Sale of Goods and Services
I.INTRODUCTION
A prelude to A Framework for Global Electronic Commerce quotes Vice President Gore as follows: “We are on the verge of a revolution that is just as profound as the change in the economy that came with the industrial revolution.”[1] The revolution to which Mr. Gore refers is the proliferation of the use of the Internet[2] to buy and sell goods and services around the corner and around the worlde-commerce.[3] This prolific growth is fueled by the relative ease of transmitting information nationwide or worldwide, instantly. Ease of use, powerful and effective communications that are interactive and in many instances real-time, and a culture that encourages the use of computers has created the “virtual storefront.”[4] Without question, the Internet is redefining the way that business is done worldwide.[5]
Some have referred to the growth of e-commerce as “exponential.”[6] “Exponential” is an adjective that in only a few, rare instancesbacterial replication, rabbit procreation, and Bill Gates’ net worthhave we historically used to accurately describe numerical growth. Whether electronic commerce should be added to that elite list is yet to be seen, but the growth has been and is expected to remain, exceptional.[7] The Industry Standard estimates that from 1998 to 1999, the number of web users increased 55 percent, while the number of web servers increased by 128 percent.[8] According to Nua, an Internet strategy firm, as of May 1999, 171 million people around the world had access to the Internet.[9] As the number of worldwide users and access portals continue to expand, it appears that consumer confidence in e-commerce providers will follow, thus translating into significant e-commerce growth. Predictions of e-commerce varies greatly, but one sourceDataquest, an Internet research firmpredicts that on-line spending will reach US$12.2 billion globally in the fourth quarter of 1999 alone.[10] Moreover, even optimistic forecasters of e-commerce growth have historically underestimated e-commerce revenue projections by many fold.[11]
The Clinton Administration recognizes the potential economic benefits the Internet and e-commerce present to global commerce.[12] For that reason, the administration proposes that “the legal framework supporting commercial transactions on the Internet should be governed by consistent principles across state, national, and international borders that lead to predictable results regardless of the jurisdiction in which a particular buyer or seller resides.”[13] This paper attempts to investigate how pre-Internet jurisdictional law would resolve the common kinds of conflicts in the post-Internet world. Additionally, it will begin to discuss as a matter of policy, whether the use of pre-Internet jurisdictional law in the post-Internet world is problematic, and, if the use of traditional jurisdictional rules causes policy problems, how the substance of the rules should change to cope with the realities of the new technology.
II.Sale of Goods
A.Traditional Personal Jurisdiction Principles
Analysis of when a seller of goods that causes harm to a plaintiff can be sued in the forum where the harm accrued must begin, of course, with the International Shoe “minimum contacts” standard. However, two additional cases are also of great moment with regard to personal jurisdiction generally and the sale of goods particularly.
In World-Wide Volkswagen Co. v. Woodson, the Court considered the case where World-Wide Volkswagen, a New York dealer and distributor, sold a new Audi in New York to owners, who were subsequently injured in an accident that occurred in Oklahoma, and who brought a product-liability lawsuit in Oklahoma against the dealer and the manufacturer.[14] The Court held that “the foreseeability that is critical to due process analysis is not the mere likelihood that a product will find its way into the forum State. Rather it is the defendant’s conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there.”[15] Since, as the Court found, World-Wide Volkswagen did not “purposefully avail itself of the privilege of conducting activities within the forum State,” the exercise of jurisdiction was unconstitutional.
In Asahi Metal Industry Co. v. Superior Court of California, the Court, in a split decision, considered whether personal jurisdiction would extend to a non-resident where the non-resident had put a product into the stream of commerce that caused injury within the forum state.[16] The entire Court endorsed the two-prong International Shoe testfirst, test to see if the defendant availed itself of the benefits and protections of the forum state and second, determine if the exercise of jurisdiction would be fair and reasonable.[17] The majority held that the exercise of jurisdiction was inappropriate though there was no unified voice on the reasoning.[18] Because the Asahi Court was fractured, its acceptance and application has been varied greatly,[19] but the one rule from Asahi is that simply placing a product in the “stream of commerce” without more does not pass constitutional muster.
B.Traditional Prescriptive Jurisdiction Principles
The pre-Internet sale of goods analysis with regard to prescriptive jurisdiction focused on the principles set out in the Restatement (Third) of the Foreign Relations Law of the U.S.: territoriality, nationality, effects, and protection. In addition, certain international conventions such as the United Nations Convention on Contracts for the Sale of Goods,[20] the Brussels Convention,[21] and the Convention on the Law Applicable to Contractual Obligations[22] were and remain relevant.
1.Territoriality Principle
“The territorial principle is by far the most common basis for the exercise of jurisdiction to prescribe, and it has generally been free from controversy.”[23] The most obvious, and possibly the only, controversy under the territorial principle stems from whether or not a person or property can properly be deemed present in the State’s territory for purposes of exercising jurisdiction.[24] Some States, including the United States, have asserted jurisdiction over goods or technology located abroad on the basis of their origin in the State exercising jurisdiction.[25] In the sale of goods context, to the extent the defendant is not, or has not been, physically present in the forum State, the territorial principle would not confer jurisdiction over the defendant.
2.Nationality Principle
More aptly titled the “nationality, domicile, and residence principle,” this principle permits a State to exercise jurisdiction on the basis of the defendant’s citizenship, domicile, and residence.[26] While this principle plays an important role in other areas of law, such as wills and succession, divorce, and family rights, in the sale of goods scenario the nationality principle does not affect whether the defendant would be subject to a State’s jurisdiction.[27]
3.Effects Principle
The effects principle takes effect when an act committed outside of the territory of a State has, or is intended to have, a substantial effect in the territory of the State.[28] This principle is generally accepted with respect to liability for injury in the State from products made outside the State and introduced into the stream of commerce.[29] The Restatement’s position is that a State may exercise jurisdiction based on effects in the State, when the effect or intended effect is substantial and the exercise of jurisdiction is reasonable under Section 403.[30]
4.Protective Principle
Section 402(3) states the protective principle. The class of offenses that threaten the integrity of the governmental functions are generally espionage, counterfeiting of the State’s seal or currency, falsification of official documents, perjury before consular officials, and conspiracy to violate immigration or customs laws.[31] This principle does not extend to the support application to foreign nationals of laws against political expression, such as libel of the Chief of State.[32] We have found no case where the protective principle was used in the sale of goods scenario to confer jurisdiction.
C.International Conventions[33]
(a)United Nations Convention on Contracts for the Sale of Goods
The CISG applies to contracts for the sale of goods between commercial parties where the parties have places of business in different signatory States[34] The CISG, however, does not address jurisdictional issues.[35]
(b)Brussels Convention[36]
The Brussels Convention applies in “civil and commercial matters whatever the nature of the court or tribunal.”[37] Article 2 provides that “subject to the provisions of the Convention, persons domiciled in a Contracting State shall, whatever their nationality, be sued in the courts of that State. Persons who are not nationals of the State in which they are domiciled shall be governed by the rules of jurisdiction applicable to nationals of that State.”[38] In other words, a person will be sued in the courts of the State where she lives. This also applies to foreign nationals from countries that are not signatories, where the foreign nationals reside in a member State.[39] So, a U.S. citizen domiciled in an EU country is entitled to invoke this protection against a citizen of another EU country.[40]
The Brussels Convention eliminates the “’exorbitant’ national rules on jurisdiction. . . .”[41] Contrary to U.S. jurisdictional law, neither “doing business” by a corporate defendant nor service of process in the forum State is permitted as the basis for the exercise of jurisdiction under the Brussels Convention.[42]
Article 5(1) of the Brussels Convention provides for jurisdiction “in the courts for the place of performance of the obligation in question.”[43] In the French case of Jakob Handte & Co. v. Traitements Mecano-chimiques des Surfaces SA, Handte Deutschland, a German manufacturer, and a Handte France, its French distributor were sued by TMCS, a French company, claiming that a product that it supplied was not suitable for its specific use.[44] The manufacturer disputed the exercise of jurisdiction on the basis of Article 5(1), claiming that there was no contract, and, therefore, there could be no “matter relating to a contract.”[45] The European Court of Justice agreed, concluding that a “matter relating to a contract” was not present where there was no obligation voluntarily incurred by one party in relation to the other, i.e., essentially the contract was not executory.[46]
The ECJ also concluded in Tessili v. Dunlop that the law which governs the obligation in question determines the place of performance of that obligation.[47] Another case decided the same day as Tessili provides that the obligation forming the main basis of the plaintiff’s claim is the crucial obligation for Article 5(1) analysis.[48] Thus, if the buyer brings an action for delivery of defective goods, the place where the seller delivered the goods determines the forum.[49] If, on the other hand, the seller brings an action for the same goods for non-payment, the place where the buyer was obligated to make payment determines the forum.[50]
Clearly, the Brussels Convention, as interpreted by the ECJ is inadequate to resolve disputes regarding sale of goods transactions in cyberspace. How would the ECJ address where the performance occurred in the sale of materials delivered through the Internet? Would the location of the server be considered in this determination in addition to the locations of the buyer and seller? What if an Italian buyer purchased the right to download and view a movie on his computer and the video malfunctions? Where is the place of performance? Was the delivery of the video FOB the seller’s server in Germany? Was it the playing on the buyer’s computer in Italy? Also, could the buyer order his credit card company not to pay due to the defect and force the seller to sue so that the place of performance changes?
(c)Rome Convention[51]
The Rome Convention is considered a “key document for harmonizing choice of laws in Europe,[52]” which is potentially useful to vendors wishing to conduct electronic commerce with residents of signatory States to the convention. Unfortunately, the Convention does not address jurisdictional issues with regarding to contracting parties. Moreover, the Convention does not apply where a member state has joined an international convention on a certain topic,[53] such as the CISG. Additionally, with regard to the sale of goods, it is important to note that the Rome Convention does not apply to consumer transactions.[54] In summary, the Rome Convention does not assist in the resolution of the jurisdictional issues discussed herein
As discussed herein, the U.S. jurisdictional jurisprudence, including that directly related to the sale of goods, began evolving before the advent of the Internet and electronic commerce in response to other technological innovations and advances in transportation and communications. The rate at which the current changes in technology are pacing the development of hardware, software, and even business models for electronic commerce is driving the abundance of jurisdictional cases in the United States in an attempt to apply relatively antiquated legal principles to cutting edge e-commerce transactions.
U.S. courts struggled to apply the standards articulated in International Shoe and its progeny to cases where the basis for the jurisdiction the court seeks to exercise is on-line conduct.[55] Clearly, electronic commerce caused courts to reconsider and modify the International Shoe sliding scale “minimum contacts” analysis.[56] The Zippo decision squarely addresses the use of an Internet Web site, often as a medium for in electronic commerce, but due to its focus on the Internet Web site may not have the inherent flexibility to be applied to the technological innovations that will certainly transform in the coming year the Internet from the World Wide Web that we know today to something we can only imagine.
D.How would Pre-Internet Jurisdictional Law Resolve the Common Kinds of Conflicts in the Post-Internet World?
1.Hypothetical
To assist in the discussion of jurisdiction, consider the following hypotheticals:
(a)Hypothetical 1
S operates a retail and wholesale hardware store in jurisdiction X. Virtually all of S's retail sales are to customers in jurisdiction X or Y who come to S's retail site. S does not do mail order sales and does not have a mail order department. S operates only at the X site.
S is a major distributor for the products made by ElectroCo (“E”). Two of the most popular E products which S distributes are the Electromow and the ElectroPerk. The Electromow is an electric mulching lawnmower. The ElectroPerk is a high tech, very expensive automated coffeepot. S is the only distributor of Electromows; S has the worldwide exclusive right to distribute the Electromow and E does not do any distribution at all.
S's wholesale business consists of selling to brokers, who then resell the goods to retailers. S’s wholesale business accounts for 25% of S's total sales. S deals with various brokers, several of whom S is aware sell throughout the world. Contractually, all of S's wholesale sales are fob its store in X to brokers. Occasionally, the brokers have S deliver directly to their customers, who are retail department and hardware stores in other jurisdictions, though most of the time, S delivers to the brokers' warehouses, which are located in X and Y.
S contracts with AOL to post advertisements on the Internet. S uses this Internet connection for sales at which special prices are given for selected merchandise. This is the sole use that S makes of the Internet. S posts advertisements regularly with AOL for the Electromow.
B, who resides in jurisdiction Z, subscribes to AOL. Several weeks later, while in a department store in Z, B purchases an ElectroPerk coffeepot for $1000.00. B has not seen the advertisements for the Electromow on the Internet.
The ElectroPerk, for which B paid $1000, not only will not make coffee, but also malfunctions and destroys the electrical system in B’s house. B brings an action against S for breach of contract in Z. S appears specially to contest the Z court’s exercise of jurisdiction.
Hypothetical 1(a): All the same facts, except that S maintains its own Web site on which it posts advertisements for its merchandise and periodically general statements of reductions in the prices for certain models, although there is no coordination or communication about these reductions between S and brokers and retailers.
Hypothetical 1(b): All the same facts as 1, except 200 residents of Z, B’s home jurisdiction, have “hit” S’s Web site.
(b)Hypothetical 2
S posts an advertisement for an electric mulching lawnmower, the Electromow, with AOL. The advertisement states that the Electromow is a “powerful self-propelled electric mulching mower.” B, who resides in jurisdiction Z, observes the Electromow advertisement on AOL. It appears to be perfect for B's lawn. B then goes to a retail department store which sells Electromows in Z and purchases one there.
The Electromow is a very poor mower. It is so underpowered that it will not cut grass which is more than one inch high. It can be easily established that the standard in the industry is that mowers generally must be able to cut grass that is two inches high, and the description of “powerful” in the industry is used generally for mowers that will cut grass which is three inches high. In addition, in the industry, the sale of any mower which will not cut grass that is at least 1 inch high is not acceptable.