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A Global Approach to

the Laws of Jurisdiction in Cyberspace

by

Thomas P. Vartanian*

 

Subcommittee on Courts and Intellectual Property

of

the Committee on the Judiciary

U.S. House of Representatives

 

The Internet and Federal Courts: Issues and Obstacles

 

Rayburn House Office Building

Room 2141

June 29, 2000

10:00 a.m.

Introduction

I appreciate the opportunity to be able to discuss with the Subcommittee the complex jurisdictional issues raised by the movement of commerce onto the Internet. As Chairman of the American Bar Associationís ("ABA") Committee on the Law of Cyberspace, I have directed the two-year transnational project on jurisdiction in Cyberspace for the ABA. While I will borrow liberally from it in my remarks and testimony, I appear here as a private attorney and expert on the law of Cyberspace. Therefore, my testimony reflects my views alone and not those of the ABA.

* * * * * * *

"Jurisdiction" is a word that makes even the most intense legal theoreticiansí eyes glass over. Yet it has become an intensely important subject even to business people because of the new environment in which they find themselves competing. Simply stated, anyone doing business in Cyberspace needs to know what laws to obey, whether it be a question of what taxes are due and where, or what consumer protections apply to the sale of their products or services.

As we know, a web site can generally be viewed by anyone with a computer in any part of the planet at any time. This tends to make the "location" of the sponsor of the site less relevant, but broadens the geographic reach of a business. However, it is geography and location that have been the basis upon which our territorial laws have been constructed and applied. Therefore, there is no more fundamental issue that must be resolved in order to facilitate the development of efficient electronic distribution channels than the question of whose laws apply to electronic commerce. In business-speak, executives must know what laws to follow in order to understand their liabilities and accurately price their products. Perhaps, there is no greater example of this problem than the recent decision by a French court requiring Yahoo! Inc. to block access in France to U.S.-based auction sites selling Nazi memorabilia and artifacts.

The Need for Jurisdictional Predictability

Should the jurisdictional principles applied to commerce in Cyberspace be any different from those that are applied to commerce in the physical world? In cross-border Cyberspace transactions, who should protect the consumer? Who should be able to levy taxes? Who should enforce the terms of a commercial transaction?

Certainly, global commerce, whether electronic or otherwise, is not a unique or new development. Many principles do not need to be altered significantly even though the use of Cyberspace has changed some of the accepted dynamics of commerce. But the creation by Cyberspace of a new "environment" in which commerce can flourish has provided a basis for these questions to be raised. For example, it allows governments that see the assertion of jurisdiction as the precursor to the imposition of taxation, or businesses which see jurisdictional confusion as a shield behind which they can hide, to leap into the void purportedly created by these new dynamics.

To decide what laws apply in Cyberspace, those responsible for the creation of laws must first decide whether Cyberspace is a place, a means of communication, or a state of mind. I submit that the Internet merely represents yet another means of communication along a continuum of technological developments that date back to the discovery of electricity. But that does not mean that these questions are easily answered.

Second, if this new means of conducting business is to fully succeed and be as efficient and economical as possible, commercial rules that are at least predictable, if not certain, must be developed. Predictability requires a legal infrastructure that allows the participants to an electronic transaction to consummate it without undue concern over the risk of repudiation, the means of enforcement or the rules of dispute resolution. Jurisdictional predictability for a business may suggest that the law of the country of origin should apply, while for a consumer, it will mean that the law of the country of destination should apply. Is there an easy compromise to these polar alternatives?

The Dynamics of Online Commerce

When an online purchase is made, either directly or through the intervention of an electronic agent, or "Bot," has the buyer stepped into a new place or simply used a different means of communication, much like a phone, fax or satellite link, to effect that purchase? Should it matter where the hardwires, servers, routers and artificial intelligence agents we use are located?

If a consumer orders a book online from her home in Virginia from a seller physically located in Paris, is it as if the bookseller boarded a plane and delivered the book to the purchaser in Virginia, or as if the purchaser flew to Paris to buy the book off the shelf? Does the "push" and "pull" of technology make a difference in how the law of jurisdiction should be applied?

The argument that jurisdiction should not attach where digital transmissions are "pulled" into a locale was unsuccessfully made in United States v. Thomas, 74 F.3d 701, 706-07 (6th Cir. 1996), a criminal case in which the defendant argued that he had not "pushed" pornographic pictures into Tennessee from his server in Los Angeles and should not be subject to Tennesseeís pornography laws. Rather, he asserted that, given the way digital technology works, the 0ís and 1ís he transmitted were actually "pulled" into Tennessee by a computer that must have had a less than noble intent, as it took those 0ís and 1ís and created a pornographic picture. A difficult argument to make, perhaps, but the question seems valid. Should a business be subject to the laws of whatever jurisdiction into which a consumer drags its digital message? What are the commercial costs of such a result? And how are such results enforced?

A similar set of issues were raised in Minnesota v. Granite Gate Resorts, Inc., No. C6-95-7227, 1996 WL 767431 (Minn. Dist. Ct. Dec. 11, 1996), affíd, 568 N.W.2d 715 (Minn. Ct. App. 1997) and affíd, 576 N.W.2d 747 (Minn. 1998), which applied the laws of Minnesota to an online gambling business located in Las Vegas that operated through a server in Belize. Sweeping legal assertions that every transmission viewable in a state is subject to the criminal and civil laws of that state are difficult to harmonize since they essentially mean that each such state regulates the entire Internet! Should every jurisdiction be able to impose its advertising, gambling, consumer protection and tax laws to every web site that can be seen by a visitor to that site? At least one federal court in New York concluded that such a result would violate the Commerce Clause of the U.S. Constitution and that the Internet should be viewed as a federal presence. (See American Library Association v. Pataki, 969 F. Supp. 160 (S.D.N.Y. 1997)).

While understanding where one may be haled into court is worthwhile, the issues subsumed by the concept of jurisdiction in Cyberspace are far broader and more important. For example, when an online distributor of financial products located in the United States sells mutual funds registered in Germany through a German division to a German-speaking person who happens to reside both in Germany and Austria, there are regulatory jurisdictional questions that both parties should be interested in beyond the question of where one party may sue the other over a dispute:

1. Where does the seller reside for organizational purposes?

2. What countries can regulate these Cyberspace solicitations and/or sales transactions?

3. Who can tax the business as well as the transaction?

4. Under which laws are the terms of the transaction enforceable?

5. In what country(ies) must the product be registered or licensed?

Some transactions are even more difficult to analyze than would appear at first blush. For example, if the words of a book are sold online and are downloaded to the purchaser, rather than actually shipping a hard copy of the book, has a product been sold or a service provided? Electronic commerce actually blurs the lines of demarcation between products and services, a distinction which could be critical to regulation and taxation of electronic transactions. And, if an electronic agent, or Bot, executes decisions for a party in a way that does not necessarily suggest a physical location for the action, how is the jurisdictional analysis affected?

New Jurisdictional Paradigms

To attempt to answer these questions, or at least establish the academic and practical boundaries for their exploration, the ABA established its Transnational Jurisdiction Project in April 1998, through the sponsorship of six separate sections and under the direction of the Committee on the Law of Cyberspace of the Business Law Section. More than 100 lawyers in approximately 20 countries have worked together toward the release of a report at the July 2000 meeting of the ABA in London. The report will explain how the rules of jurisdiction have traditionally operated, how the Internet has affected it and what options are available to the market to deal with these changes in the areas of (a) taxation, (b) the sale of goods and services, (c) financial services and securities, (d) intellectual property, (e) public laws and gambling, (f) consumer protection and (g) data protection. The Projectís draft report and related research is set forth at http:www.kentlaw.edu/cyberlaw. The Projectís report will be published in the August 2000 edition of the Business Lawyer. I commend this report to the Subcommittee for its study.

One conclusion reached by the ABA draft report, with which I strongly agree, is that, in order to attempt to develop principles that may be used to solve the jurisdiction questions that arise as more and more products and services are offered over the Internet, it is necessary to explore several threads that seem to flow throughout these issues.

The Relevance of Physical Location

Activity occurring in Cyberspace may be difficult to ascribe to any specific physical space, even though the parties themselves always exist in real, not virtual, space. Courts and legislatures have focused on physical location as the touchstone of both personal and prescriptive jurisdictional inquiries Ė where a negligent act took place, the injury was suffered, a contract was entered into or was to be performed, a security was offered for sale or a trademark infringed.

Technology, however, reduces and frequently may eliminate the need for physical contact in the creation of legal relationships between parties and/or government regulators. Courts, therefore, are forced to reexamine the criteria that they will use to determine what the relationship must be between the forum, the parties and the conduct occurring outside the forum. For example, if a doctor in Wyoming, using detailed verbal and visual information supplied to her electronically by a patient living in Illinois to diagnose the patient using assistance from a physician online in Boston, the doctor has created a legal tie between herself in Wyoming with Illinois and Massachusetts, which may be sufficient to permit any of these states to assert jurisdiction (i.e., to hear a dispute or claim by the patient, impose regulatory limitations or apply substantive principles of law).

Targeting

Today, entities seeking a relationship with residents of a foreign forum can "target" their web site to avail themselves of the benefits of that jurisdiction. Language, graphics and software can be used to focus the direction of a web site. But the concept of "targeting" is more easily stated than understood, both from a technological and a legal point of view. Moreover, the issues become multidimensional when it becomes necessary to determine what constitutes legally sufficient targeting when a web site can be accessed by the entire world.

As a threshold matter, the maintenance of a web site, by itself, should not constitute targeting the world. There is no legal or practical reason why the posting of a companyís marketing brochure, without more, should create multijurisdictional issues. However, designing a web site whose only focus, or at least primary commercial focus, is on the population of a single forum, clearly does target that forum. A site in French, offering to sell securities at prices quoted in francs and supplying French tax information, is targeted at least to France. At issue is whether it might also be considered to target, for instance, French-speaking Morocco, where it is also accessible.

The critical issues are the intent of the web site sponsor and what constitutes sufficient evidence of that intent. The site itself provides the primary evidence of that intent. It may state where it intends to sell its products and utilize filtering software to block participants from other states. It may contain a list of fora it does not intend to target. But filters may be by-passed, and stated intent may not reflect reality.

Power Parameters

Jurisdictional rules (particularly regulatory applications of consumer protection laws) sometimes reflect presumed power imbalances between buyers and sellers. But those presumptions may need to be reevaluated given the manner in which the Internet empowers consumers vis a vis sellers.

Power in a commercial relationship depends upon knowledge and choice. Electronic commerce expands consumer choice because it opens up every market to every buyer regardless of where the seller is located. Consumers can use Bots, for example, to shop for product availability around the globe by price and terms. Thus, the concern that buyers may have little competitive power in commercial transactions and be easily taken advantage of by sellers on whom they are reliant because of geography, may not be as appropriate in electronic commerce transactions. On the other hand, the large numbers of sellers on the Internet may result in a kind of information overload for buyers, negating some of the improved leverage they have gained in this new market structure.

But technology can address this problem. Cyber-robots, or Bots, can give consumers powerful tools to assimilate the enormous amounts of information with which the Internet confronts them. Such cyberagents, using artificial intelligence, can be programmed to understand consumer preferences, attitudes and rules of commercial engagement and run interference for them. They can roam in virtual space without human intervention, endowed with such information, and apply their artificial intelligence to conduct all manner of commercial, social and intellectual transactions with other Bots. In turn, they can appoint sub-agents, capable of speaking in multiple languages or ultimately communicating through a universal "computer-speak."

The Internet not only empowers consumers, it also may reduce a sellerís power to define its market. In traditional commerce, a seller defines its market through its advertising strategy, budget, investment in distribution channels and physical locations. But on the Internet, unless a seller takes substantial measures, the default market is now global. Thus, a buyer can search out a relatively passive seller. To what extent does that affect the protections that the user needs? Might there be situations in which the enfeebled seller needs protection from the empowered buyer?

The technology that has created novel jurisdictional issues may be able to assist in their solution. Industries interested in developing voluntary rules to resolve jurisdictional complications created by electronic commerce can develop universal electronic protocols that employ multilingual, intelligent electronic agents to:

    • communicate the site sponsorís and userís country of origin;
    • disclose to each other the laws, rules, respective protections and dispute mechanisms that would apply; and
    • enforce the userís preprogrammed choices to reject the "site," or give the user the choice to override the program and transact business under terms that do not match the preprogrammed preferences.

Contractual Choice

Many disputes between parties are subject to contracts that determine the terms and conditions upon which they have agreed to interact. This is particularly true in business-to-business transactions. Frequently, such contracts will provide that a dispute must be lodged in the courts of a specified state ("choice of forum") and must be resolved according to the substantive law of a specified state ("choice of law" clause).

When parties have equal bargaining power and, therefore, an equal ability to accept or reject such clauses, the clauses are generally enforced. But in consumer transactions, the buyer is assumed to be confronted with a stark option: accept the terms imposed by one of a limited number of sellers serving her market or forego the purchase. In an attempt to protect the consumer from disadvantageous choice of forum and law clauses, the E.U. will enforce them only if they favor the consumer. In the U.S., they are usually enforced, unless they are "unreasonable."

To the extent that the Internet is both limiting the ability of a seller to confine its market and, consequently, dramatically widening the options available to buyers, the presumption of inequality in business-to-consumer transactions is called into question and, therefore, the policy reasons for refusing to enforce contractual choice of forum and law clauses in that context are correspondingly weakened.

The Intersection Between Jurisdiction and Substantive Liability

Historically, changes in substantive law have driven changes in jurisdictional rules, rather than the reverse. The dynamics of Cyberspace may, however, encourage states to create new rules of substantive liability for third parties who have a physical presence in the stateís territory. A state unable to compel a nonresident merchant to collect sales tax on sales to its residents might insist that a resident financial institution collect that tax if credit cards issued by it are used by the resident for the purchase. Indeed, most elements of electronic commerce pass through certain gateways or choke points, such as Internet Service Providers, credit card processors or financial institutions.

Should the junctions in the flow of electronic commerce and money be employed to impose or enforce jurisdictional standards and rules? And what would the cost be to the private sector? Governments should be cautious about imposing the policing functions of electronic commerce on the private sector for fear of skewing the economic balance that may make electronic commerce so efficient a form of business.

Recommendations

The Internet, unlike earlier forms of electronic communication, moves data in a widely diffused fashion, which raises questions about what laws should apply to it. The resolution of the jurisdictional legal uncertainties created by electronic commerce will be a function of the reconciliation of a wide variety of factors and national and state interests. In that regard, I strongly endorse the proposed solutions of the draft ABA report and offer my own version of those which I view as most important:

1. Since no one state or nation can bring about predictability and certainty in global electronic commerce, a multinational Global Online Standards Commission ("GOSC") should be established to study jurisdiction issues and develop uniform principles and global protocol standards. The GOSCís charter should require it to complete its work by a specific sunset date and to work in conjunction with other international bodies considering similar issues. The agenda of the GOSC should include the points discussed below.

2. Technology should be used to solve the issues that it creates. There is no need to impose the burden upon consumers to read and negotiate the jurisdictional terms of their electronic commerce experience on a global basis. Intelligent electronic agents can be programmed to electronically communicate jurisdiction information and rules (including rules relating to taxation), enabling such preprogrammed agents to facilitate the userís or sponsorís automated decision to do business with each other. Similar software products have been deployed (e.g., P3P) to allow consumers to use such electronic agents to monitor their journey through Cyberspace and warn them when they are entering a site whose privacy policies do not match their preferences. Businesses and/or nations of the world must, however, agree on the rules and standards under which such agents will operate.

3. Cyberspace needs new forms of dispute resolution to reduce transaction costs for small value disputes and to erect structures that work well across national boundaries. Voluntary industry councils and cyber-tribunals should be encouraged by governmental regimes to develop private sector mechanisms to resolve electronic commerce disputes. Government-sponsored online cross-border dispute resolution systems may also be useful to complement these private sector approaches.

4. Self-regulatory regimes should be encouraged to forge workable codes of conduct, rules and standards among a broad spectrum of electronic commerce participants to provide an efficient and cost effective jurisdictional model that governments can adopt and embrace.

5. Personal or prescriptive jurisdiction should not be asserted based solely on the accessibility of a passive web site.

6. Good faith efforts to prevent access by users to a site or service through the use of disclosures, disclaimers, software and other technological blocking or screening mechanisms should insulate the sponsor from assertions of jurisdiction.

7.Users (purchasers) and sponsors (sellers) should be encouraged to identify, with adequate prominence and specificity, the state in which they habitually reside, so that jurisdictional consequences will not be a surprise to either party.

8. Safe harbor agreements, such as the one negotiated between the United States and the European Union in the context of personal data protection, should be encouraged to resolve jurisdictional conflicts in Cyberspace. They should include a public law framework of minimum standards, back-up governmental enforcement and the opportunity for a multiplicity of private, self-regulatory regimes that can establish their own distinctive dispute resolution and enforcement rules.

9. Global regulatory authorities of highly regulated industries, such as banking and securities, should be encouraged to reach agreement regarding how laws will be applied to financial products and services offered in a global electronic environment.

10. Any use of intermediaries ("choke points") in the flow of electronic information, commerce and money, such as Internet Service Providers and payments systems, to regulate commercial behavior and to enforce jurisdictional principles impose significant, new legal burdens on those private entities which require careful exploration before being proposed for adoption.

Thank you for the opportunity to offer my views to the Subcommittee. I look forward to your questions.


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