Griffith Law Law Office of David M. Griffith, APC
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RETAILING ON THE INTERNET – LEGAL ISSUES

Introductory Note

The rapid evolution of the Internet ensures that the future of retailing ten years from now will be dramatically different than today where shopping centers still function as the principal retail distribution channel. The process of change has already begun - retailers now have the option of foregoing leasing physical store space in premium locations, hiring large staffs and stocking extensive inventories, and instead establishing their businesses in “Cyberspace” on the World Wide Web.

Retailing on the Internet is in its infancy. Only $500 million in annual sales are currently generated through personal computer modem purchases of the total annual retail sales of $1.6 trillion. But already there are more than 5,000 distinct Web sites for retail transactions. And over 51% of businesses with more than 1,000 employees have Web sites, a statistic that is expected to expand by another 15% by year-end. Presently it is estimated that only 37 million people in the United States and Canada have access to the Internet, but each one spends an average of five and one-half hours per week using the “Net.” About ten percent of this group, or 2.5 million individuals, have made Internet retail purchases. As access to the Internet becomes universal the amount of retail sales conducted over the Net is expected to increase exponentially.

Q. We are a successful retail chain that conducts its business both through retail stores in several western states and a national catalogue business. We are interested in increasing our sales through the Internet both in the United States and internationally. We presently have a registered federal trademark and well-known trade name and would like to utilize these on the Net. We understand that the first step in getting started is registering an Internet address or “domain name.” How do we accomplish this and what protection does our federal trademark afford us as we begin to market our products on the Net?

A. You are correct in that to get started on the Internet you need to obtain an address, commonly known as a "domain name." The domain name is the name through which a retailer may utilize the Net for E-Mail and provide access to customers about its goods and services. It is commonly comprised of a name or abbreviation that identifies the retailer such as "ABC.com." Domain names are assigned on a "first come, first served" basis, by the InterNIC Registration Service, through Network Solutions, Inc.
(Telephone No. 703/742-0400), or through an Internet service provider, such as America On-Line, Prodigy, or CompuServe.

"First In Time" Domain Name Registration Critical

Only one name per company is allowed in a simple application and registration process. In the event that a company applies for a name which is already taken by a prior registrant the applicant may submit evidence that the domain name already assigned is the same as an existing trademark or tradename that it owns. If the existing user is unable to document that it has a trademark for that name it will be given a reasonable amount of time to adopt a new domain name. The name in dispute will then be subject to court or arbitration review to determine the appropriate user. Despite this change in domain name registration policy the need to be "first in time" is still critical for many users. Unscrupulous parties may "hold up" a legitimate user for a substantial settlement to secure a name more rapidly than through a lengthy litigation or arbitration process. Secondly, there may be various retailers throughout the country with similar or identical names and the first party registering the name will preclude the second party, even if the two retailers are in totally different businesses in separate areas of the country.

Companies Should Seek Trademark or Service Mark Protection for Their Domain Names

In addition to registering their domain names with Network Solutions, Inc. or an on-line service provider retailers should obtain federal trademark protection for their domain names. Because of the international access available through the Internet this consideration should be extended to any foreign countries where the retailer's products might be offered for sale. Such domain names should then be vigorously defended in a manner similar to trademark protection efforts.

Q. We have hired a graphic designer to assist us in creating a multi-media “Home Page” for the World Wide Web that we can utilize to market our product to the public. What are some of the legal issues involved with creating a Web Site for retailing?

A. As the World Wide Web is only about five years old the legal rules that apply are rapidly evolving. Because the Web has become the Internet focal point, with the number of Web Sites essentially doubling every two months, the legal consequences of Web use are being closely evaluated by many companies.

* Register Trademarks, Copyrights and Other Property Rights Involved with Your Home Page. As with your firm’s domain name it is important to take steps to protect your intellectual property assets on the Web. This involves the copyright registration of your Web page and registration of trademarks, servicemarks and patents where appropriate.

* Secure Consents to Utilize All Material in Home Page Presentation. Because of the multi-media aspects of the most popular home pages companies must be concerned about securing consents or licenses for any materials used in the home page that are not “owned” outright by the company. This would involve copyright, trademark and publicity searches to determine any conflicting ownership rights. If the various compenents of the Web page are created by employees of the company these should normally be classified as “works for hire” and protected by the federal copyright laws. But if the work is done by independent contractors the company will be required to secure a license or assignment of rights to utilize these materials. Additionally, the use of music or personalities (“celebrities”) will require the receipt of a license or release, respectively, just as with traditional advertisements or publications.

* Research Compliance with Other Federal, State and International Laws.
Because commerce on the Web is potentially international, companies must be concerned about violating laws that cross national boundaries and different cultures. What is not considered a “risque” Web site in the United States may be offensive and even illegal in certain foreign countries. There may be certain restrictions that apply to sale of the product in various jurisdictions. Additionally, the home page may violate already existing copyrights or trademarks. The need for a multi-faceted legal review the proposed Web site should take into consideration the advertiser’s industry and specific known problems inherent in its customary advertising in other media.

* Consider “Publisher’s Liability” Aspects of Operating a Web Site. The operation of a Web site exposes companies to all the liabilities that are associated with other “publishers” of information, such as magazines and newspapers. When an organization acts as a content provider it may be determined to be a “publisher” and potentially subject to liability for any damages suffered from the publication of a particular item on its Home page. Some of these potential liabilities include defamation, invasion of privacy, false advertising, and trade libel.

* Check the Availability of Insurance for Home Page Activities. Even the best researched home page may still be challenged. Companies are advised to check with their liability carriers to determine if Internet advertising activities are covered by existing policies.

Q. We have recently heard about several companies, including retailers, that are using the Internet to raise financing for their businesses. It would seem like this would be a very inexpensive approach to selling stock in our company on a national basis. What can you tell us about the securities laws regulating such stock sales on the Internet?

A. Late in 1995 the Securities and Exchange Commission released guidelines covering the electronic distribution of disclosure documentation. To date only a handful of companies have utilized these regulations. The best known of these offerings was in March, 1996 by Yahoo!, a Silicon Valley publisher of the most popular directory on the World Wide Web. Presently the rules for using the Internet to market securities are fairly complex. Specifically, electronic prospectuses are permissible if the following conditions are met:

1. The Internet disclosure document contains equivalent information to that in the printed prospectus.

2. The party receiving the prospectus electronically has previously agreed in writing to receive such information.

3. Whenever an electronic prospectus becomes available notice is given to all investors who have indicated their request to receive such prospectuses.

4. The electronic prospectus must be continually available through an access system, such as the Internet, which allows investors to view and print the prospectus without charge (with the exception of access and on-line charges).

Just as with other state and federal securities laws that have been liberalized in recent years to allow for simplified capital raising it is expected that the Internet will become an accepted and major medium in the next few years for securing investment capital for American retailers.

David M. Griffith is a real estate and business attorney with offices in Long Beach. He serves as legal counsel to California Centers Magazine. For more information please contact 310/983-8017.