GLIMA Panel Addresses Tech Related Legal Issues

June 5, 2002
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GRAND RAPIDS — The potential legal problems that a company faces in the traditional course of doing business are amplified when it takes business live on the Web.

A panel of five local attorneys addressed some of the current legal issues in respect to e-commerce at a recent presentation organized by GLIMA West, the Interactive Association of West Michigan.

Among topics discussed were Internet jurisdiction, electronic signatures, license agreements and intellectual property.

Jurisdiction

Jurisdiction is based on well-established, territorial-based principles, which means a company that has numerous contracts and business transactions with out-of-state residents may have to go to another state to file a lawsuit or grievance or to defend itself against a lawsuit brought in another state.

“Once the courts started looking at the Internet, they didn’t know what to do with it,” observed Richard Kraus, a member with the law firm of Smith Haughey Rice & Roegge. “The courts have gotten better at it but there still aren’t any clear and dependable approaches.”

To keep potential lawsuits within Michigan, companies should insert a provision in their contract that states lawsuits must be brought in Michigan, said Janet Knaus, a partner with Warner Norcross & Judd.

Tim Eagle, a partner at Varnum, Riddering Schmidt and Howlett, added that such provisions work in business-to-business (B2B) situations. Jurisdiction is a key issue for the traditional commerce site that is selling something interactively, but it’s typically a non-issue for the passive, brochure-type site that’s simply out there to give information.

He said in a recent Northern District of Illinois case, for an Arizona-based company that did $5,000 worth of business on the Web last year, 10 percent of it in Illinois, the federal court said that was enough to support Illinois jurisdiction.

But doing business on the Web is doing business internationally, so the jurisdiction issue also can arise in another country. A company can reduce that possibility by spelling out exactly where it expects to do business and where it expects to avail itself of the laws.

In the B2B transaction, parties agree on the jurisdictional issue because jurisdictional provisions are typically stated in their user agreements, said Shawn Hamacher, corporate counsel for Alticor Inc. and moderator of the discussion.

But in the business-to-consumer (B2C) arena, user agreements are usually devised by the seller or service provider and contain an “intended audience” provision that may state, for example, that the product or service is intended for sale only to residents of the United States.

“You’re telling them right there that you are not targeting people in Italy or people in Canada,” said Knaus. “You’re saying, ‘this is where my sales are.’ Is it 100 percent? No, but it will help you out in the event of a legal challenge.”

Whether a company is a provider or a user, in the B2B context there is always competition in terms of the choice of law that applies, observed Kenneth Hofman, a member of Miller, Johnson, Snell & Cummiskey. “You’ve got to be a little creative in terms of willingness to accede to certain aspects of their jurisdiction,” he added.

E-Signatures

For years the courts struggled with issue of whether or not electronic signatures were enforceable and whether electronic records would satisfy the requirement that the contract must be in original form.

That changed when the federal e-sign law went into effect last October. That same month, Michigan enacted the Uniform Electronic Transaction Act (UNETA). Both laws place electronic records and signatures on par with their paper and ink counterparts, Knaus said.

The e-sign act applies to most electronic transactions with the exception of wills, divorce papers, notices of utility service cancellation, or any document required to accompany the transportation and handling of hazardous materials, Knaus noted.

The federal act, however, does not dictate whether the signature must be electronic or digital. The difference is that a digital signature requires more protocol, as well as software that incorporates both recognition and security processes to prevent documents from being altered, Hamacher pointed out.

One must follow certain requirements for an e-signature to be enforceable. Under e-sign and UNETA, Hamacher said, the seller is required to let customers know when they are about to engage in an electronic transaction, must create a record of the agreement, then store it and allow the customer access to it. The seller also must be able to accurately reproduce the record at any time.

Knaus said agreements can be made more enforceable by making the agreement terms clear, conspicuous and simple; don’t bury them away in small print.

License And Service Agreements

In drafting license and service agreements that involve technology, the most critical element is whether provider or user bears the risk in the event of business interruption: provider or user.

Hofman recommended that providers push risk “upstream” to users, which is accomplished through a contract whereby the provider disclaims all implied warranties and states that users don’t get damages for any type of breach of warranty. Define the damages ahead of time and let users know they aren’t going to get damages anyway, Hofman said.

“It’s the upstream push. It’s a very simple business due diligence item if you are a provider,” he said. “Look at your contracts and see what you’re putting out there. You may be assuming inordinate risk.”

Technology errors and omissions insurance for software has been available more than 20 years. At some point customers will demand that providers fund the risk, Hofman predicted, stressing the need for insurance to address and fund risk.

Technology error and omission coverage, or cyber liability coverage, is highly important today, and providers should check their commercial insurance policies because the chances are it’s not covered, Hamacher added.

Intellectual Property

Intellectual property includes trademarks, domain names and e-business patents.

In the past, companies that were basically local sought Michigan trademark registration, but it has become more and more beneficial to get federal trademark registration when it comes to domain names, said Frederick Burkhart, founding partner of VanDyke, Gardner, Linn and Burkhart.

The person with the federal trademark registration for a domain name holds most of the cards and is in a much better position to control a dispute arising over the name’s use, he said.

E-business patents are in a different arena from trademarks. People began seeking patents on software some 20 years ago, but for years the courts looked at software as mathematical processing related to science and scientific processes can’t be patented.

These days the U.S. Patent Office and the courts recognize that software used in just about any kind of application is patentable. About five years ago, the courts came to recognize business methods as patentable well. Like any other patent granted, a business method patent must meet the same fundamental requirements: it must be new and unique, not a rehash of something that’s been done before.

The Patent Office applies extra scrutiny to business method patents. The patents being granted in that arena are very specific to certain procedures that are carried out in a detailed manner; they’re not generally granted to cover broad, well-known business methods, Burkhart said.

“The moral of the story is that if you do have a great new business method you can patent it, but the rate of new business method patents granted is about half of what most other patents are granted.”

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