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.