Smart Business: Top Legal Issues in 2001 (Legal)

[Legal]

Smart Business: Top Legal Issues in 2001

Hed: Keep it Legal in 2001

Deck: Top Legal Issues That E-Businesses Will Encounter in 2001.

Pull quote: "A lot of clients say: 'I want to comply with the law.' The question is: which law applies?Is it the law from where you originate your communications? Is it the law of countries you target? Is it the law of where a consumer may be? These are critical questions." -- Ronald Plesser, attorney, Piper Marbury Rudnick & Wolfe

As the e-commerce terrain continues to shift and settle during these tremulous times, e-business owners have to find ways to remain on legal terra firma. Their best strategy is to be proactive and stay well informed about the latest legal developments relevant to their businesses.

What will the hot e-business legal issues of 2001 be?

Protection of intellectual property is high on the list -- whether it refers to safeguarding business methods through patents or preventing disclosure of trade secrets by former employees. The issue of online privacy still sizzles after last summer's celebrated Toysmart decision, in which the court found the company violated its privacy policy by attempting to sell its customer list in bankruptcy. The failure of numerous dot-com companies in 2000 will spawn bankruptcy filings and workouts in 2001, raising other issues. In light of the ongoing Microsoft case, antitrust law cannot be ignored. Then there is the most fundamental issue of all: legal jurisdiction.

Which law applies anyway?

"A lot of clients say: 'I want to comply with the law, '" says Ronald Plesser, a privacy, communications and intellectual property lawyer at Piper Marbury Rudnick & Wolfe in Washington. "The question is: Which law applies?Is it the law from where you originate your communications? Is it the law of countries you target? Is it the law of where a consumer may be? These are critical questions."

Say you’re a Massachusetts company and someone sues you in Texas for trademark infringement. You're open to possible liability in Texas if you have customers there via the Internet, even if the contact is insignificant, says Jay Johnson, an intellectual property lawyer at Baker Botts in Dallas. On the international front, recently-adopted conventions by the EU parliament provide that the law of the consumer controls: Whoever clicks onto your site has the protection of the laws of their country.

Does your e-business have to abide by the laws of all 50 states and other nations?

"It's just not clear," says Johnson. "This is a situation where people are out there, even in the legal community, trying new theories and testing the limits of how far they can go with these jurisdictional questions."

And companies can't do much to protect themselves, he adds. "They've got to recognize the issue and access the risk." If doing business in certain places is problematic, your company should state in its Web site's terms and conditions that residents of that state or country are unauthorized to use the site, he says. "A company has to do its homework."

Business Method Patents

Companies also should do their homework to protect unique business techniques. Until two years ago, you couldn't patent your business method, says Douglas Cawley, an intellectual property lawyer at Hughes & Luce in Dallas. That changed when Amazon.com's "one-click" patent became one of the first high-profile business method patents in Internet history. "This newly available patent will have a major influence on the way e-commerce is conducted," says Cawley.

Since filing dates on patents are critical, "e-commerce entrepreneurs should protect the intellectual property they develop at the initial planning stage, even before they order furniture," says Edward Kahn, president and founder of EKMS, an intellectual property management firm based in Cambridge, Mass. "People can't imagine just how primitive a business method is protectable. If you're going for venture funding, the VCs expect to see this kind of IP protection. You can't neglect it."

Having a patent can give you a competitive advantage over others, says Johnson. "If you come up with something unique -- business plans, technology behind business plans -- get it patented, do all the offensive things, create barriers to entry."

But, warns Kahn, "don't be seduced into thinking it's a magic bullet, creating easier funding, better valuation or ensuring business success."

Antitrust Claims-in-Waiting

With cut-throat e-commerce competition on the rise, down-and-dirty business plans are appealing but can slide perilously close to violating antitrust laws. As a matter of fact, Cawley believes that the prototypical e-commerce business plan -- raise enough capital to prevail, sell goods at or below cost to eliminate competition, lose money for several years until, as one of the survivors, you can raise your prices to become profitable – is a textbook antitrust violation.

"Going out on thin margins to make a name for yourself is okay," says Cawley, "but not if you overtly couple it with the expectation that it's going to drive people out of business. Be very careful about how you document the reason for the business decisions you're making," he warns. "I'm confident there are e-commerce businesses all over the country with business plans that basically say 'Let's go out and violate the Sherman Act.' Once the shakeout is over, disgruntled competitors are going to file suit, or the Federal Trade Commission (FTC) is going to start looking around and take action."

Inevitable Disclosure

Another emerging issue is the "inevitable disclosure" of trade secrets by former employees. Certain people are so immersed in the information or processes developed at a previous employer that they can be legally prevented from working for a new employer of the same kind because they will inevitably disclose proprietary information. Companies racing to bring new products to market might want to explore this concept if a key employee moves to a competitor or a potential hire is moving over from one.

Currently, several "inevitable disclosure" cases are pending around the country. "Obviously you have to show that the previous employer had trade secrets," says Cawley. "But some plaintiffs – businesses that employees left – have been successful, which is ironic because it accomplishes exactly what a non-compete agreement seeks to accomplish – without an agreement!"

"Inevitable disclosure" should not be confused with non-competes, where an employee, having agreed not to compete with the company, is precluded from performing a specified job in a specified location for a specified period. The enforceability of non-competes varies by state, but are generally construed narrowly.

What should a company do to protect itself from a lawsuit when hiring?

"There should be a reasonable assessment of a person's background," says Johnson, a determination of whether the candidate is subject to any agreements. Then assess the state law. Once hired, get a signed agreement that the employee will be exposed to confidential information and won't disclose such information – ever -- even after termination of the agreement.

"Clauses should be very broad and include non-compete, non-circumvention, non-disclosure references to all work products and in-house proprietary info," says Kim Lorz, President of KAL Equity Group, an investment banking firm based in Los Altos, Calif., that specializes in early stage e-commerce companies. "These contracts should set reasonable time limits and be very clear about the penalties. Serious thought should be given to the technology base to see if there is a reasonable way to determine what may be pilfered."

With regard to "inevitable disclosure," understand the type of proprietary information the new hire knows without asking him/her to divulge it, says Cawley. "If the information would be used in the new job, evaluate the law of your state. 'Inevitable disclosure' is purely a creature of state law."

What if you're sued? Bert Klein, president of Global Strategy Corp., a strategic consulting company based in Washington, which also operates under the moniker "dot.trauma.com," recommends that businesses communicate, and possibly mediate, with the parties involved. "There's a tendency of former employers to overreact," says Klein. "I've found most people try to abide by agreements they've signed. But maybe that's going to change. There have been so many layoffs. There's a lot of anger. Companies may not, like it or not, be able to control all aspects of disclosure. It's best to try to work with the parties involved, try to mediate, be proactive."

Ownership Of Intellectual Property

Legal confusion over ownership of intellectual property can be problematic when dot-coms use consultants, engage in joint ventures or sign agreements with venture capitalists. "Dot-comers often have a sloppy way of doing business," says Lorz. "They don't outline clearly what the product of the joint venture is anticipated to provide in terms of anticipated sales or profits, and under what terms the expected outcome is to be shared." Lorz recommends the use of arbitration clauses and outside audits on the technology.

Increasingly, says Klein, the ways in which entrepreneurs protect intellectual property when companies are merged, acquired or restructured is going to become an important issue. "One of the saddest things about bankrupting a technology company," warns Lorz, "is that there is no preservation of any technological accomplishments. Most bankruptcy trustees wouldn't know what to do with the technology anyway. It just becomes so much data on a disc requiring a particular technical guru to appreciate."

Customer lists and other confidential information are similarly at risk. These valuable assets are increasingly off-limits due to heightened privacy concerns in the wake of the Toysmart case.

Privacy

"Privacy is a huge issue in Internet business," says Cawley. "The Internet has not done a very good job regulating those issues and everyone expects there will be regulation of privacy through federal legislation."

In the meantime, Plesser advises e-commerce businesses to write privacy policies, look into self-regulatory groups, and comply with existing laws like the Children's Online Privacy Act. "It applies more than people think – to any site that asks the age of the visitor," he says.

Businesses must treat their privacy policies like contracts, says Johnson and Patricia Faley, VP of ethics and consumer affairs at the Direct Marketing Association, agrees: "I think that as far as the FTC is concerned, the legal issue is that once you post that privacy policy you need to make absolutely certain that you are following it. And that's not always easy in a complex organization."

To facilitate compliance, companies are appointing chief privacy officers, says Faley. "That's probably the latest issue: We're seeing a lot of dot-coms appoint chief privacy officers because nowhere is the privacy issue more important than in the Internet. The Internet is what has caused the renewed interest in privacy. The dot-coms are taking this seriously."

Johnson recommends acquiring seals from BBBOnline or TRUSTe, demonstrating that a business has put a privacy policy in place that meets certain standards to which it adheres. In addition, be aware of the new European Union Directive on Data Privacy safe harbor provisions, since Web sites can be accessed worldwide.

With e-commerce law clearly in flux, Cawley believes it will be five to eight years before we have a "comprehensive Internet law, composed of a hodge-podge of other areas."

In the meantime, Plesser urges businesses to stay abreast of changes. In other words read the newspapers and talk to your lawyer on a regular basis.

Jay B. Johnson

Baker Botts LLP

2001 Ross Avenue
Dallas, Texas 75201-2980

214-953-6431

Edward A. Kahn

President

EKMS Inc.

675 Massachusetts Ave

Cambridge MA 022139

617.864.2100. x202

Bert Klein

President

Global Strategy Corporation

1824 R Street NW

Washington DC 20009

202-483-5117, 301-765-9771

also Wendy Haig, CEO, global strategy at

Kim Lorz

President

KAL Equity Group, LTD

Forty Main Street,

Los Altos, CA 94022

Tel. 650.941.0742

Ronald L. Plesser

Piper Marbury Rudnick & Wolfe

1200 Nineteenth Street

Washington, DC 20036-2430

202-861-3967

Smart Business: Top Legal Issues in 2001 (Legal)