BEYOND AMAZON.COM. How Traditional Companies Can Navigate the Web. by Mark E. Plotkin

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1 BEYOND AMAZON.COM How Traditional Companies Can Navigate the Web by Mark E. Plotkin Electronic commerce, in the form of virtual storefronts and online auction sites, is making significant headway among retail consumers. Some 30 million Americans shopped the web this past holiday season, and no fewer than eight million actually bought something online. While most lawyers are aware of emerging internet commerce, many find it irrelevant to the needs of traditional corporate clients. In one sense, they are correct. Online sales of moderate-cost goods and services to individual retail consumers are the most visible and in terms of dollar volume the largest element of electronic commerce today. But eventually, e-commerce will be dominated by the business-tobusiness procurement and wholesale activities of traditional companies, together with their business-to-consumer retail activities. Some of the world's largest service firms, manufacturing and industrial companies, financial services and entertainment organizations, and wholesalers and distributors already have identified significant business potential in the internet, and many more will do so each day. Beyond retail sales, e-commerce can offer significant economic benefits to traditional companies. Raw and finished materials can be procured

2 - 2 - efficiently from anywhere in the world, and online bidding may lead a company to less-expensive suppliers or higher-quality parts. Eliminating intermediaries and dealing directly with manufacturers may further reduce costs. Electronic commerce dramatically cuts the time necessary to take a product from research and development to market. Online sales and marketing expose a company's goods and services to vast numbers of potential buyers worldwide at a fraction of the cost of print and broadcast advertising. The list of possible advantages is virtually endless. And so, of course, is the list of possible legal pitfalls. When a company embarks on electronic commerce, it complicates exponentially its counsel's usual goals of minimizing corporate liability and maximizing corporate rights. Successful electronic commerce requires a sophisticated understanding of different jurisdictions' legal principles concerning intellectual property, contracts, privacy, choice of law, government regulation, telecommunications, financial services, advertising, consumer protection, and taxation. This complexity is compounded by the state of the law applicable to electronic commerce. The reality is that there are overlapping and sometimes inconsistent existing legal regimes, as well as a rapidly emerging patchwork of new statutes and rules designed specifically to apply to electronic commerce. Fortunately, the legal maze of electronic commerce can be negotiated with careful analysis, vigilance, and creativity.

3 - 3 - In certain areas, it is possible to address novel questions of law through thoughtful extrapolation from traditional legal principles, together with an appreciation of the public policy that underlies those principles. In many cases, however, existing legal regimes are inadequate to address questions of first impression in electronic commerce, especially in areas such as contracts, jurisdiction, taxation, consumer protection and privacy, intellectual property, and export control. For example, the enforceability of an "electronic signature" in lieu of a written signature in certain jurisdictions cannot be reasonably answered absent new legislation or administration rule making. In these circumstances, corporate counsel must remain alert to emerging trends in electronic commerce case law, legislation, and regulation in each of a company's various markets. MORE COMPLEX CONTRACTS Some of the most challenging issues of common concern to a broad range of companies include the following: Offer and acceptance the essentials of contract formation take on a new light in an electronic world of paperless transactions. Dueling messages can travel through many nations and systems, requiring counsel to reexamine traditional notions of the locus and timing of contract formation, as well as of contract interpretation and enforcement. At the same time, digitally encrypted "signed" messages, or electronic signatures, are slowly supplanting the time-honored, handwritten seal in certain jurisdictions.

4 - 4 - Emerging business practices and coherent legal regimes will someday stabilize contractual relations in electronic commerce. Until then, companies should exercise caution, based on an understanding of the law of all relevant jurisdictions, to ensure the validity of e-commerce contracts. Among other precautionary measures, companies may wish to enter into "master" electronic trading agreements with other parties that expressly define their mutual expectations and are incorporated into all subsequent electronic transactions between the parties. Such agreements can help reduce the risk of misunderstandings and enhance a company's position in the event of a dispute. Corporate counsel are accustomed to investigating consumer protection statutes and local business practices when a company enters a new market. Yet simultaneously entering numerous local markets nationally, or even worldwide, via the internet requires unusual levels of regulatory due diligence. This is an important consideration for many companies, but obviously is critical for national or multinational corporations with assets in several jurisdictions. Given that a company's website may be accessed from a computer located anywhere in the world, it is conceivable that business conducted through the website or even simply the operation of the website itself may be subject to the jurisdiction of any number of states or countries. Or, in the export control context, global marketing through a website may subject companies to regulatory requirements not previously applicable to their operations. Extraterritoriality is not simply a theoretical concern: Companies engaged in electronic

5 - 5 - commerce already have been held subject to foreign (and extended U.S.) jurisdiction as a result of their online activities. General disclaimers on a website may be inadequate, especially in circumstances where web pages are mirrored or stored on foreign servers, or where a court determines that a local citizen determines that a local citizen simply could not understand the foreign language of the disclaimer. One common approach to this dilemma has been the posting of interactive "click-wrap" contracts at the threshold of websites. Users must scroll through and accept the contract terms, such as choice-of-law provisions and disclaimers of liabilities, by using a series of mouse clicks to proceed further. Properly drawn, such contracts may help minimize the risk of foreign jurisdiction over a company. Yet care still must be taken to analyze the law of the relevant jurisdictions in order to ensure that the online contract itself is enforceable. Many states and nations regulate or prohibit the transmission of certain types of information over the internet. Such information is not always limited to violent or sexual content, but can relate to business data or technical data controlled for export. These limitations often are broadly construed and can prove a dangerous pitfall. Many U.S. lawyers are aware that France requires online marketing viewable by its citizens to be in French, but few know that the same requirement holds true in nearby Quebec. A company conducting electronic commerce should study local authorities' approaches to advertising

6 - 6 - and content regulation in their target markets and perhaps in other markets in which the company's website may be viewed. PRIVACY, TAX ISSUES There is also increased concern both at home and abroad regarding individual privacy. Most notably, the European Union recently proposed a Directive on Data Privacy designed to safeguard European citizens' personal data. The directive may encompass not only the obvious such as credit card numbers and medical records but also names, addresses, and telephone numbers, possibly even a U.S. company's own employees based in Europe. Many countries are enacting their own data protection laws, some of which require recipients of their citizens' personal data to store them in encrypted form and protect the data from disclosure sometimes even to company employees. In short, if a company engages in electronic commerce, corporate counsel will want to review privacy issues and consider whether the company potentially is subject to foreign privacy laws. Another important issue is taxation of electronic commerce. Last fall, Congress passed the Internet Tax Freedom Act, imposing a three-year moratorium on state and local taxes on internet access, as well as a moratorium for discriminatory taxes on electronic commerce. Likewise, international agreements have substantially reduced the likelihood of special taxes on electronic commerce, at least in the short term. However, the tax-free status of the internet almost surely is finite. The various moratoriums on internet taxation

7 - 7 - may expire just as online business is hitting its stride. Advance planning for the era of multi-jurisdiction taxation of electronic commerce should be a fundamental part of structuring any company's online activities. SHAPING A NEW LEGAL REGIME Electronic commerce is a hot legislative topic everywhere. Lawmakers are considering legal structures to facilitate the growth of electronic commerce and protect citizens against perceived abuses. Given e-commerce's growing popularity and lightning-fast technological changes, applicable law will be in a constant state of flux for years to come. In addition to the Internet Tax Freedom Act, Congress last session also enacted the Digital Millennium Copyright Act, which addresses intellectual property protection in the electronic realm. Further legislative efforts should blossom this year: More than 50 bills concerning the internet or privacy already have been introduced in the first two months of the new Congress. Much of this legislation, if enacted, will have far-reaching and perhaps unintended effects on electronic commerce. The interest in e-commerce among federal regulators has been mixed. While some agencies, such as the Food and Drug Administration and the bank regulatory agencies have modernized certain rules to address electronic commerce, others have been more reticent to jump onto the e-commerce bandwagon. State lawmakers have been active, especially with respect to electronic signatures and electronic mail.

8 - 8 - Likewise, foreign legislatures are quickly fashioning their own rules. The activity is not limited to the major industrialized nations: A flurry of new laws and judicial decisions affecting electronic commerce has come from such nations as Austria, Bahrain, Brazil, Denmark, Estonia, Iceland, Mexico, New Zealand, Paraguay, Thailand, and Vietnam. Not surprisingly, there is considerable unevenness and inconsistency among these laws and decisions. Many international organizations, including the United Nations and the Organization for Economic Cooperation and Development, have taken an interest in commerce issues, as have regional trade blocs. The European Union is expected soon to adopt initiatives addressing choice of law, commercial communications, electronic contracts, professional services, and dispute resolution. Fundamentally, the road to electronic commerce is strewn with potential riches for virtually all companies. Bringing new markets, better suppliers, cheaper raw materials, and inexpensive advertising, electronic commerce can have a profound impact on almost any business. But to reach this promised land, one must navigate the rapidly growing complexity of the legal structures that are shaping, and are being shaped by, electronic commerce. Corporate counsel can create short-term solutions to these legal challenges by working with executives to understand the technology and mechanics of electronic commerce and their company's business objectives. With this information and with a good knowledge of local legal requirements in

9 - 9 - target markets, counsel can fashion strategies in electronic contracting, advertising, recordkeeping, and other online business activities to minimize liability during this uncertain period. At the same time, long-term stability will develop only if governments and the private sector work together to create workable legal regimes that recognize the realities of online business. Helping to shape these public policies in the fast-changing world of e-commerce presents an exciting opportunity, as well as a significant challenge, for lawyers everywhere. Reprinted with permission of Legal Times, 1730 M St., N.W., Suite 802, Washington, D.C Phone: Copyright Legal Times (March 1, 1999).