Module_9

MODULE 9: MANAGING LEGAL RISKS WHEN PROMOTING A BUSINESS ONLINE

All types of companies be they car manufacturers, career consultants, book sellers or music
distributors, want to promote, and in some cases sell, their products on the ‘newest mass media
marketing avenue’ — the Internet. Some of these companies approach the Internet with
reckless indifference to the unique character of this broadcast medium; others are so
intimidated by what seems to be the realm of computer techies that they let the marketing
opportunities of the Internet pass them by. This article outlines a few of the common legal risks
that face a web site owner taking its promotional activities online, and the practical approaches
for managing these risks. Most of these issues will be familiar to business owners but going
online gives each of them a whole new flavour.

9.1 DEVELOPING AND PROTECTING CONTENT

Once a company makes the decision to promote its products on a website, its next step is to
develop the on-line content. Deciding what content to put on a web site is not always easy. A
web site owner wants to present its products and services effectively, and do it in a way that is
interesting and sufficiently dynamic to meet the standards of the Internet culture. Simply
posting the text of the company brochure online is not necessarily going to meet these
requirements.

9.2 SECURE CONTENT

Web site owners first must obtain the permission of the copyright and/or trade mark owner to
post the content on their site. It is important to note that the person offering the content may
not always be the owner of those rights. An example would be a news distributor who may have
the right to publish an article on its web site, but not necessarily the right to have a third party
distribute the same article on another web site. In agreeing to such permission, the web site
owner and the content provider should establish the arrangements for posting the content so
that there are no misunderstandings about how the content will be used. For example, the web
site owner should have a written agreement with the content provider to set out the terms and
conditions for where the content will be posted, how it may be accessed by web site visitors,
how long it may be on the site, what copyright and/or trade mark notices should be attached to
the content, and the allocation of liability in respect of any claims that use of the content
infringes a third party’s rights or other legal claims that may be raised about the content.

9.3 LINKING AND FRAMING

If, instead of just posting content, the web site owner wants to link to third-party content on
another web site, then other issues arise. In its most familiar form, linking is the inserting of
hypertext into a web page such that when the hypertext link is selected, using a double-click of
the mouse, for example, the web site visitor is transferred to another web page.

9.4 UNAMBIGUOUS TERMS

The first step is to post clear, conspicuous terms and conditions for use of the web site.
What provisions should be included in these web site terms and conditions is a subject
outside the scope of this article, but these terms and conditions should be drafted with care.
They are an important way to limit a web site owner’s liability for third-party claims and, if
prepared correctly, form an enforceable contract between the web site owner and each
visitor to the web site.

9.5 EXPANDING THE MARKET FOR PRODUCTS

Typically the goal of developing a web site is to promote the company to more people and,
ultimately, to sell more products. The actual method for transacting a sale online may vary: the
smallest companies may have a traditional mail or phone order system promoted from their
web site; larger or more sophisticated companies may have third parties host secure on-line
order sites for them and process their credit card transactions; and the largest online sellers
may use tailored software programs to create, host and manage their own order and payment
processing systems. At whatever size and level of complexity, an e-commerce web site provides
a company with a powerful tool to place the company’s products into an expanded stream of
commerce, exposing these products to customers who might have no other way of knowing
about them. While there are many benefits to having this expanded consumer base, selling
products world-wide also brings the potential for world-wide legal exposure.

9.6 MORE TERRITORIAL CONCERNS

Another issue raised by selling goods in other markets through the Internet is that of parallel
imports. A parallel import is a good imported to a country through means other than through
the distribution chain established by the originator of the good and its selected distributors. An
example would be a Taiwanese distributor of Japanese trading cards selling such cards to
collectors in Hong Kong over the Internet. Such parallel imports may have serious consequences
for the Japanese maker of the cards, who will have copyrights and other intellectual property
rights attached to the cards and may want to control their distribution. These activities also may
pose a problem for the Hong Kong agents of the cards, who have a commercial interest in
preventing unauthorized distribution, and over-supply, of the collectibles in their territory. As a
result of these concerns, some countries regulate parallel imports. Web site owners looking to
sell third-party goods through the Internet should familiarize themselves with any parallel
import restrictions that may be applicable in their target markets.

9.7 "E-LEGALITIES"

The rapid development of the Web offers many opportunities to those brave enough to seize
them. Nevertheless, there are also dangers. The law and business practices in general, have not
evolved fast enough to address all the issues presented by e-commerce.

Those entering the world of e-commerce should bear ten key legal principles in mind:

1. Mark your territory
2. Have the final say
3. On your own terms
4. Is it secure?
5. The Customer's always right
6. Privacy policy
7. Domain names
8. Protecting your brand
9. Copyright
10. Chat on-line

9.8 E-BUSINESS REGULATION

Achieving legal and business order in cyberspace, forms but another step in the quest for
knowledge that is perhaps the special legacy of the new millennium1. For commercial interests
eager to gain ground in the new order, ironically, the Internet is at the same time intimidating
and indispensable, essential for business success. The issue of regulation is replete with
unanswered e-business issues that desperately need to be clarified as companies operate
electronically across the globe. Some of the regulatory issues are:

• Whose law governs contracts that are formed online? Are contracts valid without a
physical signature? Do the same laws apply to both consumers and businesses?

• Can the actual electronic transmission between countries be subject to taxes or tariffs?
Are product and service sales treated the same under local law? Who decides?

• What are acceptable forms of online promotion? Are firms with websites that link to
other sites using questionable tactics, putting themselves at risk?

• When the buyer sends his address and phone number to the seller, whose laws
determine the restrictions on the use of that data? How is the seller’s credit card
number protected? Who is empowered to address disagreements that might arise?

• What tariffs and taxes are due? How are they accounted for and paid?
• What transaction crosses a border, what consumer protection is available? What

additional risks do sellers assume?
• What happens if the seller does not get paid? Where do consumers return damaged

goods purchased online? Does business-to-business commerce operate predictably
across all trading jurisdictions?
• How can buyers and sellers enforce their rights in foreign countries? What international
treaties apply? Does enforcement differ geographically? By product or service type?
• Many laws applicable to global e-business are not yet clear. Does it make sense to move
aggressively to gain first mover advantage? Or wait? How can an individual company
protect its interests?

1 Report of the American Bar Association (“ABA”) Jurisdiction in Cyberspace Project empanelled in
1998 under the title, “Transnational Issues in Cyberspace: A Project on the Law relating to
Jurisdiction”.

Questions, questions with not so obvious answers? Business in the new economy will mean
that traditional business approaches don’t necessarily apply when viewed through the lens
of the digital environmental. E-business is a completely different way to transact ordinary
business. Since new, unfamiliar business practices are routinely scrutinised by governments
and regulatory organisations, one can expect continued regulatory review, especially where
consumer protection and economic welfare are at stake.

9.9 COMPANIES, INDUSTRY ‘VIGILANCE’ AND AUDITS

Companies must remain vigilant both to protect their business interests and ensure that they
can proceed securely in uncharted territory. Perhaps industry groups could identify potential
and real ‘hurdles’ and attempt a solution. The vast majority of regulatory hurdles facing Internet
businesses today relate to traditional considerations whose scope and application are
transformed by the global character of the electronic market. This industry along with CII should
examine key international issues and identify major international institutions that are
addressing them. The issues include:

• International trade and tariffs
• Data Security
• Encryption
• Infrastructure and Access
• Intellectual Property Rights
• Liability: Choice of Law and Jurisdiction
• Content
• Competition Law
• Self-Regulation
• Privacy

9.10 WEB AUDITS AND COMMERCIAL STRATEGY: AN ADVANTAGE

According to Internet surveys, the fastest growing Web Sites are those, which provide a place
for personal expression, such, as chat rooms, message boards, email and personal web pages2.
In addition, "e-tailing," or retail sales over the Web has exceeded industry expectations. Online
sales tripled from $3 billion in 1997 to $9 billion in 1998. By the year 2000, commerce on the
Internet is expected to generate $30 billion3. Not surprisingly, many companies are launching
Web sites to establish their presence on the Internet and to introduce themselves to the
emerging online consumer market.

9.11 CONTENT AND CONTROL: A GUIDE FOR BUSINESSES

1. Original content Web site content which is entirely or mostly generated by the Web site
owner often presents the least complex liability issues. These issues are substantially

2 Media Metrix, "The Media Metrix Web in Review: Top 50 Fastest Growing Web Sites in Audience
Reach," (Aug. 10, 1998), http://www.relevantknowledge.com/PressRoom.
3 U.S. Dept. of Commerce, "Remarks of Sec. of Commerce William M. Daley," (Feb. 5, 1999),
http://204.193.243.2/public.nsf/docs/commerce-ftc-online-shopping-briefing.

similar to liability issues that a newspaper publisher has when publishing its daily paper
or that a company has when publishing its prospectus or retail catalogue. Like their
traditional media counterparts, Web site owners in India enjoy the significant legal
protections available to publishers. Generally, Web site owners should review their
content for accuracy, fair advertising practices, intellectual property rights and Securities
Exchange Commission and other regulatory related issues.
2. Licensed content- Many Web sites license content rather than create their own. An
audit therefore may also include review of the licensing agreements to ensure that the
Web site owner has the rights it needs to distribute, alter, republish or otherwise use the
licensed content. In addition, the audit should review all representations and warranties
for the content and any appropriate indemnifications by the licensor.
3. Third party content- As interactivity becomes a primary draw for bringing back Internet
users, more sites are including chat, message boards, e-commerce and e-mail at their
site. As a result, much of the content in these areas is created by users of the site and
cannot as a practical matter be reviewed or edited by the Web site owner. Not
surprisingly, while user-created content draws the most interest, it also draws the most
complaints.
4. Linking and framing- The practice of linking to or framing other Web sites raises liability
issues unique to the Internet. A Web site owner may be found liable for contributory
infringement or vicarious liability for knowingly linking to another site that contains
copyright infringing material or otherwise engages in infringing activity. In an interesting
claim arising from allegedly improper linking, Ticketmaster sued Microsoft for its use of
hypertext links to bypass Ticketmaster's homepage and advertising.4.

9.12 CONTENT LIABILITY ISSUES

1. Copyright & Trademark- A content audit should include a review of the third-party
content, and the corresponding license agreements, to ensure that the Web site
owner has acquired the appropriate rights for use on its site. This includes graphics,
images, logos and text. Indeed, use of another's trademark as a link may give rise to
liability if the manner in which one uses a trademark creates the false impression
that the trademark owner is somehow affiliated with the Web site owner. In
addition, the audit should review the owner's copyright and trademark notices to
ensure that they are accurate and current.

2. Defamation- Under U.S. law, a Web site owner may be held liable for false
statements of fact which are defamatory and published with fault. While the owner
may not be liable for statements by third parties because of the statutory
protections of the Communications Decency Act, statements originating with the
owner may give rise to liability. Traditional publishers frequently have an attorney
review sensitive articles prior to publication to identify troublesome statements and
to set up the best possible legal defences for publication of the article. A similar
practice may be appropriate for articles published on the Internet which are written
by the Web site owner.

3. Invasion of Privacy- There are three types of privacy torts that may arise from
statements made on Web sites: the public disclosure of private facts, statements

4 Ticketmaster Corp. v. Microsoft Corp., No. 97-3055 DDP (C.D. Cal., filed Apr. 29, 1997).

which place the subject in a false and defamatory light, and the commercial use of
another's image or likeness without their permission. As in defamation, while the
Web site owner in the United States may not be liable for state law invasion of
privacy claims arising from third party statements, the owner should carefully review
original content.
4. User Privacy- An audit should include a review of the Web site's collection of user
information. This usually is done at the registration page, and may include name,
address, email address, telephone number and credit card number. In addition, most
sites now monitor the pages viewed and services utilised by a user via "cookie"
technology. Thus, sites may maintain and use personally identifiable information
about its users for a wide range of purposes such as targeting banner
advertisements, tailoring services to individual users and sending direct
advertisements to individual users based on their demonstrated interests. What
information is collected, how it is used and to whom it is disclosed should be
carefully reviewed to ensure that the Web site owner is in compliance with
applicable privacy statutes, Competition and MRTP regulations and the site's privacy
policy.
5. Advertising & Promotions- As a growing number of Web sites move toward the
advertising business model, a content audit should include review of the site's
guidelines for accepting advertising on its site, particularly banner ads which
hyperlink to the advertiser's site. The guidelines should adhere to state and federal
fair advertising laws, particularly in regard to minors. In addition, the audit should
review the ad insertion orders to ensure that they include appropriate
indemnifications and representations and warranties. Some Web sites also sponsor
interactive contests or sweepstakes and an audit may include review for compliance
with sweepstake and contest laws.
6. Sales- If the site includes commercial transactions, the audit should include a review
of the online contracts and also the Web site owner's account procedures for
creating and maintaining records of the transactions. In some cases, the owner also
may need to obtain accounting, security or other professional advice.
7. Regulatory compliance- If the business hosting the Web site is publicly traded or
involved in a regulated industry, such as banking, real estate, utilities,
pharmaceuticals, or alcoholic beverages, the audit should include a review of SEC
compliance and the specific advertising, shipping or other regulations for such
industries.
8. Disclaimers & Terms of Service- The disclaimers and Terms of Service are important
in establishing the relationship between the Web site owner and its users. Generally,
the comprehensiveness of a user agreement is determined by balancing the
potential exposure created by site content and activities against the potentially
intimidating impression a long agreement will make on the user. For example,
relatively straightforward sites that provide information about a company, but have
little user interactivity, may only require a short disclaimer. On the other hand, sites
which host e-commerce, chat, email, or message boards or provide sensitive
information, such as financial information and services, will likely require a more
extensive user agreement.
9. Message Boards & Chat- Many Web sites now provide areas for users to interact
with both the Web site owner and other users. These areas take the form of

message boards (where users can post a message that can be read and responded to
by other users) and chat rooms (where users can send each other messages, or
"chat," in real time).
10. User Information- The privacy and security of personal information on the Internet
has become an increasing concern. A Web site audit should include review of the
site's policies for disclosing user information and, in particular, policies for
responding to subpoenas for user information. In the United States, responding to
requests for either the content of communications (i.e., email messages) or user
information is strictly limited by the [federal] Electronic Communications Privacy Act.
Any policy should take into consideration privacy or procedural requirements and
other duties arising from common law or the site's Terms of Service.