Summer 2009 – An Ounce of Prevention

A thorough review of any e-commerce website is essential to avoid a
potentially nightmarish legal quagmire down the road. Here are the
key issues your legal team should examine.

By D. John Hendrickson, Esq. and Philip Rebentisch, CP.

A commercial website that is highly functional, conveys an effective sales pitch and is easy to use can result in a successful revenue source for a company’s products or services. However, if the website does not abide by state-based advertising statutes as well as federal regulations, this highly-prized revenue source can become an expensive, nightmarish problem. For this reason, a thorough legal review of a commercial website is essential to avoid potential legal entanglements with federal or state authorities.

So what type of red-flag issues do attorneys and paralegals look for when evaluating a site? To simplify, we examine advertising claims, no matter where they are found in the site; the content, placement and use of disclosures; testimonials; user-generated content; copyright or trademark infringement issues; the site’s terms of use and privacy policy (or lack thereof); the structure and content of any sweepstakes or contests on the site; and the use of appropriate notices of designation of trademark and copyright ownership.

FTC Requirements

In addition to state laws and regulations, a website is subject to Federal Trade Commission jurisdiction. As a result, it is imperative that the site conform to the FTC’s requirements regarding advertising claims and related disclosures, especially if the product category has been historically subject to FTC scrutiny. Claims must be reasonably substantiated, inherently truthful (expressly and impliedly) and cannot otherwise misrepresent the product or service.

If sales transactions involve club buying or negative-option features, have these terms been adequately disclosed? In short, as with all other advertising mediums, any and all claims must be factual and transactional items cannot be deceptive. To do otherwise runs the risk of FTC enforcement activity or action by a state Attorney General.

Advertisers can take heart because the FTC publishes a very useful document titled “Dot.com Disclosures,” which can be found on the FTC’s website at www.ftc.gov. At a bare minimum, the FTC requires the following for clear and conspicuous disclosures:

• Place disclosures near, and whenever possible, on the same screen as the triggering claim;
• Use text or visual cues to encourage consumers to scroll down a webpage when it is necessary to view a disclosure;
• When using hyperlinks to lead to disclosures, make the link obvious;
• Label the hyperlink appropriately to convey the importance, nature and relevance of the information it leads to;
• Use hyperlink styles consistently so that consumers know when a link is available;
• Place the hyperlink near relevant information and make it noticeable;
• Take consumers directly to the disclosure on the click-through page; and
• Assess the effectiveness of the hyperlink by monitoring click-through rates and make changes accordingly.

Legal professionals take these requirements into account when reviewing the site. If a potential issue is discovered, a simple remedy may be to change the color or font size of an HTML link, or perhaps to move the disclosure link closer to the claim itself. Effective counsel strives to be aware of creative design elements when suggesting changes, but if a red flag is raised, it’s best to minimize the risk in some manner.

Testimonials are another area where caution is warranted. The FTC requires the same standards for online testimonials as it does for all other mediums. If testimonials are used, the website must contain any required disclosures. Keep in mind that text-based testimonials are no different than video or film testimonials; all are held to the same FTC requirements. Briefly, endorsements must always reflect the honest opinions, findings, beliefs, or experience of the endorser. Furthermore, they may not contain any representations which would be deceptive, or could not be substantiated if made directly by the advertiser. The legal team will want to ensure that the client obtained appropriate testimonialist affidavits–and requisite substantiation–that support any and all statements.

UGC and copyright law

If the site incorporates user-generated content or an interactive community section, there should be affirmative opt-in mechanisms relating to the use of such content. This may include a statement that the user has read the site’s terms of use or other “rules” associated with this type of content. Counsel will also examine potential risks relating to UGC as well as community sections, and develop strategies to mitigate the risk.

A U.S.-based commercial website is generally protected under U.S. copyright and trademarks laws. If a client utilizes trademarks or copyrighted material (including graphics, copy, music or “look and feel”) from another website without permission, there is a risk of trademark or copyright infringement. If a client has incorporated an entity’s intellectual property (or a similar version thereof) into the website, an attorney will want to evaluate whether it falls within the “fair use” doctrine, or if it does not, whether the client has obtained permission to use such material.

TERMS OF USE AND PRIVACY POLICIES

A website’s terms of use (you know, the thing no one ever reads) is invaluable to the client. In reality, the TOU is a legal contract between the site owner and the site user which quite literally spells out the terms of use for the website. The legal team will first determine if the site has a link to the TOU, then review the terms as last updated and assess whether the TOU are still applicable to current company practices. While most TOUs may appear to be exactly the same, it is important that the terms match the content of the site in order to protect the client. For example, if user-generated content or community sections are utilized, the TOU must clarify the rights granted to use such material; establish rules for submission and participation; indemnify the client from any intellectual property infringement actions; and use language required under the federal Digital Millennium Copyright Act.

Other TOU examples include language for e-commerce (and applicable warranty and liability language), promotional or interactive elements, third-party linking and how an individual may (or may not) use content within the site. In short, a simple TOU template is not one size fits all; rather, it needs to accurately reflect the site’s actual content and purpose.

Like the TOU, a privacy policy is also essential. The legal team will want to confirm when it was last updated, whether it accurately reflects current company practices or whether those practices have changed since the last update. Another important element is whether the site collects information from children under the age of 13. If so, the site must conform to the federal Children’s Online Privacy Protection Act of 1998. If the site encompasses user-generated content, does the privacy policy affect such use? Lastly, does the policy address general FTC concerns regarding protection of personally identifiable information?

If the site is used by California residents, under California’s Business & Professional Code: An operator of a commercial website…that collects personally identifiable information through the Internet about individual consumers residing in California who use or visit its commercial website…shall conspicuously post its privacy policy on its website….” The statute lists the requirements that the policy must disclose. If applicable, legal professionals will review (or draft) a client’s privacy policy to ensure it meets California’s requirements. Further, California law sets forth company disclosure requirements regarding the use of its customers’ personal information.

The legal team will also review any sweepstakes or contests that may be part of the website or are an entirely separate entity. Sweepstakes laws vary from state to state, but it is essential that a few basic guidelines are incorporated. For instance, it’s important that adequate short-form rules are displayed prominently. Also, the complete official rules must be properly drafted and readily accessible prior to entry. Finally, attorneys must assess whether the structure and entry mechanism of the promotion complies with applicable FTC policy and state laws regarding sweepstakes or contest promotions.

An easily overlooked–but vital–website component is the protection of intellectual property rights through proper notice of ownership. The first time a trademarked term is used within the website, it is important that the appropriate ™ or ® symbol is seen. In addition, it’s also important that the owner utilizes the copyright symbol © and the relevant year or years for which it applies. This also serves notice to users that the website, the content and the design are protected intellectual property. From a design perspective, we generally recommend the © is seen on the footer of each webpage.

While each topic discussed herein could easily constitute an entire article, they represent the primary elements of a thorough website review. As mentioned above, legal professionals strive to maintain a website’s creative elements and will work with the client to maintain the site’s creative vision. Many times, needed changes are minor in nature. However, even minor issues can lead to major problems if they are not corrected. We recommend that clients contact their counsel early in the design phase to help them stay on track throughout the process. This is also a more cost-effective method for ensuring regulatory and statutory compliance. If the legal team and the client are on the same page throughout the design process, this may eliminate wholesale changes prior to, or worse, after the website’s launch. As the site evolves over time, it is also a good idea to have the legal team review the changes. Of course, the expression “better late than never” is also applicable; as long as problems are addressed before the FTC or an Attorney General comes calling, then you’re still ahead of the game.

D. John Hendrickson is a principal at Manhattan Advertising & Media Law. Philip Rebentisch is a nationally certified media paralegal and a former digital media producer. The contents of this article do not constitute legal advice or the establishment of an attorney-client relationship. Should you need legal advice, please consult a qualified attorney.