Contents
I.Introduction
II.Defining E-Commerce
III.Is E-Commerce The Right Business For Your Client?
IV.The Developing Issues
- A.Jurisdiction
- B.On-Line Contracting
- C.Collecting, Exchanging, and Managing Information
- D.Disclaimers, Disclosures, Warnings, Recalls, and Click-On Releases
- E.Security and Confidentiality
- F.Liability Issues
- G.Insurance
V.Good On-Line Practices
I.Introduction
By the first week of December 1998, America was dreaming of an E-Christmas. References to electronic commerce (or, e-commerce), Internet business, Web-only stores, e-trading, and Internet stocks had become embedded in the mainstream media, on the Web, on bill boards, across T-shirts, in board rooms, and around kitchen tables. Amid all the hubbub, some people even did their shopping over the Internet.
In the future, the number of shoppers and companies conducting business "on-line" is expected to explode. Estimates from various sources indicate that by the year 2000, consumers will spend $150 billion to $600 billion on goods and services via the Internet. One so-called Web guru has boldly predicted: "Only 10 percent of the current Fortune 500 companies will survive the next 10 years. The rest will shrivel to a fraction of their former selves, because they won't make a successful transition to the customer-centric Web economy." [Jakob Neilson, Internet Business, December 1998, Vol. 3, Issue 12 at 15.]
The full benefits of the new technology have yet to be realized. Companies now have the ability to communicate faster and more efficiently than ever before. Computers can be used to advertise, sell products, provide warnings and instructions, collect information about customers and potential customers, conduct recalls, and harness data. From purchasing to distribution to sales and marketing, businesses use e-commerce to transact with one another, as well as with the consumers of their products. Along with this new business, new players have emerged, including various contractors, consultants, and outsourcers, all of whom want to help businesses design, build and maintain an on-line presence. Other companies provide on-line services such as auctions, virtual shopping carts, trading, sales, insurance and escrow services. Putting current stock valuations aside, the presence of these new players present some interesting questions: Who are these businesses? What do they do? What is their potential liablity? What risks do these companies and relationships present? Will the electronic neighbor be around when the damages are being assessed?
The risks of the new technology are just beginning to come into view. New technology products are being developed every day. Some of these products will fail. Simultaneously, different forms of contracting are emerging. Undoubtedly, there will be lawsuits involving these relationships. The Internet also provides an unprecedented forum for customer complaints, bad press, mistruths (or misperceptions), and information exchange, all of which can spread like wildfire with the push of the button. Issues can involve contracts, intellectual property rights, trademark dilution, document and information management, exposure to jurisdiction in far-away places, linking to other Web sites, and privacy concerns.
The company Web site and the electronic information that is linked to that site are fertile grounds for the hungry cyberlawyer. For example, plaintiff lawyers routinely peruse the Internet to build a foundation for their product liability cases. A quick visit to the company Web site can provide a wealth of information. The Web site can be compared with others in the industry, as well as to other sites using state of the art technology and content. These comparisons may lead to the development of new duties, liabilities and industry standards. Whether pursuing a traditional product liability claim, or other claims related to the on-line business, these cyberlawyers will have access to more information about your client than ever before. Now, more than ever, information is power -- try fielding deposition questions about a Web site you haven't seen in months, if ever. Thus, it is essential that your clients harness and control the presentation and flow of this critical information.
For the defense lawyer, the new e-conomy will present a host of new challenges. Lawyers, and the clients they represent, can no longer rely on the traditional defense strategies built upon written warranties and disclaimers, owners manuals, labels and paper invoices. Low and behold, the brick and mortar walls of our offices and factories contain a honeycomb of new portals, all connected by a web of information technology. Warning! This web is rife with flaws, traps, and dead ends. Accordingly, companies conducting on-line business must develop strategies for identifying and managing these new risks. The purpose of this paper is to identify some of these risks and provide a starting point for further analysis. It should help you to assist your clients in deciding whether they should sell products over the Internet and how to protect them if they do.
II.Defining E-Commerce
Electronic commerce is the process of two or more parties conducting a business transaction via computer and some type of network, such as a direct connection or the Internet. E-commerce includes business-to-business transactions, on-line retail, and the digitalized financial industry. Arguably, electronic commerce can be extended to include all steps in the business cycle, including advertising, the preparation and collection of invoices, customer support and product recall.
E-commerce began in the 1970s when larger corporations created private networks to share information with business partners and suppliers. This process, called Electronic Data Interchange (EDI), transmitted standardized data that streamlined the procurement process between businesses. As a result, certain types of paperwork and human intervention were nearly eliminated. EDI is still in place, and is so effective at reducing costs and improving efficiency that an estimated 95% of Fortune 1,000 companies use it. It was, and is, the foundation of electronic commerce. [See http://e-comm.internet.com].
More and more, the term e-commerce is used to refer to business conducted over the Internet. EDI, for example, is being brought to the Internet, thereby eliminating the old system's expensive private networks. The Internet also allows a company to expand its reach to include more businesses on the supply chain. Other business-to-businesses transactions are simply moving to the Web without using the forms required by EDI. [Id.] More commonly, e-commerce refers to online retailing, whereby businesses use the Web to sell goods, services and information to consumers. Online retailing began four years ago, and was pioneered largely by Internet companies that did not (and some still do not) perform traditional retail, such as Amazon.com and CDNow. More recently, brand name companies have set up Web shops. Today, a consumer armed with a computer, a browser and Internet access can buy a wide variety of products from an ever increasing number of suppliers.
III.Is E-Commerce The Right Business For Your Client?
It seems as though every business is jumping on the "dot-com" bandwagon. While a Web site is an excellent way to provide information, an interactive site that can be used to sell products is probably not for everyone. Electronic storefronts are complicated and costly. There is no guarantee that they will increase revenue. Further, some businesses have found that they do not have the resources or desire to keep up with the potential global interaction that is presented by a Web store. Security remains a major issue. Also, the uncertainty presented by this new frontier can lead to higher levels of risk and liability exposure, especially if a company moves too quickly, or without proper advice. While on-line stores may be great for selling computer hardware and software, books, clothes, music, and flowers, the manufacturers of more complex products should take a long, hard look at the way they do business before succombing to the trend. Further, manufacturers must make an early decision about whether they need or want other businesses selling their products on-line.
IV.The Developing Issues
A.Jurisdiction
Web sites are equally accessible from every Internet connection worldwide. As a result, Web sites can be found by potential customers living in places not normally reached through conventional advertising. Accordingly, companies must develop strategies for minimizing jurisdictional hazards. For example, a passive promotional Web site alone is probably not enough to subject a company to jurisdiction. However, an interactive Web site can lead to unexpected consequences. See, e.g., Panavision International, L.P. v. Toeppen, 141 F.3d 1316 (9th Cir. 1998); CompuServe Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996); Hall v. LaRonde, 56 Cal.App.4th 1342, 66 Cal.Rptr.2d 399 (1997). Further, commercial laws, which the long-arm statutes enforce, have been amended to deal with Internet commerce. See, e.g., section 17538 of the California Business and Professions Code, which has been amended to require all Web site owners and Internet vendors to conform to California policies regarding refunds, returns, and dislosures.
If a company is concerned about jurisdictional issues, it should consider making its Web site a passive posting of information. Alternatively, the business should try to limit, or filter out, the places where it will do business. The business also might incorporate jurisdictional disclaimers into its Web site.
B.On-Line Contracting
Companies that conduct business through the Internet often use "online contracts" or "Terms of Service Agreements." Interesting issues arise regarding these paperless contracts. Instead of using traditional signatures, the contracting parties need only "click on" the appropriate terms or conditions. Many parties expect that these terms will be enforceable, but the legal issues are still being worked out. For example, how does one address issues like offer, acceptance, intent and mutual mistake when there is no guarantee that a human being was involved with the transaction? Other issues concern the specification of acceptance and the authenticity of the transactions. Further, no uniform contract law governs some of the unique issues raised by e-commerce, licensing of information and software transactions. Although the law may change with the drafting of Article 2B of the Uniform Commercial Code, which is supposed to be ready by the year 2000, there are reports of disagreement regarding the scope f the draft. Whatever the end result, there will probably be an increase in the amount of litigation regarding on-line contracting issues.
Companies that sell goods through their Web site should include an online contract to which the customer must assent. The contract needs to be carefully crafted to protect the company from liability and address the key terms and conditions for the sale and provision of goods. The contract should be conspicuously displayed and available (e.g., through a hyperlink). If possible, each key part of the Web site should provide that use of the site or the purchase of goods through the site is governed by the online contract. Sample contract language can be found at www.legal-businessforms.com.
C.Collecting, Exchanging, and Managing Information
Companies that elect to conduct e-commerce must adapt their document and information retention policies accordingly. The on-line business should develop a plan for collecting and storing contracts and other essential information. Further, it is critical that businesses have the capacity to digest and respond to the potential flood of information and inquiries that may come across the Internet. Personnel must be trained about the importance of their electronic responses - every transmission should be handled with the expectation that it could be a trial exhibit. Defense counsel must understand how information is collected and maintained. Lawyers also should learn how to access and produce discoverable information, contracts, e-mail, and other Web-based materials. Others may want to investigate the evidentiary issues (authentication, foundation, best evidence, hearsay) presented by electronic contracts, data, and Web pages. At the same time, companies must be sure to keep track of the witnesses who will testify about these issues.
D.Disclaimers, Disclosures, Warnings, Recalls, and Click-On Releases
The Web site presents a unique opportunity to provide warnings and instructions about products. Other companies, in conjunction with the Consumer Product Safety Commission, have begun to use their Web sites to conduct product recalls. [For example, please see http://www.llbean.com.recall and http://209.213.106.3/ros_snowboard/html/top_home.htm]. A Web site also allows for easy "click-wrap" agreements, which may include product disclaimers, disclosures, warnings and/or releases. At least one of these types of agreements has been held enforceable. [See Hotmail Corporation v. Van Money Pie, Inc., C98-20064 (N.D. Ca., April 20, 1998). Various discussions about this case and the concept of shrink-wrap/point-and-click agreements can be found at The Internet Newsletter Online, located at http://www.ljx.com/internet.]
E.Security and Confidentiality
Privacy and security are two of the biggest issues on the Net. To operate a successful business, the electronic store front must be secure. Lawyers should be prepared to help companies achieve a level of security, and must be prepared to act whenever there is fraud, theft or a breakdown in security. [To learn more about security, see "The Essential Role of Trusted Third Parties in Electronic Commerce" at http://www.law.miami.edu/~froomkin/articles/trusted1.htm.]
Web site operators have a unique ability to collect, track, and distribute information about their visitors and customers. This ability, and the information collected therefrom, has tremendous value. Understandably, the public has grown wary of the power of the Net, particularly when it comes to issues of privacy. Although the unauthorized interception of or access to computer transmissions is governed by the Electronics Communications Privacy Act, 18 U.S.C. § 2510 et seq., there currently is no federal privacy law that specifically applies to the collection, storage, transmission or use of a consumer's personal information on the Internet. The issue is being studied by the Federal Trade Commission. [See "Privacy Online: A Report to Congress," http://www.ftc.gov./reports/privacy3/]. Because of growing privacy concerns, companies doing business on the Web should develop and publish online privacy policies. At a minimum, users of the Web site should be informed about how their information will be ued. Companies also should be aware of applicable privacy laws and voluntary industry codes.
F.Liability Issues
Companies doing business on the Internet will encounter a quickly developing body of law presenting both added protections and new opportunities for liability exposure. While not all of these are "product liability" issues, the careful practitioner should be on the lookout for ways to protect the company's assets while avoiding risks in cyberspace. As new relationships are formed, the on-line business must be aware of risks presented by the content/service providers and the software/technology providers. Additional risks are derived from the content and representations contained on the Web site (including patent, copyright and trademark issues); the domain name; the links provided to other sites; the framing that is used on the site; the products used to access or maintain the site; the products sold over the site; the use of the site; the messages that travel to and from the site; and, the activities and information that make up the site. In addition, the company must identify and comply with all aplicable regulations.
G.Insurance
As this new industry develops, insurers have raced to underwrite the new risks. Companies that change their way of business should research the new insurance products that are available to cover Internet liability and e-commerce risks.
V.Good On-Line Practices
In addition to addressing the forgoing issues, an on-line company must perform regular maintenance of its site. Walter Effross, associate professor at American University's Washington College of Law, recommends the following: (1) check, confirm, clarify, maintain and respond to e-mail on a regular basis; (2) monitor the use and accessibility of the site; (3) test hyperlinks on a regular basis; (4) control content; (5) oversee postings; (6) back up content; (7) date information; (8) make conspicuous disclosures; (9) deploy "web-wrap" technology to ensure customer compliance with essential terms of use; (10) disclaim linkage; and (11) search for links and imposter sites. See W. Effross, "The Legal Architecture of Virtual Stores: World Wide Web Sites and the Uniform Commercial Code," 34 San Diego Law Review 1263 (1998).
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
