Legal Issues to Know for International eCommerce Businesses
This post is Part 5 of a series covering core legal issues for eCommerce and Internet-based businesses.
International eCommerce Business Law Considerations
As global business continues to become more pervasive, all companies must consider the opportunities and risks presented by international sourcing and international sales of goods and services. International business transactions are transactions between companies located in different countries that can involve the sale of goods, transfer of technology, and a plethora of other business arrangements.
Buyers and sellers located in different countries can create a number of potential legal issues for businesses. Because online transactions can be initiated from literally anywhere in the world, even small and startup eCommerce businesses must be aware of the implications of international transactions.
International Business Legal Issues
An international business transaction can arise for an eCommerce company whenever they receive a product order and ship products to a foreign customer, or purchase goods from a foreign supplier.
In addition, allowing foreigners to access software can be considered an “export” of software for legal purposes. In all these types of transactions, making and receiving foreign payments can also implicate certain legal concerns.
Once a website is launched or mobile application is uploaded to an app store it becomes available to the global marketplace. As such, companies operating online need to address the issues presented by international eCommerce transactions.
Some legal considerations for eCommerce businesses involved in international transactions include:
International Trade Regulation
International Intellectual Property Protection & Enforcement
International Web and Software Development Agreements
International Disputes
International eCommerce Businesses Terms of Sale
Conducting business in the modern global economy offers great rewards, but involves risks, as well. Although companies can take a number of precautions to limit their risks in international business transactions, the primary legal tool for such purposes is the international business transaction agreement or contract.
For eCommerce businesses, the Terms of Sale govern transactions between the eCommerce business and its customers.
Key legal provisions in eCommerce business Terms of Sale that address international business transactions include:
Choice of Law - Because of variations in legal heritage, culture and language, the law which would be applied to an international business transaction contract is often decisive. For example, it is likely that the application of Texas law to an international business transaction contract would lead to a different result than the application of Brazilian law to that same international business transaction contract. Therefore, if the parties to an international business transaction contract choose law that is acceptable to both of them, they can better anticipate how the international business transaction contract provisions might be interpreted.
Also, most domestic business transaction contracts are governed by the Uniform Commercial Code (UCC), a harmonized system of commercial laws adopted by almost every state in the U.S. However, in many international business transaction contracts for the sale of goods, the U.N. Convention on International business transaction contracts for the International Sale of Goods (CISG) will apply by default. The impact of CISG as governing law versus UCC as governing law can be of critical importance. Moreover, even for other types of international business transaction agreements, one should not assume that the UCC would apply – thus, it is imperative that the parties specify the governing law of the contract within the international business transaction agreement, itself.
Jurisdiction and Venue - In addition to selecting the choice of law for the international business transaction contract, the parties can select a jurisdiction to decide any disputes related to the international business transaction contract. International business transaction contracts make such provisions crucial because of issues related to jurisdiction over the parties and the transaction, enforcement of judgments, legal processes, and travel and litigation expenses.
Force Majeure - "Force majeure" clauses allow for a party to be excused from its international business transaction contractual obligations without punishment if certain unexpected events occur, such as natural disasters. Domestic contracts in the United States generally do not address events such as terrorism, piracy, financial market collapse, war and so on. However, in international business transactions, these are often very real concerns.
Shipping Terms - Where the international business transaction agreement relates to the shipment of goods, the shipping terms will determine each party’s respective responsibilities for elements of the shipping process. Instead of spelling out a number of elements related to the delivery of the goods, parties often use shipping terms — a shorthand for allocating responsibilities between the parties with respect to such matters as transfer of risk of loss, arrangement of carrier, payment of freight charges, cargo insurance and so on.
Under U.S. law, these shipping terms are defined under state law in accordance with the UCC. Common domestic shipping terms include FOB (Free On Board) and CIF (Cost, Insurance & Freight). However, international business transaction contracts do not necessarily use the same terms. Instead, many international agreements incorporate a separate set of shipping terms called Incoterms (International Commercial Terms), which are promulgated by the International Chamber of Commerce, or ICC.
Payment - Making or receiving payment is also a bit more involved in international transactions. Because of governmental currency controls and fluctuations in exchange rates, a key consideration is the currency in which payment is to be made. Additionally, the method of payment merits special attention in international business transactions. Payment by check is often not an option; instead, parties to international business transactions often elect to use wire transfers or letters of credit. If a letter of credit is used, the parties must comply with strict documentary requirements if they expect to receive payment.
Translations - When dealing with international parties whose principal language is not English, the parties will often prepare and execute a translated version of the international business transaction contract. Because of subtle differences in translation, it is important for the parties to elect which version of the document will control if a dispute arises.
Compliance With U.S. Laws - Finally, exports and imports — as well as technology and currency transfers — are subject to numerous U.S. laws. In some situations, U.S. companies can be held liable for violations of these laws by foreign customers, agents, or affiliates. As such, a requirement written into international business transaction contracts requiring compliance with these laws can serve as a notice to the foreign party and makes compliance a material term of the agreement.
International Trade Regulation
Both U.S. and foreign national governments have an interest in regulating international payments, collecting customs duties, and overseeing transfers of sensitive technology.
Some types of eCommerce business activities that can implicate US trade laws include:
Buying and selling products outside the U.S.
Making and receiving payments with foreigners
Downloads and transfers of software outside the U.S.
Providing SaaS access to foreigners
Interacting with foreign government officials when buying or selling products and services
International trade regulation requires eCommerce businesses to navigate a range of domestic and foreign international trade laws, including U.S. import regulations enforced by Customs & Border Protection (CBP), the Office of Foreign Asset Controls, export rules of the Bureau of Industry and Security (BIS), compliance with the Foreign Corrupt Practice Act (FCPA), and complying with U.S. sanctions.
International Intellectual Property Protection & Enforcement
Protecting intellectual property in the U.S. is important, but in a global marketplace, companies need to look beyond our borders to ensure their intellectual property rights are protected in key foreign markets. Registering intellectual property in specific foreign jurisdictions is important to protect U.S. intellectual property rights abroad.
A number of international intellectual property treaties have been formed over the years to provide some standardized practices among major trading nations, most notable the World Intellectual Property Organization (WIPO) and the TRIPS Agreement which is part of the World Trade Organization (WTO). In addition, there are a number of other treaties created to provide some level of multi-national registration or protection for specific types of intellectual property, such as the Patent Cooperation Treaty (PCT) for patents, the Paris Convention and Madrid System for trademarks and the Berne Convention for copyrights.
International Technology Licensing and Transfers
Technology is mercurial by nature, which means it is easily transferred, licensed, and sold worldwide. But the unique character of technology also creates a range of risks that require experienced technology counsel to adequately identify and address.
International technology development is a common way for companies to speed up development while minimizing costs. International technology development can be used to engage a foreign developer to create or co-create a web site, software program, prototype, or some other form of technology. Important components of international technology development agreements include the scope of work, determining milestones and deliverables, non-infringement representations and clarifying the ownership of all elements of the final product.
An international technology license involves the owner of a patent, trade secret, trademark or copyright granting another person or entity permission to use their intellectual property (“IP”). A license to use IP related to technology can include hardware, software and data, and other forms of technology. All technology licenses must be carefully crafted to protect the IP owner’s interests, but international technology licenses involve special considerations due to the impact of foreign country IP laws, among other considerations.
Unlike an international technology license, international technology transfer involves more than merely granting permission to use IP; International technology transfer refers to the sale of IP assets from the IP owner to another party. Key elements of an international technology transfer agreement include pricing and payment, the scope of the technology transfer, the ownership of all aspects of the technology involved in the transfer, the impact of the technology transfer on any existing licenses, as well as other important considerations.
Regardless of the type of technology transaction involved, an international technology agreement is critical to protect the rights of the contracting parties and clearly establish each party’s rights and obligations. Although every international technology agreement is unique, our attorneys have been involved in hundreds of international technology agreements and can leverage our experience to help ensure our clients don’t experience any unpleasant surprises.
When a company wishes to grant foreign partners the right to produce or market its products in a foreign country, an international license agreement is critical to controlling the foreign licensee’s actions and protecting their own intellectual property. Providing access to cloud-based software and materials to users outside the U.S. can be considered an “export,” making all transactions subject to U.S. export and international trade laws.
There are a number of types of International technology license transactions, but the most common include international trademark licenses, international patent licenses, and international software licenses.
International trademark licenses grant licensees the right to use your names, brands, logos and other trademarks and service marks.
International patent licenses permit foreign companies to manufacture and sell products that incorporate your patented inventions, methods and designs.
International software and SaaA licenses grant licensees the right to install, copy, use or access software.
US-based eCommerce businesses with customers or users in EU may be subject to GDPR requirements. As such, eCommerce businesses companies must understand the impact of foreign laws on their global eCommerce operations, such as the European Union’s data privacy laws known as General Data Protection Regulation (GDPR).
International Web and Software Development Agreements
Software and product development is a truly global industry. Having a solid international development agreement is important to protecting intellectual property and avoiding future conflicts with developers, and our international business attorneys have the experience to help negotiate an effective international development agreement.
There are a number of types of international development agreement transactions, but eCommerce businesses frequently are involved with international technology product development, software development agreements, international app development agreements, and international website development agreements.
Technology product development can include the development of prototypes or the manufacture of products integrating a company’s technology, proprietary designs, data, methods and other know-how – much of which may be patented or trade secrets.
International software development agreements are needed when an international software developer is engaged to create or modify a customized software application. The developer may be hired to create the entire application, or perhaps only a portion.
International app development agreements are used in essentially the same situations as International software development agreements, except that the final product the developer is creating is intended to be a mobile application typically available to users via an app store such as iTunes.
International website development agreements govern situations in which a developer is engaged to create a website.
Although these various international development agreements will typically contain similar terms and provisions, each of the transactions has unique nuances and challenges that must be adequately addressed in the development agreement.
International Joint Ventures
Sometimes the best way to enter a foreign market is to collaborate with a local partner. Each of these relationships is unique and must be reviewed carefully and deliberately, and the international joint venture agreement is a critical part of defining and managing the relationship with foreign partners.
Regardless of whether they are domestic or international, from a legal perspective, joint ventures are either contractual or equitable in nature. A contractual joint venture is merely a general partnership whereby the terms of the relationship are exclusively defined by a joint venture agreement. As such, the joint venture agreement must be clear in language and comprehensive in scope to minimize risk and prevent disputes among the venture partners.
Equitable joint ventures involve forming a legal entity, such as a U.S. corporation or LLC, or perhaps a foreign entity in the venture partner’s country. The venture partners become co-owners of the new entity and conduct all venture activities through the new entity. For these types of international joint ventures, the entity’s formation documents, shareholder agreements, management team and other governing documents must be carefully negotiated.
International Distributors
Foreign distributors can help companies gain access to a new market abroad. However, if not properly investigated and managed, these relationships can be more trouble than they are worth. A clear and comprehensive international distribution agreement is necessary to protect companies and avoid potential disputes with foreign distributors.
One of the key advantages of using an international distributor is that the international distributor typically has relationships with potential customers, as well as a knowledge of local law, customs, and market conditions and expectations. However, one must balance the advantages against the risk that the international distributor will be incompetent, will misappropriate intellectual property, will violate the FCPA, will damage the brand, or will otherwise cause harm or create liability.
The international distribution agreement represents the understanding of each partner’s respective rights, obligations, and role within the venture. In addition, the international distribution agreement should address the ownership of intellectual property, provide for the ability to terminate the international distributor, and address issues such as installation and warranty returns. As such, the international distribution agreement requires careful review and drafting by experienced international distribution agreement attorneys.
International Investment
Often a company will decide to broaden its international presence by either launching a subsidiary in a foreign county or by acquiring an existing foreign enterprise. This foreign direct investment has a range of benefits and risks, and our international business attorneys can help identify and manage the risks implicated by foreign direct investment.
There are three basic types of international investment transactions: setting up foreign subsidiaries and branches, international mergers and acquisitions, and international joint ventures.
Setting up a foreign subsidiary or branch allows a company to establish tangible presence in a foreign market. This structure is significantly controlled by foreign laws while still being subject to many U.S. laws related to trade and financial dealings. A subsidiary is a new legal entity, such as a corporation or LLC, either under U.S. law or under the law of the foreign jurisdiction. In contrast, a branch is merely a new location of the U.S. company, and thus any obligations or liabilities of the branch can directly impact the home company. Because of the significant influence of foreign laws, coordinating with local counsel in the foreign country is required to set up and operate a foreign subsidiary or branch.
International mergers and acquisitions allow a company to leverage the goodwill and relationships of an existing foreign enterprise to create an instant presence in a foreign market. Although International mergers and acquisitions dramatically decreases the time it takes for a company to begin operating in the foreign market, the cost of an international merger and acquisition can be significant. Moreover, in international mergers and acquisitions, the acquiring company is buying more than just equipment and brands; they are also inheriting a management and operations philosophy that might not be compatible with its own culture - or U.S. law.
International Disputes
One issue that effects eCommerce businesses can include cybersquatting and domain disputes, including using ICANN and Uniform Domain-Name Dispute Resolution Policy (UDRP) actions to resolve domain issues.
In addition, contracts and intellectual property registrations are useless without the ability and will to enforce them, and international transactions create unique issues regarding enforcement and dispute resolution involving foreign vendors, partners, and customers.
International litigation is, at its core, similar to domestic litigation. However, the involvement of foreign plaintiffs and dependents creates increased complexity and hurdles such as getting jurisdiction, conducting pre-trial discovery, and enforcing judgements.
Unlike international litigation, international arbitration does not involve lawsuits filed in U.S. or foreign courts. Instead, international arbitration is a process conducted pursuant to rules of arbitration such as ICC, AAA, or UNCITRAL.
International litigation and arbitration services include:
Representing foreign companies in U.S. courts
Managing foreign counsel on behalf of U.S. companies involved in litigation around the world
Handling U.S. pre-trial discovery in international litigation, such as depositions and document review
Enforcing a foreign judgement or arbitration award in the U.S.
Enforcing a U.S. judgement or arbitration award in a foreign country
Representing foreign companies in U.S. arbitration
Representing U.S. companies in international arbitration
Managing foreign counsel on behalf of U.S. companies involved in arbitration around the world
Handling U.S. pre-trial discovery in an international arbitration, such as depositions and document review
International eCommerce Businesses Should be Aware of International Legal Issues
Conducting business in the modern global economy offers great rewards, but involves risks, as well. eCommerce businesses should take a number of precautions to limit their risks in international business transactions. As such, eCommerce businesses should work closely with legal counsel who have significant experience dealing with international technology transactions.
To view previous articles in this series:
Part 1: eCommerce Law for Internet-Based Businesses
Part 2: Privacy Law and Requirements for eCommerce Businesses
Part 3: Understanding and Protecting IP in eCommerce Business
Part 4: The Key Agreements Every eCommerce Business Should Have
ABOUT THE AUTHOR: Jim Chester is a 25-year technology business lawyer, professor and entrepreneur. He is a recognized authority in buying and selling technology businesses, global technology transactions, and providing strategic legal counsel for innovation-based companies. For more on Jim, visit his professional profile. You may email Jim at jim.chester@klemchuk.com.
For more information on eCommerce legal issues, see our Internet Law and eCommerce Legal Services and Industry Focused Legal Solutions pages.