The Environment of Electronic Commerce: Legal, Ethical, and Tax Issues Chapter 7 The Environment of Electronic Commerce: Legal, Ethical, and Tax Issues © Cengage Learning 2015 1 1

Learning Objectives In this chapter, you will learn: How the legal environment affects electronic commerce activities What elements combine to form an online business contract How copyright, patent, and trademark laws govern the use of intellectual property online That the Internet has opened doors for online crime, terrorism, and warfare © Cengage Learning 2015 2 2

Learning Objectives (cont’d.) How ethics issues arise for companies conducting electronic commerce Ways to resolve conflicts between companies’ desire to collect and use their customers’ data and the privacy rights of those customers What taxes are levied on electronic commerce activities © Cengage Learning 2015

Introduction Case study: Spokeo Operates an online search engine that organizes information from public records and social media sites Sold profiles of individuals to business customers Federal Trade Commission found Spokeo in violation of the Fair Credit Reporting Act Company paid $800K fine as part of a settlement Did not admit any wrongdoing © Cengage Learning 2015

The Legal Environment of Electronic Commerce All businesses (Web or otherwise) Must comply with the same laws and regulations Face the same set of penalties Web businesses face additional complicating factors Web extends reach beyond traditional boundaries Subject to more laws more quickly than brick-and-mortar business More interactive and complex customer relationships Due to increased communications speed and efficiency © Cengage Learning 2015

The Legal Environment of Electronic Commerce (cont’d.) Online communications Facilitate strategic alliances and supply web relationships The Web creates a network of customers Significant levels of interaction (with each other) Implications of violating law or breaching ethical standards Web businesses face rapid, intense reactions from customers and stakeholders © Cengage Learning 2015

Borders and Jurisdiction Physical world of traditional commerce Territorial borders clearly mark: A range of culture The reach of applicable laws Geographic influences of area’s dominant culture Limit acceptable ethical behavior and laws adopted Culture affects laws directly and indirectly Through its effect on ethical standards Physical travel across international borders Made easier in recent years © Cengage Learning 2015

FIGURE 7-1 Culture helps determine laws and ethical standards © Cengage Learning 2015 © Cengage Learning 2015

Borders and Jurisdiction (cont’d.) Relationship between geographic and legal boundaries Defined by power, effects, legitimacy, notice Power Form of control over physical space and people and objects that reside in that space Jurisdiction: ability of a government to exercise power Effects Impact of a person’s behavior Generally stronger on things that are physically closer © Cengage Learning 2015

Borders and Jurisdiction (cont’d.) Effects (cont’d.) Laws based on traditional effects-based measures do not work as well for online businesses Legitimacy Those subject to laws should have some role in formulating them Different countries allow government different amounts of authority and autonomy Online businesses must deal with wide variety of regulations © Cengage Learning 2015

Borders and Jurisdiction (cont’d.) Notice Physical boundaries provide notice (when crossed) One rule set replaced by different rule set Expression of such a change in rules Poor translation to online business Constructive notice People crossing international border informed of subjection to new laws and cultural norms Ignorance of law: not sustainable defense Creates problems for online businesses: unknown customers from other countries accessing Web sites © Cengage Learning 2015

FIGURE 7-2 Physical geographic boundaries lead to legal boundaries © Cengage Learning 2015 © Cengage Learning 2015

Jurisdiction on the Internet Difficult due to lack of geographic boundaries Governments enforcing Internet business conduct laws: Must establish jurisdiction over conduct Contract Promise between two or more legal entities Provides for exchange of value between them Breach of contract Occurs if either party does not comply with contract terms © Cengage Learning 2015

Jurisdiction on the Internet (cont’d.) Tort Intentional negligent action taken by a legal entity Causes harm to another legal entity Does not include breach of contract Sufficient jurisdiction requires: Subject-matter jurisdiction and personal jurisdiction © Cengage Learning 2015

Jurisdiction on the Internet (cont’d.) Subject-matter jurisdiction Court’s authority to decide particular dispute type United States examples Federal courts: subject-matter jurisdiction over issues governed by federal laws State courts: subject-matter jurisdiction over issues governed by state laws Rules determining subject-matter jurisdiction Clear and easy to apply (few disputes) © Cengage Learning 2015

Jurisdiction on the Internet (cont’d.) Personal jurisdiction Determined by residence of parties If defendant is a state resident where court located Straightforward determination An out-of-state person or corporation can voluntarily submit to a state court jurisdiction Forum selection clause Statement included in a signed contract Indicates contract enforced according to particular state laws © Cengage Learning 2015 16

FIGURE 7-3 A typical forum selection clause © Cengage Learning 2015 © Cengage Learning 2015

Jurisdiction on the Internet (cont’d.) Personal jurisdiction (cont’d.) Long-arm statutes create personal jurisdiction over nonresidents committing tortious acts Businesses conducting e-commerce over state and international lines Be aware of jurisdictional considerations Tortious acts: exceptions to personal jurisdiction Negligent tort: seller unintentionally provides a harmful product Intentional tort: seller knowingly or recklessly causes injury to buyer © Cengage Learning 2015

Jurisdiction in International Commerce Governed by treaties between countries U.S. determines personal jurisdiction for foreigners Same manner as in domestic long-arm statutes Non-U.S. corporations and individuals Can be sued in U.S. courts Foreign courts can enforce U.S. court system decisions against U.S. corporations and individuals Judicial comity Voluntarily enforce other countries’ laws out of sense of comity (friendly civility) © Cengage Learning 2015

Conflict of Laws Business governed by various laws Conflict of laws Federal laws, state laws, local laws Conflict of laws Laws address same issues in different ways Online businesses span many localities, states Look to federal laws for guidance May lead to problems with state and local laws Example: direct wine sales industry More information: Free the Grapes wine industry trade association Web site © Cengage Learning 2015

Contracting and Contract Enforcement in Electronic Commerce Three essential contract elements An offer, an acceptance, and consideration Contract formed when one party accepts offer of another party Offer Commitment with certain terms made to another party Can be revoked Acceptance Expression of willingness to take offer including all stated terms © Cengage Learning 2015

Contracting and Contract Enforcement in Electronic Commerce (cont’d.) Consideration Agreed-upon exchange of something valuable Money, property, or future services Implied contract Contract may still exist, though unwritten © Cengage Learning 2015

Creating Contracts: Offers and Acceptances Exists for every kind of agreement or exchange between parties (no matter how simple) Example: consumer buying an item at the supermarket Key element of traditional and Internet business Internet communication offers and acceptances Occur by exchanging e-mail, engaging in EDI, and filling out Web page forms Can be combined with traditional methods © Cengage Learning 2015

FIGURE 7-4 Contracting process in an online sale © Cengage Learning 2015 © Cengage Learning 2015

Click-Wrap and Web-Wrap Contract Acceptances End-user license agreements (EULAs) Contract user must accept before installing software Shrink-wrap acceptance used in the past Accepting a contract by removing plastic shrink wrap on software box Click-wrap acceptance Agree to site’s EULA or its terms and conditions by clicking a button on the Web site Web-wrap acceptance or browser-wrap acceptance Accept by simply using the Web site © Cengage Learning 2015 25

Creating Written Contracts on the Web Contracts valid even if not in writing or signed May not be enforceable in certain categories Statute of Frauds (state laws) Categories of contracts not enforceable unless terms put into writing and signed Applies to sale of goods worth more than $500 Requires that actions not completed within one year must be created by a signed writing © Cengage Learning 2015 26

Creating Written Contracts on the Web (cont’d.) Forming contracts for electronic commerce Writing exists if contract terms reduced to tangible form Signature Any symbol executed or adopted for the purpose of authenticating a writing © Cengage Learning 2015

Implied Warranties and Warranty Disclaimers on the Web Implied warranty Promise to which the seller can be held Even though seller did not make an explicit statement of that promise Law establishes these basic elements of a transaction in any contract to sell goods or services Warranty disclaimer Statement declaring that the seller will not honor some or all implied warranties © Cengage Learning 2015

FIGURE 7-5 A Web site warranty disclaimer © Cengage Learning 2015 © Cengage Learning 2015

Authority to Form Contracts Contract formed when offer accepted for consideration Problems with acceptance Issued by imposter (forgery) Improper authority to bind company to a contract Electronic commerce technology Makes forged identities easy to create Also provides means to avoid deception Establish identity in online transactions Use digital signatures © Cengage Learning 2015

Authority to Form Contracts (cont’d.) Authority to bind Authority to commit company to online contract Example: employee accepts contract; company later asserts employee not authorized In physical world transactions: Check public information on file Obtain copies of corporate certificates or resolutions In online transactions: Physical world methods can be time consuming and awkward © Cengage Learning 2015

Terms of Service Agreements Site visitors must follow stated rules Most visitors not aware of rules Terms of service (ToS) agreements Detailed rules and regulations Limit Web site owner’s liability for what one might do with site information Site visitor held to terms of service by simply using site © Cengage Learning 2015

Use and Protection of Intellectual Property in Online Business Intellectual property includes: All products of the human mind Tangible or intangible Protections afforded by copyrights and patents, trademarks registration, service marks Right of publicity Limited right to control others’ commercial use of an individual’s name, image, likeness, and identifying aspect of identity Limited by U.S. First Amendment provisions © Cengage Learning 2015

Use and Protection of Intellectual Property in Online Business (cont’d Online businesses must avoid: Deceptive trade practices False advertising claims Defamation or product disparagement Infringements of intellectual property rights By using unauthorized content © Cengage Learning 2015

Copyright Issues Copyright Right granted by government to the author (creator) of literary or artistic work Specific time length provided in copyright law Gives author (creator) sole and exclusive right to the work (print, publish, sell) Includes virtually all forms of artistic or intellectual expression © Cengage Learning 2015

Copyright Issues (cont’d.) Idea contained in an expression Cannot be copyrighted Example: mathematical calculations Collection of facts Can be copyrighted if arrangement rises to level of an original work Example: Yahoo! Web Directory © Cengage Learning 2015

Copyright Issues (cont’d.) U.S. law still allows registration (no longer required) Work created after 1989 Copyrighted automatically by virtue of copyright law Most U.S. Web pages protected by automatic copyright provision Web client computer copy of HTML file Acceptable under fair use Includes copying it for use in criticism, comment, news reporting, teaching, scholarship, or research © Cengage Learning 2015

FIGURE 7-6 U.S. law governing the fair-use exception © Cengage Learning 2015

Copyright Issues (cont’d.) Specific factors in fair use Nonprofit educational uses have better chance of qualifying than commercial uses Court may consider painting using different standards than sound recording Small sections qualify when entire work might not Court may consider amount of damage caused to value of copyrighted work Good Web site sources to determine fair use University of Texas Copyright Crash Course Stanford Copyright & Fair Use © Cengage Learning 2015

Copyright Issues (cont’d.) Copyright law difficult to apply Due to elements such as fair use Vicarious copyright infringement Entity capable of supervising infringing activity Obtains a financial benefit from infringing activity Example: Napster Failed to monitor its network Profited indirectly from the infringement Music downloads, copying Legality unclear in many cases © Cengage Learning 2015

Patent Issues Patent Exclusive right granted by government to an individual to make, use, and sell an invention Invention must be: Genuine, novel, and useful Not obvious given current technology state 1980s: companies started obtaining software patents Not useful for Web site software Technology is obsolete before patent protection secured © Cengage Learning 2015

Patent Issues (cont’d.) Business process patent Protects specific set of procedures for conducting a particular business activity Enforcing rights under business process patent Not yet clear Examples: Amazon.com sued Barnes & Noble for process similar to 1-Click method MercExchange sued eBay over fixed price sales option © Cengage Learning 2015

Trademark Issues Trademark Service mark Distinctive mark, device, motto, implement that a company affixes to goods it produces Identification purposes Service mark Similar to trademark; identifies the services provided Both registered with governments (state, federal) Trade name Name business uses to identify itself Protected under common law © Cengage Learning 2015

Trademark Issues (cont’d.) Common law Law established by history of court decisions Statutory law Arises when elected legislative bodies pass laws (statutes) Web site designers must not use: Any trademarked name, logo, other identifying mark Without express trademark owner permission © Cengage Learning 2015

Domain Names and Intellectual Property Issues Cybersquatting Registering trademarked domain name Hope owner will pay money to acquire URL Name changing (typosquatting) Purposely registering misspelled variations of well-known domain names U.S. Anticybersquatting Consumer Protection Act Provides protection © Cengage Learning 2015

Domain Names and Intellectual Property Issues (cont’d.) World Intellectual Property Organization (WIPO) Uniform Domain Name Dispute Resolution Policy (UDRP) Handles trademark domain name disputes Example: Barry Diller versus cybersquatters owning URL barrydiller.com Example: The Sting musician case WIPO criticism: UDRP enforced unevenly © Cengage Learning 2015

Domain Names and Intellectual Property Issues (cont’d.) Name stealing Unauthorized changes to domain name ownership Domain name ownership change Information maintained by public domain registrar changed in registrar’s database Reflects new owner’s name and business address Occurs when safeguards not in place Main purpose: harass site owner © Cengage Learning 2015

Protecting Intellectual Property Online Digital watermark Digital code or stream embedded undetectably in digital image or audio file Can be encrypted to protect contents Examples: Verance and Digimarc Copy control Electronic mechanism limiting number of copies Example: Blue Spike © Cengage Learning 2015

Defamation Defamatory statement Product disparagement False and injures reputation of another person or company Product disparagement When statement injures product or service reputation Web sites must consider specific laws: Before making negative, evaluative statements Designers must avoid potential defamation liability Altering photos or images © Cengage Learning 2015

Defamation (cont’d.) Per se defamation Important exception in U.S. law Statements so negative that injury assumed Important exception in U.S. law Defamatory statements about public figures Allows considerable leeway for: Satirical statements Valid expressions of personal opinion Other countries do not offer same protections Web site operators with international audiences need to be careful © Cengage Learning 2015

Deceptive Trade Practices Trademarked object manipulation Constitutes infringement of trademark holder’s rights Personal Web pages Cannot include unauthorized Web site links Risk implying nonexistent relationship Trademark protection prevents buyer confusion Trademark dilution Reduction of distinctive trademark quality by alternative uses © Cengage Learning 2015

Advertising Regulation Federal Trade Commission (FTC) (United States) Regulates advertising, publishes regulations, and investigates false advertising claims FTC Web site Includes links to advertising regulations © Cengage Learning 2015

Advertising Regulation (cont’d.) Illegal under U.S. law Advertising claim misleading substantial number of consumers in a material way FTC accepts referred investigations Better Business Bureau FTC provides policy statements Useful for e-commerce Web site designers © Cengage Learning 2015

Advertising Regulation (cont’d.) Policy statements cover specific areas Bait advertising Consumer lending and leasing Endorsements and testimonials Energy consumption statements for home appliances Guarantees and warranties Prices Other regulatory agencies Food and Drug Administration (FDA); Bureau of Alcohol, Tobacco, and Firearms (BATF); Department of Transportation (DOT) © Cengage Learning 2015

Online Crime, Terrorism, and Warfare Internet Opened up worldwide possibilities for people to communicate Opened doors for businesses to: Reach new markets Create opportunities for economic growth Tool for some for perpetrating crimes, conducting terrorism, and waging war © Cengage Learning 2015

Online Crime: Jurisdiction Issues Online versions of physical world crimes Theft, stalking, pornography distribution, gambling New online crime Commandeering computer to attack other computers Law enforcement obstacles Jurisdiction issues tricky to determine Prosecuting across international boundaries Internet provides new life to old fraud scams Advance fee fraud Nigerian scam (419 scam) © Cengage Learning 2015

Online Crime: Jurisdiction Issues (cont’d.) Distribution of pornographic material Jurisdiction issues Subjective distinction between legal and illegal adult material Online gambling Sites located outside United States State laws specifically outlaw Internet gambling Jurisdiction not clear Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 provides clearer jurisdiction Other countries’ laws challenged as discriminatory © Cengage Learning 2015 57

New Types of Crime Online Difficulty applying pre-Internet era laws Example: online stalking Few states have passed Internet laws Cyberbullying Using technology to harass, humiliate, threaten, or embarrass another Laws lag behind technology Sexting Sending sexually explicit messages or photos using a mobile phone © Cengage Learning 2015 58

New Types of Crime Online (cont’d.) Infiltrating computer systems with intent of stealing data, creating operational disruptions Smaller companies: easier targets Criminal extortion example: Myron Tereshchuk threatened MicroPatent with confidential client information disclosure National Retail Federation partnered with eBay and FBI Combat cases of items stolen from physical stores and then sold online © Cengage Learning 2015

New Types of Crime Online (cont’d.) Internet can help law enforcement Track perpetrators of crime Criminals brag on social networking sites Criminals leave clues in online profiles © Cengage Learning 2015

Online Warfare and Terrorism New age of terrorism and warfare Carried out or coordinated through the Internet Web sites (considerable number) Operated by hate groups and terrorist organizations Contain detailed instructions for creating biological weapons and other poisons Discussion boards help terrorist groups recruit new members online Offer downloadable terrorist training films (thousands) © Cengage Learning 2015

Online Warfare and Terrorism (cont’d.) Agencies devoting resources to monitoring terrorist activities online U.S. Department of Homeland Security, Interpol Historically: faced difficulty in coordinating activities Interpol motivations: Update and expand computer network monitoring skills Coordinate global antiterrorism efforts Sustained terrorist effort could slow down major transaction-processing center processing © Cengage Learning 2015

Ethical Issues Web electronic commerce sites: Adhere to same ethical standards of other businesses Consequences that all companies suffer Damaged reputation, long-term loss of trust, and loss of business Web advertising or promotion Include true statements; omit misleading information Ensure products supported by verifiable information © Cengage Learning 2015

Ethics and Online Business Practices Ethical lapse rapidly passed among customers Can seriously affect company’s reputation Examples Amazon.com arrangements with publishers for book promotions eBay firearm sales 2009 Apple Apps store software approval time Important ethical issues that organizations face Limiting use of collected e-mail addresses; related information Lack of government regulation protecting site visitor © Cengage Learning 2015

Privacy Rights and Obligations Online privacy: evolving Hotly debated in various forums Electronic Communications Privacy Act of 1986 Main law governing privacy on the Internet today Deals with leased telephone line interceptions Legislative proposals None have survived constitutional challenges 1999 FTC report Concluded no federal laws regarding privacy required Created privacy advocacy group outrage © Cengage Learning 2015

Privacy Rights and Obligations (cont’d.) Direct Marketing Association (DMA) Established set of privacy standards Member activity regulation: less than successful Ethics issues Significant in online privacy area Laws not keeping pace with Internet, Web growth Nature and degree of personal information recorded Threaten visitors privacy rights Many examples of personal information lost or stolen © Cengage Learning 2015

Privacy Rights and Obligations (cont’d.) Ethics issues (cont’d.) Worldwide cultural differences provide different electronic commerce privacy expectations European Union adopted Directive on the Protection of Personal Data Approaches Opt-out: customer must specifically deny permission Opt-in: customer must specifically give permission Preferable Gives customer privacy protection unless they specifically elect to give up rights © Cengage Learning 2015

Figure 7-7 Example Web page showing opt-in choices © Cengage Learning 2015 © Cengage Learning 2015

Figure 7-8 Example Web page showing opt-out choices © Cengage Learning 2015 © Cengage Learning 2015

Privacy Rights and Obligations (cont’d.) Electronic commerce Web site guidelines Use data collected for improved customer service Do not provide customer data to others outside your company without customer’s permission Clearly describe and explain what data is collected and how it is used Give customers the right to have any of their data deleted Train employees how to keep data secure © Cengage Learning 2015

Communications with Children Additional privacy considerations arise: When Web sites attract children Children are less capable of evaluating information sharing and transaction risks Concerns Children’s ability to read and evaluate privacy statements Consent to providing personal information to sites © Cengage Learning 2015 71

Communications with Children (cont’d.) Most countries People under 18 or 21: not considered adults Specific laws for children’s privacy rights Define a child as person below the age of 12 or 13 1998: Children’s Online Protection Act (COPA) Unconstitutional: restricted lawful material access Children’s Online Privacy Protection Act of 1998 Successful: COPPA does not regulate content 2001: Children’s Internet Protection Act (CIPA) Federally funded schools install filtering software © Cengage Learning 2015

Communications with Children (cont’d.) Example: Disney Online Requires a parent or teacher’s email address Uses automated filters to look for personal information disclosed by a child Example: Sanrio Requires birth date before allowing access Encourages notification of COPPA site violations © Cengage Learning 2015

FIGURE 7-9 Sanrio’s approach to COPPA compliance © Cengage Learning 2015

Communications with Children (cont’d.) 2013: FTC rules clarifications Post clear privacy policy Obtain verifiable parental consent Give parents choice of allowing data collection without disclosure to third parties Provide parents access to their child’s information Have option to have it deleted Give parents opportunity to prevent further data collection Take steps to main information’s confidentiality, security, and integrity © Cengage Learning 2015

Taxation and Electronic Commerce Web businesses must comply with multiple tax laws Several types of taxes Income taxes: levied on net income Transaction taxes (transfer taxes): levied on products or services company sells or uses Sales taxes, use taxes, excise taxes Property taxes: levied on personal property, real estate © Cengage Learning 2015

Nexus Connection between tax-paying entity and government Similar concept: personal jurisdiction Activities creating nexus (United States) Determined by state law; vary from state to state Determining nexus: Difficult if company conducts few activities in the state Business conducted in more than one country Establish nexus with a country Liable for filing tax returns in that country © Cengage Learning 2015

U.S. Income Taxes Internal Revenue Service (IRS) Basic principle Charged with administering tax laws Basic principle Any verifiable increase in company wealth: Subject to federal taxation Pay U.S. federal income tax if: U.S.-based Web site generating income Web site maintained by U.S. company Credit given for taxes paid to foreign countries Reduces double taxation of foreign earnings © Cengage Learning 2015

U.S. State Sales Taxes Transaction tax on goods sold to consumers Businesses establishing nexus with a state Must file sales tax returns and remit sales tax collected from customers Business not required to collect taxes from out-of-state customers Unless nexus established Use tax Tax levied by a state on property used in that state Not purchased in that state © Cengage Learning 2015

U.S. State Sales Taxes (cont’d.) Large companies Use complex sales tax management software Purchasers exempt from sales tax Charitable organizations Businesses buying items for resale Amazon laws Require online retailers to collect taxes Streamlined Sales and Use Tax Agreement (SSUTA) Simplifies state sales taxes © Cengage Learning 2015

Import Tariffs Countries regulate import and export of goods Goods imported: only if tariff paid Tariff (customs duty, duty) Tax levied on products as they enter country Many reasons for imposing tariffs Goods ordered online: subject to tariffs When crossing international borders Products delivered online: subject to tariffs Example: downloaded software © Cengage Learning 2015

European Union Value Added Taxes European Union (EU) Transfer taxes generate revenues Value Added Tax (VAT): most common 2003: VAT applied to sales of digital goods EU-based companies must collect VAT on digital good sales Non-EU companies Must register with EU tax authorities, levy, collect, and remit VAT if sales include digital goods delivered into EU © Cengage Learning 2015