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
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.
Mr. NICK DISCEPOLA:
That's the high tech stuff here! There's a lap top here and every time
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 à 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
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.
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
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
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
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 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
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
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
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
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
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.
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
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
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
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
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
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
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
We thought it might make sense to start out with three presentations
giving three different perspectives on what we mean when we talk about
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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.
Mr. HENRY PERRITT:
Thank you, Mr. Lindberg. Professor 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
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
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
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.
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. 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
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
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
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
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
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
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 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
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
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
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.
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
Ms. ELIZABETH deGRAZIA
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
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
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
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.
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,
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
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
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
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-à-vis the small dot com crowd, as we call
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.
Ms. ELIZABETH deGRAZIA
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
Mr. TOM BELL:
Easy case, I agree.
Ms. ELIZABETH deGRAZIA
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
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
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
Okay. Next hypothetical 3: same as everything before, but the defendant
also ran a magazine advertisement, national magazine ad in addition to the
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
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
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
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
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
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
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
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
Ms. ELIZABETH deGRAZIA
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
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
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
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
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,
Ms. ELIZABETH deGRAZIA
And that could lead to an interesting policy result.
Mr. TOM BELL:
It could be.
Ms. ELIZABETH deGRAZIA
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
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
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
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
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:
Ms. ELIZABETH deGRAZIA
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:
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
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
Ms. ELIZABETH deGRAZIA
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.
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
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
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
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.
LUNCHEON WITH SPEAKER
Mr. DENIS HENRY:
May I have your attention, please? Can everybody hear me okay? Thank
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
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.
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
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
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.
THE STATE'S POWER TO COMPEL PAYMENT OR COLLECTION:
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
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
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
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
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.
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
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
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
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
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
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
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.
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
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
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
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
Cross-border transactions are also a less difficult problem as these
transactions are business to business transactions. In that case, we have a
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
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
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.
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
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
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
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
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
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
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.
TRANSACTIONS CONTRARY TO PUBLIC LAW AND
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
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
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
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
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
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
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
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
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
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
Having said that, I will let Janet make her concluding remarks and
hopefully we'll get things a little closer on track. Thank you.
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.
DEVELOPMENT OF LAW ON A PRIVATE BASIS: BUSINESS TO
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
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
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
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
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
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
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
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
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:
THE ROLE OF INTERNATIONAL ORGANIZATIONS AND
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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.
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.
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:
About ILPF | To Join ILPF | Working Groups & Publications
Member Resources | Events | Home