This article was contributed by Mike Young, an international business lawyer who helps clients buy and sell companies. This is part two of a two part series on legal considerations when buying an e-commerce business.
Protecting Your Internet Business’ Intellectual Property
As part of acquiring the assets of an e-commerce business, you will want to make sure to obtain the intellectual property (IP) you need to continue operating the venture after purchase. During the due diligence process, you’ll need to verify that the seller actually owns the IP rights being sold to you.
For example, many website photographs and graphics are licensed through stock photography agencies. In other words, the seller is a licensee for these images but is not the copyright owner. If the license is not transferable, you may have to purchase a new one for these images from the stock agency rather than paying the seller.
You may also discover that some intellectual property has simply been “borrowed” (stolen) by the seller from other sites under the misconception that everything found on the Internet is free for sharing and repurposing. The seller should not be paid by you for content that they have no right to sell.
Copyrights
Even after acquiring the business, you’ll want to protect your IP on an ongoing basis.
For example, you may wish to protect your site’s content (e.g. text, photos, graphics, videos, and audios) by copyright registration. Registration provides you with additional legal remedies if someone decides to infringe by using your content without permission. In the United States, copyrights are registered for a small fee at the U.S. Copyright Office. You can register at Copyright.gov or have your business lawyer do it for you.
Trademarks and Service Marks
A trademark is a symbol and/or word(s) that represent your product(s) to the public. A company logo is a common type of trademark. Similar to a trademark, a service mark represents your service(s) to the public. You can assert a common law trademark with a superscripted “TM” attached to your mark and a common law service mark by using a superscripted “SM” instead. However, a common law mark has minimal protection. This is true even if your state permits you to register the mark.
On the other hand, federally registered marks have legal remedies that discourage infringement by others. In the United States, you can register your mark online at the U.S. Patent and Trademark Office’s website (USPTO.gov) if it qualifies for protection under federal law (not all marks qualify). Because registering a mark is more complex than registering a copyright, it’s common to have an experienced business lawyer do it for you.
Patents
A patent is a government license to exclusively manufacture, use, license, or sell your invention for a certain number of years. You can learn more about patents at USPTO.gov.
Patent law is highly technical and it is uncommon for a non-lawyer to successfully apply for and obtain a patent without legal help. Even then, only those who have passed the “patent bar” exam are qualified to represent clients in patent matters.
Most business lawyers are not patent lawyers. If you want a patent, make sure you deal with a member of the patent bar who is in good standing. These include patent lawyers and patent agents (non-lawyers who have passed the patent bar).
Trade Secrets
The term “trade secret” is a broad term that covers valuable non-public information in your online business that provides you an advantage over your competitors. For example, it could be product formulas, sales processes, or distribution methods unknown to your competition.
Protection of trade secrets for an Internet business is accomplished primarily through the use of confidentiality (non-disclosure) provisions in contracts, including employment and independent contractor agreements. In addition, access to trade secret information should be limited only to essential personnel on a need-to-know basis.
Trade Dress
Your e-commerce business’ trade dress can be the unique aesthetic look to your company’s website, your products, and the packaging you use for delivering products and services. When someone “borrows” your trade dress, it causes confusion in the marketplace because customers may mistakenly purchase from one business that has infringed upon the trade dress of another.
The best way to protect your trade dress is to monitor your competitors. However if you believe your trade dress has been infringed upon, be sure to consult with your Internet business lawyer before reaching out to your competitor on the issue. In some instances, the e-commerce company that asserts its trade dress has been ripped off discovers employees or contractors have actually stolen a competitor’s trade dress. Instead of being a victim of IP theft, the company has actually inadvertently become an IP thief.
Domain Names
Your website domain name(s) are leased through a registration process for a minimum of one year. The domains should be registered in your company’s name rather than your name as an individual in order to reduce personal liability exposure.
Domain registration is essentially a tenancy rather than ownership. If the fees aren’t paid to your registrar at renewal time, the registration expires and someone else can register the domain name that you’ve been using.
In addition to losing a domain name by failing to pay registration renewal fees, Internet entrepreneurs have their website domain names stolen from them or never have the registrations in the first place.
The easiest way to reduce the chance your domain’s registration is stolen by hacking or otherwise is to implement two-factor authentication with your registrar. In addition to entering a password, you’ll be required to authenticate using a second step, such as entering a number sent to you by the registrar via text message at the time you want to log into your account. Of course, you should limit those within your company who have access to your account. There are cases where a dishonest employee or disgruntled business partner decided to change the registration without consent.
If you’ve outsourced website development or hosting to a third party for your e-commerce venture, you may be shocked to discover that domain names were never registered in your company’s name. It’s common (but dangerous) for an independent contractor to put domain registrations in the contractor’s name instead of your company’s name. This means the contractor is legally recognized as the registrant rather than your business. If you have a disagreement with the contractor or he disappears, you’re in a position where it will cost a lot of money and time to legally pursue ownership of the registration. In the meantime, your sites could go down or the contractor could even sell the domains to your competitors out of spite.
Business-to-Business (B2B) Versus Business-to-Consumer (B2C) Risks
When searching for an online business to acquire, it’s important to understand that there generally are less legal risks for B2B than B2C Internet ventures.
Difference between B2B and B2C e-commerce
A B2B e-commerce company focuses on selling products and/or services to other businesses rather than to individuals. Such sales can include retail products sold on a wholesale basis to another company that will in turn sell them as a retailer to consumers.
In contrast, a B2C Internet company focuses on selling products and/or services to individual consumers rather than to other businesses. Because of the disparate bargaining power between companies and individuals there are consumer protection laws and regulations a B2C venture has to comply with that do not exist for B2B transactions.
There are e-commerce companies that sell to both B2B and B2C customers. For these types of ventures, it’s important to know and obey consumer protection laws and regulations when dealing with consumers. Why? Violations can result in your business paying the consumer’s lawyer fees, court costs, statutory damages, punitive damages, and other expenses that far exceed the value of the underlying purchase made by the consumer.
Consumer Protection Laws and Regulations
Although the laws vary by name and content, there are two primary purposes to consumer protection laws:
- to require a business to provide enough accurate information for the consumer to make an informed purchasing decision; and
- to protect the consumer from being abused in the transaction by a business that is presumed to be more financially sophisticated than the individual as purchaser.
With regard to accurate information, the key is transparency by providing the consumer in simple easy-to-understand language all of the material terms of the sale (e.g. price, billing, quality, condition, delivery terms, etc.). Confusing language or hiding terms in the fine print can be considered a fraudulent or deceptive trade practice when selling to a consumer.
Making it difficult for a consumer to comply with your e-commerce company’s refund policy or requiring a series of unnecessarily complicated actions in order to cancel a membership subscription can also be considered fraudulent or deceptive.
Regulatory Enforcement Agencies
In addition to risking lawsuits from customers brought by private lawyers, both national and regional governments have consumer protection agencies that investigate, sue, and sometimes criminally prosecute online businesses that violate consumer protection laws. In the United States, these agencies primarily exist at the federal and state levels (not county and municipal).
At the federal level, the chief enforcer of consumer protection laws is the U.S. Federal Trade Commission (FTC). If food or drugs are involved, the U.S. Food & Drug Administration (FDA) may also take action. These agencies may even have their employees pose as customers to make purchases online from your company to see if complaints made by others are valid.
It’s important to note that these federal agencies act extraterritorially to protect U.S.-based consumers. This means that if your e-commerce business is located outside the United States but has U.S. customers, these federal agencies can and will monitor for compliance with U.S. consumer protection laws. There have been foreign business owners who have been sued or criminally prosecuted by these agencies.
At the regional level, the primary enforcers of consumer protection laws are the consumer protection divisions of the states’ Attorney General. These state agencies may pursue civil or criminal proceedings based on applicable state consumer protection law or in conjunction with the FTC based upon U.S. federal laws.
Are B2C Companies Worth the Legal Risks?
Although B2C companies must comply with applicable consumer protection laws and regulations, it’s important to remember they offer at least the same potential as B2B ventures primarily because there are many more individual consumers who exist as prospective customers than there are business prospects for a B2B company. If you’re interested in acquiring an online business, you should consider both B2B and B2C ventures.
Before and during the due diligence process, it will become fairly easy to identify if a B2C e-commerce company is doing business correctly. One quick way to identify potential legal issues is to become a customer of the B2C venture yourself. Review the advertising (e.g. website sales copy), make a purchase, and see if you have any difficulties in the sales process, customer support, and even making a refund inquiry.
If there are issues, decide if you will be able resolve them with minimal effort and expense if you acquire the business’ assets. If there’s a quick fix, a problem shouldn’t pose a stumbling block to moving forward with an otherwise sound deal.
As a practical matter, both B2B and B2C Internet companies tend to reveal their quality or lack thereof with just a little due diligence. A seller whose e-commerce company is a financial and legal powder keg will likely display many warning signs that you should proceed with caution or walk away (e.g. bogus financials, unpaid taxes, etc.). On the other hand, the seller who runs a solid business will tend to make sure things are done correctly from a legal standpoint in all important aspects of the venture.
E-commerce Labor Agreements
Online businesses often source their labor in multiple states/provinces or even different countries. This creates some issues that must be addressed when employing others or outsourcing work to independent contractors.
Employee versus Independent Contractor
Whether your e-commerce worker is an employee or an independent contractor affects a variety of key issues, including potential liability for paycheck withholding’s and liability for unemployment compensation, workers compensation, and even 13th month pay in some jurisdictions. In the United States, there are both federal and state labor and tax laws that must be taken into account. For example, a worker can qualify as an independent contractor under federal tax law but still be considered an employee under California labor laws because the legal standards are different.
Your company’s written contracts with your workers, including how you follow the terms within the agreements, will play an important role in reducing liability exposure for unpaid taxes and labor law violations. For example, your outsourcing agreement cannot state that a worker is an independent contractor but in practice you treat the worker as an employee.
Employment Agreements
Although the terms and conditions of each employee’s agreement with your online business will likely vary, here are some common issues you will want your Internet business lawyer to address when drafting your contract.
- Employment term
- Employee compensation
- Employee’s duties
- Paid time off
- Reimbursement of expenses
- Intellectual property ownership
- Confidentiality
- Non-competition
- Employer’s obligations
- Termination of employment
- Applicable law
- Dispute resolution
- Indemnification
Outsourcing Agreements
From an online business owner’s perspective, independent contractors tend to be cheaper than employees. Yet in order to qualify as an independent contractor instead of an employee, the agreement must contain certain provisions and you must follow the terms and conditions of the agreement. Although these terms will vary based on the types of services rendered by the independent contractor, here is a list of common issues your Internet business lawyer may address in the agreement.
- Description of the contractor’s services
- Provisions that show the worker is an independent contractor and not an employee
- Time of performance, including milestones
- Payment schedule for services
- Expense reimbursement
- Ownership of intellectual property created by the contractor per the agreement
- Confidentiality
- Non-competition
- Applicable law
- Dispute resolution
- Indemnification
Author Bio: Mike Young
For more than 21 years, international business lawyer Mike Young has helped clients set up, protect, buy, and sell companies. President of the Internet Attorneys Association LLC, Mike also serves as a foreign legal consultant in the Republic of Panama.
Happily married, Mike enjoys spending time with his family, his Pembroke Welsh Corgi dogs, and training in Krav Maga self-defense. To learn more, go to MikeYoungLaw.com. While there, be sure to subscribe to his complimentary newsletter where you will receive important e-commerce business legal news and tips by email.