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ELECTRONIC COMMERCE ON THE INTERNET

By Ray K. Harris

The Internet has a variety of commercial uses including: advertising;1 providing customer service information; and engaging in transactions (typically of low value).2 For example, Federal Express provides customer information (tracking deliveries) at its website. www.FedEx.com.3 When customers are sophisticated, companies are gaining notoriety for their ability to handle transactions through their websites. See, e.g., www.cisco.com4 and www.dell.com. According to the Harvard Business Review, Cisco Systems transacts $9 million a day (40% of total sales) over the Internet (while saving $270 million in annual operating expenses). "Making Business Sense of the Internet," Harvard Business Rev. (1998). One of the early Internet success stories is a book seller which uses software to enhance customer service. www.amazon.com. Recently ebay.com (an Internet auction site) surpassed amazon.com in market capitalization.

There are more than 100 million people online (more than 1/2 in the US). Radio took 30 years to reach an audience of 50 million. TV took 13 years. The Internet took only 4 years.

This paper addresses the legal issues raised by e-commerce. The first topic is where you are in cyberspace. Domain name protection and website navigation issues will be addressed. The risk of being sued in a distant forum will also be discussed. The second topic is what you can do in cyberspace. Here we will address protection of website content, contract formation, security, privacy and taxation issues.

I. Where are you?

A. How Customers Find You

1. Domain Names Key Points (Periodically search for use of your trademarks on the Internet (Register second level domain names as federal trademarks on the principal register

a. The Current System The national information infrastructure (commonly known as the Internet) includes a growing number of home pages on the worldwide web and e-mail address. Each e-mail or home page address consists of numbers that can be associated with a specific domain name assigned by the Internet Network Information Center (InterNIC) registration service. Addresses and domain names are controlled by the Internet Assigned Number Authority (IANA). IANA assigned control of top level domain (TLD) names to InterNIC. InterNIC contracted with Network Solutions, Inc. (NSI) to process domain name applications.

In late 1998 the Internet Corporation for Assigned Names and Numbers (ICANN) was formed as a private non-profit corporation to coordinate and administer policies and technical protocols in the place of IANA. See http://www.iana.org.

To locate a website without utilizing a search engine, the user can enter a Universal Resource Location (URL), which includes a unique domain name. The domain name is an alphanumeric name that the computer converts into a 12 digit Transmission Control Protocol/Internet Protocol (TCP/IP) address, consisting of a series of numbers. The domain name is divided into several domains moving left to right separated by periods (spoken as "dot"), e.g. rharris@fclaw.com. The top level domain (TLD) name identifies the nature of the business or country of origin. TLD names include com, edu, gov, net, org, or int. Most commercial users utilize the "com" TLD. Consequently, apple.com could refer to Apple Records or Apple Computer. NSI registers fclaw.com, but Fennemore Craig controls user names such as rharris. Unlike telephone numbers, there is no readily accessible directory associating corporate names with domain names. Instead, various search engines (such as Lycos, AltaVista and Yahoo!) are used to locate domains through trial and error.

Users searching for a specific Web site have two options. First, if users know or can deduce the address of a Web site, they can type the address into a browser and connect directly to the Web site as if dialing a telephone number. Panavision Int'l, L.P. v. Toeppen, 945 F.Supp. 1296, 1299 (C.D.Cal. 1996). More often, users do not know the exact address and must rely on "search engines" available on the Web to search for key words and phrases associated with the desired Web site. Because of the quantity of information on the Web, searches often yield thousands of possible Web sites. Such a cumbersome process is rarely satisfactory to businesses seeking to use the Web as a marketing tool. Instead, businesses would prefer that customers simply be able to find a Web site directly using a corporate name, trademark or service mark. Panavision, 945 F.Supp. at 1299.

Lockheed Martin Corp. v. Network Solutions, Inc., 985 F.Supp. 494, 952 (C.D. Cal 1997).

NSI assumed its supervision of domain name registration in 1993, when fewer addresses were in use. NSI now reportedly assigns over 100,000 registrations each month. NSI registration fees ($100 for initial registration and $50 per year for renewal) were estimated to generate a 91% increase in earnings for the first quarter of 1998 and NSI stock traded at 100 times earnings. The Internet Newsletter 3 (June 1998).

b. The NSI Domain Name Policy

NSI has allocated domain names based on first to apply. Registration of a domain name does not entail any analysis of potential trademark issues by NSI. In November 1995 NSI adopted a policy requiring the registrant: (1) to represent that its use of the domain name does not infringe any trademark rights of third parties; and (2) to indemnify InterNIC for legal costs incurred in defending any trademark infringement litigation. If the holder of a federal or foreign trademark registration disputes the domain name rights granted by InterNIC, the domain name would be placed on hold unless the registrant can provide its own valid registration.

NSI has adopted several revised domain name dispute policies. The current policy (effective February 23, 1998) is available at ftp://rs.internic.net/policy/nic-rev03/.txt. Under the revised policy, the trademark owner6 must notify the registrant that the domain name "violates the legal rights of the trademark owner".

A third party complainant (the trademark owner) can place a domain name on hold by providing: (1) a certified copy of a trademark registration "identical to a second level domain name" on the principal register; and (2) a copy of written prior notice to the registrant clearly stating, "the registration and use of the disputed domain name violates the trademark rights of the complainant." The registration must predate the creation date of the disputed domain names. Hold can be avoided, however, if the registrant can produce a trademark registration on the principal register with an effective date "prior to the date of any third party's notice of a dispute to the registrant."

NSI will place the domain name on hold after a 90-day transition period unless within 30 days the domain name registrant provides proof the registrant also had registered the trademark prior to the notice from the trademark owner. If either the domain name registrant or trademark owner files suit prior to the time the domain name is placed on hold, NSI will deposit control of the domain name into the registry of the court. The revised policy specifically states that it "does not confer any rights, procedural or substantive, upon third-party complainants." NSI has consistently taken the position that "NSI presumes that an applicant for a domain name has the legal right to use that name."

c. Domain Names as Trademarks

NSI's policy has been criticized as favoring trademark owners over domain nameholders, and favoring owners of federally registered marks over owners of non-registered marks, because owners of federally registered marks can invoke NSI's policy to effectively enjoin the use of identical domain name's without having to make any showing of infringement or dilution.

Lockheed Martin Corp. v. Network Solutions, Inc., 985 F.Supp. 949, 953 (C.D.Cal. 1997).

Similar trademarks can coexist when they are used in connection with separate lines of goods or services so that no consumer confusion results. Because there are only a limited number of domain names for commercial enterprises, however, corporations are often precluded from using what would otherwise be their most obvious domain name.

Registration of domain names for resale has been held not to preempt use by trademark owners. See Avery Dennison Corp. v. Sumpton, 999 F.Supp. 1337 (C.D.Cal. 1998). When incidental use of trademarks is unintentional, a cease and desist letter is usually sufficient to stop the misuse.

d. Domain Name Litigation

Georgetown Law School has set up a web site to collect references to domain name disputes. Http://www.law.georgetown.edu/lc/internic/recent/rec1.html. Alternate sources of information on domain name disputes are the "NSI Flawed Domain Name Policy Information Page" at http://www.patents.com/nsi.sht and Http://www.jmls.edu/cyber/cases/domain.html. Domain name disputes can be divided into two general categories: domain piracy (disputes with registrants of well known marks) and domain competition (disputes between competing good faith users).

In a notorious series of cases Dennis Toeppen registered not only panavision.com and panaflex.com, trademarks of Panavision International LP, but also americanstandard.com (the trademark for American Standard, Inc.), intermatic.com (the trademark of Intermatic, Inc.), aircanada.com, deltaairlines.com, eddiebauer.com and neiman-marcus.com. Panavision Int'l LP v. Toeppen, 945 F.Supp. 1296 (C.D. Cal. 1996), aff'd, 141 F.3d 1316 (9th Cir. 1998). Mr. Toeppen demanded $13,000 to discontinue use of the panaflex.com and panavision.com domain names. Id. See also Intermatic, Inc. v. Toeppen, 947 F.Supp. 1227 (N.D. Ill. 1996) (defendant characterized by the court as a "cyber-squatter"). Mr. Toeppen was enjoined from using or selling the pirated domain names.

Domain name values can be quite substantial. Compaq recently paid $3.3 million to acquire altavista.com.

2. Website Navigation Key Points (Do not link or frame sites in a way that circumvents advertising on the site

• Do not use trademarks as icons for links or metatags for search engines
• List your site with search engines
• Consider a link agreement with key sites regarding maintenance and cross-linking

In order to navigate to other websites, or locate additional information, the structure of the Internet allows the use of hypertext links. Domain names and hypertext links raise trademark and unfair competition issues. It is sometimes advisable to have a linking agreement to memorialize the mutual expectations of the developers of the important linked cites. The developer of a religious site, for example, may object to the inclusion of adult materials on a linked site. A contractual restraint minimizes argument.

a. Linking

The Internet is often navigated by clicking on an icon linking one site to another. Generally, materials can be linked by hypertext links without violating Trademark law. (A collection of links may, however, be protected under copyright law as a compilation). One way to limit linking is to require passwords or registration for users. If the host site is apparently endorsed by or associated with the linked site, then trademark issues arise. If the icon used to link to another site uses trademarked graphic images or stylized lettering an implied endorsement or association may arise. Case law has not yet resolved these issues. Some form of "fair use" may exist to allow the icon to describe accurately the linked site. See New Kids on the Block v. New America Publishing, Inc., 971 F.2d 302, 306 (9th Cir. 1992) (use of trademark required to describe musical group for popularity polls using 900 telephone number). Alternatively, posting material on the Internet may entail an implied license to link to that material in a non-misleading manner.

Ticketmaster Corp. v. Microsoft Corp., CV 97-3055 RAP (C.D.Cal. April 28, 1997) http://www.ljx.com/LJXfiles/ticketmaster/complaint.html, addresses the right of Seattle Sidewalk to use Ticketmaster's name and logo link to pages within the Ticketmaster website without permission (bypassing ads and notices posted on the home page). Ticketmaster alleges dilution, unfair competition and interference with Ticketmaster advertising. Pursuant to a settlement announced February 15, 1999, Microsoft will direct ticket buyers to the Ticketmaster home page.

Shetland Times Ltd. v. Dr. Jonathan Wills, Sess.CAS.Oct. 24, 1996 (http://www.shetland-news.co.uk/opinion.html) dealth with links from Shetland News to Shetland Times also bypassing the home page. After an injunction was entered to prevent bypassing the home page advertising, the case was settled. http://www.shetland-times.co.uk/st/daily/dispute.html.

Banner ads link to the advertiser's web-site to promote online sales. See Nuara, "Multimedia", The Licensing Journal (Sept. 1996) at 13 (Netscape often charges $46,000 for banner ads). Netscape claims 2 million impressions per month or these banner ads. A web link agreement is often used to detail the nature of the link. The ABA Business Law Section, Committee on the Law of Commerce in Cyberspace, has drafted "Model Web Link agreements." http://www.abanet.org/buslaw/catalog/5070311.html.

b. Framing

First introduced to HTML programming as a proprietary feature of the Netscape Navigator, frames are now compatible with most commercial browsers. The web page is divided into regions or windows that can operate independently. These separate regions or windows allow the user to look through to another site while still connected to the linking site. The material from another site can be surrounded with material (including advertisements) from the original site. The URL displayed by the browser is that of the framing site, not the site displayed within the frame.

In Digital Equipment Corp. v. AltaVista Technology, Inc., 960 F.Supp. 456 (D. Mass., 1997), the court granted an injunction prohibiting the defendant from using the trademark "AltaVista" beyond the scope of a license agreement with Digital. In December, 1995, Digital launched AltaVista, which has become one of the leading search services on the Internet. Digital's AltaVista web site receives millions of hits per day. Defendant AltaVista sells software to design and create web pages. Digital acquired an assignment of defendant's rights to the trademark AltaVista and licensed back to AltaVista the right to use the word AltaVista as part of its corporate name and its web site address (www.altavista.com). Although authorized to use the domain name, the defendant was enjoined from using the term AltaVista on its web site outside the scope of the license. For example, a link on the defendant's web site offered an unnamed "search engine" by linking to Digital's AltaVista search service.

By October 28, 1996, three days before Digital brought its present motion for preliminary injunction, ATI's Web-site had been altered again: ...beneath the banner ad is a solicitation encouraging one to "Click here for advertising information - reaching millions every month!" Immediately below that sits an almost identical graphical representation of Digital's AltaVista search engine interface (i.e., the appearance of Digital's AltaVista Web-site, including the logo, etc). Below that is a statement informing users that they can "search with Digital's AltaVista" (using Digital's AltaVista search engine while still, to all appearances, being at the ATI Web-site). In short, a visitor to ATI's site could easily have the impression that they were actually at Digital's AltaVista site.

This impression is created by a web technique known as "framing". Framing refers to the process where by one Web-site can be visited while remaining in a previous Web-site. Thus, while still appearing to be at ATI's site, and while still able to view its advertising, one could now have traveled to Digital's site, which would appear inside the "frame" of ATI's site.

Id. at *3 n. 12.

"Digital alleges that the quality of ATI's Web-site, as well as its style and appearance, failed to protect the "AltaVista mark" and the good will associated therewith.

Id. at *16, n. 31.

In granting the injunction, the court noted that Digital had created "one of the most recognized marks and use on the web". The court specifically enjoined the defendant from:

"using on its Web page. . . a link (without any search boxes), direct or indirect, to Digital's AltaVista Internet Search service that creates the false impression that ATI's Web-site is Digital's AltaVista Search Service."

Framing was the subject of a suit filed by the Washington, Post, Time, Inc. and other publishers against an Arizona company. Washington Post v. Total News, Inc., 97 Civ. 1190 (PKL) (S.D. N.Y., February 28, 1997) (http://www.ljx.com/internet/complain.html). Total News uses framing technology to display the content of sites from around the web with advertising sold by Total News. In addition to copyright claims, the publishers asserted trademark dilution and infringement, misappropriation, unfair competition and false advertising. The plaintiffs alleged that defendant republished their material without their consent at the Total News website. The dispute was settled in June, 1997. A copy of the Settlement Agreement is available at http://zeus.bna.com/e-law/cases/totalset.html or http://www.ljx.com/internet/totalse.html. The settlement allows linking without framing.

Finally, a recent case suggested that framing copyrighted material on a website may create a copyright infringing derivative work. Futuredontics, Inc. v. Applied Anagramics, Inc., 45 U.S.P.Q.2d 2005 (C.D.Cal. 1998), aff'd, 1998 WL 417413 (9th Cir. July 23, 1998) (preliminary injunction denied, but motion to dismiss also denied because plaintiff may establish copyright infringement if defendant's "framed link duplicates or recasts plaintiff's web page.").

c. Metatags

Metatags are HTML code for indexing pages, not ordinarily visible to web viewers, but visible to search engines as key words for search routines. When trademarks are used as metatags to misdirect search engines, the trademark owner may assert infringement, dilution and unfair competition. See Playboy Enterprises, Inc. v. Calvin Designer Label, 985 F.Supp. 1220 (N.D.Cal. 1997) (enjoining use of Playboy and Playmate trademarks as metatags and domain names); Oppedahl & Larson v. Advanced Concepts, No. 97-Z-1592 (D.Colo. July 23, 1997) (http://www.patents.com/ac/complain.sht); Insituform Technologies, Inc. v. National EnviroTech Group, No. C-97-2064 EDL (E.D.La. Aug. 26, 1997) (http://www.cll.com/case1.htm) (misuse of metatags for competing website settled by consent judgment). But see Playboy Enterprises, Inc. v. Welles, 7 F.Supp. 2d 1098 (S.D.Cal. 1998) (Defendants' use of "Playmate of the Year" title and "Playboy" and "Playmate" metatags to identify and describe her is a fair use under 15 U.S.C. ßß 1115(b)(4), 1125(c)(4)(A)).

B. How Lawsuits Find You - Jurisdiction

Key Points

• Success in expanding business creates risk of suit wherever customers live
• Interactive sites best exploit the Internet, but create the greatest risk of suit in distant forums
• Informational sites create the least jurisdictional risk

Claims arising on the Internet may be brought anywhere the defendant is legally "present." A number of trial courts have addressed the issue of jurisdiction with inconsistent results.

Interactive websites inviting electronic commerce subject the developer to suit more readily than websites merely providing information in electronic form. See, e.g., Weber v. Jolly Hotels, 977 F.Supp. 327 (D. N.J. 1997) (no jurisdiction over Italian hotel owner based on informational website). See EDIAS Software Int'l L.L.C. v. BASIS Int'l Ltd., 947 F.Supp. 413, 420 (D. Az. 1996) (a defendant with sales in Arizona "should not be permitted to take advantage of modern technology through an Internet web page and forum and simultaneously escape traditional notions of jurisdiction"). Internet commerce clearly entails the risk of litigation far from the physical place of business.

As the law pertaining to cyberspace continues to evolve, users must evaluate the risk of being drawn into litigation in geographically distant courts. See Superguide Corp. v. Kegan, 987 F.Supp. 481 (W.D. N.C. 1997) (passive website "assumed" to generate contact with residents creates jurisdiction). See generally, http://www.cli.org. (Cyberspace Law Institute).

On the one hand, it troubles me to force corporations that do business over the Internet, precisely because it is cost-effective, to now factor in the potential costs of defending against litigation in each and every state; anticipating these costs could make the maintenance of a Web-based business more expensive. On the other hand, it is also troublesome to allow those who conduct business on the Web to insulate themselves against jurisdiction in every state, except in the state (if any) where they are physically located.

Digital Equipment Corp. v. AltaVista Technology, Inc., 960 F.Supp. 456, 471 (D.Mass. 1997).

With regard to the burden of physically traveling the distances electronic message travel on the Internet, at least one court has noted that crossing the continent

"may well be the price of ...agreeing to do business involving the Internet...; if one does something that could cause a tort in another state, then this inconvenience should be considered by the potential foreign defendants before they act."

Digital Equipment Corp. v. AltaVista Technology, Inc., 960 F.Supp. 456 (D. Ma. 1997).

A number of cases have held maintenance of a website subjects the developer to jurisdiction in a foreign court.

The likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet...At one end of the spectrum are situations where a defendant clearly does business over the Internet. If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the Internet, personal jurisdiction is proper. At the opposite end are situations where a defendant has simply posted information on an Internet Web site which is accessible to users in foreign jurisdictions. A passive Web site that does little more than make information available to those who are interested in it is not grounds for the exercise of personal jurisdiction. The middle ground is occupied by interactive Web sites where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the Web site.

Zippo Manufacturing Co. v. Zippo Dot Com., Inc., 952 F.Supp. 1119, 1124 (W.D. Pa. 1997). Accord Millenium Enterprises Inc. v. Millenium Music Co., 1999 WL 27060 (D.Or. Jan. 4, 1999); Blackburn v. Walker Oriental Rug Gallery, 999 F.Supp. 636 (E.D. Pa. 1998)

"The mere advertisement on the Internet surely does not mean that a company is subject to personal jurisdiction at each and every location on the planet where someone is capable of logging on the Internet". Smith v. Hobby Lobby Stores, Inc., 968 F.Supp. 1356 (W.D. Ark. 1997) (No jurisdiction over Hong Kong defendant who advertised on the Internet).

II. What Can you Do?

A. Website Content

Key Points

• Use written agreements to obtain copyright assignment from website developers
• Include a copyright and trademark notices on your site and register the copyright
• Protect data collections with contract limitations on use
• Obtain necessary assignments or licenses for photographs, music, video or other third party created content
• Fingerprint data files
• Revise policy manuals to prohibit downloading unauthorized screensavers, music and photography
• Comply with regulations of content (e.g. language, comparative advertising) everywhere the site is accessible
• Update frequently to encourage traffic and avoid inaccuracy

Websites are created using hypertext markup language (HTML). Websites can incorporate text, images (including video) and sound. Consequently, the design of the website and the contents employed, raise copyright issues. Tools for building websites include framing and mirroring technology. These features raise copyright issues.

1. Copyright Ownership

a. What is Website Content Internet content must either be developed or acquired.

Internet content is principally protected by copyright law. Contract law can supplement copyright protection for compilations of data and licensed software.

In the January/February 1996 issue of Microsoft Magazine, Microsoft offered "ten tips for creating a web home page," promising that "it's really quite easy and fun." Step 1: start Windows Notepad. Microsoft Tells you how (even if you are a lawyer). Step 2: "The secret to getting started quickly is to modify someone else's page with material of your own. When you find a page you like on the web, save it to your hard drive. . ." Microsoft tells you how. Microsoft proceeds through the remaining eight steps without pointing out that saving to a hard drive constitutes copying for purposes of the Copyright Act. In the last two sentences of the article (probably inserted by corporate counsel), Microsoft acknowledges:

One thing to remember is that there is copyright on all web pictures and graphics. Fortunately, many site owners have no objection if you ask permission to use them.

The brief Microsoft Magazine article did not consider that underlying HTML programming as well as music and other materials used for a web site may also be copyrighted. If the web site owner hired a consultant to create the web page, without a contract provision regarding copyright ownership, the consent of the "site owner" would not be enough. If the photographs, video or music7 were created by someone other than the site owner or consultant, the additional consent of the creator (and others such as acting talent) may be required. Without careful analysis "easy" copies of multimedia pages might infringe multiple copyright owners' exclusive rights.

b. Exclusive Rights

The copyright owner has the exclusive right: (1) to reproduce the work, (2) to prepare derivative works, (3) to distribute copies to the public, (4) to perform the work publicly, and (5) to display the work publicly. 17 U.S.C. ß 106. Courts are continuing to apply the existing legal structure to the "electronic frontier" with mixed results. On September 5, 1995, the Working Group on Intellectual Property Rights recommended specific amendments to the copyright law to protect an author's creative works in the "digital, network environment" of the Internet. The Working Group concluded the reproduction right is implicated:

When a work is placed into a computer storage device such as on a disk or ROM, or is placed in RAM for more than a very brief period;

When a printed work is "scanned," creating a digital copy;

When other works are digitized, such as photographs, motion pictures, or sound recordings;

When a digitized file is "uploaded" from a user's computer to a bulletin board system (BBS) or other server, or is "downloaded" from a BBS or other server;

When a file is transferred from one user to another via a computer network.

Intellectual Property and the National Information Infrastructure (White Paper) at 65-66; 1 M. Nimmer and D. Nimmer, Copyright, ß 8.08[A][1].

Allowing users to download and print copyrighted material constitutes distribution to the public. Playboy Enterprises, Inc. v. Webbworld, Inc., 991 F.Supp. 543, 551 (N.D. Tex. 1997); Playboy Enterprises, Inc. v. Russ Hardenburgh, Inc., 982 F.Supp. 503, 513 (N.D. Ohio 1997); Marobie-Fl., Inc. v. National Assn. of Fire Equipment Distributors, 983 F.Supp. 1167, 1173 (N.D. Ill. 1997).

Allowing users to view copyrighted material on a computer monitor constitutes public display. Playboy Enterprises, Inc. v. Webbworld, 991 F.Supp. at 551-52; Playboy Ent., Inc. v. Russ Hardenburgh, Inc., 982 F.Supp. at 513. The White Paper takes the position that transmitting a copyrighted work from one person to another by means of a private e-mail message is not distribution to the public. White Paper at 215.

c. Electronic Publishing

In Tasini v. New York Times Co., 972 F.Supp. 804, reconsideration denied, 981 F.Supp. 841 (S.D. N.Y. 1997), a group of freelance writers sued the New York Times and Mead Data Central Corporation for publishing their work electronically. The issue presented was whether articles written for the New York Times, Sports Illustrated and other publishers could be republished on electronic databases (like Lexis/Nexis) and on CD-ROMs.

The judge held that republication did not violate the copyright of the freelance authors because the publisher had a limited statutory privilege to produce revisions of the published "collective works."8 This precedent, however, did not authorize republication as content for a website or a separate electronic publication.

A contrary result was reached in Ryan v. Carl Corp., 23 F.Supp. 2d 1146 (N.D. Cal. 1998). The court found a document retrieval service that published an Internet database of titles and distributed photocopies of articles violated the author's copyright in the articles. The rights held by the publisher of compilations of articles do not include reproducing individual articles.

Authors are already attempting to re-negotiate their contracts to clarify electronic re-publication rights. Anyone licensing content from third parties should include specific provisions addressing any desired rights of electronic publication.

The American Society of Journalists and Authors' Guild founded the Authors' Registry as a licensing clearing house (similar to ASCAP or BMI in the music industry). The National Writers' Union has launched a similar registry (The Publications Rights Clearinghouse). Information about electronic publishing is available at the American Society of Journalists and Authors website: http//www.asja.org.

d. Liability for Infringement

An employer is ordinarily jointly and severally liable with its employee for any infringement of the copyright owners exclusive rights. 3 Nimmer, Copyright ß 12-04[A](3)[d].

1) Vicarious Liability. If a defendant has the right and ability to supervise the infringer and a direct financial interest in the infringement, then that defendant may be liable for vicarious infringement even without actual knowledge that the copyright was being infringed. See Southern Bell Telephone & Telegraph Co. v. Associated Telephone Directory Publishers, 756 F.2d 801, 811 (11th Cir. 1985); Shapiro, Bernstein & Co. v. H. L. Green Co., 316 F.2d 304, 307 (2d Cir. 1963).

2) Contributory infringement. If a defendant is in a position to control use of the copyrighted work and knowingly induces, causes or materially contributes to use of the copyrighted work without permission of the copyright owner, then the defendant may be liable for contributory infringement. Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 437, 104 S. Ct. 774 (1984); Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d. Cir., 1971); A&M Records Inc. v. Abdallah, 948 F.Supp. 1449 (C.D. Cal. 1996); ISC-Bunker Ramo Corp. v. Altech, Inc., 765 F. Supp. 1310, 1332 (N.D. Ill. 1990).

Several cases have held a bulletin board service (BBS) operator liable for copyright infringement by users. Playboy Enterprises, Inc. v. Russ Hardenburgh, Inc., 982 F.Supp. 503, 514 (N.D. Ohio 1997); Playboy Enterprises, Inc. v. Frena, 839 F.Supp. 1552 (M.D. Fla. 1993) (170 photographs uploaded to and downloaded from BBS violated exclusive right to distribute); Sega Enterprises Ltd. v. MAPHIA, 857 F.Supp. 679 (N.D. Cal. 1994) (BBS sold copiers for uploaded video games) subsequent order, 948 F.Supp. 963 (N.D. Cal. 1996); Central Point Software, Inc. v. Nugent, 903 F. Supp. 1057 (E.D. Tx 1995) (application software).

The availability of relief against an access provider (e.g., Compuserv, America On Line), however, remains uncertain. Cases such as Playboy Enterprises, Inc. v. Webbworld, Inc., 991 F.Supp 543 (N.D. Tx. 1997) would still result in liability for website operators who sell infringing material and profit from the infringement (even in the form of a fixed monthly fee).

2. Regulatory Requirements

Because of their wide accessibility, Internet sites should comply with the most stringent regulatory requirements in any jurisdiction in which it is accessible. For example, sites accessible in Canada may need to provide French language translations. Comparative advertising acceptable in the United States may not be acceptable in other jurisdictions.

3. Accuracy

According to the Internet Newsletter (Sept. 1997), Interactive Multimedia Publishers incorrectly valued the company's copyrights on its website at $82 million. The filing with the Security and Exchange Commission reported a value of $37 million. When the company acknowledged the error (and announced plans to revise the estimated value down to a mere $7 million) the company's stock dropped 18%.

Steps should be taken to ensure that confidential, defamatory, or infringing material is not included in the website content. The site should also incorporate copyright and trademark notices to protect any intellectual property incorporated in the web pages.

B. Contract Formation

Key Points

• Use interactive technology to conspicuously display contract terms and require acceptance prior to completing any transaction
• Disclaim implied warranties and consequential damages
• Provide an option for return of goods for a refund
• Use digital signatures where possible to authenticate user identity
• Comply with encryption export regulations
• Watch out for patents on methods of doing business
• Be careful not to violate existing obligations to distributors (e.g. geographical exclusivity) when expanding Internet activities

1. Webwrap Contracts

The traditional contract model (an offer and acceptance leading to a written contract signed by both parties) is not workable for mass-marketed goods. Software providers have relied upon shrinkwrap licenses despite a dearth of case law authority upholding such agreements. A webwrap agreement may more readily fit the traditional doctrines of offer and acceptance. The opportunity for the user to click on an icon or enter an appropriate response in order to indicate acceptance would help establish affirmative acceptance with knowledge of the license terms. See G. Moore and J. Hadden, "On Line Software Distribution: New Life for "Shrinkwrap" Licenses"? The Computer Lawyer April 1996. The webwrap license agreement could modify or disclaim warranties. Ariz. Retail Systems Inc. v. Software Link, Inc., 831 F.Supp. 759 (D. Ariz. 1993). See ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) (shrinkwrap license enforced to limit use of the product to "noncommercial purposes"). Accord Hill v. Gateway 2000, 105 F.3d 1147 (7th Cir. 1997) (mail order computer purchase).

Sites which facilitate e-commerce are more likely to expose the developer to jurisdiction in distant forums. A recent case upholding a "click wrap" license, however, may provide an impetus to use of the Internet for commercial transactions. See Hotmail Corp. v. Van $ Money Pie, Inc., 47 U.S.P.Q.2d 1020 (N.D. Cal. 1998) (breach of contract claim arising out of click wrap service agreement). A case holding shareware distributed on the Internet is entitled to copyright protection also held that an express restriction on commercial distribution was valid and enforceable. Storm Impact Inc. v. Software of the Month Club, 1998 WL 466858 (N.D. Ill. July 29, 1998). The license terms should be displayed and the user should be required to click on "I accept" in order to consummate the transaction (with the option to click "I decline" and cancel the transaction).

Shrinkwrap and webwrap license terms should be expressly subject to review and rejection by the purchaser. Vendors should display warranty disclaimers prominently on packaging or computer screens. References on packaging, in manuals and on user screens to use subject to the license terms enhance the argument that the buyer reviewed and accepted the proposed license terms. Webwrap agreements should be modified to evidence assent after opportunity to review as contemplated by the UCC and ProCD. Return for a refund should be provided as an option. See UCC ß 2B-308 Reporters Notes.

The website should contain a disclaimer regarding implied warranties and any liability for consequential damages. In regulated industries (such as the practice of law), additional notices or disclaimers may be required.

2. Electronic Acceptance Under the Proposed UCC Revisions

The National Conference of Commissioners on Uniform State Laws is considering a uniform law to apply to "licenses of information and software contracts." UCC ß 2B-103(a). Drafts are available at http://www.law.upenn.edu/library/ulc/ulc.htm. The scope of this law includes software licenses, support, on-line access and customization. The law must be adopted by individual states in order to come into effect.

Three principal issues in electronic commerce are the requirement of both a writing and a signature and the admissibility of electronic transmissions as evidence. Richard Hill & Ian Walden, "The Draft UNCITRAL Model Law for Electronic Commerce: Issues & Solutions" 13 The Computer Lawyer 18 (March 1996). The UCC revisions attempt to address the first 2 issues. Under the proposed law, software contracts may be embodied in either a written or an electronic document (called a record). The draft law recognizes both a standard form and a mass-market license. A standard form is an agreement "used without negotiation of, or changes in, the substantial majority of the standard terms." ß 2B-102(a)(35).

A standard form is enforceable if the user: (1) manifests assent, after (2) an opportunity for review. Assent can occur electronically by "hitting a return key or entering an identification code." Id., ßß 2B-307 cmt. 3; 2B-113 cmt 2.

The UCC contemplates that a contract may be formed through electronic agents even though "no individual representing either party was aware of or reviewed the initial message, response, reply, information, or action signifying acceptance." Id. ß 2B-205(b). The party using an intelligent electronic agent is responsible for performing contracts made by the software. Id. ßß 2B-111, 2B-102(a)(32). This may be an area where the law has outstepped the technology, because existing electronic agents may automatically accept licenses without any analysis of the terms, and are clearly not yet capable of critically analyzing such terms.

3. Digital Signatures/Encryption

a. Authentication

In March 1995, Utah passed the first law authorizing the use of digital signatures. Utah Code �� 46-3-101 through 504. The Utah statutes require the use of public key encryption and establish a mechanism for licensing certification authorities.

California adopted a "technique neutral" approach. See Richard Hill & Ian Walden, "The Draft UNCITRAL Model Law for Electronic Commerce: Issues & Solutions," 13 The Computer Lawyer at 18, 22 (March 1996).

Arizona enacted a statute in April 1996 authorizing the Secretary of State to "approve for use by all other state agencies, and accept digital signatures for documents filed with the Office of the Secretary of State and adopt rules to implement this paragraph". A.R.S. ß 41-121(13). In 1998 digital signatures were authorized for dealing with state agencies, boards and commissions. A.R.S. ß 41-132.

Twenty-one states have studied the issue of digital signatures, but only two, Utah and Washington, have enacted comprehensive legislation. See "Sign on the Dotted Screen" ABA Journal at 100 (May 1997).9

Under the draft UCC provision authentication procedures agreed to by the parties must be "commercially reasonable." The party proposing or requesting use of an authentication procedure that is not commercially reasonable bears the risk of any resulting loss. ß 2B-111. A receiving party may rely in good faith on the agreed authentication procedure. Id. ß 2B-112. The party hiring an intermediary to transmit or electronically log messages or data is liable for harm caused by the intermediary's errors if another party reasonably relies on the error. Id.

The staff of the Federal Trade Commission Bureau of Consumer Protection has argued that these provisions do not provide adequate protection against consumer fraud. Existing protections for unauthorized use of a credit cards (the Truth in Lending Act, 15 U.S.C. ß 1601 et seq and Regulation Z limit liability to $50) or ATM cards (the Electronic Funds Transfer Act, 15 U.S.C. ß 1693 et seq and Regulation E limit liability to $50-500) may not apply to Internet payment systems.

Large trading partners can negotiate electronic data interchange (EDI) agreements under which both parties agree contractually to security and authentication procedures in "closed" communications networks. EDI communications replace paper documents. In effect the parties contractually waive the statute of frauds. This process can be expensive and entails negotiation. Only large companies and frequent transactions can justify the cost. A model agreement and commentary are published by the ABA. "ABA's Model Electronic Data Interchange Trading Partner Agreement," 45 Bus. Law. 1645 (June 1990).

The ABA Section of Science and Technology has published "Digital Signature Guidelines" developed by the Information Security Committee. http://www.abanet.org/scitech/. A digital signature is used to authenticate electronic documents using a public key and a private key. Under the Digital Signature Guidelines, a "certification authority" functions somewhat like a high-volume notary public. ABA Journal at 100 (May 1997).

b. Security

Seventy-two percent of adults are concerned with the security of online transactions. "The Internet as Marketplace" Arizona Attorney (Feb. 1999) at 24. A Lycos survey found 86% of Internet users are concerned with credit card security. "Personal Privacy Online: A Very Public Concern" E Commerce Law Report (Oct. 1998) at 9. Secure transactions require encryption of confidential data (e.g. credit card numbers).

Encryption is used: to authenticate the participants identities; to ensure the message has not been tampered with; and to maintain confidentiality. Public key cryptography was developed by Whitfield Diffie & Martin Hellman at Stanford University in 1976. U.S. Patent #4,200,770. In 1977 Ronald Rivest, Adi Shamir & Leonard Adelman at MIT created RSA, the most popular commercial implementation of public key cryptography. U.S. Patent #4,405,829.10 The keys are strings of numbers. A message encoded with one (private) key can only be decoded with the other (public) key.

To create a digital signature a hash function is used to create a message digest which is then encrypted with the senders private key. The recipient uses the public key to decode the encrypted message digest and compare it with a message digest created by the recipient using the same hash function. This proves both source and lack of alteration of the message.11 To assure the holder of the private key is who he claimed to be (when he published the public key) requires a digital certificate from a trusted third party (Certification Authority or CA). The public key of the sender is included in the certificate. The CA's public key is widely disseminated for decrypting. For information on encryption policies, see www.crypto.org.

ViaCrypt offers a commercial version of the popular pretty good privacy (PGP) encryption program which uses both the RSA public key algorithm and the International Data Encryption Algorithm (IDEA) 128 bit private key. See www.pgp.com. Terisa, Netscape & CommerceNet use the RSA public key algorithm. Wells Fargo Bank is now using a digital signature system introduced by VISA and Mastercard. ABA Journal at 100 (May 1997).

Department of Commerce regulations limiting exports of encryption software over 56 bits in key length (61 Fed. Reg. 61572 (Dec. 30, 1996)) were struck down in Bernstein v. U.S. Dept. of State, 922 F.Supp. 1426 (N.D. Ca. 1996), 945 F.Supp 1279 (N.D. Cal. 1996), 974 F.Supp. 1288 (N.D. Cal. 1997). The court held federal regulations requiring export licenses for encryption algorithms are an unconstitutional prior restraint on free speech. Exportation of encryption technology was regulated as a "munitions".

The Bureau of Export Administration amended the regulation on export of encryption products. The new rules allow strong encryption products (with key lengths over 56 bits DES (Data Encryption Standard)), to be exported, provided the industry develops a key recovery system within two years to allow law enforcement officials to obtain a warrant to access encrypted communications. Regulation has been transferred from the State Department to the Department of Commerce. Where key escrow or key recovery for recoverable encryption software is used (and the exporter names a key recovery agent), there is no limit on the key length of encryption products which can be exported.12 Financial institutions and insurance companies can now export strong encryption (up to 128 bit DES) to 45 countries, including most of Western Europe. Merchants can make limited use of strong encryption for electronic commerce. Subsidiaries of US companies can use encryption designed only for internal use. A copy of the rules is available at www.epic.org/crypto/export_controls/bxa.regs.1298.html

In Karn v. U.S. Dept. of State, 925 F.Supp. 1 (D.D.C. 1996), remanded, 107 F.3d 923 (D.C. Cir. 1997), the court held regulation of encryption software did not offend free speech and Karn was not entitled to judicial review under the Administrative Procedure Act. In Junger v. Daley, 8 F.Supp.2d 708 (N.D. Ohio 1998), the court held exporting source code was not entitled to first amendment protection as free speech.

Unauthorized exportation can even include employing a foreign national who is "exposed" to the encrypted product (a "deemed export"). Posting on the Internet is also exportation.

4. Patent Protection for E-Commerce

Methods In addition to litigation over encryption technology, patents are being issued that claim invention of a wide variety of methods of doing business over the Internet. The recent decision in State Street Bank and Trust v. Signature Financial Group, Inc., 47 U.S.PQ.2d 1596 (Fed. Cir. 1998), recognized that business methods may be patented.

CyberGold and Netcentives have patented methods of compensating consumers to view web advertisements (U.S. Pat. No. 5,794,210) or rewarding frequent use (U.S. Pat. No. 5,774,870). Priceline.com has patented a method of selling by reverse auction. Thomas Higley has patented a method of embedding web addresses in e-mail. Walker Asset Management LP has patented a product and process for Internet Commerce (U.S. Pat. No. 5,794,207). Open Market Inc. has a patent on a method to buy and sell advertised Internet goods (U.S. Pat. No. 5,724,424). Software Advertising has a patent on an advertising display method on the Internet (U.S. Pat. No. 5,105,184).

Many of these patents contain broad claims that seem to include well known practices that predate the development of the Internet. How broadly these patents will be enforced remains to be seen.

C. Privacy

Key Points

• The European Union currently requires broader protection than U.S. law
• The FTC regulates collection of data from children under 13 and any misleading data collection from consumers
• Websites should notify users how data is collected and used
• Voluntary Guidelines exist, but their effectiveness is questionable
• Clearly define rights to data use, including post terminate access agreements with your service provider

Privacy of information is one of the greatest concerns for Internet users. Personal Privacy Online: A Very Public Concern, E-Commerce Law Report at 9 (75% of users are concerned about online privacy). Under the draft UCC provisions there is no general obligation to maintain confidentiality of information unless created by the circumstances or the agreement. ß 2B-317. Data concerning a licensee or its business may not be collected or transferred (except to perform the contract) unless the licensee is notified and does not object to the collection or use of the data. Id. ß 2B-323(a). Aggregate factual information that does not identify individual licenses may be collected. Id. ß 2B-323(b).

Development of a website should consider privacy concerns for information gathered from visitors. The use of "cookies" to collect information (sometimes without the knowledge of the user) has led to regulatory efforts in Europe. The EU Directive On Privacy Protection became effective October 25, 1998. Privacy is characterized as a "fundamental" human right and requires the protection of National Legislation in order to establish full participation in the European Union. The Directive establishes "minimum standards" in processing "information relating to an identified or identifiable natural person". See www.open.gov.uk/dpr.prepare.htm.

Privacy laws in the United States may not conform to the requirements of the directive and could expose U.S. companies to penalties for failing to adequately protect the privacy of European customers. A discussion document dated June 26, 1997 provides that adequate protection is judged by: (1) limitation of use of the data to specific purposes; (2) provisions the data is correct and current; (3) disclosure of the purpose for which the date is used to the concerned individual; (4) security measures to protect the data; and (5) access to the data to correct errors. In addition, there must be effective sanctions for non-compliance.

An article in the June 29, 1998 National Law Journal ("EU Directive on Privacy May Hinder E Commerce" at B19) reported that U.S. Robotics Corporation was fined several thousand pounds for failing to register under the United Kingdom's Data Protection Act before obtaining information from website visitors used to market other products. A Swedish court reportedly barred American Airlines from transmitting passenger specific details in the US reservation systems. See www.privacyexchange.org.

Several technical standards to preserve privacy are under development including the Platform for Privacy Preferences (P3) and the Open Profiling Standard (OPS). The Information Technology Industry Council has released voluntary privacy guidelines to promote Internet commerce. http://www.itic.org.

On August 14, 1998 the Arizona Republic reported (p. A3) that the Federal Trade Commission had forced GeoCities to stop releasing computer users names, occupations, and other personal data to advertisers. GeoCities must post a notice stating what information is collected, the intended use, dissemination to third parties and how consumers can review and remove information. The company had just completed its initial public offering. The stock fell 15% on the FTC action.

The Children's Online Privacy Protection Act, enacted is the Omnibus Appropriation Act, preempts state law and limits data that can be collected from children under 13. The FTC is authorized to approve self regulatory programs. Parental permission is required to collect and disseminate personal information. Advertisers should require websites to warrant they comply with FTC requirements applicable to privacy policies and that posted policies accurately reflect actual practices.

D. Junk Email and Consumer Fraud

Key Points

• Undeliverable e-mail can be a problem for servers to handle
• Unsolicited e-mail is subject to state regulation
• States and the FTC are scrutinizing Internet transaction for consumer fraud

1. Unsolicited Advertisements

An estimated 10% of all e-mail is spam (unsolicited mass e-mail). The Ohio District Court enjoined Cyber Promotions Inc. from sending unsolicited email advertising to Compuserve online subscribers. A federal court in Pennsylvania enjoined Cyber Promotions, Inc. from falsifying return email addresses in order to prevent American Online from blocking unsolicited email. Collectively, Compuserve and America Online reportedly serve 13 million subscribers. Both courts rejected First Amendment claims by Cyber Promotions that email is protected speech. Cyber Promotions claimed to send out 1.8 million email messages a day for 7,000 clients. The Ohio court held Cyber Promotions liable for trespass to chattels based on interference with Compuserve's computer equipment. Alteration of the return address required Compuserv's computers to store the undeliverable email messages, diminishing the capacity available to subscribers. Compuserve Inc. v. Cyber Promotions, Inc., 962 F.Supp. 1015 (S. D. Ohio 1997); See Cyber Promotions, Inc. v. America Online, 1996 WL 633702 (E.D. Pa. November 4, 1996); Juno Online Service LP v. Scott Allen Export Sales, Inc., 97 Civ. 8694 (S.D. NY 1997); America Online v. IMS, ____ F.Supp.2d _____, 1998 WL 774645, 48 U.S.P.Q.2d 1857 (ED Va. 1998); America Online Inc. v. LCGM, Inc., 1998 WL 940347 (ED Va. 1999).

2. No Federal Law (Yet)

Senate Bill 1618, which would have regulated spamming, did not pass in the last session of Congress.

3. State Law Against Spam

Washington state enacted an antispamming statute in June 1998. California and Nevada enacted similar legislation. "New State Laws Seek to Slice Commercial Spam" National Law Journal (February 1, 1999) at C5. Virginia adopted a similar law in February 1999. Damages under the Virginia law can amount to $25,000 per day. Under the California law the subject line must contain "ADV" and the return address must be valid. Liability applies to e-mail sent to a party without "express consent" or "an existing business or personal relationship." A company hiring an independent contractor to send bulk e-mail is not liable for the independent contractor's misuse of the return address. Seidl v. Greentree Mortgage Co., 30 F.Supp.2d 1292, 1998 WL 758600 (D. Colo. Dec. 1, 1998).

4. Consumer Fraud

In October the Washington Attorney General sued Natural Instincts for using false and misleading information when sending e-mail to Washington residents to promote defendant Jason Heckel's book "How to Profit from the Internet."

State Attorneys General are applying consumer fraud and false advertising laws on the Internet. See, e.g., People by Vacco v. Lipsitz, 174 Misc.2d 571, 663 N.Y.S.2d 468 (N.Y. Sup. 1997). The unlawful practices involved the use of e-mail to sell magazine subscriptions which were not fulfilled. The defendants solicited business by creating messages from fictitious satisfied customers to extol the subscription service on "listservs". The advertising involved both "spamming" list serve members and spoofing by using a fictitious source. The length of the e-mail solicitation alone was objectionable because it consumed Internet access time. The court upheld jurisdiction over the Internet activity. In fact, the respondents were physically located within New York. The court held that it could consider the complaints of both residents and non-residents against the resident defendants.

Minnesota courts have upheld jurisdiction over false advertising and consumer fraud claims arising out of an on-line gambling service based in Belize. State v. Granite Gate Resorts, Inc., 568 N.W.2d 715 (Minn. 1997)

Internet Fraud Watch, created by the National Consumer League, reports Internet auctions generate 2/3rds of the online fraud complaints. Jupiter Communications estimates online auctions will generate $7.1 billion in 2000. The FTC is launching a 24 hour Internet fraud detection group and has pursued at least 57 cases of alleged Internet fraud. "Online Fraud Complaints Surge, Watchdog Group Says" The Arizona Republic (Feb. 24, 1999) at E9.

To settle a class action over poor technical support Iomega Corp. reportedly agreed to establish a free "virtual consultant" on the Internet and refund money on some technical support calls. Tech Support Lawsuit is Settled, National Law Journal (March 9, 1998) at p. 7. America Online has also been subject to class action litigation.

E. Internal E-mail and Internet Policies

Key Points

• Minimize liability risks by notifying employers Internet use is monitored
• Adopt and follow company policies on use of Internet and e-mail

Offensive material (racially stereotyping jokes or pornographic photographs) can be rapidly and widely disseminated by computer networks. Thoughtless e-mail messages have played a role in a number of sexual harassment or discrimination suits against employers. Company policy should clearly limit use of e-mail and the Internet by employees and provide disciplinary sanctions for abuse. Caution must be exercised, however, in monitoring computer usage. Always advise employees about monitoring in advance and obtain their consent. Notify employees passwords can be circumvented and adhere to policies limiting monitoring to reasonable business purposes. Corporations warning management reviews logs of Internet usage experience a significant drop in usage.

F. State Taxation of Internet Commerce

Key Points

• Access taxes in 14 states were "grandfathered"
• The Internet Tax Freedom Act creates a 3 year moratorium on new taxes and prohibits multiple or discriminatory taxes

The tax treatment of electronic commerce is unsettled. State tax authorities, however, are expected to aggressively pursue tax revenue from the growing number of transactions conducted over the Internet. Consumers reportedly spent $2 billion in 1995 buying products and services over the Internet. This year International Data Group expects electronic commerce to reach $68 billion. AZ Republic, Feb. 24, 1999 at E2. The U.S. Department of Commerce estimates that that number will rise to $600 billion by the year 2000. Michael Lippman and Jeffrey Friedman, "Electronic Commerce Over the Internet: Emerging Opportunities and Increasing Confusion" 11 Interstate Tax Report at 3 (1996). Intel estimates $1 trillion in e-commerce by 2002. Forrester Research estimates 1.3 trillion by 2003. A survey by the KPMG accounting firm indicated that two-thirds of the executives at American companies doing business on the Internet felt the application of tax laws was ambiguous and more than half said this ambiguity was inhibiting electronic commerce. Interstate Tax Report at 3.

The Multi-state Tax Commission issued a proposed guideline taking the position that maintaining a telephone link for purposes of developing a market in a state gives rise to tax liability on the electronic transaction. Id. The Committee on State Taxation (COST) (an advisory committee to the Counsel of State Chambers of Commerce) has recommended that "non-uniform subnational taxation will exert a . . . negative force on the development and conduct of global electronic commerce." Kendall Houghton "COST Comments on White House Electronic Commerce Paper" 97 Cost State Tax Report at 14. COST recommended "a two-year moratorium on subnational (state, city and municipal) taxation of electronic commerce."

The Clinton Administration has endorsed a "contract-based model" rather than a "regulation-based model" for electronic commerce. Id. The Draft White House Paper states:

Any taxation of internet sales that occurs should follow these principals: (1) it should neither distort nor hinder commerce. . . . (2) The system should be simple and transparent . . . (3) The system should be able to accommodate tax systems used by the United States and our international partners. Id.

The Internet Tax Freedom Act, adopted in October 1998, Title XI as of the Omnibus Spending Bill, sets a 3 year moratorium (until Oct. 21, 2001) on new state and local taxes on Internet commerce. The Act prohibits taxes on Internet access as well as multiple and discriminatory taxes on electronic commerce. The Act does not effect existing taxes generally imposed and actually enforced on Internet access in approximately 14 states, but two (Connecticut and South Carolina) have indicated they will with voluntarily abide by the moratorium. The Act also created an advisory commission to study tax issues effecting electronic commerce (as well as mail orders and telephone sales).

Taxing authorities claim the Advisory Commission on Electronic Commerce was improperly constituted under the Internet Tax Freedom Act because government representatives hold only 6 of the 19 seats. The U.S. Conference of Mayors and National Association of Counties have filed suit to block the committee from meeting.

In Arizona, HB 2639, would establish a 12 member committee to study taxation of electronic commerce. A Senate Bill (1242) would exempt electronically distribute software from transact privilege taxes.

G. Insurance

Some liabilities for copyright and trademark infringement may be covered by comprehensive general liability policies. Always put your carrier on notice of any claim. InsurTrust.com in Atlanta markets an Internet specific insurance policy through Reliance National. This policy focuses on computer security risks. Premiums range from $5,000 up according to an article in the February 5, 1999 Business Journal.