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The new economy
are rules irrelevant?

Ubiquity, Volume 2000 Issue December, December 1 - December 31, 2000 | BY Daniel W. Uhlfelder 

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Federal Trade Commission Chairman Robert Pitofsky, when commenting on antitrust laws and B2B exchanges, provides insight into one of the current challenges of the law in the new economy, maintaining relevancy:

"B2B is just one illustration of the general challenge we face in dealing with high tech. And if I were to reduce that challenge to a sentence, it is: Protect the marketplace, and don't undermine the incentives for innovation. And that is what this is about. The incentives for innovation seem to be very important in this area. On the other hand, you don't want people taking advantage of the fact that claiming that 'Well. We're high tech. The antitrust laws don't apply to us.' That is not an acceptable defense."

Security, Internet taxation, electronic signatures, privacy, copyright, minority, small business development, and contract formation in cyberspace: These are just a few of the important legal issues members of the new economy are going to face. Because governing bodies and courts of law cannot move fast enough to keep up with the technological innovations that are taking place, members of our community will have to work together to figure out the best way to move along the path to an enlightened and reasoned new economy.

As governments and universities rapidly move to using e-commerce solutions for their services it is important for them to be able to move in a manner that is reasonable, informed, and of course legal. This will mean that laws need to be looked at again, changed, and updated. Legislatures and university rule-making bodies should not rush to legislate in an effort to keep up with technology. Only reasoned and informed rules and laws will help.

Obviously we should be comforted by the fact that rules and laws are not new to us. Since the beginning of human existence, human beings have followed and been guided by canons, rules, commandments, and laws. Whether it is the Ten Commandments, rules of human nature, the Magna Carta, the Bill of Rights, or the Constitution, human beings have been required to abide by certain rules or edicts. We are taught at a young age to respect our adults, eat with our mouths closed, be kind to our neighbors, eat lunch at a certain time, etc. We have been taught from the moment we leave the womb that failure to abide by rules will result in negative consequences. However, we are human and imperfect.

What is new to us at this point in time is the way in which technology and the Internet have sped up the way laws and rules need to be reexamined to ensure people are protected.

Rules, whether logical or correct, have guided human behavior because the consequences of not abiding by these rules would result in punishment, whether it is in the form of a scolding, financial punishment, or at the extreme criminal sanctions. The consequences for breaking rules vary from family to family, region to region, country to country. For example, the death penalty is legal in some states, illegal in others. The death penalty in some countries is handed out for illegal drug use, while illegal drug use in some places is legal. Gambling is legal in Nevada, but not across the border in California.

Members of the new economy community are embarking on an exciting and new venture at a very historical point in time. Nowhere, and never so fast, will rules and laws be broken, changed, ignored, reexamined, or amended as fast and as abruptly as in the current age of the Internet. Issues of jurisdiction and choice of law are especially important in the current era with regard to many issues including Internet taxation, because the location for where causes of action can be brought, and which laws apply is so difficult, if not impossible, to determine. The inability to establish which state's tax law would apply to sales over the Internet is one of the main reasons for the current federal moratorium on Internet taxation.

The Internet breaks down legal boundaries like no other technological or historical phenomenon in the history of the world. Currently, a 10-year-old kid in Florida can log on to the Internet and bet $100,000 on a football game on an Internet site based in Antigua. Three guys who started the World Sports Exchange figured that since gambling is legal in Antigua, why not let American customers set up accounts in Antigua and wager over the Internet? Since the betting transactions take place entirely inside their Internet server -- which is located in Antigua -- how could the U.S. Government possibly object? As one can imagine, these guys have made a ton of money. Despite the fact that most international rules condone gambling, many humans love to gamble. The guys who started the company actually made their start in America's favorite form of legalized gambling -- in the trenches of the major stock markets. They hired the top legal and consulting firms prior to starting their company, and were assured that the company was completely legitimate.

The World Sports Exchange was recently rudely awakened to the fact that the U.S. Government disagrees and is prosecuting the members of the company. One founder is facing up to 21 months in federal prison and a $5,000 fine, while the other two probably will never return to the United States. Antigua's attorney general has no plans to extradite the company's personnel. They are continuing to make their fortunes on the beaches of Antigua. In the two and a half hours it took the U.S. District Court Judge to sentence the offender, the Website took in seven times the $5,000 fine in bets on the NY Yankees/Oakland A's game alone, a fraction of the tens of thousands of dollars worth of Internet bets placed with World Sports Exchange that day.

They are not the only company or individuals who will be facing the ultimate sanction for violating criminal laws by engaging in criminal behavior over the Internet. Criminal and civil laws are being introduced at a record pace to attempt to keep pace with the Internet.

Companies in the United States have made enormous profits and later had those profits dwindle due to civil and criminal prosecution. One need only look at the longstanding fight that Microsoft is embroiled in to see the enormous effect government prosecution can have on the economic success of a company. While the prosecuting party does not necessarily have to be right in the end, the threat of criminal or civil liability can cause serious economic consequences for corporations. It also has the effect of diminishing the public trust. Companies and schools that recognize the importance of productive interaction with governments and law-making bodies will benefit in the long run.

The major problem is that the Internet is connecting the world in personal and business manners, and the world obviously does not abide by the same sets of laws. The Internet moves a million times faster than state, national, and international law-making bodies. Someone with a great Internet idea that will make money, but may be legally questionable could take a calculated risk to violate the law to make a quick buck and skip out of the country. By the time the authorities are able to determine that a law may have been violated, move to prosecute, move to get the violator, it can be too late.

For example, the Securities and Exchange Commission announced last month that it had nailed a teenager for using Internet message boards to manipulate stocks, pocketing gains of $272,826. While it forced the teenager to disgorge $285,000, including interest, he actually made about $800,000 trading small-company stocks -- meaning he kept more than $500,000 in profits. Had this teenager learned his lesson about the dangers of violating the law? He probably did not learn the lesson the government wanted him to learn.

There are a number of rights that are being violated every second of every day in large part because of technology: privacy, copyright, antitrust, security, and property ownership to name a few. The various entities responsible for prosecuting laws will catch only a small fragment of liable parties. Most of the behavior is not even necessarily actionable. For example, if your employer opened your mail or tapped your phone, he would face criminal sanctions in the United States. But online, that is exactly what's happening all the time.

The problem with the Internet is that it allows people who have ill intentions, or even intentions that may not be illegal or ill-advised, who take advantage of certain faults in human nature, to go practically unnoticed or unpunished.

The goal of society will continue to be, as it has been from the beginning of time, to reign in the faults of those who may prey on others, and to ensure that there is some rule of law that will dictate what is right or wrong. Unfortunately, most of the time in this new economy those who have tools and wherewithal to violate the rule of law will probably get away with it.

It is the challenge to work together to ensure that there is a sense of law and order in the new economy, so that, even if it is not necessarily illegal or wrong to, say read an employee's email or prey on the naivete' of an unsuspecting person, to not do it. Government will and can only do so much. The rest is up to us: Whether we meet this challenge is still up in the air. The Internet is an enormously valuable tool, which can increase learning, productivity and efficiency. Hopefully, its good qualities will continue to far outweigh the dangers.

However, in the end, it is crucial to recognize that while rules and laws are important, the new economy will develop in the most reasoned manner through the common sense efforts of its community, not necessarily through legislation.






Daniel W. Uhlfelder is the director of Business and Regulatory Affairs at HigherMarkets, where he is responsible for business development and running the legal department. He is also the editor of Law Watch and has worked in all branches of the federal government, including as staff aide and law clerk in White House. He may be reached at duhlfelder@highermarkets.com

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