Doing Business in the Future with Electronic Commerce

By Robert T. Gabor
John-Paul F. Bogden Taylor McCaffrey

A. THE REVOLUTION HAS STARTED

The Internet, and its use for electronic commerce (or “e-commerce”) transactions, is changing the world around us, primarily because it eliminates the impediment of geography and it compresses the amount of time required to communicate and transfer information. Now, with a click of the mouse, text and images can move in a few seconds to thousands of sites via e-mail or from a web site to a customer on the other side of the world. The commercial opportunities created by the Internet have been likened to the Silk Roads of China around 2000 BC,1 which saw the establishment of a new international trade route between the east and the west for the trade of a new commodity. Now the Internet provides a direct link between all people who are on it for the new valuable commodity - information.

Peter Drucker, a renowned social analyst and management philosopher, believes that the truly revolutionary impact of the Information Revolution is just beginning to be felt with the introduction of something that no one even talked about 10 or 15 years ago. Drucker sees the explosive emergence of e-commerce:

as a major, perhaps eventually the major worldwide distribution channel for goods, for services, and, surprisingly, for management and professional jobs. This is profoundly changing economies, markets and industry structures; products and services and their flows; consumer segmentation, consumer values, and consumer behavior; job and labour markets. But the impact may be even greater on societies and politics and, above all, on the way we see the world and ourselves in it.2

Drucker surmises that we are just at the beginning of the Information Revolution, now at the point that the Industrial Revolution was in the early 1820’s, about 40 years after James Watt improved steam engine was first applied to an industrial operation - the spinning of cotton. Drucker believes that e-commerce is to the Information Revolution what the railroad was to the Industrial Revolution - “a totally new, totally unprecedented, totally unexpected development.”3

Andy Grove, Chairman of Intel Corporation, believes that many businesses are at a “strategic inflection point” because of the Internet.4 An inflection point is an engineering term that occurs mathematically when the rate of change on a curve changes signs from positive to negative or, in physical terms, when a curve moves from being convex to concave.

What causes strategic inflection points and what is their significance? Grove states:

Strategic inflection points can be caused by technological change but they are more than technological change. They can be caused by competitors but they are more than just competition. They are full-scale changes in the way business is conducted, so that simply adopting new technology or fighting the competition as you used to may be insufficient. They build up force so insidiously that you may have a hard time even putting a finger on what has changed, yet you know that something has.

Let’s not mince words: A strategic inflection point can be deadly when unattended to. Companies that begin a decline as a result of its changes rarely recover their previous greatness.

But strategic inflection points do not always lead to disaster. When the way business is being conducted changes, it creates opportunities for players who are adept at operating in the new way. This can apply to newcomers or to incumbents, for whom a strategic inflection point may mean an opportunity for a new period of growth.5

The legal profession is just starting to feel the implications of the Internet and e-commerce. Canada’s legal system, usually reactive and based on precedents, has now lost the luxury to move in its accustomed orderly fashion. Instead it will be required to adapt and play catch-up to a revolutionary technology which is moving at breakneck speed in directions not yet discerned.

This paper is prepared for the practitioner who does not specialize in the field of technology law, and is intended to provide a broad overview of both the emerging trends in e-commerce as well as the legal issues which arise when transactions occur online. In the remainder of this part, we define e-commerce, and offer some statistics and other information about its growth and its prospects for the future. In Part B, we discuss certain of the jurisdictional issues which arise when doing business over a medium without borders or boundaries, and provide suggestions on how jurisdictional problems can be avoided. In Part C, we discuss the legal underpinnings for the taxation of e-commerce transactions, and set out the official Canadian and U.S. positions on the subject. In Part D, we discuss certain of the contractual issues which arise when using “clickwrap” and “webwrap” agreements to do business over the Internet, and offer some practical suggestions for businesses thinking about doing business online. In Part E, we provide an overview of Bill C-6, the pending federal personal privacy legislation, and, after outlining some of the problems with the Bill, offer some suggestions for businesses attempting to comply with its requirements and restrictions. Conclusions are drawn in Part F.

1. The Size of the Internet

Although there are a myriad of statistics about the remarkable growth in the technology, most of them emanate from the United States, which is clearly at the forefront of the e-commerce revolution:
The number of people connected to the Internet is anticipated to increase from 37 million people in 1996 to 200 million this year and is expected to reach 500 million within a few years.6 The number of Americans on the Net this year is 80.8 million which is broken down in ages as follows: 1-12 years, 14.5%; 13-17 years, 13.7%; 18-34 years, 28.5%; 35-54 years, 31.2%; 55+, 12.1%.7
The percentage of Canadian households with regular access to the Internet jumped from 31% in April, 1997 to 50% two years later.8
There were about 5,000 domain names registered worldwide on the Internet in 1992. In 1998 there were on average 2,500 new names registered per day. It is projected that within two years this will increase to 100,000 new domain names registered per day until there will be about 100 million domain names.9
Advertising on the Internet is projected to rise from $3.3 billion this year to $33 billion in 2004. Two-thirds of the projected amount will occur in the U.S.
More than 60% of Canada’s small and medium sized businesses are now connected to the Internet, up 13% from a year before.10
The number of conversations by telephony (voice conversations through the Internet) has increased from 500,000 in 1995 to 16 million this year and it is expected to explode with the introduction of new technology which will make sound quality much better.


2. What is E-commerce?

In the broadest sense, e-commerce is the use of digital technologies to communicate information between the providers and the receivers of that information. While this paper will deal with the commercial aspects of Internet e-commerce, its definition also includes e-mail, fax, telecommunications and cable TV service, interactive voice response, web browser and electronic data interchange (“EDI”) technologies.

E-commerce falls into two categories: “business to business” and “business to consumer”.

(a) Business-to-business

Business to business electronic trade is the fastest growth segment and Forrester Research Inc. projects that it will grow from $43 billion in 1998 to more than $800 billion of the $1.3 trillion in the value of Internet sales by 2003.11

It dominates Internet transactions, primarily because it is quickly becoming the generally accepted means for major corporations, including financial-based institutions (banks, insurance companies, brokerage houses), to conduct business. These business-to-business transactions include product information transfer, price negotiations, order entry, shipping data, billing and collection. The emerging Internet economy will force companies to shift from internal processes to external ones that force interaction between customers and supplier. The Gartner Group predicts that by 2001, 70% of distributors who operate online will receive more than 80% of their sales online.12

(b) Business-to-consumer

This category includes a variety of transactions which have gained increasing notoriety because it involves the public and it is creating a shift in retail consumer commerce through these new “e-tailers”. These business to consumer transactions include:
ordering of physical goods (books, CDs, flowers) which results in subsequent delivery of product;
transfer of information (online newspapers, Encyclopedias Britannica, search engines, pornography);
financial transactions (banking, stock trading, electronic payment/cash cards, gambling);
transfer of intangible electronic services (graphic images, software design);
transactions involving non-electronic services (law, accounting, job searches); and
any combination of the above.


While online sales in Canada in these business-to-consumer transactions are increasing from $270 million in 1998 to an estimated $114 billion by the end of 1999, the percentage of sales are declining, as set forth on the following chart:13