Select Committee on European Union Minutes of Evidence


Memorandum by Clifford Chance Limited Liability Parnership

INTRODUCTION

  New network technologies such as the internet are dramatically reducing the cost of access to information. For e-commerce this means that the number of potential customers who can obtain information about any particular supplier's products is larger. The range of suppliers about which any given customer can obtain information is also widened. This increases competition between suppliers and creates the possibility of new markets for products or services for which a sufficient demand could not previously have been established. It increases the choice available to buyers.

  A consequence is that many businesses want to use e-commerce to serve customers in countries other than the country in which they are established. Many customers welcome the possibility of buying from a broader range of suppliers. In addition, by using the new technologies to reduce the amount of human intervention required to conclude transactions between buyers and sellers, costs can be reduced. In some cases, such as music, software and many financial services, the service which is the object of the transaction can also be delivered without human intervention reducing costs yet further.

  However, the ease with which the technology can be used to provide service across borders is not matched by a corresponding simplicity in the applicable legal or tax regime. The complexity of these regimes is an obstacle for both business and consumers.

  This note highlights some of the key legal issues raised by e-commerce under three headings: regulation, intellectual property and taxation. This note represents the personal views of the author. I am grateful to my colleagues Vanessa Marsland and Etienne Wong for their assistance in preparing the intellectual property and tax sections of this note.

Regulation

  In order to identify the nature of the legal issues facing a trader who wishes to engage in e-commerce in a number of EU Member States it is helpful to consider a practical scenario. Imagine a company that wants to sell its products or services direct to the public by means of an internet web site. In addition to tax and intellectual property issues, the legal issues which the company will face in each member state will include advertising and unfair competition regulation, language requirements, specific rules as to contract terms, product specific rules, local data privacy rules and identification issues. A few examples, which are by no means comprehensive, will serve to highlight the difficulty each of these issues will present to the company.

Advertising and unfair competition regulation

  Many countries have general and sector specific rules which regulate advertising and unfair competition. In Germany, the Gesetz gegen unlauteren Wettraub (Act Against Unfair Competition) forbids the use of any misleading information or comparative statements in advertising. Also of relevance to e-commerce are the Rabattgesetz—RabbattG (Act Governing Discounts) and the Zugabeverordnung—ZugabeVO (Regulation on Free Gifts). The complex application of these laws has stopped suppliers making "2-for-1" special offers or offering "lifetime guarantees" for products, despite such offers being commonplace in many other EU jurisdictions.

  France has strict rules on advertising alcoholic products (the Loi Evin) which are not shared by many countries.

Language Requirements

  In France, the Loi Toubon mandates the use of French for certain aspects of agreements and other communications with French customers. This law has a very broad scope which has not yet been fully tested before the French courts, but should in theory result in the translation into French of many or all terms and conditions offered on a website to French customers.

Specific Rules as to Contract Terms

  For particular types of contract individual member states often have specific contractual requirements. The UK's consumer credit legislation, which imposes specific requirements as to the form and execution of regulated agreements, is an example. In addition, before the European Union acted by introducing the electronic signatures directive1 some member states had passed or were preparing new laws on digital signatures which threatened to impose inconsistent standards.

  In order to create an enforceable contract the identity or status of the parties is often important. For example, some products may not be sold to under age purchasers and in many cases it will be important for each party to know the identity of the other party in order to enforce the contract. The anonymity made possible by the use of the internet and the possibility of impersonation means that efficient and trustworthy means of identification are desirable. The electronic signatures directive provides a foundation for the development of suitable systems. Nevertheless, considerable further development by the private sector remains essential.

Produce Specific Rules

  In some countries the sale of particular products may be banned for health or safety reasons. For example in the UK the sale of children's outer garments with hood cords was banned after a number of accidents in which children had been injured.

Local Data Privacy Rules

  Notwithstanding the data protection directive of 19952, data protection law still presents difficulties for e-commerce. For example, it is not clear whether a company based in the UK which is selling over the internet to customers in France must make a notification to the CNIL (the French data privacy authority) or whether it is sufficient if the company has made a notification to the UK's data protection commissioner.

  The wide range of local legal issues which a company wishing to trade online will need to review are further complicated by the uncertainties surrounding the governing law and jurisdiction applicable to online contracts. These are largely governed by the Rome and Brussels conventions3 which normally allow the parties to a contract to exercise a free choice. However, the conventions contain rules which allow consumers to claim the benefit of their home country law and jurisdiction in some circumstances. How these rules are to be interpreted in e-commerce transactions is unclear.

Intellectual Property Issues

  e-Commerce has raised a range of challenges for intellectual property law but it is fair to say that, while development will need to continue, it appears that good progress is being made to meet these challenges.

  e-Commerce, or more generally the development of the internet, raised two main issues for copyright. First, at a technical level the passing of a message over the internet involves repeated copying, much of it automatic, of elements of the message from computer to computer across telecommunications systems until the message reaches its destination. Secondly, the ease with which valuable content, such as recorded music, can be copied and distributed over the internet raised significant piracy concerns.

  Two recent WIPO treaties4 have addressed these concerns in three ways. First, two new restricted acts, the right communication to the public and, for performers and record producers, the right of making available to the public, have been created. These new rights do not fully resolve all the issues associated with neighbouring rights. Secondly, the circumstances in which the operators of infrastructure such as telecommunications companies or internet service providers can be liable for infringement have been clarified to some degree by the treaties. Thirdly, new prohibitions on circumventing technical measures for control of these conventions. The EU has a draft directive in relation to harmonisation of copyright5 and some issues are being dealt with in the draft e-commerce directive.

  Issues remain to be resolved between the US and Europe concerning the protection of factual databases. In the EU factual databases are protected by the database directive.6 This directive extends protection to non-EU developers only where their home country confers reciprocal rights. US developers do not currently qualify for protection under the directive.

  Patents are expected to become a much more significant issue in the course of the decade. In the US significant numbers of patents which effectively cover e-commerce business processes have been issued and very large numbers of applications have been made. A number of patent infringement suits have been filed in the US. US practitioners are expressing concerns that patents may have been granted in the US which do not meet the usual standards of novelty and non-obviousness.

  We expect, with some time lag, a similar trend in Europe. We have, in Europe, prohibitions on patents for software and business methods. Work is under way towards removing the exclusion of patentability for software. However, at present, European e-commerce companies face a less favourable environment for patenting e-commerce inventions than their US counterparts while they risk being dragged into infringement actions when exploiting their e-commerce technologies in the US.

  The domain name system used by the Internet has lead to conflicts between trademark owners. Trade marks are registered for defined territories and defined products or services. This has meant that concurrent users of the same trademark have been able to coexist for different products or geography. Only one company can use a particular domain name (eg www.cliffordchance.com). Although domain names can be registered in particular national domains (eg. www.cliffordchance.co.uk) this does not eliminate the possibility of disputes. However, in spite of the difficulties, many of the domain name registries have developed or are developing reasonably effective dispute resolution procedures and many national courts have risen to the challenge.

Tax Issues

  Uncertainty regarding how a number of long-standing rules and principles apply to e-commerce is the biggest issue from the tax perspective, particularly in light of the commitment given by many governments and institutions (such as the United States and the European Commission) not to introduce new taxes. The following paragraphs provide an outline of the key areas of concern.

  "Permanent establishment"—broadly, the idea of a fixed place of business—is the internationally-accepted concept used commonly to determine whether, say, a UK resident has a taxable presence in France. If the UK resident has a "permanent establishment" in France, he will be liable to pay income or corporate tax in France. Local branches and offices are obvious example of "permanent establishments", but uncertainty persists over servers and intangible "places" such as websites. These are issues the OECD (Organisation for Economic Co-operation and Development) is already addressing, but refining the concept of "permanent establishment" is just the first step. Determining how taxable profits should be allocated between "permanent establishments" in different countries remains an equally—if not more—important issue which requires urgent attention.

  Withholding tax is payable on certain types of payments—royalities, for example. Securing international agreement on how payments which arise frequently in e-commerce should be characterised for tax purposes is key not only to providing certainty on whether withholding tax is an issue on many transactions in digitised products, but also to achieving neutrality between online and bricks-and-mortar transactions. This is another issue which the OECD is addressing.

  Although there is more certainty on how existing VAT rules apply to e-commerce, ensuring compliance with such rules often gives rise to practical difficulties (which some start-up businesses avoid by setting up in countries outside the EU). The way the current rules work also creates distortions in favour of non-EU suppliers on many business-to-consumer transactions (particularly, transactions in digitised products.). The European Commission is proposing modifications to the rules to remove such distortions, but the practical implications of complying with the modified rules remain a live issue.

E-commerce Related Legal Reform

  There is a large number of European measures, enacted and proposed, which have a bearing on e-commerce.

  The most important of these measures for e-commerce are the distance contracts directive7 and the corresponding proposed directive for financial services8 and the proposed e-commerce directive.9 The distance contracts directive is flawed in that it imposes a minimum standard of protection in relation to certain matters leaving companies with the need to identify specific rules in different member states (eg language requirements and rights to return products or withdraw from contracts). In addition some of its provisions (for example the requirement to provide certain information in a "durable medium") are open to interpretation which may lead to different requirements in different member states. The draft financial services directive is better in this respect.

  The draft e-commerce directive is still under discussion10. It appears likely that it will not cover "contractual obligations in consumer contracts". If this is the case then companies wishing to engage in cross border e-commerce in member states will still need to address many of the issues identified in this note.

Conclusions

  E-commerce gives rise to a wide range of legal issues. The main effect of these issues for business is to raise the cost of undertaking e-commerce. This could slow down the adoption of e-commerce. The cost of understanding and tackling the various issues is determined by the number of countries to be served and the type of business. It is largely unaffected by the scale of the business envisaged. Smaller business wishing to exploit e-commerce on a pan-European basis will, in all likelihood, bear a greater proportionate burden in achieving compliance.

  The EU's current proposals regarding the regulation of e-commerce will improve the position but are likely to leave significant national differences which will remain costly barriers to market entry. Ultimately, these costs will be borne by consumers.

David Griffiths

Clifford Chance Limited Liability Partnership

1 March 2000

  1  Directive on a Community framework for electronic signatures (directive 1999/93/EC).

  2  Directive concerning the processing of personal data and the free movement of such data (directive 95/46/EC) and directive concerning the processing of personal data and the protection of privacy in the telecommunications sector (directive 97/66/EC).

  3  Rome Convention of 1980 on the Law Applicable to Contractual Obligations and Brussels Convention of 1968 on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters.

  4  WIPO Copyright Treaty of 20 December 1996 and WIPO Performance and Phonograms Treaty of 20 December 1996.

  5  Proposed directive on the harmonisation of certain aspects of copyright and related rights in the information society (97/0350).

  6  Directive on the legal protection of databases (directive 96/9/EC).

  7  Directive on the protection of consumers in respect of distance contracts (directive 97/7/EC).

  8  Proposed directive concerning the distance marketing of consumer financial services (directive 98/0245) and Proposed directive on the taking up and pursuit of the business of credit institutions (9/2000).

  9  Proposed directive on electronic commerce (14263/99).

  10  An outline of the current status of discussions can be found on the Department of Trade and Industry website (www.dti.gov.uk/cii/ecomdirective).


 
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