The ruling by a French judge at the end of last month that Yahoo must block French citizens' access to Nazi memorabilia on the internet portal's US auction site may not seem very important in the grand scheme of things.

But it could have a catastrophic domino effect on contradictory national legislation, with internet firms being caught in the middle.

The French government has now set a precedent that could force all online companies to comply with local laws. This would put the development of ebusiness back by years as individual states try to broaden out their idiosyncratic legislation to cover the whole internet, which is a global beast. And the legal battles look set to continue for some time.

"It is not a case of good or bad, right or wrong. It is a legal point and local law still applies even on the internet," said Alexander Drobik, vice president of business management at analyst company Gartner. "The internet hare has been caught up by the legal tortoise and it has quite vicious claws."

French law prevents the sale of any object that is likely to incite racial hatred such as Nazi memorabilia, and Yahoo.fr already complies with this prohibition. But the ruling by Judge Jean-Jacques Gomez now means that Yahoo's global sites must install technology to prevent French citizens being able to access auctions that sell offensive goods.

Foul play
Yahoo is crying foul play and argues that technology alone cannot realistically prohibit French citizens' access to its US site. More importantly, it also claims that compliance with the French ruling will leave it open to lawsuits from US citizens. The argument goes that US citizens who sell goods through Yahoo's site could sue it for interfering with their constitutional right to freedom of speech by restricting who can buy their merchandise.

But if Yahoo complies with the ruling, industry analysts and legal experts say the floodgates could be opened for other countries to impose equally draconian legislation.

"It says to every jurisdiction in the world, you can regulate the whole of the internet and stamp your morality on it," said Jonathan Armstrong, a solicitor specialising in ecommerce and internet issues at law firm Eversheds.

"The problem for Yahoo is that if it agrees to these demands, the countries that ban pornography will want to do the same [as France] and that's what a lot of people go to Yahoo for," added Alan Pelz-Sharpe, a senior consultant at analyst group Ovum.

And he sees this issue as likely to raise its ugly head again in the Far East, not only for Yahoo, however, but also for internet service providers (ISPs), and other portal suppliers and content deliverers.

Local laws
"There comes a point where you have to respect local laws. Whether Yahoo wins or loses, it will lose at some point, or things will turn ugly. The key flash point will be the Far East and the Middle East, where it is a big issue. Muslim states will want things such as pornography to be filtered," he claims.

Yahoo attests that there is no way it can block 100 per cent of any population from viewing a segment of its content, but the judge has said he will be happy with 95 per cent. Analysts agree that the technology is available to meet the judge's requirements, but it will increase Yahoo's operating costs by up to 25 per cent.

"It is possible and it is costly. The main thing is to trace the internet protocol address and limit the delivery of content. This won't catch them all, but then using keyword filtering will take out a further percentage," said Pelz-Sharpe.

For now though, Yahoo has to find a way to deal with last month's ruling. The French court has given it three months to implement the necessary architecture to block French citizens' access to the auction through its US site, or face massive fines.

Another possible option for Yahoo, however, is to withdraw all of its assets from France, refuse to comply with the ruling and force the French courts to try to get an enforcement order through the US courts. Drobik has serious doubts as to whether the US courts would interject on France's behalf.

No comment
But the ruling has stunned the industry, and a raft of portals, ISPs and ecommerce companies refused to comment on it until their legal departments had reviewed the full decision and considered its implications.

A spokeswoman for the QXL auction site, for one, said it is reviewing its operations in light of the decision. "We have taken it seriously and are reviewing the situation," she said.

Evershed's Armstrong said legal experts are also keeping their eye on developments in a US class action suit against auction site eBay that has echoes of the French case. Six US residents sued the firm in April, arguing that it should be held responsible for fake sports memorabilia they had bought from it. A US judge has now allowed the case to proceed as a class action suit.

"Lots of ISPs innocently hold auction sites, but it's impossible to monitor every auction, or even things sold through chat rooms," said Armstrong.

Ecommerce companies are also waiting for a decision on whether the European Union will adopt revisions to the Brussels Convention. These would allow consumers to take action against European online companies based anywhere in the European Union through their national courts. If a company were deemed to direct its services specifically at a given country, then citizens could file complaints through their national courts. As a result, online retailers could face the prospect of having to comply with 15 different sets of national laws and deal with court cases in each country.

This means that, as national governments struggle to regulate internet activity, online retailers not only have to get the business strategy and technology right, but must navigate a minefield of potentially damaging legislation.

Key points

• A French court order against Yahoo could set a major precedent for ecommerce across the world
• If Yahoo complies with the ruling, other countries may try to obtain orders preventing their citizens from accessing certain material
• The legal system is starting to catch up with ecommerce, which will mean more regulation.