Legal Time Bombs Ticking for E-tailers

SYDNEY (03/01/2000) - A cluster of legal time bombs ticking away in the digital economy are moving closer to setting off an explosion of litigation.

That's the view of some leading e-commerce specialists in Australia's leading law firms. Leading their list of hotspots are online contracts, electronic record keeping and software patents.

Three-quarters of the online contracts currently displayed on Web sites are unenforceable, warns Phillip Argy, a specialist with Big Three law group Mallesons StephenJaques. They won't stand up in court because they don't correctly invoke the legal principles underpinning contract law, he says.

It is not that sites selling goods and services are using the wrong legal phrases in their online disclaimers of liability. The problem lies in the way the disclaimers are laid out on the page and the way they must be validated by clicking an "I accept" button. "If it can be argued the enter key was hit accidentally or without a purchaser having the opportunity to read the agreements, the contracts are not enforceable," says Argy.

Validity of contracts are obviously a vital concern for e-commerce sites such as online share trading businesses. They must have bullet-proof acceptance processes to prove a buyer intended to enter into the contract and agreed to any limits placed on a seller's liabilities. Says Argy, "That is not possible unless the layout of the site precludes all other possibilities such as accidental buffering of keystrokes or a baby playing with the mouse while mum is on the phone."

Even if a site fixed such flaws today, it will have to hold its breath and hope a problem doesn't arise from what could be years of retrospective exposure.

A second e-commerce legal hotspot relates to deficiencies in electronic record keeping. To satisfy certain corporate and tax regulation, companies must keep data for up to 13 years. In electronic format, the problem is not so much with the data itself but with ancillary details such as who kept the record, who had access to it and proof that its integrity has been preserved.

Many of those details are natural byproducts of manual paper systems but can be overlooked in digital systems. Other record-related difficulties stem from vast changes in corporate software and hardware over relatively short time frames, says Argy.

"A lot of people are finding their 10-year-old records are perfectly preserved on tape in air-conditioned shelves. Then they discover the tape drives they need to read the records were sold off during a downsizing... or they can't find a machine that can read a 5.25-inch diskette any more," Argy said. "In the next 12 to 18 months, there will be test cases in which major public companies will be prosecuted for failing to keep and reproduce statutory records."

A third e-commerce issue already triggering court cases has to do with the swelling number of patents being filed on e-business processes and software.

The most notorious are probably the patent claims by Open Source over shopping trolleys and by Amazon.com Inc. over the one-click ordering process.

"An amazing amount of software functionality is being locked up by patent holders," says Simon Pollard, a veteran Internet specialist with law firm Gilbert and Tobin. "There are already software vendors who won't give an indemnity their software doesn't infringe third party rights because they can't keep track of the number of patents being granted. And if they can get patents in the U.S., they can apply for patents in Australia."

Australian e-tailers such as David Gold, a former LookSmart director who now heads online department store dstore, concede that there are potential legal problems. But he's betting it will be difficult to enforce and he has more immediate issues to worry about.

"A lot of debate has been going on in the U.S. over the patent issue, there have been some court cases and there are interesting times ahead," says Gold.

"But one-click ordering and the electronic shopping trolley are not revolutionary concepts. So a lot of this has yet to be tested in terms of how far you can extend the concept of patenting business ideas."

Even if U.S. courts agree with patent claimants, "It is going to be very hard to enforce in Europe and Australia," Argy said.

Getting patents set aside or negotiating agreements with patent holders is one of Argy's specialties. "Patents have a lot of bluff value and there is a lot of pragmatism in the industry about them," he says.

"It is often possible to negotiate a one dollar perpetual licence from a patent claimant who doesn't want to risk having the patent revoked," Argy added.

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