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Jurisdiction: Building Confidence in a Borderless Medium

ILPF 1999 Annual Conference - Transcript

INTERNET LAW & POLICY FORUM 1999 ANNUAL CONFERENCE
JURISDICTION: BUILDING CONFIDENCE IN A BORDERLESS MEDIUM
JULY 26, 1999
QUEEN ELIZABETH HOTEL, MONTRÉAL, CANADA

JEAN RIOPEL, O.C.R.

TABLE OF CONTENTS

INTRODUCTIONS, OPENING REMARKS AND WELCOME

Mr. MASANOBU KATOH:

Good morning ladies and gentlemen, since it's a Monday morning and it's after 8:35, people may, you know, be coming in a bit later, but we will, you know, start early the session today.

My name is Masanobu Katoh of Fujitsu Limited, and I serve as Chairman of Internet Law and Policy Forum. On behalf of ILPF, I'd like to welcome all our members and distinguished guests to our annual conference in Montreal.

We have an excellent program for you, focusing on important issue of jurisdiction for global electronic business. Buyers and sellers want to know what rules apply; governments want to know what impact cross-border electronic transactions will have on fundamental powers. You have come to the right conference to discuss and examine what's going on in the world.

Today, we have asked a respected member of the Canadian Parliament to begin our program; we are honored to have one who represents a riding in the Province of Quebec, a successful businessman before entering public life as President and founder of ND Computer Resources Limited, and a graduate in business administration from McGill University.

First elected to Parliament in 1993, he has been a member of the Standing Committees on Justice and Legal Affairs, Finance and Industry, and the Subcommittee on National Security. Ladies and gentlemen, please join me in welcoming a distinguished member of the Canadian Parliament, Mr. Discepola.

(APPLAUSE)

Mr. NICK DISCEPOLA:

That's the high tech stuff here! There's a lap top here and every time I touch the lid, it beeps at me, so I promise you I won't use high tech equipment. I still am one of those traditionalists that likes to use notes and paper, so until, I believe, Xerox comes out with electronic paper, I'll be using my notes.

D'abord, bienvenue Montréal! Welcome to Montreal! Welcome to Quebec! On behalf of the Canadian Government, I'd like to wish you all a pleasant stay in Montreal. We've ordered the weather just like you wanted: rainy in the morning and beautiful in the afternoon; take a stroll out on St.Catherine Street and Place du Canada, I'm sure you'll find it well worthwhile.

I do want to welcome you on behalf of the Minister of Industry also; Minister Manley would have been here today, but he has asked me to fill in as members of Parliament are often called on the last moment to fill in for ministers because of their heavy agenda, and I'm here to fill in on his behalf, I won't replace him but I'll try and bring you the message that the Canadian Government would like to share with you.

We believe, as a Canadian Government, that we share an awful lot of important goals, consumary goals, that the forum here today is trying to promote; that is the growth of electronic commerce and communications across national if not international boundaries, and we are pleased to work with partnerships with the private sector and key electronic commerce stakeholders to encourage innovation and investment, and reduce, most importantly, the uncertainty and barriers to using the Internet.

I commend the conference organizers on this conference, and you've identified a team that I believe is very appropriate, Building Confidence in a Borderless Medium, and this team reflects the key issue with which governments and the private sector around the world are now grappling as use of the Internet in the electronic commerce reach critical mass.

The Federal Government has made a very strong commitment to positioning our country to take full advantage of today's global economy based, and we believe that the Internet, much like the railway was back in the 1800s, is certainly a very powerful tool for economic as well as social development for all Canadians no matter what walk of life they're from.

The businesses and consumers must adapt to a more competitive global environment where success depends on the development, acquisition and, more important, the use of the knowledge that's connecting businesses and citizens to the information highway, plays a central role in helping economies successfully adapt to these new realities.

A key part of our government's response to meeting these challenges is connecting Canadians; it's a six-party initiative to make Canada the most connected country in the world, and it's made up with the following initiatives: first is Canada Online which provides all Canadians, including those in rural and remote communities, with access to Canada's world leading information highway infrastructure.

Smart Communities is an integrated approach to helping entire communities go online to connect local governments, schools, businesses, citizens and help in social services.

Canada Content Online is increasing the availability of Canadian Content Online, content that reflects Canadian values, achievements and aspirations, and E-Commerce is changing fundamentally how Canadians conduct business. To help electronic commerce flourish, we are creating the legal and regulatory framework that will encourage greater use of the electronic transactions and make Canada a location of choice for the development of electronic commerce products and services.

Canadian Government's Online also provides Canadians with online access to Government information services. Connecting Canada to the world is a fifth program, which promotes Canada as a leading edge economy, attractive to foreign investment and establishes Canada as a hub in the global knowledge based economy.

Thus, as you can imagine, connecting Canadians is a challenging initiative, and its success is critical to our future. That is why we are working in partnership with the both the private and public sectors to make a connected Canada a reality. We have already achieved this connectivity in several aspects, one of them is Schoolnet, which we were the first country in the world to hook up all the schools through Internet, and also the libraries. I know the Prime Minister takes great, great pride when he travels abroad and he announces that we are the most connected country in the world, but we still, as you can see, have quite a way to go to keep abreast of the trends in your industry.

And Canada is one of the first countries in the world to connect the schools and libraries, and we are looking and working with other stakeholders to improve on that also.

In fact, we have done a great deal to establish an E-Commerce friendly policy environment in Canada, and you'll be hearing more about this in a moment from our next speaker, Mr. Simpson, the Director General of Industry Canada's Task Force on Electronic Commerce. Mr. Simpson has been with the Electronic Commerce Task Force since November of 1997, having previously served as the Executive Director of the Information Highway Advisory Council, which was established back in May 1994. In his presentation, he will provide a progress report on the Canadian Electronic Commerce Strategy announced by the Prime Minister in September of 1998, touching on achievements at both the domestic and international level. In addition to summarizing our accomplishments, Mr. Simpson will outline the Government's current priorities towards accelerating the development and usage of E-Commerce in Canada.

In closing, I've noticed and read with detail your program, and it's quite an aggressive program, you touch on an awful lot of issues: legal concepts, consumer issues, payment systems, the state's ability to tax issues, protection and trust issues. We're very interested in your recommendations, and I know that the Minister of Industry will welcome feedback from your report, and I do, again in closing, wish you a very pleasant stay in Montreal, and des bonnes délibérations. Thank you.

(APPLAUSE)

Mr. RICHARD SIMPSON:

Thank you, Mr. Discepola, for the introduction, and good morning ladies and gentlemen! Bonjour, mesdames et messieurs!

It's a great pleasure to participate in the Forum's conference this year. As members of the Forum, you are all engaged in the same work as we are in the Electronic Commerce Task Force, addressing some of the key policy and legal issues which surround the development of the Internet and Electronic Commerce. So it's a great privilege to be here to compare notes on our respective efforts in this area, and an honor to lead off the discussion this morning.

I hope to do three things in the ten minutes or so which is available to us prior to the start of your first session: first, to explain why we believe electronic commerce is vitally important - not just to us here today - but also what it means to the modern economy as a whole, and the benefits it can bring to Canada and to Canadians, and what role the Government, and governments generally, can and should play in bringing this about; second, to provide a brief progress report on what we have accomplished and what is under way here in Canada, and also on the international scene; and finally to highlight our current priorities, both from the domestic as well as the international standpoint.

Since I realize the program is quite full this morning, I'll move over this material quite rapidly, but there is documentation available here, and the presentation also will be available in paper and on the Web for those who wish to refer to it.

Electronic Commerce is both a product and a cause of a broader transformation of our economic and social life. Through the power of the Internet, it is a central element in the globalization of markets and economic activity; it's also the industrial engine for the shift to an economy based on knowledge and information, and we see it as the economic manifestation of the information highway revolution.

This graphic tries to capture the magnitude of this change in time and in cost, using a very simple example of a 42-page document being transmitted across continents. However, it's merely illustrative of the fundamental changes occurring economy-wide, which are redefining the boundaries of the firm, restructuring supply chains within whole industries and sectors of the economy, and reshaping the dynamics of markets on a national and global scale, primarily by drastically reducing or even eliminating transaction cost.

In Canada, the scope and scale of this transformation has propelled a vision of the knowledge based economy and society, based on the imperative of connecting Canadians, as Mr. Discepola mentioned at the outset. We see connectivity as the source of economic strength for Canada, but also as a foundation for a stronger society, as a basis for social, cultural and civic development as well as for economic growth.

From the economic side, electronic commerce represents the spearhead for the creation of wealth and employment in the modern information based economy. These graphics project some of the potential which Canada could realize in this area, and the type or targets which are achievable by Canadian governments and industry.

Broadly stated, our goal is to make Canada a world leader in electronic commerce. As part of the effort to reach this goal, the task for the Canadian Government is to create the most E-Com friendly policy and legal framework possible for electronic commerce, both by creating enablers as well as by removing barriers to its development and use.

Our strategy for accomplishing this goal is based on both a domestic and an international strategy, since the networks on which electronic commerce is based are inherently global. On the domestic side as well as internationally, our agenda for electronic commerce is based on four imperatives: to build trust in the digital marketplace to ensure that the frameworks and safeguards which can provide confidence in electronic markets are in place in the same way they are in the non-electronic world; secondly, to clarify marketplace rules, meaning that the legal and commercial ground rules for business transactions in the electronic marketplace should be clear, transparent and predictable; third, strengthening information infrastructure, the technological platforms on which electronic market are based; and finally, to ensure the means of realizing the full social and economic potential of global electronic commerce are in place for Canadian and for others around the world.

Let me just report very briefly on where we are in these major areas. As far as the trust agenda is concerned, Canada issued a policy on the use of cryptography in October 1998, which balanced the need for secure electronic commerce with the requirements for lawful access and national security.

On October 1st, 1998, the Minister of Industry tabled Bill C-54, which is an act designed to protect personal information in the private sector.

In consumer protection, we are well-advanced and nearing finalization of voluntary guidelines, which would protect consumers in the electronic marketplace.

Marketplace rules. The Prime Minister of Canada made clear in September 1998 Canada's commitment to a technology neutral approach to the taxation of electronic commerce, and this commitment will be expanded in the future. The legal and regulatory framework for electronic commerce has been clarified with the tabling of Bill C-54, which provides formal recognition for digital signatures. On the regulatory side, in May 1999, the Canadian Radio-Television and Telecommunications Commission issued a major decision indicating that electronic commerce would develop on a market-driven basis, free of regulation. Work is also under way to finalize digital intellectual property rules based on international norms.

Information infrastructure. In addition to work at the international level, Canada has established a new Internet Registry Authority to manage the .ca domain name, and there have been announcements in recent months of major initiatives to create high speed Internet backbone networks, primarily through CA Net 3.

In cooperation with the private sector, we have also issued a new framework for electronic commerce standards, which would guide both work domestically and internationally.

Capturing the full potential of electronic commerce for all Canadians will increasingly occupy our attention in the future; promoting acceptance of electronic commerce by Canadians through public education and awareness, and by promoting its adoption and use within the Canadian economy, within the public sector, the Federal Government and governments generally, and also within the private sector through development of the electronic commerce markets.

On the international side, the OECD Ministerial Conference on Electronic Commerce, which was held in Ottawa last October, represents to us a major step forward in establishing cross-national ground rules for electronic markets. The conference represented a number of firsts, not the least of which was the partnership established between governments, the business community and civil society. The joint conference conclusions, which were supported by governments, business, labor and social interest groups, is emblematic of that partnership.

As many of you know, there were substantive outcomes to the OECD Ministerial Conference, on which future international work will build. The OECD itself issued an action plan for electronic commerce in Ottawa, as well as a statement of framework conditions and an implementation plan to govern taxation of electronic commerce on a transnational basis, and declarations on the protection of privacy, consumer protection and authentication.

Equally important, the private sector issued its own action plan for electronic commerce, which outlined a number of specific initiatives which industry would be following over the coming months -- and I'll mention some of those and how that's being fulfilled in a moment.

Finally, and again this was a unique element of the Ottawa ministerial conference: other international organizations participated and issued their work plans for electronic commerce. Not only did the work plans indicate their commitment to on-going work in this area, but also represented a rationalization of work to avoid duplication and to ensure effective international rules across a broad spectrum of international organizations.

Work continues on the OECD action plan to advance results of the Ottawa conference. To mention the central elements of this action plan there will be Work: to finalize consumer protection guidelines; to advance authentication and how we would operate on an international basis to cross-certification and other standards and institutional arrangements; and a very important element of the on-going OECD work plan, to further clarify the definition, measurement and economic impacts of electronic commerce. Trade policy, taxation and privacy are also part of the future agenda of the OECD.

The focal point for the OECD's work this year will be the OECD Forum on Electronic Commerce which will be held in Paris on October 12th and 13th. Its objective, following from the Ottawa Ministerial Conference, is to take stock and report and progress in the year since the conference, and to continue and strengthen dialogue among governments, the private sector, international organizations and civil society. They will priorize work priorities for electronic commerce both for the OECD and in relation to the work of other international organizations.

Other important components of the international agenda include work at the WTO on trade related aspects of electronic commerce, which will be directed to the November 1999 session of the General Council, and will also be the subject of discussion at the Ministerial Conference in Seattle.

In the Americas, a private/public sector working group has been doing analysis of electronic commerce and its relation to the evolution of the FTAA, and this work will again culminate in discussion at the Ministerial Conference this fall.

In APEC as well, looking in other regions of the world, there is on-going work on electronic commerce which is consolidating work taking place at the OECD, FTAA and applying it to the Asian Pacific region.

Just a word on a very important even this fall: the WTO Ministerial Conference, which will take place at the end of November and the beginning of December. Ministers from WTO member countries will consider recommendations that will form the basis for new multilateral trade negotiations, and it's now generally accepted that any new negotiations or any new consideration of trade in the modern global economy must take account of the effects and implications of electronic commerce. Canada is playing an active role, and many other countries are as well, in analyzing the impact of electronic commerce and putting forward both substantive proposals as well as recommendations on the process of how to deal with electronic commerce in a trade policy context.

The international agenda will be advanced on a number of fronts this fall, some of which I've mentioned; these events are listed on the slide that you see. There are a number of government events here, but there's also several private sector meetings and conferences also listed -- and these are important elements of the business agenda which I mentioned earlier -- centered this year on the Global Business Dialogue in electronic commerce.

Many of you will be quite familiar with the work of the GBDe, which has as its members CEOs of many of the world's leading companies. They will be looking at nine specific issues this fall, based on papers prepared within the GBDe membership, and one of the important papers will be a paper on jurisdiction which, looking over your program, it seems to me, is a very close fit with some of the concerns that you will be dealing with in the next two days.

Canada considers the advancement of business initiatives in this field to be vitally important and to be a crucial element in establishing the overall international agenda for electronic commerce.

Let me conclude very briefly by noting some of the current priorities for us in the area of electronic commerce; these are probably not very much different from what other countries are currently concentrating on in the policy realm, and I'll be interested to hear more about this later in your program.

The three areas that we will concentrate on very much in Canada over the next six to twelve months will be investment and innovation, the trust and confidence agenda and government as a model user. Let me just note what that means in specific terms: private sector adoption and use of electronic commerce will be the key to realizing the social and economic potential of the technologies. We will be carrying out a program, which will be conducted very much in partnership with the private sector, to accelerate the diffusion of electronic commerce throughout the Canadian economy. A key element in this initiative will be the E-business round table, which consists of more than fifteen chief executive officers of large Canadian companies, who will identify priorities for Government, and private sector action in this round, and also opportunities for Canadian business in the global marketplace.

As far as the trusted agenda is concerned, many of you will know that the Bill C-54, to protect personal information, is a crucial element of Canada's electronic commerce strategy and passage and full implementation of privacy legislation will be a major element of our future work plan. Also a priority for action will be finalization of the consumer guidelines which I mentioned a few moments ago.

Government, as a model user, will be the third of the key priorities for future work, centering on government-wide roll-out of public key infrastructure which will provide the security framework not only for delivery of government services but also interaction with clients, and therefore could very well be a platform for security infrastructure for Canada as a whole.

There will be increasing emphasis placed on government services in information being placed online, centering on pathfinder pilot projects, by major Federal Government departments.

And finally, referring again Bill C-54, passage and implementation of the digital signature elements of that bill will be an important element in making Government a model user of electronic commerce.

You will be exploring some of these subjects in considerable detail, I know, over the next two days. The work of the Forum has been a source of valuable advice for policy makers and I expect that the results of your deliberations today and tomorrow will similarly provide important guidance to policy makers not only in Canada but around the world.

Once again, we appreciate the opportunity to take part in the process, and to take advantage of your knowledge and thoughts on all of these topics. Thank you very much for your attention.

(APPLAUSE)

Mr. MASANOBU KATOH:

I'd like to thank our two speakers for their great remarks. Now, it is my pleasure to introduce our Executive Director, Ruth Day, who has been working very hard to make this conference possible. She will tell us more about the program and next speakers. Ruth?

Ms. RUTH DAY:

Good morning! Thank you, Katoh-san. It's a pleasure to welcome all of you here to join us at this conference, and thank you especially for the words of welcome from Canada, from Mr. Discepola and from Director Simpson, a good overview of Canada's programs in this area. So thank you both very much.

I have the pleasure of introducing our panel of experts to begin today, and I also have an opportunity to say a few words to you about the program as a whole. At this time, I'd like to ask that our experts join us up here and say thank you once again to our Canadian hosts.

First a word about our program: we are about to embark on an aggressive two-day exploration of the basic legal concepts of jurisdiction as they apply to the Internet and electronic commerce across different legal systems and across different substantive areas; the purpose of this exploration is to add some focus and clarity to what is a very complex set of issues which is much in discussion on public forums at this time. You may hear opinions expressed, opinions about solutions -- that's good, we encourage that as part of the discussion.

The program itself will not offer the ILPF conclusions. What will come out of this is a report of the variety of opinions that we hear on this, this complicated subject.

We've given you a program that has the experts' papers, the papers from these three gentlemen, for your reference throughout the program. The rest of the program looks like this; it's more than an inch of material, it's very dense; there are footnotes, there are cases that will make your lawyer's heart glad when you have to address these issues at your desks; this will be a live document waiting for you on the Web.

What you need to remember is that in these presentation materials, you'll find a green sheet that tells you how to access those materials, because at this very moment, they are behind a password. They will be behind a password until we've completed the other two pieces of the program, one of which is a transcript of these proceedings and the second of which is a summary, and together that will constitute the record of this program and it will be delivered first to the GBDe, when it meets in September, and then to policy makers throughout governments anywhere that we can convince people to take a look at it.

Because we're making a record and because we recognize that many of you in the audience are experts and practitioners in this subject, we encourage participation at the end of each panel, there are mikes in the audience; for the record, if you would give your name and who you're with, then that will appear in the court reporter's record, and we ask you to do so.

Before we begin, I just want you to know that most of us are lawyers or legal policy experts, and we focus on the law, which is what most of the substance of our conversation here will be about. We need to keep in mind two realities: one is a governmental reality, and that is as we have seen in a couple of cases, if an interest, if protecting an interest is a strong enough compelling factor to a government, a government will reach outside its territory to do what it feels needs to be done in the circumstances; we saw that in the Compuserve case in Bavaria; we see that to some extent in the privacy debates. So the law is -- the law is the law, but there is a reality that governments can use, that they have a great deal of power in this area.

The other reality is business reality, and that reality is: if it's too complicated to do business in another country, because you don't know the laws, because the laws don't work for the medium, for whatever reasons, business has ways to stay out of that jurisdiction; with current payment systems, the credit card system and with setting out websites, you can effectively not do business in another jurisdiction.

It's the extremes of those two realities that we want to avoid, and in a very positive sense, we want to soften that so that the benefit of the medium, in a global sense, its economic efficiencies can complement all the efforts, for example, that we heard from the Canadian Government and from other governments, and from other business to make this a global medium and bring efficiency to markets and strengthened governments and societies, that's the goal here, to soften those realities, understand the debate better and have better conversations on the subject, so that we can move towards resolutions, and that's the goal to which we dedicate these two days.

To begin our program, we have three experts. These experts are here to help us remember the elements of the law jurisdiction, take us maybe back to law school, establish a comparative foundation for the rest of the program. Each one of them has a depth, an impressive depth of knowledge Internet technology, information technology and computer law; each has been recognized and has been seen as an expert and has participated in the public policy and governmental processes in their country, so they are no strangers to politics and policy, and each has authored an impressive number of publications, books, articles in this area. None of them lives in an ivory tour.

We have first Dean Hank Perritt from the Chicago-Kent Law School, author of 45 articles and 15 books; he has made the potential for the Internet and what it can do for people in communication as a reality in both Bosnia and China, and he has a leading role in the American Bar Association's project on the rules of jurisdiction for Cyberspace. Just to say one moment more about that project: we are indebted to a number of speakers who come to us from that project, they're marked by an asterisks in your program and it's a fine effort.

We also have, returning for a second year to the ILPF conferences, Agne Lindberg who adds to his expertise a practitioner's view of these issues, and is a practitioner with Advokatfirman Delphi in Sweden, and like his experts, other experts on the panel, has extensive publications and expertise in the area.

Finally, we welcome Professor Kazunori Ishiguro from the University of Tokyo. We're very pleased to have him join us and help explain jurisdictional concepts from the Asian Pacific region; his list of expertise and publications is equally impressive, you'll find it in the bio materials.

Dean Perritt has agreed to moderate, to take your questions at the end, and as well as to speak. We are most honored to have all three of you to start our program.

TRADITIONAL LEGAL CONCEPTS: BASICS FROM THREE EXPERTS

DEAN, HENRY PERRITT:

Merci et bonjour! Je m'appelle Hank Perritt et je suis Dean at Chicago-Kent College of Law at the Illinois Institute of Technology. That exhausts my French, but I wanted to make at least some symbolic gesture to the tradition of Québec in Canada.

It's appropriate, I think, that we talk about jurisdictional problems in Canada, because some of the earliest and best work about the relationship between new information technologies and legal doctrines and institutions was done at Canadian universities, and as you saw from Mr. Simpson's presentation, Canada continues to provide leadership in terms of what seems to me a sound agenda and set of policy goals.

But we're not here today to talk about all of cyberspace and all of cyberlaw. We're here to talk about one particular part of it: jurisdiction, which defines the boundary between traditional legal institutions and doctrines and procedures, and activities in cyberspace.

I'd like to start out by congratulating Chairman Katoh, the ILPF, and Ruth Day on putting together an absolutely first-class program for these two days.

We thought it might make sense to start out with three presentations giving three different perspectives on what we mean when we talk about jurisdiction.

One of the challenges that confronts us is the risk that we American lawyers are likely to be too U.S. centric in thinking about what is inherently an international issue.

We wanted to try to protect against that U.S. centrism by offering not only a U.S. perspective on jurisdiction, which is my job this morning, but also a European perspective, which is Mr. Lindberg's job, and as important, perhaps most important of all, an Asian perspective, which is Professor Ishiguro's responsibility. We thought we would proceed in the following fashion: each of us will take 15 minutes to sketch the perspective that we bring to the panel. Then we no doubt will have some questions and perhaps challenges for each other, and then we hope you will have questions and challenges so we can start out our program as interactively as possible.

Now, shifting to my responsibility as the spokesperson for the Anglo-American perspective, I'd like to do four things: first of all, I'd like to distinguish among three different issues that we're talking about when we talk about jurisdiction; second, I'd like to talk about the role of territoriality with respect to each of these types of jurisdiction; third, I'd like to offer some observations about how some of this is hardly new, but on the other hand, some of it is very new when we're talking about the future of the Internet; fourth and finally, I'd like to talk about where the ABA Internet Jurisdiction Project fits in.

First of all, when we talk about jurisdiction, we really are talking about three different concepts. The first concept is Prescriptive Jurisdiction, what most American lawyers think of as choice of law. Prescriptive jurisdiction has to do with the legitimacy of a sovereign state having its own rules applied to resolve a dispute.

The second jurisdictional concept is Adjudicative Jurisdiction, what most American lawyers call personal jurisdiction; that refers to the legitimacy of a tribunal, often a court, deciding a dispute with respect to particular parties.

The third thing that we may be talking about when we talk about jurisdiction is Enforcement Jurisdiction. Oversimplifying somewhat, enforcement jurisdiction includes the legitimacy of executing a judgment or imposing border controls.

Territoriality, historically and today, is at the core of all three types of jurisdiction. There's a good reason for that: sovereignty long has been defined in terms of two variables: the first variable is a defined piece of geography that makes up the sovereign state; the second variable is the practical exercise of physical coercive control over that territory by the sovereign.

It is the second variable that links territoriality with jurisdiction, because it really doesn't make any sense to suppose that the Government of Albania legitimately could make rules for conduct in China when Albania has no prayer of making those rules applicable in China, because it doesn't have the physical coercive capacity to do that in another country; that's the linkage between territoriality and prescriptive jurisdiction.

It also doesn't make any sense to suppose that it would be legitimate for a court in Kenya to decide a dispute between two British subjects who have never been to Kenya and have no expectation of going there, because there is no practical reality that the Kenyan court can enforce any judgement that it might issue; that's the linkage between territoriality and coercive power and adjudicative jurisdiction.

There's no reason to suppose that the United States legitimately can enforce a judgment against a losing party in Belgium, who has assets only in Belgium, because there are important practical limitations on the U.S. ability to do that; that's the linkage between territoriality, coercive force and enforcement jurisdiction.

But thinking about territoriality only in terms of physical borders is not satisfactory, and as we all understand over the last several hundred years, the territorial concept of sovereignty and jurisdiction has become elastic, mainly through what is known as the Effects doctrine, which conceptually recognizes that a territorial based sovereign may have legitimate interests in applying its law, offering its courts as adjudicative forums, or applying enforcement resources, even when major aspects of a dispute or issue occur outside of its country. The reason that's legitimate is because the sovereign state has interests that are affected by that issue or that dispute. So today, we have concepts of jurisdiction that are mixtures of territorial concepts and interest analysis.

Let me give you an example: let's suppose that two French citizens, while in France, have a dispute and one defames the other; shortly thereafter, they both come to New York. Now, a New York court would have adjudicative jurisdiction over the defendant, but almost certainly would apply French substantive law of defamation, because France in that instance has prescriptive jurisdiction. And then if the plaintiff was successful in the New York court, but the defendant had assets only in Scotland, enforcement would take place only in Scotland because only Scotland has enforcement jurisdiction.

Now, third, it's appropriate for us not to be swept up in our enthusiasm for the potential of the Internet to suppose that all of this is new. It's not new. These three concepts of jurisdiction and these linkages with territoriality and interest analysis are at least 2500 years old, and well before either Canada or the United States became independent, a complex and sophisticated body of rules had been worked out to decide questions of prescriptive adjudicative and enforcement jurisdiction.

Maritime commerce required the development of such rules, in the Mediterranean 2500 years ago; the telegraph required an elaboration of those rules 150 years ago; television, radio, satellite broadcasting and other modern technologies other than the Internet has required further development and application of these concepts.

Indeed, what we American lawyers learned in law school about interstate jurisdictional and choice of law problems in the United States are based entirely on concepts of international law as they were understood when Justice Story wrote his treatises in the early part of the 19th Century, and when the Supreme Court of the United States decided Penoyer v. Neff, and International Shoe, the two great adjudicative jurisdictional cases in American jurisprudence.

But there also are some things that are new. Jack Goldsmith, who's going to moderate our concluding panel, has been a great proponent of the proposition that the law is sufficiently developed to deal with all of the jurisdictional problems that the Internet may throw up.

But I'm not so sure that Professor Goldsmith has it right, because there are some things that distinguish the Internet from all of these technologies that had gone before. Unlike television broadcasting and newspaper publishing, the Internet has very low economic barriers to entry. Unlike the telegraph and telephone and radio broadcasting, the Internet is inherently and instantly global; as soon as you put the file up on the website in Florida, it's visible in Florence and it costs no more to obtain access to it in Florence than it does in Florida.

Because of these differences between the Internet and older technologies, people have been thinking hard about whether what we inherit in terms of jurisdictional concepts are adequate for the Internet or whether we need some new ideas. David Johnson of Wilmer, Cutler & Pickering, in Washington, has been particularly articulate and energetic in suggesting that we think about entirely new approaches to address jurisdiction on the Internet. David's partner, Susan Crawford, is among us today and I'm sure would be happy to talk about some of David's concepts.

Ron Plesser, of Piper & Marbury, has been a pioneer in the practical sense of organizing new mechanisms of private ordering, or self-regulation, in the privacy arena, and now Ron and his associate Stu Ingis are working with a number of companies active in the Internet to see if some of the same private ordering and self-regulation concepts might be applied internationally in the consumer protection area. So one of the things that may be new about the Internet and its relationship with jurisdiction is the role that private ordering, private self-regulation may play in conjunction with a governmental framework to deal with some of the uncertainties of applying traditional jurisdictional concepts to this new medium.

Fourth, what should we do about all this? One of the things that occurs to me is that we may care less about prescriptive jurisdiction when the laws are the same in multiple sovereign states. Who cares whether you apply the law of Germany or the law of Georgia if they are the same? And we may care less about adjudicative jurisdiction if the result is likely to be the same, and if jurisdiction surely exists in some court.

So one way to come at this problem is not to look for some grand solution for all of the jurisdictional problems that might arise in the Internet, but instead to think somewhat separately about clusters of issues. That's exactly how the American Bar Association has organized its Internet Jurisdiction Project, which is a creature of the Business Law section of the ABA and is jointly sponsored by the Science & Technology section and the International Law section. That project defines nine different clusters, for example, privacy, consumer protection, taxation, and has mobilized the efforts of hundreds of volunteer lawyers to work through the particular issues that arise with respect to jurisdiction over Internet activities pertaining to those subject matters.

Tom Vartanian, in the last row, is the overall leader of the Internet jurisdiction project on behalf of the Business Law section; Margaret Stewart, in the back row on the other side, is the reporter for that project, and I'm sure that those of you that don't already have asterisks by your name in the program signifying your involvement in that project could get asterisks by your name in the next program by volunteering to participate.

As Ruth said, by the end of tomorrow, we're not going to have clear answers or recommendations. By the ABA meeting in 2000, when the ABA Internet Jurisdiction Project presents its report, there will not be clear answers or recommendations. In the end, at least some of the answers will be determined by the interplay of interests in the political process around the world.

But what we can do as lawyers - and what we are making a good beginning of doing today and tomorrow - is to understand the issues clearly, and begin to define and to crystallize the alternatives that may help the Internet realise its potential as a remarkable new marketplace and political arena in this tradition of 2500 years of defining jurisdiction.

That's the American perspective, and now I'd like to call on Mr. Lindberg to give us the European perspective.

(APPLAUSE)

Mr. AGNE LINDBERG:

So being an IT lawyer is difficult. If I get this to work as well, we will be happy.

So let me start by introducing myself a little bit more, I'm Agne Lindberg, and I'm a partner with Delphi Lawfirm in Stockholm. I also serve together with my U.S. colleague Tom Pitegoff as the co-chair of the American Bar Association's subcommittee on international transactions within the Cyberspace Law Committee, trying desperately to put some international touch on the subcommittee's work, and bring it, just as Henry said, not to be only U.S. products.

I'm here to give you in 15 minutes a short presentation of something that you're going to see pretty soon -- no signal -- a short presentation of basic European principles of jurisdiction.

I can do this. It's easy for me, I can do it in three words: Europeans love regulation! However, that would make it a little bit too easy for me and maybe not as interesting for you. Being from Sweden, I will do this by serving you a smorgasbord, and I'll do that by giving you a brief summary of some of the regulation we already have in force, and I also would like to take the opportunity to just glance through some of the regulations in pipeline. Tomorrow, you will have a more in-depth presentation of development in Europe regarding especially consumer protection, but this is to give you a little hint of what's happening in Europe.

First of all, you should all be aware that there are already existing conventions, international agreements on jurisdiction applicable for Europe, both EU and EFTA countries, dealing with both choice of law and choice of forum, adjudicative and prescriptive jurisdiction. I will give you a short description of those regulations pretty soon.

You should also be aware of the fact that a lot is being done in Europe to harmonize the substantive law of commerce, and, as you already heard, that makes the jurisdiction problem less important, because if you have the same rules in the member states, it doesn't really matter where the disputes are solved or under which law the disputes are solved.

E-Commerce has been a focus for the European community for a long time. Actually, already in the '80s there was quite an extensive project dealing with E-Commerce, at that time, we didn't call it E-Commerce, we called it EDI, Electronic Data Interchange. The Telus Project was the name of this project. Amongst other things, they produced an overview of the EU and EFTA states legislation, to what extent it concluded it contained barriers, legal barriers to E-Commerce, and in none of those analyses anybody pinpointed, nobody pinpointed the fact that jurisdiction could be a legal obstacle. That's a pretty interesting fact.

However, in '97, the EU presented a commission communication on how to create a coherent legal framework for E-Commerce, and now we finally focus on jurisdiction, that's the need for defining what countries law will apply and what courts can try a dispute.

The way of reaching the result in Europe is definitely by statutory regulation, by directives forcing the member states to implement national legislation or by regulations which have a direct effect in the countries. This is how it's done, it's definitely regulation we're talking about more than anything else.

Another focus on the work on creating this legal framework is consumer protection. Consumer protection is in focus in almost all the directives or proposed directives dealing with E-Commerce, and you can say that the background is that there is an inherent feeling from the EU that it might be harmful with E-Commerce, because if you want, as a consumer, a customer to have remedies, it will be difficult, slow and expensive. So it's inherent in the E-Commerce that it might be harmful for consumers. This is the background as I see it. Being a lawyer is great, because you don't have to wear a hat -- I'm just speaking from my heart without representing anybody.

Going into the smorgasbord. First of all, we have conventions dealing with adjudicative jurisdictions and those are the Brussels and Lugano conventions; they look just about the same, it's just different countries that are part of the conventions. These deal with jurisdiction and enforcement of judgement, and they are applicable for civil and commercial matters, mostly dealing with contract disputes.

The main rules in these conventions are that if you want to sue a counterparty in a commercial matter, you will have to go to that party's country of domicile, where he resides, and that goes for private persons as well as legal entities; that's the main rule.

There are plenty of exceptions, maybe the most important in this context is that if you are having a dispute regarding a contract, you should or you can go to the country where the performance is made under the contract. And also there is of course a rule on consumers, that you will always sue a consumer in the consumer's domicile country; that's the main principle. So those are some of the principles that apply according to the Brussels and Lugano convention.

Now, you should be aware of that fact that, of course, these rules apply in the electronic world as well. If you have an Internet commerce dispute, you will have to look into these rules, and if it's a consumer dispute, you will definitely end up in the consumer's home country.

Right now, there is a great discussion going on in Europe regarding these conventions, because since May 1st, according to the Amsterdam Treaty, jurisdictional cooperation is actually a part of the powers of EU. There now exists a proposal to make these conventions - the international agreements - into EU regulation, and doing so, there are some changes being made, some of those changes are dealing with, definitely dealing with consumer contracts and will have a great impact on E-Commerce by stating that first of all we will remain with a main rule on the home, the country of the residence will apply, but there will also be implemented a rule on the destination principle, meaning that if you're sending out information or directing your commercial messages to a specific country, you will end up with the jurisdiction of that country.

And I just wanted to read very quickly for you a part of a press release issued by the EU Commission on July 14th, kind of summarizing what happened in a discussion after this proposal: "The Commission has noted that a wording related to consumer contracts has given rise to anxieties among those looking to develop electronic commerce. These concerns relate primarily to the fact that companies engaged in the electronic commerce will have to contend with potential litigation in every member state, or will have to specify that their products or services are not intended for consumers domicile in certain member states. One such concern relates to the perceived problems with the notion of directing activities towards specific markets, which is considered difficult to comprehend in the Internet world."

These are the words of the industry, trying to make some changes in this proposal. The result has been that there will be a hearing on this proposed regulation this fall, trying to absorb some of the industry's remarks. Anybody interested in doing business in Europe, I'm advising you to keep a close look at this work and try to be at that hearing.

More regulation about adjudicative jurisdiction. We have a directive on injunctions for protection of consumers' interests, not a very well-known, I would say, directive maybe within the EU, but it will definitely have an impact on E-Commerce. The background is that we have a legal vacuum, because the Brussels and Lugano conventions are all dealing with commercial matters, contracts. So if you have a problem with advertising, that's a part of the legislation which is so far not harmonized, and if an Irish company is advertising towards Swedish customers in Swedish, et cetera, via the Web page, E-mail, et cetera, you will have great difficulties suing that company in Ireland, because the courts will not deal with public law issue and it involves another country. And furthermore, if we sue them in Sweden, the courts and the authorities in Ireland will not accept that decision. Therefore, we now have a directive where the solution is that we implement a right for qualified organizations to bring actions in the country of origin, where the commercial messages have its origin, we can file a suit and that country's courts can then decide on an injunction for it to stop with illegal commercial activities. It doesn't contain any choice of law provision, it's just making sure that we can go to that country's courts. And that will enter into force by the end of next year in the member countries.

We have a proposal for a directive in financial services dealing with distance contracts, and that is definitely E-contracts, so if you provide a financial service over the Internet, this will apply for your work.

Here, we also have a consumer protection rule saying that any actions towards a consumer must be brought in the consumer's homeland. Actions brought by the consumer, if the consumer wants to argue with the provider of the financial services can also be brought in the consumer's home country, and proration agreements pointing out some other country's right will not be valid in principle. So we have it once again the consumer protection.

We have also a proposal for directive on electronic commerce dealing generally with E-Commerce and providing a lot of rules and ISP responsibility, electronic contracting, et cetera, it does also include actually a jurisdictional rule providing for a country of origin principle by providing a definition of establishment; it's the country where an ISP is established that can govern what rules will apply for this activity, and it's defined in the proposal here as "a service provider who effectively pursues his or her activity using a fixed establishment for an undetermined duration".

What that means is still written in the stars, I would say, but at least we know that use of technical means it's not sufficient to make it an establishment. So just providing a server in a country is not an establishment, it does not provide for jurisdiction in that country.

Finally, some prescriptive jurisdictions rules, and you have those in the distant selling directive and the proposed directive on financial services. These are directives regarding the fact that you are providing services or selling goods over the Internet.

Here, you also have the consumer protection, first of all by a harmonization of the substantive law, but also by saying that prorogatory agreement choosing a non-EU member state's law are invalid. So you can't point out when you're dealing with a European customer, for example, with the financial services, that U.S. law will apply. Those agreements are, will be invalid under this regulation.

And finally, finally, we have the Rome convention, which is the general choice of law convention in Europe, applicable of course on E-Commerce as another international commerce, providing a freedom of choice, I mean, prorogatory agreements are in principle valid unless it's a consumer contract. If you don't have an agreement, the choice of law will land with the country where the characteristic performance is made, and also here we have some discussions on amendments, and by that I'm concluding my presentation of the principles we have, and I leave it for tomorrow's wrap-up to give my conclusion on what that really means. So thank you.

(APPLAUSE)

Mr. HENRY PERRITT:

Thank you, Mr. Lindberg. Professor Ishiguro?

Professor KAZUNORI ISHIGURO:

Good morning! Before I enter into the content of my presentation, there is one thing which should be mentioned here. I made a big mistake, perhaps you will find in some part of my paper the name of Mr. Lindberg referred to as she or her, not he or his, I apologize to him again. Sorry.

My paper consists of four parts. Please refer to the introductory note of my ADDITIONAL PAPER.

The topics which will be discussed in this forum are not limited to private law areas, but cover public law areas, including taxation and the role of the WTO.

In this regard, first of all, one must be aware of the fact that the way of distinction between the private and the public law, or, in other words, distinction between civil and non-civil matters, is fundamentally different between the European continental countries and Japan on one hand, and the common law countries on the other hand. Often that point causes several confusions in cross-border legal problems, including those in actual interpretation of treaties.

In common law countries, there seems to be a common understanding that if the civil procedure is used, then the problem at issue is categorized as civil or private. However, the intrinsic character or function of the relevant legal institution is decisive in Japan, as in European continental countries.

Now, with regard to choice of law problem, for the mutually better understanding of lawyers from various countries, the most basic point is that there is a big difference in the depth of the basic methodology concerning choice of law process, between the U.S. on one hand, and other countries including Japan on the other hand. Namely the problem of the U.S. choice of law revolution since Babcock v. Jackson in 1963. One should not forget the fact that whether such a basic discrepancy can be overcome or not is the very prerequisite of the real harmonization of choice of law problems among nations concerning the Internet.

The next problem would be the appropriateness or suitability of the so-called country-of-origin rule proposed by Global Business Dialogue on electronic commerce (GBDE). Similar opinions can be found in the arguments on cross-border copyright infringements in cyberspace, namely the lex originis rule which I discussed in Appendix 1 of my paper.

There is an argument on the GBDE side that compliance with all legal regimes of all jurisdictions, based on the location of the consumer, will result in conflicting obligations and will create trade barriers.

However, the location of habitual residence of the relevant consumer is an important connecting factor for both jurisdiction and choice of law, especially for consumer contracts, as Mr. Lindberg explains now.

According to such a proposal, article 120, paragraph (2) of the Swiss Code on Private International law of 1989 will become the target of negotiations aiming that reducing trade barriers, because that provision clearly rejects the party autonomy for consumer contracts.

However, according to my view, the legal development seen in this Swiss article which goes one step further than Article 5 (consumer contracts) of the 1980 Rome Convention is well-founded for the sake of consumer protection at the level of conflict of laws.

Next: With regard to the international jurisdiction in civil matters, the U.S. long arm statutes have been posing serious problems on business activities between the U.S. and Japan, including international concurrent or parallel litigations as found in Hitachi v. IBM case, just as between European countries and the U.S., as found in the famous Laker Airways case, both occurred in 1980s. Undoubtedly, similar cross-border problems will occur frequently concerning transactions in cyberspace too.

To take one of the most basic example, namely the jurisdiction of the court of the domicile of a defendant which is admitted as the most basic principle in Japan and Europe, the U.S. Supreme Court chose a different way, as clearly seen in Piper Aircraft v. Reyno, a Supreme Court case. A foreign plaintiff can sue a defendant in the U.S. domicile of the latter only in rather few cases where the doctrine of forum non conveniens is not a bar.

If jurisdictional rules among nations are to be harmonized for the sake of further developments of cyberspace, one must think of whether such a fundamental difference can be overcome or not, though that is only the tip of an iceberg.

The next problem would be the chilling effect of worldwide injunction. In this context, the U.S. Playmen case of 1996 would be a good example. That was a case of civil contempt. The U.S. court ordered the Italian defendant, as one of the alternative remedies, to shut down its Internet site completely, within two Weeks: not two years, but two weeks.

In this case, the court order was based exclusively on the U.S. law. As stated before, it was a contempt case. The court found no need to mention the applicable law and jurisdiction in rendering the new injunction. Therefore, the problems of applicable law and jurisdiction were completely bypassed, and there was a meltdown of conflict of laws problems in the depth of the U.S. judicial system.

This is a peculiar phenomenon in the United States. Even if jurisdictional rules among nations are harmonized, such U.S. solutions will surely survive and might cause serious problems surrounding the Internet.

The next problem is recognition and enforcement of foreign judgements. In this respect, again, one must be very cautious about the fact that there are different understandings between common law countries, on one hand, and civil law countries including Japan, on the other hand, with regard to the distinction of civil and non-civil matters.

In the Playmen case mentioned before, from the Japanese perspectives, there was a symbolic feature of the intermingling of civil and non-civil matters in common law countries.

If the defendant was a Japanese company and the Internet site at issue were located in Japan, this type of U.S. injunction might be seen at first sight as eligible for recognition and enforcement in Japan. However, my answer is negative. This was a case of contempt. The intrinsic character or function of the relevant legal institution in its totality should be viewed as decisive in rejecting its recognition and enforcement in Japan in the above-mentioned hypothetical case, according to my opinion.

In the U.S. legal system, for example, there are remedies of distinctive features such as punitive or multiple damages, disgorgement in security regulations, parens patriae, et cetera. They will surely survive any attempts of harmonizing legal rules among nations, because they are so deeply embedded in the U.S. legal system. Examples of similar peculiarities can be found in legal systems of other nations too.

If one is willing to harmonize legal rules among nations for the purpose of this forum, one should not forget such aspects of the problem in order not to concentrate oneself on rather superficial harmonization of rules.

Next, with regard to extraterritoriality and the doctrine of state jurisdiction, excessive, the so-called excessive extraterritorial application of U.S. laws has been the target of serious concerns on the Japanese side. Both legislative jurisdiction and enforcement jurisdiction are relevant in this regard, though there is some confusion with regard to the definition of each type of jurisdiction.

Here I would like to take one example. Suppose a case where, without the consent of the Japanese government, an official of a foreign government, or his nominee, has actually removed from the Japanese territory, over the telecommunication networks or by using other means, a decryption key deposited within the Japanese territory. That should be viewed as a clear infringement of the Japanese sovereignty or, in other words, the use of sovereign power by the foreign country within the territory of Japan. Similar problems on enforcement jurisdiction were reported in the 1995 U.S.-Japan trade friction on automobile.

In order to avoid frictions between or among nations with regard to the extraterritorial application of national laws, it is quite understandable that people tend to favor, without any reservation, the establishment of bilateral or multilateral treaty systems. Such treaty routes are undoubtedly important.

However, exclusiveness of such routes depends on the constitutional system of each country and the actual practice which reflects such a background. Even if a treaty is concluded between or among countries, there remains room for imbalance or, in a sense, even free riding, between or among the relevant countries.

This point is serious especially in cases where a country adheres to use unilateral measures which might contradict its treaty obligations.

If unilateral measures survive all attempts of harmonization, one must reconsider the very notion of equal footing before one devotes oneself to such attempts.

And, at the same time, one must be very cautious when the word COMITY is used in discussions at the global level like this forum.

In continental European countries and Japan, comity is theoretically not a legal rule at all. However, in common law countries, it often functions as if it were a legal rule.

In this regard, one must be aware of the important message of Professor F.A. Mann, the author of the worldwide famous book "The Legal Aspects of Money", that: "It is time to forget comity and to recognize the term as meaningless and misleading." Please see Note No. 29 of my main paper.

The last point which should be mentioned here is the impact of the W.T.O. system. The issues of electronic commerce will be included in the next WTO round. Detailed discussions are needed. Consumer protection in the digital age is, of course, very important. However, regrettably, the fundamental position of the general public or even the society itself has become more and more vital in this respect.

As seen in the collapse of the OECD activities on the M.A.I., namely Multilateral Agreement on Investment, the reality in recent negotiations for liberalizing trade and investments tends to reflect one-sidedly the major supply-side voices. Please refer to Appendix II of my paper.

Now, conclusion. It is quite understandable that not a few people regard the traditional framework of conflict of laws as insufficient and useless, in particular in the context of the Internet or the GII. However, the traditional Savigny-type conflict of laws should be viewed as the fruits of scholarly research over centuries, or even a crystal of our historical wisdom, even if it appears to be too fragile at first sight.

The most important premise of the traditional Savigny-type conflict of laws is the equality of every legal system which has something in common with the very basic structure of the world trading system.

However, in this respect, the GBDE's arguments are typical supply-side ones which remind me of the OECD activities on the MAI collapsed in 1998 because of the resistance of the so -called civil society. A well balanced approach is needed for the purpose of the sustainable development of the Internet and the GII.

That's the conclusion of my presentation. Thank you.

(APPLAUSE)

Mr. HENRY PERRITT:

Thank you, Professor Ishiguro. If I'm interpreting the schedule and my instructions from Ruth Day correctly, we have about 20 minutes for questions and discussion. Let me encourage those of you that might have questions or comments to begin making your way to one of these two microphones in the aisle. While you're doing that, let me ask a question of each of our panellists, and I'm going to put both questions on the table so you can think about it a little bit before you answer.

Professor Ishiguro, at page 3 of your paper, in talking about the differences and choice of law approaches between Japan and the United States -- yes, your main paper -- if I understood it correctly, you said that Japan prefers the traditional theories of the First Restatement of Conflicts to what you characterize as the American Jump into the darkness, under the current Restatement, which I think is a fair characterization of current American choice of law jurisprudence; how, if we take one of the traditional rules such as you apply - - the law of the place of the wrong - - to a tort like defamation, how do you decide what the place of the wrong is, if you have, let's say, defamation or copyright infringement through a website that's visible around the world?

My question to Mr. Lindberg is whether he sees prospects for transatlantic harmonization with respect to either adjudicative jurisdiction or prescriptive jurisdiction or both, given that there is a draft proposal before The Hague Conference on Private International Law that purports to harmonize jurisdiction on an international basis?

Professor Ishiguro, you want to respond first?

Professor KAZUNORI ISHIGURO: Yes. One thing which I'd like to say here is with regard to the applicable law in tort cases is that it always depends on the details of a case and that such an uncertainty which people may feel is more deadly severe in the United States legal system. For example, in California, how could they decide the place of wrong or how could they decide the applicable law in a tort case, and then how could you do it in New York? Every state has a different solution, and the total phenomenon in the United States, theoretically, is, if I may say the same thing again, quite different from other countries. Even in Canada, Australia, and even in the U.K. the traditional approach, namely Savigny-type one has been adopted in principle. The U.S. revolution began in 1963, but the counter-revolution began in 1969, and after this, perhaps U.S. courts and Congress laws cannot find the way to - yes, can't find a new way, it's like an impasse, I think, yes that's my answer.

Mr. HENRY PERRITT:

Mr. Lindberg?

Mr. AGNE LINDBERG:

Well, I certainly hope that the answer is yes, and I think it is, and you mentioned that the work being done with The Hague Convention, and that is a very promising work, and this forum will be an international conference on jurisdiction on the Internet, and I know that there will be participants from the ABA Jurisdiction Project at that place.

From the European perspective, I think it's very clearly stated in the words from the EU that they want to have a global solution. However, of course, they, at the same time, say that they want to play a very important role in establishing those rules, meaning once again that maybe not relying very much on self-regulatory methods but rather on regulation, and that's where my worry is, that there is a different approach between the U.S. North-America and Europe for self-regulation, that's my main worry actually.

Mr. HENRY PERRITT:

I don't see any great line at the microphones. Good! Let me ask you for the benefit or our reporter and also for the audience, if you would begin by stating your name and your affiliation.

Mr. ROGER TASSÉ:

My name is Roger Tassé, I am from Ottawa, welcome to Canada to all of you!

I wonder whether in effect in terms of federal states, like Canada and the U.S., whether in effect harmonization is not more difficult to achieve in areas of provincial or state jurisdiction. In our country, we have, for example, in terms of consumer protection, consumer legislation, both the Federal and the Provincial governments have responsibilities and have enacted legislation; same thing with jurisdiction liabilities. So there's a full range of issues relating to the Internet that fall on both Federal and Provincial jurisdiction.

I believe it's the same in the U.S.: you have 50 states, when one reads the cases emerging from your country, you have an impression that there's some very different views on some of these matters, although both in Canada and the U.S., one could say that the basic principles that Mr. Perritt referred to in terms of sovereignty of the states and perspective and adjudicative jurisdiction and enforcement are basically the same, but when you start looking at the details, you find that there are some important differences that businesses would have to understand.

My impression is that, having said that, my impression is that in the EU there is an instrument to harmonize the directive which might in effect give some edge to the EU when compared to Canada and the U.S., where I don't see -- maybe you have in your country the treaty power in the U.S. -- the same instrument to achieve harmonization in some key areas. Would you care to comment on this question of harmonization in federal states, like ours and yours?

Mr. HENRY PERRITT:

Well, one might also say Germany, because in Germany, for example, the competence to regulate broadcasting is at the lander or state level rather than the federal level, and so problems of federalism exist in several different parts of the world. Just to start off with an American response, I think I agree with you that there are mechanisms for forcing harmonization on states, for example, federal preemption in the United States. Since a treaty has the same status as a federal statute, it has preemptive effect, but just as in Europe, where a Commission directive has preemptive effect, it's one thing to say that you have a legal instrument to wipe out the differences among subordinate bodies in the federal states and it's quite another thing to deal with the politics of that.

And so I think one of the interesting questions for us to begin thinking about today and tomorrow is whether some of these uncertainties that we'll be talking about on the one hand create an opportunity to straighten out some of our domestic messes as in the U.S. with respect to choice of law by working on some kind of an international treaty, or whether the politics of that would just be so difficult that it would be altogether fanciful to undertake that approach. Do you all have responses to the federalism issue?

Okay, our second questioner.

Mr. CHRIS REED:

Hi, I'm Chris Reed from the University of London, I'm speaking after lunch, but that's too long to wait, so I'll get my question now. I actually wanted to just to --

Mr. HENRY PERRITT:

You better be careful though, because Ruth will deduct the time that you had.

Mr. CHRIS REED:

I know, I know, but I'm already down to 15 minutes this afternoon, so it's getting tougher.

I wanted to give an answer or additional answer to the question you posed about defamation and the place of the wrong, because we do have some European jurisprudence on that point, there's a case called Chevilon Press, it's about 10 years ago, and some recent litigation in London involving some Russians suing in England for defamation, all in the case of print media, but that crosses national boundaries, although less fluidly than communications by the Internet, and the results that we seem to have been coming up with in Europe are to say that for defamation anyway, the place of the wrong is very easy to determine, because it's the place where your reputation is damaged, and so if you have a reputation in a jurisdiction, you can sue there for the damages to your reputation that you've suffered in that jurisdiction. That's essentially the result of Chevilon and Press Alliance.

The complicating factor, though, is that you can only sue for the damage you have suffered in that jurisdiction. It was at one time thought that you might be able to bring an action in one of the jurisdictions where you had suffered loss and then claim compensation for all your other worldwide losses, and that's where the line has currently been drawn.

So in a sense, it's a fairly plaintiff friendly solution, in that defendant has to bring actions in every jurisdiction where he or she has suffered damage to his or her reputation.

Mr. HENRY PERRITT:

But what do you do -- wait, wait -- but what do you do about, assuming that a corporation can be defamed for a moment, what do you do about a plaintiff such as Yahoo as to which the reputation that matters, I would submit, is global?

Mr. CHRIS REED:

The current answer is that Yahoo's global reputation is made up of a collection of national reputations, and he would have to bring a suit in every country in which it had suffered loss.

Mr. HENRY PERRITT:

So there's adjudicative jurisdiction everywhere and the substantive law of every place could be applied, which sounds rather like Professor Ishiguro's jump into the darkness.

Mr. CHRIS REED:

Yes, I think that's right, it just happens to be the current solution I'm not saying it's the right one, but it's the place we're starting from, at least in Europe.

Mr. HENRY PERRITT:

Okay. Seeing no further line at the microphones, let me give Professor Ishiguro and Mr. Lindberg a chance to offer any concluding thoughts that they might have on this opening subject. Mr. Lindberg, you want to go first?

Mr. AGNE LINDBERG:

Sure. Well, some of the conclusions I'm drawing from the European perspective is that, yes, we are achieving a more predictive legal framework by the regulation. Problem number 1 is, and we already touched that because of your question here, is that it's a European solution and not a global solution and that's not a solution to the commerce problem. So it's both a positive thing that the regulation is creating a solution for Europe, but also a dangerous thing that we are kind of locking Europe in its own borders and not achieving the global solutions that are required for E-Commerce; that's one of the conclusion I'm drawing, the drawing of the work that's being done in Europe.

Mr. HENRY PERRITT:

Professor Ishiguro?

Professor KAZUNORI ISHIGURO:

Professor Perritt quite often referred to the concept of jurisdiction, but I'd like to say something about it. You say that prescriptive jurisdiction is the base of the total problem. It is a peculiar phenomenon in the United States. Now, for example, this type of discussion is based on the U.S. legal system or judicial system, namely the distinction between civil and non-civil matters, but there is quite a difference, for example, even in civil cases, between the U.S. and the U.K. There's a difference also concerning the notion of action in rem. In the U.K. only the admiralty case is in rem. But not so in the U.S.

So what I'd like to say is that what is most important for us is to realize and recognize the differences of our legal systems as discussed in my paper.

Mr. HENRY PERRITT:

Thank you. My impressions from the presentations that we heard this morning are that Europe, taking a more statutory approach, and as Mr. Lindberg said, loving regulation, is perhaps ahead of the rest of us not only in trying to craft language that addresses some of these new prescriptive, adjudicative and enforcement jurisdictional questions but, perhaps more important than that, developing real practical experience on hammering out differences among different sovereigns that make up Europe. I would think that the world can benefit from that experience in hammering out some of these differences, setting up processes for working them out and can draw some ideas about some of the institutional solutions that have been adopted in Europe.

What I get from Professor Ishiguro's presentation is that Japan prefers certainty offered by some of the traditional rules, especially for choice of law, and is more guarded about the application of adjudicative jurisdiction rules than American courts applying state long arm statutes. More troubling to me, he seems quite dubious about the prospects for harmonization, because, as he points out, the differences that we see, even though they may look like differences in detail, are in fact fairly deeply rooted differences of legal culture. He says we have to be attentive to those, and I understand him to be rather pessimistic about whether, even if we are highly attentive to these differences, that we can do much to paper over the differences.

My sense is that, whatever the prospects for success, we need to try. I think that there is one hard question about what we should try first, but that there also are some interesting new institutional possibilities.

The hard question, I would submit, is whether we should try, issue by issue, to understand the prospects for substantive harmonization first before we come to the choice of law and personal jurisdiction questions, or whether instead we ought to start with the choice of law and personal jurisdiction questions? In other words, if one is in a treaty negotiating mood, should you first try to negotiate a tax treaty or should you first try to negotiate a choice of law treaty for the Internet?

I'm not sure what the right answer is to that $64.00 question, but my sense is that we ought to do it on a sector by sector, that is to say subject - area by subject - area basis, because I think that's going to turn out to be easier. I think it will be easier to deal with problems of child pornography on a global basis than it will be to deal with issues of antitrust treble damages on a global basis, and so I think it might be a good idea to start with child pornography, because there's a large probability of agreement there and that would build confidence and experience that then could carry us forward into some of the intermediate areas where agreement may be possible but more difficult.

Now, we do have some new arrows in our quiver. It is remarkable to me that there is agreement in France as well as in Florence, South Carolina in the United States, that private self-regulation may have at least some role to play in connecting law with the Internet. I think our efforts are likely to bear the greatest fruit if we emphasize new hybrid concepts of regulation where we try to figure out what the framework, what the public law framework might be for private ordering.

That's exactly what's going on right now with the very competent and energetic aid of Barbara Wellbery, from the Department of Commerce, in the negotiations between the European Union and the United States Government about some sort of safe harbor under the European privacy directive for American companies that agree to comply with privately developed guidelines.

Those negotiations are difficult, but I think the idea is the right one, because on the one hand private self-regulation can be inherently global, nothing inherently territorial about that, and so that may be a very attractive answer to the personal jurisdiction problem. We already know, under the New York Convention, that you can deal with adjudicative jurisdiction issues by agreeing to arbitrate, and we already know, at least in the United States and Europe, and I think I understood Professor Ishiguro to say the same thing with respect to Japan, that at least in some commercial contracts the choice of law rule is: the parties decide. So whatever their contract says about the source of substantive law to be applied, that's the answer. So there is considerable power in private ordering.

On the other hand, I disagree with my friend David Johnson, whom I mentioned before, that one can take the Internet out of the world and remove it from the politics and the legal institutions that had been developed over hundreds and thousands of years, punctuated by wars fought over the definition of these legal systems.

However much we would like to have some sort of entirely autonomous self-governance for the Internet and electronic commerce, entirely free of unwelcome regulation in some traditional country of the world, we aren't going to have that, because the political reality in any democratic country anyway will force regulators and legislators to assert their traditional public law tools over the Internet, unless we're creative enough to figure out some new hybrid institutional solutions as an effective alternative.

Thanks a lot, and I think it's time for your coffee break.

(APPLAUSE)

Ms. RUTH DAY:

I think we're going to go ahead and get started and people will just be joining us as they come. One clarification that is very important: someone asked me where is this password to get into all materials on the website, if you look at the book that you have today, you open it to where it says Presentation Material, it's a green page, that will tell you how to access the material in full.

One of the questions at the end of the last panel was something about federalism in 50 states and the differences of law in 50 states in the United States. We have as our next panel a discussion of how that works in the 50 states, developments of law in the United States, primarily dealing with whose law governs and a practical explanation of how Web companies have been dealing with those differences over the last five years. So Liz Blumenfeld is our moderator, and as soon as she's ready.

DEVELOPMENTS IN THE LAW: JUDICIAL DECISIONS AND PRACTICAL APPROACHES

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Good morning or almost afternoon! I hope everyone's coming from outside. As the title of this panel suggests, we're going to be examining judicial decisions and practical approaches. Unfortunately, Peter Harter, who was going to join from EMusic.com isn't able to be with us today, but we have two great panellists. First is Professor John Gedid, who will take us back to law school and remind us of International Shoe minimum contacts analysis, he'll then review U.S. Internet jurisdictional case law and we'll see how that minimum contacts analysis holds up in this borderless medium.

Professor Gedid teaches at Widener University School of Law, and has a law degree from Yale; he's elected to membership in the American Law Institute and former Dean of Widener. Just as a note, since everyone else has noted in the ABA Jurisdiction Project, Professor Gedid is in charge of the ABA's Jurisdiction Project Sale of Goods Subcommittee.

Next, we're going to have Tom Bell, Partner at Perkins Coie, who will provide us with some practical approaches and their policy implications. Tom graduated from Columbia University School of Law and also is an adjunct at the University of Washington Law School, where he's taught Internet and E-Commerce law.

At Perkins Coie, Tom specializes in Internet and electronic commerce issues, and his clients range from Amazon.com, Yahoo, Dell Computer Corporation, Costco Online, Walldata, Northern Light and Wheel Networks. So we'll be able to get a really great perspective on the practical implications of some of these legal decisions as well as the policy implications of them.

After Tom's remarks, we're going to go through a series of hypotheticals that will help all of us take a look at what the case law really means in practical real life, and then we're going to try to open up the floor for questions. We got started a little bit late and we only have -- well, we're only supposed to have an hour, I think we've got less than that now. So I apologize in advance if we rush a little bit, but we will have a lot of information to share with all of you. So first, Professor Gedid.

Mr. JOHN GEDID:

Thank you, Liz. Good morning! You may be wondering how we got around to this topic. Let me tell you what happened: at an early stage of the ABA Jurisdiction and Cyberspace Project, we said: you know, we ought to take a look, what is the law, we're all talking about the law, what is the law in the United States?

A preliminary look disclosed to several of us that there was some confusion in the application of the International Shoe long arm jurisdiction principles, and so we did some digging: look at the cases you'll find in the materials and on the website, two efforts to review and explain the cases over primarily the last six or seven years involving long arm jurisdiction. Our focus is on the United States case law primarily the lower federal courts.

To understand what is going on in the lower federal courts however, we need something close to the heart of a professor, a quick review of International Shoe. We're going to focus on specific jurisdiction and omit general jurisdiction. For those not familiar with long arm jurisdiction principles of International Shoe in the United States, by definition specific jurisdiction means that the cause of action, the lawsuit, arises out of the context or specific activities of the defendant in the forum.

International Shoe established two requirements for the exercise of long arm jurisdiction, that type of jurisdiction by which a state can force an absent defendant to defend where the plaintiff's residence is, that's the way -- or place of business is, which is the way most of the cases arise.

The first prong, and it's the one we'll be focusing on, is known as the minimum contacts requirement or the power prong; this focuses on the nature of the defendant activities that impinge on, that touch on the forum.

The second prong of the test established by International Shoe is known as the Fundamental Fairness or Reasonableness prong; it's much less, as a practical matter, the second prong has turned out to be much less important, is much less important in the lower federal court cases and the subsequent U.S. Supreme Court cases that followed International Shoe, because usually, if you satisfy minimum contacts frequently, it is not unfair because of the nature of the defendant activities in the forum for the defendant to have to defend in that forum.

In particular, in reviewing International Shoe, what you need to focus on are the later Supreme Court cases, and I just want to mention very briefly the polishing up that four later Supreme Court cases gave to the minimum contacts test in International Shoe. First case, many of you will remember, is Hanson v. Denckla. Hanson explained that the basis for International Shoe and minimum contacts is the territorial limitations on the power of the state. You've got to have, as a result, defendant actions that result in contacts. You can't have a product wondering into the forum somehow through a scheme of distribution or third party action that somehow impinges on the forum; it must be actual defendant activity.

And the way that Hanson, the term of art or the concept that the Hanson case gave that is repeated in the later cases, the cases now, the Internet cases, that the lower U.S. federal courts are struggling with is the idea of purposeful availment. In defining these defendant activities, these minimum contacts, the Court said you've got to have some act or acts by which the defendant purposely availed herself of the privilege of acting within the forum state that invokes the forum states law. In other words, they're operating under the aegis of the law of the forum.

A second case in this series that polished up this initially somewhat vague International Shoe test was the World Wide Volkswagen case. World Wide explained further what purposeful availment means, and World Wide explained that it means a degree, a level of defendant activity that should warn the defendant, put the defendant on notice that if a dispute arises, he might have to defend in the forum, he might have to defend in one of these other states where he's selling or distributing or so forth. Notice the shift that's occurred here: from Hanson to World Wide Volkswagen, the shift is from some sort of territorial idea in Hanson to notice to the defendant in World Wide Volkswagen, to foreseeability on the part of the defendant to the possibility of a lawsuit being brought against defendant in the forum.

Next case in the series is Burger King. Burger King further explained this idea of what constitutes or further elaborated on this idea of what constitute purposeful availment, and defendant activity in the forum that will justify pulling defendant into the forum. You can't have isolated or attenuated contacts, they must be substantial, and Burger King -- and a lot of people overlooked this -- gave concrete examples of what constitutes defendant intent to target the forum, intent to act in a forum. Deliberate defendant activities: selling, perhaps would be an example, and in fact, selling goods is given as an example; the creation of continuing obligations with residents of the forum, which is exercising jurisdiction over the defendant, whether by entering into contracts or informal arrangements where information goes back and forth, and then the Court threw in two catch-all categories: doing business or other activities in the forum by which the defendant is taking advantage of the privileges and benefits of forum law.

The last case is perhaps the most difficult to explain, it's the Asahi case, a case where an Asian vendor of a tire valve that was incorporated into a tar which was then used on a motorcycle in California, was the defendant. In Asahi, you had a plurality opinion; it was a four for one split; Justice O'Connor, writing for one group said, adopted a narrow definition of a stream of commerce. Stream of commerce is a definition, is a concept of specific jurisdiction which has been developed by the lower federal courts. What it in effect says is if you put the goods into a chain of distribution and you know they're going to arrive in a forum, frequently, you will be liable to suit for the exercise of jurisdiction by that forum.

The opinion written by Justice O'Connor said: "Defendants merely placing the goods into the stream of commerce is not sufficient for the exercise of jurisdiction by a distant forum." Justice O'Connor explained you need something more, and that something more that will justify the exercise of jurisdiction is defendant action purposely directed at or targeting or focused on the forum, and just Justice O'Connor gave some examples: designing for the forum market, advertising specifically in the forum, or directing advertising at specifically or particularly the forum state, or the establishment of distribution channels with distributors in your control who will cooperate with you to develop a market in the forum. All of these things are sufficient to constitute to something more in Asahi that will render a distant defendant subject to jurisdiction.

And by the way, the defendant was held not to be subject to the jurisdiction of California in Asahi.

There was another group of four justices led by Justice Brennan, who adopted a broad interpretation of a stream of commerce. They simply said if defendants know the goods are arriving in the forum, then defendant has notice that defendant might be sued there. So a very broad definition of stream of commerce.

The reasonableness prong has hardly been a factor, the reasonableness prong of the International Shoe test. I'm not shifting from minimum to the reasonableness prong. I will suggest that only the first three factors are primarily what are looked at by the courts, but there are very few cases where the reasonableness factors have affected the outcome of the case. Most of the focus of the federal cases has been on minimum contacts, the first prong of International Shoe.

Now, here's what I find that I'm sure many of you are familiar with this, at first look, I find great confusion in the law review articles and in the lower federal court cases. When it came to websites with ads, there were two lines of cases, two groups of cases: one group of cases was headed by Bensusan and other similar cases that are listed in the written materials. Bensusan reasoned that an advertisement of a website which merely advertises is not sufficient to constitute purposeful availment under International Shoe; it simply doesn't show defendant intent to reach the forum that all it shows is a very general national, or international, approach.

But there was a second group of cases: the Inset and Maritz cases in the materials which you'll see, in which the courts said merely posting an ad on the Internet is sufficient to justify any state, and by inference, any sovereignty on earth, I would guess, to exercise jurisdiction. The Inset court held that Internet ads are different from earlier forms of communication, magazine ads, for example, tried to draw a distinction -- and, please, the language as to the Internet distinctions is the Court's not mine; I don't, for the life of me, understand several of the points that the Court was trying to make in those opinions.

One of the things the Court said is: since the Internet is designed to reach every state and since we, Connecticut are one of the states, therefore the defendant has purposely availed itself of coming into our state, and we can exercise jurisdiction. It's an amazing feat of logic, and the other point that the Court made in Inset was that large numbers of persons, 10,000 persons at that time were connected to the Internet in Connecticut, all 10,000 could have seen the advertisement, therefore, the State of Connecticut can exercise jurisdiction.

Some of these early cases dealt with situations involving magazine ads, pardon me, toll free telephone numbers; mostly the cases have said that they are general in nature, they don't involve targeting a particular jurisdiction and usually, if they're not following the Inset case, will not result in a constitutional exercise of long arm jurisdiction.

The same is true about, generally about an Internet website ad coupled with a magazine ad; if the magazine add is in a national magazine, many courts have held no jurisdiction can be exercised.

These same cases worked out some additional principles that have been fairly well accepted, I think they're fairly obvious, but the courts had some difficulty in discovering these.

First, the actual nature of the contacts, the number of hits and where they're from might have something to do with the nature of jurisdiction. Some cases said Internet contacts alone are not sufficient, that you need also non-Internet contacts, and finally, other courts reasoned and made clear that in looking at an Internet case, the Courts will consider the totality of context; that is Internet and non-Internet cases together.

Finally, in late, in mid to late 1997, a case was decided that I think changed everything that was going on in the United States and began the process of making some sense out of the long arm jurisdiction cases. That case was Zippo v. Zippo.Com. Zippo adopted a comprehensive approach, explained and reconciled the earlier cases, and carefully tied in the Internet technology and the long arm jurisdiction test to the International Shoe requirement; Zippo adopted what it called a Sliding Scale, a set of categories based on the nature and quality of the defendant Internet activity, three, Zippo described, looked at the cases and described three different, three categories of case in which you get different results.

First is the passive website where there's merely an ad no jurisdiction; second is the intermediate website where there is some interactivity between website and persons who visit, some of those cases may permit the exercise of long arm jurisdiction; and finally is the fully interactive website where large numbers of files are exchanged and where contracts are entered. Passive website is easy, that's the Bensusan case, mere ads on the Internet, Zippo establishes, do not permit the exercise of long arm jurisdiction.

The interesting category is the Zippo intermediate category. In this category, there's some Internet exchange of information, and the specific test in this category, what the courts are supposed to look at in an intermediate category case is the level of interactivity and the commercial nature of the exchange. They may be sufficient to show purposeful availment.

The third category is easy, that's the fully interactive where you're entering contracts, exchanging large numbers of files.

Conclusion. There's a, I won't say a sea-change, but Zippo represents a major step forward for this reason: the case was well-written, analytical and persuasive. As a result, numerous lower federal courts have bought into the Zippo analysis so that now instead of cases on long arm jurisdiction in the United States going off in a number of different directions, it appears that we have evolving a single test for application of the International Shoe minimum contacts long arm jurisdiction test. Most courts, following Zippo, now agree on a certain set of relevant factors.

Now, it's an evolutionary process, it's not final, there are going to have to be more cases decided until the application in many specific situations becomes clear, but at least things like the degree of interactivity and the actual, what is actually going on will inform the decision and you won't have, hopefully, you won't have courts exercising jurisdiction simply because they want to, which I think is what happened in some of the earlier cases. And that's where we are with U.S. long arm law right now, and I will now surrender the floor.

(APPLAUSE)

Mr. TOM BELL:

Ladies and gentlemen, it's a pleasure to be here today to speak to you. The title of my remarks is Sticky Sites, ECEOs, Bopping Beavers and Jurisdictional Anomalies, and I really have two goals in my presentation today: 1) is to present some practical insight into how we see companies dealing with jurisdictional issues, and 2) is to suggest some conclusions about jurisdictional issues from a policy perspective that we, as lawyers and policy makers, can take into account. I want to do that by using four anecdotes and three jurisdictional anomalies.

The anecdotes are as follows: first, this notion of a sticky site; it's a buzzword on the Internet right now, it is particularly popular in the portal area and it really means three things: it means that your site is attractive, so it draws people to it; 2), it's attractive so they stay there, meaning they do more than view the first page; and 3) it means that they come back. That's what makes up a sticky site.

If you think about the case law, particularly the Zippo analysis, an interactive site is by definition sticky, and so I think we're quickly moving, at least to the commercial area, to a situation where Zippo would dictate that jurisdiction is going to be had against most commercial companies who are doing business at least nationwide, and, for certain, worldwide.

Second anecdote: Internet Law Symposium which was really the birth place, at least in part, of the ILPF. About four years ago in Seattle we talked about the Internet and law, and the discussion seems to be whether or not there should be any law regulating the Internet, a lot of discussions about free speech in the Internet as a published medium. We only talked about the Internet as a commercial or E-Commerce medium as something that might happen potentially in the future.

Third anecdote: ECEOs, there was a very interesting article in a recent Fortune magazine, it was the cover story and it was about Internet E-Commerce companies and how the CEOs are having different demands placed on them today, particularly dictated by the speed with which you must get to market, because the first to market in the Internet has such a big advantage.

And finally, the Bop, the Beaver story. A true story, and speaking with a in-house counsel at a large E-Commerce company here in the United States, we were talking about what her job was like, and she described it as a carnival game, and you've seen the carnival where there's a table and there's usually a set of holes, and randomly this little plastic animal pops up and you have a mallet, and whichever animal pops up, you try to hit it before it can disappear, and she said: that's what my day is like; people are constantly creating these random business models, wanting to deploy them tomorrow and they want me to answer them, and so I'm constantly bopping down the beavers and telling them: no, you have to do this first, no, you have to do that first.

Now, three anomalies, and I'll try to tie this together at the end. First, the anomalies in the jurisdiction that we see in the United States really focus on business models, and as a caveat, tax nexus permeates this discussion, and there's a lot of discussion about tax nexus coming up later and some good papers, so I'm not going to talk about tax nexus, except as it relates to these other business models, because, again, when our clients are talking about whether they can do something in a particular jurisdiction, that is almost always the first thing they're worried about.

Now, one of the businesses we've been in lately, it seems like it's doing 50 state surveys and overseas surveys for a particular business model, let's talk about two of them: auctions and pharmacies, very popular on the Internet right now.

Now, the auction one is particularly interesting because in some ways the Internet is very close to a perfect market, where we went from a situation where people were basically selling on auction sites their yards materials to now helicopters, medical practices and other things you can find listed on some of the popular auction sites.

Interestingly enough, most states in the United States do have laws that regulate auctions; the statutes are old, they were intended to cover basically the itinerant or travelling -- the citizenry against the itinerant or travelling auctioneer who would come to the jurisdiction, take the goods for themselves, not under the consignment laws or charge exorbitant fees. They were also intended to -- they tended to regulate those people by making them register, in some cases take tests or post a bond.

One of the anomalies in the auction area is that if you think about it, online auctions really aren't auctions. I think they're actually much more akin to a flee market or swap meet: there is a person who is willing to provide a forum; the seller of the good doesn't lose control of the good, doesn't give it to the auctioneer, dictates the terms basically upon which it will be offered, and often times decides whether or not they're going to perform.

Nonetheless, 50 states worth of auction laws have to be looked at. Well, is it really an auction? If it is, even if it is an auction, where does it occur other than on the server of the auctioneer? And finally, most of the problems that have been associated with auctions have been in the sale and delivery of goods as opposed to actions taken by the auctioneer. So in some ways, the activity that seems to plead more for regulation would be the activity between the buyer and the seller as opposed to the party who's providing the forum.

Well, the practical approach for us is that if barriers to entry are low, generally speaking, we comply with the auction laws; if the barriers to entries are too high, then we're locked out of a state.

Second model: pharmacies. This is actually a much more compelling model, because states are trying to protect the help and safety of their citizenry. The 50 state laws tend to focus on the location of the pharmacy, meaning not that I'm in a state, but the physical address where the pharmacy operates, the pharmacist and licensing the pharmacist. There's quite a bit of a statute, particularly for Internet companies, on mail- order companies, because mail-order companies really prompted some of these statutes, at least provisions to them.

The notable feature of the 50 state statutes are that in most cases they require that an out-of-state pharmacy that is going to be delivering pharmaceutical products, drugs, in some cases even things as innocuous herbals and vitamins to a state, need to register as an out-of-state pharmacy.

Now, the anomaly that is created in some of the laws, some of the states have determined that it's so compelling to regulate this, it's so important for them to get registration from out-of-state pharmacies, that they are actually willing to go out on a limb and say that registering as an out-of-state pharmacy in and of itself does not subject the out-of-state company to tax nexus, which again is something that's critical to companies that are trying to take advantage of some of the advantages on the Internet.

One more anomaly -- I call this the big versus little. Interestingly enough, one of the phenomena of law in the Internet is that sometimes the big multistate, multinational companies are put at a severe disadvantage under regulatory frameworks vis--vis the small dot com crowd, as we call them.

Now, there's a couple of examples of this, tax nexus is a perfect example: if a large multistate retailer is competing with an Internet start-up that's selling goods from one location, generally speaking the retailer is at a disadvantage because they're charging sales tax in each of the 50 states. Now, they may take an aggressive approach, form a subsidiary and take the position that the online subsidiary does not have to pay taxes, but there are inherent risks in that model.

Data collection is another area where the differential can be a problem, and this extends not only to the states but to international collection of data and the privacy laws. For instance, if a large multinational company is subjected to privacy rules that require it to segregate data, okay, that it collects about people in one jurisdiction versus the other, then one of the advantages that a large multinational company has goes away, because in other words, they can't take advantage of the large data base that they have already collected because they have to segregate that data in order to achieve certain advantages.

Digital delivery of products is another category where the dot com crowd seems to be at advantage and in fact has led a number of companies to close their stores, consolidate their entity into a new one where there's a favorable tax jurisdiction, and provide products either online or at least not through a store at all.

Now, some observations that flow out of these what I call them jurisdictional anomalies: 1) is that a few years ago, and this goes back to ILPF, law was ahead of businesses. Clearly, today, that is not the case; businesses are doing business online, they are looking at 50 state and overseas laws, they are going forward.

The Internet pace demands of those ECEOs that companies act now in spite of jurisdictional uncertainty. New business models are facing legacy laws that may or may not apply to their business model whether it's called an auction or not, is it really?

Small companies can compete with large companies and in fact some of the laws give small companies the jurisdictional advantage. Jurisdictional anomalies occur in both laws old and new, not just in the legacy laws, through our 50 states surveys and overseas survey, we note that the practical approach is to advise to the highest common denominator of laws but to opt out of those jurisdictions where there is too much uncertainty or the regulation is overly burdensome.

The conclusion is that business on the Net seems to be a lot like the flow of water: if you open a channel and it starts to trickle out, it tends to erode itself into the path of least resistance. Jurisdictions that provide uncertainty or too much resistance will lose the flow of water and much like the water rights cases that we've had in the past, regulation will be a combination of both self-regulation and those imposed by the states that are just and fair.

Thank you.

(APPLAUSE)

Ms. ELIZABETH deGRAZIA BLUMENFELD:

What we're going to do now is go through a couple of hypotheticals just to bring some of this into context, and we'll get both John and Tom's perspective on these hypotheticals.

The first one, it's up there, an Illinois seller, posts an advertisement on his website, or a third party website for a widget, a sale of a good. California buyer visits the website and goes out and purchases the widget at a department store in California, so it's an offline purchase. Apparently, there's a serious defect and so the buyer sues in California.

John, what would the case law suggest?

Mr. JOHN GEDID:

Foregone conclusions: Bensusan and the other cases, passive website, no jurisdiction.

Mr. TOM BELL:

Easy case, I agree.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Okay, good! Next case. We like agreement here. Hypothetical 2: same as before, but the defendant adds a toll free telephone number at the website which callers can obtain additional information; does this change the scenario?

Mr. JOHN GEDID:

Most of the cases that have considered this have reached the conclusion that adding the toll free telephone number does not constitute focusing or targeting a particular jurisdiction, and without more, once again, passive website, no jurisdiction under International Shoe.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

And, Tom, do you agree?

Mr. TOM BELL:

I agree but my policy then will start to show three breaches: the toll free 800 numbers have been a characteristic of mail-order companies for years, and unfortunately, I think it's now the jurisdiction cases are starting to treat Internet companies with a little bit -- they're treating them differentially from the mail-order companies that have been shipping products telephone stations for years, and an 800 number should make the difference at all.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Okay. Next hypothetical 3: same as everything before, but the defendant also ran a magazine advertisement, national magazine ad in addition to the website advertisement.

Mr. JOHN GEDID:

Many of the cases that have considered this situation have said: as long as the ad is national, doesn't focus the forum or a particular state, no jurisdiction under International Shoe.

Mr. TOM BELL:

I agree. There's an interesting other comment here on international side, because among the 50 states, the online sellers don't usually differentiate very much in their websites, there might be specific persons to the pharmaceuticals or auctions who will give certificates, sweepstakes when there will be some bird seed down at the bottom of the cage to differentiate. But the real interesting one about this I think is the overseas implications, because retailers online have now started to direct a version of their site to a jurisdiction; it's in that language. It is quoted in those prices, it addresses the other public policy implications that come up in that country, so it's not just an advertisement, but it's clearly directed to a country. It would be interesting to see how this ends up being played out in an international context.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

I think that's right, and I think that, you know, your perspective on what constitutes directed or what businesses are thinking about when they're trying to target a particular country or state. For example, what about some of the local website areas that are directed towards a specific state or a particular country, are those considered directed sites and does that mean that any advertisement that appears on that site would also be considered directive?

Mr. TOM BELL: Yes, we take the position that in your 50 state question, it shouldn't be. You're just trying to comply with the law of the state, for instance, if they're giving gift certificates out and constant reply with the differences in California law versus the New York law, you're just being a good corporate citizen.

A little bit more difficult is the international context, it's the context specifically target the site to a country, but you're not doing that, but we'll see how those cases come out.

Mr. JOHN GEDID:

One further thought: in the United States, in the U.S. state long arm cases, there are a couple of cases which have said: if you happen to put an ad into a magazine that circulated in one or only a couple of states, that's sufficient targeting for the exercise of jurisdiction. So the hypo emphatically deals with ads, national ads in magazines distributed nationally or internationally.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Okay. Hypothetical 4 is a little bit more complex, we're trying to add some interactivity and go down the Zippo sliding scale. In this case, the seller adds a form on the website that the prospective buyer or interested persons can fill out, requesting information, and the seller will send the information on various products and their prices. The seller generally, as a business matter, answers all of the inquiries so that it is interactive in nature, and in fact answers the particular buyer from California's inquiries. The buyer goes out to the store, buys the product, there's a defect and the buyer sues in California; how does this change the equation or does it?

Mr. JOHN GEDID:

Well, we're now into the intermediate Zippo category, and depending on the way you read, the way the Court reads the level of interactivity and the commercial nature of the website, a court may reach the conclusion that jurisdiction can be exercised.

The argument that would be made is that the defendant is creating a demand in the forum by this interactive activity, that's targeting, that's directed at the forum, that is in effect in the forum almost doing business in the forum.

Furthermore, furthermore, under the Asahi test, defendant has notice, clear notice that they're dealing with residents of a particular forum, and notices are important. A number of cases had considered something close to this scenario; in the materials, the origin in Millennium cases held no jurisdiction.

The Vitulo case in which the information sent back touted a boat show in the residence forum Illinois, along with the knowledge by the seller that the goods went into Illinois and particularly were being sold in Chicago, it was enough to convince the Court that there was a sufficient level of interactivity on the totality of the contacts for Illinois to exercise jurisdiction. So this isn't clear either way, it's going to depend on the specific facts of the case.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Tom, let me ask you a question about this: from a policy perspective, I mean, the beauty of the Internet is the interactivity, and so the more that websites utilize the functionality, it seems like the Zippo is, Zippo case is saying: the more interactive the site is the more likelihood of jurisdiction being applied, so the more sophisticated websites may face jurisdiction across the country or across the world. What do you think about that?

Mr. TOM BELL:

I think that 1) it's an accurate statement of the law unfortunately, you know, on the Web right now is that brochure sites don't work; they're great for brochure purposes, but that's not how you become on the Web, and so I think if Zippo remains the law, which it likely will, then we're stuck with any stickiness or interactivity giving you jurisdiction wherever the site is accessible from, and gets me back to my wish that the court cases would focus a little bit more on the second part of the Shoe test, which they're just ignoring. I mean, if there's a highly regulated industry where there's particularly, you know, sensitivity protecting the consumers, then it makes no sense to have jurisdiction that goes so far as we just don't have any kind of private skill like that, and the fairness of reason test makes it work.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

And how do you think that would impact, say, larger companies or the smaller companies who, in terms of their interest or risk aversion of going out and engaging in a global commerce?

Mr. TOM BELL:

Well, that's interesting, maybe that is an area -- my first just reaction, and I've thought on that, is that perhaps that's an area where there isn't a jurisdictional anomaly, because if we're talking about just the website presence in many ways, the dot com crowd is much more interactive than the traditional company approach, although that's changing as the big companies migrate on line, so they may be in the same shoe, I have to think about it.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

But, yes, my question was: do they have the money to understand what all the jurisdictional issues are to, you know, research around the world?

Mr. TOM BELL:

No, they're not thinking of that for the most part.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Okay. We'll move on to the next hypothetical. Hypothetical 5, same as hypothetical before, same as hypothetical 4, but we're adding personalized E-mail, so basically all we're doing is increase the amount of interactivity; does it change the scenario?

Mr. JOHN GEDID:

I think it makes it more certain that jurisdiction could be exercised, this is more highly interactive, personalized, certainly. There's notice to the defendant that they're dealing with residents of the jurisdiction, and it meets the test specifically spelled out in Zippo, which is the exchange of files on a repeated basis. That is the definition of interactivity that justifies under Zippo the exercise of jurisdiction.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Okay. Last hypothetical. Hypothetical 6: now, the payment is online through a credit card, and the goods are shipped F.O.B. to the buyer in California.

Mr. JOHN GEDID:

Certainly, this is doing business that suits more than highly interactive, you've got a physical contact now coming from, in addition to the Internat contact with the forum, and there's simply no question under Zippo, this is going business and long arm jurisdiction is justified.

Mr. TOM BELL:

The interesting conclusion of that is if you want to be, if you want to have customer service on your website, you are going to be subject to jurisdiction under Zippo, unless you're willing to ignore your customers, then --

Ms. ELIZABETH deGRAZIA BLUMENFELD:

And that could lead to an interesting policy result.

Mr. TOM BELL:

It could be.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Let's take it one step further, sort of having a hypothetical 6.5, let's say instead of the goods being shipped through snail mail to the individual in California, it's a digital delivery of music; how would that change the scenario, or does it?

Mr. JOHN GEDID:

I don't think it does, you apply the same test: interactivity, the goods are arriving, they're resident in the forum. As long as the sender has notice, you've got an interactive site along with notice to the defendant, I think that in many cases jurisdiction, it's an intermediate category case, and under Zippo, many courts would permit the exercise of jurisdiction -- although, I should caution you, my area of focus has been sales of goods.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Tom?

Mr. TOM BELL:

Actually, I'm thinking that it's very likely we'll end up getting a case that says: digital delivery, almost by definition, gives jurisdiction under Zippo. I think it's too bad, because I don't know that the mode of delivery really should be treated differently, just think of the phone line versus the mail or road, but I think it will be.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Great. Now, I'd like to open it up for questions from the audience, we've only got a few minutes, run to the microphones.

Mr. VINCENT POLLEY:

Vince Polley with Schlumberger. Taking hypothetical number 6 and your reaction, Tom, just now to it, when you're doing digital delivery, you don't know where the consumer may be located. If you're sending a file by email, you have no idea which jurisdiction you're touching. In such cases, what's the proper jurisdictional scope?"

Mr. TOM BELL:

You know, I guess I have two comments: 1) is at least for the first question you don't know, you certainly have the capability to know, and if you're going through digital delivery, you may want to know. So I'm not sure we'd be out of the box by just saying we can deliver blind. I think we'll still be stuck with the assumption that because you have, for instance, a reversing hook-up functions or that you can find out who you're sending to, you're going to be stuck with at least -- perhaps this will be constructive knowledge, you know, where you could know or you should know who you're delivering, I'm not sure that's going to help us. I wish it would, but you know --

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Again though, I would comment that that would add a lot of transaction costs to the seller, a lot of investigatory work.

Mr. TOM BELL:

Absolutely.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Next question?

Ms. NATALIE JAMES:

My name is Natalie James, I'm from the Australian Competition & Consumer Commission. For those of you who aren't familiar with us, it's a very similar organization to the U.S.'s FTC. Perhaps if I can put a case to you that is similar to a matter that we're dealing with at the moment: a U.S. website passive, in terms of the description you've been given, and it's a U.S. company, but there's also an Australian version of the company that produces fliers, promotional material in Australia, targeted to Australian consumers that refers those Australian consumers to that passive U.S. site. In accordance with the principles that we've been discussing here, would jurisdiction apply with regards to that U.S. website?

Mr. TOM BELL:

The U.S. website, let me repeat the facts for certainty: U.S. website is totally passive and just providing information on the site?

Ms. NATALIE JAMES:

That's right.

Mr. TOM BELL:

That's all it does. Do you know if Australian site basically passes people to act?

Ms. NATALIE JAMES:

There is no Australian website at this stage, but promotional material that's been distributed in the country refers Australian consumers to that website, so it's got the Web address there, it says: go and check out at website for more information. Mr. TOM BELL:

I guess the only argument for jurisdiction would be that it's directed advertising; otherwise, the site is passive, at least under the principle that we've been discussing, it's likely a U.S. court case looking at it would say no jurisdiction, but I'm not sure that would -- I'm not sure how long that would last.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Okay, great.

Mr. JOHN GEDID:

To the extent that the Australian activity is focusing on the U.S. jurisdiction and targeting it, it's possible, but, you know, one of the things the Courts take into account, whether the cases say it or not, is the distance that the number of context, the nature of the context, but also the distance would know that the defendant is from the forum. It was no coincidence that in Asahi, an Asian company was held not subject to jurisdiction in the United States, and the same might be true in your hypothetical.

Ms. ELIZABETH deGRAZIA BLUMENFELD:

Unfortunately, I've been told I must stop. So we will be happy to take other questions after the next break. So thank you very much.

(APPLAUSE)

PLENARY: JURISDICTION AND CONSUMER CONFIDENCE IN A BORDERLESS MARKETPLACE: BALANCING POLICY GOALS

Mr. ROGER COCHETTI:

My name is Roger Cochetti and I'm with IBM Corporation, and it's my pleasure to introduce our first keynote speaker in the conference.

Since 1995, Robert Pitofsky has been Chairman of the U.S. Federal Trade Commission, and in that capacity, he has primary responsibility in the United States Government for both consumer protection and competition policy, regulation and enforcement.

Chairman Pitofsky and his staff at the Federal Trade Commission have perhaps more than anyone else anywhere broken new ground in creating a legal framework for consumer electronic commerce; they've launched at least four major inquiries on subject ranging from consumer privacy on the Internet to full and fair disclosure practices for Web based merchants, and they've taken over 80 enforcement actions in areas ranging from garden variety fraud to esoteric and complicated international Internet unique practices that have deceived consumers.

Currently, Chairman Pitofsky and his staff are engaged in what I think is probably their most ambitious undertaking to date, and that is to examine the whole range of consumer protection on the Internet issues, including those that include jurisdiction and choice of law, conflict of law and other international matters.

This puts our speaker this morning right smack in the middle of an emerging global legal and policy debate over jurisdiction on the Internet.

But Chairman Pitofsky brings more to this debate than the perspective of one of the most important government officials engaged in it, he is also a legal scholar in his own right. Former Dean of the Georgetown University Law Center and variously a professor at New York University, Harvard and Georgetown Law Schools, his publications include case books in both antitrust and trade regulation.

Among the most endearing quotes of the American author Mark Twain is his comment about the weather, which he says "everyone talks about it and no one does anything about it". To slightly paraphrase Mark Twain, this morning we're going to hear from someone who not only talks about jurisdiction on the Internet, but is actually in the process of doing something about it.

Please join me in welcoming Robert Pitofsky, Chairman of the Federal Trade Commission.

(APPLAUSE)

HON. ROBERT PITOFSKY:

Thank you very much, Roger, and I'm glad to be here with all of you. This is not the slot that I was supposed to fill. I was supposed to come on tomorrow, and I want to thank other speakers and the organizers of the program for readjusting things to allow me to speak today. My explanation is that I've been invited tomorrow to testify before a Senate committee and my rule of thumb is that when you're invited to testify by a Senate committee that controls your budget, it's a good idea to accept the invitation, which is what I'm going to do.

Let me start briefly with something that we all know: commerce on the Internet is the most amazing, dynamic, exciting development of the marketplace that we've seen probably in a hundred years. In the United States, 1 % of all consumer purchases last year were on the Internet, and we're told that by 2003 it will be 10 %, it will be a trillion dollar market. I mean, there's nothing quite like it in this century.

Second, I really believe that the issues that you're here to discuss, rule of law, jurisdiction, remedies, are the most important set of issues that have to be worked out in order for Internet commerce to thrive at the level we all want to see it thrive, and I congratulate this organization in getting ahead of the issue and holding this program.

I'm going to focus on consumer rights, but I suppose many of things that I say are relevant to other aspects of these problems.

To simplify, we need to serve two inextricably linked goals: easy to state, hard to do. On the one hand, from a consumer protection point of view, we need effective consumer protection against fraud and unfairness, and probably some dispute resolution, whether it's in the courts or in some other fashion, to make sure those rights are really vindicated.

On the other hand, we want to create an environment for sellers that is predictable and not unduly burdensome. The challenge is how do you do both those things at the same time?

As Roger pointed out, the FTC has been unusually active in this area, we held hearings, workshops, issued reports to Congress, offered proposals a little bit before other people were onto this set of issues.

We also, in the last year, have been very active in case by case enforcement on Internet commerce: we've brought 91 cases in less than a year. Our concern is that there is a sense among some sellers on the Internet that it's the Wild West and nobody is watching, and of course it is very difficult to monitor and to come up with solutions, remedies for Internet fraud. Incidentally, some of these 91 cases cross borders, of course.

Let me mention two lines of cases, a case and then a line of cases, to try to bring into sharper focus what the difficulties are going to be in enforcing the law in this area.

A few months ago, we learned of an E-mail offer which said essentially: "Your purchase order has been received and you will be charged, you will be billed unless you cancel the order." Many people received this kind of E-mail communication. It said: "You'll pay $197.00." And I can imagine families going around saying: did you order something? Did you order something? Maybe one of your children ordered something. Once you find that, well, nobody ordered anything for a $197.00, then you were told in the message: call what purports to be a toll free number, to cancel.

Well, it turns out that this number, in a complicated way, is a phone call from the United States to some island in the Caribbean so small that I never heard of it. You place the call and cancell the order.

Well, actually, when you place the call, you're linked to a pornographic site, so if you really want to stay on the line for a while, you can listen to some pornographic material, but most people hung up promptly, and they were not charged $197.00; what they were charged is for a very expensive phone call.

The way it went, the consumer pays the money to AT&T. AT&T, by contract, transfers most of that money to a British telephone company that serves the Caribbean area. That telephone company transfers a portion of the money to an agent located in Gibraltar, and that agent transfers a portion of the money to the person who initiated the website in the first place. If you have thousands upon thousands of calls, there's some real profit in that kind of behavior.

We had never brought a case before, I believe, where the defendant was someone who we could not name, but we did in this case; fortunately, a fair amount of the money still resided with AT&T, and we put a freeze on the transfer of the money, and we were able to do some good in preventing that fraud to continue.

I mention this matter because when we say we can ask the Government in some foreign jurisdiction to enforce their law against the fraud; the complexities of fraud on the Internet are so astonishing that we must think through what we are saying when we say we'll ask somebody else to enforce the law.

A second line of cases, I should say of our 91 cases on Internet fraud, most of them are the kind of 'snake oil' deception that we haven't seen for a long time in this country. Frequently, they're medical cures in which you are offered a portion of shark cartilage to cure cancer, Alzheimer's and other serious disease, miracle cures that you can buy on the Internet. The FDA has eradicated that kind of behavior in magazines and brochures long ago, but many people do purchase these products. The number of people who look to the Internet for medical advice and for pharmaceutical purchases is really astonishing.

Now, those frauds probably violate the law of virtually every country that's represented in this room, but they don't violate the law of every country in the world, and it may be that the initiator of that program has located itself in some country that has no consumer protection law at all, and we will have all sorts of difficulty in dealing with that.

We've initiated dialogues at the Federal Trade Commission, as many of you know, we had a two-day dialogue on June 8th and 9th, and received after that 70 submissions raising issues, asking questions, answering questions about their views in this area, and including industry, consumer groups, government groups and academics.

What I'd like to do is discuss with you today a little bit of what we learned from those submissions. Of course what I will do is raise more questions than offer answers, more issues than rules, but that's the way life is when you're starting out in the regulation of a rather new and extraordinarily dynamic sector of the economy.

First, let me summarize what we think we learned about the concerns that different groups were expressing about Internet regulation. From the business point of view, the concern was that access to customers on the Internet meant that you were subject to jurisdiction around the world and there are extraordinary complexities and consequences to that. For example: suppose a Pennsylvania company selling toothpaste puts on its website a comparative ad of its toothpaste and some toothpaste in Northern Europe. Well, comparative ads in many parts of Northern Europe are illegal, and you would be subjecting yourself to charges in France, I know, and perhaps in other places.

A company advertising a Florida amusement park may run an ad on a site targeted to young people. Well, marketing to kids in Denmark may be illegal, and they would be subjecting themselves to charges if viewers in Denmark were to take a look at that website.

Also, there's a problem of different levels of disclosure in different countries around the world. If you're selling an appliance, what do you have to tell consumers about the levels of efficiency of the appliance? If you're selling jewelry, what do you have to tell people about the qualities of your gold or your diamond product? Guarantees vary tremendously in different countries. What is a full guarantee? What is a limited guarantee, full warranty, limited warranty? What terms do you have to disclose? Do you have to disclose sufficient terms to satisfy the law in every single country?

Same thing applies with cooling off rules, which vary considerably from country to country. How does a seller navigate in a world of law like that? That's was the principal concern.

Consumer concerns had to do with the difficulty of enforcing consensus rights in a foreign jurisdiction. Incidentally, it is still true that 67 % of consumers feel insecure in making purchases online. Now, these surveys are always difficult to evaluate, that's down from what we had heard earlier, about 85 % thought it was an insecure environment, but still, it's a large proportion of people doing business. Confidence is essential for the Internet to fully realize its potential as a marketplace. Concerns are: where is the seller located? You can't necessarily tell from an offer on the Internet. What law applies? Is there really any consumer right when you take into account the cost, the delay, the travel, the unfamiliarity of other legal systems? Is it possible that there is no private right as a practical matter when you have to look to the courts of a jurisdiction 5000 miles away to give you relief?

From the law enforcement point of view, what we heard was that the sellers are often anonymous, the transaction complex -- my Gibraltar hypothetical certainly illustrates that point. Can we really -- can law enforcement officials in different countries really make a difference in this area?

How do we meet that challenge? There are choice of law rules, but do they work, what is the result? We heard a lot in our submissions about the difference between rule of origin and rule of destination. Sellers prefer rule of origin, of course. On the other hand, does it provide any real consumer protection if the consumer must depend on the law of Turkey or Singapore or New Zealand?

Also, I would be concerned about the possibility of a race to the bottom, that Internet sellers will locate themselves in those jurisdiction where they think the law is least likely to interfere with their occasionally unprincipled marketing programs. Is that imaginary, will it really happen? Well, we have a little experience in the telemarketing sales area, and the fact of the matter is that telemarketing has been a major priority of enforcement by the Federal Trade Commission, the FBI, the Department of Justice, State regulators, and we've had great success in curtailing the level of fraud in telemarketing, but I know as a fact that some telemarketers previously located in Los Angeles or Las Vegas or Miami are now living comfortably in other countries where the law does not hamper their activities in quite the same way.

We also heard about rule of destination, but I've already indicated that business feels that if it must abide by those rules, it will impair their ability to do business on the Internet at all. What are the rules? How can we reach out and impose obligations on the business community? In the United States, there are constitutional limitations that you've already heard about through the Due Process clause, that these rules must be fair and there must be minimum contacts in order to impose the law, so that the answers obviously in that area are not clear.

One of the possible solutions -- I've already heard a little bit of some of them in my sitting here this morning -- one solution, the most idealistic, cosmopolitan solution is that we ought to have substantive convergence, in which case it won't matter that much where the seller is located if the law in the seller's jurisdiction and the buyer's jurisdiction is roughly the same.

Now, nobody thinks you can achieve total convergence on every issue, but I think the argument would be that the core principles of fraud and unfairness and deception would be worked out in such a way that they were comparable or similar in every jurisdiction, after all most jurisdictions would challenge the legality of pyramid frauds, debiting your account without authorization, and so forth.

But as I indicated earlier when I was talking about comparative advertising and disclosures, there are many jurisdictions in which many principles that are important to sales are quite different. Perhaps the core would be an agreed upon set of disclosures: there ought to be a disclosure on who you're dealing with; there ought to be a disclosure of the location of the seller. So far so good. But once you move on to a disclosure of the terms and conditions that are relevant, now you're talking about disclosures that are going to vary from country to country, sector and sector around the world.

My agency, and I believe a good part of the United States Government, would support legitimate efforts at convergence. But we also recognize that different rules in different countries reflect their history, their values, their culture, their level of economic development, and convergence is not going to be an easy approach.

Let me say that I've been active and interested in the convergence issue in the antitrust field ever since I came to the Commission, and indeed even before I arrived there, and precisely because of differences of values, goals, levels of economic development, convergence is extremely difficult to work out.

We've had some success at the OECD and in the western hemisphere in agreeing in the antitrust field upon a fairly uniform reaction to cartel behavior, but that's because cartel behavior violates the law of virtually every jurisdiction that's relevant for purposes of antitrust, certainly all of our major trading partners. But when you move past cartels and you start thinking about market access, dominant firm behavior, mergers, the fact of the matter is we are so different that the idea of producing convergence in the near term is virtually impossible.

Will there be convergence in the longer run? I believe there will. In a global economy, we're going to see more convergence.

Has there been some convergence as a result of imitation by learning? Absolutely, it's one of the most important least remarked upon developments in recent years. A country sees the way other countries do it -- what are their successes, what are their failures -- and they adopt programs that are consistent with other countries. We're seeing a lot of that going on.

Will we see that in the Internet consumer fraud jurisdiction area? Probably, but it's a slow process, two steps forward, one step back.

We could look, I'm still talking about solutions, we could look to international treaties, mostly, they would be bilateral, perhaps some would be multilateral. The idea would not be to agree on everything but to agree on core principles, but there are tremendous problems, and the last program, last panel talked about them to some extent. The factors that determine choice of law, remedy, jurisdiction are so elusive it's going to take a while to work those out. When you list your product for sale on the Internet, do you subject yourself to the jurisdiction of all these multiple countries and areas around the world? What creates that obligation? Is it the toll free number, is it the credit card, is it the advertisement and so forth? It's going to be very difficult to work out, and I will only add that the United States makes life more complicated through 50 states jurisdictions that are not going to be precluded or excluded from contributing to the solution in this area.

Finally, there's the possibility of self-regulation, and I've been a supporter of self-regulation. I think where there are the right circumstances, where industry is truly committed to self-regulation, where there are market incentives, self-regulation can work, and of course, this is an area where I wonder if law and courts really can be the solution to all problems. Can we really expect that consumers making an individual purchase in Turkey, Singapore or New Zealand are going to solve their problems by bringing a case? In the United States, we like to think about law as the solution to almost everything, but it may be that there are some circumstances in which self-regulation can do as much, and in a more flexible way, than law.

I notice that there is some self-regulation on the Internet already: I see some third party mediation and arbitration; I see some arrangements in which the moneys involved in a purchase are placed in escrow, and the money is transferred to the seller only after the buyers has indicated satisfaction with the transaction; I notice some insurance remedies beginning to develop in this area. Is that the solution? Well, I don't know.

Dean Perritt raised a question that I would like to spend a minute addressing. He was talking about substantive convergence, international treaties with respect to jurisdiction, and self-regulation, and the very thoughtful question that was raised was: which should go first, what should we pursue most aggressively in the first instance? And I think my answer is: it would be a mistake to pursue any one first. There's no reason why all three cannot be pursued: substantive convergence, of course, international treaties, self-reg. Indeed, if we were to single out one set of solutions as opposed to the other two, then we may distort the policy that will eventually develop, and I guess that leads me to my conclusion here, and that is that in an area like this, there's a range of ways to address the problem: there is existing law, common law, fundamental statutes that regulate deception. There is also new legislation, which may very well be necessary, and certainly, at a certain point, if there's no other way to get there, then there must be legislation, or the Internet, as a medium of commerce, as a new marketplace, will never reach its entire potential, and the Internet is too good for consumers and competition to allow it to be thwarted by bad behavior by a few actors.

Third, there's consumer education, I barely touched upon that this morning, but, you know, in the end, it may be that the best way to protect consumers is for them to understand what their rights and what their vulnerabilities are when they purchase on the Internet. Finally, there's self-regulation.

My own thought is that no one of these approaches is going to carry the day. The challenge is to come up with the right mix where law and legislation is the appropriate approach, self-regulation, consumer education, the appropriate mix to get to the right solution with the least burdens on this fantastic new marketplace.

Thank you and I'll be glad to answer some questions.

(APPLAUSE)

Mr. ROGER COCHETTI:

If I may, as the introducer of the Chairman, I begin with a question: one of the many conundrums that arises, Chairman Pitofsky, in looking at this question from the point of view of the business community is that there are certain embedded costs, compliance costs that occur when a merchant does business on the Internet or on the Web; assuming they intend to comply with regulations of a variety of jurisdictions, there are costs associated with that, and if one considers the prospect of industry self-regulation, which is one of the options you've discussed, there are typically compliance costs associated or development, compliance and other costs associated with industry self-regulation. I think one of the issues that would be useful for you to address is: would in your view the costs of industry self-regulation be additive to the costs of compliance with existing regulations or would they be a substitute for the costs of compliance with the existing regulations? In other words, it begs the very political question of whether, to the extent that industry engineered and introduced programs of self-regulation, whether these would in any way be a substitute for the existing narrative of national regulations or whether they would simply sit on top of the existing framework?

HON. ROBERT PITOFSKY:

Excellent thought and question. My own view, my own experience in dealing with this area is that the burdens that the companies voluntarily take with respect to self-regulation will substitute to some extent, I can't say that they will entirely displace the costs of complying with government rules, but quite often when you head off a complaint through effective self-regulation, then you take yourself out of a situation where litigation is the solution.

You know, I think we all know that litigation is very expensive, and quite frequently leaves both parties with a sense that they did not get what they want. There are some companies, I know, that have developed self-regulation through escrow insurance and so forth, and their experience, as I understand it, is that their business expands, it is a form of marketing to convince consumers who are thinking of doing business on the Internet that it's a secure medium. If you ask people who are familiar with computers and the Internet but have never made a purchase, what is your reason, the number 1 reason by a mile is: we don't think it's a secure transaction, I'm not giving my credit card to some machine where I don't know where, how it's going to be used. You can argue with them all you want about, well, you gave your credit card to the waiter in the restaurant, how is this different? People think it's different, and they will have reservations about doing business on the Internet until they believe it's a secure transaction, and companies that have developed systems to convince people it's secure increase their business, and I think decrease the complaints.

Mr. ROGER COCHETTI:

Thank you. We have time for a couple of questions from the floor, so if I can ask the questioners for the record to introduce themselves, thank you.

Mr. HENRY PERRITT:

Hank Perritt from Chicago-Kent College of Law at the Illinois Institute of Technology.

Chairman Pitofsky, one of your comments I thought was intriguing, you've referred to the FTC's great success in eradicating medical quackery ads from magazines, and it seems to me that the Commission did that by targeting a particular type of intermediary, the magazine itself as opposed to the originator of the ad.

Now, if that is an apt model for regulation of the Internet, it would suggest that intermediaries, portals and providers of connection services and that sort of thing become attractive targets, which is, of course, the opposite of what some segments of industry have sought in seeking immunities for intermediaries, and I wonder if you would talk a little bit about how you see things playing out with respect to this tension of the difficulty of going after the little guys on the one hand, who may almost certainly have greater guilt in some sense, as opposed to the convenience of going after the highly visible intermediaries as a regulatory strategy.

HON. ROBERT PITOFSKY:

Well, let me say first that I don't really want to take credit for whatever success has been achieved here, I really meant to give credit to the FDA in their enforcement efforts.

There's always an interesting tension between how hard you lean on the medium, the party that's communicating the message, and I do believe, I think the Commission believes that newspapers and magazines, and you could argue the Internet, cannot completely wash their hands of any responsibility. But my own view is that imposing liabilities by law on 'the medium' is unlikely to occur. Magazines and the networks, for example, have self-regulation programs in which they have voluntarily reviewed ads that they find in their medium. I think they've done some remarkable and fine work. We have asked them through the years to pay attention to that responsibility, and I think in some cases they have and some cases they have not.

I would be a little uncomfortable, I would want to think long and hard before imposing a responsibility by law on a portal site to check out the substantiation of every claim made through their auspices, and that would be extremely burdensome for them.

Mr. MICHAEL NELSON:

I'm Mike Nelson with the Internet Division at IBM and I also serve as the Executive Director of the Global Internet Project, which is a consortium for a team of companies that's trying to promote private sector non-governmental solutions to some of the problems you spoke about.

As one of the non-lawyers in the room, I was very glad to hear your emphasis on self-regulation, and I was interested to go into a little more detail on something you said about how self-regulation works best when the stars are aligned and the environment is conducive to that.

I'd like you to spend a little bit more time explaining exactly what you mean, you know, what kind of environment fosters self-regulation and in particular what can governments do to create such an environment that will spur companies to do the right thing? And certainly IBM has been pushing very hard in this area and I think we've taken some positive steps, but as you said, it doesn't work everywhere, I'd like to hear a bit more from you on how we can make it work in more places.

HON. ROBERT PITOFSKY:

Yes, I think it's a critical issue. I would say there are two stars that must be aligned: 1) is that the important responsible leaders of the industry must see it in the industry's interest to achieve a kind of self-regulation that people have confidence in, and I'll come back to that in a minute, and the second is there must be incentives, there must be marketing incentives to insure, to create the energy to impose self-regulation.

I told the story before, it's not an Internet story, but I think it's worth noting. 25 years ago, a question as sensitive as those relating to the Internet was how to resolve the behavior in the United States of funeral directors. They were thought to be a group of people who took advantage of a vulnerable audience and exploited them. Critics wrote books, a very powerful book on the 'American Way of Death', there were exposés of the way funeral directors behaved, and at the request of Congress, the Federal Trade Commission passed a rule, in my view, one of the better rules the Commission has ever enacted, requiring that funeral directors behave in a certain way: disclose terms and conditions, not impose onerous conditions and so forth.

The funeral industry resented the rule deeply and felt that government, Washington, had no business regulating such a local business, and they would not go along with the rule. Indeed our study showed that year after year, we would sue funeral directors, we would collect the fine, the fine would go to the Treasury, and then we would sue the next year and the next year. Compliance with the Federal Trade Commission's rule was something like 35 %). 65 % of the funeral directors spent very little time abiding by its rule.

About two or three years ago, the leaders of the industry came to the Federal Trade Commission and said: look, this is getting us all nowhere, people still resent funeral directors, they still have no confidence in this industry, our reputation is poor. We will undertake enforcement of your rule; we will monitor, we will crack down on people who don't abide by the rule, we will fine them and they will pay their fines to the Treasury, and we will send them to education programs if we find them not complying by the rule.

I am told that compliance with the rule is now in the 90 % range, because they came to the view that they were all better off abiding by the rule than not doing so.

There are other self-regulation programs in the United States, the advertising community has a very effective self-regulation program, I sometimes think they're tougher on ads than we would be in their enforcement program. But you have to have a group that comes to the conclusion that they must crack down on the irresponsible few in order to preserve the integrity of that sector of the economy. It can be done.

Does it always work? On the contrary, I would say that quite often self-regulation has been proposed as an excuse to turn Congress aside and the agencies aside, and that it doesn't always work, but where it does, it seems to me that agencies like mine have a responsibility to cooperate.

Mr. ROGER COCHETTI:

I think that brings us to the end of our program. If I could thank Chairman Pitofsky again for joining us and remind everyone that we are now about to go to lunch, and we go out, and I guess there will be signs outside. Thank you again for joining us.

(APPLAUSE)

LUNCHEON WITH SPEAKER

Mr. DENIS HENRY:

May I have your attention, please? Can everybody hear me okay? Thank you.

My name is Denis Henry and I'm from Bell Canada, and before I introduce our luncheon speaker, I'd just like to say a few words on behalf of Bell Canada, and that it's a pleasure to welcome you all to Montreal and to the ILPF conference on jurisdiction.

As one of the founding members of the ILPF, and myself personally as well, I have been involved with this organization for about four or five years since its inception, and we're very proud of our association with the organization, and very privileged to sponsor this lunch today.

On your behalf, I'd also like to just thank the conference organizers who I know have put a lot of work into this, in particular Chairman Katoh, Ruth Day and Marilyn Malenfant, so I think on our behalf I'd suggest a round of applause.

(APPLAUSE)

Like most of you in the audience, Bell Canada and the BCE group of companies have an enormous stake in the growth of Internet and E-Commerce, we're involved in virtually all aspects of the Internet; not only are we Canada's largest carrier, but we have international alliances with Ameritech, MCI, worldwide investments through Bell Canada International. We're also an Internet service provider in Canada, the largest, I believe, we're involved in content on the Internet, and we have an E-Commerce provider in the family, BCE Allergis, and not to mention of course BCE's significant interest in Nortel Networks in the manufacturing sector. So that's why we're delighted to be part of an organization that is making an important contribution to, and understanding and hopefully a resolving of the many outstanding legal and policy issues associated with this medium and affecting the growth of E-Commerce and Internet.

As many of you know, Montreal is not only the home of our head office and the host of this venue for this conference, it's also famous for its many summer international festivals, and one that just completed this weekend is the Just for Laughs Festival, it's a comedy festival, and I don't know if anybody noticed in the paper yesterday but they had a listing of the supposedly best jokes that had been heard at the various venues. Of course, lawyers came in once again for their share of abuse, and being a lawyer myself I thought I'd share one of them with you, which was heard at one of the local venues.

It seems that during the creation, God was somewhat sensitive about public relations, and so God said: "Let there be a devil so people don't blame everything on me." And then he thought about that a bit, and then he said: "And let there be lawyers so people don't blame everything on the devil!"

Now, I hope lawyers such as ourselves, that are practising lawyers and others involved in this area, can be seen as part of the solution and not as part of the problem, and that brings me to the serious part of business of introducing our distinguished speaker, who is indeed part of the solution.

We are privileged to have with us today Mr. Francis Gurry, who is currently Assistant Director General and Legal Counsel of the WIPO, the World Intellectual Property Organization in Geneva; he's responsible for WIPO's activities in the field of electronic commerce, and the WIPO Arbitration and Mediation Center, as well as for international legal and constitutional questions, and as well the organization's relations with industry.

He holds law degrees from the University of Melbourne, and a Doctor of Philosophy from the University of Cambridge in the U.K., and he's also Vice President of the International Federation of Commercial Arbitration Institutions.

Before joining WIPO in 1985, he practised as an attorney in Australia and taught law at the University of Melbourne, and he's the author of a couple of text books details of which are in your materials, in bios.

I think we are indeed privileged to have with us someone of Mr. Gurry's stature and experience, and he's about to share with us some of his experience and intellectual property and dispute resolution, and I would please ask you to join me in a warm welcome for Mr. Francis Gurry.

(APPLAUSE)

Mr. FRANCIS GURRY:

Thank you very much, Denis. Ladies and gentlemen good afternoon! Let me start by thanking Katoh-san and Ruth Day and Marilyn Malenfant also, and the ILPF for giving me this opportunity to speak today, as well as Bell Canada, to speak at this luncheon.

There's a certain amount of confusion about the topic on which I'm supposed to speak, it's a bit like the question of jurisdiction itself, and it reminds me, I think it was Winston Churchill who said that the only good spontaneous speech was a prepared one.

In any case, I'm very grateful to have the opportunity to speak at a luncheon, because the origins of intellectual property in fact go back to food. The first recorded instance of intellectual property was amongst the sybarites, who, in the 7th Century before the present era or B.C., developed a system whereby they gave a 12-month monopoly to the chef who developed the best recipe in the course of the year, and from that system, we have gone on of course.

Now, the sybarites lived in a self-contained world, they didn't have international franchises or fast food chain stores for exploiting their intellectual property, and it's a very different situation obviously from the one which we confront today of the fact of global markets and the growing fact in the making of the Internet as a medium for global transactions or international transactions.

How do we approach these questions which are being discussed in the course of this conference? What I would like to address is just a few reflections on a number of considerations that I think are probably anterior to the classical legal considerations that we use for determining jurisdiction. At least, they're anterior to those questions when we consider jurisdiction as an international problem that requires, because of the Internet and the global medium of the Internet, an international solution.

I think there are five or six rather such challenges that I'd like to mention briefly, which require to be addressed. The first is the economic challenge or the challenge of economics, which is the problem of cost really.

Chairman Pitofsky discussed this morning the growing segment of the business to consumer, electronic commerce, it's still a much smaller segment of electronic commerce of course, but it's one that will require for its continued growth the confidence of consumers and particularly first time consumers in order to take the plunge and actually consummate a transaction on the Internet. And one of their fundamental questions of course is going to be: what happens if the transaction breaks down, what happens if the goods that are delivered are faulty or if they're indeed not delivered at all?

Traditionally, we would approach this as a classic situation in many circumstances for arbitration; that is a contract between two parties in which often there is an international character. I think that some 33 % of the sales of Amazon.com, for example, are international sales, and around 35 % of the sales of CD Now are also international sales.

There is a problem however in applying arbitration as a mechanism, as we've seen in the case that was heard in the Supreme Court of New York last year, Brower v. Gateway, which concerned an item, a consumer item of reasonable value, somewhere around about $2,000 or $3,000. There the court struck out as unconscionable a clause mandating ICC arbitration since they say that the cost of the deposit for the arbitration would exceed indeed the cost, the value of the transaction itself.

So cost is a problem really that in anterior to forum or even lower, and how will this be dealt with as a matter of civil dispute between the parties? Well, one suggestion which I think was explored a little this morning also by Chairman Pitofsky is that this is an area in which we can take advantage of the policy of private sector lead in developing mechanisms for securing consumer confidence in electronic commerce.

What needs to be developed really is the equivalent of the customer complaint service, an electronic customer complaint service. It is a means of resolving disputes, of course the difficulty is that it's unilateral means of resolving the dispute and doesn't involve any third party, third party as an arbitrator or a dispute resolver.

I notice that in the draft directive of the European Commission, on certain legal aspects of electronic commerce, they intend to mandate out-of-court settlement schemes for consumer disputes, and there is an implication, if I read it correctly, although it is a little ambiguous, that this would involve dispute resolution bodies.

I think however that probably the cost considerations are such if you're talking about an argument over the delivery of five CDs, for example, over the Internet, the cost considerations are such that really one needs to start with the company itself or even with the industry as a self-regulation scheme for industry. If it's on a company basis, then one needs to investigate a different role for dispute resolution bodies from that which they've had in the past, namely a role rather of certification of the appropriateness of the dispute resolution model that is put in place internally. In other words, to adopt a system which is modelled along with certification of privacy guidelines for Web sites that is being developed in North America.

One then must contemplate, I think, if one does go down that track, the possibility of some form of appeal mechanism, and indeed the reverse side of the cost consideration, and that is who would finance the appeal mechanism or the electronic ombudsman and whether this would be one that, something that is financed by industry on an industry-wide scheme.

Let me leave the problem of cost and turn to a second dimension, I think, that underlies jurisdiction, which is really the question of the sociology of the Internet; it's a popular medium, of course, and here we confront, in relation to jurisdiction, the problem of complexity, the fact that, of all legal disciplines, perhaps conflicts of law and jurisdictional questions are already the most complicated for lawyers, let alone translating that onto consumers.

I think if you imagine an average consumer going along to a record shop to buy some CDs, and you imagine he or she being told that in fact this might be regulated by the Brussels Convention or indeed it might be the Lugano Convention that will decide that, or it's perhaps the U.S. restatement of law, that the consumer is unlikely to have very much confidence in the transaction. So one of our tasks, I think, as lawyers is to deal with this fact that we have a very complex series of questions here, and that we really need to approach it, I think, from the point of view of simplicity and minimalism. I think this is one of the lessons that we derive from the WIPO Internet domain name process which we have recently completed.

You may be aware that we were mandated by the U.S. Government to investigate certain questions relating to the interface between intellectual property and domain names, and in particular dispute resolution for disputes between those two areas.

I think that in our interim report, which we published in December last year, we adopted what we thought was the best solution: the design solution; that is, we said that we thought that a compulsory part of the domain name application ought to be a submission to an out-of-court procedure, administrative procedure, which would deal with or would have the scope, the competence to deal with any intellectual property dispute arising out of a domain name registration.

I think the reaction that we got to that however indicated that the design solution was not necessarily the best solution and perhaps a sociological approach to the question was one that was more likely to work in the context of the Internet. And in consequence, in the final report, which we published at the end of April, we adopted two sets of recommendations in this regard really: the first dealing with the question of jurisdiction, where we tried to achieve simply minimum certainty that at least the domain name applicant would be required to submit to jurisdiction in the country of his or her domicile, as well as the country of the registrar, and at least that amount of certainty, whatever other rules might apply, would be created.

In connection with the administrative dispute resolution procedure, the approach we adopted was to say that in fact throughout the whole of the process and the many meetings that we held in various parts of the world, not one voice had been raised against cybersquatting, not one person had defended the practice of cybersquatting, so this was at least a minimum common ground that we could fix upon as the scope of an administrative procedure. It was of course a question of defining further what was meant by cybersquatting: essentially the deliberate bad faith abusive registration of a domain name in violation of trademark rights, and we adopted in connection with the definition also a fairly minimalist approach in confining it to trademark rights and not dealing with, for example, personality rights or geographical indications or any other forms of intellectual property.

We think that if the recommendations are ultimately accepted, and we are hopeful, and indeed, there's a meeting tomorrow in Washington of the ICANN Accredited registrars, we're hopeful that they might be in this respect adopted voluntarily by the ICANN Accredited registrars, and at least part of the reason for that would be that we didn't adopt the best solution; we adopted the minimal or the certain solution that sociologically might work on the Internet.

Let me move then to a third challenge, I think, that underlies the approach, the whole approach to jurisdiction, and that's one that I'll mention very briefly, particularly speaking in English in Montréal and that is the linguistic or cultural challenge: even more difficult as a challenge than the one of choosing the applicable law is to chose the applicable language for any dispute resolution procedure, which will be out of court.

You will have noticed the difficulties that have been associated with the linguistic side of the expansion of the European community or union recently, and the difficulties they're getting into.

In a recent edition of the Communications Outlook published by the OECD, they reported that 87 % of all Web pages linked to secure servers, which was one measure that they used of electronic commerce, 87 % of all Web pages linked to secure servers were in English, but as the digital economy expands, what language will be used for the dispute resolution procedures that may be developed for it?

In the domain name process that we undertook, the approach again that we've adopted is a fairly minimalist one and which we intend to deal with on a case by case basis really, or rather I should say registrar by registrar basis. It seems that, for example, the administrators of the Country Code Top Level Domains in Central America are going to adopt our recommended dispute resolution procedure for the CCTLDs in that area over the world. That would no doubt have to be a procedure that's conducted in Spanish.

Similarly, one can imagine that a registrar accredited in Japan would need to have at least the option of a dispute resolution procedure in Japanese available, if not this is the only possibility.

Let me leave then the linguistic challenge and talk very briefly again about a further challenge which is underlying the solution to jurisdiction at the international level, and that's the institutional challenge.

Of course, jurisdiction is a horizontal issue and we have a series of international organizations which have competence in respect of particular subject matters, and it raises the question, that I'll come back to, that was raised by Dean Perritt this morning. If you take intellectual property, then the exploitation of intellectual property on the Internet requires of course that it be licensed, and a precondition to that is that the legal systems of the world recognize the validity of electronic contracts, but this is an issue that shouldn't be dealt with by intellectual property, any intellectual property institution, indeed it's already dealt with in the UNCITRAL model law on electronic commerce.

The same applies to jurisdiction more broadly where there is at the moment, and it's best to put it on the table, a sort of land grab-on with UNCITRAL involved, The Hague Convention private and national law involved, UNIDROIT are involved, and various specialized agencies involved in various particular aspects of the question.

This is ultimately something that if there is to be a generalized solution to jurisdiction, it will need to be dealt with.

There is also associated with the institutional challenge, but coming at it from a slightly different perspective, a process challenge. How do we achieve the results that we may wish to achieve in respect of jurisdiction internationally?

There is here, I think, a wide spread recognition of the fact that the traditional multilateral process of negotiations and conclusion of a treaty and entering the force of a treaty really have a considerable amount of difficulties. Typically the period of time required for multilateral negotiations for the conclusion of a treaty is between three and five years on a fast track.

Then, you have the treaty being, needing to enter into force, and for a treaty that is going to deal with the question of jurisdiction on the Internet, a global medium which needs to be dealt with in a uniform way internationally, if it is going to be treated internationally, you then have to get all of the countries of the world to sign on, of which they're roughly I think about 185 at the moment.

Even an instrument like the New York Convention on the recognition and enforcement of foreign arbitral awards, which is universally recognized as a very good instrument, it was concluded in 1958, the number of contracting parties now is I think 120. And as was said this morning, you only require one jurisdiction out of it, and it doesn't work.

Well, there is, we are in a stage of a certain amount of experimentation in new processes; the United States Government, in relation to the White Paper that is issued on the management of Internet names and addresses, and indeed WIPO, in our Internet domain name process, have tried a process of mixed private and public sectors. It's modelled on the Internet technical process, that is the process used traditionally in the early days of the Internet for getting new technical solutions, but unlike technical solutions, social and legal solutions can't be tested beforehand, and also unlike technical solutions for which this process was used, there is not necessarily a defined objective of the process beforehand, and our own reflections on having just gone through one of these processes is that certainly we are, as I say it, in a stage of experimentation, and we need to refine the process, if it is going to be a viable one, for involving the public and private sector, and in particular I think three matters need to be addressed: 1) is that in this sort of a process, there is no objective means for distinguishing the value to attach to an opinion expressed by, for example, the European Union and its member states jointly, on the one hand, or on the other hand, the value attached to an opinion expressed by an individual. And self-regulation, in this form of process, requires a certain amount of discipline on the part of governments to stay out. And the success of this sort of process ultimately would depend on governments being heard appropriately within the process.

It's not the case that we should go back in this form of process to the system of one vote per country in the United Nations General Assembly but it is the case that we have to develop mechanisms for attaching weight to various sectors, expressions of opinions.

A second comment would be that the process is not always transparent in respect of participants and there is a possibility of sabotage. In a legislative process, normally, it's very clear where the interests are coming from, that a certain industry voice is expressed, you know what the industry is representing. But in an open participatory process on the Internet it's not always clear who represents who, and this is something that will ultimately need to require some attention.

And a final comment then on the process I think is that if it is indeed going to be superior to the traditional multilateral treaty making process, it's also got to be expeditious; it's also got to correspond in time or produce solutions in time which correspond to the urgency of the need for the solution.

Let me go then to a final area of challenge and just mention the question of enforcement, the challenge of law. There are various adages in all legal systems: where there is no remedy, then there's no right; or where there is a wrong, there must be a remedy; or a law which is not respected is not a law at all. In the intellectual property field, this is a vary grave difficulty, because you have the easy possibility of the distribution online of software, on a global medium of software, proprietary software of music files and ultimately of film files, audiovisual files.

Three suggestions that we would have, following our experience recently in this regard, are as follows: 1) the problem of anonymity, soon or later, needs to be resolved on the Internet. In the domain name process, we recommended that the contact details of any domain name holder should be publicly accessible. I notice in the European Commission's draft directive on certainly the aspect of electronic commerce, it also envisages that any Internet society service provider, should be required to publish its contact details.

Of course, the difficulty we run into here is the difficulty of privacy protection and more particularly perhaps freedom of expression, and the possibility of expressing oneself freely without the fear of prosecution. You may have noticed that a number of Internet sites have grown up recently from opponents to the regime in Serbia at the moment. So these concerns are real and legitimate concerns.

Our approach in the domain name process that we undertook was that for as long as the generic top level domains remained undifferentiated, that is as long as any applicant can chose for himself or herself which website it wishes, which domain it wishes to be priced in, regardless of its activity, then anonymity cannot be allowed, you must have publication, because anyone could perform a commercial service.

We did recommend however that consideration should be given or further explanation should be undertaken of the idea of creating a generic top level domain, which would be not only non-commercial but use restrictive. Non-commercial is not sufficient because you could distribute, for example, software free over the Internet, and it's not a commercial activity.

So it would need to be circumscribed and use restrictive, and we feel that that's a question that requires further consideration because it's obviously one that -- the definition of the use restriction is one that is a difficult question.

A second possibility in relation to enforcement is to use wherever possible the technology and the possibilities of the Internet. The administrative domain name, the administrative dispute resolution procedure that we've recommended for cybersquatting can work only if the registrars agree to enforce the results of the procedure. And there are other possibilities, for example, in the Digital Millennium Copyright Act for such systems of technological enforcement of the result, of the legal result in fact.

Then a final comment, if I may, in relation to Dean Perritt's question, and that is that in the field of copyright, we have adopted the approach historically -- when I say we, it goes back over a hundred years -- we have adopted the approach historically of dealing with uniformity in the substantive law as the first way of approaching the question of jurisdiction. The Bern convention and more recently the copyright conventions that were concluded at the end of 1996, establish a uniform set of rules that apply whenever a work is published in any Bern union country or by a national of one of those countries, and that establishes the substantive law.

However, I doubt that this is a model that is necessarily applicable to all disciplines. It may however be the case that our experience in the Internet domain name process and the trademark question, and in the copyright question, indicate that perhaps one way of proceeding is by building blocks and dealing subject matter by subject matter, whether a one deal is with jurisdiction or substance in the subject matter, rather than having one generalized solution.

Thank you ladies and gentlemen.

(APPLAUSE)

Mr. DENIS HENRY:

Excuse me, just before you do leave, we do have a couple of moments for questions, so if there are any, I'm not sure we have microphones out on the floor, but if you could speak up, by all means, feel free to ask Francis whatever questions are on your mind.

PANEL: BANKING AND FINANCIAL SERVICES/ELECTRONIC PAYMENT SYSTEMS

Mr. THOMAS VARTANIAN:

Good afternoon! My name is Thomas Vartanian of Fried, Frank, Harris, Shriver & Jacobson, and I am the Chair of the Cyberspace Law Committee and the ABA's Jurisdiction in Cyberspace Project that you've heard so much about today.

In that regard, while everybody is getting seated and our panelists are getting ready, on behalf of the ABA, let me take this opportunity to thank the ILPF for their gracious invitation for us to participate in this conference and to be able to share so much with so many luminaries in this business toward the goal of creating a better product.

As you may or may not know, the American Bar Association, as Dean Perritt said, has nine working groups, working on nine separate areas of the law with the intent to produce white papers on those nine areas of the law that will be released July 17, 2000, at the Annual Meeting of the American Bar Association in London. So I invite you all, as Dean Perritt said, to become "asterisks" in this process and to become involved. I do also wish to thank all the people who have asterisks next to their name who are working so hard and vigorously on this project, as well as some of the people who haven't shown up in this program, and in particular Tom Pitegoff -- where's Tom? Tom, let everybody see how handsome you are. Tom, who is the Chair of the International Transactions Subcommittee of the Cyberspace Law Committee, has been working diligently and hard with us to try to make this project the reality, which is sometimes very difficult.

We're going to talk about banking and payment systems for a little bit, and unfortunately since we're running behind, it may get a little shorter than it was anticipated. But we're going to try to run through from a jurisdictional point of view the issues that affect financial services. In that respect, banking should be viewed in its broadest context, and that is, financial services which includes not only the traditional bank, savings and loan, credit union, but also insurance companies, securities companies and mutual funds, to the extent that they are moving value across the environment and, in this case, through the Internet.

Let me give you a little perspective before I introduce our panelists. Twenty-three years ago, I graduated from law school; in fact, it was this week I started at the Office of the Comptroller of the Currency in 1976 in Washington, D.C. The OCC is the agency that regulates national banks in the United States. The first thing that was thrown on my desk at the OCC was an application by a national bank to establish an automated teller machine, an ATM. I can recall at that time going into meetings with various officials and various lawyers at the office of the Comptroller of the Currency, wringing our hands over what this was all about, and what the legal permutations would be in establishing a machine some place in a remote location that would actually be a bank and offer banking services.

Eleven years before that, the Supreme Court, in U.S. v. Philadelphia National Bank, said that the antitrust laws applied to the business of banking because it is a locally limited business, a business built upon physicality. Well, obviously, the fixation on a branch and location in banking and the payment systems has changed dramatically.

Today, financial services is a much broader concept in which there is no friction of location any longer. The friction that made us focus on the branch as our bank is totally disappeared, and in fact, now we not only use ATMs, we're moving to the next dimension where the ATM may become obsolete, because your cell phone may become your ATM.

This is an electronic wallet that I picked up in Swindon during the Mondex experiment in 1996. It comes with its own smart card and its own keyboard that allows you to do a whole number of things including store five currencies and load them on the smart card, depending on what country you're in. It holds information about transactions and allows me to move money through a telephone.

So, perhaps the future of banking is to put an ATM like this in your pocket. Alternatively, you may soon use a Sun Microsystems ring like this one that has a 64K microprocessor chip in it and be able to load on to it a number of things. I happen to have on this ring $1,000 of electronic money, a stock trading program and an online banking program. And all you would need for your ring is a serial port connector for your computer and you could go anywhere and do anything that you want to do in the financial services area.

In fact, when I came through customs yesterday, the agent who was checking my credentials said: "That's an interesting ring, could you show me it?" I showed her the ring, and I was afraid she was going to ask me questions that would probably lead to some conclusion that I was violating some laws by crossing a border with this ring. She didn't, but it shows you where the future of financial services is going. From that perspective, let me raise several questions that I hope we can explore today.

In terms of the Internet, in terms of jurisdiction, and where financial services seem to be going, a critical threshold question, is "where is the financial services companies market?" A "market" for a financial services company has been an important concept throughout the years. A good example in the United States is the Community Reinvestment Act which requires a financial institution to do or not do things based upon the identification and delineation of its market. So in cyberspace, where's the market?

Who regulates the products? That's a particularly interesting question for companies that are offering offshore products, such as offshore mutual funds. In that respect, if you are a company in the United States offering offshore mutual funds, you have to satisfy not only the requirements of the SEC but the requirements of the country into which you are selling.

Where can you be sued if you're a financial services company. Where is the lending decision made? That's a particularly interesting question from the point of view of the tradition of how we regulate financial services companies, because the lending decision and where it's made often indicates the location of where the home office or branch is, or in other words, where the banking is being done.

How should we tax financial services? Where's the flow of income going and where is it coming from? How does Federal preemption, a concept that's been used in banking law in the United States for many, many years, apply in a world where we no longer have geography, location and boundaries?

So with that, let me leave you with several questions that I'd like the panelists to focus on and we can come back to in the question and answer period.

My job here, by the way, is basically to moderate our fine panelists. I have left you materials that you can find, I think, on the ILPF website that will eventually be distributed: an article on jurisdiction and there's a brochure, I think, for our book, 21st Century Money Banking & Commerce, that the ILPF has been distributing. So, let me leave you with the following questions.

We must consider whether cyberspace is a place, a state of mind or a medium of communication. Depending on where you come out on that question, I think you come to different conclusions with respect to the jurisdiction of financial services.

Second: does technology blur the distinction between what is a financial product and what is a financial service? In many cases, it may.

Third: does the velocity, the volume and scale of the amount of information in cyberspace and the speed at which information can move through the Internet change the nature of the information such that the rules by which we play have to change?

Fourth: is there a difference between push and pull technology; that is, does it matter for jurisdictional purposes in the financial services world whether the information is pushed at you or you pull it?

There's an interesting case that we haven't discussed today that I always find somewhat interesting. It's U.S. v. Thomas, a criminal case dealing with jurisdiction out of the Sixth Circuit in the United States. In that case, Mr. Thomas, who was a California resident, put up a server in Los Angeles and distributed pornographic materials through that server in Los Angeles. Now, in the United States, pornography rules basically turn on the community standard of where you are located. So, the question in that case was: do we use the standards in California or do we use the standards in Tennessee where several FBI agents took down this transmission, saw it and thought it was pornographic?

It was stipulated in the case that if this information was to be judged by the standards in California, it was not deemed to be pornographic. I'm not sure what is pornographic in California, but this information was deemed not to be pornographic. So, the question became: whose rules do we use?

Mr. Thomas defended in a number of different ways, offering a number of different technological defenses under the law, and you can read those in the privacy of your own home, but one of them that I thought was rather ingenious was the fact that Mr. Thomas said: "Well, you must understand how technology works, I didn't send any pornography over the Internet. What I did was send out a number of 0's and 1's from my server in Los Angeles, and unfortunately, your computer in Tennessee had a dirty mind and it took those 0's and 1's and it created a pornographic picture. Now, the judge didn't buy it either, but the point is interesting: he was making a point about push and pull technology, which may in the final analysis say something about Internet jurisdiction.

And lastly, should we look at solving the significant issues of jurisdiction or all the differences that we find? In that regard I've come full circle in terms of thinking everything is changed to now thinking that not much has changed, and that what we really have to do is think about the rules at the margin that are really substantially and materially affected by cyberspace. But, when all is said and done, financial services and banking are very affected by regulation, and there are two key questions we are left with in that area: Who will regulate the company? (That is, where is it chartered, where does it have to register?) And who will regulate the product, whether it be a deposit account, loan or security?

With that, let me begin with Hank Judy and his presentation. Hank is Of Counsel at the firm of Kirkpatrick & Lockhart. From 1975 to 1982, he was General Counsel of the Federal Home Loan Mortgage Corporation, otherwise known as Freddie Mac, and before that he served in various capacities as an attorney, and finally Deputy General Counsel with the Federal Home Loan Bank Board.

He will be followed by Chris Reed. Chris Reed is currently Reader in Information Technology Law and Head of the Information Technology Law Unit at the Centre for Commercial Law Studies, Queen Mary and Westfield College, University of London. He's responsible for the University of London's courses in Information Technology Law, Internet Law and Electronic Business Law and Telecommunications Law; he's the editor and part author of Computer Law, and the author of Electronic Finance Law and Digital Information Law, all books on these areas of the law.

So, with that, let me hand it over to Hank to begin his presentation. I'll get my gadgets out of your way.

Mr. HENRY L. JUDY:

I'll put my gadgets up here, and we thank you with your Captain Video ring here.

I started out, by the way, with this page display because I'd like you to know that in the materials that you'll be able to download, it's not just a power point presentation, but there's note pages, there's 25 slides and below each one of the slides, as you would load them down, is a text and that text is in effect a paper.

Okay. Let's see if we can get this going. Well, first let me say I'm very glad to be here; my mother's father was born up the river at a place called Trois-Rivières, and so I'm part French Canadian, and it's a pleasure for that part of me to come home.

I'm going to go rather rapidly because of the restrictions on time here. What I'm going to do is take you through what we have been doing in our banking and payment systems working group of the ABA project of which I'm a co-Chair, and I'm going to take a number of the things that are in the work of that group and see if I can extend them more generally and in effect address some of the questions that Tom raised.

I'm going to put my remarks under some eight headings, they're up here, certain focus questions, nature of banking and the like. The first thing I want to indicate to you is that in our working group, we had, to be candid, a number of false starts, and the false starts dealt mainly with trying to figure out in this banking area what really we needed to focus on, and we finally decided we needed to have three test questions, and they were the ones here: does the issue arise because of electronic commerce over the Internet? Is it solely a banking and payment system issue? And is it a jurisdiction issue?

And the reason why we did that is that it is terribly easy in this area to get confused that simply because an item is in the rules and regulations and statutes applicable to banks, it's a banking issue. That isn't true. Advertising consumer protection rules are a simple example, and it's easy to get lost with in the fascination of the technology and not focus on the fact that what you're really talking about is what are the things that the technology makes different about banking?

I also would just note that, to reinforce what Tom said, we have concluded that in order to do a proper job of our report, we need to abandon any formal legal distinctions and classifications of entities under particular national laws, we need to include the other entities that are listed here and focus on financial services, not just on banking, and we need to focus on functions not entities.

This is a necessary approach conceptually for several reasons, which are listed up here. First, it's very important to focus on the fact that money is a belief system. You know, if you don't get that straight on the metaphysical level, everything else isn't going to work.

The next thing you need to understand is that evidence of money is or can be made a digital file, and that all financial services and products are evidenced by digital files. And in fact, any entity with an adequate information processing technology can perform the functions of a bank, and I'm sure you're familiar with the idea that in the future, software companies in partnership with others may be the most potent competitors for traditional banks.

It's also important to focus on these definitions for yet another reason, and that is: banking and payment systems, more than any other commercial area that I am aware of, is historically geographically bounded; it was geographically bounded for two basic reasons: there were limitations on the transportation of persons and the limitations on the transportation of information.

You know, in the United States, at the turn of this century, there were some 25,000 banks, and they have virtually no branches, this was a period of time where a person couldn't travel more than 15 miles in a day, and an institution had to keep all the records in a single office because it couldn't transfer the necessary information to branches.

So the history of U.S. banking and the banking in most jurisdictions is a history of breaking out of that historical boundary and through subsidiaries, holding companies, ATMs, faxes, telephones, regional compacts, different kind of facilities, joint ventures, everything possible to make themselves more geographically diverse, and in doing so, they took the simple world in which the plaintiff, the defendant and the entity were all subject to a single jurisdiction, and many of these problems were created.

The next point that I would like to put on the table is a description of traditional payment systems as opposed to alternative payment systems, and to put some essential facts on the table in that regard. The immensity of the traditional payment system is something that almost nobody appreciates. It is literally the case that the average daily volume of currency, transactions globally, electronically is over a quadrillion U.S. dollars daily. Daily, not weekly, not monthly but daily. In fact, the average daily volume on the FedWire, which is one of the principal components of the traditional payment system, it's run by the Federal Reserve banks, is over a quadrillion U.S. dollars daily and that has been the case since 1997.

There are many technological reasons for that which are listed up here, but I would like to focus on some of the legal reasons why that's true, or some of the legally relevant reasons. The first: it is the nature of a payment system that everything has to balance at the end of the day, literally and figuratively, globally. At the end of the day, you can't balance your system the way I may balance my cheque book periodically by just stuffing in a fudge factor, and this has been true as a result of centuries of evolution. We've had payment systems in the developed world for a thousand years, and it has become more sophisticated over time, that single basic idea that everything has to balance at the end of the day is true, and this is the result of the web of contracts, protocols, practices, et cetera, that are mentioned up here.

This creates a kind of virtuous cycle and that virtuous cycle was essentially that vast volume makes disputes intolerable, and the lack of disputes enhances volume. That's been true in the paper world and technology simply enhances and accelerates that cycle, and I'd like to throw that idea out, just hang it out there, that this may be the model for business to business issues in the Internet.

In the interest of time I'm going to skip over any discussion of alternative payment systems in any detail, I do want to make just one or two points and that is that this is where the jurisdiction issues are, but at the same time, this is a trivial portion of the volume in the global payment system. In fact I think people need to think that there is not a sharp distinction between alternative payment systems and the traditional payment system in that, at some point, as any drug dealer will tell you, it is necessary to convert the notational money in the alternative payment systems into real money.

Let me also emphasize that the alternative payment systems are retail systems, they are business to consumer and consumer to consumer transactions, they are not business to business transactions.

Let me now turn to the core of the principal argumentative type of material that I want to put on the table here, and that is what I've denominated as five commonalties among financial products and between financial products and non-financial products, and they are summarized up here, the commonality of digital files that all products and services have the separate dimensions of formation and fulfilment; that they are the commonality that one occurs online and the other, offline; that product and financial products and services involve applications as well as files; and the commonality of substantive and transactional independence, or interdependence. I want to go through those very quickly one at a time.

We know, as lawyers, that blackacre is not literally purchased, that what you purchase is an intangible fee interest by contract, that's the legal formation, and we know that the taking of the occupancy is the legal fulfilment.

The same thing is true of loan contracts, loan proceeds, telephone order, mail delivery, and that distinction between formation and fulfilment is a critical distinction for the analysis which is going to be coming up.

There's also the commonality of all of these products and services, financial and non-financial, is that they all can be broken down into the formation process being online and the fulfilment process being offline, and even if it is the case that the product is delivered digitally, as in the case of songs or software, something like that, it is a separate process than the formation process.

In that sense, and I'm circling around to approaching Tom's question about whether the Internet is a mindset or the Internet is infrastructure or what the Internet is that to a large extent, for the underlying commercial reality is that the medium is irrelevant and it doesn't matter whether it's the musty conveyancer's office of it is the website.

I would also like to put on the table the idea that many financial products are essentially applications, an application being an instruction or set of instructions applied to data. If you think about it, a check is an application; it is an instruction -- pay -- and everything else is a name field. In fact, on a programming level, the only difference between a check and a draft is that there's one less name field in a draft, and if you also think about orders to buy and sell securities, deposit money, fund a loan or any of these other transactions, they all fit exactly the same pattern, and if you think about it on a maybe even deeper level, there's absolutely no difference between the payment system and security settlement system anywhere in the world.

In fact, the digitized evidence of the digitized transaction is normally stored in electronic database, and the usefulness of these database is inseparable from the applications that create them. We also use Java Applets, Active X Controls and Agents to form these contracts and thus at all levels, solicitation, formation, evidence, infrastructure, fulfilment, transactions, financial and non-financial are the same.

Let me skip ahead and make the next point -- Tom is giving me a signal here -- that every transaction be it financial or non-financial is interdependent in the sense that you can't solve the tax problem, you can't solve the pricing problem; if you can't solve the price problem, you can't fill out the regulatory application; if you can't fill out the regulatory application, you can't get approval, and the idea that has been suggested that we try to solve these problems on a sector by sector basis is, to my mind, for that reason for the practical lawyer not a particularly useful way to proceed.

I want to throw out a couple of ideas within the time available on the country of origin, country of destination issue and tie it into these commonalties. This is a fundamental issue, as the previous speakers have indicated, it's commonly presented in either or terms, business community versus consumer groups and the like. I submit that that's not the way it is, and it largely depends on whose ox is being gored. With respect to privacy, the EU wants country of origin controls, and the U.S. wants country of destination, and when it comes to other elements such as, to take an odd example, genetically modified organisms, the reverse is true. The EU, even internally, has different views, that is in the draft directive that the EC, the draft EC directive on electronic commerce, it has a country of origin orientation whereas proposed amendments to the Brussels and Lugano conventions have a country of destination origin, and you really cannot say that there is a consistent view all around.

These commonalties, to my mind, point at a given direction and that is that the answer to the country of origin/country of destination debate is both, and that the banking and payment systems is an example of a possible general approach, and that is it is quite common for banks to be regulated with respect to certain things at the origin, for example, safety and soundness, and to be regulated at the destination by other with respect to other items, particularly compliance and consumer protection.

I'm going to skip over the material on EC, and lay out a couple of ideas on solutions. First is I agree totally with everything that has been said so far as to the importance of international agreements, and that they are most likely to work; I also agree that using private approaches as opposed to governmental approaches in using the government as an enabler works well and it works well in the banking area; however, there's one area that I would like to emphasize in conclusion, and that is the role of trusted systems, and by trusted systems, I mean any kind of guarantee type of system.

The problem with international agreements is that they may very well work over the long term and within a life time of my children, and that kind of thing, but we need something that works well in the shorter run, and if you just look back into the history of banking, one particular little thing stands out, at least in my mind, as an example.

It used to be at the beginning of the Renaissance that, if you wished to send money across Europe, there were certain independent third parties in which you would commit that money, or you would put them in a position of guaranteeing it, and if you put the right paper in the hands of the right person, that money was good from London to Lombardy, it was good from Paris to Prague, and one of the principal organizations that did that worked out of a little house in Frankfurt, and they had this sign above their door, and that sign was painted red and it was in the shape of a shield. In German the words for red shield are "Rot Schild", which becomes Rothschild, and that red shield was the early Renaissance equivalent of an icon, and if you just think about that for a minute, and it was that trusted third party, it was that trusted system that produced the result of the commerce being able to work in that dimension at that time. And the trusted systems that we have been discussing here, that have been discussed in other forums, the type of things that AOL does with its trusted merchant program, and the like, are the successor to the red shield, and I submit to you that if you're trying to build consumer confidence with respect to a financial system, that is the way to go in, and I'm not arguing for any particular systems, but that is the way to go and you need then to wrap it up with international agreements that work to set a larger infrastructure. With that, I hope I haven't exceeded my two minutes and let me give that to Chris, and thank you very much, and I regret the rush, but I would hope that you will turn ultimately to the website, and there's a full paper there. Thank you very much.

(APPLAUSE)

Mr. CHRIS REED:

Thank you! Isn't technology wonderful? Okay. Hi! I'm Chris Reed, I should perhaps start by saying that although I'm on this banking and financial services panel, to be honest, I think I'm really an electronic commerce lawyer. It's just that banking, financial services are all very good examples of electronic commerce.

What I want to talk about today is in a sense to answer one of the questions that Hank posed. This morning's discussions indicate to me that there are two quite separate issues in jurisdiction. One of these issues is: a dispute has arisen between two parties, where should that dispute or where could that dispute be heard? I'm not interested in that so far as my presentation today is concerned.

The second issue is: in what circumstances does one country have the right to impose their law on a foreign organization whose activities via the Internet somehow impinge on that country? And that I think is a fundamentally important question.

What's more, work within the banking and financial services sector has gone some way to providing solutions or at least ideas about solutions, and I want to talk very briefly about those.

So there are three things I'm going to try and achieve in this presentation. The first is to explain to you some of the justifications, and these are both technical and operational justifications, they have nothing to do with legal theory, they're purely practical justifications, why one country's regulations should be imposed on a foreign company.

Secondly, I'll try and show you some of the trends, particularly that have been coming out of Europe recently, towards deciding which of these justifications should be used, and then I'm going to give you the 'better view' as to what the correct result should be; better view is academic shorthand for saying this is what I think and I'm right, so you just you'd better put up with it.

And one of the things that I'll focus on is the difference between country of origin and country of destination regulation, and unlike Hank, I think the answer is not both, but I won't tell you what the answer is until we get to the end.

If we just look at the kind of financial activities that have been going on the Internet, we can see they cover pretty much everything that falls within the banking and financial services sector: giving people access to their bank accounts, and the ability to move funds around -- I don't like to use 'money', instead 'value' or 'funds', a nice neutral term -- letting them buy investments, giving them advice, services, buying stocks and shares for them, and even nowadays providing electronic cash and issuing it, settling it and redeeming it.

If we look at the way regulation works, we see that there's a pattern of regulated activities which most countries agree on. This is one of those areas where no matter how much Europe loves regulation, and I'm not saying I haven't looked at U.S. law, it doesn't seem much less heavily regulated from Europe, but if we look at European regulation, the U.S., Canada, almost all the rest of the world has decided that this is an area which they are going to regulate. So there's a general global agreement: this is an area for regulation. And the kind of things that are regulated are quite interesting, because they're only a subset of the things that you can do via electronic banking products.

The regulated things tend to fall into three basic categories: taking deposits, that's taking somebody's money to look after for them on the promise that you'll give it back one day; selling them investments or advising them what investments to buy, that's a regulated activity; advertising quite a wide range of services is also a regulated activity, but interestingly, the only kinds of advertising that tend to fall within regulation are those that either solicit deposits or that deal with investing in investment products or buying stocks and shares.

What I do find interesting is some work I did fairly recently suggests to me that electronic money is in most countries not currently a regulated activity. The only exception I know for certainty is the Netherlands, because a Dutch central banker stood up in a conference and told me I was wrong, and I think I can trust the Dutch Central Bank, but that's because in the Netherlands payment services, actually moving funds from one place to another, falls within regulated activities. But in most countries, it's a fairly small subset that's regulated.

Sorry, I've gone too far. Excuse me, let's go back one. So it will teach me to it from memory and not do it from notes. Okay. So what I'm going to do is in terms of these regulated activities is to look at the three bases on which a country might decide that it could regulate those if they happen via the Internet through a foreign corporation, foreign bank or a foreign financial service company, and they have basically three possibilities: one is that this foreign company has some how established itself in the jurisdiction, that's one possibility; the second is that this foreign bank is providing services in the jurisdiction; and the third thing is that the foreign bank is advertising one of these regulated categories within the jurisdiction. And certainly the European experience that we've had over the last few years suggest that these are the three possibilities that regulators will be able to use.

Let's look at establishment first, which is probably the most interesting of these three, and the reason it's interesting is because of the fact that the Internet overturns geography. Currently, I'm in Montreal, as you probably noticed, but I'm resident in London. If during my visit to Montreal, I purchase a financial services product, nobody is going to argue that U.K. law should apply to that transaction or give me any protection whatsoever, because I travelled from the U.K. to Montreal and I'm doing my transaction there.

What happens if I'm sitting at home at my desk and visit a website in Montreal? There are three possibilities: one is that I travel electronically to Montreal and visit the website, in which case Montreal law should apply; the second possibility is the website magically travels from Montreal to England, and it visits me there, the branch comes to me, and in that case, of course, English law should apply; and the third possibility which no one is going to allow, because it doesn't give any space for regulators, is that the two of us meet in some neutral territory that has no regulation, and we there transact. Okay. We all know that no central bank, no securities and exchange commission will ever accept that position.

So let's look at the two possibilities then: the website comes to me, I go to the website. If the website comes to me, we get some very interesting consequences. What that means is that this Internet bank or financial services company has just set up a branch in my country, and every time somebody logs onto the website and downloads papers to look at, another branch is created. This has seriously been argued by central banks, that a branch is created every time a person looks at a website.

Now, within the European Union, we have a system where 15 countries have agreed on a method of operations between banks, in the banking or financial services sector, that essentially says if you are registered in and supervised by anyone of the member states, you can freely establish branches and offer services in all the other member states. In order to achieve that, we've had to have quite a lot of legislation to clarify the law, and this is mainly based on something called the Second Banking Directive, which is now just coming up to its 10th birthday.

Okay. 10 years ago, no Internet, but in 1997, the European Commission produced the snappily titled Interpretative Commission on the Freedom to Provide Services and the General Good. Now, that's not something that would normally get you running to the websites to read about it, but can I strongly recommend it to you -- it's not exactly bedtime reading, but it's one of the most important documents that I think has been produced in this area -- because what the European Commission had to do was to interpret what it meant to establish a branch or to provide services in another country, in order to make sense of the underlying legislation. It looked at things like establishing ATM networks, it looked at things like offering banking via the Internet, and they came up with some very interesting conclusions, and those conclusions and the approach has been taken outside the banking field into the electronic commerce directive, if you look at article 2 c), paragraph 3, then you will see, if you know anything about banking law, that we have the Second Banking Directive writ large.

And when Agne Lindberg said this morning, he didn't understand what those words meant in article 2 c), if only he had sat down and read the European Commission's Interpretative Commission, et cetera, he would have discovered that there are about 30 pages explaining exactly what those words would mean.

So what is establishment as far as the European law is concerned? It's pretty simple: you're established in a country if you have premises and staff there. If you have no premises and no staff, you are not established, that's a very nice bright line test. And on top of that, the mere fact that you have premises and staff is not enough even then to make you established in that country, those premises and staff have to be used for transactions with customers in the regulated business.

So for example, the Commission interpretative document says that if I establish in your country an ATM network, and I have employees who service that network and fill it up with coins and fill it up with notes and maintain it but never have any contact with you as a customer, then I'm not established in your country; I have no branch there, I have no establishment there. Very interesting in my view.

What are the next possibilities then? The provision of services. Well, the second view that seems to be merging from Europe is that maybe providing somebody with access to information is not the same as providing him with a service. The access to information is just a communications mechanism. If you're asking where the service is provided, you have to ask rather different questions, and interestingly the questions differ depending on the particular activity. But let's take account transactions, transactions on bank accounts or nominee share accounts, something like that. Where do those take place? Well, I haven't got time to go into the reasoning, but the result, according to these documents, is that those transactions take place where the account is held, in other words on the bank's server, which is holding the accounting data, which is the account. Because bear in mind, as Hank said, there's no money, there's no shares, there's no physical property involved here, this is just information, so it's where the information is primarily recorded.

Some things get slightly more difficult, with an asset purchase for example, then it's much more difficult to know where the service of buying that asset on your behalf is performed. Certainly, if the result of my transaction with this financial services company is that I'm to end up with an insurance policy, let's us say, I suspect that the service is ultimately to be performed where I'm resident, because that's probably where I intend to be insured. But these things can be slightly more complex than that, again if I'm trading in a derivative product or some kind of securities product, that may be held in a nominee account, in which case we would be back to the account transaction forum.

And finally, on the advice questions, suppose I'm receiving investment advice, where is that being received? And I think the answer probably is it's being received where I physically am located, which is difficult unfortunately. Up to now, it's been quite good as far as a sensible solution is concerned, but here we start to get the first difficulty, because if I'm on the move and I receive electronically some investment advice, it starts to look as if I'm going to be covered by the law of the country where I happen to be at the time, which is an unfortunate result.

Let's move on to the third basis for a certain jurisdiction, that's advertising, and this is where things get very complicated. There's a general agreement, it seems to me, that advertising takes place where it's received, after all the whole purpose of advertising is to communicate something to your potential customers, you haven't managed to do any advertising until your customers have been communicated with. So advertising must be effective for legal purposes where it's received.

The result of this is that almost every financial services company in the world which has an Internet presence is committing multiple criminal offenses. Just to give you some examples, it's a criminal offense to produce an advertisement relating the purchases of stock or shares under the U.S. Investment Company Act, and most U.K. banks and buildings societies have websites which tell you about the wonderful products you can buy and most U.S. customers can look at them. Criminal offense.

Turn it back the other way, under the U.K. Financial Services Act, it's a criminal offense to advertise investment agreements or insurance contracts or deposit advertisements, unless in both jurisdictions you happen to be registered in that jurisdiction and also supervised in that jurisdiction.

Now, this gives us the prospect for anybody who wants to advertise their financial services products on the Internet without committing a crime anywhere, they will have to register with and be supervised by every jurisdiction in the world, treating the EU as one, because of the single passport within it.

This is obviously a nonsense. As well as being an academic, I also do some practice and my banking clients say this is a nonsense: we are not going to register in Papua, New Guinea, I'm really sorry, but we do no business in Papua, New Guinea, we have no assets there, we have no customers there, we don't mind committing criminal offenses in Papua, New Guinea.

Okay. You may laugh, but what about the European banks that say: we don't mind committing criminal offenses in the United States, and there are plenty of those as well, we never intend to do business there. You can see that this is in danger of actually driving the law into disrepute. Something has to be done to solve the problem.

Well, the regulators have made some attempts to solve the problem. The SEC, last year, produced a document saying: okay, we know the law is pretty damn stupid, because you are committing criminal offenses, but we will, as a matter of policy, not prosecute you if you do two things: one is you limit your territorial aims in your advertising, that is, you say in your adverts I'm not soliciting U.S. customers and, on top of that, you take reasonable steps not to sell your investment products to U.S. customers.

Now, okay, in the current state of the law that's actually quite a generous concession. What it means is that I could put up a website, I can say these are my financial products, I can put a little banner on it saying not for sale in the U.S., and I can, maybe in my terms and conditions, suppose it's an insurance product, say I won't pay out to any U.S. bank account or U.S. address; that would be enough to satisfy the SEC, I think.

The U.K. Financial Services Authority, in a typically British fashion, has said: well, we like what the SEC has done, but it's all a bit too generous to the poor old bank, so in the U.K., you have to limit your territorial aim but also you have to actually prevent the advertisements being shown in the U.K. That's really quite good. So you put up your website saying I am ABC Bank Co. and if you want to see my advertisement, then click here, I certify that I'm not a person from the U.K., and then you will be let through to the next screen which actually has the advertisement in it.

Now, there are two problems with this, well, the problem with the U.K. approach is it's laughable and we have no problem with that. If there's anybody from the FSA here, I apologize but it's a nonsense and just be sensible.

The problem with the SEC approach is that it works, but think about it: if you are a financial services organization with an Internet presence, realistically you want customers in every country of the world, you don't want to restrict yourself just to one or two countries where you happened to be regulated. The whole point of the Internet is to be able to do these things on a global scale.

So ultimately, you're going to get people that are just going to ignore U.S. law on the basis that they have no assets, they have no customers there and the U.S. has no effective jurisdiction over them.

A couple of other very brief points before I tell you the answer to the questions I've posed in the beginning. No real time to talk about electronic money, but electronic money is interesting because there are two justifications for regulation: one is that there's a risk to consumers - I'll talk about that in a minute. The other reason is actually a risk to the world financial system; electronic money is the thing that poses the risk to the world financial system. So I think the regulation will come on the basis that it's justified for that reason.

There are two other bits of regulation which I thought I'd mention, because they're very important to financial services organizations, and they also have a lesson for us: 1) is privacy and data protection regulation, and what's interesting here is again this has grown up in Europe on the basis of home country regulation, country of origin regulation, and on the basis of harmonization of laws, so the laws in two countries are the same. I have multiple theories about why there is a big fight between the EU and the U.S. over this area, and I also think I know the solution, but no one is going to listen to me, so let's not bother with that.

The second which is actually also interesting and is being picked up by a number of people is the idea of identification. Digital signature technology is based on electronic identification of people, of certification of their identity. And what's quite interesting here is that although there has been no transnational work done on electronic signatures until very recently, though UNCITRAL has been working quite hard over the last 18 months or so, but as the electronic signature technology is being developed, an international consensus is also developing. If you look at, say, the Singapore law, or the Utah law, or the German law, or the EC draft directive, all those laws have got a number of fundamental principles in common: they are all converging because the technology requires them to be used globally and it therefore requires the law to be very similar in different places.

So we come to my last slide, and I thought I'd give you an answer as to what the 'better view' was. Well, the better view, to my mind, is simple: as far as the financial services industries are concerned, the only workable option is home country regulation, country of origin regulation; that's the only one that's actually workable, because the alternative is not just to register in one country, which is pretty onerous, it's to register and be supervised. Now, the cost of registration and supervision is enormous just in one country, and being registered and supervised in maybe 190 jurisdictions? I mean, I don't know who's done a count recently of all the jurisdictions in the world, there are plenty of them, it's nearly 200, it's just an intolerable financial burden, especially for new start-up organizations.

So if we forget any kind of legal theory, this is just practically impossible, and the result of insisting on country of destination regulation will be the ignorance of the law; the law, we just forget about it, we're going to do anyway.

How does country of origin regulation work, what are the conditions? Well, there are two basic conditions for it to be effective: one is that national laws have to converge, they have to converge so they are very similar in the two countries concerned. That allows those countries to recognize each other's regulatory and supervisory regimes. And this sector is an ideal sector because there is no fundamental difference between the Federal Reserve and the Bank of England and the Banque de France, they're all pretty closely agreed.

The SEC and the Financial Services Authority and the various other securities regulators are all pretty much agreed on how the law should work, what banks and financial services companies should and shouldn't do. So we're getting there petty well.

What are the outstanding problems then? Well, if the laws are similar, the systemic risk goes away and we're left with just one area which is the final justification for hanging onto country of destination regulation, and that justification is consumer protection. It's to say: we must have U.S. law applying to U.S. citizens if they purchase from a foreign website, because we need to protect our country's consumers.

I hope that tomorrow's panel will tell us rather more about the solutions to that, but it seems to me that there are just two points that one needs to think of: one is how do you make consumer protection reasonably effective, reasonably similar in all those countries? That removes part of the problem. Now the second and most difficult one: how do you actually make it properly enforceable? Because if I've lost $100.00 to a foreign corporation, I'm not going to waste my money suing, I'm just going to be a dissatisfied customer. So enforcement of rights may be more important than the content of this right.

Thank you.

(APPLAUSE)

Mr. THOMAS VARTANIAN:

We're running a little late, but we have time for one or two questions. So if anybody wants to run up to the microphone, please do.

Let me start by asking one question: both of you talked about the problems in terms of determining jurisdiction for financial services and trying to figure out how you deal with a world where everybody is violating the law everyday. Can you talk a little bit about some of the real world solutions, such as targeting and disclaimers, and whether you think those work or don't work, because I know we've all come across clients who say: I am not going to do what you've just told me to do, since we have to build our Internet business quickly. What are the real world solutions to some of those problems?

Mr. CHRIS REED:

Okay. Real world solutions. Targeting and disclaimers work, at least they work as far as the SEC is concerned, and they sort of work for the U.K., though you've got to do more than that, but as I said in the presentation, I really think that anybody who would seriously try to do this activity on the Internet doesn't want to restrict himself to one country. So if you want realistic solutions, I think the realistic solutions are probably you absolutely move the advertising to an offshore haven, sometime; it's probably what I would say to a client, you know, you find a country where you're already regulated, set up a separate corporation. It's not a very ethical response but it works.

Mr. THOMAS VARTANIAN:

Are there are any regulators in the room who would like to serve subpoenas before we break?

Mr. HENRY L. JUDY:

I would respond on a couple of levels: first, I would repeat everything that I said or make reference to everything I said about some kind of trusted organization, because the nature of that kind of solution is that the jurisdiction problem goes away. You know, if I get the goods or service, they're delivered in a timely and convenient fashion and nobody has fooled around with my financial data, I don't care about jurisdiction, the average consumer doesn't even think about it.

You know, I recently bought some software over the Internet, I dealt with a company that I knew and trusted, the stuff arrived on time, I had every confidence they weren't going to fool around with my data because friends of mine had also dealt with the company; I didn't even read the license, I didn't read the disclosures, I didn't do anything, and I think about these things. The average consumer doesn't care under those circumstances, that's the first point.

I am not entirely sure that I am unhappy with the idea of targeting, you know, I think that that is going to be an increasingly popular solution, I haven't totally wrapped my mind around it either conceptually or from the standpoint of practice, but I'm not as negative on it as Chris indicates.

I also think that there is a lesson in a number of the EU directives that can be used by the different nation states for solving the problems that Chris has articulated. I don't think that the home country solution that he posits works transnationally. It may work, and by transnationally, I mean outside of the EU, it may work within the EU, but that solution doesn't work as between the EU and say the United States, or as between EU and other; however, the EU technique of saying here in the directives are the minimum requirements and each nation may, in its implementing legislation, go beyond those minimums, significantly reduces the amount of law that is at variance, and it should be possible, if you keep thinking about what's the floor and everybody can have a little more ceiling if they want, I think that that tends to push the whole system in the direction of a desirable convergence. Those would be my responses.

Mr. CHRIS REED:

Can I just add one more thing? You know, it just occurred to me but it's something that's quite interesting. The prohibition on advertising, one of the different ways of looking at it is to say it's actually a very good way of reserving your national market for your own nationals, that's true for every country.

Now, it's just occurred to me that there's -- the European Union has transnational antitrust laws, and it's quite possible that the local laws that forbid advertising might just be struck down on the ground that they are in violation of the antitrust law.

Mr. THOMAS VARTANIAN:

Are there any other questions? If not, then I appreciate your attention, and the panellists have asked me to thank you very much for holding your applause to this moment.

(APPLAUSE)

THE STATE'S POWER TO COMPEL PAYMENT OR COLLECTION: TAXATION

Mr. PETER COBB:

My name is Peter Cobb, I'm a partner with the law firm of Fried, Frank, Harris, Shriver & Jacobson, not to be confused with the law firm of Freid, Frank that Tom Vartanian is also a partner with, they're the same firm but in different cities, I'm from New York and he's from Washington. I'm also the Chair of the Tax Working Group of the now well-heralded ABA Project on Jurisdiction, and in the next hour, the four of us are going to try to talk about some of the highlights or lowlights of the interaction of the Internet, and various taxing regimes.

Let me introduce the panel now: to my immediate left is Kaye Caldwell, who is the Public Policy Director for CommerceNet, and the author of several significant papers, always very moderate in tone and on a number of issues relating to the Internet,and particularly United States' state sales and use taxes; she's a member of the Multistate Tax Commission's, Public Participation Working Group, and a lot of other things, all of which you can read in the more extended biographies.

To her left is Martin Kreienbaum, who is with the Federal Ministry of Finance of Germany, he's Deputy Head of section, and his principal area of responsibility is the taxation issues arising out of electronic commerce. Prior to being with the German Federal Government, he was with the Berlin Lander Government, finance and administration, and before that with Deutsche Bank.

And then to his left is Carol Dunahoo, who is with Pricewaterhouse in the International Tax Services Group. Before joining Pricewaterhouse, she was with Treasury for five years as the Associate International Tax Counsel, and has a distinguished list of other accomplishments as well.

Dealing with this topic, I can think of electronic businesses and those who advise them. Standing on one corner the national State and the local tax authorities and those who depend on the revenues standing on another corner, looking at each other with substantial mutual suspicion that each is out to do the other in. Watching very carefully are at least two other constituents: the non-electronic businesses who are frequently very concerned about differential impact of tax laws, and of course taxpayers and consumers themselves.

What are the major interactions between tax law and tax administration and the Internet? In a very generalized way, let me list six, maybe just five. First, and the one who gets most attention is erosion of the tax base, both through the migration out of -- the facilitation by electronic commerce of the migration of businesses out of the jurisdiction, and also by the use of the Internet to facilitate cheating of one form or another, and undercutting compliance efforts.

The second area of concern from the business' point of view is the erosion of profits, it comes from the imposition of a tax that can't be passed on to someone else, and the imposition of high administrative burdens for dealing with the myriad jurisdiction, tax jurisdictions that Internet business may have to deal with.

The third area of concern is competitive disadvantage, that is particularly businesses, hometown businesses, the Barnes & Noble -- that's not a hometown business -- your neighborhood bookstore, worried about Amazon.com, the kinds of tax disadvantage, price disadvantage that comes from their sales being subject to sales and use tax, and Amazon.com's only being in theory subject to a sales and use tax.

Classification issues. Throughout the substantive tax law of every jurisdiction, there are very substantial issues of how you classify a particular transaction, a particular item of income; the Internet has had, in a variety of ways, a substantial impact on the traditional ways of categorizing transactions and payments resulting in confusion and administrative complexity.

Finally, and this is somewhat overlooked in a lot of the debate, I think the Internet also provides on the positive side very enhanced tools for improving tax compliance, tax collection and the user friendliness of the tax system through interactive information on systems, and I know that the OECD, for example, has focused in substantial part on some of the positive uses that the Internet and the electronic communications medium generally will enhance in the quality from all points of view of the tax system.

Focusing a little narrowly, what are the significant problems that lawyers such as those of us in this room face today with respect to the Internet and tax systems?

First of all, I'm going to keep narrowing down so we can get a topic that we can spend a little time on, tax systems fall into two general categories: indirect taxes, direct taxes, and a third category of miscellaneous; direct taxes are sales and use taxes, VAT, what we also frequently consider to be consumption taxes, although they may or may not technically or practically fill that definition; indirect taxes which are income taxes that can be imposed in a state, local, national level. We're not going to spend much time today talking about income taxes, the Treasury and Commerce and U.S. Trade representatives have told, at least the U.S. Advisory Committee on the Internet, that those issues are all well under control, and will be worked out with the OECD, so we don't need to worry about them here. Actually, we just don't have time. They are some of the most intellectually interesting issues in the area, but we're not going to talk about them here.

The kinds of issues also divide into what you might call jurisdictional issues and substantive issues; jurisdictional issues, and I don't want to fall into a sort of semantic issue of what is jurisdictional and those other things, what we generally think of is tax nexus, when does a particular jurisdiction have the authority as well as the power, enforcement power to impose a tax, a particular tax on a particular potential taxpayer?

I'm going to -- we're going to spend most of the rest of this panel talking about direct taxes, talking about principally jurisdictional issues and to some extent I think classification issues, because those interact with jurisdictional issues to some extent. I will start off with a very brief overview in the context of U.S. law relating to state and local sales and use taxes, as to what the, where the law is and where I believe it's going, and I will then turn over to Kaye who will pick up talking about the Internet and how her perceptions of what developments there have been applying current rules by state and local authorities to the Internet and Internet electronic businesses more generally.

We'll then turn over across the ocean and let Martin and Carol talk about VAT, and Martin particularly from the point of Germany, and then even more generally, and Carol from the sort of American perspective on what's going on over there.

So let me just summarize the most significant landmarks of U.S. law as it relates to the ability of state and local governments to impose their sales and use tax, and in effect, we're really talking about sales tax, the businesses --

In thinking about sales and use tax, in theory at least, the primary tax, although that's not necessarily how it developed historically, the primary tax is the use tax, that's a consumption tax, each resident of a particular state should pay a tax with respect to the goods purchased for consumption by that resident; it is clearly the least enforced and least understood tax in this country, I believe. I don't know how many American citizens that are in here will ever file a use tax return, but probably all should have at one point or another. We rely almost exclusively with respect to the use tax on true consumer purchases, a tax to be collected in the form of a sales tax imposed on vendors.

The law that is most relevant to the Internet is developed over the last 30 years, principally in the area of mail order. The potential limitations on a state's ability to impose a tax on an out-of-state business come from the United States Constitution, those are the only ones I'm going to talk about. There are obviously also state constitutional issues, federal legislative issues, and state legislative issues, but I think principally we all look to the important limitations that are contained in the U.S. Constitution.

There are at least four that potentially are operative: one is the import/export clause of the Constitution, I'm not going to talk about that; another is equal protection, I'm not going to talk about that; and the other two are the due process clause and the commerce clause.

I think from a jurisdictional theory purist point of view perhaps only due process is a true jurisdictional issue, but the jurisprudence of due process and commerce clause has been closely intertwined over the last 30 years, and it's clearly important to talk about them both.

The first case that's worth commenting on is Bellas Hess, a mail order house. I frankly forget which state was involved, a Supreme Court case in 1967, which held that as a matter of due process and operation of the so-called dormant commerce clause, that a state did not have the power to impose a sales tax collection obligation on an out-of-state mail order house that did not have some physical presence within the taxing jurisdiction.

In the physical presence, Bellas Hess was a fairly pure case, at least as postured by the court, sent catalogs into the state, I believe people could -- there were phone numbers you could call, you could write and they sent goods into the state by common carrier. The Supreme Court held no tax nexus on both due process and commerce clause grounds.

The next significant case, which I think Kaye may say a little bit more about, was Complete Auto Transit in 1977, which went through a four-part analysis with respect to commerce clause compliance. The four prongs in order for there to be exercise of the tax, again we're talking about out-of-state vendor, the four prongs, the most significant one for our discussion is: 1) substantial nexus, whatever that means; 2) fairly apportioned; 3) it doesn't discriminate against interstate commerce, and; 4) that the tax is fairly related to the services provided by the state which the vendor takes advantage of.

The seminal case that sets sort of the modern law was, and the last U.S. Supreme Court case that I will talk about is Quill, Quill v. North Dakota in 1992, which held that first of all, that due process standards and commerce clause standards were different; it's the first time any significant decision had separated the two standards. The Supreme Court didn't quite do away with due process protection altogether, but it minimized it very substantially. Again, Quill was a case much like Bellas Hess, at least again as postured, mail order out-of-state, no physical presence in the state. The Court found that there merely needed to be some minimal connection or a purposeful direction of activity toward the state, which could be satisfied by a purposeful direction of activity toward the state, to satisfy due process issues, and that no physical presence of any sort was necessary, and that's it, to meet that standard.

The Court then looked at the commerce clause issue, and basically said Bellas Hess with its some- physical-presence role looked to live like it was perhaps old fashion, not necessarily consistent with the current state of the world, but nevertheless there were significant reliance by businesses, mail order businesses in ordering their affairs over the years, and that therefore with some reluctance clearly, the Court upheld the some-physical-presence test to justify state taxation of out-of-state mail order.

It's very important, there's one very important distinction between due process and commerce clause: if the Court is to find that something is forbidden by the due process clause, that's it, that's sort of written in stone until the Supreme Court changes its mind; if the Court finds that, as a matter of dormant commerce clause doctrine, a particular taxing authority is forbidden, Congress can change it. The dormant commerce clause only operates when Congress has not legislated in the area, so in effect, the Supreme Court was inviting Congress -- well, not in quite so many words -- to look at this area and if they thought the mere some-physical-presence test was not appropriate, they could change it. And it's possible as part of the legislation that's been -- Internet Tax Freedom Act conceivably could result in legislation of that sort.

Finally, let me just comment on two state Supreme Court cases that have followed on Quill, which I believe reflect where the law is going. The first is a case called Orvis, in the New York Court of Appeals, it's the highest court of the State of New York.

Orvis was an out-of-state company that sold retail into New York through catalogues in a very pure way, in the same way that Bellas Hess and Quill had, and also sold wholesale into New York, you could buy their bags at Abercrombie & Fitch, and every once in a while, one of their salesmen would show up to one of their wholesale customers and give them some advice. So there was occasional physical presence in the state that related to not the retail sales that were being subject to the tax, but to some other activity, a different sales activity.

The taxpayer in that case argued that this was an issue of substantial nexus, Quill had said that substantial nexus for this purpose includes physical presence, this physical presence was not substantial and therefore they should be okay under Quill.

So the New York Court of Appeals held that physical presence, the amount of physical presence necessary to meet the substantial nexus test did not have to be in itself substantial, so that, in effect, incidental physical, almost incidental physical presence was sufficient. Whether the Supreme Court would follow that is not clear, but it's certainly a good law in New York.

The final case and the one that has raised a number of fears is a case called Geoffrey, which was in 1993 Supreme Court of South Carolina. Geoffrey, you actually know who Geoffrey is, Geoffrey is the giraffe in the Toys"R"Us logo. Geoffrey was a Delaware company that licensed Toys"R"Us' trademark into the states in which Toys"R"Us had stores; Geoffrey itself had no presence in the State of South Carolina in this case other than the use by Toys"R"Us, a related company of intellectual property own by Geoffrey under a license. Toys"R"Us paid substantial royalties. This is not a mail-order case, this is not a sales and use tax case, this is an income tax case, a state income tax case.

This was a fairly typical state tax planning device that royalties paid out of the South Carolina company to the Delaware company were deductible in South Carolina, reducing the income tax liability in South Carolina, and were income in Delaware that doesn't have a corporate income tax, and so that's a typical plan in order to get around burdensome, the perceived burdens of interstate income taxes.

The taxpayer in that case argued relying on Quill -- I'm sorry, South Carolina asserted that Geoffrey was taxable on its income in South Carolina solely on the basis of the fact that it licenses its intellectual property into the State, and that was upheld by the South Carolina Supreme Court, disregarding the taxpayer's reliance on Quill that some physical presence was required.

The differentiation from Quill is potentially on one of two grounds: one, income taxes are different, and there is a respectable argument that can be made that they are, and that therefore Geoffrey would not be a precedent in the sales and use tax area. It also arguably can be based on the fact -- an analysis that the presence of intangible assets in the State meets the physical presence test.

And if that's the case, and there are certainly many people who think this is not an aberrational case and that it can be read for that, if that is the case, then the peg for jurisdiction under Quill based on a variety of possibilities. This is very much opened up.

With that, I'll -- I'll -- that description of the landscape I'll turn over to Kaye.

Ms. KAYE CALDWELL:

Thank you, Peter, I'm not sure I've ever been accused of writing moderate papers before. I know you didn't mean it, but I'm wondering about all those people who'll read the transcript. Boy, are they going to be surprised!

Well, as Peter mentioned, in the Quill case, the Supreme Court actually invited Congress to legislate in this area, and essentially freed them to do so. As you might expect, state and local governments liked this idea, so they have been lobbying Congress to grant jurisdiction over out-of-state sellers for tax purposes.

Now, I'd characterize this tax a little differently from what Peter did, I think the question here is not so much in use tax area as to whether or not a state can impose a tax on an out-of-state seller but whether or not they can impose an obligation to collect the taxes that the state levies on the in-state customer. And how you interpret that really kind of varies from state to state, but as we're talking about that within the National Tax Association's Communication & Electronic Commerce Taxation Project, that's the point of view that we're taking on that, and that seems to be the point of view that even most of the tax administrators agree as the right way to look at that.

Examples of how the states are approaching Congress on this can be seen in many areas. There's of course the famous Bumpers bill which I guess will soon have a new name and then probably be reintroduced again; this bill has been introduced in Congress several times since the Quill case came down. The Senate has actually voted it down twice, but it essentially says that the states have the right to impose a collection obligation on remote sellers over a certain dollar amount.

What's interesting about that bill when it keeps coming up is what it doesn't say. It doesn't say, for example, if you're under that dollar amount, you don't have the obligation, which just moves the battlefield from a bigger battlefield concentrating on bigger companies to a smaller battlefield concentrating on smaller companies. So it's not very balanced.

There are some other resolutions that have been issued recently from the various state and local organizations: the National Governors Association is putting out resolutions, I think they put out one last year and they've put out some again this year on this issue; the MTC, which is the Multistate Tax Commission, and the Federation of Tax Administrators annually put out resolutions that Congress should allow them to impose this obligation; the National Association of Counties has just recently gotten into the act of putting out these resolutions that Congress should do this also.

What I find interesting about these attempts, and what I think we really need to consider here is that none of these attempts actually have any mention of Congress taking on any sort of oversight role on the imposition of these state and local taxes. The state and local governments just want to be granted the ability to go out and impose these obligations with no constraints whatsoever.

And the question is whether or not that's the appropriate thing to do. The reason that's a question is because there's extreme difficulty for taxpayers in obtaining redress for unconstitutionally imposed taxes.

The state's record in this area is not comforting. There are two papers that I submitted which are on the website, the first one is called States Behaving Badly, and it's called that for good reason: the states have been doing fairly outrageous things in the area of unconstitutional taxes.

The most recent case is the South Central Bell case in Alabama, where South Central Bell has been fighting this case all the way to the Supreme Court, it has taken them 10 years, and what the State did in the process of getting this case fought all the way to the Supreme Court was fairly outrageous, and they made arguments that, well, you don't have any right to bring this case to court, they made arguments that the Supreme Court doesn't have any right to hear the case; they actually declined to make the argument that the tax was actually constitutional, and instead of making that argument said to the Supreme Court: well, you should just change your mind about the dormant commerce clause and we should just be able to do this. If you find these things amusing, which I happen to, you should read some of the amicus briefs in this case.

One of them, I'm reading along and I'm thinking, you know, this is like Alice in Wonderland, and about two pages later, this is the Tax Executive Institute amicus brief, they start citing Lewis Carroll, so it wasn't only me that thought that was like Alice in Wonderland. What typically happens in these cases is that you litigate all the way to the Supreme Court, you get a ruling that the tax is unconstitutional, and then you go back to the state, and all of sudden now you have to argue about refunds, and they can drag you back all the way to the Supreme Court, and what they typically do is this kind of bait and switch operation where they've got some sort of mechanism by which you can get a refund, but when they get a negative decision, then they change that mechanism by which you can get a refund.

Cities do this also, there's a case going on San Francisco where they've done exactly that: they lost their case, the tax was ruled unconstitutional and they changed the law, retroactively, to say that if you want a refund, you have to apply for it within 90 days of when you paid the tax. Well, you know what? That time passed six years ago.

This is the kind of situation you get into with these unconstitutional taxes, and the reason that these taxes are ruled unconstitutional, of course, in the sales and use tax area, they get ruled unconstitutional because the Quill case basically says there's an administrative burden here that's just kind of outrageous. I heard some talk earlier in the last session about having to comply with 190 different countries' regulations, 180 for the banking institutions. Well, in U.S., state and local taxes there are 6,500 different taxing jurisdictions now, and there's 30,000 of them that could decide to impose a tax.

AT&T files, according to the speeches I've heard them give, on average, a tax return every three minutes, that's just outrageous, and they file them to things like Mosquito Abatement Districts. All these places have got different rules.

Now, I will admit that some states are okay. California is doing relatively well, and a lot of the states have mechanisms by which they have control over what the local governments can tax and what the rates are, and how it's collected, et cetera, but there are some states that don't, and I think it's Louisiana, the different parishes -- they don't have counties in Louisiana, they have parishes -- they can set what is and isn't taxable in each different parish, and there's no central location where you can even get a list of what all those things are, and on top of that, guess what? Parish boundaries are not the same as Zip Code boundaries. So this is really, I mean, this is what we're talking about when we talk about administrative burden; it's a true nightmare out there.

In the income tax area, the big problem that these taxes frequently have is that they discriminate against interstate commerce, they just flat out discriminate. The interesting thing about the Alabama case was that there had been a previous case and the taxpayer lost this case essentially because there wasn't any good data. So when South Central Bell went to litigate this again, they got the Department of Revenue, which they may be called something else in Alabama, but they got the Tax Department to come up with some data on this, and the Tax Department supplied data that showed that out-of-state corporations were paying 20 times as much of this tax as in-state corporations were.

Now, the question is: well, why didn't the State, once they knew that this tax was unconstitutional, why didn't they take steps to fix it? Oh! no, they didn't do that, they made the taxpayer litigate it all the way to the Supreme Court. So now, you've got to understand what position Alabama is in, this is an enormous tax, this is, I think, 15 % of their General Fund, and they have to make refunds going back for 10 years, and at the same time they have to fix this tax. So how are they going to fund their state government? It's just amazing that they have gotten themselves in this position.

If you ask me what they should have done instead of allowing this to go forward, they should have said: we got the data now, we know we're going to have a problem, we're going to fix it and we're going to act responsibly. But they don't do that.

The same thing is happening in San Francisco with the taxpayer in this situation is General Motors and this one really cracks me up. This tax has, for the second time, been ruled unconstitutional, There are quite a number of cities in California that have the same tax ordinance. Instead of realising that they've got a problem and fixing it, they're petitioning the Court to depublish the decision so that taxpayers in other cities don't realise it's unconstitutional and so the cities can continue to collect these unconstitutional taxes.

So this is my point: this isn't a fair system. If Congress is going to say to the state and local governments: okay, you know, you can impose these tax collection obligations, I think they've got a responsibility to take some oversight responsibilities here and to actually control what the states can and can't do in that area.

There's a lot of areas where they could actually do this, I mean, one of the questions is going to be: how do you define all these things? Right now, there's a physical presence standard, but the states claim, as we've heard in some other context today, that if you can see a website in our state, well, then, you're physically present.

You know what a website is? It's a change in the arrangement of the magnetic coding that the thing is stored on - it's a rearrangement of some magnetic impulses, this is not physical presence in a lot of people's minds.

One other big problem that we see, just kind of continuing on what I was saying earlier about these discriminatory taxes, is that the system is really stacked against the taxpayer. A lot of the states have got pay-to-play rules, so they issue a tax assessment; in order to challenge it, you have to first pay the taxes, and if there's penalties and interests you have to pay those too, that's kind of stacked against the taxpayer there.

There's a federal law that prohibits federal courts from issuing injunctions on the collection of taxes by the State, so first you have to go through all the state courts and then you get to go to the Supreme Court, and the Supreme Court decides to take it - or not.

Peter was talking a minute ago about a couple of state tax cases that came down against the taxpayer and in favor of the states. I want you to think about something: who pays those judges' salaries? Isn't there a bias on this? That's one of the big problems here: state judges tend to support their state tax administrators.

There's a number of other examples in this area, but I think I will refer you back to the paper on this, where they're all nicely listed for you, and just go to my conclusion and tell you that what I think we need to think about here is whether or not we're going to allow these state and local governments to abuse the tax powers they already have and whether or not we're going to allow them to extend their ability to abuse those tax powers into other areas. One of the things that we need to start thinking about, as we look at this, is what kind of oversight Congress ought to be imposing if they're going to allow the states to extend those tax powers? Thank you.

(APPLAUSE)

Mr. MARTIN KREIENBAUM:

Good afternoon, ladies and gentlemen! Taxation of electronic commerce and in particular the application of basic consumption tax principles on electronic commerce transactions is a problem discussed worldwide.

In the next 12 to 15 minutes, I'd like to focus on the basic principles of the EU Value Added Tax system, the practical and mainly technical difficulties in applying these principles regarding certain electronic commerce transactions, and as a third point, I'd like to outline different options for tax collection mechanisms.

The Value Added Tax rules are harmonized mainly by the Sixth Directive within the European community. Harmonized means that all member states of the European Union have the same VAT system, and in addition to that share a number of common rules.

The Sixth Directive provides a framework for more specific legislation for the member states. VAT is a tax on final consumption. There is an effective tax burden for private consumers only, not for businesses, because they normally have the right to deduct input taxes.

The directive distinguishes between the supply of goods and the provision of services. Both are subject to VAT.

The determination of a place of taxation depends on whether the category is classified as a good or as a service, and it also depends on whether a transaction is being conducted within the European Union or from outside the EU into it.

EU member states agreed that for consumption tax purposes, a supplier of digitized products should be treated as services. Rules for the consumption taxation of cross-border trade should result in the jurisdiction where the consumption takes place. That is the place of consumption principle.

The main problem in applying these principles on electronic commerce transactions is to realize the place of consumption principle. To examine this problem, it is helpful to distinguish between offline transactions and online transactions: an offline transaction should be by definition a good or a service ordered via Internet but conventionally delivered or provided; that is,for example, a book which you have ordered electronically at Amazon.com and which is delivered to you as a physical object. This is also true, for example, concerning the plumbing service ordered via Internet. In such cases, there's nothing new as far as the legal basis is concerned.

For consumption tax matters, the way of ordering generally has no evidence. And there's also nothing new as far as tax collection or administrative procedures are concerned. To realize the place of consumption principle, in most of these cases, the place of taxation is where the customer is located or the service is being executed, where the customer uses a service or where the receipt of a delivery of a good is located.

The physical cross-border delivery of goods makes customs able to control transactions and to levy Import - VAT. It is a support to tax authorities to recognize that a transaction has taken place. The physical presence or a physical nexus of the vendor in the state of consumption is not a legal requirement to compel the vendor to declare something or to collect taxes.

So as a result, one could say that VAT principles are applicable to offline transactions without legislative changes. Existing tax collection mechanisms are appropriate as far as such transactions are concerned.

Although services are in general subject to VAT, the situation is different, completely different in online transactions. Those transactions are by definition electronically conducted transactions; those transactions are deliveries of digital or virtual goods, like software, films, music, computer games and so on, and those transactions are also electronically provided services, for example, consultant or other professional services, data processing, financial, educational services or information services.

The problem to apply the place of consumption principle on online transactions is not so much the legislative basis, but it's rather more the technical question how the tax due is to be assessed and how assessment information is to be verified?

To understand that specific problem, which is in effect a compliance and tax-control problem of digital transactions, it is helpful to examine the special features of such transactions.

There's a high level of mobility of transaction partners It doesn't make any difference whether an online transaction is carried out from the Netherlands to Belgium or from South Africa to Canada. The Net knows no distances and no borders. Except for the computer connection itself, the digital goods vendor does not need any sophisticated infrastructure to conduct this business. Even for the customer, it is easy to get a mailbox account anywhere in the world as an address for online deliveries.

How should the online supplier of, for example, a software program know that he's contracting with a, for example, German customer if the Internet protocol number of the American mailbox for German customer makes him believe that he's contracting with an American?

How should the supplier apply the right VAT rate if, in this case, by legislative means Germany would be held as a place of consumption?

A second point is the potential anonymity of transaction partners. The tax authorities might discover certain IP numbers and might locate the countries of the transaction partners, but the IP number is useless as far as there's no possibility to identify the taxable person behind the IP number.

Cryptography of data is a further important point: how should tax authorities verify transaction data or realize the tax evidence of certain transactions if the transaction data are encrypted?

The final point I'd like to mention is the disappearance of traditional intermediaries like wholesalers. As traditional intermediaries disappear, also the bookkeeping and documentations of those intermediaries disappear. In traditional trade and commerce, such documentation is an important starting point for tax control mechanisms. As long as tax assessment is based on personal declarations of a vendor or of a customer, the system is required to control whether potential taxpayers comply with the rules or not.

The German Constitutional Court ruled in '91 that as a matter of equality of taxation, tax rules generally must be designed to realize the tax due; that means that if there is a significant lack of compliance, the tax rule is against article 3 of the German Grundgesetz, which is constitutional law, and the tax rule itself is invalid.

The compliance issue is a less difficult problem as long as your transaction is conducted within one jurisdiction. In this case, the vendor is liable to register at local tax offices -- at least in Germany -- and the vendor has to prove all relevant transactions through obligatory bookkeeping.

Cross-border transactions are also a less difficult problem as these transactions are business to business transactions. In that case, we have a reverse-charge mechanism.

We're faced with crucial and mainly unsolved problems in digital cross-border transactions with private consumers. If the tax assessment of digital cross-border transactions with private consumers is based on a declaration of the vendor or of the customer, the required control mechanism in this area covers the following questions: how is a taxable transaction to be identified? Second, how are the parties to the transactions to be identified? Third, how are the locations of the parties to a transaction to be identified (at least the country)? And what documentation is to be provided by the taxpayer?

Compelling the vendor to collect VAT would require extensive control mechanisms, high level documentation standards and bookkeeping would be required. It must be guaranteed that the vendor's bookkeeping contains server produced data, accurate, authentic and complete. Tax inspectors must have electronic data access to the company's data to be able to verify tax declarations.

With a little imagination, we can see that such a concept would perhaps work within highly industrialized countries, but what if the vendor is situated, for example, in Pakistan, in China, in Botswana and sells digital goods to Germany? Germany wants him to register, to document all the transactions and to collect 16 % VAT for the German state. Germany also perhaps wants to send a tax inspector to verify the information provided by the Chinese vendor, or wants the Pakistani tax authorities to do that for Germany. In fact, the consequence would be that domestic vendors in Germany would be compelled to document and to collect taxes, vendors from many other countries would not comply with the rules and as a result German companies would have an enormous competitive disadvantage, and that is not what we want.

Committing customers to collect VAT would presuppose to establish compulsory bookkeeping for private consumers, and would presuppose that tax inspectors would be able to check that bookkeeping. That sounds absurd and could really lead to a big-brother-is-watching-your-society.

There's hardly anybody remaining to assist; intermediaries could be appropriate tax collectors, they could ensure anonymity of transactions and anonymity of transaction parties, and they could act as trusted third parties for vendors, customers and revenue authorities.

Tax collection, with help of intermediaries, would presuppose that the intermediaries know specific transaction data. Many problems would be solved if intermediaries would withhold consumption taxes.

We must recognize that there are ongoing developments in areas such as establishing electronic trading, payment, certification and technical standards and protocols, and also in the reform of the Internet governance.

I personally believe that today we are unable to realize the place of consumption principle regarding cross-border digital transactions with private consumers. But there's no need to abolish a systematically right principle today. We all should see very clearly that the taxation at the place of consumption will, from an international point of view, lead to an equal burden of consumption taxes on the same products and the same market, it achieves the aim of consumption taxes: taxation of final consumption at the place of consumption.

In the near future, we will see how business with digital transactions is really conducted on the Net. If we don't achieve internationally accepted technical solutions in order to realize taxation at the place of consumption, we will not only face substantial revenue loss, we will also face a serious distortion of competition with domestic providers. The aim must be both: facilitate the development of E-Commerce and at the same time ensure the application of basic taxation principles in a way that does not discriminate against technological development.

Thanks for listening.

(APPLAUSE)

Ms. CAROL DUNAHOO:

You folks have been remarkably patient, I can't believe that, we could never get a tax audience to sit here and listen to this for a whole hour.

I will try to be brief, because Martin has covered a lot of what I wanted to fill you in on already, but I have few thoughts to share with you on that.

Now, I'm going to talk, as Peter mentioned, about consumption tax issues in the international context, that's not because there are no income tax issues, in fact they're starting to surface, but they've received the most attention, because a lot of folks aren't making much of a net profit for income tax purposes. The consumption taxes, like VAT for example, and sales tax apply to your transactions when they apply regardless of whether the business is making a net profit at all, that's why they are of such great interest to the companies that I work with.

And we've talked about the fact that there are a lot of countries out there that have national level consumption taxes; of course the U.S. is one that does not, we don't have a national level sales tax or other broad national consumption tax, which has not precluded us from expressing views. A lot of times, people will say: well, what's it to you? Well, U.S. based companies of course are engaged in selling products and services into other jurisdictions, and so have been watching this very closely.

We've talked about the discussions at the EU, the focus has been on the EU VAT tax I think, in large part, because the European Union, the European Commission, the German Tax Authorities and others throughout Europe have been quick to identify issues and to start talking about some proposals; that is not to suggest that there aren't other jurisdictions that should be active in these discussions, and I know for example that the Canadian government is participating actively in these discussions as is the Australian government.

Now, as Martin has already indicated, the key concern that's been put on the table is how to apply and collect the European VAT when a so-called digitized product, something that can be delivered online, is provided by a non-EU supplier to a private consumer, a final consumer in the EU? That is a tiny piece of the total right now. Apart from the fact that not everything can be digitized, most electronic commerce occurs in the business to business context; depending on how you define it, we may be looking at something like 5 % of the market has a business to consumer, a portion, and that is predicted to decline not increase in the future, as a percentage of the total.

Very little of that right now occurs with online delivery and even less cross-border, I mean, it's far less than 1 % again of the total amount involved here, as according to the most recent statistics that I've seen, okay? So that does not mean that it's not an important issue, but just to keep it in context I think is informative.

Now, we've already heard the concerns about the effect on the tax base, and this is a serious concern, it's a legitimate concern, the OECD member countries, leaving the U.S. aside of course, derive something like 30 % of their revenues on average from VAT or other national level consumption taxes, and so this is a serious concern.

Now, I think that an even more serious concern perhaps is the protection of local suppliers, and again Martin has already touched on this. The companies that I worked with, I have been working with a group called the Electronic Commerce Text Study Group, which is a lot of large mainly U.S. based and Canadian based companies, we acknowledge this as a legitimate concern. I don't think anyone is seeking a tax based advantage in, let's say, the German market, but being able to sell services or goods into that market free of VAT when there is a comparable product being sold that is subject to VAT.

Now, as we will see in a minute though, I think what's on the table now goes a little beyond this, and gives us some cause for concern, and we have to be very careful when we're talking about a level playing field not to tilt the playing field too far in the other direction, because two can play at that game, and you've already heard Kaye Caldwell say there are about 30,000 potential U.S. state and local tax jurisdictions and I don't think that anybody wants to get into a tit for tat in terms of seeing who can impose the most onerous cross-border collection responsibilities.

Enforceable collection mechanism, this is something that of course tax authorities are very concerned about; if you're going to assert a tax, you want to figure out how you can collect it, and that actually is something that our clients agree with as well, the companies we have been advising. Otherwise what happens is that it disadvantages the honest taxpayer if there is an obligation asserted that is not generally enforceable, and I think they figure that they will wind up paying and perhaps others will not.

Now, the concept of enforceable collection mechanism and in business support service for this is premised on finding something that works and it is not regarded as too onerous or again unlevel.

Taxpayer goals. Neutrality, and I use the word neutrality a little differently than Peter did in his outline, I mean, neutrality is to the form of delivery, we'd like a system that does not disadvantage electronic commerce compared to physical commerce. Level playing field is a point that we've made ourselves, no double taxation or multiple taxation, that's incredibly important during the time when the state of the laws is in flux somewhat, and you may have tax authorities taking different positions.

We need adequate guidance, especially in areas such as the VAT, where the tax in theory is supposed to be passed on to the final consumer, and it needs to be perspective. That has not always been the case in the past, and you've heard some examples already, and that is critical.

Taxpayers are concerned that the compliance burdens not be too onerous. For example: we have made the point that the compliance bar should not be raised for electronic commerce as opposed to physical commerce. Much as I think it might distress some of the tax authorities to hear this, it is clear that compliance with existing laws is not complete, and while I certainly won't stand up here and condone that state of affairs, I don't think we need to panic if we don't figure out how to collect every single last penny of VAT that we might like to see collected here. If the compliance burdens are reasonable, then it will encourage, we think, greater compliance, and so that is something that ultimately benefits the tax authorities and the governments as well.

The last point on taxpayers concerns, taxpayers goals, is that it is very important not to have undue interference with technology, the technologies as they evolve with the business models, which relates to issues that might arise if governments tax authorities get involved in too much standards, that is prescribing protocols, and I think the businesses that I have worked are happy to cooperate and discuss what the needs, the legitimate needs of the tax authorities might be in terms of identifying the parties to the transaction of what have you, but there are limits on how far they're willing to go.

Just briefly, I think Martin has already talked about what the EU approach is. This is the point that has been a sticking point thus far for a lot of non-EU businesses, and it is the point to characterize everything that's delivered online as a supply of services for VAT purposes. Now, he told you that there are two basic categories, at least in the EU and in most of VAT systems, it's either a supply of goods or it's a supply of services, and there are very different rules that apply to these categories. And so you have to put every transaction into one bucket or another so that you know how to tax it and who collects the tax and how it's collected.

The problem is that there are also different tax rates that apply in some cases to goods and to services, and electronic commerce rate is a very difficult classification issue, because you look at this, the software program, and you think well, this is the same for all intents and purposes as the software that is being sold in a box and delivered on a physical carrier medium, on a diskette, and should we have a different approach just because it is delivered online?

Same question for newspapers, the physical version, the online subscription, and the difference can be substantial, it can be a difference in some cases -- although the rules vary across the EU -- between a 0 % VAT rate and a 25 % VAT rate, or up to 25. So that's a major issue of competitive advantage, competitive disadvantage, I guess. I'm going to skip these.

There are two jurisdictional issues, one is enforcement jurisdiction, and Martin has touched on this already, these are options that are under consideration; there are problems with every single one of them, I don't think anyone would argue that we have found the silver bullet, the intermediary withholding system which is, I think, where you came out, your best option might work. If it is market-driven and it's done on a voluntary basis, it might very well be made attractive to potential intermediaries if other issues can be resolved such as who bears the cost, who bears the legal liability if the answer is wrong, that sort of thing, but I don't think, my sense is that we are not at a point yet where any of these options really is ready for prime time.

The second jurisdictional issue, I think, and I think it really ought to be resolved certainly no earlier than the enforcement jurisdiction, is what the appropriate scope is. I think there's inadequate consensus on this at present.

Getting back to the neutrality principle, and I haven't outlined it, that goes into a lot more detail on that in the paper on the table in the back; the current proposals do, I think in some important cases, ignore the need for neutrality between physical and electronic forms of doing business, and I would suggest that we need to reach consensus prior to trying to reach consensus on the enforcement issues, and that the consensus needs to be global in nature not just limited to the U.S. or the EU or, you know, even just to the OECD member states.

These are difficult issues, we're dealing with situations where tax systems are based on location, physical location. The Internet, I think, poses difficult challenges in the tax area because of that as well as in the other areas that we're discussing here, and I think we need a principles based approach to this rather than a results based approach to avoid the development of protection sentiment and to enable us to reach a global consensus. Thanks.

(APPLAUSE)

Mr. PETER COBB:

I'm told that we've been much too long-winded, that's principally me I guess, and that we don't have time for questions. Is that correct, Ruth?

Ms. RUTH DAY:

That's correct about the time, you need a hearty round of applause.

(APPLAUSE)

TRANSACTIONS CONTRARY TO PUBLIC LAW AND POLICY

Ms. JANET HENDERSON:

Excuse me, ladies and gentlemen, I'm being urged to urge you to take your seats as we are running very late, so at your leisure, if you could be seated.

I think I'm just going to make a start here, as I'm sure people are going to be recovering from the taxation talk for a little bit longer, and I'm going to try and introduce the next topic and get you energized and excited.

I notice in this version of the program that this not actually billed quite as it should be, because it's missed out the sexy bit of the presentation which is really all about Internet gambling. I'm very pleased to introduce our speaker, Alan Sutin, who's a partner at the law firm of Greenberg Traurig, and also head of their IT unit in their New York office, and he is a specialist on IP and computer issues. He's also Chair of the Subcommittee on Public Law and Gaming Issues of the ABA Jurisdiction Project, so he's very well qualified to talk about this.

Now, I was going to subject you to a few of my own rambling thoughts on this issue, but I've been told that there isn't time for that, but I will just make a couple of introductory remarks, because I think it's very important, I mean, I've been very impressed with the level of thinking and analysis on the jurisdiction issue throughout the day, but speaking as a representative of one of the U.K.'s largest service provider - and certainly its largest telecom company - we are constantly, on a daily basis, grappling with this issue at a practical level, seeking practical solutions.

Now, I have to say that Internet gambling was not a topic that until recently (or until I started researching for this for today), was keeping me awake at night, there are many other topics that do such as copyright and defamation, and pornography (don't take me wrongly when I say that!) but this was not one that actually had really come to my attention. But as I started to look into it, I realized the scope for it to be another headache for service providers, because given that it is an issue that I think is quite emotive and has quite a strong public resonance, it could put a lot of pressure on government to take action. Given also that gambling legislation around the globe is so diverse - and hence a very unlikely target for imminent harmonisation - I think there's a real likelihood of seeing governments, or indeed courts, target service providers or intermediaries if they can't actually get to the source of the problem, namely an illegal gaming operator.

There have already been a couple of examples of attempts to do this in the gambling context in the U.S., not to my knowledge in Europe. The Kyle bill did suggest that service providers should have responsibility for blocking access to illegal gambling sites, which, as I'm sure most of you know, is a very tall order for service providers; they argue it's impossible to block access to foreign sites. So that's not something that fills my heart with joy; and equally in a case that I think Alan is going to mention, AT&T found themselves caught up in a very difficult situation as piggy in the middle where they were effectively being asked to not provide the wires for the service, and maybe Alan can say a bit more about that.

So, I will come back after Alan has given his presentation, which will take you through the roller-coaster ride of Internet gambling in the U.S., where there have been a number of cases on this, and just throw out a few suggestions for solutions I see. But I've probably already broken my own law on going over time here, so without further ado, I'll turn over to Alan.

Mr. ALAN SUTIN:

Thank you, Janet. Well, Ruth has told me that I have about three and a half minutes now, so we'll try to race through this as quickly as possible.

I think for a conference like this, you'll be surprised, Internet gambling is actually a very interesting topic, not because so many of you or your companies are involved in this, but it's one of those issues that flows to the surface many of the types of things that we've been talking about all day today.

Let me give you just a brief overview, though, about the market and the size of the market. The Internet gambling market just in the U.S., which is where I was able to get some statistics, in 1998, we were talking about total gambling revenues of about 27 billion dollars; on the Internet, we're talking about 1998 revenues of 650 million dollars, although that was about double the 1997 amount, and the estimates or the projections for the year 2000 are that Internet gambling revenues just in the U.S. alone will be about 10 billion. If you look at the number of Internet gamblers, that also more than doubled in the 1997 to 1998 range from just under 7 million to about 14.5 million.

Now, Internet gambling is one of those things that gets regulated for a variety of different reasons, it can be because some regulators feel that it's an important social and moral issue and there was a recent gambling impact study that focused principally on these reasons. I suspect that in fact many of the regulatory efforts are based more on the protection of the established industries, some of the most vehement opponents of the Internet gambling are the casino operators in Las Vegas and Atlantic City, here, I mean in the United States.

Prevention of organized crime is another reason that you sometimes hear, and of course Internet gambling is something that can generate substantial tax revenues for the state.

In the United States, there are several states that have introduced or passed a legislation banning Internet gambling: Louisiana, Texas, Illinois and Nevada are examples. Now, take a look at Nevada, do you think that Nevada banned Internet gambling because they saw it as a social or moral issue, or because you think they were trying to protect established industries?

There have been a number of state attorney generals that have been very active in seeking enforcement against Internet gambling activities in the states. Minnesota, Missouri and Florida have been among the most active, but the National Association of Attorneys Generals has had a task force working on this issue, and has been very active in this area.

At the U.S. federal level in terms of regulation, there's really one statute that people have been focusing on, it's 18 USC, Section 1084, which has presented some interesting issues. It's really a wire, it's a wire act statute that goes back to the days of regulating the use of the telephone and wire services in support of sports betting activities. There's been questions as to whether that can be enforced extraterritorially, and whether it can be enforced against online casinos.

There is now the newest version of the Internet Gambling Prohibition Act of 1999, many of you may know this as the Kyle Bill. It was introduced first in 1997; it was rejected, did not get a lot of support the first time around; the next time around it was passed by the Senate, but died in the House. It's back again like Jason in the Halloween movies, this time, though, there have been some substantial modifications: it does not penalize casual betters whereas the earlier version did; it targets really Internet casino operators, extending the sports betting prohibition to the casino operations and provides for fines of up to $20,000, and four years in prison; bans Indian reservations from operating casinos, and we'll see that this has been a big issue in some of the jurisdictional cases; and it does provide numerous exceptions for things like securities, trading, indemnity contracts, insurance contracts, et cetera, there's an exemption now for fantasy sports and several others.

So just again to complete the context for this, what's happening for the most part is private parties, who are getting into the Internet gambling business, are setting up in Internet gambling friendly jurisdictions, for the most part, those are in the Caribbean, places like Antigua, St.Kitts, Dominica, Belize. Australia, though, is also become very Internet gambling friendly and has instituted a scheme in some states to license Internet casinos.

Governments have also been getting into Internet gambling activities The Liechtenstein lottery is available over the Internet; a number of the indian tribes, which operate theoretically in their own jurisdictions in this country, have started to operate Internet gaming operations, and in Dominica now we've seen the first government owned online casino.

From a jurisdictional point of view, most of the cases focus on what I call the two distinguishing characteristics of the Internet for purposes of this problem: one is the lack of central control or governance, that's not something of course that legal bodies are accustomed to, and the borderless nature of cyberspace, the lack of geographic boundaries. As a result, you can now have, very easily, a better sitting at a computer in, say, Minnesota, who accesses a sports book in Antigua, places a bet on a World Cup match between Italy and Spain using funds that were drawn from and then paid into an account in the Cayman Islands. So a lot of this activity now is done on a cross-border basis, and the question becomes: how do you deal with the tricky jurisdictional problems?

Well, what I want to do is take just a couple of minutes, the remaining two of my three and a half minutes, to run through a few of the United States cases on this issue. One that many of you may have known, may know, because it's been addressed in some of these materials, is the State of Minnesota v. Granite Gate Resorts. This involved a service called WaiterNet, which was a service that would match up betters with other betters - it was not a casino per se, they did not take the bet - they just matched up other betters and took a percentage of the fee.

In this case, like a couple of the others we're going to talk about, the attorney generals, in this case, the Minnesota Attorney General brought an action based not on a violation of the gambling laws, but rather on a violation of that State's Consumer Protection Act. It was premised on the fact that the defendant's website advertised in Minnesota that gambling on the Internet was a lawful activity, which in fact it was not.

In December of '96, a State District Court denied the defendant's motion to dismiss for lack of jurisdiction, and the Court adopted a five-factor test for determining whether the defendant had established minimum contacts with the state, and if you read the analysis of the case, you will see they took some pretty expansive positions. For example: on the quantity, the issue of the quantity of the contacts, which was the first factor, they found an Internet advertisement is like an advertisement placed in a national publication, except that it's available 24 hours a day, seven days a week, 365 days a year. They rejected the defendant's, what I call, push-pull argument, in other words, the argument that they weren't placing advertising in Minnesota, but rather people were coming to the site to get it, and they held that every time somebody accessed the site, they were affirmatively transmitting advertising into the state.

On some of the other points of the test, the quality of the contacts, the nexus between the action and the contracts, the court sort of adopted a broad purposeful availment analysis, and with respect to the nexus issue, they stated that here the defendants crossed the Minnesota borders through the Internet advertisement and solicited business for the gambling venture.

If our attorney general cannot hail them into our court, then the citizens of Minnesota will not have an adequate consumer protection remedy.

At the end of the day, going through all the five factors, they found there was jurisdiction.

Now, on appeal to the Minnesota Court of Appeals, the finding of jurisdiction was upheld only under somewhat more moderate analysis. In particular, the Court of Appeals rejected the reliance on the District Court's argument that the jurisdiction is established because the server sends in electronic messages every time there's a URL call.

Nevertheless, they found that the defendant, in advertising its gambling activities on the Internet and accepting phone calls and some other activity, was subject to jurisdiction in Minnesota. That case was affirmed by the Minnesota Supreme Court without explanation.

There are a couple of other cases that have also focused on consumer protection statutes or advertising related statutes: one was Thompson v. Handa-Lopez, in Texas, and in this case, this involved a violation of the Texas Deceptive Trade Practices Act, and the District Court found that extensive interaction between the plaintiff operator of an online casino and a resident of Texas constituted a clear transaction of business. The defendant in Thompson not only provided the toll free number but also entered into contracts with residents of various states knowing that it would receive commercial gain at the present time.

Basically, the court found that each time a resident of another state -- in this case Texas -- played a casino online game, a new contract was formed, and it adopted a contract type analysis to find that there was sufficient contact for jurisdiction in a case involving these consumer protection acts.

A similar result was achieved in Nixon v. Interactive Gaming Communications Corp.; in that case, the State of Missouri was able to obtain an injunction against the Internet gaming operator for violating the state's Merchandising Practices Act. The Missouri consumers filled out account applications and paid fees to enter online gambling tournaments and using contract principles, the Missouri Attorney General argued that this conduct constituted an offer by the defendants in Minnesota and that -- I'm sorry -- Missouri, and an acceptance of that offer within the state, and that analysis was upheld by the court.

The case that Janet was referring to earlier was another Missouri case which involved an effort to seek an injunction against an Ohio Indian tribe from operating an Internet lottery that was accessible to residents of Missouri.

The case arose when the Coeur d'Alene Tribe created a lottery that was accessible to residents off the reservation first by dialing a toll free 800 number. After several state attorneys general notified AT&T, who was the provider of that toll free service, that the provision of the number violated section 1084, the tribe responded by creating an Internet based lottery called the U.S. Lottery, and began selling tickets over its website. Players were required to be at least 18 years of age, establish an account to purchase lottery tickets, and had to be located in a state where lotteries are legal. Visitors to the U.S. Lottery website were advised that the lottery was authorized under the Indian Gaming Regulation Act, and that the lottery was conducted on the tribe's reservation in Idaho.

Without -- in the interest of time, I won't walk you through the various court decisions, but suffice it to say that the ultimate issue here, when the Eighth Circuit remanded it back to the DC Circuit was whether or not the gambling took place on Indian lands. In other words, the ultimate factual issue of when you're conducting gambling over the Internet, where does it occur? And in that case anyway, there has not been a resolution. And that, until last week, is kind of where things stood on this issue.

Then last Thursday, the Supreme Court of New York handed down a case -- if I can get my computer going here -- New York World v. World Interactive Gaming Corporation, in which a New York Supreme Court judge -- and for those of you who aren't familiar with the New York court system, the Supreme Court is the basic level of trial court, it's not the highest court in the land, and the New York Supreme Court Judge Charles Edward Ramos held that World Interactive Gaming Corporation was using cyberspace to circumvent New York's gambling laws.

Justice Ramos wrote that the Internet site creates a virtual casino within the user's computer terminal, and that the virtual casino is located in New York, and is therefore in violation of the State's ban on gambling not specifically authorized by the State. The act of entering the bet and transmitting information from New York, be it the Internet, is adequate, according to Judge Ramos, to constitute gambling activity that takes place within the State of New York.

As Judge Ramos wrote and as I say here, "to hold that New York law does not apply to Internet based gaming concerns would severely undermine this State's deep rooted policy against unauthorized gambling by establishing the Internet as a safe harbor for otherwise illegal activity." Now, I think it's a safe bet that this case will be appealed, and it certainly does not suggest the sort of sophisticated thinking and analysis that has been developing in some of the other cases, I mean, it would be quite frightening indeed if this were applied to non-Internet gambling activities, if you're simply merely accessing a website and constituted an activity in and of itself within the state.

It would be very interesting to see what happens with this case, as I say, it was issued, it came down last Thursday, the opinion is not even generally available yet at this point.

Five minutes, okay. Let's press ahead then. The difficulties in actually obtaining jurisdiction and successfully prosecuting folks under the existing laws is evident, I think, last March -- excuse me just one second -- last March, the Department of Justice, the U.S. Attorney's Office in New York brought indictments against 14 managers of six Internet sports books, and today not one of those has gone to trial, and in fact they have quietly settled nine of those 14 cases indicating that, as they've done further research on this issue, the Department of Justice has become a little less confident of some of the theories under which jurisdiction was being asserted under the existing federal laws.

There is some support for the proposition that they can be applied particularly in extraterritorial concepts, there's a U.S. Supreme Court case that deals with crimes committed over the telephone that holds that crimes are committed in the place of the hearer and not the speaker, but basically there are a number of problems they've had but not the least of which is that under the criminal laws they generally have to get physical, the physical presence of the defendant.

There are a couple of cases that have dealt with the issue of jurisdiction over non-U.S. nationals, and this is getting into a sort of general international law concept. It's one thing where you've got a U.S. national who's operating overseas and you have jurisdictional theories based on the citizenship of the defendant, but where you're trying to apply these laws in an intraterritorial manner against non-U.S. residents, it's proven to be more difficult.

The only couple of cases that have addressed this in the Internet gambling context, one found that there was no personal jurisdiction over a Hong Kong corporation based merely on an advertisement that was placed in an Internet trade publication, and the other case, which was Playboy Enterprises v. Chuckleberry, they did assert jurisdiction, this involved a website called Playmen that was operated out of Italy, and solicited subscriptions from the U.S. folks, but that jurisdictional basis now arose out of an earlier injunction that had been issued at a time when there was activity in the States and they were able to get jurisdiction over that company.

I guess, finally, I want to talk just for a moment about some policy considerations that arise under international law, and originally we would have had a longer section on this, but the basic concept here is that Internet gambling, which the U.S. government seems to have chosen, is the one area where it wants to break its policy of slow going regulation of the Internet and go out and apply its laws extraterritorially to folks operating in other jurisdictions, I think, has important policy considerations.

We were involved in a matter for a British gaming company that had some assets seized here as a result of activities that it was conducting on a website in the U.K., and I think it's a very dangerous proposition for any country, including the United States, to start to assert jurisdiction over foreign nationals as a result of activity which is perfectly lawful in the country in which it occurs. It will open the door for nations with differing views on privacy and human rights, political and cultural and religious issues. I think there's no doubt that if you'd talk to anyone in the U.S. Government, they would not support the notion that a fundamentalist Islamic country, for example, could arrest executives of a U.S. clothing manufacturer that happens to sell skirts on the Internet that they felt were too short in a fundamentalist country, Islamic country, and I think that's the kind of policy consideration that needs to be brought into this debate as well.

Having said that, I will let Janet make her concluding remarks and hopefully we'll get things a little closer on track. Thank you.

(APPLAUSE)

Ms. JANET HENDERSON:

Okay. I'm going to try to be very, very succinct indeed.

I think that it's very interesting to talk through the issue of jurisdiction in practice, because to some extent we've been talking so far about the theory, and this is one area where certainly in the States there have clearly already been attempts to assert jurisdiction and in the way that Alan has described to clear to the extraterritorial jurisdiction in the way that Alan has described. I did want to pick up on some earlier threads from today about how self-regulation, combined with enlightened state regulation is, I think, the way forward, and if you want to know more about my views on that, then catch me in the social hour, I'll be happy to bore you on that subject!

But I think it's important nonetheless - picking up on what Alan said - just to conclude that really we have to try and discourage government from knee-jerk reaction in this area. It's a natural thing for states, I think, at the moment and particularly in an area like gambling, to try and assert control and stamp their authority to show that they are not ceding control, but I think in effect they would display much more power or much more authority if they actually stood back and said that this is something that has to be dealt with at grassroots level. By that in particular I mean that if in each territory we encourage the gaming operators to actually try and get their own house in order and encourage them to perhaps develop self-regulatory codes of conduct and other such responsible practices, and perhaps, just going one step further, to develop a system of quality marks or seals of probity that they can apply to their sites, we could have systems like this developing in various jurisdictions around the world with some sort of reciprocity of systems. Possibly from that grassroots approach could follow supranational government endorsement of these kind of approaches. Now, I'm not saying that there's necessarily going to be any harmonisation of the strict law on gambling in the territories of the world, but I think it's a practical common sense approach to say: well, most people actually do legitimate business, let's encourage them to do legitimate business, and let's encourage mutual recognition or reciprocity of legitimate operators, and then possibly have some kind of overarching and government framework on top of that.

So I'm not sure I have given you a portrait summary of my views on this, but I think service providers have a lot of experience or are developing experience in the area of self-regulation, and so I think that we actually (or certainly BT believes) that this is a viable approach, and as I say, I have further views, but I'm going to shut up now.

Thank you very much.

(APPLAUSE)

DEVELOPMENT OF LAW ON A PRIVATE BASIS: BUSINESS TO BUSINESS TRANSACTIONS

Ms. ROSALYN BREEDY:

Good afternoon everybody! My name is Rosalyn Breedy and I work for Warburg Dillon Read in London, I am one of the vice chairmen of the Internet Law and Policy Forum, and it is my pleasure this afternoon to introduce Mr. Åke Nilson to the Forum. And Åke will be speaking about the development of law on the private basis for business to business transactions, which picks up on the theory of self-regulation discussed earlier this morning.

Mr. Nilson is a Managing Director of Marinade Limited, and specializes in advising on the legal aspects of E-Commerce, electronic data interchange; he's also the Chairman of the E-Commerce Project with the International Chamber of Commerce. Thank you very much.

Mr. ÅKE NILSON:

Thank you, Rosalyn. Bonjour, mesdames et messieurs! Je suis très heureux de faire cette intervention dans la belle cité de Montréal, et je veux bien remercier les organisateurs canadiens et américains pour l'invitation.

Got you worried now, haven't I? You should be so pleased that you're not in Minnesota, because then I would be making the whole presentation in Swedish! But I promise I'm going to be nice to you, I'm going to do it in English and furthermore I'm going to try and make it on some sort of time scale basis here, so I will skip a little on what I was going to say, but try and keep to the basic points which I think are mainly centered around the subject of self-regulation.

I wanted to give you a quick overview to start with on some of the concepts that are involved here, and then I shall quickly speed on into two examples of what I mean: one is the electronic commerce project of the ICC, and the other is a project called Bolero, which some of you may have heard about, and which shows a really quite distinctive example of how you can develop a sort of private law for use within a community of traders with the same interests.

So let's just start by thinking about why would anybody bother with doing such a thing as developing law on a private basis? Well, I think in the area that we're talking about here, electronic commerce, the Internet and so forth, there is something, the one thing that business is missing is predictability and consistency of applicability of the law, and I'm sure, as is everybody else, I think, that most of the ordinary laws do in fact apply to Internet transactions, and there's no particular reason why you would want a separate legislation to cover the Internet. It's just that because we are in the beginning of this development, business is not sure how the courts in various countries, and we are talking about a global medium here, will apply these laws, and the result is unpredictability and uncertainty, and that, of course, is something that businesses don't like.

So the idea here for development of private law is to achieve something that will be predictable and consistently applied both in areas of different languages and in areas where you have different legislative systems, the main difference, of course, being between common law and civil law countries.

But there are several problems related to this and one is that this is much easier to do in a closed community, when you have a grip on all the people who are going to participate and play by the same rules. In a closed community, you can apply contracts, you can make sure that these contracts are binding on all the members, and you can make sure that because their contract effectively writes down everything that you want to say and it therefore applies consistently across the group.

But the closed community also has problems: it becomes unmanageable eventually when you begin to grow into the thousands or ten of thousands of people in the closed community, how can you be sure that all of them really are bound by the contractual rules? And this sort of thing can be a bit of a problem. Also invariably, contracts tend to be written for a specific legislative approach, and that may not suit everybody, especially people who come from a different culture of law, if you like.

On the other hand, the open community is exemplified by the Internet, anybody can get on to a website, and there you can't bind people by contracts, you have to try and -- or not so easily anyway, not the same kind of contract, and we will get back to what I mean by that a little bit later. And so you have -- it is perhaps in one sense even more unmanageable, you have no idea of who's going to come in, and how can you make sure that they are bound in relation to you? And indeed when we are talking about business to business and market making and similar applications, then you also want to make sure that the various users are bound in relation to each other; that can be very difficult.

The first example that I wanted to talk about is that of the International Chamber of Commerce's Electronic Commerce Project. This is an example of where we are looking at the latter model, the open community, and trying to see what can we achieve, to what extent can we put things in place to help people, help businesses in particular, achieve this consistency in the application of rules?

Let me tell you a little bit about the ICC, the International Chamber of Commerce, World Business Organization as it calls itself: it's an international organization, and of course you will shortly hear a little bit more about another type of international organization, but the ICC is only about businesses, it is the voice of business, it's indeed the only global business organization really that is around. It was started shortly after the First World War on the basis that it's better to make trade than war, and in the hope that people who made trade with each other will not fight, and I think that experience since and before indeed should have shown that it is not necessarily the case, but anyway.

The ICC is very much about self-regulation, it's about harmonizing best business practice on a global basis in some of the legal and quasi-legal rules that it is best known for all things like the UCP-500 that regulates the way documentary credits are handled by banks globally, and the Incoterms such as Free On Board, you know, Delivery, Duty Paid and so forth, part of almost every sales contract in the international trade today.

The ICC has a number of policy commissions, about 15 or 16 of them arranged on subject matters where the members meet and agree on policies; it has got a court of arbitration, which is the biggest court for settling international trade disputes by arbitration means; it makes various publications; it has an Institute for the study of trade law and so forth; it is generally, all its activities are aimed at facilitating trade and promoting best practice in a harmonized manner across the globe.

It also has the electronic commerce project which was started about five years ago, and which I have the great honor of chairing. It is that provides some practical guidance and rules to the business constituency. It publishes a newsletter called E-Business World, and its holds various conferences on E-Commerce. So there's quite a lot of activity now in the ICC on E-Commerce and growing, so I should think.

The structure of our electronic commerce project is that we have a steering committee which coordinates, sets strategy, relates to other international organization and so forth and we then have three actual working parties where the work itself is developed.

The electronic trade practices group deals with best practice for users of electronic commerce services. The information security group deals with best practice for providers of electronic commerce services, and the E-terms group looks at putting in place a repository of standard terms and conditions that can be easily referenced by anybody who needs to introduce them into a contract.

Now, the aims of our project is to put in place some guidelines and practical helpful rules that businesses can look to as a sort of general help before there is, before they feel that there is consistent law around that can take over the role of the ICC in this respect. But it is a consensus organization and we have to try and make something that is applicable for an open community, and this is very hard, that's why, after five years, we have produced what I would in a commercial context consider to be a not too brilliant number of deliverables, but we do have some useful things, the Guidec rules for the certification authorities; we will shortly be presenting a sort of advanced interchange agreement for Internet users, and of course the E-terms repository will -- it's already available in a pilot form.

The other thing that we do in the ICC ECP is also to support the other initiatives, because we think that rules that are put in place by the ICC, which tend to represent best business practice around the world, they are contractual again and so they do not have the force of law, but perhaps by providing some of our experience to other organizations that can actually make law such as UNCITRAL, such as the WTO, and so forth, we can perhaps help in making things happen a way that is suitable for business.

So I will rapidly skip on to the main subject of my presentation today, perhaps the Bolero project. Now, this is based on a club concept; in other words, it's a closed user community where you can bring all the users together in a single association. It has proven quite useful in the past and it's quite a useful little example that if you have something that is a club, you can provide contractual solutions that have a far better chance of surviving any disputes than if you just make a sort of network of -- a sort of hub-and-spoke system of contracts.

I won't bore you with the historical precedents for this, but let me just remind you of the Mayflower Compact, which was really a club of immigrants deciding to how they wanted to build, create their new society. I have examples from the Student Societies at the University of Uppsala where Agne and I went and where he no doubt like me spent a lot of time in the Student Societies, they are a very nice example of the development of law on a private basis, and a very long running one as well, since they have, such in Sweden, their roots back to the 17th Century, and there is a body of law, i.e. the statutes for the society, that goes back at least as long as that.

You have other things, the P&I Club, the Protection & Indemnity mutual insurance companies for ship operators, they have rule books that define when the clubs will pay out to their members in respect of losses that they have suffered, and finally we come up to the famous case, the Satanita -- I promise you that this is the only case I'm going to quote to you -- it is a case about a sailing club in the 1880s which had a rule in its, in the club rules, that said that when there's a race on and one yacht causes damage to another yacht, then the damaging yacht will pay out the full value of the damage that it has caused to the owner of the damaged yacht.

There was a race, a certain yacht damaged the Satanita, which was another yacht, and the owner of the damaging yacht tried to limit his liability under the then Universal Limitation of Damages Act in the U.K. which would have limited his liability based on the tonnage of the yacht, and therefore it would have been about 25 shillings or something like that, and but it was held eventually, at least by the Court of Appeal, and I think it actually by the House of Lords, that the contract that was expressed in the club rules not only did it create a contract between each member and the club, but also between each member and every other member, and that this contract was good enough to override such a non-binding legislation as the Universal Limitation of the Shipping Act.

So on that basis, one can proceed and create a club that has its own rules, its own rule book, and you can be pretty sure that as long as this, as long as we apply English law to this, that will hold up in any area where there is freedom of contract such as International Trade.

So Bolero is a project to dematerialize all trade documentation, all the sort of documents that you have in international trade from invoices through to certificates of origin, bills of lading, all this sort of stuff, and there is a lot of it, I can assure you.

Why would one want to do that? Well, the United Nations estimate that 7 % of the value of international trade is made up of paper administration. So in other words, if you import something and it costs a $1,000 when it gets to you, $70.00 of that is made up of the cost of the paper that is required to handle the consignment itself. So the value of international trade is something like five trillion U.S. dollars annually, so there's some 350 billion U.S. dollars every year to be saved by doing away with paper and replacing it with electronics, and that would be rather nice, but it hasn't been done so far for several reasons: one is the conservatism of the industry, and another one is this problem with what rules will apply and how can we be sure that there will be a consistent and predictable outcome if we have a dispute. So that is what we're trying to do with Bolero.

Bolero is today owned by two organizations, S.W.I.F.T., the banks, International Network and the Through Transport Club which is a sort of P&I Club of the kind that I mentioned before, albeit one that specializes in containerized shipping. So it is owned by two co-operatives, one from the banking industry and one from the shipping industry. This is order to make sure that we get the maximum neutrality into the project so that it cannot be accused of having, of being biased towards one industry or another, or even one company or another.

There is also the Bolero Association, and that is a user group consisting of all the users of the service and other interested parties, today's got about 200 members, all of them are blue chip companies well-known, and that is the very club which administers the Bolero Rule Book which contains the rules that are binding on all the users and which creates a legal glue and a sort of safety net within which they can all trade and be pretty sure that the outcome will be what they expect it to be.

In the case of Bolero, that outcome is specially designed to be the same as it would have been had they been doing the same process as using paper. In fact, Bolero is emphatically not about business process re-engineering, it's about taking today's business processes and taking the paper out of it and replacing the paper with electronic messaging, and that's all. Now, in order to make sure that the result of that is what we expect it to be, we have to have this contractual safety net, and that comes through the Rule Book.

There's been quite a lot of work on this Rule Book, it stems from a serious of previous projects that started with something called Seadocs back in the mid-1980s, and we've developed it through wide user consultation, consultation with the academic community and consultation with law firms around the world, in fact in about 20 countries which we selected on the basis of them being typical for a particular legislative culture, and we have found so far that the only area where we don't think that the Rule Book will work is in the Arab states where Shariah law applies that does not seem to be very conducive towards the Rule Book project, but other than that it pretty much works everywhere.

Now, one particular thing that we need to regulate here is the concept of the negotiable bill of lading, and I will just mention that very briefly, because it's interesting from an electronic commerce point of view. The negotiable bill of lading is essentially a receipt by the carrier to the person who ships goods with his vessel, which says: I, the carrier, have got these goods that are described on this piece of paper, and I will deliver these goods to whomever presents me with this original document at the other end of the journey.

That means that the value of the goods is sort of locked into the document itself, so the maritime bill of lading is not just an information carrier like an invoice or any other trade document, it is also a negotiable document, it carries the value, it has a value in the same way as a banknote has a value, and therefore it's quite difficult to handle by electronic means because of course the one thing that you have to be sure of with a negotiable document is that there's only one of them that represents the same value; otherwise, you get something that is technically known as hyper-inflation.

And there have been various ideas of how to deal with this in the past, Seadocs I mentioned, this developing to a set of rules developed by the Comité Maritime International, an association of international maritime lawyers, where the idea was that the carrier could hold the goods in trust for whoever was entitled to the goods at any particular time.

Now, we slightly developed that in a later project by Bimco, another international shipping organization, and said that we could put in place a central registry that would register the holder ship of rights in relation to each consignment and that this would be owned and held neutrally and would act on behalf of all the carriers.

Eventually, we have developed and developed this concept to a point where we now feel that by contractual means we have got something in place that actually replicates all the functions of a negotiable document without itself being a negotiable document, because, of course, it's only a data base and a series of secure messages going backwards and forwards over the Internet to this registry.

So sometimes, in order to achieve the same old result as you had before in the paper world, you have to resort to some contractual trickery in order to get there, but usually you can.

Okay. Since the subject of the conference is jurisdiction, I want to finally, before I get thrown off the podium, just touch on what we see as being important in relation to the jurisdiction in Bolero. One thing that we do is that we consider the Bolero Association to have certain jurisdictional powers over its members. After all, it is a peer group, it's a group of -- it's a club, so you can have club rules about who can be admitted to the club, and more importantly who can be thrown out of the club if they misbehave, and that jurisdiction will be exercised by a committee of the board of the association itself.

Taking it slightly further, we hope that we will then be able to look at member to member disputes and be able to help settling them by mediation and arbitration in various ways, this may be one point where we'll link in the ICC eventually, for natural reasons very keen on seeing a close cooperation between Bolero and the ICC, which we do have in theory but not yet in practice.

But finally, it has to be said that the Bolero project will be subject to English law, it should work under other laws as well, but just to continue with this belt and braces approach, the whole contract, the Rule Book and all the other contracts in this rather complex contractual system that we have are subject to English law where we know, where we can base ourselves firmly on the good old Satanita case from about 1887, I think, and know that we are on home ground as it were.

Well, thank you very much, that is all I think that I should say in this formal part of the presentation, but I'm very happy to answers questions about any specific areas that you would like me to address in more detail.

Mr. MICHAEL SAX:

Michael Sax. Sax Law, Toronto. Just one question: how does Bolero fit in with the part 4 of the UNCITRAL Electronic Commerce Act being carried to this?

Mr. ÅKE NILSON:

Yes. The specific chapter in the UNCITRAL model law, yes. There is the -- that specific chapter was in fact written specifically with Bolero in mind. I think that my good friend Bob Howland of the U.K. Delegation was, to a great extent, responsible for insisting on there being a specific chapter in there, and it's been written in there so that to make sure that nothing that the application of the law in no country where the model law would apply, that it would in anyway prevent Bolero from happening.

In fact, it's quite interesting to look at the -- to compare that chapter with the Rule Book of Bolero, and you will see that they actually fit quite well together even though that chapter of the model law was based on the much earlier version of the Rule Book in a previous face of the project.

Ms. ROSALYN BREEDY:

Okay, any more questions?

Mr. NIGEL HICKSON:

Just briefly, Nigel Hickson, DTI, U.K. In your experience on Bolero, do you think it's a model that is expandable in other areas? I mean, clearly, it's been a significant success in the industry area that it's being applied to, but do you see it going beyond that sort of closed environment into other areas, and being a sort of a model for regulation as such?

Mr. ÅKE NILSON:

Yes. I think it can work like that in certain circumstances, though: it has to be in an area where it is possible to achieve self-regulation. We were talking about this before, that in heavily regulated industries such as banking and financial services and so on, it may not be entirely appropriate. So it's got to be in an area where there is freedom of contract, and it's also got to be in an area where you can in some way find, get hold of all the people who are going to use the system, and get them bound into something, like joining a club, before they can start trading. It won't work in a totally open community, but I would have thought that there may well be other areas where the same concepts can be applied.

Ms. ROSALYN BREEDY:

I think we have one more question.

Mr. RON PLESSER:

Just a quick question, Ron Plesser, Piper & Marbury, Washington. Isn't there a third player which is the shipper? You've got the banks and the steamship companies, the shipping companies, then you have the shipper, and I'm interested because of how you do these things with constituencies. Is that a constituency you've been able to ignore or is that a constituency that you've incorporated, or how do you maintain neutrality as to that constituency which, at least in the United States, has very much different interest than the steamship or shipping companies and the banks, if you can respond? Mr. ÅKE NILSON:

That's an excellent question, I'm sorry, I did skip a little rapidly through explaining what is going here. The shippers are indeed also members of the Association, and indeed everybody on all sides of the contract that are involved in an international trade transaction are members of the Association. The fact that the ownership of the service itself is currently only by a co-operative of banks and a co-operative of shipping companies is solely because there simply exists no similar organization that unites all the cargo interests. Had there been one, it would very much have been welcome to join in the owning of this concept.

Now, I think that even S.W.I.F.T. and the T.T. Clubs themselves look at this as being something that they do in order to improve electronic trade, the possibilities of doing E-Commerce for international trade for their own members, and so they will probably, once it's up and running and they have got a reasonable return on the investment they have made in making this happen, they will probably be looking to putting Bolero on a different sort of basis of ownership, one where I should think the Bolero Association will play a very important role, and you can see that Bolero might eventually evolve towards a S.W.I.F.T. type model where it's actually owned by everybody who uses it.

But the co-operatives are wonderful in the longer term when you have an established business, but when you have a business that needs to get up and going, you've got to have somebody that can put in the money and just get on with it, and that, you know, running start-ups by committee is not necessarily a good idea.

Ms. ROSALYN BREEDY:

Okay. In the interest of time, I would like to thank Mr. Nilson for a very interesting presentation on the power of self-regulation, but just before we do close, I also would like to make one observation: it seems to me that once you've established the multinational contracts structure for this project, the key to maintaining the path of regulations building and maintaining a process for building consensus, could you talk a little of this matter before we close?

Mr. ÅKE NILSON:

Yes. We're very much looking at building the consensus through the Bolero Association. So it will have working groups, it already has working groups, I should say, that are based on different concepts, some of them could be geography because it's obviously not convenient for people from all over the world to travel to a single place to meet and create consensus, but there can be other reasons for creating subcommittees of the Association.

Ultimately however, they can all forward their views on the Rule Book and put forward proposals for changes, and these proposals will be dealt with by again a specific committee of the board, the Rule Book Committee, which will then take a view as to whether this is something that should be, that needs doing. There are different kinds of changes that may have to take place to the Rule Book; sometimes it may be necessary if somebody discovered a loophole, for instance, it would be necessary to close that very quickly, but other rules can be moved forward in a more settled democratic process, based on the annual general meetings of course of the Association as a whole, which will be meeting on a virtual basis very much, using teleconferencing and other things. Ms. ROSALYN BREEDY:

Particularly E-Commerce as well. Thank you very much, Mr. Nilson.

Mr. ÅKE NILSON:

Thank you.

(APPLAUSE)

THE ROLE OF INTERNATIONAL ORGANIZATIONS AND AGREEMENTS

Ms. JENNY CLIFT:

I'm sorry if we started in a state of disarray, but we're going to keep you here until we finish, which could be I think until about 6:30, but we'll just see how we go, how quickly we can go through what we've got prepared.

My name is Jenny Clift, I'm a Legal Officer with the United Nations Commission on International Trade Law, I work principally on electronic commerce and insolvency law, and prior to joining UNCITRAL last year, I worked for the Australian government, again principally on electronic commerce and international trade law.

What I've been asked to talk about today is partly the role of international organizations, but also about harmonization of law in general. We've heard today a lot of comments about the restrictions on harmonization, what harmonization might be aimed at, so I think what I'm going to do is really sum up of a lot of the points you've already heard and perhaps throw in a number of other issues for consideration and thought.

Just a brief point on terminology first: we've heard people use phrases such as harmonization, unification, I've heard substantive convergence today for first time. The different terms do generally mean slightly different things but it's really a question of degree. When we talk about harmonization, we're certainly talking about eliminating differences and making regulatory requirements and government policies more similar; what perhaps I'm talking about is the same degree of outcome as we would be if we were talking about unification. As I take it, substantive convergence is probably something on the lines of harmonization.

The two terms tend to be used interchangeably and I'm going to talk about harmonization, but I think the same considerations also apply to unification.

There are several levels at which harmonization can operate. The one with which UNCITRAL is most familiar would be specific rules which regulate things like the outcome characteristics of performance of specific transactions. When you're dealing with harmonization at that sort of level, the process usually requires that there are policy choices made in the process of negotiation and compromises have to be reached before you actually get to the text at the end of it.

Two other levels at which harmonization could operate would be at the level of general governmental policy objectives, where policy choices are left to states to make after the broad principles have been agreed. Obviously states would have a fairly broad discretion as to how the objectives would be obtained and what the data of the implementation would be.

A third level would probably be the adoption of agreed principles that are intended to influence or constrain factors that are taken into account in making policies and rules, and some examples of that might include things like the ILPF international Consensus Principles for Electronic Authentication and perhaps the OECD Guidelines on Cryptography.

There's a number of justifications that are usually given for the process of harmonization. The most common one is that harmonization will enable participants from different jurisdictions to interact or communicate particularly where transactions occur directly between two jurisdictions.

In the case of the Internet, the means of communication may increase the impact of these differences between jurisdictions, and potentially increase the disadvantages that would be inherent in the legal diversity between the different jurisdictions.

In addition, and I think we've heard people say this today, the impact of those differences probably extends beyond what would traditionally be regarded as international trade, where the sorts of issues that commonly occur are expected by the parties and they are equipped to deal with them. Now, we find ourselves dealing with issues that relate to consumers where they aren't particularly conversant with the sorts of problems that arise.

In order to deal with jurisdictional differences, the adoption of similar or identical domestic rules might not always be required. The traditional area in which UNCITRAL functions, for example, is really setting up special regimes for international transactions which don't abolish or actually overrule the domestic law that applies to a particular subject matter, and a lot of commentators refer to those as interface laws.

Many UNCITRAL texts, for example, are limited in there application to international commercial transactions, but the point I think we find with electronic commerce is, it's really hard to draw a distinction between where the domestic transaction begins or ends and where the international transaction begins or ends. So we find in the UNCITRAL Model Law on Electronic Commerce that it really applies seamlessly from the begin to the end of the transaction, whether it's domestic or international.

Another justification for harmonization, as Tom Vartanian points out in his paper for this conference, is the expense and effort entailed in monitoring and complying with regulatory requirements that you would find apply in the different jurisdictions that you might come into contact with. So if everybody adopted the same substantive rules such as the United Nations Convention on International Sale of Goods, international contracting becomes a lot easier.

Of course, a lot of these differences you could resolve by agreement as we've heard with the Bolero project, but equally there are cases where the parties don't actually address particular issues in their contracts, or where the issue is such that it can't be resolved by contract. Again, the Model Law on Electronic Commerce, for example, addresses mandatory requirements of law that would not normally be subject to variation by agreement by the parties.

It's also possible to suggest that the sheer volume of international transactions would in any event justify a goal of harmonization.

Three other, very quickly, three other justifications for harmonization would be the limited application of unilateral rules where, for example, you would try to protect goods, you would try to protect your own goods and services from non-conforming goods and services that might enter your jurisdiction and intellectual property is a good example of that, but the cost of actually doing that might be a reason for seeking a harmonized regime so that everybody in fact had the same thing and you didn't have to enter into such an expensive border control exercise.

The other two economies of scale, I think we've heard examples of that today, if you have to deal with lots of different requirements in different jurisdictions, it's obviously going to be a real headache. It may be that you just restrict yourself to your own jurisdiction because you know exactly what you have to deal with. And the last one would be transparency.

But while they're the principal goals of harmonization, there's a number of other considerations. The first one is legitimacy of differences. Differences between the laws that different countries adopt are generally legitimate on several grounds: the first one would be that they will probably be justified by differences in the substantive concerns and values that have been forming policy behind the law, and another one might be that the process by which they are adopted is legitimate within the particular jurisdiction.

An interesting example of the first one, the substantive concerns, that I heard recently was that in talking about implementation of a one-stop shop for a national public key infrastructure, countries that actually have some sort of national identity card have less problem with the idea of a national public key infrastructure for absolutely everything that you might want to use a digital signature for, as opposed to those countries that don't have national identity cards and have serious privacy concerns about the impact of such an infrastructure.

Sources of difference in laws and policies that nations adopt are also commonly regarded as sources of competitive advantage, so you've got a complex relationship between the law that you have or the differences in laws between jurisdictions and competitive advantages. And you can see that, if you look at the pattern of adoption of some conventions, the countries who adopt a particular text might identify themselves as sharing a particular interest whereas countries that don't adopt it can be identified as having, as not sharing that interest but perhaps having a different common interest.

We talked briefly this morning about federal states, and my experience as a lawyer from a federal jurisdiction is that the process that occurs internationally is really just a reflection of the difficulties that occur domestically, particularly in federal jurisdictions, in achieving a consensus.

Another issue is that of cost, if costs associated with the differences in laws are relevant to international trade, then you also have to look at the costs of a harmonization process itself, and that might be relevant in two ways: the first way would be actually carrying out the harmonization process, and the other might be the costs of not doing anything and leaving things as they are. For example, think about what the cost would be of establishing an international working group which travels to and meets in a particular country for four weeks every year, and where the proceedings are translated into six languages. Also what are the costs of the time required to develop harmonized laws but in terms of the length of the time that might be required to develop that text and the timeliness of the resulting text.

The United Nations Sales Convention, for example, is generally regarded as having taken 50 years to complete, and one commentator suggested that by the time it was completed, the substantive anomalies that had existed were so reduced that the result was less essential than it had been at the beginning of the 50 years. You could ask yourself the same question in relation to current efforts on electronic commerce, given the speed at which the technology is advancing in comparison to the time that's actually required to develop international consensus, and one question we ask ourselves at UNCITRAL, constantly, is: we completed the Model Law on Electronic Commerce in 1996, but if we embarked upon the same task today, could we achieve it in the same period of time or could we in fact achieve it at all?

Another issue is the impact of harmonized laws: can harmonized laws actually cover every difficulty that might arise in a particular topic?

The potential is limited impact where they don't address certain aspects of transactions, for example, consumer-related issues or issues of liability; most UNCITRAL texts expressly stipulate that the provisions do not override domestic laws intended for the protection of consumers. Equally, they then go on to say that the laws themselves might have some benefit in application to consumers, but that's really a matter for domestic law. Issues of liability are one of those topics that we all like to raise and say wouldn't it be nice if we could, but invariably it ends up in the too-hard basket.

Harmonized laws might also be of limited impact where they don't override rules of domestic law which might be mandatory or that might not be mandatory. Again, certain articles of the Model Law are not intended to interfere with the law on formation of contracts, but rather to promote international trade by providing increased certainty as to the conclusion of contracts by electronic means.

A third point on impact is where the rules of the instrument are not themselves mandatory and may be varied by agreement. The level of harmonization that you're going to achieve is obviously going to be diminished if the scope for variation by agreement is fairly broad, and again a number of UNCITRAL texts, even conventions such as the UN Sales Convention, provide for varying degrees of party autonomy.

And a final point on impact is the scope for amending and updating a text, should that in fact prove necessary. One text that we've been recently talking about updating is the New York convention because the requirements for writing are out of step with current practice and also with the Model Law on Electronic Commerce. There have been a number of proposals on how that issue could be addressed, but most of them or all of them are not free of difficulty.

The next area is important: does representation in groups actually drafting uniform laws represent a broad enough range of interest and expertise? And that would include the interest of the participants, the regions they represent, the economy they represent. One commentator has suggested that both UNCITRAL and UNIDROIT draft and propose texts with no power of their own to give legislative force to their proposals. Their influence depends in part on their reputation for technical expertise, which depends in turn upon the quality of the representatives. Given the number and diversity of representatives and the logistics of international meetings such as those that UNCITRAL holds, you'd have to ask yourself whether the efficiency of meetings is less than it would be if the meetings were held in a comparable domestic forum, and does this in turn impose a time constraint that would not exist in the domestic forum? And finally, language. I think this has been touched on by previous speakers. Language often imposes difficulties both for representatives who attend the meetings even where the proceedings are translated, and also for people in home jurisdiction who have to deal with texts that come out, not always at the same time in different languages.

A fifth area is output, the output of the process. A number of criticisms can be made of some harmonized or unified texts, since invariably they're based upon a compromise between a number of competing considerations, not only those relating to law but also to public policy, and some quick examples of the obvious ones of differences between civil and common law systems, between countries' needs and requirements depending upon the stage of development that they're at; you get problems with language and the different terms, terms that might be okay in English, can't be translated into Spanish or Russian or Chinese or whatever; different legal systems sometimes have a different understanding of concepts so as we found with the uniform rules on electronic signatures. What some jurisdictions regard as a signature, other jurisdictions say: well, no, that would never be regarded as a signature in my country.

Another point is that the policy choices often require compromise, so that you have, for example, a compromise between the public interest in protecting minors from pornography transmitted on the Internet versus the burden placed on electronic commerce where you need to regulate that. To suggest that once you have a harmonized law, you've solved all your problems ignores the fact or the extent to which legal rules operate in different social and policy settings. You get a different result where the text is applied in different systems and where the process of adoption may be anything but uniform.

The New York convention was mentioned earlier. It has I think now more than a 130 parties, but you still can't be sure that if you want to enforce your arbitral award in a signatory country that you will in fact be able to do so or that the process you have to go through will in any way be uniform.

And where the text is a model law, and there's obviously a deal of scope for differences, you get differences in different jurisdictions. The Model Law on Electronic Commerce, for example, has been adopted in a number of jurisdictions which have made, in some cases, really significant adaptations. Because of the way in which it's been adopted, we have to look at each law and say: well, is there enough of the Model Law in Electronic Commerce in the adopting legislation so that we can in fact say it's an adoption of the text. That's probably the first UNCITRAL text where we've had to do that; model laws that have been adopted in the past, such as that on International Commercial Arbitration, have more or less adhered to the terms of the text itself.

Which brings me to my final point, and that is the role of international organizations. Very briefly, UNCITRAL, I think, was mentioned, was set up to be the core legal body within the United Nation system on international trade law, to give the UN the ability to facilitate harmonization of international trade law and remove legal barriers to international trade. At the time that it was set up, there was a perception of the need for a body that had broader representation and participation in the process of harmonization than the existing international bodies had.

Performance of the role of a harmonizing body involves studying areas of law where harmonization would not only be appropriate and desirable but also feasible, and that isn't always necessarily apparent at the beginning. The process always involves a constant balancing of the factors that were mentioned not only when you decide that you want to undertake a particular process of harmonization but as the process itself develops, and certainly I think anybody who's participated in the current negotiations on uniform signatures would agree with that constant need to examine what you're doing and the relevance of it. It doesn't necessarily proceed in a linear fashion neatly from beginning to a logical conclusion.

And another related question is: when you're balancing those different interests, you have to decide how much harmonization you might need to achieve or how much agreement you might need to achieve to achieve the goal of harmonization in the particular area of law? If you have to leave out particular issues because you just can't reach consensus, does that invalidate the whole process or do you have to adopt a more philosophical approach and say: well, this is all we could achieve now, it's part of a process that takes a much longer period of time, and it's a slower step? Alan Farnsworth has said that, of necessity, unification and harmonization proceed slowly by small steps by imperfect achievement. So the role of international organizations is to try to guide the process, if necessary, to push the process towards consensus.

We ask ourselves a lot in UNCITRAL meetings why we are here, when we hear delegations say: oh! but we couldn't possibly have that, or no, that's an issue that we would address differently, or we could never agree with that proposition.

So there have been some significant successes in harmonizing a private international law, the New York convention is one of them, and there have been others that perhaps have not been quite so successful, and the success of the outcome seems to really be a question of how you take all those factors, balance them together, work with them and get something out at the end. Thank you.

(APPLAUSE)

Mr. HAROLD BURMAN:

Hi, my name is Harold Burman, I'm with the Department of State Office of the Legal Advisor, Washington, D.C. Been active in the field of electronic commerce for 10 - 12 years or more, and which is a little like saying in this field we were there kind of before the dawn, it's a very fast moving field, as I think most of us know.

What we are looking at as we look at the role of international organizations, and just picking up on what Jenny described to us is the process, I think the process that she described while she was focusing on one body, UNCITRAL, applies in more or less the same way to most of the international organizations that we watch closely in terms of their activity in the field of electronic commerce; this includes quite a number, some of them you've heard about today, WIPO, the International Telecommunications Union, the International Standards Organization, OECD, UNCITRAL, UNIDROIT, even the OAS is starting to move into this field with a slow - but we hope steady - effort in the future.

The subject of jurisdiction however presents a new rapidly growing point of focus which, at the moment, is a fairly broad one. People today, as we've heard people speak about it, use the word jurisdiction, I think, in very different ways. Some refer to jurisdiction or at least analyze it and think about it in terms of the capacity of a national court to take an action. Others have talked about it as the capacity to regulate or the capacity to tax, and that can even be by a nation, by a regional, political or economic body, and so forth.

There's a variety of different uses we put at that term too in this field, taken together, it's probably the single most commonly referred to term in the last year that we've been surveying the movements in various international organizations, and the reason is it's kind of this large missing link, it was something put off that many people did not deal with in early efforts.

In the earlier efforts, in the field of international electronic commerce, there were some fairly rapid strides through the late '80s and on up to I would say 1996, '97 perhaps, before a lot of them were significant public policy issues, privacy, data rights, trade barriers, and so forth began to catch up with the process. It's not clear for example, as Jenny had mentioned today, it's not clear to me, that we could have successfully today negotiated the UNCITRAL model law on electronic commerce with the facility that we did achieve a completion in 1996. If I had to guess today, you couldn't get there. You couldn't get there, and we have to look at why, and coming along as part of this mix now is the need to deal with jurisdiction.

You could examine this field broadly and roughly, and it's an oversimplification of course, roughly about three different large areas of problems -- and I'm going to confine my comments to one, because of the time limitations -- one of those areas would be torts in the broad sense of the word, content and intellectual property protection, each of them have connecting factors with the other and it's one kind of ball of wax, if you will; another might be the consumer world, the interaction of legal systems, protective laws and technological developments that somehow bring in issues of notice, fairness and so forth, and it's a separate body of activity that you could examine separately with regard to, I would argue, jurisdiction.

And the third body, which I'm going to talk about more, is the commercial transactions, business to business, and in that area, I think there's a very significant social value set of issues that has to be examined, primarily, if you're talking about jurisdiction. How important is it in a given society to foster the development of electronic commerce or for commercial enterprises or individuals or consumers, whatever you want to call them, in the society?

When you begin to look at that, the role of territorial borders and states and governments is very much alive indeed. People who predicted that somehow states and borders are becoming irrelevant I think confuse the mechanism that is available for rapid communication through technology with the political reality of legislation and the application of laws.

The issue, when you begin to look at business to business transactions, is not primarily court jurisdiction. I know that's a very favorite topic here, I'm going to take a different approach, I'm going to call it the road less travelled. Some of you may recognize that from a certain poet in the United States, the road less travelled. The real issue is not primarily, I would submit, court jurisdiction. The real issue is the capacity to put technological applications in the marketplace to develop them effectively, to develop them in an international basis as we look more and more to our globalization of trade and more and more to our privatization of that trade within more and more countries. And what really drives that process is the extent to which commercial predictability is apparent, and the extent to which that drives the credit market.

The absence of consensus on important jurisdictional issues, whether we're talking jurisdiction of a governmental body to act, taxing power, the regulatory power, the power to impose digital signature, and a given application as a mandatory mechanism in transactions in order to obtain a legal value from that transaction, which I would suggest to you is very much a regulatory act, these functions all drive something else known as the cost of capital, the cost of credit.

To the extent that jurisdiction is less apparent, to the extent that it's really kind of Wild West, which I think it is in many respects internationally, I've heard some discussions of the movement of cases and the developing jurisprudence in the United States, you could say the same for a select but small number of other countries, and when you get beyond that circle, it is the Wild West. You try to write an opinion letter on that one for a credit rating agency, you're going to have a lot of blank spaces for a lot of qualifying terms, none of which bring you credit, none of which bring you into a foreign market.

What happens is there is a significant enhancement of both direct and indirect costs, a significant reduction of available commercial finance, that throws electronic commerce companies back into venture capital, debt equity capital, other means of financing their inventory, their market access efforts and that's at much, much higher cost than it could be obtained otherwise. Insurability drops, all these things have a very significant affect on the ability to deliver, the ability to deliver the services, especially in international markets, and it's the concepts that surround what we call jurisdiction that are driving that uncertainty.

Now, there is, I would suggest, a way to get to that problem. Obviously we could have meetings and very informative discussions like this in a whole variety of Countries. I think we would certainly, slowly begin to distil some consensus that may or may not meet up with a timely political action by way of legislation, but I would suggest that we could get there a lot faster if the writness test is not the traditional litigator's writness test or the traditional conflicts of laws analysis.

When you try to do interest analyses at minimum context on electronic commerce, you really stretch it, and I would suggest that another way to go about jurisdictional issues is to see them as result-driven; examine sector by sector how commercial transactions in that sector can work, internationally, and you work backwards to what kind of jurisdictional rule is going to support that economic development. That's a different way of going about it, and it's the way that, I think, if we can move in that direction, we'll get a lot further and a lot faster.

I would suggest that to do that, you have to separate out consumer laws, you deal with them separately so that, at least as to business to business transactions, you achieve a coherent transaction facilitative set of rules, something that makes Silicon Valley work.

I would suggest that you can not do this job only looking at any one of the three factors: you can't just do courts jurisdiction, in order to make the scenario, I'm describing work, you have to also do rules and applicable law, and you can't just do those two, you have to come out with rules on choice of law party autonomy, and the three of them have to work together: choice of law, applicable law and jurisdiction for courts or other quasi-judicial or decisional bodies to take an action and enforce their decisions.

I think that another avenue this might take, this is where I came to the road less travelled, instead of doing only the large focused discussions and possibly international rules efforts projects, if we can move organizations to that point, on jurisdiction, however broadly defined, there's a lot of other activities that are either starting up, pilot projects on the books industry wants, industry needs in international trade which are fairly narrow in their application, but each one of which requires significant thinking and significant action on jurisdictional issues in order to make it work.

An example, although these are usually a little bit sexy than these great topics of broad jurisdictional issues, an example would be what our last speaker discussed as the Bolero project. Indeed, one of the reasons why Bolero has problems in terms of widespread implementation is the absence of international or at least regional economic agreements on jurisdiction, applicable laws and enforceability. So examples of the kinds of projects that would fall into this category: online settlement of commercial disputes is one possibility; electronic transfer of rights, big issue, that would include the Bolero project, but here you can think in terms about tangible transfer of rights and transfer of intangibles, both goods in transit, and intangibles such as electronic bills of lading or electronic letters of credit, electronic settlement and transfer of securities transactions, all of these, and I could name some major efforts in effort to provide international clearance and settlement of securities that have not ever come up off the ground, because when it came to looking for consensus on jurisdiction and applicable law, the opinion letters could not be written, and the downrating of the credit agencies basically drove the commercial finance out of the picture, and the projects simply wouldn't get off the ground, and there's a real payoff if we can focus on those kinds of efforts and make them happen.

Electronic data rights is another one, and it's a kind of combined species of intellectual property rights, and electronic contracting law. The line is no longer distinct between the two: who owns the data? What kind of enforcement rights do you have with respect to uses of that data? But unless that can work at the very least on a transatlantic basis and a pacific rim basis, it is not going to work. I think it's the reality of geoeconomic structure of world trade today; it's a more narrow focus, but it's something that we probably could achieve.

Another example are negotiations that don't have an immediate, that don't strike you right away, this is something that we need to be thinking about in electronic commerce. We're well along the way to negotiating at The Hague Conference and private international law, a new convention, you heard the discussion earlier today, references to the Brussels and Lugano conventions, which have jurisdictional rules for countries in the European Union; we're well along the process toward negotiating a new convention at The Hague Conference that will be some kind of balance between the European Union's rules and the kinds of rules that we and other countries outside of the Union bring to the table in effort to find -- it's like the unified theory of physics finally, unified theory for jurisdiction, recognition and enforcement of foreign judgements, and that has gone along its merry way with no input of any serious sort at all on electronic commerce. That's a major issue. That's a major issue.

People negotiating that came from worlds involved in litigation, court judgements, enforceability, and only now are beginning to look at what do we do about electronic commerce? Will some of these rules work? They may not. Do we need a special chapter and is there time to negotiate provisions on electronic commerce, or as some are now proposing as of a week or two ago, should we have a broad exclusion for electronic commerce conventions that get out of the conventions altogether?

What I would submit to you is these are efforts that this body, that ILPF can help organize. If thought is given to and input is made available, each of these projects can move ahead and can achieve something that will give us all back something in electronic commerce.

So I would suggest that you look beyond just projects that are labelled a Project on Jurisdiction, look at these other kinds of efforts internationally; work with ILPF, hopefully, more of these subjects will come up for some serious consideration, and that's another way we can move forward in this topic, and hopefully that will bring us a much greater pace of achievement as we go into the next millennium than we're seeing now in these last two or three years of the 20th century. Thanks.

(APPLAUSE)

Ms. RUTH DAY:

We've had wonderful speakers today, I think you'll agree; you've been a wonderful audience as well, and now we will have, as protection for you, our consumers of this conference, a two-drink cooling-off period next door. Thank you.

(APPLAUSE)


I, the undersigned, JEAN RIOPEL, Official Court Reporter, do hereby certify under my oath of office that the foregoing pages are and contain the exact transcription of the proceedings of ILPF, taken by means of stenotype and according to the law.

AND I HAVE SIGNED:

___________________________________

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