1. Introduction
Cyberspace created a revolution in the standard principles of finding jurisdiction over business transactions. Legal authorities and law-makers have been spending enormous amounts of time planning new forms of reducing the jurisdictional discrepancies brought by Internet-based relations.
Not surprisingly, the securities market, which has always been dependent on information technology and has always absorbed the ultimate and most advanced means of communication, currently raises one of the most interesting jurisdictional questions when securities transactions are carried out through cyberspace.
Nowadays, Internet securities trading gives individual investors far greater speed and independence to conduct transactions. This increased automation of the securities trading system provided by the Internet tends to significantly reduce the participation of the investor, and his or her physical presence or power of decision in the future may not from now on play a very important role in this industry. Also, computer-programming tools and cyber-robots are currently being developed to implement a full search in the cyberspace securities environment seeking for the best products, and even conclude transactions. The human involvement is likely to drastically diminish in the securities transactions.
On the other hand, questions of jurisdiction over business transactions have always relied on the concepts of physical location or personal intention. Internet-based transactions, thus, have severally confronted these concepts in the last years and some new principles and concepts of jurisdiction, especially those applicable to cybersecurities transactions, must now be discussed.
The purpose of this paper is, thus, to analyze how unimportant the investor’s physical location and personal intention can be in some of the potential online practices of the securities markets, how these practices may affect the standard principles of finding jurisdiction over business transactions, and how the current legal framework may be adjusted in order to accommodate such potential practices.
2. The Internet Phenomenon and the Current Legal Framework
The Internet, the computer super-network connecting millions of people all around the world, has been posing many legal issues that require law-prescribing authorities to address new situations in an unprecedented extremely short time frame.
New spheres of human relations are created every day through the Internet. Original means of transacting business, transmitting text, pictures, sound, and moving images are made at an enormous speed. [1] As a reflection of this Internet phenomenon, the communications industry is growing and changing faster than ever.
Each minute, more than five million e-mail messages are now being sent around the world; while it took more than one hundred years to install the first 700 million telephone lines, in less than 15 years the next 700 million will be installed - 300 million in China and India alone - and there will be 700 million new wireless subscribers; within the next two years, one thousand new communications service providers are forecast to be established worldwide. [2] In recent years, the numbers of computers and users connected to the Internet have skyrocketed as well. Today, there are nearly 260 million users internationally with Internet access [3], and forecasts project there will be more than 765 million users by 2005. [4]
The current legal framework attempting to regulate this huge transformation, on the other hand, is still in its infant stages. This is mostly due to the fact that these advanced electronic communications have been undermining the geographic boundaries that traditionally support the law of jurisdiction.
In an attempt to find a global solution for this jurisdictional problem raised by Internet-based transactions, authors around the world have different ideas and proposals about how cyberspace should be conceived by legal authorities. Some authors as David Johnson and David Post understand that cyberspace should be regarded as an independent environment that would need a new set of laws, not just an adaptation of existing laws. As they outlined, "a new boundary, made up of the screens and passwords that separate the virtual world from the ‘real world’ of atoms, emerges. This new boundary defines a distinct cyberspace that needs and can create new law and legal institutions of its own." [5] Other authors, in contrast, understand that cyberspace is simply a new means of communication and can be perfectly regulated through the adaptation of the current legal framework applicable to business transactions. [6]
The ideas developed in this paper rely on this latter approach, which appears to be more feasible in regard to online trading. In view of the traditional adjustment of the regulated markets in light of changing technologies, and the legal authorities’ urgency in having new transactions regulated (with special concern to the securities market), it seems more practicable to seek a transformation of the current legal framework rather than implementing a brand new set of rules attempting to regulate an isolated market environment.
Governments and legal authorities have already recognized that cyberspace, either as a place, a means of communication, or a technological state of mind, has been a support for several different kinds of business transactions, and has reached an irreversible highly developed stage. In response, legislators now have been slowly devising a new approach to online transactions by modifying the existing legal structure to accommodate Internet-based relations.
The United States Government, for example, by recognizing the potential economic benefits of the Internet and the e-commerce component of the global commerce, proposed that "the legal framework supporting 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 sellers resides." [7]
However, the harmonization of this legal framework among many different States, as intended by the U.S. Government, is not easy to achieve. The impossibility of defining the precise nature of cyberspace will mean that this adjustment of rules will develop separately from legal doctrine tied to territorial jurisdictions. In this particular sense, it is hard to disagree with some of the conclusions manifested by Johnson and Post when they state that such rules will govern a wide range of new phenomena that have no clear parallel in the non-virtual world. They will function as law by defining legal personhood and property, resolving disputes, and crystallizing a collective conversation about core values. [8] This intended global coordination of the rules to be applied to the cyberspace environment requires, thus, a brand new approach to the traditional way of law-making.
This fuzziness of cyberspace’s location has already led the United States Supreme Court to recognize, that "[t]aken together, [the tools of the Internet] constitute a unique medium known to its users as ´cyberspace´, located in no particular geographical location but available to anyone, anywhere in the world, with access to the Internet." [9]
3. The New Jurisdictional Challenge
Law-makers around the world are facing the paradoxical challenge of implementing a legal infrastructure that can provide certainty and predictability for something that today seems more likely uncertain and unpredictable, the boundaries and architectures of cyberspace. Attaining this goal, however, is mandatory if electronic commerce is to become an irreversible market force.
In reality, by establishing an unprecedented technical structure that confronts geographical boundaries, cyberspace is forcing a modification in old legal paradigms. For example, traders established in one State can have their Web site accessible to computers in other States. Any person connected to the Internet may access this site. Therefore, traders are capable of being subject to the rules of numerous distant and nearby jurisdictions, including those with whom they never intended to do business. Activities that previously had only local reach may now have global effect. Contracts can be executed, and goods and services may be advertised, bought, and sold over the Internet. Products and services may be delivered through traditional means, or entirely through the Internet. The novel structure affects consumers since there are no signposts to inform the consumer that they have moved from one jurisdiction to another. Traders and consumers are often unaware of each other´s physical location. [10]
In order to best understand the jurisdictional dilemma with the Internet, imagine an individual (the "web page creator") who develops a home page on his home computer located in State A and uploads the home page to his server, making it freely available on the Web. Next, another individual in State B (the "surfer"), while on the Internet, locates the address of the web page creator’s home page and downloads the web page onto his computer. Seeing some content that he does not like, the surfer alleges that the web page creator’s home page has infringed on his rights in some way and sues the web page creator in a trial court in State B. Is there a sufficient basis for the courts of State B to exercise personal jurisdiction over the web page creator?
The solution of this jurisdictional dilemma depends on how the Internet operation is viewed by the legal interpreter. Courts all over the world, as well as scholars, distinguish the operation of the Internet under different archetypes [11] that lead to different approaches to jurisdiction.
The first archetype sees the Internet as an interconnected web of computers in which the user can interact with any other point through many different combinations of interconnecting lines and each point on the web is also physically connected to the user´s computer. Cyberspace is, under that view, considered "omnipresent". That is, the content placed on the Internet is simultaneously present at each and every point on the web. Courts following this view see the user´s posting of content on the Internet as establishing the user´s presence in every forum where the Internet is available.
The second archetype takes the view that any material placed on the Internet by the user and the user’s own presence can only be in one place at any given time. Each server is also associated with its particular physical location. Under this view, an user travels from a physical location of one server to the physical location of another server when communicating through the Internet. Judicial decisions following this view would rely on the location of an individual or his server, and verify from which party the contact was made, in order to determine whether the exercise of personal jurisdiction would be proper. However, there will be situations when this "single point presence" view will lead to exercise of personal jurisdiction over a nonresident defendant.
The third archetype proposes a nonterritorial view, under which cyberspace is part of a "virtual reality" not related to a physical world and, consequently, not connected to a particular jurisdiction. Under this view, an individual connected to the Internet is really nowhere for the purposes of personal jurisdiction. Decisions supporting this view would have to determine if any of the alleged acts of the defendant fell outside of the scope of the Internet, and then apply the conventional test for personal jurisdiction to those claims. Note that this view has not been specifically applied by a court, but is a theory advanced by scholars and proponents of a separate area of law governing the Internet. [12]
At a first glance, the first archetype (omnipresent cyberspace) would seem more likely to accommodate online securities transactions, especially in view of the prospective globalization of securities trading, as better commented below, from and to any point in the world. However, as a highly complex market, the securities market will probably require a more immediate solution for this jurisdictional dilemma, which must be reached by means of transactional measures. Cyberspace, at least for the securities market environment, is more likely to be regarded as a means of communication and, only as so, will be able to undermine jurisdictional problems.
The judicial decisions on cyberspace jurisdiction matters so far have manifested both the interpretations of the "omnipresent cyberspace" and the "single point presence" view. However, while the omnipresent cyberspace view has been followed by a number of courts, [13] it has been criticized on the basis that it would be "tantamount to a declaration that this Court, and every other court throughout the world, may assert personal jurisdiction over all information providers on the global World Wide Web" based on an Internet web site alone [14].
However, the courts also manifest different approaches. The manufacturer of Zippo lighters, Zippo Manufacturing Co., sued an Internet news service which had registered the domain names "zippo.com", "zippo.net", and "zippo-news.com." Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997). The Court held that jurisdictional questions on the Internet should be considered on a sliding scale, with passive sites that merely post information at one end (the end least appropriate for asserting jurisdiction), and more interactive sites over which business is conducted at the other end (where jurisdiction is appropriate). In addition, the Court noted that it was more appropriate to assert jurisdiction when the activity alleged to confer jurisdiction is also the activity about which the lawsuit is concerned. Based on this reasoning, the Court found that it was appropriate to assert jurisdiction over Dot Com, because it had actually conducted business with thousands of Pennsylvania residents. [15]
As seen, there is still a conflict between courts as to which is the proper characterization of interactions on the Internet. Until this discrepancy is resolved, individual courts are essentially free to follow whichever view is deemed appropriate for the controversy at issue.
4. A Different Approach for Highly Regulated Markets - Securities
There is no doubt that the reduction of uncertainty is critical to the development of an efficient and effective legal system that can accommodate electronic commerce, but jurisdictional questions involving cyberspace must be individually considered for each of the different areas of substantive law that are most commonly implicated by electronic commerce. In this sense, one single jurisdictional analysis would not fit all types of cyberspace transactions, which deserve to be independently analyzed at greater length.
Highly regulated markets, such as the securities market, are more likely to accommodate a common set of cyberspace-related legal standards, rather than the less regulated markets, in view of the similarity of their functioning around the world. In most of the stock exchanges, members, or stock brokers, buy and sell for themselves or for others, charging commissions for their services. Generally, a stock may be bought or sold only if it is listed on an exchange, and it may not be listed unless it meets certain requirements set by an exchange’s board. By providing a centralized, ready market for the exchange of securities, stock exchanges all around the world greatly facilitate the financing of business through flotation of stocks and bonds. Today, a large percentage of stocks are traded through such over-the-counter organizations as Nasdaq (National Association of Securities Dealers Automatic Quotations) and its European equivalent, EASDAQ. Through these organizations, many securities not listed on a major stock exchange may be traded by dealers using computer and telecommunications technology.
Computer-driven trade has been significantly affecting stock exchanges all around the world. Computer and telecommunications technology, besides opening a wide market in over-the-counter dealings, has also given rise to trading on an international level. Personal computers and modems allow trading to occur around the clock (after-hours NYSE and Nasdaq trading began in 1999), and the securities trading on one major stock exchange can now significantly affect the trading on others. Many already contend that the traditional manner of trading will eventually become obsolete. Technology also now allows for "day trading," a high-risk business in which numerous computerized trades are made during a single day, with large gains (and large losses) possible.
As seen, not only do most of the securities markets around the world have a common set of procedures, but they also seem to be equally receptive to new means of communications and computer-based transactions. As a consequence of this similarity of functioning and acceptability to new communications tendencies, the question of whose laws to apply to the global Internet securities market becomes simpler than it appears at first glance.
The most recent solutions presented for jurisdictional questions pertaining to highly regulated industries, such as the ABA’s Project [16], suggest the execution of a global agreement among nations’ regulatory authorities regarding either the uniform application of laws, rules and regulations to the provision of such products and services offered in a global electronic environment.
In a near future markets around the world will start interconnecting to each other, generating what is called today as an emerging global marketplace, where physical locations of buyers’ and sellers’ residences shall have much less significance. This circumstance will better define the jurisdictional aspects of Internet-based transactions in securities, including issuing and trading in securities and the use of cyberspace in complying with informational requirements imposed by securities laws.
An emerging global marketplace basically involves cross-border trading, which presents a host of complex issues including market structure, listing and disclosure standards, and enforcement. Interest in cross-border trading continues to expand rapidly. Before the development of the Internet and on-line trading, institutional investors generally had direct access to foreign broker-dealers. U.S. retail investors wishing to purchase a foreign security, however, had to place an order with a U.S. broker, who would transmit the order to a foreign affiliate or other foreign broker-dealer for execution. The U.S. broker-dealer was required to book the trade and retain responsibility for all aspects of the trade. Today, however, investors are impatient with the slowness and expense of this approach. They do not understand why they cannot trade in markets they can access through their personal computers. [17]
The Securities and Exchange Commission (SEC) already attempted to deal with the issue of foreign market access issuing its Regulation of Alternative Trading Systems (Regulation "ATS"). This regulation proposed three non-exclusive approaches aimed at protecting U.S. investors from less stringent foreign regulation without unduly impeding trading in foreign markets: (1) a mutual recognition approach for countries with regulation "comparable" to that of the United States, (2) an exchange regulation approach requiring U.S. registration as an exchange, and (3) an access regulation approach for entities providing U.S. investors with foreign market access. The general industries and commentators‘ reactions with regard to this new regulation so far have been diverse. Some commentators suggested that U.S. institutional investors and retail investors should have direct access to foreign markets. Not surprisingly, most foreign exchanges and foreign associations supported an approach based on mutual recognition of home country regulations.
The lack further regulatory action on this issue has not deterred industry action. Spurred by competition as well as the SEC’s apparent "deferral" of action, numerous alliances have been proposed among international securities exchanges. The London Stock Exchange PLC and the Deutsche Boerse AG are considering a merger that would result in a new London-based entity, International Exchanges or iX. Initially, iX will list only U.K. and German securities, although it plans to list other foreign securities in the future.
These alliances have not really advanced efforts to create a global marketplace either. Rather than adopt a single shared regulatory structure for iX, regulatory responsibility will be split between the United Kingdom and Germany. iX blue chip securities will be traded on the London Stock Exchange subject to LSE regulation, and the growth or "tech" stocks listed on the Deutsche Boerse will trade subject to Frankfurt’s regulation. Other shares will trade on their existing national markets. Not to miss a competitive opportunity, Nasdaq and the NYSE have also jumped into the foreign market fray. Nasdaq has announced a joint venture with iX to establish a pan-European market for growth stocks and the top 100 Nasdaq-listed companies. Nasdaq Japan has entered into a similar agreement with the Osaka Securities Exchange and seven Nasdaq stocks began trading recently in a pilot project on the Hong Kong Stock Exchange. The New York Stock Exchange recently announced a Global Equity Market linkage among eight international exchanges, including the NYSE, Euronext and the Tokyo Stock Exchange, that will work towards a round-the-clock trading platform for the world’s largest stocks. [18]
Given the regulatory and practical problems involved, it may take some time before any of these arrangements bear fruit. Differences in trading systems, currencies and clearance and settlement systems must be resolved. Technology provides the opportunity for globally-linked, round-the-clock trading capabilities to satisfy investors’ growing diversified needs. [19]
In addition to this global marketplace scenario, the fact that investors and brokers have already been selecting through the Internet the regulatory authority of an exchange or alternate trading system to govern the disputes generated shows that there is less focus on the residence of each of them and more focus on the marketplace where the transaction occurs or on the explicit agreement between the parties to the transaction.
One of the main circumstances supporting the idea of a global marketplace combined with the less focus on investors and brokers’ residence is the growing popularity initiated in Silicon Valley of the use of new cyber-robots or ‘bots‘. The web user (or web investor) describes the product or service desired, and the shopping ‘bot’ scours the Web and returns with organized information on price, quality and other features. This tool can roam in virtual space without human intervention and apply its artificial intelligence to conduct all kinds of commercial, social and also securities "transactions" with other ‘bots and agents, day and night, while their principals are asleep or working on other things.
Some businesses foresee that the growing use of bots may lead to the consolidation of exchanges worldwide and the disappearance of any distinctions between when markets are officially open and when they are closed (that is, markets will be open all the time from and to a large number of nations). The bots will trade securities based on transparent prices, determining which markets are most reliable and efficient. They will be able to avoid transactions that would call for the application of unreasonable or unfair laws of a certain jurisdiction that may be applied to the transactional contract.
Given the dynamism of the bots to select the best product in the market, the legal systems in securities transactions will be simply part of such product to be evaluated, as warranty terms for physical goods are today. [20]
However, at the same that the securities market may experience this unprecedented automatism based on the self-sufficient initiative of cyber-robots, large institutional investors and regulators might become concerned about the possibility that markets may be subject to fluctuations triggered by extensive use of non-human agents. Hence, the allocation of this new technological circumstance into the traditional ways of finding jurisdiction in business transactions will not be an automatic process. There must be globally developed a new jurisdictional legal approach, based on strict rule sets providing for transactional solutions.
Indeed, since the bots would themselves search out and transact business at a given exchange or dealer site, the jurisdiction of the bot’s principal should not immediately apply. Since the bot will make a value judgment about the laws and fora within the site’s jurisdiction, the site’s laws should not control in the default situation.
This situation leads us to the conclusion that contractual arrangements, as agreements made with regard to the forum, controlling law or limitation on damages, whether made as a result of the interaction of the investor’s bot with the bot of a market-maker or dealer, should be a good alternative. But in order to make this cyber-contractual circumstance feasible, it is important to remember that a contract requires an offer, an acceptance, consideration and an intention to be bound.
When is a contract which is made over the Internet formed? The answer depends on whether cyberspace is to be viewed as an instantaneous form of communication, or as being more analogous to postal communications. It is uncertain, thus, which rule would apply, particularly because delays are common in delivering e-mails. Accordingly, an express clause determining the time of formation of the contract is preferable. [21]
Further, some other elements as electronic signatures, data protection and encryption need to be foreseen by legal authorities regulating cybersecurities transactions. Those, among others, are some contractual tools that will probably be used in such transactions. In brief, unless there is a specific requirement for the particular type of contract (for example a "deed"), a contract can be made over the Internet.
Thus, in contrast to the largely linear, point-to-point lines between buyers and sellers that have heretofore characterized traditional commerce and early e-commerce, securities transactions (as well as other kinds of commerce) will increasingly occur outside of any geographical place in a truly virtual world, conducted by highly programmed agents applying highly sophisticated artificial intelligence without human intervention. This makes it necessary to consider new, non-geographical or less geographical paradigms. [22]
The recent approach of the SEC [23] and the NASAA in the United States, the Australian Securities Commission [24] and the Canadian Securities Administrators - CSA in Canada over securities transactions has been to focus on the place to which the information on securities is directed by the offeror. However, if the entrance of highly sophisticated agents in the securities markets, communicating and carrying out complex transactions through a virtual space really takes place, this approach will become less appropriate and will have to be reviewed.
If a person located outside a given jurisdiction uses a website to conduct transactions with residents of that jurisdiction, the website operator has "availed" itself of the jurisdiction and should reasonably expect to be subject to its courts in matters relating to the transactions. But an electronic agent, as a bot, dealing with other bots should not necessarily be seen as "availing" itself of a jurisdiction. The functions take place not inside a "territory" but in a virtual meeting place. Greater attention should be placed on the degree of activism exhibited by the investor. [25] One could say, then, that if the investor spends a good deal of time and money to equip a bot with information and authority to "scour" the cybersecurities marketplace worldwide, then that investor has less need for the SEC’s regulatory intervention than the less informed, less equipped and more passive investor.
However, this question is still subject to unpredicted factors. The strength of this argument depends on three points: (i) the ease with which investors with less technological abilities could program their agents or bots; (ii) the still not certain reliability of the bots’ functioning as their programming is supposed to; and (iii) the extent to which bots may be manipulated by questionable companies or even by criminals who maneuver the securities market. These are all factors to be carefully considered before adopting a more liberalized regulatory approach over cybersecurities transactions. Therefore, such regulatory intervention on these securities transactions should still be made with careful attention to the phase of electronic contractual arrangements, until the market itself demonstrates that it obtained technical standards to operate in a global perspective.
The ruling in Zippo [26] that provides for the passive-interactive gradations in a web site to determine the applicable jurisdiction must be now reexamined. For an investor to engage in the use of electronic agents and other non-geographically based intermediaries is somewhat like the investor sending highly programmed, computer-driven spaceships into outer space to locate and ‘dock’ at space stations for the purpose of conducting transactions. [27] It becomes harder to argue that the investor’s home jurisdiction should control in preference to that of the space station operator or owner.
Nonetheless, one could argue that the situation described above does not differ from that of a corporation sending its sales force to many countries and then making commercial deals in such different countries; the principles applicable to traditional multi-jurisdictional commercial activities, according to this assertion, would prevail. However, it is important to remember that in that situation, the investor does not know where and when his or her cyber-agent will find the appropriate transaction to make a deal. The investor’s intention to reach a specific market in a specific moment never existed in this scenario. And it is exactly this challenge to the physical location and the personal intention of the investor that claims for an adaptation of the contractual rules applicable to the securities market.
By directing his or her bot to operate in a digital environment fully inhabited by other bots and virtual proxies, the web investor has chosen to depart from his or her own geographical place and decided to make business in a distinct milieu. Consistently with his or her option, the web investor would not reasonably expect to have the laws or courts of his or her own location applied to the transaction.
As a consequence of the fact that individuals may be playing a diminishing role in transactional models in the future, the elements that have been cited as "targeting" certain individuals and certain territories need to be re-evaluated.
This jurisdictional challenge, brought out by the highly sophisticated atmosphere in which electronic agents or bots will be independently working on the securities transactions, calls for consensual measures. As an example, "click-wrap" agreements on the applicable forum and law should be recognized as an efficient tool to eliminate the impasse. As long as the process of agreement between investor and dealer is commercially reasonable, that is, properly displayed to the individual or his or her cyber-agent, it will represent a substantial advance in the securities market.
On the other hand, there may be some concern about whether there are any categories of securities transactions where some mechanism other than contractual provisions may be preferable or necessary. Advanced ideas as the "choke-points" foreseen by the ABA’s Project were also presented, as follows: "an intriguing idea in the world of cybersecurities which could reduce the impact of jurisdiction over substantive liability is the development of new electronic "choke points". This would involve sophisticated programs through which a securities transaction would have to pass before it would be completed. In a matter of nanoseconds, an electronic "gate" could determine whether current information was on file with regard to an issuer, whether a suspect trading pattern was beginning to develop, whether the jurisdictional choices and disclosures met minimal standards, etc." [28]
Without taking any credit away from the above-mentioned approach, it rather appears to be more critical in the nearer future to implement new legal contractual provisions relating to securities transactions carried out by the Internet. In parallel, global cooperation and the creation of an international organization regulating this market would be key to establish the inclusion of such rules, as concluded below.