Rebecca has posted the draft of the "Global Online Freedom Act" (GOFA) and has great coverage of yesterday’s hearings. One part of GOFA that struck AsiaPundit as interesting was the below section.:

UNITED STATES BUSINESS.—The term ‘‘United States business’’ means—

(A) any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship that—

(i) has its principal place of business in the United States; or

(ii) is organized under the laws of a State of the United States or a territory,possession, or commonwealth of the United States;

(B) every issuer of a security registered pursuant to section 12 of the Securities Exchange Act of 1934 (emphasis added) (15 U.S.C. 78l)

Part ‘B’ is of interest as that the proposed legislation would not only cover Google but also the Nasdaq-listed Baidu, Google’s largest rival in the Chinese market. The fines that are suggested for non-compliance with the legislation range from $10,000-$2 million, which would be peanuts for Google, Microsoft or Yahoo - but more painful for Baidu and for  portals Sina and Sohu.

That’s still fairly inconsequential for all of the companies. The biggest damage, if such a bill passed, could come from the provision that would allow a user who is  "aggrieved" by a company failing to protect their user data to sue the company in a US court. Although the proposed fines imposed by the state could be tolerated by US companies and their Chinese counterparts, punitive damages can be crippling. Such damages exist simply to ‘teach companies a lesson’ and ’set an example’ for others. These damages can run in the tens of millions or higher. A US jury would surely consider aiding the imprisonment of a pro-democracy activist as something that would be deserving of a serious ‘lesson.’

If the case of Li Zhi were to be repeated, and such legislation were in place, the risk would likely be greatest for local portal Sina.com rather than Yahoo. Roland notes that both were implicated in the case.

Yahoo Inc would likely in the future be shielded from direct actions in US courts as its China operations are 60 percent owned by Chinese e-commerce firm Alibaba, Sina, however, would be exposed to court actions through its Nasdaq listing. Note that the legislation would not be retroactive so Li Zhi could not seek redress, the above is just an example.

Google has not yet located any servers in China and it has said it will not offer any e-mail or blogging services in the country. In that sense, it is much more insulated from penalties than US rival Microsoft.

Baidu, as well, is facing trouble in the US due to its popular MP3 search function, which accounts for more than 20 percent of searches.

AsiaPundit suggests readers take a moment to appreciate the irony. In China, conventional wisdom is that the internet is a major regulatory grey area where foreign companies must tread cautiously. The internet is governed by over a dozen ministries and authorities and an investment could be easily put at risk by a number of them.

In the US, the market is developed, has relatively clear regulations and is predictable. Yet, Chinese internet companies are now facing risk due to what could be called a ‘political whim.’

It seems that the legislation that Chris Smith is proposing, though targeted at US companies, could have the most adverse impact on their Chinese rivals.

For further reading read RConversation (link to February 2006 archive, hearings were held on the 15th) and follow the links at Boing Boing.

Technorati Tags: asia, baidu, censorship, china, , microsoft, northeast asia, sina, sohu, yahoo