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Risky business? Internet opens new markets but creates new legal risks.

For 40 years, Uncle Henry was among legendary family and friends for the buffalo summer sausage he made and marketed in his rural Montana hometown. Then one summer, his nephew came home from college, a degree in business in one hand and a laptop computer in the other. "What you need, Uncle Henry, is a Web site," the nephew said, whereupon he launched Henry's buffalo sausage into cyberspace.

Neither uncle nor nephew realized, however, the potential--and significant legal risks associated with the worldwide, Internet-based marketing of Henry's homegrown business. Few small business people do. In fact, all firms--large and small--using the Internet face new legal risks that are not yet fully developed or understood. This much we do know: By marketing his summer sausage over the Internet, Uncle Henry unwittingly exposed himself to a multitude of potential lawsuits in virtually every jurisdiction in the world.

The past 30 years brought a rapid globalization of the world's economy, first for large multi-national corporations, most recently for smaller companies with fewer resources. In the past 10 years, businesses of all sizes developed an Internet presence and began selling their wares throughout the world.

The Internet makes information available to anyone who has access to a capable computer. According to one recent study, 171 million people around the world have access to the Internet. What a market! Cyberspace has greatly expanded the sales potential of all manner of businesses--from made-in-Montana huckleberry hand lotion to buffalo sausage and beyond. By displaying its products on a Web page, a business has access to more of the world's population than it could ever hope to reach via conventional marketing methods.

But what are the risks of conducting business over the Internet?

Cyberlaw

At the American Business Law Association's annual meeting in 2000, more than half of the presentations focused on cyberlaw. The Internet, while opening the world's markets to virtually every business, has also broadened the risk of doing business. The damage can be instantaneous--and can be felt in more than one country. One day, Uncle Henry knew the names and addresses of all his customers--had known them for years. The next day, he knew neither the names and addresses nor the legal protections afforded his potential customers in hundreds of countries worldwide. "Going international" presents a business with liability exposure that could far exceed the value of doing business in the global marketplace.

Every country has the right to enforce its own laws--the rules and regulations that both citizens and visitors must follow. But what happens in cyberspace, when an act is illegal in one country and legal in another? Consider the French Yahoo! case: When the Internet search engine Yahoo! opened its operation in France four years ago, company officials hired French attorneys to research the legality of certain items to be offered on its auction sites. As a result, the French Yahoo! site offered different items than did the American Yahoo! site, most notably Nazi memorabilia--which is illegal to sell or own in France.

That precaution was not sufficient, though, as French Internet users were still able to access the American auctions of Nazi artifacts. So the French government took Yahoo! to court and fined the American-based company for every day the Nazi auction was accessible to French Internet users. Attorneys for the American-based Yahoo Inc., though, claimed--and continue to claim--that French laws bump up against the U.S. Constitution's First Amendment guarantees. To require the removal of Nazi memorabilia from the U.S.-based Web site would violate this country's free speech provisos. The case continues to be argued, both in France and in the United States.

The U.S.-based Internet company CompuServe took a different approach in 1995, when it blocked access to 200 chat rooms, fearing that German obscenity laws would be violated. While the move resolved a potential problem in one country, it created a problem and angered citizens in many other countries. CompuServe did not have the software to block only its 220,000 German subscribers from the suspect chat rooms. Instead, it had to block access by all 4 million CompuServe subscribers in 147 countries.

Risks

For small businesses based in relatively rural and remote states like Montana, the risk of e-commerce may seem daunting. How could the owner of a little Montana business know what items are illegal to sell in France or Saudi Arabia or Germany? Can you imagine the millions of dollars it would take to research every country where you might do business over the Internet?

Of course, if the product or products in question are relatively mundane, you likely won't violate another country's laws by doing business over the Internet. But what if a customer is unhappy with the merchandise or is injured by a product? Then a Montana business owner could find himself in court in another country--or in this country, defending himself against a foreign judgment.

If a business owner has assets in another country--a bank account in London, for example, or a warehouse in Germany--the risk becomes greater. Now a foreign court could potentially seize those assets. In fact, 15 European Union countries are considering an agreement under which they would enforce the legal judgments of other EU countries. So a Montana business could lose a legal challenge in France and have its bank account in London seized by French authorities. The same could be true for companies that have some or all of their products manufactured in foreign countries. Those goods--those assets--could be seized to satisfy a foreign legal judgment.

Can't a company simply choose not to do business with certain countries? Not really. There is no reliable software that screens out other countries, or consumers in other countries, from using a specific Web site. It may be possible to prohibit over-the-Internet orders from But it is simply not possible to selectively screen out viewers, and in some countries, even permitting citizens to see certain items is illegal. Even promotional materials could be considered illegal in some parts of the world.

So there is no way for a small business--in Montana or any other state--to totally protect itself from legal challenges stemming from Internet sales. It's a risk of doing business over the World Wide Web. Business people can cut down on that risk by choosing not to do business with certain countries. Or, if a particular country accounted for significant sales, a business owner interested in holding onto that expanded customer base could pay for the legal research needed to safely proceed with product marketing and sales.

And don't forget the risks associated with trade across state borders within the United States. Even when the Internet is not involved, jurisdictional disputes are complex. In the United States, the "Long Arm" statute of one state can be used to hold an individual in another state liable. So if you are a hot tub manufacturer in Montana and sell your product in Florida via the Web, you have potentially exposed yourself to a lawsuit flied in Florida. And if the suit is successful, Florida courts can come to Montana to enforce that judgment.

U.S. case law does, however, make a distinction between "active" and "passive" Web sites. At least in the United States, passive Web sites are less likely to be subject to the jurisdiction of courts in other states. Typically, the more active a Web site is, the more responsibility the host company assumes.

Let's look at the case of Zippo Manufacturing Co. v. Zippo Dot Com: Zippo Manufacturing sued the same-named dot-com. But Zippo Dot Com claimed the Pennsylvania court did not have jurisdiction over its California-based company. Dismiss the lawsuit for lack of jurisdiction, the dot-com said. Wrong, came the court's reply. Jurisdiction is not a restraint when almost 3,000 individuals and seven Internet access providers associated with Zippo Dot Com are located in the state of Pennsylvania. The Web site, the court contended, was "active" and had "sufficient contacts" in Pennsylvania to subject its owners to legal challenges in that state.

Historically, a defendant had to be physically present in a state before they could be sued there. Now, if a defendant has "minimum contact in a state," then there is personal jurisdiction. And an active Web site satisfies the test for minimum contact by providing consumers with a way to order goods, a way to receive goods and even a way to interact with the company. A passive Web site, however, does not usually constitute minimum contact. There is no attempt to sell a product, for example, and no way for consumers to contact the business. The Web site is "information only."

Foreign courts, of course, don't have to apply this country's passive-active Web site standard. In the international arena, the standard can be different from country to country. For example, the French could say anytime you have a Web site accessible by Internet customers in our country, we'll entertain cases against you. U.S.-based companies can still insist that a foreign court bring its judgment to this country for enforcement. And, at least so far, the United States has insisted on enforcing its own constitutional protections when faced with a foreign court's judgment.

Protecting Your Business

So what should a small, Montana-based company do to protect itself in the new global Web-based marketplace? Be aware, for starters. The legal issues associated with e-commerce are just beginning to surface. One approach might be for businesses to enter into private contractual agreements with other international businesses - foreign companies that could take care of marketing and sales in their own country.

Another approach might be to place restrictions on transactions with citizens of specific countries. Drug companies, for example, might want to use this type of approach. By eliminating all business transactions with any country where a particular drug is banned, the company would minimize its liability. This strategy, of course, requires a Web-hosting company to understand the laws of each country where its Web site will be accessible.

Nationally and internationally, it may be necessary to develop a new public law framework for addressing at least some of the aspects of e-commerce. Already, the Hague Convention on Private International Law sponsored a discussion of legal jurisdiction and e-commerce. The U.S. government does not yet recognize foreign judgments in this country, and doesn't appear inclined to change that stance. Presently, the government lets each state decide on the enforcement of foreign judgments, and states differ widely on their approach. But pressure from other countries is building for the United States to federalize recognition of such judgments.

Small businesses might consider not doing business with certain countries, especially if they are concerned about legal issues. Each business has to decide for itself: In which countries should we spend money and time doing the legal research necessary to safely conduct business? If most of a company's business is with England, where the laws are similar to those of the United States, they're probably on solid footing. In other countries, the rules are more complicated and differ greatly from U.S. law. More than anything, business people--Uncle Henry included need to be aware that the world not only became a larger, more accessible marketplace with the advent of e-commerce, it became a larger, more accessible courtroom as well.

Jerry L. Furniss and Jack K. Morton are professors in UM's School of Business Administration. Jeffrey P. Shay is an assistant professor, and Cameron Lawrence is an assistant visiting professor in UM's School of Business Administration.
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Author:Furniss, Jerry L.; Lawrence, Cameron; Morton, Jack K.; Shay, Jeffrey P.
Publication:Montana Business Quarterly
Geographic Code:1U8MT
Date:Dec 22, 2003
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