Virtual Enterprise Legal Issue Taxonomy Prof. Dr. Caroline VAN SCHOUBROECK1, Prof. Dr. Herman COUSY1, Dimitri DROSHOUT1, Bart WINDEY1 1 K.U.Leuven University, Law School, Department of Commercial Law and Insurance Law, Collegium Falconis, Tiensestraat 41, 3000 Leuven, Belgium, Tel: +32 16 325214; e-mail: [email protected]; Url:http://www.kuleuven.ac.be/ve Abstract. This paper describes the development and the structure of the "Virtual Enterprise Legal Issue Taxonomy". First the Taxonomy will be situated in the framework of the ALIVE-project. Next the objectives and the structure of the Taxonomy will be clarified. Then, the three branches of the actual Taxonomy will be explained. The first branch holds a description of the features of the VE, from both a business and a legal point of view. The main part of the paper gives a general overview of the second and third branches of the Taxonomy. The second branch of the taxonomy is situated at a rather basic level and will resemble most to a common dictionary. At that level, the sequence of the topics is mainly alphabetical, because at random. The third branch lifts up the prior classification of legal issues to a higher level, by classifying those issues on the basis of different angles by which the VE can be looked upon. In conclusion, some dilemmas and questions will be raised.

1. Introduction During the first six months of 2001, a "Virtual Enterprise Legal Issue Taxonomy" ("the Taxonomy") has been developed by the Department of Commercial Law and Insurance Law of the K.U.Leuven University Law School. The Taxonomy development phase constituted one of the first stages of the Project on "Advanced Legal Issues on Virtual Enterprises" ("ALIVE") (Task 1.2, Work Package 1, EC Information Society Technologies Programme – IST 2000-25459). The final objective of the ALIVE-project is to define a roadmap for the resolution of legal issues associated with or related to the Virtual Enterprise (VE) paradigm. Therefore, all legal issues being important for the VE will be identified and classified. Several "Legal Issue Subgroups" will study thoroughly the emerging legal issues and compare them with the existing legal and regulatory framework in order to make suggestions and proposals for future policy development and RTD actions. Consensus building concerning the revealed legal issues will involve trade, consumers and industrial associations as well as policy makers Europe-wide. The Taxonomy will be used as a baseline suitable to provide a starting point for the activities of the "Legal Issue Subgroups". It will constitute a common dictionary, guiding in the discussions and in the distillation of findings and existing knowledge. Furthermore, the Taxonomy will also be used as a navigation support in the search for information in a web based repository to be developed within the scope of the project. In nature a taxonomy is known as a classification or a systematics. Its main goal is to systematize a gamma of various elements in a hierarchic structure. The VE Legal Issue Taxonomy is thus not merely a list or catalogue of as much as possible legal questions that could be related to the VE, but already systematizes and clusters different relevant legal questions in more general legal issues. In fact, the Taxonomy should be regarded as a quest, setting out the boundaries of the main research subject and providing a preliminary framework of guidelines for an in depth analysis of the legal issues related to the VE. The

Taxonomy solely initiates further research by merely pointing out the most problematic legal questions, clarifying and illustrating the significance of certain legal issues. The Taxonomy does not present (legal) solutions. The Taxonomy is constructed around three different, but nevertheless to a certain extent mutually related branches. The first branch of the Taxonomy provides the reader with a description of the most striking legal characteristics of a VE. Therefore, the way in which a VE deals with a business opportunity is compared to the approach of a so-called traditional company. In a next step, the VE business concept will be reconsidered from a legal point of view. It will be set out in which respect the economic and legal organisation of a VE differs from the traditional enterprise. Finally, the first branch of the taxonomy will pay attention to some considerations concerning the relation between the essential and key economic features of a VE on the one side and the legal study and eventual regulation of a VE on the other hand. This is referred to as the VE paradox. The second branch of the Taxonomy is situated at a rather basic level and will resemble most to the description of the Taxonomy as a "common dictionary" as put forward by the task description of the ALIVE-project. First of all, this branch will deal with the absolute key issues of the Taxonomy, namely the study of the legal identity of the VE and the question how a VE should be structured ideally, taking into account the leading principles of company law. Then, the branch will continue as a listing of several legal issues, each of them clustering various underlying legal questions. In this stage, the sequence of the topics is still alphabetical, because at random. The relationships and interconnections between the various legal issues will be outlined. The third and last branch of the Taxonomy lifts up the prior at random classification of legal issues to a higher level, by classifying those issues on the basis of different angles from which the VE can be looked upon. First of all, different legal issues will be classified according to their importance at different moments of the VE life cycle. Next, the legal issues will be classified according to their importance for the different actors of the VE. Finally, the legal issues will be distinguished according to their influence upon the internal or external relationships of the VE. Inevitably, dealing with the legal issues from specific angles will sometimes – indeed because of the specific point of view – result in a more elaborated description of or more specific focus on the issue than was realised in the second branch of the Taxonomy. Consequently, the two last branches of the Taxonomy do not entirely overlap. 2. The first branch of the Taxonomy – The features of the VE 2.1. The VE Business Concept A traditional company can be seen as a stable organization, which looks for or tries to create business opportunities. Such company will generally be based in a certain member state and will be governed by national law prescribing all formal and financial requirements. The existence of the company is a prerequisite to be able to answer to a business opportunity. The VE however turns around all classical business concepts. While a traditional company starts from and focuses on different business opportunities or has the possibility to shift from one business opportunity to another, the business opportunity itself constitutes the heart of the virtual enterprise. In other words, the existence of a business opportunity is a prerequisite for the VE. A virtual enterprise appears when different enterprises join forces to deal with an emerging business opportunity, which could not have been handled by one participating

enterprise separately. Information and communication technology (ICT) functions as a motor within the VE. In the absence of modern ICT, partners would not be able to get in touch with each other, nor would they be able to coordinate their activities in a highly efficient way. One of the most interesting features of a VE is that it allows smaller companies (SMEs) to join a bigger international project. A special feature of a VE is to be found in its high degree of flexibility, making it possible to react to a business opportunity as quickly as possible. The ultimate target is to achieve a business concept that will function in so-called zero-time. 2.2. The features reconsidered from a legal point of view Although the above-mentioned Copernican shift in concept seems logical and understandable, it creates major problems from a legal point of view. At first sight, it becomes inevitably clear that lots of traditional points of references, as there are nationality of the company, the base of a company (headquarters), the legal personality, the limited liability, etc… will not necessarily prove to be adequate to answer to this new concept. Even a fast preliminary survey leads to defining the following description of major legal characteristics. (1) The most important characteristic from a legal point of view, is the finding that under current legal rules, a VE does not necessarily have a legal personality (or at least does not aim at having it). The consequences of this finding need to be highlighted. E.g. a VE cannot conclude any contract. According to traditional rules, a VE cannot be located. The different members of a VE will be jointly and severally liable. (2) Although it has no significant organizational supra-structure (e.g. no head-office, no legal personality), third parties perceive a VE as being one enterprise. Third parties act with a VE as if it were a traditional enterprise. Major problems will arise when there is no possibility to identify the members behind a VE, because third parties cannot turn against the VE itself due to its absence of legal personality. (3) As new technologies made it possible to work together worldwide, the members of a VE will be geographically spread and a VE will not stop at (member) state borders. The members of a VE will have to agree upon which national law will govern the VE. Within a VE, one will have to deal with different legal cultures. (4) A VE tends to have an ephemeral character. A VE will mainly be developed to face new business opportunities. Members (and perhaps the VE itself) will come and go very fast. 2.3. The VE – paradox One has to realize the paradox, which is inherent to the VE. The absolute key factor or key characteristic of the VE is its flexibility. Any regulation made applicable to a VE or enacted specifically for the VE will take away some of it’s flexibility. Everyone studying the legal aspects of the VE and discussing the regulations applicable to the VE needs to be aware that too many strict regulations will suffocate the concept of VE. In many highly regulated sectors (insurance and banking for example), establishing a VE will simply be impossible because of the severe and mostly very formalistic requirements. 3. The second branch of the Taxonomy – The legal issue approach The second branch of the Taxonomy constitutes a kind of dictionary. Nothing but a list of separate points of interest is defined. The sequence of the topics is still alphabetical, because at random. Only the absolute key issues of the Taxonomy ("VE legal identity" and "Company Law") are discussed before all others, because of their capital importance.

3.1. VE Identity A first and very important issue concerns the identity-question. How and to which extent can a VE enterprise be identified? Which criteria are important to identify the VE? It is not unthinkable that a VE is of such an ephemeral nature that it has neither a nationality, nor a legal personality, making it impossible to conclude any contract with the VE or to adopt some regulation protecting third parties, especially consumers when they deal with this VE. This problem gains strength from the fact that the VE has the potential to change radically or to disappear on a short term, leaving behind third parties with no claim at all. 3.2. VE Structure – Company law This issue is closely related with the identity issue. Both the issues of identity and company law are fundamental problems that need to be tackled together before all other problems. Under current law, many of the national legislations will recognize the VE as a kind of partnership, being a type of company without legal personality. Such recognition, which is possible against the will of the partners, entails certain risks. Having no legal personality most regulations will consider the partners jointly and severally liable, meaning that the partner’s personal capital will be at stake without limitation in case the assets do not cover the debts. Moreover, the absence of legal personality implies that the VE on itself cannot conclude any contract, make any profit, employ people, etc… Many countries also have registration and publication requirements for a company starting up (e.g. the registration in a trade or similar register, the application for a VAT identification number). The application of these regulations to the VE will often be problematic and incompatible with its nature and business goal. However, the preliminary determinative is the question if and which national company law would apply to the VE. 3.3. Broker – VE-architect The broker / VE architect will not only identify potential members of a VE, they will also function as a motor during the business opportunity evaluation phase. Although the advantages of such actors are more or less obvious, the legal implications with regard to their task are important and could be troublesome. The role and liability of the broker or VE architect will need to be studied. However, it is obvious that it is not elementary to create or set up a VE with the intermediation of a broker or VE-architect. Nonetheless, in case such actor is involved, an important partition between two scenarios has to be made. On the one hand, it is possible that the actor is no partner in the production of a certain good or service (the VE architect). He will only coordinate the setting up of the VE. On the other hand, it is possible that one of the actual VE members (the broker) defined the business opportunity and designed the VE itself. As then the legal implications will become all the more complex, since the broker assumes two different tasks and risks additional liabilities. 3.4. Consumer protection Consumer protection is a very delicate aspect of the VE. As the VE has the potential to be very ephemeral, international and very hard to identify, consumer protection will be endangered. If for example the VE has no legal personality and no real identity, the question of liability for a defective product cannot be solved, in this sense that the VE as such cannot be held liable. Moreover, any consumer protection will fade because the consumer will not know which individual VE member should be sued, in which country

this should happen or which law will apply to his claim. The consumer protection issue represents just one element of the broader business to consumer relation (B2C) of a VE. 3.5. Contracting with third parties The whole field of business to business (B2B) is incorporated within this issue. As mentioned before the question arises if a VE itself can conclude any contract with a third party and which jurisdiction will apply to this relationship if parties have not chosen explicitly which law should apply. Many questions concerning drafting contracts are related to this topic. 3.6. Intellectual property rights – industrial property rights Intellectual and industrial property will also be of major importance with respect to the VE. Working together in a VE implies the disclosure of some secret or protected information. Consequently, the VE will need to provide a certain level of security and protection for this information. Knowing that a VE can be very ephemeral and international many companies could refrain from taking part in a VE because they are afraid of disclosing information that is crucial to them. Once the VE is created questions concerning the ownership of IPR, concerning the partner that will see to it that proper steps are taken to obtain a patent, copyright, etc. will arise. Last but not least, questions will arise when the VE dissolves after having obtained certain IPR. Who will be able to profit form these rights, who will own them, etc? 3.7. Interchange agreement This issue will be of very high importance for the VE. The internal relations of a VE can be described as the set of rules, liabilities and duties that exist only between the members of a VE. These relations will be and have to be based on a contract between the different members of a VE. These contracts are often referred to as interchange agreements. The legal issues of forming and maintaining a VE and negotiating an interchange agreement as a set of rules governing the internal relations between the members of a VE will not create many new legal issues that were not already confronted in classic forms of (international) cooperation between companies. Contractual freedom will allow most parties to cover and anticipate the legal issues they could encounter. Parties will enjoy the freedom to determine the law governing their cooperation, the competent courts or arbitration, etc. If drafted well, the interchange agreement will provide the members of the VE a means to anticipate and solve many legal problems. 3.8. Control legislation – competition The debate concerning the legal issues of the VE should also take into account some influences that are located completely outside of the VE and have nothing to do with any relation of the members of the VE or the other businesses or consumers the VE is dealing with. Many sectors are governed by some kind of control legislation. Most of these sectors are of major importance for a Member State. Examples can be found in the banking and insurance sectors and in sectors of telecommunications or electricity. These sectors are regulated so severely that it becomes impossible to create a VE in these sectors. Very specific examples of control legislation in the broadest sense are competition law and tax law.

3.9. ICT related topics It is obvious that ICT related problems will arise in the VE (such as digital signatures, data protection, e-payment, etc.). These legal points of interest should only be taken into account as far as they have specific legal consequences for the VE. Although the ALIVE-project is part of the EC IST-program, not every possible issue linked to new technologies or to the information society in general will be studied. 3.10. Remaining legal issues Next to the above identified main legal issues, the Taxonomy also pays attention to topics concerning labour relations, liability and insurance and privacy. Given the limited scope of this paper, these topics are not discussed into detail. 4. The third branch of the Taxonomy – A classification according to different angles The third branch of the Taxonomy tackles and classifies the legal issues revealed by the second branch according to different angles. The angles are not merely used to classify the legal issues but also to create an added value. They provide a better insight into certain legal issues, for example to which actors of the VE they are important and at what time during the lifecycle they become crucial. 4.1. The Taxonomy and the VE life cycle A first angle is the classification based on the life cycle of the VE. From a legal point of view, the main phases in the live cycle are the business opportunity evaluation phase, the VE design and constitution phase, the VE operational phase and the end of the VE. Every phase will be characterized by its legal problems. E.g. the issue concerning the liability of VE members during the negotiations to set up a VE will arse during the VE constitution phase. This angle also shows the major importance that should be given to the interchange agreement and how parties should anticipate the end of the VE. 4.2. The taxonomy and the different actors in the VE A second angle to classify can be found in defining the different actors in the VE and the relations between them. The main actors are: the broker or the VE-architect, the members of the VE, consumers (B2C), other businesses (B2B), potential members, former members, authorities and governmental agencies. Every actor will encounter his own legal problems. The different relations between the actors will give rise to specific legal issues. 4.3. The taxonomy and the internal and external relationships of the VE A third and last angle can be found in the important partition between the internal and external relations of the VE. Using this approach, the legal issues can be classified in three main categories: Legal issues at the internal side of the VE. Examples of these issues are the interchange agreement, intellectual and industrial property rights, etc. Legal issues at the external side of the VE. Examples of these issues are consumer protection, control legislation, privacy issues, etc.

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Legal issues at the internal and external side of the VE. Examples of these issues are identity, liability and insurance, etc.

5. Conclusions At this stage of the ALIVE-project, it is still too early to draw final conclusions. However, some major dilemmas and questions that can function as guidelines, which have to be kept in mind during further research on the subject, do already emerge. A first dilemma to be solved is a political one. Too much regulation can suffocate the VE. Any regulation tackling the legal issues of the VE should try to strike a fair balance between the legitimate interest of the VE by safeguarding its flexibility on the one hand and the legitimate rights of the VE members and third parties doing business with the VE on the other hand. As the first one, a second dilemma to be solved is also a political one. Does a policy concerning the VE have to try to adapt existing rules to make it possible to apply them to the VE? Or should a totally new (legal) framework be set up, enabling to profit to the fullest extent of the new concept? The latest approach could overcome at least have the advantage of overcoming many conflict of law problems. However, a new formal legal structure may not endanger the fundamentals of a VE by taking away (a large part of) the economic potential of virtual enterprises. Finally, one has to question whether the more the cooperation between the members of the VE becomes stable and lasts longer in time, the more the current legal rules put pressure to shift towards the formula of a more traditional company.

Acknowledgement The paper has been funded by the European Commission through IST Project concerning Advanced Legal Issues on Virtual Enterprises (ALIVE) (IST 2000-25459). This paper does not represent the opinion of the European Community. The Community is not responsible for any use that might be made of the content of this paper. The K.U.Leuven Law School Department of Commercial Law and Insurance Law is solely responsible for all content provided by this paper. However, the K.U.Leuven Law School Department of Commercial Law and Insurance Law does only aim at communicating concerning the ALIVE-project. This paper does not make a claim to be exhaustive on the presented subjects and cannot be regarded as constituting any form of professional and/or legal advice. The K.U.Leuven Law School Department of Commercial Law and Insurance Law cannot accept any liability going beyond the limits described above. References – BIDSAVER-project (IST-10768): VE Legal Framework – CE Consulting: Advanced Legal Issues in Virtual Enterprises (ALIVE-project). WWW page. http://www.vive-ig.net/projects/alive. – Cousy, Herman; Van Schoubroeck, Caroline; Windey Bart: The Virtual Enterprise – Report on TechnoLegal Issues, 1999. – Cousy, Herman; Van Schoubroeck, Caroline; Droshout, Dimitri; Windey, Bart: Virtual Enterprise Legal Issue Taxonomy (Deliverable 03 ALIVE-project), see also: WWW page. http://www.kuleuven.ac.be/ve. – ESPRIT-project (EP 26854): VIrtual Vertical Enterprise.