Untangling The Web: An E-Commerce Legal Guide to Protecting Your Business and Avoiding Problems

Federal and state e-laws are rapidly changing, while federal and state courts and agencies aggressively assert jurisdiction over Web-based businesses to bring the brave new e-commerce world under control. There is no mistaking one aspect of the law:  cyberspace is not some offshore law-haven. To the contrary—sell to a nationwide customer base and you are accountable under all applicable laws, federal and state, and to all federal and state courts and agencies, such as the increasingly aggressive Federal Trade Commission (“FTC”) and its state consumer protection counterparts. Giving your business a prompt legal check-up may be critical both to ensuring that you are maximizing growth potential through protection, and benchmarking its value to maximize exit strategies.

Current issues snarling e-commerce competitors in the tangled web of American lawsuits include:

• False advertising claims for alleged misleading statements about a vender’s own goods and those of competitors, including cases for lost business profits from downloaded software which failed to perform as promoted by the Website distributor¹ ;
• Cyberpiracy, trademark infringement and dilution claims stemming from unauthorized use of others’ trademarks as metatags, as domain names, and on Websites² ;
• Unauthorized commercial e-mail spamming to solicit traffic in violation of ISP license agreements.³  The FTC has conducted hearings on unsolicited commercial e-mail, is carefully monitoring the problem, and has pursued enforcement actions in cases involving fraud;
• Unauthorized linking, “deep linking” and framing to others’ Websites, resulting in copyright and trademark infringement actions⁴ ; and
• Damages for the unauthorized “cramming” of fees through the addition of charges on phone bills for purportedly “free” services. The FTC has aggressively enforced against cramming practices.

And looming in the future are lawsuits for violation of business process patents – that is, patents which cover e-commerce business methods for those who allegedly first used them, such as the reverse auction.⁵

Business Process Patents – An investment for the VC or IPO?
The patent process is increasingly important to aggressive entrepreneurs who are willing to make the significant investment required to assert patent protection in their innovative e-commerce ideas. From methods for creating a reverse auction⁶, scrolling tickers⁷, and the “shopping cart,”⁸ competitors have staked claims to many basic business methods of Web commerce. It is clear that business process patents are viable. State Street Bank & Trust Co. v. Signature Financial Group, Inc.149 F.3d 1368 (Fed. Cir. 1998).

If securing a business process patent requires the investment of thousands of dollars, forcing others to license those patents through enforcement and litigation may require that investment ten-fold. In the U.S. market, many are willing to make to this investment – from the largest players who are willing to buy patent rights, to plaintiff attorneys, willing to pursue contingent fee litigation. An investment in patent applications, along with copyright and trademark applications, however, often can provide the tangible appearance of a desirable, proprietary e-commerce business. Investors look for tangible indications that a business is unique or proprietary; patent protection is a clear sign of exclusivity. Thus, owning patent applications, together with more readily available trademark and copyright registrations, may help increase the value of the company to venture capitalists and other investors.

More vexing, however, is the effort to analyze the true enforceability of a patent and the risk of having to defend infringement claims. It may take several years for a patent to mature from application to registration, during which time the contents of the U.S. patent application are confidential. Restated, it is impossible to advise a client at any given moment that its business plan will not infringe an existing patent application. In rapidly changing technology fields, the true value of business patent protection is, therefore, purely speculative. It is not a great exaggeration to note that there are successful, entrepreneurial, e-commerce businesses whose life cycles are shorter than the business process patent process. The value of investing in such protection as well as the risk of competitive actions must be carefully considered and matched to each individual opportunity.

Anti-trust Considerations
Because the Internet has created new ways to distribute products and services, and because the temptation is great to restrict distribution channels to gain advantage over “dot com,” traditional “brick and mortar,” and blended “click and mortar” enterprises, antitrust law suddenly has new relevance. Overly restrictive sales and distribution channels can violate the Sherman Act, an old law that many business owners are only recently factoring into their business decisions. The Act also governs other anti-competitive business practices such as price fixing and product tying, that merit legal analysis when a business is planning reseller arrangements, vendor partnering, and business-to-business transactions.

Domain Names and Marks
Nowhere is branding more critical than on the Web. Domain names, brand names and logos are among the most valuable assets for a company whose bread and butter are consumer products and services. They create consumer demand through advertising and word of mouth. As every Web entrepreneur knows, consumers often shop by directly typing a term – generic and brand identifiers, alike – into a “www” Web address or search engine. Businesses scrutinize even the metatags used in competitive Websites and sue for unauthorized use of their marks as metatags to unlawfully create initial interest in unauthorized sites. Competitors jealously guard their trademarks and logos - and are often willing to sue each other to protect their rights. They also are willing to aggressively assert rights in the interest of ensuring that businesses do not dilute their rights in their brand identifiers, even if the offending use is non-competitive.

Prominent use of a term or logo to attract consumer attention can be attacked as violating prior rights of others. The fact that your business does not claim that a term is its mark does not mean that use of the term is lawful. Legal clearance is a must for any term that receives prominent use because it appears

• as the domain address or proxy address;
• in the site metatags;
• prominently on Website copy; and
• prominently in collateral material to promote the e-commerce business.

Like patent infringement, trademark infringement may be innocent or unintentional. A business may be liable even if it unintentionally adopted properties that are likely to confuse consumers, or because it treads on the distinctive reputation of a famous mark. And unlike patents, trademark rights subsist for so long as the owner uses them.

Intentional adoption of another’s mark for use as a domain name or on a Web page may trigger additional claims – and, perhaps, severe damages and attorneys fees according to the 1999 Cyberpiracy Law, enacted as Section 43(d) of the Lanham Act, 15 U.S.C. ß 1125(d), with possible statutory damages ranging from a minimum of $1000 - $100,000. And intent to misappropriate another’s trademark may result in a treble damage award under the federal trademark laws.

Before committing time and resources to product development, legal clearance should be sought for all proposed marks. Despite the outcome of the initial investigation, you may want to adopt a particular domain and mark. Recommendations against use of a mark based on government and trade records are just that – recommendations based on records. However, records do not necessarily reflect marketplace fact, and the noted conflict may not actually exist. Indeed, in this environment, the competitor may not exist, may have changed its marketing plans, or may have been acquired. Sometimes the mark is owned by a business that would love to sell it for a reasonable price; and, if the company is willing to expend more substantial time and money in pursuit of a desirable mark, viable options may exist.

Federal registration of marks which the company intends to secure should be sought as soon possible. While use of an e-commerce mark usually is proven through submission of screen prints., mere use of the mark as part of the Website address is not sufficient to support registration; rather, the mark must appear prominently, in an attention getting manner, on the Website itself.

In the event of a dispute over a domain name, there are at least three options: 

• Sending a “cease and desist letter” is efficient, inexpensive, and helps you build a record for use later in the event of litigation, but may not convince the other party to stop using the domain name;
• Litigating in Federal Court, under either the new Anti-Cybersquatting law or traditional trademark law, provides a host of strategies for convincing the court that the domain name rightly should be used by you alone; and
• The very new and so far, highly acclaimed, Internet Corporation for Assigned Names and Numbers (“ICANN”) dispute resolution policy provides a quick mechanism in the event of genuine cybersquatting.

Advertising Clearances
Advertising claims are aggressively policed in the United States through competitive suits for false advertising, federal agency oversight, and individual state agencies. In addition, companies that engage in prominent print and broadcast media advertisements may encounter the National Advertising Division of the Better Business Bureau (“NAD”). NAD findings that an advertising claim is false and misleading may result in the inability of the advertiser to obtain placement for the claim in desirable media.

Claims which commonly result in disputes with competitors, litigation, and agency review, include:

• Product or service superiority over a competitor;
• Consumer preference claims regarding a product or service;
• Health or safety claims regarding a product or activities for which it is used;
• Scientific or medical claims regarding how a product or ingredient works - especially if related to health, safety, or the environment; and
• Scientific or medical claims regarding the results a product or ingredient will achieve.

Truth in advertising is required by federal and state law, and enforced through the FTC; state consumer protection agencies; and, most importantly, by the threat of lawsuits for false advertising which may be brought by competitors as well as consumers. Competitors also may complain to the NAD, which may effectively ban advertising containing false claims.

Advertisements which contain claims that are not substantiated as of the date they are publicly made may result in:

• Injunctions;
• Product recalls;
• Treble damage awards based on the false advertiser's profits, the competitor's loss of market share, or the competitor's cost of placing ads to correct the false statements;
• Government fines of $10,000 or more each day; and
• Retractions.

Unlike many foreign countries where comparative advertising is unlawful, it is common place in the United States. But there are rules. And these aggressive forms of competition often result in lawsuits for false advertising, or referrals to the NAD. A company may refer to a competitor or its marks to fairly and accurately describe them. Comparative advertising, poorly executed, can result in substantial damages, injunctions to prevent further use of the advertising found to be unlawful, and even injunctions and awards to require corrective advertising. In short, a single false claim may cause millions of dollars of harm.

Copyright Protection and the E-commerce Business
Advertising materials are commonly protected through the copyright laws, and Websites are well suited to such protection. Fanciful logos, packaging designs, labels and brochures may well be protected under the copyright law, which broadly protects original works. The originality requirement means that the work must not be so elementary that it lacks even a modicum of creativity and that it was not copied from another source. Protection may be asserted in text, music, photos, sculpture and drawings, although very basic graphic layout, simple geometric shapes, color selection, one word terms, like a trademark, or short phrases, like slogans, generally are not copyrightable subject matter. Most critically, the copyright law will not protect ideas or concepts.

Copyright laws have forcefully shaped the development of e-commerce businesses by requiring developers to strike careful bargains regarding ownership of technologies. Moreover, copyright laws are potent weapons against infringement of Website engines, as well as content. E-commerce businesses are almost always partnerships between technology and business experts. U.S. copyright laws consistently give the upper hand to the technology creators, in the absence of carefully drafted written agreements in which ownership rights are clarified. The common ownership dispute develops when an e-commerce entrepreneur strikes a handshake deal with a consultant, or small programming team or business.  In the rush to beat competitors and launch their business, the entrepreneur and programmer pool their resources and go to market – all without a signed agreement.

When a dispute develops in the foregoing scenario, the entrepreneur who funded the effort will be the unhappy loser under U.S. law. The entrepreneur will assume that it owns the work which it paid the programming team to develop. But the law will not support this result. At best, the entrepreneur may have a non-exclusive license to use the work for the specific purpose for which it was created, leaving the programmer with the right to

• Sell the same or improved version to the entrepreneur’s competitors;
• Go into business directly in competition with the entrepreneur, touting the added marketing advantage of being the technology expert;
• Enjoin further development by the entrepreneur of the work; and
• Make additional use of the work, for example, by selling it to customers who were not anticipated at the time of creation.

There is simply no excuse for failing to strike clear agreements between e-commerce business entrepreneur and technology partners given the catastrophic results. Title to copyrightable works cannot pass in the absence of a written document signed by the creator. The sole exception to this rule is when a salaried employee creates a work as part of their defined employment duties for the benefit of their employer; this rule is absolutely inapplicable to independent contractors.

A consolation to the Web programmer that may aid in resolving the ownership issue is to agree to grant “attribution rights” so that the programmer has a mechanism, through notices or ads on the site, for publicizing the services toward a wonderfully designed Website. And, be sure to seek adequate service levels and warranties that the software underlying the Website is portable. A competent programmer/host will agree to service levels that specify, for example, the that the site will not be unavailable for more than a specified number of hours per month, or that maintenance will not be applied during peak periods of activity, and you should be provided with monthly statistics on site activity and availability. Finally, when you and your programmers decide to part company, you should receive assistance while transitioning to the new host, and a license to continue to use and maintain that software.

While the focus during the implementation of your business plan may be on protecting your company’s materials, do not neglect to avoid infringing the works of others. For example, an owner of a Website could be held liable for contributory infringement of copyrights of others by knowingly providing links to infringing works.  And, the Digital Millennium Copyright Act (17 U.S.C. Section 101 et.seq.) provides specific definitions for Copyright Management Information (“CMI”) that owners of copyright may convey in connection with their work. It is illegal to remove or alter CMI; and CMI includes not only identifying and notice information, but may include terms and conditions for use of the work.

Copyright registration efforts may be well worth it – and the $30 filing fee may be the most cost-effective government fee available. Works should be registered within three (3) months of first publication to secure all rights and to secure entitlement to all remedies provided by the Copyright Act. Prompt registration triggers remedies which frequently help avoid litigation and, if unavoidable, make litigation less costly. Ironically, the registration must be sought as a prerequisite to a suit for infringement by an American author. Failure to register promptly, therefore, only delays the inevitable in the event infringement occurs. Delaying registration also may result in a waiver of some of the copyright law's most significant remedies:  recovery of attorneys' fees and statutory damages.  Copyright Law is a trap for the unwary and the apparent simplicity of the copyright application can lead to unexpected consequences if not completed properly.

Terms of Use
If your Website, or special areas of the site, involves more that just providing access to information about your business, for example, if your site distributes software or can be used by your customers to enter purchase orders, you may need to require users to agree to terms and conditions in a “use agreement.”  The agreement can be “clickable” whereby assent from the user is attained interactively and it should clearly state the authorized scope of use of the service or materials provided. Be sure to clearly and conspicuously display any warranty disclaimers or limitations of liability if the operation of the Website exposes your business to risks.

Privacy
The Financial Services Modernization Act of 1999 (the “Gramm-Leach-Bliley Act”) imposes new requirements on businesses that fall into the category of “financial institutions” that process customer nonpublic personal information. The Act prohibits certain uses of consumer information and requires that businesses disclose how they use such information. Every business with a Website should examine their current privacy policy for compliance.

Businesses with customers in Europe may be impacted by different and more restrictive rules. The European Union Directive 95/46/EC applies to all entities that process data by automatic means or as part of a filing system, except for a) those who process data related to public defense, security, and other limited exceptions or b) individuals undertaking a personal or household activity. This EU Directive also contains the controversial Article 25 Principles regarding the transfer of personal data to other countries.

ENDNOTES

1. Arizona Retail Systems v. The Software Link, 831 F. Supp. 759 (D. Ariz., July 27, 1993). But see M. A. Mortenson Co. v. Timberline Software, 970 P.2d 803 (Wash. App. Feb. 1, 1999);  Niton Corp. v. Radiation Monitoring Devices,Inc., 27 F.Supp.2d 102, 1998 U.S. Dist LEXIS 18538, (D.Mass. 11/18/98).

2. Brookfield Communications v. West Coast Entertainment Corp., No. 98-56918 (9th Cir., April 22, 1999); see also SNA Inc. v. Array et al, No. CIV A 97-7158 (E.D. Pa., June 9, 1999).

3. Hotmail Corp. v. Van Money Pie Inc., 47 U.S.P.Q.2d (BNA) 1020, 1998 U.S. Dist. LEXIS 10729 (N.D. Cal. 4/20/98).

4. Hard Rock CafÈ Int'l v. Morton, 1999 U.S. Dist. LEXIS 13760 (S.D. N.Y., Sept. 9, 1999;Ticketmaster v. Tickets.com (C.D. Cal., filed July 23, 1999) (deep linking case).

5. State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998).

6. U.S. Patent No. 5,704,297 issued August 11, 1998.

7. U.S. Patent No. 5,768,528, issued June 16, 1998.

8. U.S. Patent No. 5,715,314, issued February 3, 1998.