Legal Considerations in E-commerce

  • Written By: D. Geller
  • Published On: November 1 1999



Legal Considerations in E-Commerce
Anthony E. Perkins, Esq. and Dennis P. Geller, Ph.D.
December 9th, 1999

Guest Analyst: Anthony E. Perkins is an Attorney and a Principal with TechVentures Group, LLC., a business advisory group focused on technology-oriented businesses and ventures seeking expert assistance and information on starting, growing, selling, merging or financing their companies.

Can They Do That?

"I sent them an e-mail and the next time I looked at their website they had posted the mail, with my name and address for everyone to see. Can't I sue them for violating my privacy?" asked one shopper. "Somebody told me that my competitor has already taken the name of my store as an Internet address. Can they do that?" wondered the owner of a small chain of shoe stores. "I heard that someone has a patent on the whole idea of a shopping cart. How can they get a patent for that?, What can I do if they sue me?" complained the CEO of an on-line cosmetics site.

What exactly are the rules for business on the Internet? How does a new business make sure that it is following those rules, and protecting itself against legal challenges from other companies and irate consumers? Legal advice about the most important legal steps to be taken when entering into an Internet-based business venture can be essential for the venture's long-term success. This article will help you understand the kinds of information you need to provide to your attorney to get the best possible advice on setting up you new Internet business.

Where to Start

Although you may be already thinking about the complex contractual issues of buying and selling on-line, or about protecting your business from being hailed into foreign courts, your attorney will probably want to start with the key intellectual property components forming the core of your electronic business. So the first item of discussion will undoubtedly be your business plan.

Electronic commerce is like any business undertaking. As with any business, there needs to be a well thought out business plan that includes the details on what the business entails, who will be involved in the business, who will carry out the various business steps and how the business will achieve its financial goals. Unfortunately, the current gold rush mentality surrounding Internet stocks and IPO's has created a feeling among many in the business community that they need to jump into the E-commerce arena or risk losing a significant competitive advantage. Your attorney will be aware that many of the Internet-based business ventures rolled out in the last few years have spent large sums on start-up and still have not made any profits.

So don't be surprised or impatient if, before spending a significant amount of her time and your money your attorney's initial focus is on whether you have completed a detailed business plan with solid financial projections. She has already seen far to may people who don't recognize that a poorly planned venture cannot be a success in cyberspace any more than it can be in any other venue. Once she has determined that you have defined a financially feasible and technologically appropriate Internet based business, your attorney will engage in some or all of following key lines of inquiry.

Trademarks and Domain Names

Business commentators and Internet consultants alike make it clear that "branding" and key trademarks and trade names are critically important to most successful Internet businesses. AOL, Amazon.com, E-bay, E*Trade and others are Internet brand names known to a significant portion of today's business and consumer population. As a result, trademarks and domain names are often one of the two or three most important business considerations for an E-commerce business plan. This area also presents some of the most significant legal pitfalls for companies that do not undertake the proper investigation and preservation of proposed trademarks and domain names.

Although you may have been able to register a catchy Internet domain name, it may well be that a registered trademark in the same business category will trump that domain name and likely prohibit its use altogether. In one case, Brookfield Communications had already registered the trademark "Movie Buff" when West Coast Entertainment Corp. tried to use it as a domain name. Although West Coast was able to secure the domain name, a court found that because of the similarity of the businesses at issue consumers would likely be confused as to the source of the information or products provided at the moviebuff.com web site or through its related services. As a result, West Coast was unable to use that domain name.

It is not enough to engage in Internet based searches of registered trademarks at the Patent and Trademark Office and of Internet domain names at NSI.com. There is an ongoing flood of registrations in both offices for trademarks and domain names and you need to have the most current and complete information possible. If you are considering international trade or business via this Internet business, your attorney must also be prepared to investigate the availability of these marks and names in the foreign nations where business is to be conducted and then file appropriate applications to register these names. Simply put, your attorney should not only register any key domain names with the appropriate domain name authorities but may advise you to file and prosecute appropriate trademark applications to fully protects your rights and interests in this key piece of intellectual property.

Choosing A Lawyer

You will want to retain an attorney with prior experience in E-commerce ventures or one whom you believe has sufficient skills and contacts to fill in any holes in his background. Since the areas in which you need legal expertise are broad, you may consider working with a large firm that has all of the specialties in house. However, a small firm, or even a solo practitioner, may have sufficient experience or professional resources to meet your needs.

As the accompanying article shows, your total needs include general familiarity with legal issues resulting from business ventures, the ability to research copyright, trademark and patent issues, trade secret and intellectual property, and employment law. Ability to advise on your overall business strategy is a plus, as is experience with the financing of Internet ventures. Each of these can be a professional specialty, so finding one individual who can do all of them well is unlikely. Whether you choose a sole practitioner or a top corporation, treat your legal team as you would any other consultant.

  • Make sure that there is one person who will be your direct contact, and that this is a person you feel you can work well with.

  • Meet the key members of the team and examine their backgrounds. Ensure that the team has the necessary skill and experience, and that they are actually available to work on your case.

  • Talk to references.

  • Get estimates of the cost.

You want to spend your time building your business, not dealing with legal roadblocks. Spending the time to get good legal advice from the start is a diversion, but it is nowhere as much of a diversion as a lawsuit.

Web Site Development and Web Site Hosting Contracts

Most web site development and web site hosting contracts will offer their "standard" contracts for you to sign. Businesses like yours often sign these so that they can "get rolling" with their new web site and their E-commerce venture. These businesses may later find they do not "own" the fundamental pieces of their web sites and that they have little control over much of the key customer or "web traffic" data generated by those sites. Unfortunately, under the U.S. Copyright Act this approach almost always results in the business not owning the computer coding, graphics, documentation and derived web data which comprise its web site. All of these "products" are works of authorship owned by the author/creator under the Copyright Act.

If you have already begun to negotiate for development and hosting services, or have already signed contracts for these services, it is therefore very important to make them available to your attorney. Unless the web site development contract (and possibly hosting contract) contains a provision making the web site a "work made for hire" you may actually have a very limited license to use and change that product.

These may seem to be farfetched issues that are unlikely to arise if you work with respectable developers and hosting organizations, but it is easy to miss something important in the rush to get a product up and running. A particular area of concern can be that custom development houses often have proprietary software packages that they can use to build your website. This is one of their advantages, and is much cheaper for you than having the same functionality built from scratch. However, downstream you may need to be able to write your own software to use these packages, or your requirements may change in ways that require modifications to these packages. If issues like these are not addressed in your contract - and it is unlikely that they will be part of the vendor's standard contract, no matter how respectable they are - you may incur unexpected costs or loss of function at a later time.

As always, prevention of disputes is preferable to having a way to resolve them after they occur. For example, while the registration of trademarks and domain names will most likely prevent a web designer/host from using your product if a dispute arises, any questions about ownership do you no good and likely derail your web presence and E-commerce venture. In this area the key considerations are your ownership and control of the product (and all related data) and your ability to "unplug" the web site from one Internet service provider ("ISP") or hosting agent and transfer it to another seamlessly. Given the competition among ISP's and the potential for comparatively poor or spotty service, maintaining those rights (and the related flexibility to make changes) is critical to a solid E-commerce plan. Interruptions and loss of usage of your web site due to a dispute or a failed ISP is one of the fastest ways to lose customers in the E-commerce arena. Control over your customer data is also critical: Another sure way to lose Internet business is to allow customer information to be used by third parties in any manner not related to or contemplated by the original business transaction.

Protection of Software, Trade Secrets and Business Processes

Another key area closely related to web site protection is the protection of any customized software, trade secrets, computer system innovations and customer data used in or generated by the "behind the scenes" operation of a true Internet business. As more business processes become automated and driven by or through computers, more attention must be paid to protecting and preserving the intellectual property that comprises these operations.

Historically, software developers generally have sought protection for their products under the provisions of the Copyright Act. Depending upon the circumstances and the particular usage of the software in question, the protections under the Copyright Act may be sufficient to preserve the author's (software developer's) ownership interests in the product. As discussed above with respect to web site programming, you should seek to "own" and protect any customized software created for use in connection with their electronic business. There are various legal mechanisms that can provide for this, depending on the type of product involved. Your attorney will also ensure that agreements contain suitable confidentiality provisions to prevent software developers and/or consultants from disclosing and/or using any of your trade secrets or proprietary information.

Your attorney should be aware of the growing use and popularity of "Internet patents", also known as "business process patents" or "software patents." The availability of patent protection for certain software or computer systems has been known by industry experts for many years. However, a recent case involving State Street Bank & Trust Co. and Signature Financial Group, Inc. has brought the power and potential liabilities associated with Internet or software patents to the front page. State Street Bank & Trust challenged a patent issued to Signature Financial covering the automated business process of calculating and attributing gains, losses and expenses to multiple investors in a pooled investment fund. The court, in denying the challenge, cleared the way for patents on myriad "automated" business processes. The State Street ruling has caused a flood of patent applications for all types of Internet and computer based "inventions," including the web site "shopping carts" every web surfer has seen, the "reverse auction" process put into place by Priceline.com, and other computer driven business processes.

In short, this trend of "business process" or Internet patents has raised the stakes for any business getting into the world of Internet-based commerce. If your E-commerce plan involves any unique automated features or methods it would be wise to undertake a patent search to determine whether a patent has been issued for that particular process and if not, possibly protect it by filing a patent application. These steps could well prevent the unpleasant and expensive surprise of patent infringement litigation.

Key Employees

This final key area falls under the same general umbrella of intellectual property protection. Technical employees have rapidly increasing market values (and opportunities), and these individuals often have detailed knowledge of the key technical systems and proprietary processes and/or information which drives your e-business. You therefore need protection against the loss and subsequent competitive use of that proprietary information by departed employees.

A written non-compete, non-disclosure, non-solicitation, work made for hire agreement is the best means of protecting the "know how", trade secrets and confidential customer and operational information obtained by these key IT personnel. While the geographic scope and time periods covered by this type of agreement is open to question in this rapidly changing, increasingly global business market, a comprehensive non-compete/non-disclosure/non-solicitation and "work made for hire" agreement with a self-limiting clause is a good first defense. If the goal of protecting your intellectual property is an important one, this step is an absolute necessity.

Conclusion

As E-commerce becomes an ever-increasing portion of business activity, the marketplace is going to become much more competitive. Smaller businesses and virtual start-ups will be able to compete in almost any business segment. In order for you clients to compete efficiently and profitably in this Internet-based business arena you will need a solid legal foundation. Your legal counsel can provide valuable assistance in establishing that foundation by addressing these key legal issues at the outset of your electronic business venture.

 
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