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Hyper-Liability
New Jersey Law Journal May 6, 2002
Copyright 2002 NLP IP Company - American Lawyer Media
May 6, 2002
BYLINE: By Jonathan Bick The Author is of counsel to Brach Eichler (NYC and NJ) and is an adjunct professor of Internet law at Pace Law School and Rutgers Law School. He is also the author of “101 Things You Need To Know About Internet Law” (Random House) BODY: Companies that maintain Web sites must be vigilant to scrutinize the substance of the sites, including content accessible via Internet links from the company's site to a third-party site. If not, the potentially deceptive nature of hyperlinks can lead to direct and derivative liability arising from actively using hyperlinks and from passively allowing others to hyperlink to an existing Web site. Hyperlinks are technically Hypertext Reference links. These links permit an Internet user to jump from one Web site to another. When an Internet user clicks on the link, that act activates software code written in the language of the Internet, Hypertext Markup Language. This software instructs the Internet user's Web browser software (such as Microsoft's Internet Explorer) to go to the linked location, which is often another Web site or another part of the Web site itself, such as a home page. Typically, one commercial retail Web site contains a hyperlink to another's
commercial retail Web site. That linking may implicitly disparage the
goods on the linked site and thereby tarnish the trademark associated
with the linked site by the association with the linking site. Alternately,
manufacturers and distributors of low-quality goods often seek to improve
the image of their goods, passing the goods off as associated with better-quality
producers by hyperlinking to sites associated with better-quality producers.
Hypertext links may create legal difficulties in a roundabout manner. An advertiser, for example, links to a source that initially provided reliable information but which subsequently turns out to contain misleading or harmful information. It has been five years since the Shetland Times linking case in Scotland found that Internet links can be unlawful. See Shetland Times Ltd. v. Wills, Scot. Sess. Cas. (Oct. 24, 1996), 1 Eiplr 723 (Nov. 1 1997). The now-established U.S. principle is that some links can be unlawful. In general, the courts have found that one Web publisher's attempt to link to other Web sites or content may create liability. In particular, the courts have found that when links are designed to confuse Internet users, to evade court orders, to evade statutory prohibition or to promote illegal conduct by others, links are unlawful. The use of hyperlinks by businesses has caused legal difficulties primarily
in the context of unfair competition, trademark or copyright infringement,
misappropriation and violation of Securities and Exchange Commission
rules. A trademark is any word or symbol used by a business to identify the firm's goods or services. Trademark law guarantees that a person who owns a mark will not be forced to compete with another whose mark is so similar as to confuse a potential buyer (infringement) or to compete with another who uses the mark in question to promote products that do not benefit the mark holder (dilution). Trademark law also guarantees that a mark owner will not have to compete with another who just plain uses the mark as his or her own (passing off). Companies that use hyperlinks risk liability for violations of a trademark
owner's rights by a hyperlinked third-party site. A company's use of hyperlinks can also lead to a charge of false advertising.
Section 43(a) of the Lanham Act contains a broad prohibition against
the making of false statements in connection with commercial advertising
or marketing, and has been characterized as creating a federal law of
false advertising, deceptive marketing or unfair competition. A firm's
use of a hyperlink that contains content that is a "false or misleading
description of fact" may result in legal difficulties. Under U.S. copyright law, copyright protection attaches to every creative work as soon as the work is created and "fixed in any tangible medium of expression." Therefore, a company that uses hyperlinks to allow users to access
copyright content without permission may be violating one or more of
the copyright owner's five exclusive rights -- the rights of reproduction,
distribution, adaptation, performance and public display. The use of a hyperlink by a company's Web site may also be a basis derivative liability under two theories. First, a hyperlink may induce, cause or materially assist another in the infringement. In such a case contributory infringement may be an issue. Second, the doctrine of vicarious liability derived from the doctrine of respondeat superior may apply. Such a liability may arise when a company's site uses a hyperlink and fails to supervise the infringing activity of others. A common-law tort theory of information misappropriation exists in U.S. law, which essentially prohibits the unauthorized interference by one party with another party's valuable and time-sensitive information. In International News Service v. Associated Press, 248 U.S. 215, (1918),
the Supreme Court recognized the theory and held actionable one news
service's attempt to pirate the content of a rival. As demonstrated
inNBA v. Motorola, 105 F.3d 841(1996), this cause of action has modern
application. Although trademark infringement and dilution, passing off, false or deceptive advertising, copyright infringement and misappropriation have figured in several important Internet linking disputes, SEC actions with respect to hyperlinks in cases where corporations have used the Internet to raise capital have resulted in the most financially significant legal liabilities. The SEC attempts to reduce or eliminate fraud with respect to Internet communications between a company and the public with Rule 10b-5. Promulgated in 1942, Rule 10b-5 mirrors §17(a) of the 1933 Securities Act, 15 U.S.C. 77, except that Rule 10b-5 extends to misstatements occurring in connection with either "a purchase or sale of any security," while §17(a) of the 1933 act focuses only on fraudulent sales or offers to sell. This rule has brought about hyper-liability for companies that use hyperlinks for promotion. Since courts may find a company liable for fraud under Rule 10b-5 when its Web site contains a link to a misleading or incorrect analyst report, some companies have eliminated this liability by avoiding the use of hyperlinks on their site. However, such a prohibition has proved to be too big a hindrance to many companies that need to disseminate such information to the public. The SEC has warned companies that hyperlinks to third-party Web sites could create legal difficulties ("Use of Electronic Media," Securities Act Release No. 33,7856 (May 4, 2000). Companies that hyperlink to third-party Web sites risk having the content of the third-party site imputed to the company. The imputation will most likely be made if the third-party site contains impermissible communications. Material misstatements and omissions that appear on the Internet will satisfy the "in connection with" requirement of Rule 10b-5. In particular, Rule 10b-5 allows actionable fraud complaints to be filed in connection with material misinformation associated with the purchase or sale of a security. Thus, serious securities law consequences can arise from the content
on company-sponsored Web sites or from the content on sites linked to
company-sponsored Web sites. Companies will be liable for the content of linked third-party sites to the extent to which the linked sites constitute an adoption of the statements contained on those sites. Consequently, at the very least, management should be careful to disclaim responsibility for statements that may appear in third-party Web sites linked to the company Web site. Typically, this disclaimer appears in the "Terms of Use" section of a company site. A typical disclaimer states that the Web site in question contains "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The disclaimer usually goes on to state that the information on the
Web site is based on then-current expectations of future events, and
if any of those underlying assumptions prove to be inaccurate, actual
results could vary materially from the company's expectations as detailed
on the Web site. An appropriate disclaimer will list and describe known
risks, uncertainties and other factors. Nearly two years ago, the SEC issued a release that, among other things, addressed business Web sites ("Use of Electronic Media," Securities Act Release No. 33,7856 (May 4, 2000)). This release detailed how the SEC will consider a number of factors in determining whether a hyperlink to a third-party Web site on a company-sponsored Web site will operate as the company's adoption of the information contained on the third-party site. First, the context of the hyperlink must be considered with the following question being addressed: "Does the corporation expressly adopt or endorse the statements that may be contained on the third-party Web site hyperlinked to the company Web site?" If there is such an endorsement, the corporation may be held accountable by statements made on the third-party Web site. Second, the SEC takes the position that if the hyperlink exists within a portion of the company-sponsored Web site that constitutes a document that satisfies delivery requirements under the federal securities laws, the company will be deemed to have adopted the statements contained on the hyperlinked third-party Web site. Third, the SEC indicated that if the company is embarking on an offering of securities and is "in registration" under the 1933 act, then there is a strong presumption that the company has adopted statements contained in Web sites hyperlinked to the company's Web site. The period during which an issuer is "in registration" begins "at least from the time an issuer reaches an understanding with the broker-dealer which is to act as managing underwriter prior to the filing of a registration statement and the period during which dealers must deliver a prospectus" (See Sec. Act Rel. No. 33, 5180). To be specific, the "Use of Electronic Media," Securities
Act Release No. 33, 7856, stated that when an issuer is in registration
and the issuer establishes a hyperlink (that is not embedded within
a disclosure document) from its Web site to information that meets the
definition of an "offer to sell," "offer for sale"
or "offer" (see Section 2(a)(3) of the Securities Act), a
strong inference arises that the issuer has adopted that information
for purposes of Section 10(b) of the act and Rule 10b-5. Thus, an issuer
in registration must be particularly sensitive to the use of hyperlinks.
Another factor in determining whether information contained in a third-party Web site will be attributed to the company is the likelihood of confusion. One of most effective ways to prevent confusion is to give the Internet user effective notice. So attorneys should suggest that the hyperlink from the company-sponsored Web site present a separate screen announcing that the viewer is leaving the company's Web site. The use of such a technique will reduce or eliminate the likelihood that the company will be deemed to have adopted the statements on the third-party's Web site. Company disclaimers of liability for statements contained in hyperlinked third-party Web sites will not in and of themselves insulate the company from liability if there are other indications that the company has somehow endorsed the statements. However, statements and disclaimers will insulate an issuer from liability for hyperlinked information when the relevant facts and circumstances otherwise indicate that the issuer has adopted the information. Intermediate screens force an Internet user to see a notice or disclaimer
when moving off a company's Web site. If such a notice or disclaimer
clearly separates the company site from the linked site, legal difficulties
can be minimized or eliminated. This is particularly applicable to analyst
reports and favorable press that could potentially condition the market
in the prefiling stage. The manner in which the hyperlinked information is presented will be considered in determining whether hyperlinked information from third-party Web sites should be attributed to the company whose Web page contains the hyperlink. A company's selectivity, or lack thereof, in determining which third-party sites are hyperlinked to the company Web site may act in favor of attributing the information on the third-party site to the company. For example, if the hyperlinked Web sites do not represent the broad range of information that may be available, the content of the hyperlinked sites may be attributed to the company. Similarly, an issuer that selectively establishes and terminates hyperlinks to third-party Web sites, depending on the nature of the information about the issuer on a particular site, may be viewed as attempting to control the flow of information to investors. Again, this suggests that the issuer has adopted the information during the periods that the hyperlink is operative. The screen design of a Web site that provides hyperlinks will also be a factor. The more attention drawn to a hyperlink, the more likely it is that the information on that third-party Web site will be deemed to have been adopted by the company providing the hyperlink. The layout of the screen containing a hyperlink is also relevant. Any effort to differentiate a particular hyperlink from other hyperlinks on an issuer's Web site (through its size or location, or the use of flashing or highlighted text) that draws an investor's attention to the hyperlink may suggest that the issuer favors the hyperlinked information over other information available to the investor. The SEC has stated, however, that a hyperlink to a third-party Web site contained within a required document will always result in the issuer having adopted the content of the site. In such a case, a disclaimer is of no practical use. In December 1995, Congress passed the Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67 (Dec. 22, 1995), which contained important provisions concerning a safe harbor for projections and forward-looking statements. The safe harbor extends to any forward-looking statement identified as such and "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement." The PSLR does not define "meaningful cautionary statements." However, it is generally assumed that if companies accompany hyperlinks with such a cautionary statement, they can shield themselves from liability for misstatements in any analyst reports. This understanding is supported by the legislative history behind the PSLR. The statute indicates that protective statements must contain specific information that would provide investors and others with an understanding of identifiable factors that could render the forward-looking statement or projections inaccurate. In Rasheedi v. Cree Research, Inc., (1997 U.S. Dist. LEXIS 16968) the court validated press releases containing cautionary statements that "actual results may differ" and listing "important factors" that may cause projections to be inaccurate as a basis for finding a company not liable for securities-related violations. Thus, it is likely that the potential for avoiding hyperlink liability
by companies may become as simple as the inclusion of a standardized
boilerplate statement accompanying every hyperlink. |
