e-Commerce Business Law

By Howard G. Zaharoff

An MCLE presentation for "E-Commerce Basics," July 24, 2001

1. Setting Up A Web-Based Business

A. Infrastructure

• Web Site design and development
• Web server hosting
• Internet Service Provider
• Domain Name/URL
• System to receive, process and fulfill orders and means to ship and deliver goods and services
• Payment processing
• Security issues

B. Relationships (See III. Online Contracting, Below)

• Agreements with suppliers
• Agreements with resellers
• Agreements with partners and/or
• Agreements with customers

C. Business/Revenue Models, e.g.

• Sale of goods or services
• Brokerage and matching services (Internet affiliation and sales commissions)
• Subscription revenues
• Advertising revenues (need tools to measure impressions and click-throughs)

D. IP Protection of Site, e.g.

• Patents - for novel business methods and ornamental designs (e.g., icons)
• Copyrights - for content, databases, design elements, and look and feel
• Trademarks - for marks, trade dress, other identifying matter, and domain names
• Trade Secrets - for underlying or behind-the-(public)-scenes features and technology

2. Identify Legal Issues Specific to Client's Business

A. Regulated Industries, e.g.

• Banking and finance
• Insurance
• Gambling (Nevada v. Justice Department)
• Securities (Canada v. U.S brokerage houses)
• Medical (Special privacy rules)
• Legal (unauthorized practice and fee-sharing)

B. Controlled Products, e.g.

• Alcohol
• Tobacco (Internet sales v. NY legislation)
• Firearms
• Pharmaceuticals and food supplements (US v. foreign counterfeit drugs)
• Pornography
• IP-intensive products, e.g., software, music, books, videos: (i) Get the needed rights (ii) from the real rights-holders (e.g. Random House v. RosettaBooks).

C. Protected Customers, e.g.

• Children: contracting and personal information issues
• Consumers: FTC and privacy issues
• Foreign customers: export control (embargoes), EU data privacy, EU distance contracts withdrawal right, other special foreign rules (Yahoo and Nazi memorabilia)
  * beware of contracts providing "exclusive" US jurisdiction (which you may in fact need to litigate or enforce in other jurisdictions)

D. Special Internet Activities, e.g. linking, deep linking, framing, Web crawling, spidering, spamming, chatrooms

E. Jurisdiction: Prepare to be sued anywhere your client actively promotes its products and services or conducts business

3. Online Contracting

A. Clickwrap (click-and-accept) vs. Terms of Use (posted only)

• Clicking (better, doubleclicking) to show acceptance is a clear affirmative act manifesting assent (better than tearing shrinkwrap); under UCITA doubleclicking is statutorily sufficient for contract.
• Terms of Use (no click): can bind if (i) clearly assented to (e.g., by using site after notice) and (ii) not unconscionable.
  * How to do it right: ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996): License enforceable, despite terms not being seen before money paid, because license conspicuous, software not usable until offeree shown license and manifested assent, and licensee could return for refund if disagreed.
  * How to do it wrong: Williams v. AOL , (Mass. Sup. Ct. 2/08/01): AOL's forum selection clause, contained in its Version 5.0 license agreement, was not enforceable because problems arose before license could be read; acceptance process was confusing; and requiring litigation of minor claims in Virginia is unreasonable.
  *  Doing it wrong again: Specht v. Netscape and AOL , (SDNY 7/03/01): Arbitration clause in Netscape's "browse-wrap" license is not enforceable because users downloading software were not required to indicate assent (or even to view the license, which was referenced in text visible only if user scrolled to next screen).
  *  Lessons: Requiring user to click twice is best, but in any case the terms should be conspicuous, reasonable, and clearly assented to.

B. E-SIGN ("Electronic Signatures in Global and National Commerce Act"): A record or signature may not be denied legal effect solely because it is in electronic form

• E-SIGN, 15 USC §7001 et seq., became effective October 1, 2000 (except that federal and state record retention requirements effective March 1, 2001).
• "Electronic signature" defined broadly to include any electronic symbol, sound or process used by person with intent to sign record.
  * Do not confuse "electronic signature" with "digital signature," a narrower concept incorporating authentication process.
  * N.B. Voice on answering machine may qualify, though probably not in consumer context.
• Prohibits state from denying legal effect to electronic signature or record if parties have agreed to accept.
  * Parties may establish own procedures for accepting e-records
  * Where law requires writing, enforceability may be denied if electronic record not in form "capable of being retained and accurately reproduced for later reference by all parties."
• Provides significant consumer protections, including: if law requires that information be provided to consumer in writing, consumer must affirmatively consent to receive electronic information and must be informed clearly and conspicuously if there is an option to transact without electronic communication, how to withdraw consent, and how to obtain paper records.
• E-SIGN (and UETA) exempt certain types of laws, including certain family and probate laws, court orders and documents, cancellations of utility services or health and life insurance benefits, mortgage default notices, product recalls, and documents required to transport hazardous or dangerous materials.
• I-SIGN preempts state law UNLESS state has adopted UETA without modification.
  * Since UETA lacks E-SIGN's consumer protections, unclear if UETA without consumer protections preempts E-SIGN_s consumer protections in that state.
  * To avoid preemption state laws must be technology neutral.

C. UETA ("Uniform Electronic Transactions Act"): A record or signature may not be denied legal effect solely because it is in electronic form

• Adopted by 23 states (excluding Massachusetts - but two bills pending).
• Any law that requires a writing is satisfied by an e-record; any signature requirement is satisfied by an e-signature.
• Contains provisions to facilitate substituting electronic records for paper records to satisfy record-retention requirements (including cancelled checks).
• Recognizes that "electronic agents" (automated means to take action without human intervention) create binding obligations for intentional users.
• Rejects "mailbox rule" (offer effective when sent): electronic records effective when received, even if no one aware of receipt.

D. UCITA ("Uniform Computer Information Transaction Act")

• UCITA, which evolved out of 10-year NCCUSL/ALI UCC 2B project, is currently the law in Maryland and Virginia
• Contracting parties in other states (including Web sites anywhere) may choose to make UCITA (Maryland or Virginia law) apply to their contract
• Provides generally that party accepts contracts by "manifesting assent."
• Applies to "computer information transactions;" based on freedom of contract; uses complicated default rules; provides that consumer protection statutes supersede; no enforcement of unconscionable terms.
• Does not apply to financial services, entertainment or broadcasting content, or employment relationships.
• In a mass market license, certain terms - e.g., disclaimers of implied warranties of non-infringement, merchantability and fitness - must be CONSPICUOUS to be enforceable.

4. Sales and Distribution Issues

A. Channel conflict

B. Antitrust concerns: no price collusion, fixing or maintenance

C. Antitrust concerns: no horizontal allocations of customers, suppliers, territories, or lines of commerce

D. Antitrust concerns: no setting standards that create barriers to entry

E. EU (Treaty of Rome) Issues: regulation of vertical agreements

F. Taxation of online commerce (Quill v. North Dakota, 504 U.S. 298 (1992): state may only tax sellers with "physical" presence)

5. Promotion and Advertising Issues

A. FTC Rules

• Advertising must be truthful and not mislead consumers - if Site posts prices or other changing information (including limited inventory), to maintain accuracy it should update pages regularly and inform visitors when page last refreshed.
• Claims (especially concerning health, safety or performance) must be substantiated: catalog marketers should ask for material to back up claims rather than merely repeat what manufacturer says.
• Disclaimers and disclosures must be clear and conspicuous.
• COPPA: Websites targeted to, or knowingly collecting information from, children under 13 must obtain parental permission following specified rules. (FTC just collected $$ from several violators via settlement.)
• Truth in Lending Act requires creditors dealing with consumers to disclose information about finance charges (including APR) in credit transactions.
• Fair Credit Billing Act requires creditors to acknowledge customer billing complaints promptly in writing and to investigate billing errors.
• The Mail or Telephone Order Merchandise Rule requires a reasonable basis for stating a product can be shipped within a certain time; if no time is stated, must believe can ship in 30 days. If a customer doesn't consent to a delay beyond 30 days, the merchant must refund all money paid.
• Rule on Pre-sale Availability of Written Warranty Terms requires that warranties be available before purchase for products over $15.
• "Satisfaction guaranteed" or "money-back guarantee" requires full refund for any reason.
• Testimonials and endorsements must reflect typical experiences of consumers, or conspicuously state otherwise.
• Non-compliance can be met with fines and orders: For advertisers under FTC jurisdiction, FTC can obtain cease-and-desist orders, liability to injured consumers and fines up to $11,000 per violation.

B. Foreign sales issues: e.g., EU Distance Selling Directive requires that consumers be provided with certain "clear and comprehensible" information (e.g., name of supplier, main characteristics of goods, and right to withdraw) and be permitted to rescind contract for up to 7 days.

C. Promoting with "games"

• Price, prize and chance = unlawful lottery
  * Most states allow games where one of three is absent (but not always); even where allowed, sponsor may be required to register, post bond, keep records or comply with other rules.
  * Is NeuLevel (the dot-biz registry) illegally raffling dot-biz domains?
• Sweepstakes (chance): generally okay if no price; but check laws of Florida, New York and Rhode Island.
• Contests (no chance) generally okay; but if charging a fee may have problems in Arizona, Florida, Maryland and Vermont; might also be issues in Arkansas, California, Connecticut, Iowa, Minnesota and New Mexico.
• Many contests (games of skill) aren't really (e.g., charging money to predict winning sports teams).

6. Bankruptcy

A. Protecting against bankruptcy of infrastructure partners:

For land-based clients you worry over bankruptcy of providers, such as landlord (e.g., using subordination and attornment agreements); for Web-based clients you should worry over access to systems, software, and domain names.

If yours is a land-based client with a minor Internet presence, this is important; if your client is entirely Web-based, this is critical.

• Hardware: own server and other equipment; lease it from financially secure entities; obtain security interests and options to purchase.
• Access to hot site or backup server; regular backups of site/system.
• Software:
  * Licenses to IP should recite Bankruptcy Code §365(n) (though it applies regardless) - but recognize (i) this is US solution (e.g., no Canadian equivalent); and (ii) doesn_t apply to databases or trademarks.
  * Obtain source code escrow and possibly right to hire support personnel.
  * Special issues If software accessed via ASP.
• Domain name: Client should own DN registration  do not leave in name of third party such as Web designer.

B. "Planning for" client's own bankruptcy (and other termination events) - must do this to address concerns of vendors, lenders, investors, business partners and significant customers.

• Know your client's cyberassets (generally an amalgam of IP and contract rights) and how to use these as collateral (to give comfort to creditors and others). In general, you perfect a security interest in IP by:
  * Patents - UCC filings and PTO "collateral assignment" filing (gives priority against all subsequent purchasers and mortgagees)
  * Trade Secrets - UCC filing
  * Registered copyrights - Copyright Office filings
  * Unregistered copyrights - Uncertain; consider registering then filing
  * Trademarks - UCC filings; many practitioners file with PTO for registered marks (N.B. Can "assign" trademark only with goodwill)
  * Domain Names - Several courts have denied this is asset; may be mere contract right.
• In contracts, avoid termination for "insolvency" - many start-ups are technically insolvent from the start - or "bankruptcy" - though this may be unenforceable, avoid giving licensor an argument when its main concern should be performance.
• Obtain rights to assign technology licenses and other contracts, at least to successors:
  * Courts have held that patent and copyright licenses are not assignable, so if the contract doesn_t state they may be assigned, they may not be available for bankruptcy sale or even reorganization.
  * See In re Catapult Entertainment, 165 F.3d 747 (9th Cir. 1999) (debtor cannot assume rights under non-exclusive patent license without licensor_s consent); but see Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489 (1st Cir. 1997) (licensor may not terminate licenses because sale of reorganized debtor's stock to competitor was not assignment to different entity and did not deprive licensor of benefit of its bargain).
  * Special issues If software accessed via ASP.
  Data Privacy - sale of personal information, or its use by a successor, may constitute "unfair or deceptive" act (even if it isn_t a breach of contract).
• Data Privacy - sale of personal information, or its use by a successor, may constitute "unfair or deceptive" act (even if it isn¹t a breach of contract).

For more information on e-commerce law and how it pertains to your unique situation, please contact Howard G. Zaharoff.

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