Internet Business Law Alert

Fall 1997


Losing Your Company Name And
Trademarks To The Internet


Most people do not know that there is a major difference between a trademark and a trade name (whether the actual corporate name, or trade name). Businesses have names, while only goods and services can have trademarks. A trademark must be used on the goods or service. In the case of a service mark, the mark must be used in connection with the offering of the service.

Richard L. Ravin, Esq.

By: Richard L. Ravin, Esq.
A trademark cannot stand independent of those goods or services. That is why business names or trade names, in and of themselves, cannot be registered as trademarks. Business names are registered by the Secretaries of State. Trademarks are registered by the U.S. Patent and Trademark Office (“PTO”).


Trademarks

Trademarks are words, names, symbols or devices which serve to identify the source of goods or services and distinguish them from those sold by others. At the heart of trademark law is the public policy goal of preventing consumer confusion as to the source of goods or services.

Your company’s right to use its trademark in connection with the sale of goods and services is limited by the class of goods or services sold (e.g., nutritional products, computer products, financial services). By registering a trademark, the owner has the exclusive right to use that mark nationwide within a particular class of goods or services. If your trademark is not registered, its use may be limited by the geographic market in which your company is currently doing business.


In This Issue

Published by Ravin, Sarasohn, Cook, Baumgarten, Fisch & Rosen P.C., Counsellors At Law


Losing Your Company Name And
Trademarks To The Internet


Who Really Owns Your Web Site?
Look To Copyright Law

What You Should Know About
Company E-Mail Systems

Keeping Trade Secrets On Computer:
Protecting Your Secret Formulas,
Customer Lists And Designs

HOT TOPICS

Can You Be Sued Wherever
Your Website is Viewed?

Three Impediments To Commerce
On The Internet

The Right Of Privacy In Cyberspace


The “Year 2000” Problem:
Avoid Data Base Meltdown At
The Turn Of The Century


Inquiries and free subscription
Internet Business Law Alert


Legal Services Available

Disclaimer and Notice

 


Trade Names

Your company’s right to use your trade name or corporate name may, in part, be restricted by the geographic territory in which you are registered to do business (e.g., the State of New York). Having your company name registered with the Secretary of State in one state does not give you the right to do business under that name in any other state.

If you are “doing business” in another state, you are required to register with that State as a foreign corporation. “Doing business” usually means some physical presence is required — something more than merely sending some letters and making some phone calls to that jurisdiction — but it does not necessarily require a branch office be located there. When attempting to register in another state, you may find that your corporate name is not available, in which case you must choose a substitute name to be used in that state.

The Internet Has Eroded Traditional Notions of Territorial Boundaries

Prior to the commercial use of the Internet, one could, for example, operate Acme Software Sales of California (“Acme California”), founded in 1970, while someone else operates Acme Software Sales of New Jersey (“Acme New Jersey”), founded in 1995. Concurrent use of the same name was no problem because the geographic markets were different, even though the product class (or market) was identical. Consumers would not likely be confused as to the identity of the two businesses.

All of that has changed with the arrival of the World Wide Web as a “cyber-marketing” tool. If Acme California set up a Web page in 1996, displaying its “Acme Software” trademark, the right of Acme New Jersey to continue using the same “Acme Software” mark could be challenged. That challenge would likely succeed if Acme California had registered its mark prior to Acme New Jersey’s first use of the mark (in 1995).

Assume instead that Acme California did not register its mark, but that Acme New Jersey had registered the mark in 1995, prior to Acme California going online with its Web Site in 1996. In that case, Acme New Jersey could challenge Acme California as infringing on Acme New Jersey’s mark and require that Acme California cease and desist from using the mark on the Web or outside the geographic market that Acme California occupied at the time Acme New Jersey registered its mark. Thus, by registering the mark, the new company, Acme New Jersey, could “box in” the older company from expanding its business beyond the territory in which it operated at the time the mark was registered.

Assume instead that neither company registered the mark. Under that scenario, the first party to adopt and use the mark in commerce would obtain the exclusive right to use that mark within the area that they are conducting business. Thus, if Acme California could establish that it was doing business nationwide (because of its presence on the Web or otherwise), then it would have the right to use the mark everywhere except where Acme New Jersey was doing business. But here again, by using the mark in New Jersey (via the Web), Acme California would be infringing on Acme New Jersey’s right to use the mark in New Jersey.

Continuing to assume that neither company has registered its mark, the reverse is also true. If Acme New Jersey could establish that it was doing business nationwide (because of its presence on the Web or otherwise), then it would be entitled to use the mark everywhere except where Acme California was doing business. Considering that companies from all over the world are marketing on the Web, it becomes readily apparent that the first company on the web has a distinct advantage, unless, of course, the other company has previously registered its trademark in the United States. By not having a registered trademark, a company is at substantial risk of losing not only potential markets, but the right to use its own name. In light of the slight cost involved, trademark registration should be a high priority.

While it is true that prior to the Internet, businesses could advertise nationwide, never has it been so inexpensive to do so. For only a few dollars per day, a business can advertise world-wide. Whereas prior to the Web it was unlikely that small businesses would advertise nationwide, now the opposite may be true. Keep in mind that even the smallest business on the Web can prevent you from using your trademark nationwide if your mark is not registered.

Domain Names

A related issue involves registration of domain names themselves. A domain name’s primary purpose is to provide a computer address for the physical location of the computer on which the Web site resides so it can be accessed by other computers — i.e., Web browsers — or so e-mail can be sent to the server (from which a company receives and sends its e-mail). The most sought-after domain names are those that contain the company name or trademark. Companies that wish to conduct business online want domain names that are easy for consumers to remember and that relate to their goods or services.

Domain Names and Trademarks

In the traditional pre-Internet trademark environment, identical marks could co-exist in different product markets (e.g., Apple Computers and Apple Records). In the domain name system, however, a trademark can only be used in a single domain name. Under the current domain name registration system, there can only be one “apple.com.”

The International Ad Hoc Committee on Domain Names has recommended the addition of seven extensions [known as top level domain names (”TLD”)] to include for example, “.firm”, “.store”, “.web”, “.arts”. If this proposal is adopted it will not have any effect on trademark law except to make trademark registration even more important, as there will become the potential for conflict among trademarks, company names and domain names. Under the new proposal, there could not only be “apple.com”, there could be “apple.firm”, “apple.store”, and “apple.web.”

For the $100 domain name registration fee (covering the first two years), it is well worth it to register your company’s domain name now, before someone else does. You will also want to start using it, even if only as an e-mail address, so that you are not accused of being a “squatter.” Even if you do not intend to set up a Web site immediately, claiming your “natural” domain name now can save you problems in the future.

Domain names are currently assigned on a first-come, first-served basis by Network Solutions, Inc. (their exclusive contract to do so expires in 1998). Network Solutions recently announced a new policy regarding disputes over domain names which requires the challenging company to prove that it holds a certificate of trademark registration. Otherwise, the challenger must file a lawsuit to determine who is entitled to use the domain name. This is yet another benefit of registering a trademark, in addition to the exclusive right to use that mark nationwide within a particular class of goods or services.

Registering Trademarks

To register a trademark, the first step is to do a search for existing uses of the words, phrases, designs, logos, etc. of the proposed mark. This search checks for registration with the trademark office (PTO) and the Secretaries of State of the 50 states, as well as for common law uses (magazines, newspapers, and other publications).

Once it is determined that your proposed trademark is sufficiently dissimilar to existing marks, you can begin using the mark and thereafter file an application for registration, or you could file an intent-to-use application, which allows you to register the mark first (thereby reserving the mark), then use the mark and file an affidavit as to its actual use after the mark has been used in commerce.

The trademark search itself is usually less than $400, as is the application fee for a trademark. Considering all that is invested in building the good will of a trademark, as well as the new and unique issues raised by conducting commerce on the Internet, registering your company’s mark can be a tremendous advantage, both from a business standpoint as well as a legal standpoint.

Beware of a Change in the Use Classification of Your Trademark

You must also be aware that if you have a registered trademark for a product, and then go online via a Web site to market that product, you should consider amending the registration to include a service classification for the mark since you will not be using your trademark on the product. Rather, you will be using the mark in connection with providing information about your product, which is considered a service. Your federal trademark registration only gives you protection for the class within which it is registered.

Choosing a Domain Name

The first step in registering a domain name is verifying that the domain name is not already taken. This can be done by checking the “who is” subpage of the InterNIC Web site (www.internic.net). If the name is available, you must arrange with an Internet Service Provider (“ISP”) to establish an e-mail SLIP account (or set up your own e-mail server). The SLIP account will allow you to send and receive e-mail. Once you have contracted with an ISP, the ISP can register the domain name for you. The domain name registration fee is $100, which covers the first two years. Thereafter it is $50 per year.

In acquiring the right to use a domain name, it is wise to conduct a federal, state, and common law trademark search to determine whether anyone else is using the proposed domain name as a trademark. In performing this search, the extension (e.g., “.com”) should be omitted. Although this search is not mandatory, if the domain name is one which is already in use as a trademark, you want to know that sooner, rather than later. Again, it is often well worth the cost (usually under $400) to conduct a trademark search. The attorneys at Ravin, Sarasohn, Cook, Baumgarten, Fisch and Rosen, P.C. can assist you in this process, as well as make suggestions regarding ISPs.

An Internet domain name may be eligible for trademark registration with the U.S. Patent and Trademark Office if its owner uses it, or intends to use it, as a trademark or service mark, and if it is sufficiently distinctive to support registration. If the domain name you have registered online is already a federally registered mark of your business, you may still need to amend the registration to include a service classification to coincide with the new use of your mark on the Web. Use of the mark as a domain name may be an expanded use of the mark in connection with a new product or service class. Before amending the registration to include another class, you need to perform a trademark search for the new class to make sure the mark is clear for that class.

Federal registration of a trademark provides the greatest protection for the mark in the United States. Outside the country, one must comply with the laws of the various countries. In many foreign countries, for instance, the user of a trademark must register the mark to obtain any rights therein (unlike the United States). The European Union countries have recently enacted the Community Trade Mark law (“CTM”).

Trademark-Domain Name Litigation

A vigilant trademark owner should continually search the Internet and other media for infringers in order to preserve its trademark rights. If a violator is found, the rightful trademark owner should take prompt action. Failure to diligently prosecute infringers could jeopardize the owner’s right to do so later.

To help prevent your trademarks from being appropriated for use as a domain name, you can enlist the services of a domain name watch service, which will identify potentially conflicting new domain names registered with Network Solutions that could potentially infringe your trademark.

Trademark owners can pursue legal action in the courts to enjoin infringers from using the mark, including domain names, under the federal trademark laws. Domain name disputes have arisen in a number of contexts, including a practice known as “piracy,” or “cyber-squatting,” in which individuals and companies have registered well-known trademarks as domain names in order to extort money from the rightful trademark owners. In several cases, courts have held that registering a famous mark as a domain name in order to trade on the value of the mark violates federal and state trademark dilution statutes.

Defending Lawsuits in Foreign Jurisdictions

Because marketing or advertising on the World Wide Web reaches citizens of states other than the one in which your company is registered to do business, jurisdictional problems may arise. If your company is doing business via its own Web site, you should consult with a law firm that has an Internet Law department to discuss your company’s potential exposure to defending lawsuits in the jurisdictions of other states and countries. c
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Who Really Owns Your Web Site? Look To Copyright Law


RETURN TO TOP

The emergence of the Internet as an advertising and marketing tool is a bounty to companies that wish to expand their customer base. Because many companies do not have the technical expertise or time to design and implement a Web page, they usually hire outside contractors to create a page that reaches out and grabs all of those ‘Net surfers. Whether you hire an employee or an outside contractor, you must consider issues of ownership of the Web site. Besides the design of the site, you must also be aware of the copyright law governing the content contributed by others.

Web Sites Are Copyrightable

At least five aspects of a Web page may be copyrightable: content created by the Web page designer under a development contract; content created by the company that will own the Web page; pre-existing software modules; software modules developed specifically for the Web site; and non-factual and non-functional aspects of the graphical user interface.

Creating a Web page is akin to creating any other compilation, such as an anthology of short stories, a catalog, or magazine, and, thus, the rights in every individual work used must be in the public domain, belong to the Web site owner, or have been assigned or licensed to the Web site owner. Many companies that have hired outside contractors to create their Web sites have learned the hard way that those Web page artists “own” the resulting page.

Your Outside Web Site Designer May Own the Copyright To Your Web Site

Under copyright laws, the rights in a work are initially owned by the author of the work, that is, the person who actually creates the work by translating an idea into an expression entitled to copyright protection. In the case of Web pages, the author is usually the Web site designer. This can present several problems for the owner.

Over time, Web sites must be updated with the latest technological advances or new information. The site owner must either have license rights or own the copyright to the content of the page. The U.S. Copyright Act provides several ways for a Web site owner to acquire the rights to use and modify the content of the site.

If the Web site designer is an employee of the site owner and the work was done within the scope of his employment, the copyrightable work product is considered to be a “work-made-for-hire,” and the employer, in this case the Web site owner, is considered to be the “author” of the work. Work done outside the normal scope of employment, however, is not governed by the work-made-for-hire doctrine, and the copyright in the work may only be obtained by the employer through a written assignment from the employee.

If the Web site designer is an independent contractor, the Web site owner has the option of obtaining a written work-made-for-hire agreement, a written assignment, a license from the contractor, or a joint authorship agreement. Although it would appear that Web sites are eligible for work-made-for-hire agreements (as a compilation work), as Web sites become more intricate and begin to resemble computer programs themselves, the eligibility of the Web site as a work-made-for-hire may have to be re-examined.

Work-Made-For-Hire Agreements

The Copyright Act requires that two criteria be satisfied before rights are obtained under the work-made-for-hire doctrine:

1. the designer must execute a written assignment
2. the work must be commissioned for use within one of the nine categories specified in the Act:

• an atlas
• a compilation
• a contribution to a collective work
• an instructional text
• a part of a motion picture or other audiovisual work
• a supplementary work
• a test
• answer material for a test
• a translation

The contract should specifically address ownership or licensing of every element, including the programming code, formatting, text, music, graphics, photographs, video clips, software, graphical user interface, or any other copyrightable features.

Owning the elements of the site - the features that make the site distinctive - is important to a company marketing on the Internet, in terms of attracting new customers and making the site memorable or recognizable to repeat customers. Good Web sites must be continually updated with new content and new technology in order to retain their value. Thus, owning the intellectual property rights in those features is critical.

Has Your Company Obtained the Copyright for All Content on Your Web Site?

Equally important is securing the rights to display all the material incorporated in the Web site, such as any articles, stories, pictures, video clips, audio, etc. Many people wrongfully believe that if they found it on the Internet, then they have the right to copy it and display it themselves. This is a gross misunderstanding. Content taken from the Internet is not in the public domain. The chances are that someone owns the copyright to the works. Do not use content copied from the Internet unless you have the copyright, or it falls into a proper exception, such as fair-use or parody (topics which are beyond the scope of this article). Interesting legal developments are expected in the area of use of hypertext links and other “documents” linked to the Web site.

Conclusion

Because the development of Internet law is still embryonic, explicit agreements between Web owners and Web “authors” remain important to solidify and clarify the rights of each party. So, go on out and hire a Web page designer, but before she begins your online masterpiece make sure you secure all the necessary licenses from others and a contract which explicitly grants you all the rights to your page. After all, you don’t want the profits from your increased business going toward settlement of a copyright infringement claim. c

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What You Should Know About Company E-Mail Systems


By Richard L. Ravin, Esq. and Barbara A. Schweiger* 

RETURN TO TOP

Operating an e-mail system on a computer network exposes a company to legal liability in a number of contexts. As an employer, the company may be liable for an employee’s e-mail if it is obscene, harassing, or otherwise offensive. The company may also be liable for copyright infringement, defamation and violation of trade secret laws.

You can institute safeguards to protect against or limit your liability for activities or actions that give rise to legal claims. Below are steps you can take to help reduce your exposure to lawsuits.

Employers are generally liable for employee conduct that violates others’ rights and occurs within the scope of the employment relationship. If an employee uses e-mail in a way that infringes others’ rights or violates a statute, the employer may be liable for conduct such as copyright infringement, divulging trade secrets, defamation, harassment, sending sexually-explicit materials, and entering a contract.

Employer Liability for Employee E-Mail

Using e-mail to harass other employees in the company presents a unique problem in the workplace because of the relative anonymity the medium provides. Employers who do not inform their employees that messages which contain offensive statements of a sexual or racial nature are prohibited or who simply fail to stop harassing e-mail communication when it is brought to their attention are potentially liable to employees harassed by such e-mail messages. Several major corporations have already been sued for sexual harassment related to e-mail. You can protect against liability for harassment by acting quickly and decisively when employees report offensive behavior and emphasizing in your company e-mail policy that:

• the medium is provided primarily for business purposes
• offensive communications of any kind are strictly prohibited.

Copyright Infringement

Most cases of copyright infringement in the context of computers involve users who post copyrighted information to a computer bulletin board without the copyright owner’s permission. Transmitting copyrighted material in e-mail poses identical problems. Companies that provide Internet access for their employees might be subject to liability for contributory copyright infringement if the company fails to investigate a claim that a posting infringes another’s copyright or forwards a customer’s or third party’s e-mail containing infringing material.

In addition, vicarious copyright infringement may be imposed if the company has the right and ability to supervise infringing activity or has a direct financial interest in such activities. There are some precautions employers can take:

• Institute and enforce a clear company policy against posting or electronically distributing copyrighted material
• Implement legally-sound procedures to promptly investigate and respond to allegations of infringement.

Trade Secrets

A trade secret is confidential information - a formula, database, customer list, manufacturing process, or business plan, for example - that derives economic value from its secrecy. Whether or not information is protectable as a trade secret is determined by courts who examine the extent to which anyone other than the owner knows the information and the ease or difficulty with which it could be duplicated or legally acquired. The law additionally requires that the owner of a trade secret take reasonable steps to maintain its secrecy. In a trade secret suit, failure to institute safeguards against disclosure of secrets such as through e-mail transmission over unsecured networks or without encryption is evidence that a company did not consider the material secret or confidential.

Defamation

Defamation laws protect individuals and entities from damage to their reputations caused by false, injurious statements published to a third party. The person who makes a defamatory statement, that is, the publisher or speaker, is liable for defamation. In addition, one who repeats or otherwise republishes a defamatory statement is subject to liability as if he or she were the original publisher of the statement.

A mere distributor or deliverer of defamatory material is not ordinarily liable unless he knew or should have known of the defamatory statement at issue. Whether an online access provider is a publisher/speaker or a deliverer/distributor was thought to be settled when Congress enacted the Communications Decency Act of 1996. The Act shielded online access providers from defamation liability, stating that “no provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” The U.S. Supreme Court recently ruled that the Act violated the Constitution; thus, the liability of online service providers - which may include employers who provide Internet access to employees - is still in question.

Employer Monitoring of E-Mail

If your business operates an e-mail system, you have access to all stored employee communications data and you may even be able to monitor employee live communications and usage habits. There are a number of reasons why you may wish to monitor employee e-mail messages, including concerns over illegal conduct, hostile workplace environment, violation of trade secret laws, copyright infringement, and defamation. Because courts tend to view e-mail as a work-related communication tool when it is provided by an employer in the workplace, employers have been found to possess a right to access and monitor employee e-mail messages as long as the access and monitoring are for legitimate business purposes. Any such monitoring should not be undertaken lightly or without legal counsel.

You should consider adopting an employee e-mail policy. In determining whether employer monitoring of e-mail is permissible in a given situation, courts balance the employee’s reasonable expectation of privacy against an employer’s need for supervision, control, and efficiency in its business operations, as well as to investigate sexual harassment and discrimination claims.

Many employees assume that their selection of a password for accessing e-mail messages confers absolute privacy, but employers can and should dispel such expectations by issuing a company e-mail policy which each employee should be required to read and sign. Such a policy could advise the employee that e-mail is to be used primarily for business purposes and that the employer has the right to monitor all e-mail.

The federal Electronic Communications Privacy Act prohibits anyone from intercepting, accessing, or disclosing the contents of an electronic communication, but provides two exceptions that appear to authorize employer monitoring of employee e-mail messages:

• the prior consent exception: Interception is lawful where one of the parties consented in advance. For this reason, many e-mail policy statements put employees on notice that their e-mail is subject to monitoring and require that the employees acknowledge and sign such a statement.
• the business use exception: employer monitoring is normally allowed “within the ordinary course of business” and where the subject matter of the intercepted communication is one in which the employer has a legal interest, such as divulgence of a trade secret or harassing messages.

In addition, there are federal and state statutes which prohibit electronic eavesdropping which may be applicable.

Security and Confidentiality

You can protect both your system and the information it contains from internal and external attack by adopting effective computer security measures. System security begins at the point of access through the use of passwords or biometric tokens, such as a retinal or hand scan. If your system is connected to the Internet or other open networks, additional access controls, such as firewalls, may be needed. Firewalls are hardware and software that erect a barrier between your system and the Internet (external firewalls) or different parts of your system (internal firewalls). The firewall intercepts and screens incoming and outgoing messages before relaying the messages to their destinations. Information security measures include encryption, digital signatures and date/time stamping.

Record-Keeping

If you carefully develop and conscientiously follow your electronic record-keeping system, your records will be sufficiently trustworthy to meet professional and legal standards. For each record a business keeps electronically, certain additional information might be needed to help demonstrate trustworthiness, such as each message in a course of correspondence or logs of incoming and outgoing communications. In addition to the internal business information records provide, accurate records may also be required for compliance with a statute, regulation, or tax code provision. Finally, records can help prove that certain events occurred, such as that a payment run was generated on a certain date or that a sale took place.

E-Mail As Evidence in Criminal and Civil Actions

Courts now routinely permit adversaries in a lawsuit to request electronically stored information, hidden files (deleted documents that can sometimes be retrieved from electronic fragments), or entire computer systems. Careless e-mail messages increasingly turn up as critical evidence in litigation. The best way to diminish the possibility that damaging e-mail will be used in future litigation is to caution your employees to compose their e-mail messages with care and to adopt appropriate record retention and destruction policies. c

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Keeping Trade Secrets On Computer Protecting Your Secret Formulas, Customer Lists And Designs


 

RETURN TO TOP

Some of your company’s most valuable assets may be its customer list, supplier list, secret formulas, secret designs, or other trade secrets or proprietary information. If handled properly, these trade secrets may be protected from disclosure to competitors under state or federal trade secret laws. Storing these trade secrets on computer, transmitting them via e-mail, or making them accessible through intranets could jeopardize their trade secret status in the eyes of the law.

A trade secret is any formula, method, technique, device, pattern, or compilation of information that is used in one’s business, and that gives the business an economic advantage over competitors who do not know that information. Under the Uniform Trade Secrets Act, adopted in forty states, a company must take reasonable precautions to insure such information’s secrecy and the information must derive independent economic value from not being generally known. New Jersey, which has not adopted the Model Act, nevertheless has developed rich decisional case law in the area of trade secrets. In addition, in late 1996, Congress adopted the Federal Trade Secrets Act, which provides criminal penalties for economic espionage and theft of trade secrets related to products placed in interstate and foreign commerce.

Prior to the use of networked computers, as a practical matter, if you kept your customer list segregated and accessible only to certain individuals in the company, it was prima facie evidence of your intent to keep it secret. A court today may well find that you no longer have a trade secret if the information is kept on a computer system accessible to all employees. Trade secret status, unlike copyright or trademark status, is legally determined only through litigation, and, thus, an owner of a trade secret must take security precautions to ensure that a court, if necessary, will protect its trade secret.

Whether information is a secret depends on the extent to which it is known to persons other than its owner, and the degree of difficulty with which a person could acquire or duplicate the information. In addition, the law requires that the trade secret owner take reasonable steps to maintain its secrecy. Courts have considered various security measures when making trade secret status determinations involving computers. In a 1985 case, a federal Court of Appeals found that a company’s customer lists lost their character as trade secrets where the company failed, upon selling its computer, to take reasonable steps to protect the lists by erasing them from the computer’s memory.

Along with the many communications and record-keeping benefits computers and the Internet provide, the online medium constitutes a serious threat to trade secrets unless measures are taken to prevent access and disclosure. Wide variations in computer literacy and skills, for example, may leave many employees ignorant of the risks and employers vulnerable to theft of trade secrets. Where a secret could be published, posted, or otherwise disclosed with the push of a button, lack of corporate policies and procedures makes transferring trade secrets particularly tempting and risky.

Protecting information stored in a computer database defies standard security measures. Theft of business data from a computer system poses special problems with regard to detection and retrieval. Employers may not detect losses because digital information can be copied without altering the “original.” If the loss is even discovered, it may be difficult to trace who transferred the information and to whom it was sent, much less to retrieve the information.

As noted above, trade secret misappropriation is generally a matter for state law, with remedies ranging from injunctive relief to punitive damages. In addition, federal statutes provide civil and/or criminal penalties for intentional and wrongful copying or control of trade secrets.

A trade secret owner can take several steps to protect his or her property:

• restrict access to the database in which a trade secret is stored to persons having a “need to know”
• use passwords and key codes
• encrypt sensitive data
• employ physical security measures such as locked file cabinets
• require employees and others (such as consultants or entities doing due diligence or having access for limited purposes) to sign confidentiality agreements.

When trade secret information is communicated electronically, it may require use of secured networks or encryption. Disclosure to persons who are not subject to an obligation of confidentiality may result in loss of trade secret protection. At least one court has held that an unrestricted disclosure occurs when trade secret information is posted on the Internet. In 1995, a federal District Court in Virginia held that once a trade secret is released into the public domain, via posting to an Internet news group by an anonymous employee, there is no retrieving that secret. A trade secret owner has the right and obligation to control access to the information comprising the secret.

Anyone who acquires the trade secret by “improper means” is liable for misappropriation of the trade secret. Improper means include unauthorized interception, bribery, theft, and breach of duty of confidentiality. Where the owner has disclosed the secret information to a party under a duty of confidentiality, any actual use by the party that hurts the owner or helps the party’s business without the consent of the owner constitutes misappropriation. Once the unauthorized taking or use of the trade secret occurs, the owner must act quickly, possibly seeking a court injunction, or risk waiving his or her right to do so in the future.

In California, which has adopted the Uniform Trade Secrets Act, the plaintiff must show that a defendant has been unjustly enriched by improper appropriation, use, or disclosure of a trade secret. A federal District Court in California found that a corporation had taken reasonable steps to ensure the secrecy of its customer database by requiring employees to sign confidentiality agreements respecting its trade secret. Since California, unlike most other states, specifically prohibits restrictive covenants in employment contracts, except in connection with the sale of a business, many companies rely on confidentiality agreements to prevent current and former employees from divulging the company’s trade secrets.

In New Jersey, trade secret misappropriation is governed by common law. The New Jersey Supreme Court enumerated several factors for courts to consider in determining whether given information is a trade secret:

• the extent to which the information is known outside the company
• the extent to which it is known by employees and others involved in the company
• the extent of measures taken by the company to guard the secrecy of the information
• the value of the information to the company and its competitors
• the amount of money or effort expended by the company in developing the information
• the ease or difficulty with which the information could be properly acquired or duplicated by others.

If your company has gone through the time, trouble, and expense of soliciting and obtaining customers, gathering information, or developing a process or formula, make sure you preserve your property rights in that trade secret by taking all of the necessary precautions, such as seeking legal advice about including a non-disclosure clause in employment contracts or limiting access to certain files or programs in your computer system. c

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HOT TOPICS

Can You Be Sued Wherever Your Web Site Is Viewed?


Web sites are being used as a basis to require a company to defend itself in a foreign jurisdiction, even when the Internet or the company’s Web site has nothing at all to do with the dispute. Whether your company must defend itself in a foreign jurisdiction (e.g., a state or country in which your company does not have an office) is determined by the doctrine of “personal jurisdiction.”

A plaintiff may claim that your company has sufficient contact with the state in which the lawsuit is being held (the “forum state”) because the Web site can be viewed from that state even though the Web site physically resides on a computer in another state. If your company already has substantial contacts with every state, then the Web site will not expose your company to any increased personal jurisdiction within the United States. If that is not the case, then your company will be exposed to defending itself in every state. The same analogy applies to foreign countries, but the issue becomes more complicated because of a wide range of laws.

Minimizing Exposure

There are some steps which your company can take to minimize exposure to an adverse personal jurisdiction ruling, but because many state courts have not yet addressed the issue, it is not known how any particular court will rule. One obvious step is to include a disclaimer on your Web site which states that the Web site is not intended to be viewed in certain states or countries to whose jurisdiction you do not wish to be subjected. Disclaimers have not yet been tested and it is unlikely that a disclaimer alone will be effective.

Declining to accept sales orders from persons in those jurisdictions may help to avoid personal jurisdiction on the ground that the company (i) did not purposefully avail itself of the protections of the forum state’s jurisdiction, and (ii) did not expect to be hailed into the forum state’s jurisdiction to defend the lawsuit. Your company would argue that the opposite is true — that your company turned down business from those jurisdiction for the very reason that it did not want to submit itself to the jurisdiction of the forum state and had no intention of being forced to defend a lawsuit in the forum state.

If your company markets itself over the Web, it is important that you keep informed on this issue. Your company may need to do some strategic planning to determine in which states or countries it does not want to transact business, for instance, in states or countries whose laws look unfavorably upon some aspect of your company’s business.

State Registration of Corporate and Business Names

Another potential problem (which is beyond the scope of this article) involves laws in each state requiring that a “foreign” corporation is required to file a certificate of authority with the Secretary of State before conducting business in that jurisdiction. It would not be surprising if some states take the position that conducting business over the Web constitutes “doing business” in the state and requiring registration of a foreign corporation. c

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HOT TOPICS

Three Impediments To Commerce On The Internet


A major impediment to the flourishing of commerce on the Internet is the lack of enforceability of contracts. In the paper world, contracts are enforced by proving the other party signed the written agreement. Entering into contracts over the Internet, however, means that contracts are entered into without ever having been reduced to paper — thus, they are not a writing, and cannot be signed. The current laws (known as the Statute of Frauds) in most states do not recognize as enforceable contracts that are negotiated purely electronically or by e-mail.

Digital Signatures

A few states have passed digital signature or electronic signature laws, and more are expected to pass such legislation within the next year. Once that is done, the business community will feel confident about entering into contracts over the Internet.

Digital signatures must be encrypted to prevent their unauthorized use. One widely acknowledged method of encryption is the pairing of pubic and private keys, or asymmetrical encryption. This would permit the transmittal of a secure message containing a secure digital signature.

Cyber Notaries

To enhance verification and authentication of encrypted electronic messages (including contracts and documents), the concept of “cyber notaries” or “certification authorities” is also on the horizon. Cyber notaries would be certified by a governmental authority or an organization.

If you received e-mail, the cyber notary would authenticate the e-mail — confirm that the e-mail was actually sent by the sender. The sender would receive back confirmation that you actually received the e-mail. Other validations are possible, such as time and date stamping. A cyber notary could retain electronic copies, under certain confidentiality restrictions, of the transmitted documents in the event a dispute were to arise between the parties over the e-mails.

Payment Over the Internet

Once the major financial institutions agree on a protocol by which funds can be transferred over the Internet, many individuals and businesses will be in a position to fully embrace commerce on the Internet and make payments for goods and services. Currently, credit cards are the only practical method of payment, but this requires the merchant to accept a particular credit card, and for the purchaser to hold the same credit card.

A system is needed that permits a user to actually make a payment over the Internet (sending a check through the mail). One idea is to actually transmit negotiable instruments over the Internet, such as a check or a promissory note. Instead of a written check, there would be a computer file. One problem is that files can be duplicated, even if encrypted. If a promissory note is sent for $100, counterfeits could be made by simply copying it.

Another idea is to use the existing wire transfer laws to make it possible for users to send or wire funds from their own accounts without the need to call up their bank with wiring instructions. Instead, the transfer would be accomplished directly from the user’s keyboard. This idea, known as the “SET” (Secure Electronic Transactions) protocol is being explored by major financial institutions.

Once businesses are confident that their electronic contracts can be enforced and protocols are in place that permit payment of funds over the Internet from one person to another, then commerce on the Internet will flourish. c


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The Right Of Privacy In Cyberspace


 

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Imagine getting a phone call from one of your customers, irate upon learning that you support some political group trying to pass legislation that could harm his business. You learn from him that he visited a Web site that had a link to your company’s site. You check it out for yourself after assuring your customer that there must be some mistake and, sure enough, your domain name appears somewhere on the page of an organization about which you may never have even heard. With one click, your Web page pops up within their page. You have been “framed,” and you may have a legal claim for invasion of privacy under the theory that the link places you and your company in a false light.

The publication of any statements or other materials that include information about an individual, including a name, voice, records, or image, may raise right of privacy issues. People generally have some rights to control the use of their identity and any information about them. Some aspects of privacy rights are regulated or protected by laws which protect individuals against intrusion or personal embarrassment. Privacy laws may vary from state to state, but four activities generally give rise to liability for invasion of privacy:

• Public Disclosure of Private Facts: A person invades another’s privacy when he or she publicly discloses private facts about that person, the disclosure of which is highly offensive to the reasonable person. Unlike the tort of defamation, truth is not a defense.
• Intrusion upon Seclusion: Under many state laws, persons have a right not to have others intrude on their solitude or private affairs, if the reasonable person would find such intrusion highly offensive. Additionally, state and federal laws against wiretapping or interception of electronic communications protect individuals from invasion of privacy. Most cyberspace intrusions will likely be based on:

• hacking: unauthorized accessing of a computer system
• spamming: posting advertising to a large number of bulletin boards
• unsolicited junk e-mail
• “cookies”: files stored by a Web publisher on the hard drive of the visitor to the site that provide, among other things, information about sites the user visits and how long he spends at those sites.

• Misappropriation of Name or Likeness: This right is similar to the right of publicity but, rather than protecting the commercial value of a person’s identity, this right protects against injuries to a person’s dignity or feelings. The three elements of a misappropriation claim are:

• the defendant appropriated the plaintiff’s name or likeness for the value associated with it, and not in an incidental manner or for a newsworthy purpose
• the plaintiff can be identified from the publication
• there was some advantage or benefit to the defendant

• False Light: This privacy violation arises where a false impression derives from something other than an express statement, such as a juxtaposition of a photo to an unrelated statement, adding false materials to a true report, omitting relevant details, or attempting to fictionalize a recognizable person. The very nature of digital information enhances the potential for creating images or words that place a person in a false light because the medium allows for combinations of different sounds, information, and images in unusual or creative ways.

Not all states recognize all of these claims; New York, for example, provides no cause of action for false light claims. In recent years, Congress has passed a number of laws affecting online privacy, providing a federal civil claim and remedies for those whose privacy rights are violated.

• Electronic Communications Privacy Act (ECPA) of 1996 is the primary federal legal protection against unauthorized interception and disclosure of electronic communications while in transit or in storage. The ECPA addresses the growing concern over unauthorized persons deliberately gaining access to or tampering with electronic communications.
• Privacy Protection Act of 1980 establishes safeguards relating to materials held by “a person reasonably believed to have a purpose” to publish a newspaper, book, broadcast, or similar public communication. Such materials, generally, may not be subject to search or seizure by a government employee unless there is probable cause to believe that the person possessing the materials has committed or is committing the criminal offense to which the materials relate, or immediate seizure is necessary to prevent death or serious bodily injury.
• Privacy Act of 1974 imposes limits on the collection and use of personal information only by federal government agencies, imposing upon them a duty to collect, maintain, use, or disseminate any record of identifiable personal information in a manner that assures that such action is for a necessary and lawful purpose, that the information is current and accurate for its intended use, and that adequate safeguards are provided to prevent misuse of such information.
• Fair Credit Reporting Act of 1970, a subchapter of the Consumer Credit Protection Act, regulates all information maintained by credit bureaus, which are required to implement and maintain reasonable procedures and to avoid reporting obsolete, unfair, or inaccurate information.
• Right to Financial Privacy Act of 1978 restricts government access to the financial records of any financial institution customer. Financial institutions may not provide the government access to or copies of, or the information contained in, the financial records of any customer except under certain circumstances.
• Telephone Consumer Protection Act of 1991 makes it unlawful to place a phone call using any automatic telephone dialing system or an artificial or prerecorded voice to any service for which the called party is charged for the call. The Act also bars, among other things, “any telephone facsimile machine, computer, or other device to send an unsolicited advertisement to a telephone facsimile machine.”
• Federal Records Act governs federal agency record creation, archiving and disposal requirements. The Act’s goals include creating an “accurate and complete documentation of the policies and transactions of the Federal Government,” as well as “judicious preservation and disposal of records.”

Other areas which are not covered by comprehensive statutes but that, nevertheless, raise critical privacy issues involve health, employment and insurance records. Whether those records are disclosed traditionally or electronically is insignificant. c

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The “Year 2000” Problem: Avoiding Data Base Meltdown At The Turn Of The Century


By Bruce Steinhorn, Esq. 

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It’s January 2, 2000, your first day back at work after the gala, if not premature, millennial celebration, and your computer system seems to have gone berserk, producing all sorts of errors, deleting data files, canceling billing cycles. Orders go unfilled, receivables have aged a century since your last business day, pensions are being paid to employees fresh out of college, policies have been canceled. Even the elevators have shut down and the heat will not turn on. These problems are occurring faster than your technical staff can correct them. Your business grinds to a halt and you wait, frustrated, for weeks as the errors are slowly corrected.

Welcome to the Year 2000 crisis, also known as the millennium virus. This scenario is a very real and probable consequence of the “Year 2000” problem threatening to produce chaos in our increasingly computerized world. Many older computer programs and systems use date systems comprised of three two-digit numbers, which are based on using “19xx” as the year configuration. When the turn of the century arrives, however, the computer will calculate the date as 01/01/00, reading it as January 1, 1900, since “20xx” was never programmed as a valid year configuration. Any process that relies on date comparisons and calculations to trigger actions will either fail to perform the action or perform the action unexpectedly.

Is Your Computer System Year 2000 Compliant?

Susceptibility to this problem is related to the age of the system. While most “bugs” in a computer system usually can easily be programmed out, the Year 2000 problem eludes a simple solution, since no magic bullet has been created to correct the problems and the only available solutions - locating date fields in complex systems among endless lines of computer codes - are expensive and labor-intensive.

Newer programs written for Windows, Windows 95 and Windows NT are “Year 2000 compliant,” which means that the software has been programmed to handle four-digit years in dates. Older PC programs written in DOS or Cobol may not be Year 2000 compliant, and the majority of non-compliant programs exist on the mainframe and older mini-computer systems, such as IBM systems 36 and 38. These systems are generally from 10 to 30 years old, written at a time when the turn of the century seemed far away. Software developed for in-house use or by companies no longer in business is highly suspect.

Some computer companies are providing free compliance upgrades under warranties or maintenance agreements, but many are relying on disclaimers in their agreements that would allow them to charge a fee for compliance upgrades. If your software or hardware provider or manufacturer is not giving you support for this serious problem, you need to act now, including possible legal action on breach of warranty and negligence theories.

Are Your Suppliers’ Computer Systems Year 2000 Compliant?

Year 2000 problems generated outside of your company can also affect your business. Your suppliers may fail to deliver on time, forcing you to scramble for substitutes. Another source of aggravation may come from federal, state and local governments, who have been the slowest to upgrade their systems and are, in many cases, using obsolete technology.

Year 2000 problems in systems that record mortgages, titles and liens can affect your ability to obtain title insurance. In other instances the government may cancel licenses and permits prematurely. A company needs to be prepared to substantiate the status of licenses, permits, security interests and title to real property.

Most critically, the Year 2000 problem threatens the integrity of financial information because it is highly date-dependent, and a banking meltdown that could impair the ability to make or collect payments or wipe out the interest in your account would have serious economic consequences.

Your Company May Be Liable For Its Year 2000 Problems

The magnitude of the problem is reflected in the real possibility that any individual or company that relies on computers in its business will face significant legal problems. Preparing for and facing those problems now may prevent many of them, or, at least, mitigate the damages.

In order to be fully protected, your company should conduct a comprehensive legal audit to avert potential liabilities about which you may not be aware. Disruptions in your operational system can prevent you from meeting your contractual obligations. Errors in calculating depreciation can result in misstating your financial statements, leaving you open to liability for fraud or Securities and Exchange Commission actions.

Companies that are required to provide notice pursuant to statute or regulation and who rely on computerized tickler systems to comply will find themselves subject to sanction or may forfeit a legal right. One possible scenario is that directors and officers of public companies will be held liable for failure to exercise due care in not taking measures to prevent reasonably foreseeable business disruptions.

A consultation with an Internet/Computer Law attorney will help you understand the scope of your exposure to the liability particular to your business and industry. You are advised to start addressing your year 2000 problems immediately to leave yourself ample time to correct them.

Any effective strategy for preventing Year 2000 problems might naturally begin with replacing non-compliant software. The operating departments in your company should draft contingency plans for dealing with the types of disruptions your business may face. Another important step calls for determining if your key suppliers are year 2000 compliant, and, if not, you can make this a term in your contracts with them.

Finally, be prepared to substantiate and validate your licenses, permits, tax returns, and filings and confirm the accuracy of the record dates of any mortgages, deeds and security interests. Ravin, Sarasohn, Cook, Baumgarten, Fisch & Rosen, P.C. can give you further guidance and assistance with regard to these actions. It might be expensive to take care of all of this now, but it is far less expensive than finding yourself liable under some Year 2000 contract or tort action. With a proper plan and prompt action, the turn of the century can still be a happy new year. c


 

DISCLAIMER and NOTICE

This publication provides information of general interest to our readers. It is not intended, and should not be used, as a substitute for consultation with legal counsel. The law changes constantly, particularly in this rapidly emerging area of Internet commerce and communications, and is subject to different interpretations. Ravin, Sarasohn, Cook, Baumgarten, Fisch & Rosen, P.C. shall not be responsible for any damages resulting from any inaccuracy or omission contained in this publication.

No part of this publication may be reproduced or transmitted in any form by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without written permission from Ravin, Sarasohn, Cook, Baumgarten, Fisch & Rosen, P.C. ©1997. All Rights Reserved.

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Legal Services Available:

Ravin, Sarasohn, Cook, Baumgarten, Fisch & Rosen, P.C. is available to counsel its clients regarding Internet, Computer Law and Intellectual Property Law:

    • Registration of trademarks, domain names and
    corporate names
    • Drafting and negotiating software development licenses, software technical support agreements, hardware maintenance agreements, and Web site maintenance agreements
    • Drafting work-made-for-hire agreements for Web sites and other copyrightable works
    • E-mail policies and employment law related issues
    • Trade secrets (such as customer lists, secret formulas and designs)
    • Personal jurisdiction issues (avoiding being sued wherever your Web site is viewed)
    • Internet privacy issues
    • The “Year 2000 Problem”

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