Chapter 7 The Environment of Electronic Commerce: International, Legal, Ethical, and Tax Issues

International Nature of Electronic Commerce Any business that engages in electronic commerce potentially becomes an international business When companies use the Web to create a corporate image, or build a community, they are automatically operating in a global environment Customers ’ inherent lack of trust in ‘ strangers ’ on the Web is logical and to be expected –Businesses on the Web must find ways to overcome this well- founded tradition of distrusting strangers –Business trust is an important success factor in attracting customers

International Nature of Electronic Commerce Businesses engaging in electronic commerce must be aware of the differences in language and customs that can create barriers The barriers to international electronic commerce include language, culture, and infrastructure issues –The only way to do business effectively in other cultures is to adapt to those cultures –The first step to reach foreign customers is to provide local language versions of a Web site –This may mean translating the Web site into another language or regional dialect

Language Issues About 70% of the content available on the Internet today is in English –More than 50% of current Internet users do not read English –The most-used non-English languages for U.S. companies are Spanish, German, Japanese, French, and Chinese One approach is to have a Web server that can detect the default language setting of the browser and automatically redirect the browser to the set of Web pages created in that language Another approach is to include links to multiple language versions on the home page –Firms that provide Web page translation services include Alis Technologies, Berlitz, Rubric, Ltd., ScanSoft, Transparent Language, and Worldpoint Interactive –Idiom Technologies sells software that automates the process of maintaining Web pages in multiple language versions

Cultural Issues The combination of language and customs is often called culture On the Web, designers must be very careful when choosing icons that represent common actions –Colors or Web page design elements can be troublesome. –A site that strongly reflects a cultural design preference is the Bol.com, which is an online bookstore for several different countries Softbank has devised a way to introduce electronic commerce to a reluctant Japanese population Some parts of the world have cultural environments that are extremely inhospitable to electronic commerce initiatives The People ’ s Republic of China and Singapore are wrestling with the issues presented by the growth of the Internet as a vehicle for doing business

Infrastructure Issues Internet infrastructure includes the computers and software connected to the Internet and the communications networks over which message packets travel Regulations in some countries have inhibited the development of the telecommunications infrastructure or limited the expansion of that infrastructure –Local connection costs through the existing telephone networks of many countries are very high –This can have a profound effect on the behavior of electronic commerce participants –OECD statements have provided guidance for businesses and government to support international electronic commerce –In 1998, business and government leaders in several European countries began pushing for flat-rate telephone line Internet access charges The information flows can be very complex for international trade transactions Companies, such as NextLinx, ClearCross, and MK Technology sell software designed to automate much of the international trade process

Infrastructure Issues

The Legal Environment of Electronic Commerce Businesses that operate on the Web must comply with the same laws and regulations that govern the operations of all businesses. –The Web extends a company ’ s reach beyond traditional boundaries, thus it faces many more laws than before. The Web increases the speed and efficiency of business communications. –Web businesses that violate laws can face rapid and intense reactions from many customers. Territorial borders in the physical world serve a useful purpose in traditional commerce. –In the physical world, geographic boundaries almost always coincide with legal and cultural boundaries. –The relationship between geographical boundaries and legal boundaries can be discussed in terms of four elements: power, effects, legitimacy, and notice.

Relationships Among a Society ’ s Culture, Laws, and Ethical Standards

Power Power, in the form of control over physical space and the people and objects that reside in that space, is a defining characteristic of statehood –Effective law enforcement requires power –The ability of a government to exert control over a person or corporation is called jurisdiction –The level of power asserted by a government is limited to that which is accepted by the culture that exists within its geographic boundaries

Effects & Legitimacy Laws in the physical world are grounded in the relationship between physical proximity and the effects of a person ’ s behavior –Government-provided trademark protection is a good example The characteristics of laws are determined by the local culture ’ s acceptance of or reluctance to various kinds of effects Most people agree that the legitimate right to create and enforce laws derives from the mandate of those who are subject to those laws Legitimacy is the idea that those subject to laws should have some role in formulating them

Notice The physical boundary, when crossed, provides notice that one set of rules has been replaced by a different set of rules Borders provide this notice in the physical world The legal systems of most countries include a concept called constructive notice

Jurisdiction on the Internet Jurisdiction is more difficult on the Internet because traditional geographic boundaries do not exist –Thus, power effects legitimacy –People or corporations that wish to enforce their rights based on either contract or tort law must file their claims in courts with jurisdiction to hear their case Subject-matter jurisdiction is a court ’ s authority to decide a particular type of dispute –In the U.S., federal courts have subject-matter jurisdiction over issues governed by federal law –State courts have subject-matter jurisdiction over issues governed by state laws

Jurisdiction (cont.) Personal jurisdiction is determined by the residence of the parties –One way that people voluntarily submit to a jurisdiction is by signing a contract that includes a statement known as a forum selection clause –Businesses should be aware of jurisdictional considerations when conducting electronic commerce over state and international lines The exercise of jurisdiction across international borders is governed by treaties between the countries engaged in the dispute –Jurisdictional issues are complex and change rapidly –The John Marshall Law School ’ s Center for Information Technology and Privacy Law Web site is a good source of cyberspace law

Online Resource for Cyberspace Law

Contracting and Contract Enforcement in Electronic Commerce Any contract includes three essential elements: an offer, an acceptance, and consideration –The contract is formed when one party accepts the offer of another party. –Contracts are a key element of traditional business practice and they are equally important on the Internet; they can occur when parties exchange e- mail messages, engage in EDI, or fill out forms on Web pages In general, contracts are valid even if they are not in writing or signed –A signature is any symbol executed or adopted for the purpose of authenticating a writing –It is reasonable to assume that a symbol or code included in an electronic file would constitute a signature –The U.S. now has a law that explicitly makes digital signatures legally valid for contract purposes, the eSIGN Act of 2000

Warranties & Contracts on the Web Any contract for the sale of goods includes implied warranties –Sellers can avoid some implied warranty liability by making a warranty disclaimer –To be legally effective, the warranty disclaimer must be stated obviously and must be easy for a buyer to find on the Web site A contract is formed when an offer is accepted for consideration –Problems can arise in electronic commerce since the online nature of acceptance can make it relatively easy for identity forgers to pose as others –Digital signatures, however, are an excellent way to establish identity in online transactions

Terms of Service Agreements Most Web sites have stated rules that visitors must follow, although few visitors are aware of these rules –If you examine the home page of a Web site, you will often find a link to a page titled “ Terms of Service ”, “ Conditions of Use ”, “ User Agreement ” or something similar –These contracts are often called terms of service (ToS) agreements

Web Site Content A number of other legal issues can arise regarding the Web page content of electronic commerce sites, including: trademark infringement deceptive trade practices regulation of advertising claims defamation

Copyright, Patents, & Trademark Infringement A copyright is a right granted by a government to the author or creator of a literary or artistic work Creations that can be copyrighted include virtually all forms of artistic or intellectual expression: books, music, artworks, recordings (audio and video), architectural drawings, choreographic works, product packaging, and computer software A patent is an exclusive right to make, use, and sell an invention that a government grants to the inventor –To be patentable, an invention must be genuine, novel, useful, and not obvious given the current state of technology The owners of registered trademarks have often invested and developed their trademarks –Web site designers must be very careful not to use any trademarked name, logo, or other identifying mark without permission

Defamation A defamatory statement is a statement that is false and that injures the reputation of another person or company –If the statement injures the reputation of a product, it is called product disparagement –Web site designers should be especially careful to avoid potential defamation liability

Deceptive Trade Practices If the Web page objects being manipulated are trademarked, these manipulations can violate the trademark holder ’ s right Trademark protection prevents another firm from using the same or a similar name, logo, or other identifying characteristic in a way that would cause confusion

Advertising Regulation In the U.S., advertising is primarily regulated by the Federal Trade Commission Any advertising claim that can mislead a substantial number of consumers in a material way is illegal under U.S. law Other federal agencies have the power to regulate online advertising in the U.S. including FDA, BATF, and DOT

Web-based Crime, Terrorism, and Warfare The Internet has opened up many possibilities for people to communicate and get to know each other better –The Internet has also opened doors for businesses to reach new markets and to create opportunities for economic growth –It is sad that some people in our world have found the Internet to be a useful tool for perpetrating crimes, advocating terrorism, and waging war Crimes on the Internet includes online versions of crimes that have been undertaken for years in the physical world, including theft, stalking, distribution of pornography, and gambling –Many Internet security experts believe that we are at the dawn of a new age of terrorism and warfare that could be carried out or coordinated through the Internet A considerable number of Web sites exist today that openly support or are operated by hate groups and terrorist organizations

Ethical & Web Business Policies Companies using Web sites to conduct electronic commerce should adhere to the same ethical standards that other businesses follow –In general, advertising on the Web should include only true statements Ethical considerations are important in determining advertising policy on the Web Often times legal practices on the Web can be perceived as unethical –For example, eBay removed the sale of firearms from its site, even though it was legal, in an effort to present a better overall image to its customers

Privacy Rights and Obligations The issue of online privacy is continuing to evolve –The Electronic Communications Privacy Act of 1986 is the main law governing privacy on the Internet today –A more recent law is the Children ’ s Online Privacy Protection Act of 1998 Ethics issues are significant in the area of online privacy because laws have not kept pace with the growth of the Internet and the Web

Communications with Children A special set of privacy considerations arise when Web sites attract children Countries define “ child ” differently from others – there are many classes of “ non-adults ” The complicated nature of age-appropriateness confuses laws and ethics for Web sites that aim to interact with children, such as Disney.com

Taxation and Electronic Commerce Companies that do business on the Web are subject to the same taxes as any other company –A Web site maintained by a company in the U.S. must pay federal income tax on income generated both inside and outside of the U.S. Most states levy a sale tax on goods sold to consumers. A sales tax is subject to where the customer is located, the law of jurisdiction and tax rate, and the taxable status of the customer The Internal Revenue Service is the U.S. government agency charged with administering the country ’ s tax laws