e-Deal Making

The Daily Deal August 7, 2001 Tuesday

Copyright 2001 The Deal L.L.C.
The Daily Deal

August 7, 2001 Tuesday


LENGTH: 925 words

HEADLINE: E-adaptation

BYLINE: by Jonathan Bick

America has long-standing traditions and laws regarding transactions, but few laws specifically apply to e-commerce.

Not only are Internet-related companies a major source of deal making activity, but e-commerce is also playing a role in deal making itself - which opens the door to new challenges. America has long-standing traditions and laws regarding transactions, but few laws specifically apply to e-commerce. Companies, however, can use existing procedures to reduce problems in using e-commerce in deal making.

In particular, they should consider taking four steps normally associated with traditional venture capital, private equity placements and similar transactions to avoiding e-commerce legal difficulties.

Members of the deal making community - lawyers, investment bankers and corporate executives - may significantly reduce their legal risk if they:
* Rein in the use of manual and automatic communications;
*Properly position people and assets;
*Use appropriate legal electronic notices; and
*Take advantage of contracts.

Such steps are regularly employed in traditional transactions.

America's traditions and laws regarding transactions are premised on the idea that the participants are at some physical location. Dealmakers have long taken steps to limit legal risk by ensuring that their clients know where they must go to enforce their legal rights before participating in a transaction.

The same companies now use e-commerce and most likely are using networks, routers and hosts, each located in more than one physical location. Since e-commerce transactions do not fall easily into neat geopolitical legal spheres, as do traditional commerce transactions, dealmakers must specifically apply their traditional legal precautions to their e-commerce activities.

The first step to reducing and eliminating many e-commerce legal difficulties requires companies that use e-commerce to rein in the use of manual and automatic Internet communications, such as e-mails and "cookies."

While no Internet case law has described a universally consistent standard to which e-commerce users can tailor their actions to avoid litigation in distant courts, a U.S. District Court in Zippo Manufacturing Co. v. Zippo Dot Com Inc. detailed a set of guidelines often used in litigation.

The Zippo court guidelines were based on the finding that the likelihood a company could be compelled to answer for Internet related problems "is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet."

Practically speaking, this means that the more a dealmaker has back-and-forth e-communications, the greater the risk of a legal problem.

The two central interactive activities associated with almost all e-commerce are cookies and e-mail. The first is an automatic, two-way communication used to gather information, and the second is a manual two-way communication that has replaced both telephone and postal communications.

To limit legal exposure, dealmakers should not use cookies or respond to e-mail indiscriminately.

Dealmakers that use the Internet are well-advised to deploy software to limit the use of cookies and the responses to potential client e-mail to locations where the company is willing to do business.

The second step toward minimizing the legal difficulties associated with participating in e-commerce is for a dealmaker to limit where it locates its people, assets and real estate.

It is much more expensive and legally difficult for an e-commerce participant to sue an out-of-state (or an out-of-country) company than one that has people, assets and/or property nearby. Thus, companies that use e-commerce to make deals should try to make being sued more challenging by restricting their people, assets and real estate to as few locations as practical.

The third step dealmakers might take to reduce or eliminate e-commerce legal problems is use appropriate legal electronic notices.

Traditional deal making companies have routinely notified potential clients about where legal disputes must be resolved. Similarly, Internet users should be told what laws apply to deals negotiated via the Internet.

Likewise, e-mail programs should be adjusted to state that all of a firm's e-mail offers are subject to a particular state's law.

For example, the following text might appear under the signature line of each e-mail sent by a firm to a potential customer: "All legal disputes concerning this message will be resolved pursuant to the laws and courts of New York."

The fourth step companies engaged in e-commerce deal making should take to reduce legal problems is to use contracts similar to traditional agreements, to minimize legal difficulties.

Just as the e-mail that is sent to potential clients should contain notice of where customers must go to take legal action, so, too, should any e-commerce contracts.

E-commerce agreements should include self-serving disclaimers.

In addition, similar clauses should be incorporated into the terms and conditions required of each person who uses a company's e-commerce site.

For example, a New York venture capital firm should consider requiring each e-commerce site user to agree that "By accessing this site, you have directed your system to a computer located in New York and disputes arising out of the transaction associated with its use to be governed exclusively by the laws and courts of New York."

Jonathan Bick is an adjunct professor of Internet law at Pace Law School and Rutgers Law School. He is the author of "101 Things You Need To Know About Internet Law" (Random House 2000)

LOAD-DATE: August 8, 2001