Multinational Monitor

MAR 2002
VOL 23 No. 3


The Enforcers: The Hague Convention and the Threat to Internet Freedoms and Consumer Protection
by Charlie Cray

E-Commerce Eludes the Tax-Man: The Click-and-Mortar Artificial Advantage in the New Economy
by Sarah Anderson

The Business of the Watchers: Privacy Protections Recede as the Purveyors of Digital Security Technologies Capitalize on September 11
by Wayne Madsen


Controlling the 'Net: How Vested Interests Are Enclosing the CyberCommons and Undermining Internet Freedom
an interview with
Lawrence Lessig



Behind the Lines

Keeping the On-Line Commons Open

The Front
Hi-Tech Trashing of Asia - Corporate Crime Sentencing

The Lawrence Summers Memorial Award

Names In the News


The Enforcers: The Hague Convention and the Threat to Internet Freedoms and Consumer Protection

by Charlie Cray

The integrity of the Internet, and an array of consumer, civil and other kinds of legal protections and even national sovereignty may be undermined by an obscure treaty, now under negotiation, designed to strengthen the global enforcement of court decisions related to business, observers say.

The agreement, known as the Hague Convention on Jurisdiction and Foreign Judgments in Civil and Commercial Matters (the “Hague Convention”) is being negotiated by more than 50 countries, including the United States. It is designed to give parties assurance that if they win a lawsuit in one country, it will be enforced in another.

Even critics of the treaty acknowledge that international enforcement of court decisions would have some benefits. For instance, business scofflaws or foreigners who leave a country to evade a civil judgment could be forced to surrender their assets in any country that signs the treaty.

This kind of extension of the reach of national laws seemed an attractive proposition when negotiations on the draft treaty began in 1992. Back then, “the driving factor was the U.S. perception that U.S. courts typically enforce foreign judgments, while foreign courts often do not enforce U.S. judgments,” says Barbara Wellberry, a former chief counselor for e-commerce to the Commerce Department’s undersecretary for international trade.

Although the drafting of the Hague Convention began in 1992, formal negotiations didn’t begin until 1999. The last time the parties convened in a two-week session in June 2001, the negotiations broke off with little achieved besides an agreement to resume discussions by 2003.

Virtually everyone involved attributes the slow progress to complications brought on by the introduction of e-commerce, which has exploded from virtually nothing as late as 1995 to an estimated $330 billion last year, and is projected to reach $2 trillion to $3 trillion by 2005.

One reason for concern is that the treaty might subject both consumers and businesses to virtually any jurisdiction where the Internet is available — giving plaintiffs the ability to shop around for a legal forum where they might have an advantage.

“Allowing plaintiffs to sue wherever the harm has arisen in the electronic commerce context subjects an alleged tortfeasor to jurisdiction in any country of the world, regardless of whether there have been meaningful contacts with the particular jurisdiction,” says Wellberry. Wellberry is now a partner at Morrison and Foerster in Washington, D.C., representing a coalition of corporate interests known as the Internet Coalition on Jurisdiction.

Worse, according to consumer rights advocates, the ability of multinationals with subsidiaries in numerous countries to comparison shop among different national laws gives them the ability to use the treaty to drag civil rights such as free speech protections and public rights to privately held intellectual property (such as “fair use” of copyrighted material), down to the level of the country with the weakest levels of protection.

As drafted, “the treaty will shrink the public’s rights to only those that exist in every country, which of course is smaller than what exists in any country — a frightening outcome,” says James Love of the Washington, D.C.-based Consumer Project on Technology. Love argues that countries should not adopt a jurisdictional treaty covering e-commerce unless they have first harmonized the applicable commercial and civil laws.

Caught in the Internet

The potential ability of plaintiffs to shop around for the most receptive forum is particularly striking when it comes to speech torts such as defamation and libel.

Critics say that unless it explicitly exempts speech torts, the Hague Convention could expose writers, publishers and even people who post opinions on the Internet to defamation and libel suits in countries where free speech protections are weaker than those in countries such as the United States.

“There are a lot of countries that have laws that are far less protective of free speech than the United States,” Chris Chiu, an Internet policy analyst with the American Civil Liberties Union points out. “What has prevented a lot of foreign judgments from being enforced on U.S. soil is that courts in the United States have refused to enforce those decisions based on the First Amendment and other public policies. The concern is that the Hague Convention will shift the balance of power, and create some sort of bias towards enforcement of foreign judgments. It opens up the possibility that American publishers will face potential lawsuits from places like mainland China, Singapore and other countries where there are strong restrictions on what people can say about the government.”

Even without the treaty, observers have noted a growing incidence of cross-border defamation and libel lawsuits, where plaintiffs have used the ubiquity of the Internet to seek out jurisdictions where libel and defamation laws are stricter than where the plaintiff would normally be expected to sue.

In one case last August, the Supreme Court of the Australian state of Victoria ruled that Melbourne businessman Joseph Gutnick could sue Dow Jones for defamation in an Australian court over an article published in the United States, but posted on an online version of Barron’s magazine. Barron’s is not sold in Australia.

Gutnick, a mining magnate, claimed the article wrongly portrayed him as a schemer given to stock scams, money laundering and fraud.

Although Australia’s highest court ruled in December that New York-based Dow Jones & Co. can appeal the decision, Dow Jones attorney Geoffrey Roberson points out that if it sticks, the Victoria Supreme Court ruling would set a precedent that anything published on the Internet could be subject to litigation in any country, and would therefore have a significant impact on freedom of speech in cyberspace.

Supporters of the Hague Convention say the treaty will not necessarily exacerbate the situation, since countries including the United States with stronger free speech laws could block enforcement of such decisions by exercising a public policy exemption built into the treaty. The exemption allows signatory countries to preserve unique constitutional protections, such as the U.S. First Amendment.

However, observers say U.S. judges may be reluctant to continuously exercise public policy exemptions in order to protect free speech, knowing that foreign judges might in turn refuse to enforce U.S. decisions.

“Right now U.S. courts have a fair amount of latitude in terms of whether they want to enforce judgments from other countries,” says the ACLU’s Chris Chiu. “The public policy exemption [in the Hague Convention] is not well defined. It doesn’t explicitly mention free speech. The people who have drafted and pushed the treaty along have so far made it so that the exemptions should be interpreted strictly and not expansively. In that sense, there’s a genuine concern, especially in the realm of free speech.”

Plaintiffs could also threaten companies with deeper pockets such as Internet service providers (ISPs) like AOL Time Warner and Yahoo!, which host the sites where controversial material is posted.

The result of such a chain of interlinked responsibility could force ISPs to police their own sites, a monumental task that they say is virtually impossible, given the amount of traffic.

A case brought against Yahoo! in 2000 illustrates what observers say might become epidemic under the Hague Convention.

Yahoo! was threatened by a French court with stiff fines for hosting a U.S.-based web page where Nazi memorabilia was being sold. French hate-speech laws disallow the trading of Nazi items within France. Although the listing is constitutionally protected under U.S. law, since the website was accessible within France, the court claimed Yahoo! was violating the law.

A U.S. federal judge ruled in November 2000 that Yahoo! was not obligated to comply with the French ruling as it applied to sites hosted in the United States. In February 2002, the French criminal court said it would seek to hold Yahoo! liable, with a former company CEO facing a maximum prison sentence of five years.

Under the proposed treaty, France would have more leverage to enforce the French court’s decision against Yahoo!

“While surely U.S. courts would refuse to enforce such judgments on First Amendment grounds, the Hague Convention would nonetheless compound the problem,” says Wellberry, whose clients include Yahoo! “By requiring that those judgments be enforced in other countries where U.S. companies have assets, U.S. First Amendment principles could more easily be avoided. The result could be that the Internet is reduced to the lowest common denominator, where web sites avoid any but the safest content for fear of offending someone and being hauled into court.”

The Boosters

Not everyone is unhappy with the Hague Convention. Copyright holders — including software companies and the recording and motion picture industries — like the treaty for its potential to extend their ability to enforce intellectual property laws and go after software copiers and the Napsters of the world.

“In general, our view remains that a convention could provide an effective framework,” says Mark Bohannon of the Software & Information Industry Association, the principal trade association of the software and information content industry. “Such a convention should not exclude nor carve out intellectual property, but would have to be consistent with U.S. and international norms for the enforcement of judgments in this and other areas.”

Intellectual property laws are not consistent internationally, however. Critics say the Hague treaty would allow the owners of intellectual property to forum-shop for the most restrictive intellectual property laws and trample on “fair use” and other public rights established in countries like the United States.

The range of activities common to Internet users that may come under threat include the liberal use of quotations from authors, linking to articles originating in commercial publications, the sampling of copyrighted video and recording materials, and the use of reverse engineering techniques to find out how to make software programs work together (be interoperable). Even activities not on the Internet, such as the distribution of copyrighted materials in classrooms, are potentially threatened.

“We are concerned that the draft Convention, with its current rules regarding forum selection, could subject Internet users in the United States to intellectual property infringement in other countries for activities that are lawful in the U.S. For example, users could be sued for engaging in conduct falling within the fair use doctrine,” states the American Library Association in a letter to the U.S. delegation to the Hague Convention.

“It makes no sense at all to lock in the whole world to a system that extends every nation’s intellectual property rights regime to everyone. The fact that intellectual property right regimes are so different now, and undergoing so much change, is a good reason to exclude intellectual property issues from the Hague, as has been done for maritime law and other areas where there is not agreement upon jurisdiction issues,” says James Love.

Some large multinationals, such as Internet-based businesses, agree. Most concerned are Internet service providers, who are worried about being held liable for activities of their users.

“The Hague Convention would allow copyright owners to avoid the limitations on liability that were negotiated with U.S. service providers under the Digital Millennium Copyright Act, by bringing suit against the service provider for copyright infringement in countries that have no laws limiting service provider liability,” says Wellberry. “In addition, where the service provider had no assets in the country in which suit was originally brought, under the Hague Convention copyright owners would be entitled to enforcement in the U.S. or any other signatory country to the Hague Convention where the service provider has assets.”

“Although there are various global treaties and conventions dealing with intellectual property laws, there is no one international global copyright, patent or trademark law,” adds Sarah Deutsch of Verizon. “Intellectual property laws generally are still created nationally and such laws are enforced locally by their respective national courts. These national intellectual property laws may differ on what may constitute a registerable trademark, what may be copyrightable subject matter or the subject of patent protection. In the trademark area, many countries, including the United States, generally avoid enforcing judgments or adjudicating disputes outside their jurisdiction. In the U.S., courts have defined the rule succinctly: ‘[When] trademark rights within the United States are being litigated … in an American court, the decisions of foreign courts concerning the trademark rights of the parties are irrelevant and inadmissible.’”

Buyer Beware

Although various stakeholders who have advised the U.S. and other delegations have different takes on the treaty, everyone agrees that much is at stake, since the current intent is to have the treaty cover a variety of issues including torts (among them libel and slander), copyright, patents, trademarks, trade secrets and numerous other issues.

But as the negotiations drag on and pressure to complete an agreement rises, delegates are likely to agree that reducing the treaty to a limited set of issues may be necessary for any agreement to be reached. And most of the stakeholders who have provided input to the U.S. delegation agree that one area where there is little agreement is business-to-consumer contracts. In part, that is due to large differences between U.S. and European consumer laws.

“I don’t see European courts changing their consumer protection laws and I don’t see the U.S. Congress changing U.S. consumer protection laws. We have to figure out a way to finesse that as some language has done, or leave that argument for another day,” says Marc Pearl, a partner in the Washington, D.C. office of Shaw Pittman, who coordinates an ad hoc working group of companies and trade association with e-commerce interests.

But disagreements run deep between different stakeholder groups within each country as well.

“Consumers could be at a considerable disadvantage if they are subjected to the jurisdiction of distant courts when disputes arise,” the Trans-Atlantic Consumer Dialogue (TACD) suggested in a group resolution. TACD is a loose federation of consumer groups in the United States, Canada and Europe. “Depriving consumers of access to their own courts in the case of cross-border disputes is effectively denying them their right to redress via the public justice system.” Meanwhile, “businesses can limit the jurisdictions in which they transact with consumers to those jurisdictions in which they are comfortable being subject to litigation.”

On the other hand, corporate representatives claim the treaty offers excessive rights to potentially litigious consumers.

“Allowing consumers to bring actions in the courts where they live, as proposed in the Convention, merely because a web site is available may cripple the development of electronic commerce,” says Wellberry. “Such allowance means that even the smallest merchant may be subject to jurisdiction and the expensive burden of defending lawsuits around the world. And because of the close relationship between choice of forum and choice of law, worldwide jurisdiction may also mean that merchants will have to go to the expense of being compliant with laws around the world.”

“In many instances it will be impossible for a seller to determine where the buyer or user of a digitized product (even if such buyer or user is a business or commercial entity) is located at the time of the sale or use or where performance of the electronic contract took place,” agrees Mark Bohannon of the Software Information & Industry Alliance. “In an Internet-based transaction, in particular, application of this standard would potentially subject a company to jurisdiction in unexpected countries.”

Eroding Support

Given the many objections to including business-to-consumer contracts, and recognizing that the vast majority of e-commerce occurs between businesses, the permanent bureau at the Hague and members of U.S. industry and government have begun to propose scaling the treaty back to business-to-business contracts when negotiations resume in 2003, leaving the more complicated business-to-consumer disputes for later.

But this still does not resolve some issues. For example, it leaves open the question of how “business” is defined. Should that definition include small non-profit groups who are incapable of defending themselves in foreign countries?

While raising such objections, James Love continues to advocate for the removal altogether from the treaty of intellectual property, speech-related torts, contracts of adhesion and rules that could undermine the free software movement.

Software companies object to these specific carve-outs, which would limit the circumstances under which the treaty would cover e-commerce. “You can’t draw a bright line between what is commerce and what is e-commerce,” says Marc Pearl. “If crafted successfully, [the treaty] could create greater predictability and reliability.”

Without removing e-commerce, however, the issue of forum-shopping will remain a sticking point.

Several firms, including Quova, Digital Envoy and NetGeo, have proposed a technical fix to this jurisdictional conundrum by developing technologies that would allow businesses to target their on-line presence to particular geographic areas. At the same time, governments and policy makers are determining how technologies used to restrict online advertising to specific geographical audiences might be used to play a role in Internet lawmaking.

But the Internet community has had little chance to discuss the benefits, challenges and consequences of creating e-borders — or “zoning” the Net — with these technologies. Many say the technical “solutions” threaten to destroy the fundamentally open nature of the Internet.

While many Hague Convention negotiators are aware of the quandaries posed by the Internet in a world where nations have not harmonized their laws, most are nevertheless pushing ahead with a quixotic sense of optimism.

But even Bohannon cautions that “it is important that U.S. government and other delegates understand that the ultimate merits of the proposal are based entirely on prospective benefits, not retrospective experience. Inevitably, this requires a complex and detailed assessment of the costs and benefits emerging from the changes required by the proposal which, to date, has been absent.”

The treaty negotiations are being carried forward by a political momentum born before the advent of e-commerce and the recent realization by many Internet-based firms that the Hague Convention might subject them to an unwanted host of liabilities.

But with business and consumer opposition growing, and business proponents offering only the tepid support voiced by Bohannon and others, the Hague Convention’s future is very much in doubt. Perhaps the lingering momentum will be sufficient for finalization of a treaty that excludes e-commerce or at least contains severe restrictions on coverage of e-commerce.

For now, it appears that consumer and civil liberties advocates may have intervened early and strategically enough — including working successfully to cultivate business allies — that their worst fears about the Hague Convention will not be realized. With complex international treaty negotiations, however, the final result is never clear until the process is completely finished.

The Clickwrap Trap

The confounding jurisdictional problems highlighted by the Hague Convention have long been apparent to software companies, as have the opportunities to use creative contract provisions to unilaterally determine forum in case of dispute between a software seller and buyer.

For years, software companies have made use of “shrinkwrap” and “clickwrap” contractual provisions to impose jurisdictional choices on consumers. Shrinkwrap licenses are notices to consumers that by removing the shrinkwrap packaging on a product, they agree to form contract provisions drafted by the seller (sometimes these provisions are not even visible until the consumer has opened the package). Clickwrap licenses involve clicking on an "I agree" button that binds the consumer to form contract provisions before they can begin using software or accessing a website.

Among the crucial provisions in these licenses are clauses related to choice of law, choice of forum and arbitration. These contractual terms purport to determine which jurisdiction’s laws will apply in case of dispute between the company and consumer (potentially evading consumer protection laws applicable in the buyer’s state or country); the jurisdiction where disputes will be heard; and whether consumers are required to resort to arbitration instead of full-fledged courts in case of dispute.

The validity of these provisions is not settled in U.S. law. Opponents say they should be found to be invalid because they are contracts of adhesion (unilateral contracts not subject to negotiation between parties) which contain terms that are onerous, unconscionable, unreasonable (and sometimes unknowable, in the case of shrinkwrap contractual provisions only visible after opening a box). Defenders say consumers are free not to buy products if they do not like the terms of licenses to use the products, and that the terms properly eliminate uncertainty about how buyer-seller disputes will be handled.

A controversial proposed model state law for the United States, known as UCITA (the Uniform Computer Information Transactions Act), would facilitate enforcement of many clickwrap and shrinkwrap terms. UCITA is issued by the National Conference of Commissioners on Uniform State Laws, the organization responsible for the Uniform Commercial Code, which provides the basis for most U.S. states’ law on commercial transactions. So far, Virginia and Maryland have enacted UCITA as state law.

Clickwrap provisions that limit the consumer to a particular forum, irrespective of its convenience and the viability of using it for what may be relatively small disputes, are common. Microsoft’s terms of use for its .NET Messenger Service, for example, specify that, “This Agreement is governed by the laws of the State of Washington, U.S.A. You hereby irrevocably consent to the exclusive jurisdiction and venue of courts in King County, Washington, U.S.A. in all disputes arising out of or relating to the use of the .NET Messenger Service.”

Some of the more aggressive clickwrap provisions limit the consumer to a particular forum, but permit the seller to forum shop. Consider the following license terms for the Financial Times website:

These Terms shall be governed by, and construed in accordance with, English law.

The parties irrevocably agree that the courts of England shall (subject to the paragraph below) have exclusive jurisdiction to settle any dispute which may arise out of, under, or in connection with these Terms or the legal relationship established by them, and for those purposes irrevocably submit all disputes to the jurisdiction of the English courts.

For the exclusive benefit of FT, FT shall retain the right to bring proceedings as to the substance of the matter in the courts of the country of your residence or, where these Terms are entered into in the course of your trade or profession, the country of your principal place of business.

Clickwrap and shrinkwrap contractual provisions typically cover much more than jurisdictional issues. Among the more controversial provisions are extremely broad statements disclaiming liability, limits on hyperlinking sites and barring criticism of the seller. Microsoft, for example, in its licensing terms of Agent, a software program that enables the use of animated characters on web pages, requires users to agree to: “not use the Character Animation Data and Image Files to disparage Microsoft, its products or services or for promotional goods or for products which, in Microsoft’s sole judgment, may diminish or otherwise damage Microsoft’s goodwill.”



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