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How Liability Rules Influence Global Internet Investment

It shouldn’t be surprising that a domestic court’s decisions can influence investment and trade in the country in which the court resides.  Because international trade rules have not been updated for 21st-century trade, however, a single domestic court can steer Internet investment and trade worldwide.

Today, CCIA released a paper, “Modernizing Liability Rules to Promote Trade”, which explores the liability risks that impede the advance of the Internet as a platform for international trade, and indicates the need for minimum levels of international protection.  There is precedent for subject matter-specific international agreements setting minimum standards, including the 1994 TRIPS Agreement, which established international standards for intellectual property.  As discussed in the paper, the Internet revolution demonstrates the urgent need to establish international, minimum levels of protection for Internet-enabled trade.

In less than two decades, the Internet has upended international trade.  Internet-enabled trade already constitutes a growing share of international commerce, with an estimated $4 trillion more on the table.  Nevertheless, the international trade framework has yet to catch up, meaning that in the 21st century it is far easier for a nation to block bits at the border than Buicks or bananas (a fact evident in the recent ITC report, Digital Trade in the U.S. and Global Economies, Part 1.)  At the same time, the global accessibility of services online and the intangible nature of Internet-enabled trade renders online commerce uniquely susceptible to asymmetries in international law.

One manifestation of the lack of coherent protection for Internet trade is international disharmony in liability rules, and the lack of minimum levels of protection from liability for online content.  Imposing liability on Internet platforms for the actions of their users is a surefire way to stunt international growth in Internet-enabled commerce, given the impossibility (and undesirability) of screening or monitoring so many users online.

Prospects for the industry’s international growth will thus remain clouded as long as courts and policymakers can threaten to block or penalize services like Facebook, Twitter or eBay for actions taken by any one of their hundreds of millions of users (or, in Facebook’s case, 1 billion+ users).  Furthermore, uncertainty suppresses the appetite of venture capitalists (VCs) to fund international startups, which helps explain why many major Internet brands started and grew predominantly within the United States.

Several cases from the post’s titular example, Italy, demonstrate this risk.  In July, an Italian prosecutor expressly threatened to file a criminal complaint against Facebook for allegedly failing to remove content that led to an Italian teenager’s suicide, and in 2010, a YouTube video led to the conviction (subsequently overturned) of three executives in Milan.  Similarly hostile civil cases abound. [1], [2].  Italy is by no means alone or even distinctive in this category: as the paper describes, numerous jurisdictions share the dubious distinction of applying liability rules in ways that may be politically attractive but hostile to international commerce.

If executives bore civil or criminal liability for the actions of all users, VCs will instead pursue projects that do not require hiring attorneys in every jurisdiction where the service is available, thus steering investment away from trade-enabling services.

The Internet prospers in the U.S. in large part because various safe harbors, including Section 230 of the Communications Decency Act, exempted providers of Internet and telecommunications services from liability for content that was published by their users.  Without such protection, it is unlikely that the massive social networks and online commercial platforms we have today would have been funded in the first place.  Similar protections in modern trade agreements would not only spur increased international economic activity, but would contribute to a much-needed modernization of the international trade regime for the Internet era.

Digital Trade

Companies rely on clear, predictable rules that facilitate digital trade to export their products and services around the world. These rules include balancing the competing interests between encouraging investment and enabling information access; promoting the free flow of information online; and maintaining balanced intermediary liability regimes.

Intellectual Property

The Internet enables the free exchange of ideas and content that, in turn, promote creativity, commerce, and innovation. However, a balanced approach to copyright, trademarks, and patents is critical to this creative and entrepreneurial spirit the Internet has fostered. Consequently, it is our belief that the intellectual property system should encourage innovation, while not impeding new business models and open-source developments.