with principles established by the EU Treaty and the case law of the ECJ. It also prohibits the use of prior licensing or special authorisation schemes for e-commerce services and sets out certain information requirements that the service provider must give in order to ensure the transparency of its activities.

2. Commercial communications (advertising, sponsorship, direct marketing, promotions etc)

   The Commission believes that commercial communications are a fundamental part of the majority of electronic commerce services. Therefore the Directive defines what constitutes "commercial communication" and makes such communications subject to certain rules regarding transparency in order to ensure consumer confidence and fair trading. The Directive requires e-commerce businesses to ensure that commercial communications by e-mail are clearly identifiable in order to prevent harmful intrusion into consumer privacy.

   The Directive also states that regulated professions (eg lawyers and accountants) should be permitted to use commercial communications providing they comply with the professional codes of conduct drawn up by national professional associations.

3. Online conclusion of contracts

   The Directive states that electronic commerce will not fully develop if the conclusion of on-line contracts is hampered by certain formal and other requirements (eg language requirements) which are not adapted to the needs of on line business. The Directive proposes that Member States should be obliged to adjust their national legislation to facilitate online contracts. In addition the Directive clarifies the moment of the conclusion of a contract in certain cases.

4. Liability of intermediaries

   The Commission recognises the need to clearly identify the legal liability of on-line service providers for transmitting and storing third party information. The Directive limits service provider liability by using the mechanism of a "mere conduit" for intermediary activities.

5. Implementation

   The Commission is seeking to ensure that existing EU and national legislation is effectively enforced. The Directive intends to do this by using the principle of mutual recognition and the development of codes of conduct at EU level. Furthermore it aims to increase cross border co-operation between national regulatory authorities in the Member States and the setting up of an effective cross border dispute resolution system.

A Summary

Article 1

Article 1 of the Directive sets out its objectives and scope. It clarifies the primary objective which is to ensure that after the implementation of the Directive, e-commerce services will be able to fully benefit from the free movement of services between Member States of the EU.

Article 2

Article 2 gives definitions of what constitutes "information society services". This is in accordance with the definition laid down in Articles 59 and 60 of the EU Treaty. Information society services are defined as "any service that is normally provided for remuneration at a distance by electronic means and at the request of a recipient of services". The Article also gives definitions of the terms "at a distance" by electronic means and "at the individual request of a recipient of services".

The provision of internet television broadcasting is expressly excluded from the definition as this is governed by Article 1(a) of directive 89/552/EEC.

There is a certain amount of uninformed opinion surrounding the definition contained in Article 2 which holds that services not provided for remuneration paid by the recipient fall outside the scope of the Directive. This is incorrect as the definition of services provided for remuneration is taken from Articles 59 and 60 of the EU Treaty and re-affirmed by the ECJ in Case 352/85 Bond van Adverteerder et al where the ECJ stated that the term provision of services for remuneration covered services provided to recipients where the remuneration was not given by the recipient but by a third party eg an advertiser paying a TV broadcaster to transmit advertisements to the public is a service for remuneration despite the fact that the service is not paid for by the recipient.

Article 2 also gives a definition of service providers which encompasses both natural and legal persons.

Paragraph (c) of Article 2 defines the concept of "established service providers" This definition allows the Commission to determine the Member State in whose jurisdiction the service provider is situated. It is based on Article 52 of the EU Treaty and the judgement of the ECJ in case C-221/89 [1991] ECR I-3905 at paragraph 20 where the ECJ stated that the concept of establishment within the meaning of Article 52 of the Treaty involves the actual pursuit of an economic activity through an establishment in a Member State for an indefinite period.

This definition is based on criteria regarding the nature and stability of the economic activity rather than formal legalistic criteria such as a letter box address or the establishment of a technical method of transmission.

It should also be noted that in certain circumstances the ECJ has held that a provider of services can be established in several Member States. The ECJ has held that the Member State in whose jurisdiction the service provider falls is the one where the service provider has its centre of activities (see case C-56/96 [1997] ECR I-3143 at paragraph 19).

Article 2 also contains a definition of a recipient of services again based on Articles 59 and 60 of the EU Treaty.

Article 3 - internal market

The object of this Article is the implementation of the freedom to provide services under Article 59 of the EU Treaty. This is based on determining the Member State responsible for regulating the activities of e-commerce (the country of origin) and the prohibition on other Member States restricting the freedom of e-commerce service providers to provide services (mutual recognition).

The Member State in which the service provider is established pursuant to the definition in Article 2 is required to ensure that the service provider's activities comply with the Directive as implemented into its national law.

This Article does not override the 1980 Rome convention on applicable law for contractual obligations or the 1960 Brussels convention on jurisdiction and the enforcement of judgements.

Section 1 - Establishment and information requirements

Article 4 - The exclusion of prior authorisation

The purpose of this Article is to reinforce the principle of freedom to provide services by facilitating access to the supply of services on the internet. It constitutes a "right to a site" which can be exercised by any natural or legal person wishing to provide e-commerce services over the internet.

In short this provision prevents Member States from maintaining and introducing any legislation requiring prior authorisation or licensing before internet sites can be set up for the provision of electronic commerce services.

However this Article does not override existing requirements for professional qualifications or authorisations by a professional body for the provision of services which are not exclusively aimed at e-commerce services.

Article 5 - general information to be provided

This Article sets out the minimum information (e.g. the name, place of establishment and e-mail address and VAT registration which the service provider must give to consumers. It supplements the information requirements which exist in directive 97/7/EC on the protection of consumers in relation to distance contracts. It also extends the provisions of the distance selling directive by placing the obligation on the service provider to provide the information even where no contract is to be formed.

The information in question must be easily accessible from the service being provided eg by clicking on an icon or a logo with hypertext link to the page containing the information which should be visible on all the pages of the website.

Prices indicated in Euros will meet the price information requirement laid down in this Article.

Section 2 - Commercial Communications

Article 6 - Information to be provided

This Article establishes the principle that commercial communications must be clearly identifiable as such by consumers eg commercial communications should not be hidden in the form of an advertorial.

The person on whose behalf the commercial communication is carried out must also be clearly identified eg the banner could carry the name of the company or an icon or logo with a hypertext link to the page containing this information which should be visible on all the pages of the site.

Promotional offers must also be transparent and must give the consumer sufficient information so as not to leave any ambiguity as to their nature and the conditions of entry and participation.

The rules and conditions of entry to competitions and games must be clearly indicated to consumers by means of a logo or icon with a hypertext link to the relevant web page.

It should be noted that the only competitions allowed under the Directive are those related to commercial communications. Gambling is expressly excluded from the scope of the Directive (see Article 22(1)).

Article 7 - Unsolicited Commercial Communications

The aim of this Article is to ban spamming practices ie the sending of unsolicited e-mail to consumers. This Article obliges Member States to enact legislation requiring unsolicited commercial communications to have a specific message on the envelope so that the recipient can immediately identify it as a commercial communication without having to open it.

Article 8 - Regulated Professions

This Article sets out the general principle that members of regulated professions are permitted to use commercial communication, to the extent necessary for these professions to be able to provide e-commerce services, provided that such communications meet the professional rules of conduct applicable to them.

The Commission has also reserved the right to define what type of information is compatible with the professional rules of conduct in the Committee set up under Article 23.

Section 3 - Electronic Contracts

Article 9 -Treaty of Electronic Contracts

This Article requires Member States to change their legislation in order to allow contracts to be concluded by electronic means.

Member States will have to:

1. Repeal provisions which expressly prohibit or restrict the use of electronic media for contracting.
2. Refrain from preventing the use of certain electronic systems as intelligent electronic agents for making a contract.
3. Refrain from creating a two tier system which gives electronic contracts less legal effect than paper contracts.
4. Repeal formal contractual requirements which cannot be met by electronic means or create ambiguities when applied electronic contracts.

Please note this does not affect the requirement of a signature which is governed by the proposal for a directive on the common framework of electronic signatures.

For example, statements that the contract be "written" or that a document can be presented or that there is an original copy of the contract or that the contract must be "printed" or "published" will have to be amended as this will hinder electronic contracting.

Requirements as to human presence ie that contracts be negotiated or concluded by natural persons or in the presence of both parties will also need to be changed to allow electronic contracting.

This Article also contains a number of derogations from the general rules in respect of:-

1. contracts requiring the involvement of a notary;
2. contracts which must be registered with a public authority to be valid;
3. contracts governed by family law;
4. contracts governed by the law of succession.

The Member States are required to submit complete lists of excluded contracts to the Commission.

Article 10 - Information to be provided

In order to achieve a high standard of fair trading and consumer protection this Article sets out the different steps which are necessary to conclude an electronic contract.

It requires Member States to enact legislation for concluding an electronic contract using a mechanism to ensure that the parties can give full and valid consent.

Article 11 - Moment at which contracts is concluded

The aim of this Article is to define with certainty as to when a contract is concluded in situations where:-

1. the contract is concluded when the recipient of the service:
   • has received from the service provider, electronically, an acknowledgement of receipt of the recipient's acceptance; and
   • has confirmed receipt of the acknowledgement of receipt;
2. acknowledgement of receipt is deemed to be received and confirmation is deemed to have been given when the parties to whom they are addressed are able to access them;
3. acknowledgement of receipt by the service provider and confirmation of the service recipient shall be sent as quickly as possible.

Section 4 - Liability of Intermediaries

Article 12 - Mere conduit

Article 12 creates an exemption from liability for service providers in situations where they act as a mere conduit for the transmission of information over a communications network.

This exemption covers both cases in which a service provider would be directly liable and cases where the service provider would be considered secondary liable. This exemption from liability also includes criminal liability e.g. a service provider would not be liable for the dissemination of pornographic material from a website connected to its system where it merely provided a conduit for the dissemination of the information over the internet.

In order to qualify for the exemption service providers must meet certain pre-conditions. These are as follows:

1. The service provider must not initiate the transaction. This means that the transaction must not be under the control of the service provider.
2. The service provider does not select the receivers of the transmission.
3. The provider does not select nor modify the information contained in the transmission.

Article 13 - Caching

This Article governs temporary forms of storage which is referred to as "systems caching". This form of storage is used by service providers to enhance the performance of networks and does not constitute a separate use of information transmitted over the network therefore copies of information made available on line by third parties are temporary kept in the operators system or network for the purpose of facilitating the access of subsequent users to the information. These copies are made by technical or automatic process and are intermediate between the network where the information was originally made available and the final user. In such cases the service provider shall not be liable providing that the following conditions are met:-

1. the provider does not modify the information;
2. the provider complies with conditions on access to the information;
3. the provider complies with rules regarding the updating of the information, specified in a manner consistent with industrial standards;
4. the provider does not interfere with the technology, consistent with industrial standards, used to obtain data on the use of the information; and
5. the provider acts expeditiously to remove or to bar assess to the information upon obtaining actual knowledge of one of the following.

Article 14 - Hosting

This Article sets a limit on the liability of service providers as regards the activity for the storage of information provided by recipients of the service or at their request (e.g. the provision of server space for an individual website).

The exemption from civil and criminal liability cannot be claimed if the service provider knows that the user of its service is undertaking illegal activity. The test is whether or not the service provider has actual knowledge of the illegal activity.

The exemption from liability as regards complaints for civil damages will not be granted if the service provider is aware of the facts and circumstances from which the illegal activity is apparent. The test here is constructive knowledge.

Service providers will not lose the exemption from liability if on obtaining actual or constructive knowledge of illegal activity they act expeditiously to remove or disable access to the information. The Commission also actively encourages industry self-regulatory mechanism including the establishment of codes and conduct and hotline mechanisms to report illegal content.

Article 15 - No obligation to monitor

Article 15 states that service providers are under no obligation to monitor third party content placed on their system. However this rule does not prevent a court or a law enforcement agency from requesting a service provider to monitor a site for a given period of time.

Chapter 3 - Implementation

Article 16 - Code of Conduct

The Commission is encouraging the creation of self-regulatory codes of conduct at EU level. In order to ensure that switch codes are consistent with EU law interested parties are encouraged to inform the Commission of any draft codes. Voluntary agreements to which public authorities are party must be notified to the Commission in accordance with the terms of Directive 98/34/EC.

Article 17 - Out of court dispute settlement

Article 17 seeks to establish a form of pan-European alternative dispute resolution for e-commerce transactions.

Article 18 - Court actions

The aim of this Article is to ensure that Member States take measures to ensure the availability of legal remedies in urgent cases (e.g. injunctions).

Article 19 - Co-operation between authorities

The purpose of Article 19 is to encourage co-operation between regulatory authorities in regulating the internet.

Article 20 - Electronic media

The aim of this Article is allow implementing measures to be adopted concerning the electronic means which might be considered appropriate for facilitating alternative dispute resolution and co-operation between the regulatory authorities and Member States.

Article 21 - Sanctions

This is a standard EU provision requiring Member States to put appropriate sanctions in place for violations of the Directive.

Article 22 - Exclusions and derogations

The directive contains a number of derogations. These are as follows:

1. A general derogation providing that the application of the directive does not cover taxation and the free movement of personal data as guaranteed under directive 95/46/EC.
2. Member States are also allowed to derogate from the provisions of the directive on the grounds of public policy, public security and public morality and consumer protection.
3. Derogations from Article 3 in respect of
   • copyright, neighbouring rights, rights referred to in Directive 87/64/EEC and Directive 96/9/EC as well as industrial property rights;
   • the emission of electronic money by institutions in respect of which Member States have applied one of the derogations provided for in Article 7(1) of Directive / /EC;
   • Article 44 paragraph 2 of Directive 85/611/EEC;
   • Article 30 and Title IV of Directive 92/49/EEC, Title IV of Directive 92/96/EEC, Articles 7 and 8 of Directive 88/357/EEC and Article 4 of Directive 90/619/EEC;
   • contractual obligations concerning consumer contracts;
   • unsolicited commercial communications by electronic mail, or by an equivalent individual communication.

Section 5 - Advisory committee and final provisions

Article 23 - Advisory Committee

Article 23 sets up a consultative committee charged with assisting the Commission in implementing its power of enforcement.

Articles 24-27

These are the standard Articles contained in all internal market Directives dealing with re-examination, implementation and entry into force.

Concluding Comments

Key Issues

Perhaps the most contentious issues surrounding the adoption of the Directive are that it is based on the principles of mutual recognition and country of origin.

Mutual recognition is an established and uncontroversial principle which is constantly applied in a multitude of sectors (e.g. the New Approach Directives on technical standards which apply to products including toy safety and low voltage). Despite this, consumer groups have attacked this aspect of the Directive. It seems surprising, if not perverse, that a concept which is uncontroversial when applied on a daily basis to product safety should become so when applied to the marketing of electronic services.

The Commission has chosen to use the principles of the country of origin and mutual recognition rather than full harmonisation as the basis for the Directive because it recognises Member States of the EU operate a number of different sets of rules regarding marketing promotions and commercial communications which are impossible to harmonise without killing off the electronic commerce sector in its infancy. As a case in point, under the unfair competition laws of several Member States (e.g. Germany) it is forbidden to offer three for the price of two discounts or loyalty bonuses. These types of restrictions are normally justified on the grounds of consumer protection. However, they are frequently characterised as restrictions on the freedom to trade which do nothing more than protect inefficient economic actors from fair competition. These laws have also been criticised as damaging to consumers interests as the restriction on the use of competitive tools such as promotions keeps prices at an artificially high level by discouraging new market entrants. This has been recognised by the Commission and it is taking a complaint against Germany for restricting the free movement of goods and services by imposing a ban on loyalty bonuses.

The decision to base the Directive on the principles of mutual recognition and country of origin will also help to overcome the setback suffered by the internal market when the ECJ delivered its ruling in the Keck case where it stated that restrictions on commercial communications which applied equally to both imported and domestic products and did not discriminate in law or in fact against traders fell outside the scope of Article 30 of the Treaty. This judgement has been used as a legal justification for the failure by the Commission to pursue infringement proceedings in respect of national laws that restrict the free movement of services. This is despite the fact that the ECJ has consistently refused to apply this principle to services under Article 59 ( see Bosman, Alpine and de Agostini). The ECJ's refusal to apply the Keck doctrine to the free movement of services is hardly surprising, the restrictions which the ECJ stated fall outside the scope of Article 30 in the Keck judgement are secondary restrictions in so far as the free movement of goods is concerned, ie goods can still enter the market even though they cannot be marketed effectively. However, if this concept was to be applied to the free movement of services, it would constitute a primary barrier to free movement because services would not be allowed to cross borders. This would have the effect of fragmenting the internal market and distorting trade flows.

The Directive is a major step forward in increasing Europe's competitiveness in this rapidly developing area. It will allow a great deal of consumer choice, for example, a consumer in Member State A who is not able to take advantage of a three for the price of two offer through normal retailing channels in that State due to the existence of the unfair competition law may dial up a web site in Member State B and receive such an offer as the web site established in Member State B will not be subject to the restrictions in Member State A.

Also, consumers will continue to enjoy a high level of protection as the Directive does not affect the provisions of other legislation such as the Distance Selling Directive, the Unfair Contract Terms Directive and the Products Liability Directive which impose an approximated set of rules for consumer protection across the EU.

Consumers will also retain their right to sue suppliers in the consumers country of domicile under the provisions of the Brussels Convention. Furthermore, contracts concluded between suppliers and consumers who are domiciled in different Member States cannot be used to take away the rights which a consumer would enjoy in his country of domicile which are protected under the terms of the Rome Convention.

The Directive also allows Member States to derogate from its provisions on a case by case basis to impose restrictions on information society services supplied from another Member State if necessary to protect public interest on the grounds of protection of minors, fights against racial hatred, sexual racial discrimination, public health or security and consumer protection. However, such restrictions would need to be proportionate to their stated objective. Moreover, it introduces the important caveat that, the restrictions can only be imposed after the Member State where the service provider is established has been asked to take adequate measures and failed to do so and the intention to impose restrictions has been notified in advance to the Commission and to the Member State where the service provider is established.

As stated above the Directive has been strongly criticised by consumer groups. In the author's view this criticism is based on a misunderstanding of the law. The consumer groups' view that the adoption of the Directive will have a negative effect on the present EU consumer protection legislation is mistaken. The fact of the matter is that the Directive actually strengthens EU consumer protection law by requiring, inter alia, transparency of commercial communications and increased co-operation between regulators. Therefore, the author finds it surprising that the consumer groups are taking such a negative view of a Directive which has many benefits for consumers whilst allowing the growth and expansion of businesses providing e-commerce services.