September 9, 1997

THE WEB: A WORLD OF OPPORTUNITY -- AND RISK

Edited by Dennis Berman

The Web is up, and barriers to entry -- to new customers, new partners, new markets -- are coming down. But that doesn't mean electronic commerce is as simple or as painless as a mouse click. There are, as always, legal risks.

These legal hurdles are far from insurmountable, but they are real, and they must be considered before, during, and after moving a business onto the Net.

Take, for example, the Web site of a small, local restaurant. The site features menus, daily specials, and a digital kitchen tour. Thanks to the Internet's global sprawl the restaurant now has the potential to reach customers not only in its local neighborhood, but almost anywhere in the world. Perhaps some of those worldwide Net users will be in the area one day, and they might want to sample the restaurant's unique Chinese/Cajun cuisine.

What could possibly be the downside of such added exposure? The restaurant -- and any small business in this situation -- must now consider every new territory covered by its marketing message as a new source of potential risk, whether from unhappy customers, government regulators, or competitors. And the business' existing risk management strategy (every business has one, even if it doesn't go further than 'hire friends, don't borrow from relatives, and lock the door at night') probably does not yet cover this area.

Here are four basic risk-assessment questions any business must answer before putting itself on the Net:

1) Are you breaching any territory, franchise, or marketing agreements by putting your business online? Many small businesses have specific territories in which they may market, or specific industries they're allowed to cover. Or, if they're franchisees, their use of franchise trademarks and logos may be similarly restricted. Putting ads or menus or price lists on the Internet may violate these agreements, however well-intentioned or local-minded the effort may be. Such concerns aren't limited to small businesses: In one instance, a major retailer with both international exclusive marketing agreements and domestic distributor relationships has had to work hard to craft its online presence so as to avoid problems (and possible lawsuits).

2) Does the content of the Web site or E-mail list violate local consumer protection or criminal laws in other jurisdictions or countries? As a small business in the United States, you might never have imagined that you needed to know Japanese advertising law. But suddenly, your Web site may come under the scrutiny of the Japanese consumer protection agency. Of course, even if your Web site does unintentionally (or even intentionally) go against foreign laws, you may be too small a business, and the violation sufficiently minor, that you will never be at any risk of prosecution or censure.

On the other hand, there's no telling how successful (or global) your business may become someday. Further, you may wish to work with suppliers or customers in the foreign jurisdiction, who may be prohibited from doing business with you because of the illegality. Finally, even if your company itself is not located in the foreign country, you may have affiliates or fellow franchisees who might come under fire for your actions. For example, when CompuServe was singled out in Germany for carrying Usenet newsgroups from the Internet with sexual content, it was CompuServe's local office (and its manager), and not the main headquarters in Ohio, who were the subject of prosecution. For this type of risk, awareness of potential problems, and appropriate disclaimers on the site, are usually the most practical approach. (Blocking audiences in specific countries is not yet technically feasible.)

3) Have you obtained all of the rights needed for the content -- and links -- you will be including on your Web site? Given the ease of duplicating certain Web pages -- through downloading or scanning images and code -- one may forget that photos, graphics, text and computer programs are protected by copyright, and that using these materials without permission may be a violation of U.S. or even international law. Even if you already own the rights to content used in a print publication, say an ad or an annual report, those rights may not extend to digital transmission, for which you may have to pay an additional fee. Many Web sites have been delayed in launching when a final review highlighted potential rights problems.

Trademarks and domain names also have rules associated with them, and even linking your site to another may constitute an infringement or other violation if done in a misleading or improper way. For example, Ticketmaster and Microsoft recently squabbled over Web links, and a news service called Total News was sued for framing other sites within its own advertising banners.

4) Does your existing business liability insurance cover these new activities (sending content across the Internet, possibly taking and shipping orders internationally)? If not, check whether your insurance agent understands the Internet well enough to write appropriate coverage. You may have to go to another agent (check with local Internet businesses for referrals). The coverage you want need not be overly expensive: A good agent can adjust the coverage limits and deductibles to fit your business' actual risk arising out of its Internet operations. One example of this type of coverage is a recently-announced policy being offered by Chubb for information technology firms (see http://www.chubb.com/news/pr/pr19970815.html for details).

Doing business on the Internet is so new that it's impossible to know entirely what, over time, will remain legal and what won't. But taking precautions now will not only protect your business today, it will also prepare it for what will surely be some of the most complicated, and widespread, litigation of the next century.

By Jonathan I. Ezor in New York

Jonathan I. Ezor (jezor@ny.poppe.com) is the director of legal affairs for Poppe Tyson, Inc., a multinational interactive and traditional advertising and marketing agency based in New York. His work focuses on Internet and traditional advertising and marketing, as well as on copyright and trademark issues. The opinions expressed here do not necessarily reflect those of Poppe Tyson or its affiliates.