The Internet Bankruptcy: What Happens When the Bell Tolls for the eCommerce Industry?

Article excerpt


Not long ago most business and intellectual property lawyers representing Internet start-ups thought they had no need for knowledge of the bankruptcy world. Bankruptcy attorneys knew no better, thinking that Internet companies never really failed--at worst they just closed their doors quietly while the VC paid any creditors. Both sides of the fence know better now and are learning that the technologies that revolutionized intellectual property law, tort law, and business have the potential to also revolutionize bankruptcy and commercial law. The last two years saw a trickle of eCommerce and telecommunication bankruptcies turn into a flood and, along the way, found several books and articles published by the people on the front lines. (1) This article summarizes some of the relevant and emerging issues.

The .com Phenomenon

The late 1990's were generally an unhappy time for bankruptcy attorneys. A strong economy and expanding financial markets greatly reduced the number of business bankruptcies filed. Chapter 11 business bankruptcy filings dropped from 13,379 cases in the year ending September 1994 to 7,953 cases during the year ending June 1999. (2) This change coincides with an incredible expansion of the information technology (IT) industry, resulting, in large part, from the Internet's integration into U.S. society and business.

The Internet is a major component of the networks and non-networked applications generally referred to as "cyberspace." The term generally applies to "any interactive environment that is or can be outside of real time and real space." (3) The term cyberspace references the network of computers that can be accessed over the Internet, and the information available on that network. (4) The Internet is not as new as some might think. Its predecessor, ARPANET (the Advanced Research Projects Agency Network of the U.S. Department of Defense), was completed as far back as 1970. The current TCP/IP transmission protocol went into use in 1982. However, it was not until HTTP (hyper text transfer protocol) was established in 1991 and the Mosaic browser created in 1993 that the Internet as we now know it began to emerge. (5)

Still, at the end of 1994 only 10,000 Web site servers were connected to the Internet. By August 1999, that number had increased to more than seven million. (6) Today, HTTP allows the World Wide Web, which consists of millions of connected Web sites and is what most people think of when they think of the Internet. The Mosaic browser has gone through several transformations to become Netscape Communicator. Hundreds of millions now use it or similar Web browsers to surf the Internet.

Understanding the Internet's impact on future bankruptcy practice requires examining how the Internet has changed technology use in U.S. business. After all, the computer industry is not a new industry, technology-oriented bankruptcies are not new, and businesses have used computers since the 1940's. The difference is that the Internet raises the stakes. Businesses using tools made available by the Internet gain such an advantage that they can't afford not to use them. Law practice provides a convenient example. Three years ago many major law firms had neither e-mail nor Web sites, and not all attorneys used personal computers. Today, almost all major firms realize that they must integrate computing into their practices in order to remain competitive. Without e-mail, attorneys don't have the ability to communicate with clients in the manner clients require. Without a Web site, firms can't project a world-class image. The software required to work collaboratively with clients and other firms does not run on older DOS based computers, nor will the software needed to access the Internet, so firms are forced to upgrade their computer systems.

Today any major corporation has a Web site and probably uses it to sell goods, automate its supply function, or otherwise operate its business. …