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Legal Risks Associated With Doing Business On The Internet

Prepared By: Melissa C. Marsh, Los Angeles Business Attorney
Written: November 2000


This article briefly explores the legal risks associated with conducting business over the Internet and some of the legal protections available under existing United States law. Since this is merely an overview, no particular attention is given to any particular industry. The principal methods of protecting an Internet-based business include:

  • Copyright law.
  • Trademark law.
  • Other Intellectual Property Issues.
  • Contractual Principles.
  • Compliance with the Laws of Foreign Jurisdictions.

Copyright Law.

Protections Afforded by Copyright.

Of all the methods of protecting an Internet-based business, copyright law protection is perhaps the most pervasive. A broad category of works are protectable under copyright law, including everything from written materials, music, photos, graphics, drawings, movies, and videos to databases and other compilations. In fact, almost all of the content available via the Internet is subject to some form of copyright protection, which inherently offers protection for the "infrastructure" of a web site (i.e., the graphics that comprise the "look and feel" of the web site, the content available on the web site, and the software that controls the functionality of the web site). Since copyright protection also covers content that is contributed to the web site by its users through such things as bulletin boards, chat rooms, and other interactive areas, it is important for a Web site containing such interactive features to specify who owns any content generated by its users in its terms of use agreement.

Copyright Owner Rights.

Copyright protection grants the following exclusive rights to the copyright owner:

  1. reproduction;

  2. preparation of derivative works;

  3. public distribution;

  4. public performance;

  5. public display; and

  6. public digital performance of a sound recording.

Each of these rights may be exercised by the copyright owner, or may be assigned or licensed to a third party. Copyright law does not protect ideas or facts themselves, but does protect the expression of an idea or fact when it is fixed in a tangible form. Accordingly, copyright law does not provide an effective means of protecting a great business idea, unless that idea is somehow reduced to a tangible form of expression.

Why Registration Of Your Copyright Should be Sought?

Although copyright protection is obtained automatically upon the creation of a copyrightable work (such that registration of the work with the United States Copyright Office is unnecessary), filing an application for registration is necessary before an infringement action can be filed to protect your copyright interest. I, therefore, strongly recommend filing for copyright registration, as it is a relatively inexpensive means of protecting your interest in copyrighted material. The United States Copyright Office has made it clear that the graphical and textual elements of an Internet web site are subject to copyright protection. When a copyright registration is filed, all copyrightable elements of the website should be registered, including text, graphics and any multimedia content. Separate copyright registrations may be required for the software used to create the Internet website and any software that can be downloaded from the Internet website. Internet web sites are not static. As copyrightable elements of the website change, additional copyright registrations should be filed to protect the new elements. Implementation of an internal procedure for monitoring changes to the web site with something to remind the responsible party to file additional copyright registrations can limit the risk of not having maximum protection for the copyrightable elements of the website.

Prominent Display of Copyright Notice.

I also strongly recommend prominently displaying an appropriate copyright notice on any copyrightable work. A copyright notice is comprised of the following elements: (a) the symbol or the word Copyright; (b) the year the work was first published; and (c) the name of the copyright owner. A fairly typical notice would look something like this: 2001, Melissa C. Marsh. All Rights Reserved. The location of the copyright notice depends upon the nature of the copyrighted work, but the prominent display of the notice is a key element.

How Copyright Laws May Impact Your Web Presence.

First, the unique "look and feel" of your web site may be separately protectable under copyright law as should be the underlying interactive features on your web site. For example, software designed to facilitate forum participation, chat, or electronic commerce are all be protectable under copyright law.

Second, web sites generally display three types of content capable of copyright protection - that is content created by: (1) web site owner/operator; (2) by a third party for the web site owner; and (3) persons who visit and use the web site. Issues regarding who has ownership over these different types of content must be addressed in separate contracts with employees, independent contractors, as well as the web site's visitors and users via a terms of use agreement. Posting of third party content on your web site also creates significant issues regarding who bears the risk any liability arising out of the posting of such content (e.g., infringement, defamation, slander, etc.) which should be addressed in separate contracts and/or the terms of use.

Third, linking and framing via hyperlinks may lead to unwanted litigation. Hyperlinks embedded in a web site enable individuals to "click through" to other related content. Linking practices that incorporate one or more of the following elements should be avoided: (a) use of any third party owned trademark, service mark, logo or brand name of the owner without prior written approval; (b) linking to an internal page of a third party web site; (c) framing third party content into your own web site; and (d) linking to any website that you have not pre-screened to ensure the content is appropriate for the type of person who is known to visit your web site.

Forth, are the unresolved and evolving legal rules regarding who is responsible for content posted on the Internet. Controversial content (e.g., adult, opinions, investigations, etc.) certainly creates a higher risk of liability for defamation and other causes of action than factual reporting of current events. Federal law now provides some immunity to web sites and ISPs as to liability for defamatory content disseminated through their service by a third party. Nevertheless, web site operators must be careful about what they post on their web site, what they allow to be uploaded onto their web site, and where they send users of their web site. For example, inclusion of hyperlinks to "adult-only" web sites would be entirely inappropriate on a web site known to be frequented by children.

Trademark Law.

Trademark law offers protection for trademarks and service marks that are used to distinguish one person's products and/or services from those of another. Things such as names, words, symbols, logos, phrases, numerals and letters, abbreviations and nicknames, colors, sounds and music, domain names, advertisements, product identities, and brand names are protectable by trademark law. Marks that are coined or made-up (e.g., CLOROX or KODAK) are generally protectable on their own merits. Arbitrary marks (e.g., AMAZON or COMET) are also generally protectable on their own merits. Suggestive and descriptive marks (e.g., COPPERTONE for sun tan oil or AT A GLANCE for calendars) must have a secondary meaning or be distinctive to be protectable. Generic marks (e.g., aspirin or tissue) are part of the public domain and are not protectable. A special form of trademark protection called "trade dress" may also be used to protect the overall look and feel of an Internet web site. Trademark protection is key on the Net, as the lack of physical presence and the inability to touch and feel products before purchasing them makes the existence of a strong brand name even more important than in the real world.

The owner of a trademark has the exclusive right to use the mark in a particular market in connection with particular goods and services. The key to acquiring trademark ownership is using the mark in commerce on goods or services. Typically, the person who makes "first use" of the mark in commerce has priority to the mark as to the particular channel of trade and as to those goods or services used. "Use" includes displaying the mark on the goods themselves, as well as displaying the mark on containers, packaging, labels or tags associated with the goods. For services, use of the mark in connection with promoting or advertising the services is sufficient. Registration with the United States Patent and Trademark Office is possible (and highly recommended) for both existing and new marks. Registration should be preceded by a detailed and through search to determine if the mark is available for registration, or if there is a conflicting mark already in use. Registration can be accomplished at either or both the state and Federal level in the United States, as well as throughout the world where protection of the mark is important.

As with copyright, the benefit of registration include:

  1. nationwide priority to the mark as of the filing date;

  2. increased ability to protect the mark through access to the Federal courts;

  3. ability to recover attorneys' fees from infringers;

  4. availability of treble damages in some cases; and

  5. assistance by the Customs Service to prevent the inflow of "gray market" goods bearing the mark.

A trademark registration must be renewed periodically, and should be updated to address changes in how the mark is used. Any change in the channel of trade used to distribute the goods or services should be addressed in a new or updated registration. For example, taking the use of a mark to the Internet requires a determination as to whether an updated or new registration is required to protect the mark. Use of the mark on different goods or services should similarly be addressed. Generally, any change in the mark or how it is used should trigger a determination as to whether additional registrations are required. Use of the appropriate trademark mark notice is also an important. For unregistered marks, a TM (SM for service marks) should appear immediately after the mark. For registered marks, use of the symbol immediately after the mark is appropriate. Although trademark law gives owners the ability to enforce their rights against persons who use the same or a confusingly similar mark, there are some significant limitations on the ability to enforce these rights.

These limitations include:

  1. use on unrelated goods and services;

  2. use of the mark other than as a trademark or service mark;

  3. geographical limitations on use;

  4. use of the mark in different channels of trade; and

  5. use of the mark as part of a parody.

Use of marks on the Internet creates some special concerns. The Internet creates a convergence of the channels of trade, where businesses with the same or similar marks that had previously utilized completely different channels of trade use their marks through a single channel of trade, the Internet. Domain names must be separately registered with one or more domain name registration authorities before they can be used. A domain name can also be (and should be) separately protected as a trademark/ service mark. Current Patent and Trademark Office ("PTO") practice is to treat the ".com" in a mark the same as it would treat ", Inc.", i.e., to essentially ignore it for purposes of reviewing whether the mark can be registered. This eliminates a registrant's ability to attach the ".com" suffix to an otherwise descriptive or generic mark and get it registered. Similarly, the "e" and "i" prefixes will not be allowed to save otherwise descriptive or generic marks.

Other Intellectual Property Issues.

In addition to the various legal protections available, implementation of certain sound business practices can help protect various aspects of an internet presence. Casual conversation about business ideas and strategies can lead to disclosure of such ideas and strategies to competitors. Thus, it is highly recommended that non-disclosure agreements be used whenever you are discussing business proposals or strategies with potential business partners. Although certainly not a fail-safe method of protecting business ideas and strategies, the discipline associated with having these agreements reviewed and signed by potential business partners lets them know that you consider the discussions confidential and are serious about protecting your confidential information. Implementation of trade secret protection practices can also protect important business information that should not be disclosed to the public. Companies should utilize secure methods of communications within the company, and restrict access to confidential information resident in the company's computer system to those who need to know such information to perform their work. This includes restricting access to internal company web sites where confidential customer and pricing information is frequently displayed.

Another important business practice for Internet businesses is the intellectual property audit. All companies should conduct a periodic audit of the intellectual property owned and used in its business, which includes identifying all intellectual property created internally by its employees, intellectual property created for the company by outside contractors, and intellectual property licensed from third parties. Confirmation that appropriate steps have been taken to protect any intellectual property "owned" by the company should be done on a regular basis. Management should also be educated as to what is and is not protected by applicable intellectual property laws. This management awareness can easily be folded into a comprehensive program for protecting its intellectual property that includes the following elements:

  • identification of all intellectual property used by the company;

  • determination of the appropriate steps to be taken to protect such intellectual property, whether it be patent, trademark or copyright registration;

  • procedures for making sure that required intellectual property notices are properly displayed in connection with the sale of the company's products and services; and

  • procedures for making sure that infringing activities are monitored and appropriate actions are taken to enforce whatever rights the company may have to the item being infringed by a third party.

Contractual Principles.

Most companies now have web sites. These web sites typically display a wide variety of information regarding the company, its products, its services and its customers. Procedures should be implemented to ensure that information posted on the company's web site is accurate, up-to-date, and appropriate for disclosure to the public. In addition, structuring relationships with third parties should be accomplished with care and caution. Ensure an effective nondisclosure agreement is in place before any substantive discussions begin. Terms contained in a "Letter of Intent" should not restrict your ability to have similar discussions with other potential business partners, and should state a beginning and end date for the parties respective obligations. Business plans and revenue models change rapidly in this industry and long-term commitments and any kind of exclusivity should be avoided.

Contractual Issues. Contracts with third parties. Internet businesses are required to procure products and services from a variety of third parties. These significant relationships, as well as several important internal relationships, should be documented in properly drafted contracts. The following list provides a useful overview of some of the more significant contractual relationships that will exist for most Internet businesses:

Contracts with employees. Issues regarding intellectual property ownership, trade secret protection, and the privacy of customer information should be addressed.

Contracts with independent contractors. Issues regarding intellectual property ownership, trade secret protection, restrictions on working for competitors, and privacy of the company's customer information should be addressed.

Contracts for website hosting. Issues regarding web site performance, access, number of concurrent users permitted, and caching practices should be addressed.

Contracts to facilitate electronic commerce. This category includes a variety of contracts such as: electronic data interchange trading partner agreements, credit card processing agreements, and electronic payment processing agreements.

Privacy Policies regarding how customer information will be used by the company. Privacy policies that describe the types of customer information that are collected by the company, how such information win be used, and how customers can "opt-out" of having their information used in such a manner.

Terms of Use Agreements. It is becoming more and more typical for Internet websites to display terms of service that establish the rules for using the website, which become binding on users through prominent disclosure of the terms and/or having users enter into a "click-wrap" agreement.

Linking contracts. Contracts memorializing the company's linking practices (and those of relevant third parties) should be entered into with third parties whose links appear on your website, as well as those who display links to your website on their website.

Foreign Jurisdiction.

Information posted on a web site is typically available throughout the world. As a result, companies doing business over the Internet could be subject to lawsuits and other legal proceedings in far-flung jurisdictions where they have no reasonable means of protecting their interests. Although the law in this area is still developing, adherence to few simple rules will lessen the chance of being hailed into court in a foreign jurisdiction:

  • Passive content on a web site is less risky than interactive content.

  • Notices and disclaimers may be displayed on the website to let users know that the website is not intended to be viewed by persons in certain jurisdictions.

  • Filtering and screening technologies may be used to keep persons from certain jurisdictions from accessing the website.

  • Clear which law governs any use of the website and where the exclusive jurisdiction for resolving disputes is located.

If you have any questions, or would like further information, please call 818-849-5206 or e-mail us at MMarsh .

California business lawyer, Melissa C. Marsh, is based in Sherman Oaks and West Hollywood, and serves individuals and businesses throughout Los Angeles County, including: West Hollywood, Miracle Mile, Beverly Hills, Century City, Santa Monica, Burbank, North Hollywood, Valley Village, Toluca Lake, Studio City, Sherman Oaks, Van Nuys, Encino, and Woodland Hills.

© 2000 Melissa C. Marsh. All Rights Reserved.

If you have additional questions, or need specific legal advice tailored to your specific needs, please schedule a low cost Telephone Consultation.
If you would like to inquire about my services, please call 818-849-5206.

Disclaimer: The information presented on this web site was prepared by Melissa C. Marsh for general informational purposes only and does not constitute legal advice. The information provided in my articles and alerts should not be relied upon, or used as a substitute for professional legal advice from an attorney you retain to advise or represent you. Your use of this Internet site does not create an attorney- client relationship. Transmission of this article is not intended to create, and receipt of it does not constitute, an attorney-client relationship. All uses of the contents of this site, other than personal uses, are prohibited. You may print or email a copy of any information posted on this web site for your own personal, non-commercial, use, but you may not publish any of the articles or posts on this web site without the Express Written Permission of Melissa C. Marsh.

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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.