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As E-Commerce Heats Up So Do The Lawsuits

By Marge Chertok.

A few short years ago the Internet (the "Net" or "Web") was viewed with as much enthusiasm as HAM radios and walkie talkies. It was the means of communication used by professor and military types who saw it as a means of communicating in the event of a natural disaster. The "inventors" of the Web viewed the Web as a computerized version of a ham radio, not the pervasive vehicle for advertising, commerce, communication and data transfer that it has become. A truism that applies to the Web and life in general is the saying no good deed goes unpunished. Along with the great good provided by the Web is the proliferation of fraudulent schemes, violations of privacy and contract disputes all arising with greater frequency because computer technology has made the world a much smaller place.

A number of private organizations such as the Online Industry Alliance and the Trust E have been formed to develop protocols for commerce on the net. These organizations register domain names, attempt to create mechanisms for resolving disputes and attempt to address privacy concerns. These organizations are funded in large part by major media, computer and retail enterprises who have a significant vested monetary interest in making sure that commerce of the Web is viewed as safe, inexpensive and preferable to other sales mechanisms. These organizations are further motivated by European and U.S. agencies who have threatened to shut down or sanction providers and website sponsors who violate the privacy and other natural rights of users.(1) Unfortunately, few governments have developed a comprehensive legislative and/or judicial frame work for handling internet-related commercial disputes. In order to foster true commerce on the Web, companies and governments have to convince consumers of four (4) issues: (1) the reliability of the media for data transmissions, (2) security of data and financial information within the context of the business agreement, (3) privacy of the transaction from use or abuse by third parties, and importantly, (4) the existence of a fair economical method of enforcing violations of the aforementioned three (3) elements.

At the present time commerce on the Internet is "protected" through a series of contractual agreements between users, vendors, on line service providers and others. This article examines the terms of so called "privacy" and "subscriber agreements" and their value in promoting on line commerce.

Contracts as a Means of Policing the Web

You can't view certain websites or order goods over the Internet without entering into an online agreement. Most of these contracts are "accepted" by clicking on a box. These "contracts" cannot be negotiated. Rather, the alternative to unconditional acceptance is ending the session.

One of the most common contracts is the privacy disclaimer box which appears each time you sign onto the Web, use an online research package or buy goods. A usual version of this privacy disclaimer reads:

"Any information you submit is insecure and could be observed by a third party in transit. If you are submitting passwords, credit card numbers or other information you would like to keep private it would be safer for you to cancel this transmission."

Unfortunately, if you cancel, you can't use the Web. So what is the reality of this consent? Most users click the box and go forward. Does this mean that you have assumed the risk of improper data interception and use? The answer is probably yes. And, even if you have not, your damages are probably limited to the costs of the transmission. For example, in the telegram cases of "yesteryear," damages are limited to the cost of the telegram. What's the cost of an e-mail?

Each website also has a "terms of use" or "subscriber" agreement which is sometimes accepted by a mouse click. More often the subscriber agreement is accepted by merely viewing the site. Use of the service is considered acceptance of rules which can change at each login even though few users read the experiment once, let alone each time they log in. The typical items covered in a subscriber agreement are:

Protection of the vendor's copyright, trademark, service marks
Prohibition of copying of posted material or reproductary materials for commercial purposes
Prohibition of posting of libelous, defamatory and/or pornographic material
Reservation of right to review content and delete offensive material
Waiver of editorial and moral rights in uploaded information
Disclaimer concerning selection and content of links to other sites
Disclaimer of all warrantees
A representation that the user is at least 18 years old
Indemnification and hold harmless agreement for all damages incurred by offender because of breach of subscribe agreement
Disclaimers regarding accuracy of information posted on the site and declaration regarding reliance on the truthful accuracy of information posted on the site
Obligation of the subscriber to truthfully represent his (her) identity and prevent unauthorized third party use and to indemnify the vendor for breach
Reservation of rights to use subscriber data such as usage and demographics. Some sites agree not to disclose personal identities.
Limited software license to users for the purpose of accessing the site.
Right to terminate the user for any reason, including breach.
Consent to venue, jurisdiction and choice of law for all disputes; and/or consent to arbitration, if appropriate.

Cases which have reviewed subscriber and vender on-line liability for breach of contract, false advertising and posting of defamatory, pornographic or discriminatory information have upheld the right of the subscriber to exercise free speech and the concurrent contract right of the on-line service providers to exercise its right of termination for violating its subscriber agreement.(2)

In an effort to induce subscribers to rely on on-line services for commerce, many vendors have developed website-based privacy policies for information collected during the course of consumer transaction. These policies generally state that the vendor will not use the customers' data without their consent. These agreements also provide that consumers can review the information collected about them and comment upon it. Consumers can also delete themselves from this list. These agreements usually fall short in the area of remedies. For example, few have user friendly choice of law, forum or jurisdiction provisions. Even fewer provide indemnification for actual let alone incidental, consequential or punitive damages for intrusions of privacy. These agreements also fail to compensate users for collection and use of market research data which corporations paid for before the advent of the internet. Privacy statements also routinely disclaim liability for activities of companies with whom they link websites and for information intercepted during transmission, thereby potentially negating the value of their privacy policy. Although these agreements set a benchmark regarding privacy, the agreements do not allow for negotiation of the privacy policy nor do they protect users from abuse of these voluntary internet protocols. The one positive note is that recently U.S. federal agencies such as the Federal Trade Commission appear willing to enforce these policies on behalf of consumers, creating a disincentive for companies to exploit consumer information.

Jurisdiction

Suppose that you subscribe to a service and buy defective goods over the internet, or are sold non-existent stock pursuant to an on-line offering. Which law governs the transaction and if things go wrong where is the lawsuit to be brought? Once an agreement or other document such an advertisement is posted on the web, it is available to users throughout the globe. Absent a choice of law clause, contracts are usually governed by the law of the local where the contract is executed. If execution is a mouse click in your bedroom, what law applies?

In the United States, jurisdiction is determined either by agreement or principles of minimum contacts and due process. This is perhaps the most developed area of internet law. Unfortunately, cases which address on-line commerce apply traditional constitutional principles of due process, minimum contracts and long arm jurisdiction with varying results.

For example, in Gary Scott International Inc. v. Barardie, 981 F.Supp. 714 (D. Mass 1997), the Court applied a liberal interpretation of the term doing business to find that a California business selling humidors to Massachusetts residents over the internet could be found to be doing business in Massachusetts for the purpose of a trademark infringement case, and had to litigate the case in Massachusetts. The court found that the following facts were sufficient to maintain a trademark infringement case, (1) Defendant entered into an on-line agreement to sell twelve "Tobacco Keepers" to a Massachusetts retailer; (2) Defendant solicited business from Massachusetts retailers through his internet site; and (3) at a tobacco show, Defendant told a colleague that he intended to sell a large number of products to a chain store that does business in Massachusetts. Id. at 715-716.

The Ninth Circuit has had several chances to review the issue and has taken an increasingly broad view of internet jurisdiction. For example, in Cybersell v. Cybersell, Inc., 130 F.3d 414 (9th Cir. 1997), the Court held that jurisdiction did not exist because Defendant had absolutely no contact with Arizona, other than a website accessible by persons living in Arizona. The Court held it was determinative that the defendant did nothing to encourage Arizona residents to visit the website, did not business in Arizona, entered into no contracts with Arizona residents, earned no income in Arizona, received no telephone calls in Arizona and did not maintain an 800 number in Arizona.

In contrast, in Rubber Craft Corp of California v. Rubber Craft, Inc., 1997 WL 835422 (DC Ca. 1997), a District Court within the 9th Circuit distinguished Cybersell holding that Rubber Craft Corp. of California could bring a trademark infringement case in California against a southwest company with a similar name. Both used the name for over twenty years with the knowledge of the other's existence. In fact, they did business together. Competition between the two developed with the advent of the internet causing the California resident to sue the Arizona resident for Federal unfair competition and trademark dilution, California dilution, false advertising, unfair competition and an accounting based upon defendant's use of the "Rubbercraft" mark, registration of the "rubbercraft.com" domain name, and creation of the "www.rubbercraft.com" web page. The Court held that jurisdiction existed even though the California sales consisted of less than 5% of Defendant's total sales.

International companies soliciting United States business over the Internet will be subject to these precedents under the terms of the Hague Convention regarding jurisdiction and service of process. Companies dealing with European users will also be subject to the European Union regulations concerning commercial transactions with European trading partners. It is unclear how conflicts between these treaties and regulations will be resolved.

Contracts on the Net -- Terms and Enforcement

What is sometimes glossed over in United States jurisdiction cases such as the ones described above, is the underlying "contract." People are entering into contracts over the net without any understanding of (a) whether these contracts are enforceable, (b) where they are enforceable; (c) what law applies, and (d) what damage remedies are available. The answers to these questions will materially impact the rights of vendors and consumers, as well as their willingness to use the net for E-Commerce.

For example, in the Rubbercraft case, it was the use of the internet and similar domain names for sales purposes that caused entities which previously co-existed to file a lawsuit for trademark infringement and false advertising. No facts in their relationship changed other than that variable. A similar dispute was raised by the case of Playboy Enterprises, Inc. v. Welles, 7 F.Supp. 2d 1098 (S.D.Ca. 1998). There, Playboy sued a former playmate, Terri Welles, who used the “playmate” designation to identify herself at her website. Since 1981, Ms. Welles, without objection from Playboy, used that designation to identify herself. Playboy alleged that her use of the Playmate name in her website and meta-tags designation created an unauthorized link to the Playboy website. The Court denied Playboy’s demand for injunctive relief because the meta-tags factually identify Ms. Welles and therefore constitute a fair use of the mark.

Courts faced with determining whether contracts have been formed over the net look to the intention of the parties and the nature and content of the transaction. As the court in Resuscitation Technologies, Inc. v. Continental Health Care Corp., 1997 WL 148567 p. 3-4 (S.D. Ind. 1997) observed, "this notion of transacting business over the internet involves examining the level of interactivity, and the commercial nature of the exchange of information that occurs.... The quality of those electronic contacts is measured ........ with reference to the intended object of that activity. This process is particularly important, when.... the dispute is about whether or not a contract was formed between two parties by reason of their use of the Internet or other electronic transmissions. (Citations omitted)."

With the proliferation of do it yourself websites, e-commerce and on-line advertising, more and more businesses and individuals will be running into disputes with competitors, suppliers and others concerning unauthorized or false advertising designations, unauthorized links and meta-tags, and other breaches of subscriber agreements.(3)

Problems will also arise out of the reality and terms of consent. For example, in the Rubber Craft and Welles cases the alleged infringer had prior business relationships with the mark owner and had used the mark either with the other's consent or knowledge and tacit consent through inaction. Neither thought that they would engage in bitter and costly conflict by posting the information they previously used on the Internet. Courts have yet to meet a real challenge concerning consent or validity of acceptance through a "mouseclick" or unprosecuted link.

Courts have also been faced with traditional fraud and criminal activity arising out of on-line contracts or contracts solicited on-line . For example, in an increasing number of securities law cases Courts have found liability against persons who solicit investments over the net. In SEC v. Infinity Group, 993 F.Supp. 324 (E.D. Pa. 1998), the United States District Court found that a company and its principals violated the Securities Act prohibition against interstate sales of unregistered securities by soliciting investment contracts through various media but most notably their website. Clearly use of electronic media expanded the actionable impact of the unlawful solicitation of securities inducing litigation. Use of the internet also increased the magnitude of the potential damages claim.

What to Do

Clearly the internet should not and cannot be avoided as a means of commerce. In fact, its importance increases daily despite precedents which seem to ignore the efficiency of digital signatures.(4) We suggest the use of a written electronic communications policy or Standards of Conduct/Commerce developed with the assistance of counsel. This Agreement should require active user acceptance before proceeding; and a hard copy should be sent to consumers who order merchandise or request catalogs at a website. The company must recognize that this on-line agreement is a contract which can be used against the company. Accordingly, the agreement must set forth the same terms and conditions of all sales, including remedies, choice of law and venue provisions, disclaimers of warranties of fitness for a particular use and of merchantability and any other limitations of damages used in non-internet transactions. A good electronics communications/commerce policy will protect your franchise and avoid litigation.

A set of helpful guidelines is contained in the European Union Directive and the United Nations Guidelines for Consumer Protection. These organizations suggest that the following provisions be included in your website agreement:

Introductory Statement . The statement should set forth the importance of the policy and why the user should read it. If the policy si an employment policy, it should state, in bold print, if there are sanctions for non-compliance. Similarly, if it contains the terms of consumer transactions, it should clearly identify all disclaimers of liability.
Privacy Protection Statement. Consumer confidence is critical to sales and should be fostered by offering consumers the same protection as provided by the laws and practices that apply to other forms of commerce. The customer privacy statement must be rigorously enforced against employees and third parties in order to prevent claims against your company. The privacy policy must be communicated to consumers before personal information is obtained or sales agreements executed. The method of communication should be more than a mouse click. Some of the more effective sites I have reviewed require a verification which mandates an adult level (i.e., mother's maiden name or driver's license number) and a representation that the party is over 18 years of age.

Identity Statement. A brief description of the identity and location of your business, as well as a contact person for complaints and inquiries. Some sites allow for direct e-mail communications to a sales person and for complaint department.

Domain Names. All domain names used to identify the site must be registered with the appropriate private agencies and the United States Patent and Trademark office. Written permission to post information and trade names, trade dress and marks on the website must also be obtained.. Permission should include, if possible, a representation that the consenting party has corporate authority to give permission, that the entity owns the mark, and that the party giving permission will indemnify your company for all infringement claims arising out of the use of the mark. These principles should be applied to links and meta tags.

Information Concerning the Terms of Sale. A clear and concise statement of the terms of sale including any policy. This should include all warranties and disclaimers and be consistent with all advertising material and non-electronic sales agreement. It should also have clear statement of the means of making payment and terms of each means of payment.

Contract Terms. The contract for the particular goods, if different from above must be in "Plain English" and in every other language in which you transact business. Its agreement must boldly display all disclaimers and limitations of remedies.

Confirmation. A mechanism for confirming and double-checking that a consumer over age 18 has accepted the agreement and consents to its terms. Often this requires that all billing information be typed twice. You should also develop a mechanism for auditing these responses and verifying these responses to prevent fraudulent purchases. Fraud claims should be reported to the appropriate authorities for prosecution.

Complaint Procedure. A clear, concise and effective means of dealing with customer complaints and returns of defective merchandise should be offered. Attention should be paid to all disputes to avoid escalation to litigation.

Dispute Resolution. A clear statement of how disputes are to be resolved, limitations of damages or remedies, if any, the country or State’s law to be applied and venue for resolving disputes. If arbitration is to be the exclusive remedy, the arbitration procedures should be detailed.

The Standards of Conduct/Commerce discussed above must be consistent with all advertising claims made in the body of the website and sales terms offered in face to face or purchase order transactions. The website should limit puffery which can lead to claims of false advertising. The website should also be reviewed to avoid the impression that it targets specific states or localities, unless you are prepared to be haled into court there. Sales orders should also be confirmed in writing and comply with the consumer protection, solicitation and industry codes of all state and federal governments where even a small amount of sales are generated. As this area of law is in transition, the web master should keep abreast of all developing protocols. The developing sets standards which come to mind are Article 2b of the Uniform Commercial Code; the Banking Industry Codes of Conduct; and Internet Industry Association Code of Conduct.

(1)By way of example, Germany has prevented a group protesting the Church of Scientology from transmitting defamatory information to German citizens. The U.S. Federal Trade Commission has also brought sanctions against Geocite for violating Geocites' own privacy policy concerning use of subscriber information.

(2)Religious Technology Center, Inc. v. NetCom Online Communications Services, Inc., 907 F.Supp. 1361 (N.D.Ca. 1995).

(3)Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D. Pa. 1997); Logan Prod v. Optibase Inc. 103-F.3d 49, 53 (7th Cir. 1996); Edias Software Inter. LLC v. Basis Inter. Ltd., 65 LW 2471 (D. Az. 1996).

(4)Parma Tile Mosaic & Marble Co, Inc. v. Estate of Fred Shot, 640 N.Y.S. 2d 477 (Ct. of App. 1996)(....an electronic, signature does not meet the standard of a writing under the New York Statute of Frauds).