A primer on legally setting up your Internet-based business.
So, all those rags-to-riches stories you've heard have compelled you to start a company on the Inter-net. Before you leave the real world behind and launch your virtual company, take a step back and assess the various legal issues that await you. You need to devote some time and effort to making sure you cover all of your legal bases. As you probably know, the nature of online commerce changes almost daily, so you will also have to keep up with the new laws and legal rulings that will affect your business down the road.
To get you started, I have listed here several of the legal aspects of setting up an e-business. While this checklist is not exhaustive, it will make you aware of the major bodies of law that can affect an online entertainment-related business. These include intellectual property rights, personal property rights, and contract rights. Because every business is unique, you have to decide which legal issues require your attention.
THE RIGHT RIGHTSCopyrights, trademarks, and domain names are among the most hotly contested issues in the entertainment industry. For entrepreneurs in online entertainment, establishing ownership of these rights is especially important - in fact, it's everything.
Trademark.In basic terms, a trademark tells the consumers the source of goods or services. Trademarks can take a number of forms, such as a name, a logo, or a phrase. For example, the Nike trademarks are "Nike," the Nike "Swoosh" and the phrase "Just Do It." Your first task is to decide exactly what you want to trademark.
Because an online business can cross state and international boundaries, you must seek federal trademark protection. The Web site of the U.S. Patent and Trademark Office (PTO) has very thorough and easy-to-follow instructions that walk you through the trademark-registration process online. (For the Web addresses of the PTO and other rights organizations, see the sidebar "The Rights Stuff.") After you've determined that your proposed trademark is available for use, the PTO requires you to (1) submit the words, phrases, or artwork you want to protect, (2) describe the class of business in which you are establishing your company, and (3) pay a filing fee.
The PTO then reviews the validity of your submission, taking in account challenges from other parties who feel your submission infringes upon their preexisting trademarks. Depending on the review's outcome, the PTO may register your trademark with the U.S. government. Once your trademark is registered, you may safely invest your time and money in making that name known to the public, armed with a good legal argument against anyone who claims to have owned it first.
Domain names.In e-business, your domain name is your calling card. It's how people remember your business, and it's what search engines pull up when people are searching for your type of product. Register your domain name at the same time you pursue your trademark protection. You should register it in as many configurations as possible and economically practical (for example, myname.com, my-name .com, myname. net, myname. org). Some online services can officially reserve a domain name for you. The Web site of the Internet Corporation for Assigned Names and Numbers lists all of the services that assign domain names.
Your desired domain name may already be registered by someone else, in which case you can either come up with a different name or purchase the domain name from the current owner. If you choose the latter option, be sure that the purchase contract spells out that you are the sole owner of the trademarks associated with the domain name. Also stipulate that the party selling you the name will not use or sell any domain name similar to or a variation of the name you just purchased.
Copyrights.The owner of any kind of copyrighted work has the exclusive rights to make copies of, display, perform, make revisions to, and publish that work. To use or sell third-party works on your Web site, you need the permission of the copyright holder. You may have to pay for those rights, either up front or based on the income you earn from those works. Payment arrangements will depend on the type of use. For example, if your site sells other artists' CDs and videos, your license agreement with the artists, their labels, and their publishing companies may allow you to post their work for no fee up front, but require you to give them some of the money you get from unit sales. Some of the copyrighted works you want licenses for are photos, artwork, text, music, and videos.
The performance rights societies (ASCAP, BMI, and SESAC) try to keep up with the licensing and royalty collections for musical compositions delivered through Web sites. If you get a blanket license from each society, you can play any song from their catalogs on your site. Contact the performance rights societies to learn the procedures for obtaining performance licenses.
Of course, if your site will feature only your music and artwork, you won't need permission to use it. You should, however, copyright anything you have created for your site. Doing this through the U.S. Copyright Office is easy.
On each page of your Web site, include a tagline noting that all images, text, and music are the exclusive property of the copyright holders, and give the date of the copyrights. Some on-line businesses opt instead to devote a page to the various copyrights and trademarks connected to the works on the site. It's a simple way of dealing with the issue because updating one page is easy.
Trade secrets.In the fast-moving and highly competitive world of Inter-net commerce, protection of concepts, contacts, technology, and information - also known as trade secrets - is crucial. The nondisclosure agreement (NDA) is the legal ammunition used to safeguard trade secrets. Parties to NDAs disclose what information they obtained prior to their relationship and then promise that they will not disclose to others their respective secrets or use the information for their own ends. For example, if I disclose to you what I already know at the outset of our business relationship, you can't claim that I developed the idea while we were working together and then try to stop me from pursuing it on my own in the future. Our NDA would prevent you from claiming that it was our idea and not mine alone.
NDAs can also protect technology, information, and intellectual property developed during the course of a business relationship. If you've thought of a brand-new online business or a completely different approach to an existing business, it is worth your time and effort to prepare a well-drafted NDA and have it ready when you let others - such as potential partners and investors - know about your idea.
Personal rights.In setting up your online business, you'll have to consider the personal rights of the individuals appearing on your site. These rights stem from our constitutional rights to privacy. Furthermore, laws in many states protect an individual's right to the publicity and exploitation of his or her name, likeness, performances, and biographical material.
So, before using any of those items online, obtain a release from the involved people that includes online display and distribution rights. Some audio/video production companies and record labels may have releases that were created before online rights were a consideration, so review the existing releases and negotiate to extend the rights to include online uses if necessary.
Keep in mind that so-called unofficial fan sites and flaming sites - which allow and even encourage people to share opinions and information about individuals - may open site owners to libel or disparagement lawsuits. Free speech online has been well respected and supported so far, but publishing false information that damages a person's character or reputation is a definite no-no. Check your site for any libelous material.
BUSINESS BASICSStructuring your company as a sole proprietorship, general partnership, joint venture, limited liability company, or corporation can have enormous impact on the future of your business. Determining which of these forms of business is best for you is beyond the scope of this checklist, but here are some questions to ask yourself: Do you want to take on partners? Are you raising capital to get the business started? If you intend to sell the business later on, how much of your ownership and management share are you willing to give up?
The media has focused a great deal of attention on the "instant millionaires" who cashed in on their stock options after their Internet companies went public. If you are handing out pieces of your company in exchange for spec work, just be sure you retain enough of the ownership to control the management decisions and see your vision through.
Negotiate contracts with third parties with the Internet in mind. Review your deal with your Internet service provider. ISPs handle business accounts differently from personal accounts, and technical reliability, volume of use, and types of services vary widely. Don't get locked into a long-term contract with an ISP that might not be able to meet your needs as your business grows. Your contracts should spell out royalty and sales splits with content providers (including artists and record labels), online distributors, and other e-commerce businesses.
The government is currently encour-aging sales on the Internet, but it's still determining federal and state taxes. Keep an eye out for any changes in tax policy. (See the sidebar "Online Research and Advice" to learn where to get the latest business and technology news and free legal and business advice online.)
FINE PRINTOnline entertainment is probably getting more publicity than any other type of e-business. As I was preparing this column, the Recording Industry Association of America (RIAA) filed major lawsuits against MP3.com, MP3Boards .com, and Napster. The outcome of these lawsuits will directly affect how music is delivered to consumers. If you're not careful, any one of the court decisions could make your business legally liable to consumers, developers, or content providers.
One method of covering yourself is to include a carefully drafted disclaimer on your Web site. The disclaimer should state that you are aware of the various laws regarding trademarks, copyrights, privacy, and the like; that you are making good-faith efforts to comply with all of these rights; and that those using your site to conduct business can do so only if they comply with all of these rights. Taking this precaution won't guarantee that you'll be absolved of all wrongs, but your disclaimer and the business actions you take (for example, ceasing to do business with a person who knowingly violates another person's copyrights) will put you on good legal footing.
LOGGING OFFOnline business is one of the most exciting phenomena the entertainment industry has experienced in recent years, and it doesn't show any signs of slowing down. Many historical, business, and legal analysts compare the impact of online entertainment to that of the printing press, radio, and phonograph records. By keeping up with the legal issues that change with the technology, you and your cyber-business can ride this fast-moving wave more safely.
Once you decide to take the plunge into the world of e-business, you must commit yourself to staying abreast of new technology and the laws involved in technology and business. Here are a few sites that might prove useful to you in establishing your business and keeping it legal.
There is no shortage of news outlets on the Web. In addition to the online arms of traditional news ser-vices such as the New York Times (www.nytimes.com) and CNN (www .cnn.com), you should frequently visit the news sections of such technology-specific sites as ZDNet (www.zdnet .com), Wired (www.wired.com), and Cnet (www.cnet.com).
You can also keep up with the major lawsuits that are brewing by checking in with the litigants them-selves, the RIAA (www.riaa.com) and Napster (www.napster.com). The Napster site's "Press Room"area contains many articles about Napster and the RIAA's lawsuit against the company. These stories are from reputable news organizations from around the world. Many of Napster's court depositions are also available as downloadable PDF files.
The RIAA site has general in-formation on copyright and piracy, as well as most of the organization's press releases regarding the suits against MP3.com and Napster. Bear in mind that these are press releases, not news accounts, so they only con-tain the RIAA side of the story. Still, reading them is a good way to follow the history of these cases.
Two legal sites worth checking out are FindLaw (www.findlaw .com) and FreeAdvice (www.freeadvice .com). The FindLaw site offers legal news, articles, discussion boards, and advice for small-business owners. The site's home page is text heavy and a little difficult to wade through, but clicking on the "Small Business" link takes you to a well-organized and helpful list of topics, such as step-by-step instructions on how to put to-gether a business plan and how to deal with intellectual property and contracts.
FreeAdvice also provides help for small businesses. Topics covered include getting a tax identification number and partnership types. The site is heavily oriented to hooking you up with a lawyer (the enormous blue Find a Lawyer button after every para-graph is a tip-off), but it does give plenty of free helpful advice. Free-Advice also sells legal forms at low prices (most cost about $10 or $11, and a few are $15).