Jun 1, 1998
Electronic Commerce - The Role of Governments
by Gary Dunn

"The first thing we do, let's kill all the lawyers."
W. Shakespeare, King Henry VI, Act 4, Scene 2


I. SUMMARY

The Internet has created a banquet of opportunities and challenges for society in general, and for business and the related professional communities of law and accounting. At the same time as the Internet has facilitated international communication and business relationships, it has created the potential for unprecedented conflict between legal systems. This paper examines the sources of law, discusses the role government in regulating Internet activity, and suggests where legislation is required. Discussion needs to take place about the degree of certainty (in the form of rule making) required by business in order to thrive, and how that certainty might be achieved. Only then can we be satisfied that the level of government intervention is appropriate to the legal challenges posed by the Internet.

Recognizing the need for "just in time" information, the paper also includes references to paper and electronic sources of information.

II. INTRODUCTION

Marshall McLuhan said of television that "the medium is the message" and predicted "the global village". The Internet seems to be the platform that will take globalization and the ability to freely exchange information and ideas to the heights envisioned by Mr. McLuhan some fifty years ago.

Cultural and legal differences are unlikely to evaporate. Even a close and apparently similar neighbour such as the U.S., our largest trading partner, can have different cultural attitudes from Canada, often as a result of different historical experiences. This shows up in materially different approaches to concepts such as cultural sovereignty, methods of doing business, foreign investment, health care, community decency, and the relationship between the individual and the state. We can expect social values and legal systems to grind, and to see an increased need to cooperate in the face of this diversity.

III. CYBERSPACE ANARCHY

To legislate or not to legislate. The question is not new.

"CADE: I thank you, good people: there shall be no money; all shall eat and drink on my score; and I will apparel them all in one livery, that they may agree like brothers and worship me their lord.
DICK: The first thing we do, let's kill all the lawyers.
CADE: Nay, that I mean to do. Is not this a lamentable thing, that of the skin of an innocent lamb should be made parchment? that parchment, being scribbled o'er, should undo a man: Some say the bee stings: but I say, 'tis the bee's wax; for I did but seal once to a thing, and I as never mine own man since. How now! who's there?"

"William Shakespeare, King Henry VI, Act 4, Scene 2"

As appealing as this sentiment might be, what Shakespeare was really saying is that without laws there will be anarchy in society. If we accept the need for the rule of law, a set of legal principles of general application backed by authority, to what extent should government play a role in establishing these rules for the Internet? And, as important, to what degree should there be regulation in the first place.

IV. TWO CAUTIONARY NOTES:

A. STATUTORY MONOPOLIES AND ECONOMIC PROSPERITY

It is worth noting that intellectual property rights were created to encourage economic activity through the granting of statutory monopolies. It is conceivable that at times the scope of these monopolies goes beyond what is necessary to promote a desired level of business activity. Growth can in fact be inhibited. To quote from an article authored by David Vaver entitled Rejuvenating Copyright (1):

"The reality of copyright is that it is indeed a Very Good Thing. ... For a copyright to be obtained, no money need be spent; nobody needs to be notified that the right is claimed; protection is worldwide; distributors can carve up the world market into territories, often preventing parallel imports and maintaining varying price levels in different countries. One can start, stop and finish exploiting the products as one wishes, charge whatever prices the market will bear for the rights or products produced under it, refuse licenses whenever one wants, and band together with others to exploit rights collectively, with relative immunity from competition or antitrust action so long as one behaves with a modicum of diplomacy. In most places, copyright owners can count on sympathetic lawmakers, bureaucrats and judges to enforce and expand their rights. This is evidenced by the latest worldwide push to harness fine tuned versions of copyright to protect business investment in ever-expanding computerized information webs."

The economist Mancur Olson sounded a warning when he laid the blame for the decline in the postwar economic vitality of some nations at the feet of narrow, self-serving groups more interested in personal gain than the well-being of society as a whole. In The Rise and Decline of Nations, he outlined his insights about how parochial lobbies form and then defend their positions. Subsidies, monopolies and other forms of protectionism grow. Over time, economic activity comes to focus on redistributing these benefits rather than on more productive output.

At the same time, Mr. Olson advocated the need for good governance and secure property rights and contracts as a way of reducing the power of entrenched self-serving governing classes.

The more our law makers are called on to create laws, the greater the likelihood of an increasingly confusing and potentially self-centred array of regulation. For example, significant amendments to the Copyright Act were passed in April, 1997 (2). The next legislative review is scheduled for the year 2000. The majority of the amendments were effective September 1, 1997, but some provisions still remain to be proclaimed into law. The general tone of the legislation is one of improving copyrights and cash flow to record producers, book producers and copyright collecting societies at the expense of the broadcasting and education sectors. Unproclaimed amendments provide statutory damage provisions similar to the U.S., with the addition of the right of a court to award punitive damages without limit. Hard put to rival the complexity of the Income Tax Act, our legislators can be given top marks for trying. For a discussion of the amendments in more detail, see David Vaver, The Copyright Amendments of 1997: An Overview (3). Has all of this encouraged business activity? Not likely.

If there is a message in all of this, it is that we must take care when promoting business activity that we do not fall into the trap of self interest so carefully laid by human nature.

B. USING CRIMINAL LAW TO ENFORCE PROPERTY RIGHTS

Increasingly, the RCMP has been called on to enforce property rights in a civil context. More recently, copyright and trade-mark holders hired off-duty officers from a large metropolitan police force to police the sale of illegally copied goods at rock concerts and from street vendors.

Under international treaties, Canada is obligated to have an intellectual property enforcement regime in place. Regular reporting of enforcement activity is made by Canada to the organizations administering the treaties. Current statistics show that criminal enforcement in Canada is taking place in only three cities. Concern has been expressed that criminal enforcement is not taking place in B.C. Encouragement of criminal enforcement activities can be expected.

Some argue that enforcement actions dealing with trade-mark and copyright infringement should be dealt with in civil court (1) so as not to bring the criminal enforcement arm of the judicial system into disrepute and (2) to allow the Federal government to refocus its' resources on more serious matters. The debate is compounded by an increase in the level of copyright protection being afforded today.

Recently the Department of Justice and the RCMP agreed on an Interim Copyright Enforcement Policy (4) to do just that. The policy, dated February 19, 1998, provides for enforcement activity only in cases of significant commercial infringement by importers, manufacturers and distributors. Retail enforcement will be given a significantly lower enforcement priority. Input from the public has been requested.

V. REASONS FOR REGULATION

If we accept the idea that some degree of rule making is necessary, where does one start?

Some of the reasons for passing laws are:

1. to recognize personal freedoms, private contracts and sanctity of ownership of property;

2. to regulate taxation;

3. to encourage certain activities, like the creation of intellectual property by the granting of statutory monopolies;

4. to prohibit certain conduct and provide sanctions; and

5. to provide a dispute resolution mechanism, including laws and a forum to apply them.

Value judgements are inherent in all of these reasons. The role of government is to identify society's objectives and then to pass the necessary laws to achieve them. It is trite but true to say that self-interest drives perspective. But some rules might benefit first individuals, and only later society in general.

The same methadology used to evaluate copyright law can, for example, be used to evaluate proposed laws relating to the Internet. The idea of copyright is that an individual deserves protection for the fruits of her intellectual labour. In other words, what labour, what protection? Or put another way, copyright represents a metaphor for the pressing policy debate between the public's ability to access information and the rights of the creator. For patents, the goal is to provide limited protection in return for the disclosure of an idea. For the Internet, the methodology would be to (1) identify desirable outcomes/interests (2) then to balance them against each other, and finally (3) design laws to accomplish the objectives.

As a rule, governments tend to legislate in reaction to events, rather than providing legislative leadership designed to promote the economy.

Like the regulation of the economy, countries are no longer free to operate in isolation when it comes to law making for the Internet - whether they act in concert or react to each other. For example, as of the end of 1998 members of the European Union will not be able to share data with countries which lack rules providing a minimum standard of protection for personal data - the EU Privacy Directive. While the U.S. sees this as yet another attempt by the EU to raise non tariff trade barriers, there is little likelihood of the directive not being implemented as scheduled. The international community is left with the option of doing nothing, or passing laws which accord with the requirements of the EU Privacy Directive.

The National Computer Security Association suggests that five pillars form the foundation for secure electronic commerce - privacy, integrity, authenticity, non-fabrication and non-repudiation. Privacy acknowledges the need for confidentiality between sender and recipient. Integrity presupposes the unaltered state of a message. Authenticity and non-fabrication assure both parties of each others identities. Non-repudiation means that neither party can deny they sent the message.

Amelia H. Boss, in her paper Security: it ain't just a matter of Encryption - The Development of Legal Infrastructures to Support the Growth of Electronic Commerce (5) used the analogy of the security we feel in our home to explain trust. She outlined the expectations of a homeowner, including the right to use the property and the liability of anyone intruding. For business, this translates into an expectation when entering into transactions that obligations will be performed because of the legal and social consequences of not doing so.

VI. LEGAL UNCERTAINTY

The seamless and transparent way in which electronic transactions take place make it difficult to apply national laws. The number of contacts with different legal regimes increases the likelihood of competition between jurisdictions , both as to the application of domestic law and for the right to act as the forum for resolving the dispute. The uncertainty over whose national laws apply to Internet transactions (and what those laws actually are) is colloquially referred to as "the jurisdictional issue". The jurisdictional issue is one of the most significant problems facing business in its use of the Internet.

The Federal government has already recognized the existence of a significant amount of domestic legal uncertainty arising from the use of the Internet. See Raciot, Hayes, Szibbo and Trudel, "A Study of the Issues of Liability for Content Circulating on the Internet", 1997 (6)commissioned by Industry Canada. Topics covered include copyright, trade-mark, defamation, and obscenity and hate literature.

Internationally, and domestically between provinces, conflicts of laws decides (1) which laws apply in a given situation and (2) whether a court has the jurisdiction to administer them. Over the years the judiciary has developed a series of principles, having exotic Latin descriptions like lex conveniens, lex loci actus, lex loci solutionus and forum non conveniens, to guide it in choosing the applicable law and the forum to settle a dispute. At the heart of the rules is the extent to which a person has had a voluntary contact with a jurisdiction, and whether it is "fair" to assert jurisdiciton. If a court takes jurisdiction over a dispute, it does not automatically follow that it will apply its native laws. For example, a court in British Columbia could apply the laws of the state of Washington, and vice versa. International activity demands that participants not only pay attention to the forum where disputes will be resolved, but also to the body of laws that will used to resolve them.

The nature of the business being conducted or the harm alleged can have an effect on the willingness of the judiciary to apply local law. Some case law suggests that electronic contact with a jurisdiction, without anything more, cannot support jurisdiction unless the conduct complained of is a breach of a non-contractual duty owed to another, such as defamation (7). Other cases have suggested that the conduct being complained of can be directed at a state, permitting an assumption of jurisdiction based on electronic contact only.

In Avery Dennison Corp. v. Sumpton (8), a Los Angeles district court granted an injunction preventing Freeview, a Vancouver, B.C. based provider of Internet E-mail addresses from carrying on business using the domain names dennison.com and avery.com on the basis that its use of the two surnames constituted a dilution in the value of the Avery Dennison trade-mark. In Naxos Resources (USA) Ltd. v. Southam Inc. (9)the court decided that it was not enough to establish jurisdiction in California just because an alleged defamatory article in a Canadian newspaper was available on a California web site. In Southam Inc. and David Baines v. George Chelekis, et al (10), a Canadian court took jurisdiction in a case involving now proven defamatory statements "published" in Florida. In U.S. v. Thomas (11), owners of a California bulletin board service (as distinct from an "Internet type" situation), were extradited to Tennessee and found guilty of distributing pornographic materials in Tennessee. And in Hearst Corp. v. Goldberger (12), a New York court decided that a federal court could not exercise personal jurisdiction over an out of state defendant solely because the defendant's web site was accessible in New York.

Increasingly, courts are refusing to take jurisdiction where there is a more appropriate forum, but business is still left with a high and potentially unacceptable level of uncertainty.

VII. WHERE IN THE WORLD IS CYBERSPACE?

The notion of cyberspace as a separate legal jurisdiction suggests a body of rules, and a mechanism for enforcing them that is independent of conventional sources of authority. The Virtual Magistrate (13) is an example of an attempt to provide a cyberspace forum for dispute resolution through agreement - but to date it has been unsuccessful.

Law acts in part as the gatekeeper of the past and a champion of existing institutions. As such, at least in common law jurisdictions, lawyers take old legal principles and apply them metaphorically to new situations (facts) in order to arrive at a decision. The uncertainty inherent in this process, coupled with the "jurisdictional issue" and suspicion of the legal community's ability to understand new technology, has given rise to the possibility of a jurisdiction known as cyberspace. Ironically, this concept has also arisen from a desire to keep the Internet unregulated and free of the courts and their conventional dispute resolution mechanisms.

Over several centuries, two main sources of law have co-existed. The first, and expected source, is national (or domestic) law. National law, at least in common law countries, arises from judicial decisions (the "common law") and from legislative action. The power to legislate is tempered by the respective constitution of the country in question, and by the speed with which legislators are willing to implement new laws. The second source is international law - a body of international treaties and subsequent enabling legislation arising out of years of interaction. International treaties, by their very nature and the number of participants, carry the burden of a lack of flexibility that is not present at the domestic level. National and international laws do not recognize the existence of third jurisdictions such as cyberspace.

In the absence of support from national and international laws, cyberspace must look to private treaties for its existence. Private treaty (or contract law in most cases) has come to be recognized as a third source of law, although subject to the over riding authority of the first two. Private agreements are subject to the disabilities that they are only binding on the parties to them, and there can be substantial transactional costs to them.

For the simple reason that it is unlikely private agreements can completely oust national jurisdiction, cyberspace is unlikely to be recognized as a separate legal jurisdiction.

VIII. A CALL FOR ACTION

Government is a bureaucracy. A bureaucracy tends to reward reaction before it rewards initiative. The private sector is guilty of reinforcing this. In other words, the private sector might applaud an entrepreneur for trying but failing, but is unlikely to do this with government. This reinforces government inactivity, particularly when it comes to legislation that is in the form of an initiative.

Three areas where government, both Federal and Provincial, could show some initiative are international treaty making (contract formation), the protection of privacy (a cornerstone of democracy) and trade-marks and domain names (marketing).

A. INTERNATIONAL TREATIES

International treaties could provide a harmonization between national laws, and establish ranges of acceptable legal standards for business activities. Copyright is one of the best examples of this in the last century.

There is already an international model law in place governing international commerce that has been adopted by many states. A remarkable level of consensus between these and other proposed model laws exists with respect to the issues involved. The UN Convention on Contracts for the International Sale of Goods was implemented both federally and provincially in Canada by the respective International Sale of Goods Acts. In addition to providing specific rules for the creation of contracts, the convention addresses issues of delivery, conformity of the goods, and remedies for breach of contract.

The United Nations Commission on International Trade Law (UNCITRAL) (14)has also proposed a model law dealing with electronic commerce. The model law recognizes that "legal requirements prescribing the use of traditional paper-based documentation constitute the main obstacle to the development of modern means of communication". The proposed model law is based on what the Commission describes as a "functional-equivalent" approach, namely how could the purpose and function of the paper-based requirement be fulfilled in an electronic environment. Not only is the model law intended to deal with disparities among national regimes, but it also provides a model for a number of countries where existing laws governing electronic communication and storage of information are inadequate or outdated. The U.S. supports the adoption of the model law internationally. The executive summary of A Framework for Global Electronic Commerce, the policy statement of the Clinton administration, is available on-line (15).

The International Chamber of Commerce is also developing standards for electronic commerce for international consideration and adoption - E-commerce roles, rules and responsibilities (16).

B. PRIVACY

The Internet has facilitated the greatest onslought against personal privacy on a global basis ever witnessed. Canadians demand and expect a high degree of personal privacy. Electronic communication and electronic commerce are exponentially increasing the amount of personal data being collected and stored. The creation of more and bigger data bases is giving rise to data matching and data mining, and the ability to discern personal information to a greater degree than ever before possible. See also, Dunn, Privacy on the Internet FAQ (17).

Generally, privacy rights means that individuals should be as free as possible to determine the appropriate level of personal privacy in their lives. People should have the right to an informed consent to the collection, storage and use of data. These rights would include the extent to which data is collected, the quality of it, whether there are any restrictions on the subsequent use of it, and whether there is personal access to the information to ensure that it is correct.

The Freedom of Information and Privacy Act (B.C.) is presently under going a legislative review. It is expected that the provisions of the Act relating to access to information will be relaxed in response to the government's belief that the Act is being used against it as a political tool. It is not expected that the privacy rights enshrined in the Act will be extended to the private sector at this time.

Some argue that privacy concerns are better dealt with by private watch-dog agencies such as the Better Business Bureau. Truste (18)is an example of an organization in the U.S. offering an online seal of approval for web sites.

Canada cannot assume a "made in Canada" approach to perceived problems. For example, the U.S. approach of using checks and balances in the area of consumer protection is more likely to result in consumers being bestowed with additional powers in the face of growing business might.

C. DOMAIN NAMES AND TRADE-MARKS

The primary domain name space, .COM, is controlled by U.S. interests. U.S. trade-mark holders are in possession of a tremendous advantage when it comes to protecting their trade-marks domestically, because they can go to a domestic forum for application of their domestic laws whenever a dispute arises about a domain name. Increasingly, the international community is becoming aware of the potential for conflict between national trade-mark regimes and U.S. holders of .COM domain names.

Fundamental changes (the "proposal") are being contemplated to the .CA domain name space. The target date for implementation was May 1, 1998, now expected to be January 1, 1999 (19).

Use of the .CA domain name space is lagging behind use of the .COM domain name space. Government intervention in the process, with the objectives of expediting the changes and facilitating use of the domain, would at a minimum increase Canada's profile on the international electronic scene. This could also result in increased protection for Canadians by ensuring that the allocation of domain names coincided with Canadian, as opposed to U.S., trade-mark law.

D. CONCLUSION

Where does this leave us? We are left with the recognition that carefully though out international treaties are mandatory for international commerce. And for those trading primarily in their geographic area, a prediction that domestic law will suffice in the long run.

IX. TAXATION

The business community can sleep easier. Recent pronouncements by both the White House and Congress, the dominent players in the North American scene, have indicated opposition to the imposition of new Internet based taxes. On May 14, 1998, a committee of the U.S. House Commerce Committee approved the Internet Tax Freedom Act, which would impose a three year ban on any new taxes, such as access taxes. The bill would also protect the Internet from regulation by the Federal Communications Commission, the sister of the CRTC in Canada.

Before there is rejoicing in the streets, a point of clarification. This does not mean that the Internet will not be taxed. Rather it means that no new taxes will be created. In short, the legislators are content to work with the rules presently in place.

The Internet has the promise of creating untold work for tax professionals, however, as jurisdictions compete for tax revenues. To name but a few, some of the issues being dealt with are: the effect of tax treaties, the location of permanent establishments, the allocation of income and capital taxes among provincial jurisdictions, and the exposure to alien tax jurisdictions from electronic contact.

Revenue Canada has an Advisory Committee on Electronic Commerce which has recently delivered a report to the Minister of Revenue. A copy of the report should be available soon (20).

X. PRIVATE AGREEMENTS - A PERMANENT SOLUTION

Until national sanction exists for specific model laws, there is always the option of adopting them by agreement.

Private agreements can be expected to flourish as the most efficient way, for now, to give individuals and business alike a degree of certainty.

XI. CONCLUSION

Both the Federal Government and the Clinton administration in the U.S. have declared themselves against laws specifically aimed at the Internet. This reflects a growing comfort level that existing laws will permit the growth of the Internet while we determine the level of government intervention required.

The opportunity exists for Parliament and the Legislature of British Columbia to promote information technology and the Internet in ways that not only provide certainty, but encourage Canadians to do business on the Internet.

Endnotes:

1. 1997 75 CBR 74
2. S.C. 1997, c. 24
3. I.P.J. December, 1997
4. canada.justice.gc.ca/Consultations/droitauteur_en.html
5. http://www.canarie.ca/cdncc/comments
6. http://strategis.ic.gc.ca/SSG/it03117e_pr115.sgml
7. McDonough v. Fallon McElligott, Inc., 1996 U.S. Dist. LEXIS 15139; 40 U.S.P.Q. 2d (BNA 1826 (S.D. Cal. 1996)
8. 1998 U.S. Dist. LEXIS 4373 (C.D. Cal. 3/19/98)
9. CV 96-2314 WJR (Mcx) (S.D. Cal. 8/16/96)
10. [1998] B.C.J. No. 848 (BCSC)
11. 74 F. 3d 701 (6th Cir. 1996), 117 S. Ct. 74 (10/7/96)
12. 1997 WL 97097, 1997 US Dis. LEXIS 2065 (SDNY Feb. 26, 1997)
13. http://www.vmag.cilp.org
14. http://www.un.or.at/uncitral/en-index.htm
15. http://www.iitf.nist.gov/electronic_commerce.htm
16. http://www.iccwbo.org/Commissions/Telecom_IT/E-commerce_roles_rules.htm
17. http://www.dunn.com
18. http://www.truste.org
19. http://www.canarie.ca/cdncc/comments
20. http://strategis.ic.gc.ca (search for Advisory Committee on Electronic Commerce)