Beware the Litigation Beast

Just say the words Napster or these days, and free downloading of music will probably not be the first thought that leaps to mind. Indeed, a rather different melody is being played in the courts as they tell these and other companies unequivocally that cyberspace is not a no-holds barred frontier where anything goes. There are laws governing e-business, and running afoul of these laws will land you in as much hot water as doing so in a traditional marketplace.

Therefore, if you select your e-business initiatives with only business and technology issues in mind, you may be headed into a morass of legal liabilities.

In the Law of Electronic Commerce, Benjamin Wright and Jane K. Winn stress the importance of including due consideration when undertaking e-business initiatives. They write, “while the law of electronic commerce may be unclear in certain areas, this uncertainty gives rise to an element of business risk to be analyzed with all the other business risks.”

Charting An E-business Course

So what e-business legal course should be followed in somewhat uncharted waters, where lines of responsibility and culpability may be murky? How do you recognize the legal considerations, and after determining the smallest proportion of legal risk possible, assure that this risk is mitigated? Fortunately, there are existing strategies and solutions to help you. But do you really need them or can you get by on “guestimation” and common sense?

Consider recent e-business-related cases. In the case a U.S. court granted an injunction ordering a Canadian company to cease re-transmitting TV broadcasts on-line without permission from the U.S. copyright holders, on the basis of evidence that the Canadian Web site could be accessed in the U.S.

In Stratton Oakmount, Inc. v. Prodigy Services Company, (1995) a New York superior court held that an Internet service provider that exercised content guidelines was liable for a defamatory message posted in a public space on its Web site by a subscriber.

In the Chapters-Globe case, an Ontario court ruled that a cybersquatter had to turn over the domain name to Chapters and The Globe and Mail, the parent companies of the joint on-line venture, notwithstanding the (slight) variation in spelling between the defendant’s domain name and the plaintiff’s.

There are countless other cases that demonstrate that the state of on-line law can be both uncertain and unpredictable – hardly the ideal legal environment to stimulate e-business. Some legislation has been passed to change this. For instance, the Communications Decency Act has since overruled the Stratton case in the US. A notable statute now in the books on this side of the border, the Privacy Act, introduces clear rules for the collection and use of personal consumer information obtained on-line. However, there is still far to go.

Legal Issues In Cyberworld

Around the world, courts and legislatures continue to grapple with several other e-business legal issues. These issues include: the taxation of on-line sales and income; dissemination of copyrighted material on-line; digital signatures; redress mechanisms; Internet security; the applicability of advertising regulations to on-line ads; tariffs and export controls in cyberspace; the collection and use of personal information on-line; links, frames, and meta-tags; and cooling off periods for on-line consumers – to skim just the surface.

So how do you prepare? By practising due diligence and leveraging technology solutions as an effective and efficient means of managing your e-business legal risks. For example, use technology to more efficiently manage and police legal risks, create the necessary legal relationships and workflow, and lobby for more “new economy” legislation.

First, however, you must identify and understand the legal challenges facing you. Then you must determine how to control the legal aspects of your initiative. And, finally, deploy appropriate resources to ensure effectiveness.

For example, legal considerations should be critical inputs for the overall assessment and planning of both your business and IT design. And you must match the legal issues with governance areas.

Business Benefits

Leveraging existing expertise and e-solutions in the field of e-business as it relates to law delivers multiple business and legal benefits. For instance, by adopting a well-formed strategy, legal certainty is increased within the company. It also minimizes legal liability and helps avoid the impairment of overall business objectives. There is nothing that cools investor ardour as fast as a public lawsuit.

Identifying potential legal issues in advance enables the company to adopt the best legal compliance practices to minimize exposure. Again, “limit, minimize and mitigate” are the operative words.

E-business governance frameworks allow clients to simultaneously lead and control e-business investments to ensure effective resource deployment. Such frameworks could also be used to manage the investments required to ensure legal compliance, including the efficient retention of legal counsel.

Another benefit is clarity. An e-business governance framework ensures clarity around the execution of e-business initiatives. The system can be used to ensure clarity around the minimization of legal risks.

How serious can the consequences be for not considering the legal aspects of your e-business? Take the case of Napster. After a U.S. district court held it accountable for the unlawful use of software by users of its service, it was very nearly shutdown by injunction.

As for, its share prices plummeted in the wake of a U.S. district court ruling that violated Universal Music’s copyrights by making thousands of Universal’s CDs available over the Internet without permission. In his decision, Judge Rakoff wrote that while Internet companies “may have a misconception that, because their technology is somewhat novel, they are somehow immune from the ordinary applications of laws. They need to understand that the law’s domain knows no such limits.” has subsequently settled out-of-court with the record companies, but the cost of those settlements – upwards of US$300 million – is a very steep price to pay for not having bothered to validate the legal feasibility of their business model from day one.

Indeed, recent cases are a wake-up call to anyone engaged in e-business: ignore e-business legal issues at your peril.

Nick Covelli, LL.B, M.Sc.Econ, is an e-business consultant with IBM Global Services in Markham, Ontario. He can be reached at