Technology February 2022

Online Transactions

E-Commerce law for internet-based business

Written by Jim Chester

E-commerce and Internet Business
Any business that wants to thrive in the modern marketplace needs some form of online presence to advertise its products and services. What makes an e-commerce business different from a more traditional business, one that merely advertises on the internet, is that an e-commerce business uses the internet to conduct some or all business operations online.

Thus, instead of merely advertising a product that would require physically going to the store to purchase, e-commerce businesses facilitate the direct purchase of products via their site and can ship products to the customer’s door—in some instances that same day.

There is no single type of e-commerce business; some are product-oriented while others may be social media platforms. There are e-commerce businesses that may deliver services directly through the web, such as Software as a Service, or SaaS, or online gaming products, financial services, or telemedicine.

In fact, many e-commerce businesses don’t really exist anywhere “IRL” (in real life). They have no traditional offices, warehouses, or factories. Some don’t have any employees. Others may have employees, but they are scattered across the United States or across the world. And their market reach isn’t limited to a town or state but can be global.

Legal Risks and Challenges for E-commerce Business
The tremendous opportunities generated by the internet for e-commerce businesses also generate just as many risks. At their core, an
e-commerce business is substantially similar to more traditional businesses. They have a legal structure (such as an LLC or corporation), need financial and human assets, and must comply with a host of laws and regulations. However, the nature of the operations, structure, and assets of an e-commerce business pose unique legal challenges.

Some common internet business matters include:

  • Domain-name registration and hosting—The registration of domains and hosting of websites involve relationships between companies and service providers that are governed by contracts.

  • Cybersquatting and domain name disputes—“Cybersquatting” occurs when a registered domain includes a registered or famous trademark but the person or company registering the domain is not the owner of the trademark. In such situations, the trademark owner can initiate legal proceedings to force the registrant to turn over the domain to the trademark owner.

  • Privacy and publicity issues—Data privacy protection is an ever-evolving area of law. Companies must navigate myriad state, federal, and sometimes foreign privacy laws with respect to their use of personal and financial information of their users, as well as automated data collection devices such as cookies or web beacons. Sites should post an up-to-date privacy policy that reflects the actual practices of the company with respect to collection and use of user data. In addition, sites obtaining private data and financial information can be the target of hackers, cyber-terrorists, identity thieves, and other criminals, so they must ensure their sites and the data are secure. In the event of a data breach, the company must initiate protocols to inform users so they can protect themselves.

  • Terms of Use—Web “Terms of Use” (also called “Terms of Service” or “Terms and Condition,” “Terms,” or similar titles) are essentially a contract between the company that operates the site and the site users. As such, it is important for companies to post comprehensive web terms of use to clearly define the rights and obligations of the company and the users.

  • Copyright issues relating to web content—For sites that allow users to post content, companies must avoid allowing users to post content that infringes on the copyrights of others. Due to the sheer volume of content posted on websites, it is often practically impossible for sites to police all such content to prevent possible infringement. The Digital Millennium Copyright Act, or DMCA, provides a safe harbor to protect site owners from lawsuits related to copyright-infringing posts by their users, but the company must post their DMCA policy and follow the protocols of the DMCA.

In addition to these issues, which are common to most every website, companies operating e-commerce sites must address a number of additional issues. Some common e-commerce legal issues include:

  • Terms of sale—The sale of goods or services online, like the sale of goods and services in the real world, involves a contractual relationship. As such, e-commerce sites need a comprehensive agreement regarding the terms of the sale to include payment terms, refunds, warranties and returns, and other aspects of the transaction. Finally, in the event of a dispute, there may be questions regarding where it would be proper to sue, whether the courts have authority over all the parties, and whether any judgment can be enforced.

  • Payment mechanics—e-commerce sites need to collect payment for the goods and services they sell. Most such payments are made via credit card, either directly through the site’s shopping cart, or via third party sites such as PayPal. In either situation, the site owner will enter into agreements with credit card merchant processors or the third-party processors. Moreover, if the site handles payment directly, the owner must ensure that all customer financial data is protected.

  • Sales tax—The lack of a national sales tax has often made e-commerce purchases attractive to consumers because most e-commerce transactions involving delivery of goods or services across state lines were exempt from state and local sales taxes. In recent years, however, states have gotten more aggressive in grasping for tax dollars from these transactions, so more and more e-commerce transactions must include sales tax.

  • Export controls and other trade regulations—Companies selling goods and services online must ensure they do not run afoul of U.S. trade laws. These laws prohibit transactions with certain persons or countries, and exports can include physical shipments, as well as digital deliveries of goods (e.g., software) via email or download.

  • Because legal challenges can be complex and every business is different, nothing in this article is a substitute for the legal advice of experienced e-commerce legal counsel.

Conclusion
The internet has created opportunities for a new breed of online entrepreneurs to pursue. However, those opportunities come with legal risks and challenges that must be identified and addressed if e-commerce businesses hope to survive and thrive. TBJ

This article, which was originally published on the Klemchuk blog, has been edited and reprinted with permission.


Headshot of Jim ChesterJIM CHESTER is a 25-year technology business lawyer, professor, and entrepreneur. He is a recognized authority in buying and selling technology businesses, global technology transactions, and providing strategic legal counsel for innovation-based companies. Chester can be reached at jim.chester@klemchuk.com.

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