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Electronic Commerce: Customers Are Out There (Somewhere). . .

Spring 1997

The cover of every current newspaper, magazine and trade journal reflects the new rage in business: electronic commerce. Its lexicon includes such terms as "home page," "commerce on the Internet," "Web malls," "smart cards," "orders by e-mail," "e-banking," and "e-commerce." Still, the Internet is just the next "novel" step in the development of domestic commercial trade.

Since the beginning of commercial trade, transactions have always had the same basic components: production, delivery, and payment. At first, the process was simple. Something you had in excess was delivered locally and exchanged for something you needed that your neighbor had. Such a system did not require regulation. Commerce expanded as products became more sophisticated with the development of advanced manufacturing techniques. As transportation evolved, products were delivered across oceans and continents. Payment methods changed as currency systems based on precious metals developed. A truly international monetary system is still developing around us today. Over the last 30 years, payment has evolved from principally paper and coin, i.e. checks, drafts, or currency, to a system which is primarily electronic and value is transferred between financial institutions on behalf of their customers. This electronic payment system is changing again to one where value is transferred directly between the parties without the use of conventional bank-to-bank systems. This development is straining the locally based regulatory systems as they try to cope with the speed and geographic scope of the transactions.

What does all this mean to you and how can you make effective use of this new environment in your business? This article will address three aspects of doing business electronically over the Internet: advertising, order taking, and receipt of payment. In each case, issues of regulation and security must be considered. In many cases, despite the growing collection of regulations and judicial decisions, there are no clear answers since neither the regulatory framework, nor judicial precedent has yet been settled domes-tically, much less transnationally. As in the past, the tension of the competing interests of various jurisdictions will likely result in a patchwork of standards rather than a unified set of rational solutions. As always, the additional force of market economics will exert influence on the entire process. For transnational transactions, until an internationally accepted regulatory structure is developed to control and operate the Internet commercial system, businesses selling through the Internet must be familiar with the laws and regulations used by the various sovereigns to protect their citizens and businesses.

ELECTRONIC ADVERTISING

Electronic advertising is not new. Since the early part of the twentieth century, radio and then television have been the dominant media to communicate advertising electronically. Although they provide short messages promoting companies and their products in many locations simultaneously, communication is limited to a few, small, focused ideas, often primarily directed at establishing and maintaining brand recognition (i.e. the reliance on short, but effective, jingles and slogans).

Since commercial application of the Internet first came into being, many of the "on-line services" have included advertising to be viewed by subscribers. There are now several e-mail and Internet service providers that offer free access for consumers underwritten totally by advertisers. Use of the Internet to disseminate information through the creation and maintenance of a site on the World Wide Web is the next step in this growth process. What is new about this medium is the ability of a single company, whether large or small to "place" electronic advertising, developed at a very modest cost, where it can reach millions of people throughout the world. Even more unique, people can seek out and view your advertising because they want to see it even though it is otherwise restricted in their countries. In addition to the immediate availability of this type of electronic advertising to a broad spectrum of potential customers, the new medium allows for the projection of vast amounts of information to the entire audience. The posting of on-line product catalogs, customer service data and technical updates are examples of the added depth of product communication possible through this medium.

Most countries maintain a regime of strict regulation of electronic communica-tions. In the United States, electronic communications have generally been regulated at the national level through the Federal Communications Commission. This regulation has related to the technical transmission part of the media, the allocation of licenses and to a lesser extent to the content of messages. Content is also regulated by local legislation and mores.

The transnational regulation of content on the Internet is already presenting challenges. In the absence of international conventions and multinational treaties, many sovereigns rely on their domestic networks of laws and regulations to control the transnational advertising and sale of commercial products through the Internet. However, the adverse cultural and commercial standards in each country may also encourage sovereigns to exert control over possible transnational providers of commercial information on the Internet. Each of these situations raises complex questions. Where is a Web site located legally? Is it subject to the local regulation of each sovereign? Since a site can reside on a server located anywhere and can be accessed by users who are anywhere, how do the regulations of the "server locality" interrelate with the regulations of the "user locality"?

Two recent examples of government legislation of the Internet are the efforts in Germany to influence the availability of Web sites containing sexually explicit material on America Online and the French government requirements that the Web site maintained by the Georgia Tech campus in Paris (and all other Web sites in France) be written in French. There are no clear answers. In the AOL case, the company chose to install software which blocks access to certain sites. In the Georgia Tech matter, the parties are still at odds. In the latter case, in addition to the issues which regularly arise where regulations conflict, there is the added complication of one sovereign, France, trying to regulate the actions of another sovereign, the State of Georgia in the United States. These two situations serve to highlight just two of the potential issues which will arise as electronic commerce speeds the globalization of business.

ORDER TAKING

Once all of this information is available to your existing and potential customers, the next step is to generate sales. This requires an order taking mechanism. When designing an order taking system, some of the issues to consider are the security of incoming order information and completing the contract with the customer. Security in data transmission is important because it supports order integrity and protects proprietary information. A number of vendors have developed methods for secure transmission of data.

A primary method of secure information transfer is an electronic data interchange or EDI. In this system the transmission of information is not done in the open, but rather in a closed environment, which is only available to the participants. The system recognizes only its participants and the security of the information is based on its being transmitted in the form in which the parties have agreed. To the extent that the participants in an EDI system wish to encode their data, they negotiate the precise format of the data and can easily enforce adherence to the agreed upon standards.

Another approach to secure data transmission is through encrypted electronic mail. This method is available on the Internet. In such a system, the participants must have software that encrypts messages before they are sent and decodes them after they are received. While the messages are traveling "in the open," they are in a form that cannot be read by an interceptor of the message. There are several forms of effective encryption "keys" in use today. Unless you are transmitting large volumes of information on a regular basis to the same parties, you will be using an open system such as e-mail rather than a closed EDI system. To provide you and your customers with a secure environment in which to transmit data, you should include encryption capability in the e-mail component of your Web site.

One of the difficult questions that arises when taking a customer order from a remote location is, what law applies to the agreement. This issue is not unique to the Internet. If you currently accept orders by telephone or fax, you are already facing this problem. Part of the question can be resolved by having a clear "choice of law" provision in your order form. However, this is only a partial answer. The question of where the "contract was made" and how and where it can be enforced is not resolved simply by inserting a "choice of law" provision. Again, looking to telephone and fax orders will assist in resolving this question.

As in the telephone order situation, if you are doing no more than accepting the occasional unsolicited order from customers in jurisdictions other than where your business is located, it is generally unnecessary to register to do business in that state. However, it is not clear if having a Web site accessible to buyers in other states will be viewed as "soliciting" business in those states. Similarly, in the international context, by having your products available on your Web site, you may be "soliciting" orders in countries where you do not have authority to transact business (and where such unauthorized activity may be criminal in nature).

RECEIVING PAYMENTS

An issue that has received great attention in connection with the development of e-commerce is the security of payments made through the Internet. As with electronic data transmission, electronic transfer of value is not a new concept.

Electronic funds transfer or EFT is similar to EDI except that it involves the transfer of value. The traditional "wire transfer" is an example of an EFT transaction. In these transactions, the information is transferred between the computer systems of the customers' banks.

On the Internet, the transfer of value can take several forms. The most straightforward and established is the acceptance of a credit card. As discussed earlier, Internet transmissions can be done either "in the open" or in an encrypted form. Although such transmissions can be intercepted, the chances of such an event are extremely low. To the extent that an encrypted message is intercepted, the thief ends up with useless gibberish.

In addition to payment by credit card, several new electronic payment methods are being developed to take advantage of the Internet. These types of "electronic currency" include added security features and, in some cases, allow the direct transfer of value from the buyer to the seller outside of the traditional banking system. These new systems are built on several different models. One, CyberCash, is designed to mirror paper currency. The value is transferred from the customer's bank account to a "smart card" which stores the value. When the customer makes a purchase, the appropriate value is transferred from the card to the seller's terminal (and then to its bank). There is no connection between the seller and the buyer's bank (as there is in a transaction paid for with a check, draft, wire transfer, letter of credit, or credit card). The transaction can be anonymous.

Electronic currency has been described as currency without a country. There are numerous unresolved questions about international transactions in e-currency. When a transaction in e-currency crosses international borders, regulatory issues arise. Is your buyer in a country with currency control laws? How does a sovereign tax transactions in e-currency. Do "e-assets" exist, and if they do where do they exist? Once they are located, how are they denominated. Will they be in recognized currency units, i.e., dollars, francs, marks, or will they be something else, such as frequent flier miles, future purchase credits or e-currency units? Which governments have authority to tax them?

These issues will not be easily resolved. The uncertainty which they create will require that businesses doing international transactions on the Internet be flexible. Most of the transactions which are being done today do not change significantly by the use of the Internet, but they do require additional care. Daily, the evolution of legal planning necessary to address the national and transnational regulation of electronic commerce is growing. Keeping up with it will require vigilance and creativity.

Media Contact 

If you have a media request or need an attorney with particular knowledge for comment, please contact Susan Steberl, Director of Marketing, at 414.287.9556 or ssteberl@gklaw.com.

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