Memorandum by Clifford Chance Limited
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
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.
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 RabattgesetzRabbattG
(Act Governing Discounts) and the ZugabeverordnungZugabeVO
(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.
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
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
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
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.
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
the idea of a fixed place of businessis 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 equallyif not moreimportant issue which
requires urgent attention.
Withholding tax is payable on certain types
of paymentsroyalities, 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.
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.
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
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
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
6 Directive on the legal protection of databases
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
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).