Care About Contracts?
The rapid pace of e-commerce development has generally left the legal
system struggling to keep up and gasping for breath. In much the same
way as companies doing e-commerce must invent new business procedures
and rules, the legal system is trying to adapt existing laws to fit new
settings where it is simply unclear how these laws will apply.
e-commerce legal tool of choice is the contract. If parties can agree
how matters will be handled and capture that agreement in a written contract,
they can, in a meaningful way, establish the rules that will govern their
arrangements. In other words, these contracts can provide some degree
of certainty even in the rapidly changing arena of e-commerce law. We
can also expect that as legislatures and judges try to catch the law up
to developments in e-commerce, they will look at successful methods and
practices as models.
there is a premium placed on negotiating contracts that adequately cover
the likely scenarios that will arise out of an e-commerce relationship,
to the extent that those scenarios can even be predicted. For example,
"application service providers," were largely unknown even a year ago
and novel e-commerce arrangements and relationships are announced on a
of a "co-branding" venture where one party handles backend supply and
fulfillment, the other party operates the front-end web site, and both
parties outsource hosting and other services to third parties. Spice up
that arrangement with corporate structures that include separate e-commerce
entities, subsidiaries or joint venture relationships, and the notion
of a "short," "simple," or even "standard" contract really does not make
much sense. In fact, unlike traditional legal documents such as residential
real estate contracts, it is difficult to point to a "standard" contract
for e-commerce arrangements. You might even have several different types
of contracts with different parties in any given e-commerce venture.
the importance of contracts in the e-commerce arena, you will want to
know what to look for and what to think about when launching your e-commerce
venture. While this article obviously will not discuss every issue, I
have highlighted ten key legal concerns that you should consider in your
e-commerce ventures and contracts.
Down Your Domain Name
Do you have a "dot-com" name upon which you can build a brand presence?
In e-commerce, brand often means everything. The domain name system was
not designed to handle either today's volume of name requests or the issues
raised by domain name selection. In simplest terms, domain names are registered
on a first-come, first-serve basis. Problems are largely resolved through
a dispute resolution system that lacks history and, at times, consistency.
might find that your company's name, or something confusingly similar,
has been registered by someone who now wants to sell the name back to
you at a high price. This practice is now known as cybersquatting. There
are now laws against this practice and actions that can be taken to get
"your" domain name in that scenario. In another example, the domain name
you want for your e-commerce business may be taken, leaving you with the
choice of either changing the name you will use or purchasing the domain
name you want from its owner at whatever price the market will bear.
is a substantial interplay between trademark law and the use of domain
names. You will want to obtain the domain names that you want and secure
them through a combination of practical and legal methods, including the
use of trademarks. Some of those methods of protection should be addressed
by contractual provisions that govern the use of the name and any related
trademarks. Something to watch out for: If your web host or developer
registers your domain name for you, make sure that you, rather than the
host or developer, is listed as the owner on the registration. Also, clarify
who will have responsibility for renewing domain name registrations so
you do not lose a domain name.
Definitive Developer Contracts
Not even lawyers like long contracts, but, given the complexity of issues
that can be raised in a web development arrangement, you will want to
think carefully when balancing the desire for brevity with the need for
adequate protection. Most companies seem to be having third party developers,
rather than employees, develop e-commerce sites. There are many benefits
of this approach, including reducing the time-to-market of your e-commerce
site. The downside is you are transferring a lot of responsibility for
your e-commerce strategy to an outside party.
want your development contract to cover comprehensively the issues that
matter to you. You will want to establish hard deadlines for a "go live"
date, meaningful hold backs in payments, penalties for delays, and adequate
test procedures for your e-commerce project. Ideally, you will want to
condition your acceptance of the site on the completion of these testing
procedures and have the right to cancel a contract for a full refund if
the site does not meet your specifications. Not every developer, however,
will agree to acceptance testing or refunds. In that case, you will want
to obtain warranties that the site will perform in accordance with the
specifications. The more detailed you can be in the written specifications
of the site that are incorporated into the contract, the better off you
good contract will cover many of the other issues mentioned in this article
but also should include warranties that your use of the site will not
infringe on anyone else's intellectual property, and be fair and even
handed about liability limitations and other issues. Because a developer
of an e-commerce site will have access to vital information about your
business, well-drafted confidentiality provisions are essential in any
development contract. A key point to remember: the more of your core business
processes that you put on your e-commerce site, the more complicated your
development contract is likely to become as you think through and address
the business aspects of the arrangement.
Who Owns the Intellectual Property
You own your site, right? The intellectual property ownership provisions
in many e-commerce development contracts may surprise you. You may also
find that your contracts, or lack thereof, with employees and independent
contractors have not given you clear ownership of key components of the
patents, copyrights and other intellectual property you thought you owned.
The process of negotiating an e-commerce contract can be an eye-opener
in this regard.
issues of ownership will be different whether you have employees developing
your site, independent contractors, a third party e-commerce developer,
or if you outsource the entire e-commerce operation. Careful attention
must be paid to employment contracts, contractor agreements, assignments
of rights, and other documentation so that you can establish clearly the
ownership of intellectual property rights. This process can be cumbersome,
but it is necessary.
certain circumstances, you may not be able to obtain ownership of, for
example, certain components of a site that are produced by a third party
developer because the developer will insist on retaining the ownership
of those rights. In that case, you want to be sure that your contract
specifies that you have a license to use these components in your e-commerce
site and in other ways that you think will be necessary in the future.
Making sure that ownership is clarified and that all necessary rights,
licenses and permissions are granted is a major part of negotiating an
No matter what the size of a web site, there is a tendency for people
to add graphics, content or programs that they have found, usually " somewhere"
on the Internet, because they are cool, work well or were an easy way
to accomplish a task. In your e-commerce site, a developer may be using
programming, scripts, applets, shopping carts or other features that have
been taken from or used in other projects. Similarly, graphics, pictures,
backgrounds and layout may be borrowed from other sources. To the extent
that these items are incorporated into your e-commerce site, you will
want to secure the appropriate permissions before they are used. In the
case of a developer or a "co-branding partner," you will want to place
the contractual burden upon them either to secure the appropriate permissions
and licenses or, if they do not, to cover you in the event of any infringement
claim against you.
will also want to develop a policy of monitoring the revisions to your
site and addition of content to look for usage of other people's intellectual
property that may require permissions.
Your Right to Future Use
a typical e-commerce development contract, the developer and the owner
of the site have competing interests. The developer wants to take the
work that it has done on your site and reuse it for other customers. You
want to do with the site whatever you want, including replicating it and
using it for other sites.
e-commerce contract should address these competing issues head-on. Developers
understand that you do not want to pay a lot of money for a web site,
only to find a week later that your main competitor has implemented a
very similar site, also designed by your developer, that incorporates
your best ideas. You also understand that a developer's business survival
requires that you not be allowed to go out and sell a thousand copies
of the e-commerce site developed for you at a price far below what the
developer can charge.
issues are usually addressed in contracts through well-defined permission
requirements, non-competition provisions, license grants specifying permissible
uses, confidentiality provisions and even royalty or refunding arrangements.
There are a number of approaches and one or more may be applicable in
any given situation. The important point is to address these issues on
the front end of the project rather than to try to sort them out only
after a problem has arisen.
Off Hosting Hassles
Since a successful, high traffic e-commerce site probably cannot be hosted
in-house, there is a good chance that you will using a third-party host
for your e-commerce site. Hosting raises a number of difficult questions.
You will want to be sure that the hosting arrangements address your main
concerns, such as performance, security, privacy and the like.
times, customer support, uptime, security from hacking, redundancy and
data backups are just a few of the issues that are raised in every hosting
arrangement. Try to include written specifications and performance warranties
in any hosting contract. Consider the specifications carefully. Remember
that a promise of 99% uptime still means that your site can be down for
eight hours a month. Specify how customer support, notification of security
problems, scheduling of routine maintenance and other issues will be handled.
Data backup is another important issue. You will want to determine when
and how you will receive copies of the data from your e-commerce site.
establish an exit strategy. You may want or need to move the hosting of
your site for any number of reasons. Try to get the right to terminate
the hosting arrangement without penalty if the site's performance does
not meet the contract specifications. Vague and general contract language
may not offer much comfort in the case of a dispute over adequate site
performance. High-speed, reliable hosting is essential for an e-commerce
site and your efforts should be directed toward guaranteeing it.
Your Customers' Privacy
are genuinely concerned about the protection and privacy of their information.
E-commerce sites must have privacy policies that are available on the
site, and any site that targets a children's audience has special concerns
"co-branding" or other "partnering" arrangements, it is possible for third
parties to have access to the data of your customers. Your contracts should
explicitly cover the treatment of customer data and its permitted use,
if any, by third parties. Typically, advertisers and other suppliers want
to use at least aggregate traffic data about your customers which is not
identified to any individual customer or to your company. Through confidentiality
provisions or other explicit language in a contract, you can reach a result
on privacy and customer data protection that makes you comfortable and
that also complies with any other agreements or requirements you may have
on the protection of data.
privacy is an increasingly important issue and there are areas of special
concern, such as health-related information. Some e-commerce providers
have realized that the data they handle may be their most valuable asset
and will resist any attempt you make to limit their rights to use your
customers' data. You must proceed carefully in allowing usage of customer
data because your customers will blame you for any intrusions into their
make sure that the posted policy accurately reflects your practices and
that you are following its provisions.
Out the Sales Tax
To its credit,
the federal government has taken a largely hands-off approach to taxation
of e-commerce in order to let e-commerce develop on its own. There is,
as yet, no specific federal e-commerce transaction or sales tax. As the
value of business transacted through e-commerce increases, however, it
will become difficult for the government to keep its hands off of e-commerce
and not see e-commerce as the golden goose of potential tax revenues.
using some e-commerce sites have been attracted to the savings they get
by not having to pay local sales tax. Local merchants and e-commerce sites
that do have to charge local sales tax, not surprisingly, see this state
of affairs as giving some "pure e-commerce" sites an unfair advantage.
As a result, we have seen issues raised about sales tax requirements for
e-commerce companies. These issues can be quite complex and vary from
state to state.
area is in flux and that can make it surprisingly difficult to figure
out the local sales tax implications of any given e-commerce transaction.
Note that some companies are taking technological (software that automatically
calculates applicable sales tax for each transaction and applies the relevant
business rules) and structural (separate e-commerce entities) approaches
to deal with the sales tax issues. This is an area where there will undoubtedly
be developments as time goes on.
Craft Clickthrough Contracts
sites and e-commerce transactions are governed by contracts posted on
the e-commerce site. These contracts typically give the customer a "take
it or leave it" opportunity to view the contract terms and then click
on a button that says "I accept." These contracts have come to be known
as "click through" contracts. While there remain some unresolved questions
about their enforceability, they have become an accepted way of doing
business on the Internet. The new Uniform Commercial Information Transaction
Act ("UCITA"), which is intended for adoption by all fifty states but
as yet has been adopted in only two states, will help clarify the rules
and procedures for these types of contracts.
It is important
to consider both the terms of these contracts and how you will present
them to your customers or other users of your e-commerce site. Pay careful
attention to the procedures that your customers must follow to accept
the terms of the contract. Both UCITA and the new federal electronic signature
legislation have implications for these types of contracts.
types of contracts will contain the terms by which you want your transactions
with consumers to be governed, you will want to pay a great deal of attention
to getting your contract in order and placed on your site in a way that
maximizes the probability that it will be valid and enforceable.
Mindful Of Business Method Patents
recent change in the interpretation of the patent laws has made it possible,
and attractive, to obtain patents for "business methods." This new development
has resulted in the granting of certain types of patents not available
in earlier years. Many of these business method patents have been granted
in the e-commerce and software area. Some of them are quite broad and
many are very controversial. The most well known of these is Amazon.com's
"one-click" process for ordering items on an e-commerce site.
In the past
year, business method patents have been granted which cover very basic
and commonly used aspects of e-commerce, including hyperlinking and, recently,
the basic idea of performing international transactions via the Internet.
If these business method patents prove to be enforceable, operating your
site may require the payment of a royalty to a patent owner.
site owner has two concerns. The first is that your site uses a method
that is the subject of a patent and that you might be prohibited from
using that method for your site. The Amazon.com one-click patent is a
perfect illustration of this concern. In the holiday season of 1999, Amazon.com
was able to prevent its competitor, Barnes and Noble, from using a similar
"one-click" process by asserting its patent rights. The second concern
is whether you can patent the unique features you have developed for your
e-commerce site and take advantage of these patents.
a lot of flux and controversy involving business method patents and the
Patent Office is reviewing its policies on issuing them. As a result,
these patents and the expectations of others to come have created a lot
of uncertainty in the area of e-commerce. On a positive note, however,
business method patents may give you another way to protect your intellectual
are many other "hot" legal issues in e-commerce. In the business-to-business
setting, the antitrust laws may be applied to exchanges or auction sites
run by competitors in an industry category. There are issues about hyperlinking
to other sites, using competitors' trademarks in the underlying code of
your site to enhance placement in search engines, tax treatment of bartering
and other types of auction transactions, and a variety of other issues.
Jurisdiction over e-commerce sites continues to remain unclear and issues
are likely to arise over where and how disputes will be resolved.
pushes the envelope when it comes to the application of existing law.
Eventually, the law will begin to catch up, but until then the rule of
the contract will likely be the primary authority in most e-commerce arrangements.
It will be far better to have dealt with issues directly in a contract
than to leave them to the determination of a judge after several years
of litigation. As in e-commerce itself, the rewards will go to those with
innovative, well-planned and well-crafted arrangements.
Kennedy practices law in the Intellectual Property and Information Technology
Department at Thompson Coburn LLP in St. Louis, Missouri. Dennis speaks
and writes frequently on Internet, technology and legal topics and has
collected nearly 100 of his published articles and other e-commerce resources
This note originally appeared at www.llrx.com