By Debra Susca
Freelance writer in Portland, CT

Doing business over the Internet is a bit like venturing into the Wild West. It’s a vast, uncharted territory where old rules don’t apply, but new ones are still to be hammered out. Like the pioneers before them, those who have chosen to tread this route need to be aware of the possible dangers that lie ahead.

Suddenly they’re not just conducting business on Main Street, U.S.A., but with the push of a button, instantly are doing business everywhere in the world anytime of the day or night.

"That capability challenges the fundamental legal concepts of territory and jurisdiction," says Don Borod, attorney in the law firm of Cummings & Lockwood, which has offices in Hartford, Stamford, New Haven, Greenwich and Florida. "There’s a great number of questions that stem from the fact that over the Internet, you’re everywhere at once."

Questions like:

• Where are you doing business? The place from which you run your Web site? Or the countries where you sell your products and services?
• Which laws apply to what you’re doing? Your country’s or theirs?
• Where is the contract being made? How do you authenticate it if everything is done electronically?
• Whose laws would apply if there were a lawsuit? Your state’s and country’s, or theirs?
• What are the tax ramifications? Where and how do you pay taxes?

"There aren’t any complete answers yet in the United States or in other countries either," says Borod. "A lot of things are still evolving. People doing business in this way need to first focus on the fact that there are these kinds of questions, and second, be aware of the rules in place in any of the countries where they’re doing business."

That’s advice with which Jacqueline Scheib, an attorney at Robinson & Cole in Hartford, agrees. "A lot of people starting e-businesses haven’t thought of the intricacies involved with doing business overseas, since it’s so easy to go global," she says. "My advice to them is: Look before you leap, because you’ll be exposing yourself to international competition and risk. And just because the Internet goes internationally, is it in your company’s best interests to conduct business internationally?"

Game plan critical

According to Scheib, having a game plan or strategy in place is critical. It forces you to determine why you’re venturing into e-business in the first place and what you hope to accomplish. And as you create it, you’ll have to consider such things as what your products and services are, where it makes sense to sell them, how you’ll distribute them, whether you’re going to start off small, and how you’re going to limit your markets and exposures.

"First, you come up with a strategy," agrees Thomas Williams, a partner who specializes in e-business at Pepe & Hazard of Hartford, Southport and Boston. He explains that there is a shift occurring in e-commerce whereby more traditional small and midsize businesses are using the Internet to grow their business and enhance profitability. The Internet "has no boundaries and doesn’t require costly infrastructure that large companies have traditionally needed to put into place to achieve global expansion," he says. "Using the Internet as a tool to grow the business is something small to midsize companies really should be paying attention to because their competitors are."

He recommends that companies considering going into e-business work with Internet strategy consultants to come up with their plan as well as consult with legal experts. "As you go through the strategy, the legal issues will touch on everything you do. With e-business, we can buy and sell goods anywhere in the world with relative ease. However, this new ease of doing business is accompanied by a complicated new set of legal issues."

Potential snares

So what are some of the major legal snares companies could become entangled in while doing international business over the Internet?

Jurisdiction. All agree the first concern to be plumbed is that of jurisdiction: In what countries will a business’s Web-site activities be subject to the jurisdiction of that country? The more active a company is in a country — in this case, having customers in foreign countries interact with the Web site and buy goods or services — the greater the likelihood that jurisdiction will be found. And if there’s jurisdiction, a country will be able to impose its laws.

"In the Internet realm, if your site is entirely passive, meaning people can’t communicate with you, a court may not find jurisdiction. But if you’re taking advantage of the market in that area and have [that market’s] citizens interacting with the site, then jurisdiction will likely be found," says Scheib.

She points out a situation in which a company based in a Caribbean country where gambling was legal set up a site that allowed gambling through the Internet. When New York state residents began gambling through the site, the New York attorney general lodged a claim against the company saying it was breaking New York law because gambling was not allowed in the state. Since the site was interactive, jurisdiction could be found in New York and its laws imposed on the Web-site owner.

Taxation. Another potential nightmare for e-business operators is taxation. In the U.S. alone, there are 30,000 different state and local taxation authorities, according to Williams. Abroad, he adds, most countries assert their authority to tax income a foreign company earns on goods sold in their country (source income taxation) and to tax a company that has a presence in the country (permanent establishment taxation). The question that arises is, does a Web-site operation represent a "permanent establishment?"

"Right now there is a moratorium in the U.S. on special taxes directed at Internet transactions," says Williams. He says federal policy makers are considering creating a uniform system lest taxation severely limit commerce being done over the Internet. "International organizations also are trying to come up with a universal system," he says.

Intellectual-property issues. Protecting intellectual-property rights such as trademarks and copyrights is another area that needs to be closely examined. When you go online with your business, you’ll want to make sure you protect what you own related to your Web-site content and infrastructure, and also make sure you don’t infringe on what others own. "It gets tricky if you’re going to conduct international business," says Williams. He tells of a U.S. company using a famous brand name in the states, only to be slapped with an infringement claim when it launched a Web site and discovered someone in another country was already using it. "You need to think about your protection and your intellectual-property rights in other countries."

Privacy and data protection. Privacy questions also demand consideration. For instance, what obligations does a company have to protect the data submitted by customers — foreign or domestic — with their orders? Can it sell this data to a third party with or without the customers’ consent? What are other countries’ rules regarding privacy? Many countries are becoming very active in requiring other countries to follow their directives regarding use of their citizens’ confidential information and in protecting their privacy. The most active group is the European Union, according to Williams. He highly recommends that any U.S. company setting up a privacy policy on its Web site consider complying with the directives of this group.

Given the fact that they're doing business all over the world, Internet-based businesses also must determine how they’ll handle disputes that may occur. Litigating on home soil can be costly, but in a foreign country it can be a nightmare with different rules, language and culture to contend with. Other issues to keep in mind, according to Williams, include contract formation, defamation and obscene materials, anticompetition and unfair trade practices, and export and import laws.

In a nutshell

"Most countries recognize that e-commerce is here to stay, that it's important, and that there is a need to come up with solutions so that people can do business without having all these questions all the time," says Borod. "I think most countries have taken an attitude of not trying to act too quickly, but want to see how things are going and work out solutions."

In the meantime, e-business pioneers need to be mindful of the terrain before they begin their travels.

Sidebar:
Avoid foreign litigation with mediation and arbitration

There’s one thing people setting up an Internet-based business absolutely should do — or risk being caught in a nightmare of foreign litigation: include a mediation/conciliation and arbitration clause in their terms and conditions, and make sure that all potential customers agree to it.

"If a [company] has never been involved in litigation overseas, they have no idea the grief they’re in for," says Peter Costas, an attorney with Pepe & Hazard in Hartford. Whereas the U.S. operates under common law, many other countries operate under civil law, he says. "It’s a whole different ball game. Instead of using judges and juries, they work with magistrates. The proceedings are different and very rule-oriented."

Add to that the cost of participating in a trial overseas. The company would have to bear the expense of transporting witnesses and lawyers, not to mention hiring translators since the trial and pretrial proceedings would likely be conducted in a foreign language. "It can become a very significant expense, both in terms of cost and disruption to the business."

To avoid that scenario, Costas says companies that are setting up e-businesses should draft a highly specific mediation/conciliation and arbitration clause so that if a dispute does arise, all parties agree to have a facilitator help them find a solution, rather than going to court.

With a mediation/conciliation and arbitration clause, you can:

• Specify where to conduct the dispute resolution. You’ll be able to choose a neutral location where the customs and language won’t be a problem.
• Define the skills and background of the individual to serve as mediator or arbitrator, so that you’ll have a knowledgeable person familiar with the subject matter handling the situation.
• Specify the law to be applied (the jurisdiction) to ensure it's clear which sets of laws will be followed.
• Stipulate the time frames for things to be done. And, in the case of mediation, outline the seniority level of those involved.

"You want to make sure you’ve got those provisions in your agreement to keep things to a dull roar," says Costas. "If mediators and arbitrators aren’t in good control of the situation, it can become almost as involved as a trial, take longer and actually be more expensive."

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