This post is Part 1 of a series covering core legal issues for eCommerce and Internet-based businesses.

eCommerce Business Law

The advent of the Internet has changed almost every facet of life, including how we conduct business.  The Internet, and the information revolution it sparked, has empowered a new generation of startups and entrepreneurs, such as software and web developers, information technology and cybersecurity products and services, and digital marketing services.

In just a couple of decades, the Internet has transformed how we shop, connect with one another, and entertain ourselves.  This evolution has provided information-based companies such as Amazon, Google, and Facebook the opportunity to dominate the global economy.

Although many businesses use the Internet to market and promote their goods and services, some enterprising businesses also sell their products and services online.  Many of these companies operate their entire business on the Internet.  Thus, the information revolution fueled by the Internet lead to the creation of a completely new type of company:  the eCommerce Business. 

eCommerce and Internet Businesses

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 eCommerce business different from a more traditional business, one that merely advertises on the Internet, is that an eCommerce 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, eCommerce 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 eCommerce business, some are product-oriented while others may be social media platforms.  There are eCommerce businesses that may deliver services directly through the web, such as Software as a Service (SaaS) or online gaming product, financial services, or tele-medicine.

In fact, many eCommerce 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 eCommerce Businesses

The tremendous opportunities generated by the Internet for eCommerce businesses also generate just as many risks.

At their core, an eCommerce 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 eCommerce business pose unique legal challenges.

Some common Internet business matters include:

• Domain-name registration and hosting – The registration of domains and hosting of web sites involves relationships between companies and service providers which 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 a myriad of 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 their 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 web sites, it is often practically impossible for sites to police all such content to prevent possible infringement.  The Digital Millennium Copyright Act (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 eCommerce sites must address a number of additional issues.  Some common eCommerce 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, eCommerce 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 - eCommerce 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 eCommerce purchases attractive to consumers because most eCommerce 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 eCommerce 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.

Although every eCommerce business is unique and will face its own legal issues, there are certain challenges that will consistently occur across the board. Over the remaining articles in this series, I will address many of the legal issues faced by eCommerce businesses, including:

• Founding and funding the enterprise

• Data privacy policies

• Identifying, securing, and enforcing intellectual property assets

• Key agreements such as development agreements, and terms of use and sale

• International operations

• Human capital

This series is designed to provide an overview of many of the common legal issues and challenges faced by eCommerce businesses.  Of course, this is just a basic guide that introduces some of these topics in a relatively straightforward manner.  Because legal challenges can be complex and every business is different, nothing in this series is a substitute for the legal advice of experienced eCommerce 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 eCommerce businesses hope to survive and thrive.

ABOUT THE AUTHOR:  Jim 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.  For more on Jim, visit his professional profile. You may email Jim at jim.chester@klemchuk.com.

For more information on eCommerce, see our Internet Law and eCommerce Legal Services and Industry Focused Legal Solutions pages.