sou · GQB3112 · 2003-01-01 00:00:00 — This linked with the fact that electronic documents are much more fragile and transient by na- ture, makes the future very exciting. Looking centuries or mil- ahead and trying to foresee what kind archival of informa- tion we will have access to, one is easily bewildered. It is almost like science fiction, on the lines of books describing the knowledge-based planet , where all data from the Universe are going to be kept, so that civilisation can survive the fall of the empire. ICT in Commerce and Work * Contracting on the Internet – Trends and 1 Anonymity versus community In the childhood of the Internet, many anticipated an open cyber- space where anybody could participate and no one would know who was acting at the other end of the line. Cyberspace was fur- thermore thought to be a lawless Paradise where no legislator or national state could reach out to regulate or punish certain behav- iour. In an open environment it is technically complicated to as- certain the identity of and receivers of electronic mes- sages. And without identity there is no incentive to behave hon- estly, since dishonesty cannot be pinned on a person deserving of punishment. Many feared that the Internet would become a law- less inferno and that doing business on a basis of honesty and trustworthiness would be impossible as long as there were no means of identification and no authority of law. However, we have not seen either the lawless Paradise or the lawless inferno emerging on the Internet. Actually, what is now happening in cyberspace is not dramatic at all – but instead very similar to what we see in the traditional physical world (cyberspace unplugged): We see closed communities where deals are concluded between people who know and trust each other. Not everyone is allowed to participate in these communi- ties. And misbehaving participants are severely punished by blacklisting and/or exclusion from further participation. What I mainly have in mind are closed B2B marketplaces where buyers and sellers in certain products meet to conclude a deal. Another feature of the Internet of today is that, instead of being lawless, it is overloaded with law. Now every national state claims to have jurisdiction over everything that occurs in cyber- space. The national state has proven surprisingly successful in enforcing its regulations against Internet activities concerning its national interests. National states have also been very keen to regulate activities on the Internet. is a member of the IT . entation in 1. In the following I will describe how legislators have responded to these trends on the Internet. I will also try to identify the lessons to be learned from attempts hitherto at regulating e-commerce. 2 The threat of anonymity The fact that persons may act anonymously on the Internet is ex- tremely frustrating from a legal point of view. We may pass thousands of legislative acts stating that promises should be kept, that we are not allowed to lie about each other and that we must not defraud others, but law serves no purpose if there is no prac- tical way of tracking down the law-breakers. Everybody knows that law is not the best guarantor of obe- dience to the norms of society. Instead the most important tool is social pressure. The risk of being branded as untrustworthy by family, friends and business partners is far more effective than any legislation. Our society has gradually become larger and more complex. The expansion of markets has made it increas- ingly difficult to ascertain the trustworthiness of potential busi- ness partners. This, in turn, has made law an increasingly impor- tant supplement to social pressure. When we enter into transac- tions with people whom we do not know and whose reputation is unfamiliar, we trust that they will behave honestly since they do not wish to take the risk of being punished by legal sanctions. If on the Internet we do not know whom we are dealing with and we cannot establish their identity after a deal is made, after a promise is broken, after a lie has been put about, or after we have been defrauded, neither social pressure nor the law will serve as a means of preventing dishonest behaviour. This is indeed a great challenge to law. How can we preserve honesty in a cyberspace where anonymity flourishes? As a response to this anxiety, the technology of digital sig- natures came as . Digital signatures based on the concept of Public (PKI) make it possible to create electronic identification. With the help of a certificate issued by a third party – i.e. someone other than the person who needs to establish someone elses identity – the identity of the of an electronic message can be ascertained. The level of security varies, depending on the technology used, the security routines of the third party or its subcontractors and – most impor- tantly – the means whereby the third party initially identifies the certificate holder. In short, the party needing to identify the of an electronic message can choose to rely, not on the himself, but instead on a third party certifying the identity. Some five or ten years ago many believed that PKI digi- tal signatures would solve the fundamental problem of lack of trust in cyberspace and provide a necessary infrastructure for commercial transactions on the Internet. But it has turned out that digital signatures are not in high demand. There are many reasons why digital signatures are not wide- ly used. First, it has turned out that electronic transactions are not made in the open cyberspace between total strangers. Instead most transactions are made in closed communities where the par- ties trustworthiness is a requirement for access and where the parties have met before and by contract decided how to make future transactions. In such communities there is less need to put trust in a third party that issues certificates and less need for extremely secure identification methods. Second, digital sig- natures are cumbersome to implement since they require that third parties be recognised widely by the users, which has turned out to be quite complicated to achieve in practice. Third, to estab- lish a high level of security with PKI is costly and there are other less secure – but secure enough – methods that can be used in closed communities and are less costly. In closed communities, the high and costly security that the PKI technology provides is not always necessary. 3 How law responds to the threat of anonymity The legislators response to the threat of anonymity is interesting to study. Quite early on in (in 1996) the tice held a hearing and asked business to what extent legislation was needed in relation to digital signatures. Not many found it worthwhile to attend this hearing. The representative of the In- ternational Chamber of Commerce strongly argued against legis- lation and claimed that the market forces would evolve slowly and that it was crucial to preserve flexibility. He said that legisla- tion most likely would prevent development instead of helping business. The persons present at the hearing who argued that leg- islation was needed were mostly technical experts representing the digital signature industry. They argued that people were un- familiar with the idea of electronic signatures and would not dare to engage in electronic transactions unless the legislator explic- itly stated that such transactions were legally valid and had suffi- cient evidentiary value. At that point the Swedish decided that need not take any legislative initia- tives within the area of electronic signatures. In my opinion this was a wise decision, although I must admit that at the time I was surprised that business outside the digital signature industry did not ask for the legislators help. Internationally the approach was different. UNCITRAL (the United Nations Commission on International Trade ) em- barked on a new project in 1997 relating to digital signatures. That work was initially much inspired by the already enacted Digital Signature Act in and the proposed legislation on digital signatures in . There was a heated discussion at the first meeting as to whether legislation on digital signatures was needed and the importance was emphasised of not favouring one technical solution at the expense of others. The US delega- tion strongly questioned whether any regulation was needed. Since the same delegation at an earlier meeting had spoken in fa- vour of regulating digital signatures, this intervention caused some confusion. The UNCITRAL negotiations lasted for four years, and the Model on Electronic Signatures was adopted in 2001. Throughout the negotiations the necessity and purpose of the Model remained a moot point. There was a struggle concerning the extent to which the rules should be tech- nologically and media neutral. The influence from the industry representing certain types of technology (mainly PKI) was very strong. Another discomfort in the negotiations was the slowly emerging awareness among the delegations that the vision of the open anonymous Internet was not coming true with respect to electronic commerce. On Union level there was great eagerness to show that actions were being taken to facilitate electronic com- merce. It was thought that the way to facilitate for electronic commerce was by quickly enacting directives. Un- ion would then be promoting legal certainty and harmonised law within the Common Market. It should come as no surprise to learn that the directives on electronic signatures and e-commerce achieved the exact opposite: legal uncertainty with respect to the legal effects of electronic signatures, disharmony within the Member States since the implementation of the ambiguous direc- tives differs from one to another, and obstacles to technological development and business flexibility, since the di- rective on electronic signatures indirectly favours a particular technological solution (PKI). 4 The threat of closed communities As described above, the anonymity of Internet transactions posed a fundamental threat to society and it was feared that commercial dealings and trade would become impossible in the new elec- tronic medium. However, the markets themselves circumvented this threat. Instead of using high security PKI technique for iden- tification among strangers, markets developed closed communi- ties where it was possible to establish the trust among partici- pants that is necessary for commercial dealings. This initially un- expected development also poses threats, but of a less fundamen- tal nature than the threat of anonymity: a)When commerce is carried out in closed communities there is always a risk of the market forces becoming distorted. If not all potential buyers and sellers are allowed to participate in a market, competition may become inefficient. As we all know, the impor- tance of competition and anti-trust law has increased considera- bly in recent decades, due to the idea that efficient competition is crucial for societies based on a market economy. b)There are concerns that closed communities may become so dominant within their sphere of commerce, that they abuse their dominant position against participants in the marketplace. c)Also within the individual closed community, efficient compe- tition may be distorted by participants manipulating the price- setting mechanism by forming auction rings or by other collusive behaviour. d)Another threat of closed communities is the single individuals inability to conduct business in a situation where he is not al- lowed access or is expelled from the closed community. The in- creasing use of different black-listing and white-listing schemes may severely damage the reputation of individual persons and businesses and in effect prevent them from engaging in Internet transactions. The problem of anonymity on the Internet is to a great extent solved by the closed communities. At the same time, they entail negative implications mainly with respect to questions of effi- cient competition. 5 How law responds to the threats of closed communi- ties Legislators have been much less eager to take action against the threats of closed communities as compared to the threats of ano- nymity. This is not surprising. The threat of anonymity is aimed at the very foundations of society, whereas the threats of closed communities are less severe. Traditional law is fairly well suited to deal with the problems that closed communities entail. There are examples from German and authorities where the transactions carried out in closed Internet marketplaces have been examined from an anti-trust law point of view. But we have not seen any initiatives to specifically regulate the risk of anti-competitive elements in Internet marketplaces as opposed to traditional physical marketplaces. Competition law is media- neutral and thought best kept that way. The challenge for compe- tition law is to harmonise worldwide in order to avoid the prob- lems of determining the law applicable to activities carried out in non-physical marketplaces and ensuring that that law is enforce- able. Many of the other legal difficulties in relation to activities in closed communities are best solved by the marketplace itself by contractual regulation in the Membership Terms and Conditions of . There still remain areas where national law may create obstacles – such as requirements of licensing or form for auc- tions, and approval by authorities for certain types of transac- tions. Another problematic area is mandatory national consumer protection law and its differences between different states, for example as regards the extent to which a consumer is entitled to cancel a deal made by electronic auction. These examples, how- ever, are of minor importance, and will hopefully be sorted out by the slow but inevitable process of gradual harmonisation of law. These are problems which are likely to be solved, not by new legislative efforts, but rather by minor amendments to the existing national law. 6 The lessons to be learned 6.1 Be reactive – not proactive! It was already observed by Aristotle and has been repeated many times since, that a sovereigns possibility of influencing citizens behaviour by legislation is very limited. This is particularly so in the field of private law. The role of legislation in that area is mainly to codify already existing conduct – not to proactively steer behaviour in certain directions. There was, understandably, great concern that the threat of anonymity would make commer- cial dealings in cyberspace impossible. However, the legislators initial attempts did electronic commerce more harm than good. Eagerness to establish legal certainty – to assure the markets that electronic transactions were legally valid – led to favouritism of a particular technology (PKI). The legislator gave the misleading impression that for a transaction to be legally valid it had to be effected by PKI technique. And since business was not prepared to pay for the excessive security and cumbersome administration that this technology entailed, the development of e-commerce ac- tually became slower than necessary. The legislative experiment in relation to electronic signa- tures has taught us a lesson. It is better to be reactive than proac- tive within areas that have not yet matured with respect to busi- ness models, usages, technology and actual practical problems. I agree with the initial approach taken by the Swedish : Let us wait and see if there is any real need for regulating electronic signatures. Let us wait and see if any particular prob- lems or abuse arise before we take legislative action. Let us trust that the general law is able to handle the most urgent and most fundamental issues. If we see a need for particular regulation, we will be able to do something about it in due course. The legislator should not take the lead and try to steer development. It is better to be reactive and take action when there is a real existing prob- lem, than to be proactive and try to foresee the possible problems and regulate before they have come into existence. A proactive legislator may do more harm than good by misleading the citi- zens to believe that there is to a prob- lem that may be solved more efficiently in other ways than the one suggested and regulated by the legislator. The fundamental issue of trust in a marketplace can be re- solved in many ways. It was initially believed that the only way to create trust was to enact legislation on electronic signatures. In the event, however, the markets found other means of establish- ing trust and confidence. The lesson to be learned from this experience it that the role of legislation is not to create trust, but merely to support already existing trust. It is my hope that the present fallacy among businessmen that the PKI technique is essential in order to create legally valid contracts, will soon fade away. I am, however, concerned that this may take many years and in the meantime cause unnecessary investments in a costly infrastructure, as well as slowing down the development of e-commerce. 6.2 Be media neutral! Another lesson to be learned is that the problems in contract law are eternal and exist independently of the medium used to per- form the transactions. The eternal problems are, among others, when and how a contract is formed, and the liability for fraud, mistake and delayed or defective performance. It is not wise to regulate these issues specifically for electronic transactions, since the problems occur in all types of medium used. In the future, it will be almost impossible to distinguish between transactions made by electronic means of communication and others. Trans- actions will to a large extent be a mixture of electronic and non- electronic communication. It would be devastating to have legal regimes addressing the same problem differently, depending on what medium was used to conclude a deal. 6.3 Harmonise law internationally! The third lesson to be learned is that cyberspace is not a lawless inferno or Paradise. At present cyberspace is overloaded with law – which most persons associate more closely with Hell than with Paradise. All national states claim to have jurisdiction at the same time and in parallel in cyberspace. The solution to this problem is to harmonise law worldwide. It makes me very optimistic to see how greatly the efforts and success of international harmonisa- tion of contract law have increased during the past decade. Elec- tronic contracting on the Internet has helped to speed up this de- velopment of harmonisation and is likely to go on doing so. In an interesting new book, in the Attic – Unlocking the hidden value of patent (2001), , chairman of , and highlight the need for corporate strategies aimed at identifying, protecting and commercialising intellectual property rights. Basing their analy- sis on in-depth studies of how major companies such as , , , and have succeeded – or failed – partly as a result of their intellectual property identification and protection strategies, draw the conclusion that there is an enormous potential for companies in maximising their intellectual property right assets. quote , among others, as an example of how an aggressive IP strategy can help in boosting IP-related revenues from $ 15 billion in 1990 to more than $ 100 billion in 1998. On the other hand tell the story of , which in 1960 embarked on a long patent litigation journey aimed at disqualifying Instamatic patents, a litigation which cost more than $ 40 billion and ended in failure. Since the US patent system takes a more liberal attitude to- wards the patentability of business methods and technology, pat- ents form more of a core role in a strategy. In Europe – and – patents will not serve such a central role, due to the fact that the Swedish legislator and Union, and in particular Patent Office and the Swedish Patent and Registration Office, do not have as generous an attitude as the US Patent Office when it comes to affording software and methods patent protection. The same considerations as apply for patents do, however, also apply to other intellectual property rights such as copyrights, trademarks and tradenames, design rights and semi-conductor rights, which, if identified and duly is a member of the IT . tion in 1. is an associate with 's office. He specialises in IT and intellectual property law. Among other things, he has worked as in-house counsel with the Internet consultancy firm where he gained particular experi- ence in analysing companies' possession of intellectual property rights. protected can serve as a major competitive advantage and be of great commercial value. In the course of our daily advising of clients, in particular IT, telecommunication and media clients, we have experienced an increase in the importance of intellectual property rights for a successful market penetration and a method of successfully keep- ing competitors on a distance. In order to be able to give clients qualified advice on the management and strategic handling of in- tellectual property rights, as practising lawyers we have devoted substantial efforts to developing a method for taking an inventory of intellectual property rights, the specifics being that a so-called IPR needs to take all intellectual property aspects into account and that it addresses issues such as multiple and over-lapping protection of intellectual property rights. The result is a computerised database aimed at managing the great amounts of information, which emerge as a result of an IPR . The overall contents of the IPR method will be described in short in this article. The ambition of this arti- cle has, however, primarily been to describe the general issues posed in an IPR and to, very briefly, exemplify the legal issues with examples from different intellectual prop- erty law areas. Finally, the article aims to provide an example of how legal practice today involves extensive use of . 2 Briefly on accounting issues and intellectual prop- erty rights One major reason for the necessity of performing an IPR is that intangible assets in many cases are not visible in a companys balance sheet. Although many voices have been raised, calling for intellectual capital to be made part of the bal- ance sheet, current accounting rules do not provide for intellec- tual capital and least of all for intellectual property rights to be stated in the balance sheet, apart from exceptional cases. Trade- mark rights, for example, may not be entered in the balance sheet at all. Consequently, if no IPR has been per- formed within a company, you will not be able to find any com- prehensive documentation listing its intellectual property assets and visualising their strength. Instead the information, if any, about the companys intellectual property rights is normally scat- tered, and stored in different departments. This being so, an over- all review is often necessary in order for intellectual property rights of interest concerning such a company to be identified. 3 The overall purpose of conducting an IPR gence procedures are normally carried out when one company is about to acquire another. Such procedures are very often performed within narrow time limits and normally are aimed only at identifying certain documentation, whereof intel- lectual property rights form a minor part. The purpose and meth- ods of performing an IPR differ in many respects from due diligence procedures performed in connection with a company acquisition, since the primary aim of an IPR is to ascertain which intellectual property assets exist and which are used, and only at the second stage to establish whether there exists any documentation regarding the intellectual property rights. In a word, our primary objective when performing an IPR could be compared to a financial SWOT analysis1, but this time aiming to: