Good Honest Dollar $$

The conviction in Italy last week of three Google employees over a shocking video posted by a group of students on YouTube is extremely disappointing, and raises serious issues about how far providers of user-generated content platforms have to go in order to satisfy their legal obligations.

To be sure, Google does have a duty of care with regard to prompt removal of videos containing illegal or malicious content upon becoming aware of their existence. But the company cannot be held responsible every time someone chooses to upload these types of videos. Nor should they be expected to go to the extreme measure of pre-screening each and every video prior to them being made available for public viewing.

 
The Italian decision
The case in question revolves around a video which was posted by students at a school in Turin, Italy. The video in question showed them shamefully bullying an autistic schoolmate.

Although the video was posted in September 2006, Google staff were not made aware of its existence until two months later, when they received two requests to have it removed. Subsequently, the video was removed within hours, and the company assisted Italian police in identifying the individual responsible for its upload, who was later sentenced to ten months of community service (refer official company response).

But this did not satisfy the Italian courts, and a judge in Milan last Wednesday convicted three Google executives with violating Italian privacy laws in relation to the incident. Each was handed a six month suspended sentence.

 
Two troubling aspects
There are at least two troubling aspects of the decision:

1) that Google is being held responsible for content which it did not create and does not own; and
2) that the legal standard to which Google is being held does not accord with realistic commercial expectations.

Given that Google did not either own or create the video in question, neither the company nor individual members of its staff should be held responsible for its content. The same applies for all platforms of user-generated content (Blogger, MySpace, Facebook, Twitter etc). Users, not service providers, create and own the content. Therefore, it is individual users, rather than service providers (who merely provide a platform for individual users to share their creation), who should be responsibility for illegal or inappropriate material.

(Also troubling is the fact that the punishment applies not to the company itself but to individual Google employees. If Google committed any crime, surely the offense occurred at the corporate level and not at the level of any individual staff member. Any associated punishment should therefore apply to the company itself, not to individual employees)

 
Unrealistic expectations
More troubling still – questions the decision raises about the length to which Google and others have to go in order to satisfy legal requirements.

Given the extent of Google’s efforts in this case, it is hard to see what more the company could have done, and the fact that these efforts were not deemed to be sufficient raises some very troubling questions about the extent to which Google and others have to go in order to satisfy Italian law. Really, what else could they do? Pre-screen each and every video prior to upload? Pre-screen each and every blog post prior to publication on Blogger? How about Facebook – should they have to pre-screen each and every message or photograph?

No. Even if Google and others are deemed to have a duty of care regarding illegal or malicious content, such a duty should not extend beyond realistic commercial expectations.

 
Let’s hope the law adapts
Services like YouTube, Facebook and Blogger are subject to abuse by those intent on malicious or illegal activity.

But they also allow millions worldwide a platform by which they can create, share and connect with others.

Hopefully, over time, the law will adapt to the new media environment. But for now, decisions which impose unrealistic burden on providers of these services are very concerning for both the industry and the millions of users who enjoy the wonderful benefits which these types of services provide.

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A recent case in which two American journalists were arrested in North Korea on charges of illegal entry earlier this year has prompted me to reflect upon the matter of whether indeed there are types of circumstances whereby businesses and their staff are actually doing the right thing from an ethical viewpoint if they purposefully engage in conduct is considered to be illegal within the jurisdiction in which they operate.

In brief, the two journalists concerned, Laura Ling and Euna Lee are said to have been working on a documentary relating to the trafficking of North Korean women across the border between North Korea and China when they were arrested by North Korean guards. They were sentenced on June 08 to twelve years of hard labor (read more about the case here)

It is indeed possible that the actions of the two did indeed represent a breach of North Korean law (there is some dispute about the facts of the case). But if that is indeed the case, this is because of the oppressive nature of North Korean law, not because of any lack of personal ethics on the part of either journalist.

Furthermore, in my view, the case illustrates the point that there may be an extremely limited range of circumstances whereby actions on the part of companies or their staff do not indeed represent a form of unethical conduct even if they result in a breach of regulations to which the organization concerned is subject.

 
Generally, companies and their staff must respect the law ..
In the vast majority of cases, the situation is clear-cut, and ethical considerations dictate full compliance with all applicable laws and regulations in every jurisdiction in which the company concerned operates.

Moreover, ethical considerations aside, I certainly would have thought that in the vast majority of circumstances, business case considerations dictate that companies observe complete respect for and full compliance with all relevant legal requirements. This is not only due to the desire to avoid any adverse reputational impact of run-ins with the law (not to mention fines and penalties), but also because of the ability of government officials at all levels to make life difficult for those who get on their wrong side.

 
.. but there are exceptions
But are there exceptions?

I would think so – especially concerning firms which operate in countries whose practices are repressive from a human rights perspective.

I could think of at least three examples:

 
• Media coverage.

The plight of those who suffer from war, famine, poverty or oppression should never be hidden from the broader global community, and I feel that media organizations do have a fundamental duty to raise worldwide awareness in cases where such conditions do indeed occur.

Such a duty extends to parts of the world where the law attempts to place unreasonable restrictions upon the activities of local and/or foreign media, whereby media organizations and journalists would be more than justified, in my viewpoint, in undertaking whatever forms of action which are reasonably necessary to report on the plight of the people, even if this necessitates a breach of some forms of legal restrictions in the country concerned.

(Naturally, media correspondents who enter countries illegally should do so only where absolutely necessary and should observe appropriate regard for their own personal safety at all times)

 
• Protection of individual privacy.

Firms which are required to sensitive information (such as contact details or information pertaining to patterns of online activity) with regard to individuals such as political activists or opponents, prominent religious leaders or prominent academics would, under certain circumstances, be more than justified in withholding such information this may constitute a breach of legal requirements.

This is particularly the case where there is a reasonable likelihood that the provision of such information will either: (a) place the safety of the individual concerned in unwarranted jeopardy; or (b) assist in any form of government attempt to crack down on any form of expression of political or religious freedom.

 
• Organization of labor unions.

This is one issue which relates more to the workers that businesses employ rather than businesses themselves. Nevertheless, since employees represent such a critical group of stakeholders (it’s hard to imagine businesses running without them), I feel that the formation of unions in countries where labor organizations are not legal is well worth a mention in this discussion.

The right of workers to organize themselves into unions is specifically recognized under the Universal Declaration of Human Rights as a basic form of human right. In countries where the abuse of employee rights represents a common practice, I would be more than supportive of any attempt by workers to organize some form of labor union, even in (and especially in) countries where labor organizations are prohibited.

 
Over to you
Can you think of any other cases whereby you think firms may be justified in refusing to act according to the law?

Despite being convicted last year on charges of embezzlement and raising a slush fund to bribe government officials, Hyundai chairman Chung Moon Ko will not serve any prison time.

Mr. Chung’s initial punishment was a three year suspended sentence. But even that was overturned in August when he, along with approximately 340,000 other South Koreans who had been convicted of criminal offences, received a presidential pardon from South Korean president Lee Myung Bak.

This pardon should not have been granted – at least not for business people.

Under the terms of the pardon, which was granted last month on the day marking freedom from Japanese colonialism, the affected individuals will be cleared of their relevant crimes, and will suffer no further punishment in respect of those crimes.

The majority of the crimes involved relatively minor offences, such as traffic related offences. According to my understanding, the pardon for these people was intended principally as a symbolic gesture of national forgiveness.

I see no problem with this – there is too little forgiveness in the world as it is.

But the pardon also covered 74 influential business people, convicted of serious offences such as fraud, bribery, assault and kidnapping (refer article). Along with Mr. Chung, these people included Kim Seung Youn, a tycoon who boasted about how he and his bodyguards physically assaulted staff at a bar after his son was injured in a scuffle. Also pardoned was Chey Tae-won of SK Group, a telecommunications, oil refining and construction conglomerate, convicted in 2003 of illegal share swaps designed to maintain family control of the group.

 
Flawed economics
According to media reports, the inclusion of these men was not merely a symbolic gesture of forgiveness. Instead, it was bought about by a different, and highly flawed, rationale – economic grounds.

From the viewpoint of the government, these people are leaders and entrepreneurs, and their imprisonment was a hindrance to the economy.

I cannot agree. Aside from being unjust, the idea that those who have been convicted of criminal offenses are needed to stimulate the economy simply defies all forms of logic.

On the contrary, the pardon will have a detrimental effect on Korea’s economy, primarily by reinforcing the country’s poor reputation in terms of corporate governance.

 
Reinforcing poor corporate governance
For many years, South Korea has suffered from a poor reputation in relation to corporate governance, which has inhibited the country’s ability to attract investment.

The Korean economy is dominated by chaebols – large corporate conglomerates who wield a considerable degree of political and economic influence. Although shares of many of these entities are listed on the local stock exchange, they are typically controlled by wealthy and well connected families, the behavior of many of which often reflects a negligible degree of corporate accountability and scant regard for issues such as legal compliance, corporate governance or minority shareholder rights. Cases involving practices such as bribery of government officials or stock manipulation are not uncommon.

Why are these practices so common? One reason is that they get away with it. The government has in the past shown a considerable degree of reluctance to hold key business people to account, fearing that heavy handed action would be detrimental to the economy.

But instead, allowing poor governance practices to go unchecked has in itself had a detrimental economic impact. It has created an environment which is not conducive to attracting investment, causing some foreign companies to think twice about job creating investment projects in Korea. It has also inhibited competition in industries where the chaebol are operative, largely to the detriment of consumers.

Dramatic improvements in corporate governance practices are crucial if Korea is to reach its full economic potential, let alone achieve its stated goal of becoming a financial hub within North East Asia.

But corporate governance will not improve as long as criminal behavior goes unpunished.

Much has been written over the past few years about the problem of counterfeit goods.

There are many losers from this unethical practice. Consumers end up with less reliable and potentially unsafe products. Manufacturers suffer from lost sales, loss of reputation and potential liabilities for warranties. Finally, in cases where such products are sold through online auctions, the online auction houses themselves suffer from loss of reputation.

In addition, sales of counterfeit goods at online auctions raise some interesting legal and ethical issues. These were highlighted by the well publicized court case in France between online auction house eBay and luxury goods manufacturer LVMH.

LVMH took legal action against eBay on two grounds. Firstly, they claimed that eBay did not take sufficient steps to prevent the sale of counterfeit goods on its site. Secondly, LVMH claimed that even sales of legitimate goods on the site were illegal as the company only allows sales of its merchandise through selective distribution channels.

A French court last week ordered eBay to pay 40 million Euros ($63 million) in compensatory damages, a decision which eBay has indicated its intention to appeal.

The case has highlighted two interesting legal and ethical issues:

• whether or not online auction houses be held responsible for the sale of counterfeit goods on its site; and
• whether or not a manufacturers should have a right to control distribution of their products.

 
Responsibility for counterfeit goods at online auction houses

In my opinion, primary responsibility for sales of counterfeit goods must lie with individual sellers, who have a duty of care to ensure that their merchandise is genuine.

Online auction houses themselves have a duty of care to take reasonable steps to detect and prevent such sales. Failing this, they should be held liable for compensation from affected manufacturers and/or consumers.

In the case of eBay, its Verified Rights Owner scheme invites brand owners to report suspected counterfeit sales. The company also restricts seller activity in certain cases and enforces limits on items favored by counterfeiters. (click here for details)

These are constructive steps, but the company could do more. For one thing, sellers found to have sold counterfeit goods should be placed on a blacklist and permanently barred from future auctions.

 
Manufacturers right to control distribution channels

The second aspect of the eBay case involves a more basic question as to whether goods manufactured by LVMH should be allowed to be sold on eBay at all. As part of its branding strategy, sales of LVMH merchandise are restricted to selective distribution channels. The company claims that eBay, by allowing merchandise to be sold on its site, violated the company’s right to control how its products were distributed.

I have considerable empathy for LVMH on this point. Surely, a company has a right to decide how its products are distributed, particularly given the impact this can have on branding. Parties who violate that right should be held accountable.

 
A case of poor conduct

Regardless of the final outcome, eBay’s conduct in relation to the case has been very poor.

Rather than publicly address the issue about distribution rights, the company has chosen instead to insult LVMH and spout rhetoric about consumer choice and livelihoods of sellers.

Equally as poor is the company’s flagrant disregard for European legal proceedings. According to a Business Week report, the company has refused to remove any LVMH products from its site until an appeal is heard, despite an injunction preventing the sale of LVMH perfume on its European sites.

Whatever the final result, eBay has not covered itself in glory during the proceedings. In future, the company should show more respect toward both the distribution rights of manufacturers and to legal proceedings across all jurisdictions in which the company operates.

Despite being seen by some as a hero in the fight for corporate accountability, lawyer Melvin Weiss received a fair and just punishment.

Mr. Weiss was sentenced on June 2nd to thirty months prison for his involvement in a scheme in which his firm, Milberg LLP, paid kickbacks to plaintiffs in shareholder class action schemes.

Mr. Weiss is widely recognized as the pioneer of the shareholder class action lawsuit. Under such actions, a large number of aggrieved shareholders take legal action against their own company, typically over matters relating to corporate governance or the denial of shareholder rights.

The payment of kickbacks to plaintiffs for involvement in such actions was a clear breach of professional ethics, and the punsishment handed down was well deserved.

But the case raises wider questions about shareholder class actions, and whether such actions are beneficial or harmful to shareholders.

 
Objections to shareholder class actions

Critics of shareholder class actions believe that such actions are beneficial to lawyers but detrimental to shareholders.

Objections to shareholder class actions generally fall into two categories: 

 
• Shareholders are effectively suing themselves.

A class action, as opposed to legal action from individual shareholders, involves a large number of shareholders, or a substantial portion of the shareholder base, taking action against the company in which they own shares.

Given that shareholders own the company they are suing, such actions involve shareholders effectively suing themselves to a large extent – a seemingly pointless exercise.

Meanwhile, the law firms who assist them earn lucrative fees in the process.

 
• Fee hungry law firms may encourage shareholder action over frivolous matters.

Such costly cases represent an unnecessary management distraction. They may also encourage an undue degree of risk aversion, particularly in cases where managers fear that mistakes made as a result of otherwise sensible business risks may lead to litigation.  

 
Benefits of Shareholder Class Actions

However, class actions need not be detrimental to shareholders.

Firstly, in addition to cash payments, shareholders can seek other legal remedies, such as specific actions to improve corporate governance. In such cases, shareholders stand to benefit via improved accountability.

Secondly, in environments where shareholder class actions are not uncommon, the mere prospect of such actions may prompt management to undertake preventative measures to strengthen accountability.

Finally, class actions may represent one of the few legal avenues for minority shareholders to enforce their rights, particularly in cases where companies are controlled by single majority shareholders.  

 
Conclusion

Class actions which are frivolous in nature are detrimental to shareholders as a whole, particularly in cases where settlement involves cash payments only.

Lawyers benefit from such actions, not shareholders.

In order to be truly beneficial to shareholders as a whole, class action settlements must include sensible undertakings to improve corporate governance and accountability.

Shareholders benefit only from greater accountability, not from suing themselves over frivolous matters. 
 

Over to you

What do you think?

Are shareholder class actions beneficial to shareholders?
 
Please feel free to add your opinion by clicking on the comments section above.