WEBSITE LIABILITY: A PRACTICAL ANALYSIS OF THE RISKS

1.1 The Internet contains web sites for an ever-increasing range of businesses and individuals. Many businesses use the Internet as a form of advertising and for the supply of goods and services. Hence both advertising laws and contractual terms are relevant in this new medium in addition to issues such as intellectual property ownership.

1.2 The contractual issues involved in a web site development agreement are similar to those to be considered in a software development agreement, in that the agreement should be in writing and should clearly spell out the rights and obligations of the parties. Informal oral agreements are prone to dispute and confusion, which is needless and may be expensive. While a more informal oral agreement may be suitable for a basic web site, informal oral agreements, apart from being difficult and expensive to prove, often ignore many critical issues, which may become more important should a dispute arise.

1.3 This paper will also briefly examine the publication risks involving in publishing a web page.

1.4 Being a new industry, the legal perils of web sites have yet to be fully examined by the Australian Courts but there are some dangerous but manageable trends developing for web site developers and web site owners alike.

2.1 Legal issues arise even before a formal contract is negotiated. The web site developer may be asked to put forward a proposal, which outlines their ideas for the format of the web site. This can be an unrewarded, costly and time-consuming exercise, if the web site developer is not eventually engaged to build the web site.

2.2 Without an agreement prohibiting disclosure or use of the web site developer's proposal, the web site developer may be left without recourse should they discover that their site plan has been incorporated into a site created by another web site developer.

2.3 Unless the copyright in the web site is assigned to the web site owner in writing, the copyright will normally be owned by the web site developer provided that they are not a full time employee of the web site owner acting within the scope of their employment at the time when the web site was developed.

2.4 The Australian Copyright Act 1968 Cth provides:

Section 10
“literary work” includes: (a) a table, or compilation, expressed in words, figures or symbols (whether or not in a visible form); and (b) a computer program or compilation of computer programs; and:

“computer program” means an expression, in any language, code or notation, of a set of instructions (whether with or without related information) intended, either directly or after either or both of the following: (a) conversion to another language, code or notation; (b) reproduction in a different material form; to cause a device having digital information processing capabilities to perform a particular function;

Section 35
(2) … the author of a literary, dramatic, musical or artistic work is the owner of any copyright subsisting in the work by virtue of this Part.

Section 196
…
(3) An assignment of copyright (whether total or partial) does not have effect unless it is in writing signed by or on behalf of the assignor.

2.5 If a variety of different works are incorporated to form a multimedia presentation, the copyright protection becomes slightly uncertain. The extent of the copyright protection is more difficult to determine as the complexity of the web site design increases. Many web sites will include graphic, audio, musical and literary works in addition to the computer programs, which hold the site together.

2.6 While each component clearly has copyright protection, when you examine the definitions above, the multimedia product as a whole does not, in its own right, neatly fall into any existing category of copyright works, save for possibly being classified as a computer program.

3.1 Before the web site developer has been engaged, the following points should be considered for inclusion in their web site development agreement:

Has the web site owner provided clear development specifications; a required development timetable; and details of any acceptance tests? Any ambiguities in the responsibilities of the web site developer should be removed, for example, if development is to occur at the web site owner's premises, does the web site developer have to provide its own hardware and software.

Are there any penalties for delay? Is time of the essence? Unless there is a clear written agreement, the web site owner and web site developer can have different interpretations of delivery dates, the development timetable and the liability of the parties for delay. The web site developer should ensure that their agreement draws attention to the fact that it cannot be warranted that the software is “bug free”. Some web site owners with little exposure to software development may expect to receive a perfect product on the delivery date.

In a UK case, Virgin Interactive Entertainment (Europe) Ltd v Bluewall Ltd & Ors, Virgin agreed to a variation of the delivery date, but there was no written agreement prepared which outlined what was to be delivered and when, under the revised agreement. Bluewall was developing two computer games, which they were unable to deliver on the delivery date. They claimed that Virgin had agreed that the revised delivery dates were flexible and that the product was to be delivered at an Alpha version stage. Virgin refuted both these points. The Court found in favour of Virgin. One wonders if the developer had a limitation of liability clause in the contact in order to limit the damages payable in such a dispute.

Does the contract include: web site design, registering domain names, procuring and creating art and photographs, web site programming, web site testing, web site hosting, search engine work and Meta-tags; security; framing; and reporting on the web site traffic. These issues are both legal and practical issues that need to be resolved.

Developer v Publisher. Does the web site owner want to own the intellectual property relevant to the web site development? If the web site owner wants to have future control over the web site, for example changing their web site hosting provider, it is essential to own the intellectual property in the web site. In addition to copyright, the web site owner should consider all other forms of intellectual property, including trade marks. If the web site owner is not the intellectual property owner, their web site developer may be able to reproduce the web site owner's web site design for another customer. Further, owning the intellectual property and not having possession the source code can be a very frustrating and potentially disastrous situation. Escrow should be considered when the web site developer is not prepared to supply the source code. The long term use of the developed web site by the web site owner could be compromised if they do not own the intellectual property. However, a web site developer should also consider their need to advertise the work. The web site developer should, at a minimum, obtain a license from the web site owner to use web site content for its own marketing purposes. The web site developer should consider the inclusion of a clause in the agreement, which allows the web site developer to include information about the web site developer on the web site. This may be in the form of a logo or text, which links to the web site developer's web site. This form of advertising can generate sales leads from visitors who want a web site built and are impressed by the web site developer's work.

Developer/Publisher and Third parties - Materials. If the web site owner provides any materials for inclusion in the web site, an intellectual property indemnity should be obtained from the web site owner. If the web site owner provides the web site developer with an unauthorised copy of a musical recording, for example, the web site developer may find itself being sued for copyright infringement if these materials were incorporated into the site design. Consideration must also be given to ability of non-owners to deal with intellectual property: In the Victorian case of KMA Corporation Pty Ltd v G&F Productions Pty Ltd, this issue was examined with an earlier decision being appealed by KMA. G&F had supplied artwork to Bingo 2000 and upon Bingo 2000's request to KMA for an express and limited purpose. KMA used the artwork, without licence, in newsletters it produced for Bingo 2000 and G&F successfully sued KMA for infringement of copyright. The Court originally ordered that KMA be restrained from using the artwork without the express consent of G&F and that KMA pay to G&F a sum equal to the sum paid by Bingo 2000 to KMA for producing the newsletter. KMA was unsuccessful in its appeal and the Court reiterated that G&F had not granted a licence to Bingo 2000 or KMA to use the artwork in the newsletters. The web site owner should ensure that the web site developer indemnifies it against such a claim.

Developer/Publisher and Third parties - Frames. Through the use of frames, materials from a web sites may be imported into another site. This form of linking is considered to be a possible source of copyright and trade mark infringement. Web site owners should consider prohibiting their web site developer from framing any third party materials to avoid the legal ramifications which may arise from this form of reproduction. It is always advisable to obtain permission from the owner of a web site before linking to their web site. The web site owner should clarify with the web site developer that all links have been approved by the target web sites' owners. In the US district court case of Playboy Enterprises, Inc v Webbworld, Inc, Webbworld, who operated a web site from which you could download R Rated images, was sued for copyright infringement by Playboy. It was proven to the Court that Webbwolrd had copied 62 images, which had previously appeared in Playboy publications. The Court awarded damages in Playboy's favour in the sum of $310,000.00 (62 x $5,000.00) as a result of the copyright infringement. Webbworld's principal operators, Bentley Ives and Benjamin Ellis were found to be vicariously liable for the actions of Webbworld and it was ordered that they be held jointly and severally liable to Playboy for the payment of the $310.000 damages. WebbWorld, Ives and Ellis were unable to rely upon defences, which are available to ISPs in the US, as they charged a monthly access fee, which did not include internet access at large. Similar laws apply in Australia with respect to liability for copyright infringement and company directors should not operate under the misapprehension that they are protected by the corporate veil against legal actions for copyright infringements initiated against their company.

Developer/Publisher and Third parties - Hyperlinks. The dangers of using content from another party's web site without their permission is examined in the US case of Ticketmaster Corporation v Microsoft Corporation. Microsoft linked one of its web sites (http://seattle.sidewalk.com) to the Ticketmaster web site (http://www.ticketmaster.com). Ticketmaster claimed that this linking enhanced the value of Microsoft's web site while diminishing the value of Ticketmaster's web site by, amongst other things: depriving Ticketmaster of advertising opportunities; publishing erroneous information; and diluting the value of Ticketmaster's relationship with MasterCard, a major advertiser. Ticketmaster pressed claims for, amongst others, trade mark infringement and misleading and deceptive conduct. Even if your intentions are to bring more business to the linked site, you should obtain permission before establishing a link to the site to avoid possible legal ramifications. As income derived from advertising on the Internet continues to grow, so too do the risks and potential damages that may be awarded against an infringing party.

The development and maintenance of a web site may involve the disclosure of confidential information by the web site owner to the web site developer, for example, customer information regarding impending product releases. The web site owner should ensure that the development agreement includes a clause governing the use and disclosure of confidential information. If the web site will involve a complex design, which could be adapted easily for direct competitors, the web site owner should consider including a clause which prevents the web site developer from using a similar design for another customer in the same industry.

There should be an agreed method to request variations to the original web site plan. If a number of modifications are requested and the web site developer has not made provision for increasing the fees to be charged, the project can rapidly become unprofitable for the web site developer and the web site developer may find itself liable for delay.

Any additional duties of the web site developer, such as web site maintenance should either be incorporated into the development agreement or be included in a separate agreement. This might include periodic updating of material on the web site, domain name registration or checking hyperlinks.

Internet privacy issues are a source of possible liability for a web site developer. Tracking tools such as cookies, which determine information about web site visitors, may result in liability for the web site owner if the actions of such programs are considered by the Court to be computer trespass or if they otherwise deal inappropriately with data and visitors' computers.

If the web site owner requests the inclusion of features such as bulletin boards or a listserver, the web site developer should disclaim liability for third party actions and recommend that the web site owner should seek legal advice regarding its possible liability which may result from e-mail activities such as defamation and intellectual property infringement. The Web site owner to the extent permitted by law should seek to disclaim such problems at the entry point to the site where possible.

For large web site development projects, the web site developer may want to include a restraint of trade clause to protect its investment in its employees. The web site owner may decide to move the web site in-house and may approach one or more of the web site developer's employees with an offer of employment. Without a restraint of trade, the web site developer may not only lose a customer, but possibly a highly trained employee as well.

Particularly for commercial web sites, from which the web site owner will hope to derive income, the web site developer should limit its warranties to the extent allowed by law. Due to the confusion in relation to defining software development as a good or service, warranties for both possibilities should be clearly expressed. Without a limitation of liability clause, the web site developer will be liable for all loss, which is foreseeable as result of a breach of the web site development contract, for example lost sales or lost profits. Consider monetary risks, data loses, viruses; system security breaches.

The web site owner should consider whether they want their web site developer to have professional indemnity insurance and if so, whether their policy will provide adequate protection for software development. If the web site developer does not have professional indemnity insurance, an indemnity with respect to intellectual property, as mentioned above, may be of little significance if the web site developer is unable to provide the web site owner with adequate financial compensation. The extent of coverage offered by insurance policies and the statutory protection provided by the Trade Practices Act 1974 ( “TPA” ) to those involved in the sale and purchase of goods and services depends upon, amongst other things, whether goods or services are being provided and whether or not the web site owner is a “consumer” of goods or services. The definition of “consumer” under the TPA includes a purchaser of goods or services for less than $40,000 or alternatively a purchaser of goods or services which are of a kind ordinarily acquired for personal, domestic or household use or consumption. The categorisation of computer software as goods or services for relief under the TPA is not clearly defined and may fall into either category, although recent case law tends to suggest that it will be considered to be a service. Some insurance policies may limit the coverage of the policy to either the supply goods or the supply of services. If a policy is limited in its coverage to loss and damage arising from the supply of goods, it may not be adequate to cover the activities of a web site developer. If web site development is considered to be a supply of services, different protection is afforded by the TPA to the consumer than if the supply of such software is considered to be a supply of goods. The web site owner should consider whether the scope of the warranties offered by the web site developer is adequate for its needs.

The web site owner should ensure that the Contract subject to their local laws and if a dispute arises, that it is litigated near you.

It is beneficial for the web site owner to maintain records such as minutes of meetings to document the fact that it has relied upon the knowledge and expertise of the web site developer. If the project does not produce a satisfactory end result, the web site owner may, subject to its contractual arrangements, look to the web site developer for damages if the suggested specifications were inadequate.

If the web site owner makes it clear that it is relying upon the web site developer's advice in the development of the web site, it will be more difficult for the web site developer to defend a claim of misleading and deceptive conduct made against it.

The case of Chippendale Printing Co Pty Limited v Spunaline Pty Limited & Anor examined the damages which could flow from an inadequate software development. An award of damages of $26,000 and legal costs was made to Chippendale resulting from a supply of software and hardware which did not live up to the promises of Spunaline. A director of Chippendale, having no knowledge of computers, engaged Spunaline to provide a computerised solution to calculate and record estimates and invoices for print jobs. A director of Spunaline was known to be an expert in the area of costing for print jobs and claimed to have knowledge of computers. It was made clear that the supplier would have to assist Chippendale in implementing the computerised system. The supplied hardware and software failed to provide the capabilities Spunaline had claimed they would (and as a side issue the supplied software and manuals appear to have been unauthorised copies). The director of Spunaline and Spunaline were both found to have engaged in misleading and deceptive conduct.

Due to the massive proliferation of web sites and the resulting competition to attract potential visitors to the web site owner's site, in preference to numerous other similar sites, the web site developer may employ various techniques to maximise the popularity of the web site owner's web site. One method used is to include meta tags on the pages that constitute the web site. Meta tags are analysed by the search engines, but are not visible in the normal viewing layout of a web site page. Commonly, Meta tags will include subject headings that visitors may use to find the information contained on the web site. The web site owner should carefully monitor the meta tags which are used for their web site, not only to determine the relevance but also to avoid potential legal liability.

An American law firm, Oppedahl & Larson, which offers information in regard to intellectual property law on its web site, issued a complaint against a number of domain name owners who used the words “Oppedahl” and “Larson” in their meta tags. Effectively the domain name owners were alleged to be profiting from the reputation of Oppedahl & Larson and diverting visitors who were attempting to visit the Oppedahl & Larson site to their own sites instead. Although the Internet is often described as being a lawless jurisdiction, the laws, which protect intellectual property, still apply. Consideration should always be given to Section 52 and related provisions of the Trade Practices Act and relevant state legislation.

The use of a web site to sell goods and services outside Australia may present some legal issues for the web site owner to resolve. The laws governing the sale of goods and services are not the same in all jurisdictions and the legal aspects of doing business on the Internet are still being established. The US Courts are providing most of the case law at the moment but numerous similar matters are now before the Australian Courts.

In December 1996, the Minnesota District Court ruled that the State of Minnesota had jurisdiction over Granite Gate Resorts Inc and its President, who are based in Nevada. Granite Gate provided a commercial sports betting service which is illegal in Minnesota but represented that such a betting service was legal. The agreement between Granite Gate and its customers provided that all claims against Granite Gate must be commenced in Belize, whereas claims against customers could be brought in the customer's home state. The Court used a five-factor test (This test differs in Australia and other US States) to determine whether Minnesota Courts had jurisdiction and considered: the quantity of contacts, the nature and quality of the contacts, the connection between the cause of action and the contacts, the interest of the State in having the matter before the Courts of Minnesota and the convenience of the parties. Records produced by Granite showed that Minnesota residents had both Internet and telephone contacts with Granite and as the defendants had an advertisement on the World Wide Web, accessible by Minnesota residents, it was ruled that the State of Minnesota had jurisdiction to take consumer protection action against the defendants.

The web site owner should consider whether visitors from any jurisdictions should be barred from ordering goods or services from the web site. In a similar case, Georgia Tech Lorraine which is the European platform of the American Georgia Institution of Technology was sued by the French-Defence Association because its web site home page was only presented in English. A 1994 French law requires that public communications such as advertising and restaurant menus must be written in French and if they are also translated, it must be into more than one language.

A recent US decision with respect to legal jurisdiction and the Internet, Cybersell Inc v Cybersell Inc and Ors suggests that if your Web Site acts only as a means of advertising or as a source of information, the US Courts will not be able to assert jurisdiction. If, however, you sell goods and/or services over the Internet, it is possible that a US resident or business could issue legal proceeding in the US against you or your business. To reduce the risk of such litigation, you should consider having a requirement that the potential customer submits to the laws of Australia governing the agreement before the transaction has been completed.

The web site owner should consider the use of trade marks on the web site. The fact that a trade mark is registered in Australia, does not mean that it will not infringe other parties' trade marks outside Australia.

In 1981 in USA, Playboy Enterprises Inc obtained an injunction against Chuckleberry Publishing Inc and Tattilo Edtrice SpA to prevent them from selling their magazine Playmen in the US. The injunction prevented Tattilo from using the trade marks “Playboy” or “Playmen” or any other confusingly similar word in conjunction with the sale or distribution of English language publications and related products in the US. Fifteen years later in Playboy Enterprises Inc v Chuckleberry Publishing Inc & Others, the court found that by offering access to American customers via the Internet, Tattilo was in contempt of Court by breaching the injunction. Tattilo was ordered to: shut down its Internet site in Italy or refrain from taking new subscriptions from US residents, invalidate user names and passwords previously purchased by US residents and refund the remainder of their subscriptions, pay to Playboy, all gross profits earned from its Internet services provided to US residents, revise its Internet site to indicate that no subscriptions are available to US residents, pay Playboy's legal costs and pay US$1,000 per day until it complies with this order. This order is particularly important as the judgment for damages could most likely be transferred to Italy for enforcement under international convention obligations whereas the injunction may not have been enforceable outside of America.

The web site owner and web site developer should clarify who has the responsibility to determine whether trade marks used on the site infringe any other parties' intellectual property rights. The web site owner and web site developer should determine which party is responsible to check whether the domain name used for the web site infringes any intellectual property rights. The US has seen many recent cases of parties registering domain names which suggest an affiliation with a well known corporation which they hope to sell to the corporation in question.

As found in Panavision International v Toeppen this practice can violate the US Federal Trademark Dilution Act. Mr Toeppen was ordered to stop using the trademarks “Panavision” and “Panaflex” as domain names and to transfer the registrations of the domain names “panavision.com” and “panaflex.com” to Panavision International. Interestingly, Toeppen who is a resident of Illinois was sued in a California Court as his infringement was directed at a Californian business. If the web site owner was sued by an international firm for a similar infringement, there could be a large legal bill incurred to settle the matter.

In November 1997, the UK decision in British Telecommunications plc and Ors v One in a Million and Ors followed recent US decisions in finding that the registration of famous trade marks as domain names and their use would constitute a trade mark infringement even though the marks were not used by the defendant. The relevant marks were: marksandspencer.com; marksandspencer.com.uk; j-sainsbury.com; sainsburys.com; ladbrokes.com; virgin.org, bt.org; and cellnet.net. The Court ordered that One in a Million be restrained from the use or sale of the domain names in question and be compelled to assign the domain names to the plaintiffs, the trade mark owners. Even though the domain names in question included a number of non-UK names (in that they did not end in the .uk suffix) the UK Court found that actions involving these names occurring in the UK fell within its jurisdiction. If you register a domain name in a foreign country, you cannot consider yourself immune from legal action within your own jurisdiction, if that domain name infringes a trade mark. The allocation of domain names around the world tends to be on a first come, first served basis, but it should be remembered that it is possible that there will be more than one business or individual interested in owning certain easy to remember domain names.

In the UK matter of Pitman Training Ltd and Anor v Nominet UK and Anor, two businesses which originated from a break up of the Pitman business both claimed they had the right to own the domain name “pitman.co.uk”. Pearson was the first to register the domain name as its own. During the time when Pearson's web site was being developed, unknown to it, its registration was transferred to PTL. Both PTL and Pearson spent money advertising their web sites. When Pearson realised its domain name registration had been transferred, it persuaded Nominet, the body responsible for registering domain names in the UK to reassign the domain name to Pearson. PTL commenced legal proceedings against both Pearson and Nominet to regain control of the domain name. PTL was unsuccessful as not only had it been the second party to apply for the domain name, it was also bound by reason of the original break up and sale agreement to only use the word pitman in conjunction with the word training, unlike Pearson which was able to use the word pitman alone. In Australia, you may apply for a domain name which has some relationship with your company or business name or which is a combination of two or more common words. Without a pre-existing registered trade mark and/or substantial market recognition of your company or business name it may be very difficult to have a domain name reallocated to you should another party register it before you do.

5.1 Web site development is a relatively new phenomenon. 5.2 Web site development has risks and those risks need to be allocated between the parties. 5.3 Web site development produces intellectual property. The owner and its rights need to be determined together with the rights of the user. 5.4 Web site development is about trade and consequently involves making money and potential disputes. 5.5 Web site developers and web site owners should both make sure that they protect themselves with an appropriately drafted web site development agreement. 5.6 The damages which may potentially flow from an infringement of intellectual property on the Internet may be far greater than other forms of infringement because the potential audience is so large and the speed of transmission so great. Tempting though it may be to profit from other successful web sites, care should be taken not to infringe copyright, trademarks or other intellectual property.

STEVE WHITE
WHITE SW COMPUTER LAW
FEBRUARY 1999

www.computerlaw.com.au © White SW Computer Law 1999 This article is a guide only and should not be used as a substitute for proper legal advice, readers should make their own enquiries and seek appropriate legal advice.