Ten Key Legal Concerns in E-Commerce Ventures and Contracts

  • Written By: Dennis M. Kennedy
  • Published On: December 20 2000



Why 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.

The 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.

Today, 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 regular basis.

Think 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.

Given 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.

Nail 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.

You 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.

There 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.

Demand 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.

You 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 will be.

A 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.

Know 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.

The 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.

In 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 e-commerce contract.

Get Permission

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.

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.

Understand Your Right to Future Use

In 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.

An 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.

These 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.

Head 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.

Response 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.

Also, 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.

Protect Your Customers' Privacy

Consumers 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 and requirements.

Through "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.

Consumer 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 privacy. A final point: review your site's privacy policy regularly and make sure that the posted policy accurately reflects your practices and that you are following its provisions.

Sort 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.

Consumers 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.

This whole 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.

Carefully Craft Clickthrough Contracts

Most e-commerce 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.

Since these 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.

Be Mindful Of Business Method Patents

A relatively 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.

Any e-commerce 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.

There is 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 property.

Conclusion

There 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.

E-commerce 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.

About The Author

Dennis M. 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 at http://www.denniskennedy.com. This note originally appeared at www.llrx.com

 
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