Whose rules apply to the Web?

In June, YouTube took a step toward mediating the problem by rolling out localized versions of the site. There are now 18 different YouTubes, including one for Mexico, several in Europe, and a Brazilian edition. Each is translated into the local language and tailored to reflect the countries' attitudes on privacy, copyright, and decency, Ms. Garlick says.

For example, the Taiwanese YouTube, which opened last month, has a broader definition of what's racy or violent and locks such videos behind an age-restricted part of the website, she says.

"Anytime a company has a major presence in another country, they should open a local site," says Ian Ballon, an Internet law expert who works with companies to develop international strategies. But taking that step can be a hard sell for small Internet start-ups, and for some large companies as well, he says.

"In 1999, I walked through these ideas with the general counsel of a substantial software company," Mr. Ballon says. "He looked at me and said, 'That's ridiculous.' Now, a number of lawsuits means that that attitude has subsided a bit, but there is still that cowboy mentality."

Even localized sites aren't perfect. They can't protect companies from lawsuits, because foreign users can still enter the US version. For example: In France, where it is illegal to sell Nazi memorabilia, Yahoo's French marketplace blocked them. But French users could simply buy them on the American site instead. After a lawsuit in 2000, a French judge ordered that Yahoo prevent all access to race-hate memorabilia in France – regardless of where it appeared.

"Geofilters" on some Web pages, particularly shopping sites, try to block foreign users, but the filters are easy to fool.

In 2004, Dow Jones settled a $400,000 defamation case by Australian businessman Joseph Gutnick, who sued after a 2000 Barron's Online article linked him to a convicted money launderer. Since the New Jersey-based website broadcast the offending article around the world, Australia's High Court unanimously agreed that Mr. Gutnick could sue under Australia's more stringent libel laws.

More notoriously, when Google launched its Chinese-specific search engine, it agreed to censor certain terms in order to appease Beijing. When users of google.cn look up "Falun Gong" or "Tiananmen Square," they find very carefully worded websites. The company argues that it's better to offer a partial portal than none at all.

Perhaps the biggest challenge for Internet companies today is how to manage their sites in China. Government servers block unauthorized Web pages, and companies wishing to start a localized Chinese version often must make concessions. On Nov. 13, Yahoo settled a lawsuit brought by the families of two journalists who were jailed in China. The case accused Yahoo of illegally aiding the Chinese government in arresting the reporters by handing over information that led to their arrest – and alleged torture.

But what happens the next time a foreign government demands data from a website? Should the company break local laws to protect their users and morals?

"That's a question business schools aren't asking enough," says Peter Navarro, a business professor at the University of California, Irvine, and author of "The Coming China Wars." "Executives, now more than ever, need to answer a range of tough ethical questions, and more universities need to help students think through the problems – to understand where lines should be drawn."

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