Electronic Commerce: Jurisdiction and Applicable Law
4-5 November 1999
ILPF Statement for the Public Hearing of the European Commission
By electronic submission dated 15 October 1999, and in response to the invitation of the European Commission ("the Commission") for this Hearing, the Internet Law & Policy Forum ("ILPF") sent the electronic record of its recent international conference, Jurisdiction: Building Confidence in a Borderless Medium, (the "Montreal Conference") and commended the Commission (the "Commission") for understanding proposals to amend the Brussels and Rome treaties in the larger context of electronic commerce between European Union ("EU") member states and countries outside the EU.
The ILPF, www.ilpf.org, is a not for profit association of twenty five companies engaged in Internet-related businesses. ILPF members are headquartered around the world, including within EU member countries. The group's focus and perspective is the development of legal rules for the Internet to foster the growth of cross border electronic commerce and communications. The ILPF thanks the Commission for the invitation to participate in these Hearings on jurisdiction over electronic commerce.
The ILPF respectfully submits two observations about the proposals for conflict of law and choice of forum now before the European Commission:
The Commission is to be commended for looking at the impact of EU-only solutions in terms of the larger international market in electronic commerce and for beginning to consider solutions which will provide consumers effective protection in the larger international marketplace.
Any hasty or preemptive decision for rules within the EU, however, may well leave consumers with an illusion of protection, even for electronic trade within the EU member states. Consumer protection has traditionally relied both on active law enforcement and the practices of wise consumers protecting themselves. To the extent that a choice of law rule overemphasizes reliance on local legal protections where the consumer either happens to be at the moment of purchase or permanently resides, without concomitant recognition of the Internet's potential for consumer self protection and other measures online, the rule may not be to consumers' ultimate benefit.
These two observations are based on common themes from the Montreal Conference, as discussed further in this statement.
Building Confidence in a Borderless Medium: Common Themes
The ILPF sponsored the Montreal Conference to explore basic legal concepts of cross border jurisdiction and to create a common level of understanding of the series of legal issues and policy considerations involved in that complex topic. The program included comparative analysis of the rules for jurisdiction in different substantive legal areas, and examined approaches for both business to business transactions and for business to consumer electronic commerce. Participants did not issue formal findings. Although there were differences of opinion on many particular issues, consensus could be detected on a number of broad themes, many of which are relevant to the jurisdiction proposals now before the Commission. Those themes included:
- The importance of effective cross border enforcement mechanisms. Legal experts from common law and civil law traditions identified three different kinds of jurisdiction reflective of the three distinct powers of a sovereign authority: The rules of "prescriptive" jurisdiction limit when a government can legislate to regulate conduct. Rules for prescriptive jurisdiction are sometimes referred to as rules about the "choice of law" applicable if a dispute arises but also include notions of regulatory power, including licensing requirements. The rules of "adjudicative" jurisdiction, sometimes referred to as "choice of forum" rules, define under what circumstances a court may exercise its powers to hear a case. "Enforcement" jurisdiction limits the circumstances in which a court may call upon the sovereign to enforce a judgement rendered elsewhere against persons or assets found within the geographical limits of the court's territory.
A cross border jurisdictional analysis includes not one but three distinct legal questions:
- does the court have the legal authority to hear a case involving a party outside its physical boundaries?
- what rule of law will apply?
- will the judgment be enforced in the home court of the remote party?
Of these three legal questions, the third, enforcement in a party or a vendor's home jurisdiction, is the most important: Can the aggrieved party get redress? The designation of applicable law (rule of origin or rule of domicile under current proposals) addresses only one of those questions and, for consumers, does not resolve the question of effective protection.
The cost-effective cooperation of the remote court is essential not only for enforcement of the ultimate judgement, but often, for building the case against the remote party through discovery of relevant documentation. Adopting a conflict of law rule, particularly one which favors the rules of a jurisdiction other than the enforcing court's, and even allowing the case to be heard first in the consumer's home court, protects consumers only to the extent that a cost-effective, cooperative cross border judicial framework is in place.
- The importance of harmonization of substantive laws. Conference participants spent a significant amount of time defining and exploring the potential for "harmonization" of substantive provisions. Legal experts and other participants observed that the concerns over which law applied diminished to the extent that the choices were similar. Conference participants were realistic about the challenges and difficulties of achieving broad international harmonization. Many of them lawyers, they were equally emphatic that an examination of the possibilities of harmonization should begin. In particular, conference participants noted that the basic consumer protection law of a number of trading partners included prohibitions against fraud and suggested that such laws offered a useful first target for harmonization efforts.
- The variety of consumer protection laws and the usefulness of a sectoral approach to choice of law questions. The term "consumer protection law" includes a number of distinct substantive legal areas, for example, civil and criminal fraud laws, rules re licensing for both professions and regulated industries, rules re trade and contracts, advertising rules. Efforts to protect consumers must ultimately include solutions for choice of law and cross border enforcement in each of these areas. The solutions for each may differ.
- The importance of recognizing the difference between good actors and bad actors in the business world and the usefulness of codes of conduct. Responsible businesses ask for relief from a multiplicity of conflicting regulatory systems precisely because it is their practice to comply. Those businesses experience the cost burden of that compliance. They ask that a consumer be able to reward good actors in the marketplace for voluntary compliance with codes of conduct and responsive consumer services. Good actors do not seek completely to avoid all regulation. Instead, they join consumers in seeking a system in which bad actors, those which engage in fraud, or intentional deception or cause repeated harm, will feel the full force of the law.
- The importance of consumers' own actions. Consumer protection is very much a combination of legal protection and informal self protection. In everyday life, consumers protect themselves in a variety of ways: People buy from stores and choose brands which have a reputation for quality. They avoid merchants which have developed a bad reputation. They contact the merchant directly to resolve matters if they receive defective merchandise or are billed incorrectly. The legal system is not usually seen as a cost effective means of redress. If consumers have a choice of vendors, the wise vendor will honor these informal means of self protection or face loss of customers to those businesses which do.
The Internet offers consumers the means to engage in similar self protective measures online. Consumer experiences with individual merchants can be freely shared by a variety of mechanisms from online opinion boards to seals of approval. These mechanisms, created in response to the market, have begun to develop more fully in markets in which consumers have taken to online transactions in greater numbers.
In the ILPF's view, proposals for a choice of law and forum, particularly for application of the rule of the consumer's domicile, must be understood in terms of its impact on consumers' time-honored means of protecting themselves, both within the EU member states and in larger markets. To whatever extent that "domicile" choice of law and forum rules place undue emphasis and reliance on legal rather than informal protections, the rules do the consumer no favor.
- The importance of alternative dispute resolution mechanisms. Conference participants uniformly agreed that the development of inexpensive, effective remedies should be a fundamental goal for consumer electronic commerce. Consumer protection agencies face significant territorial limitations on their investigative and enforcement powers. The expense of court proceedings is likely to be prohibitive in many consumer disputes. At the same time, the power of the medium for fast, effective online dispute resolution was recognized.
- The importance of a coordinated, multifaceted approach. Conference participants agreed that protecting consumers and building confidence in the electronic medium would require a coordinated, multifaceted approach:
- An examination of the possibilities of harmonization of national laws on a sectoral basis.
- Cooperation among governments to enforce shared rules, beginning with common provisions against fraud and intentionally deceptive practices.
- Increased reliance on alternative mechanisms including codes of conduct, alternative dispute resolution mechanisms, information and seal programs, and the like.
- The importance of creating new choice of law options for consumers. Parties to cross border transactions between businesses often resolve choice of law and forum questions by contract clause. Courts in many if not most nations will give effect to that choice. Consumers are not afforded a similar choice primarily because of an assumption that the choice will not be truly an informed one or that the discrepancy of bargaining power between consumer and enterprise will result in lesser legal protections for the consumer. Alternatives are beginning to emerge. For example, a court may honor or defer to a consumer's choice of law if that choice, in the court's view, provides sufficient and equivalent legal protection. Similarly, a court could honor a vendor's choice of law if that choice fell within a list of legal regimes "approved" by treaty as having comparable protections.
The ILPF believes that there is merit in exploring alternatives to expand the consumer's rights, under certain circumstances, to deal with a vendor which does not recognize the laws of the consumer's domicile.
Electronic commerce will not stop at the borders of EU member states. Businesses within the member states are now seeking and will increasingly seek customers in larger global markets. While it is difficult to predict which kinds of businesses will take advantage of a larger international market, first or how soon, the economic efficiencies of the medium will ultimately be compelling. While local merchants in one country may not yet have plans to go global, or even multinational, businesses (which provide services that can be delivered on line, for example, software, music, information, and financial services) can quickly move to take advantage of larger global markets. The Commission is wise to ask how rules for choice of law and forum in consumer transactions will impact European businesses as those businesses turn outward to larger international markets. Will those businesses be willing to live with the same choice of law rule, for example, a rule of destination, in their dealings with consumers outside the EU?
Similarly, consumers, both business and individual, can be expected to take advantage of broader choices afforded by electronic commerce. In an online world, a consumer need not pack a bag, take a train, or physically cross a border to be afforded opportunities to purchase from foreign, and even distant, suppliers. Indeed, purchasing from online suppliers across borders can be easier than going across town. No one can guarantee how fast such international electronic commerce will grow but it is clear that it will be global. ILPF commends the Commission for its interest in solutions for wider international markets, in which businesses from the EU will be full players.
Effective consumer protection in a world of widespread cross border electronic commerce will require a variety of measures. International pledges of cooperative enforcement for laws against fraud and those practices which cause significant or intentional harm will be an essential step. In addition, the consumer's role in informal self protective measures, long exercised in the physical world, backed by effective alternative redress mechanisms online must be fostered. Returning a defective product and spreading the word if the merchant does not cooperate must be as easy in the virtual world as it is in the neighborhood. Alternatives to the legal system, for example, credit card charge back systems, can be explored. Finally, consumers should be allowed to reward those online businesses demonstrating a commitment to consumer protection through self regulation, appropriate industry codes, and responsive customer service.
International efforts to survey consumer protection laws enforceable across borders, catalog and understand various self protection and self regulatory measures, seek innovative solutions to traditional choice of law issues, investigate alternative redress mechanisms, examine choice of law and jurisdictional issues on a sectoral basis, and examine the rules of international jurisdiction as applied to electronic commerce have begun in such respected forums and organizations as the OECD, the Hague Convention, the International Chamber of Commerce, and the American Bar Association. The ILPF will also continue to undertake specific projects. These efforts are a significant step forward but are by no means complete or comprehensive. Additional time and dialogue are necessary to chart the most effective and just jurisdictional rules for consumer transactions and to consider a consistent approach in other areas.
In ILPF's view, a rush to decision for rules within the European Union may well leave consumers with an illusion of protection, even for electronic trade within the EU member states. Consumer protection has traditionally relied both on active law enforcement and wise consumers acting on their own behalf using the tools available to them in local and alternative ways. To whatever extent a choice of law rule overemphasizes national legal protections without concomitant recognition of the potential for effective and complementary means of online protection now being discussed in the broader international context, that choice may not be to consumers' ultimate benefit. The ILPF urges the Commission to choose a path which will provide consumers the optimum mix of legal rules, cooperative enforcement, and alternative protections which will work both within the EU and in a larger international context.
Respectfully offered on behalf of the ILPF membership,
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