The Environment of

Electronic Commerce: Legal,

Ethical, and Tax Issues
 Objectives
In this chapter, you will learn about:
• Laws that govern electronic commerce
activities
• Laws that govern the use of intellectual
property by online businesses
• Online crime, terrorism, and warfare
• Ethics issues that arise for companies
conducting electronic commerce

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 Objectives
• Conflicts between companies’ desire to
collect and use data about their customers
and the privacy rights of those customers

• Taxes that are levied on electronic commerce

activities

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 The Legal Environment of Electronic
Commerce
• Online businesses
– Must comply with same laws and regulations
that govern the operations of all businesses
– Face complicating factors
• Web extends company’s reach beyond
traditional boundaries
• Web increases speed and efficiency of
business communications
• Web creates network of customers

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 Borders and Jurisdiction
• Territorial borders in the physical world

– Mark the range of culture and reach of

applicable laws very clearly

• European Union (EU)

– Allows free movement within the EU for

citizens of member countries

– Adopted a common currency

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 Culture Helps Determine Laws and
Ethical Standards

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 Borders and Jurisdiction (Continued)
• Power
– A form of control over physical space and the
people and objects that reside in that space
– A defining characteristic of statehood
• Jurisdiction
– Ability of a government to exert control over a
person or corporation
• Effects
– Impact of a person’s behavior

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 Borders and Jurisdiction (Continued)
• Legitimacy
– Idea that those subject to laws should have
some role in formulating them
• Notice
– The expression of a change in rules
• Constructive notice
– Individuals become subject to new laws and
cultural norms when they cross an
international border

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 Jurisdiction on the Internet
• Power, effects, legitimacy, and notice
– Do not translate well to the virtual world of
electronic commerce
• Governments that want to enforce laws
– Must establish jurisdiction over business
conduct
• Contract
– Promise or set of promises between two or
more legal entities

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 Jurisdiction on the Internet
(Continued)
• Tort

– Intentional or negligent action taken by a legal

entity that causes harm to another legal entity

• Court has sufficient jurisdiction in a matter

– If it has both subject matter jurisdiction and

personal jurisdiction

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 Subject-matter Jurisdiction

• Court’s authority to decide type of dispute

• Personal jurisdiction
– Determined by residence of the parties
• Forum selection clause
– States that contract will be enforced according to
laws of a particular state
• Long-arm statutes
– Create personal jurisdiction over nonresidents
who transact business in the state

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 Contracting and Contract
Enforcement in Electronic Commerce
• Contract
– Includes three essential elements
• An offer, an acceptance, and consideration
– Formed when one party accepts the offer of
another party
• Offer
– Commitment with certain terms made to
another party
• Acceptance
– Expression of willingness to take an offer

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 Contracting and Contract Enforcement
in Electronic Commerce (Continued)

• Consideration

– Agreed upon exchange of something valuable

• Implied contract

– Formed by two or more parties that act as if a

contract exists

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 Contracting and Contract Enforcement
in Electronic Commerce (Continued)

• Statute of Frauds

– Following must be created by a signed writing

• Contracts for sale of goods worth over $500

• Contracts requiring actions that cannot be

completed within one year

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Contracting and Contract Enforcement
in Electronic Commerce (Continued)
• A writing
– Exists when the terms of a contract have been
reduced to some tangible form
• Signature
– Any symbol executed or adopted for the
purpose of authenticating a writing
• Warranties on the Web
– Any contract for the sale of goods includes
implied warranties

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Contracting and Contract Enforcement
in Electronic Commerce (Continued)
• Warranty disclaimer
– Statement declaring that seller will not honor
some or all implied warranties
• Authority to bind
– Determining whether an individual has
authority to commit a company to an online
contract
• Terms of service (ToS)
– Intended to limit Web site owner’s liability

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 Use and Protection of Intellectual
Property in Online Business

• Intellectual property
– Includes all products of the human mind
– Products can be tangible or intangible
• Intellectual property rights
– Include protections by governments through
• Granting of copyrights and patents
• Registration of trademarks and service marks

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 Web Site Content Issues
• Copyright
– Right granted by government to author or creator
of a literary or artistic work
• Creations that can be copyrighted
– All forms of artistic or intellectual expression
• Works copyrighted by corporations or not-for-
profit organizations
– Protected for 95 years

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 Web Site Content Issues (Continued)
• Fair use of a copyrighted work
– Includes copying it for use in criticism,
comment, news reporting, teaching, or
research
• Vicarious copyright infringement
– Entity becomes liable if
• It is capable of supervising infringing activity
• Obtains financial benefit from infringing activity

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 Patent Infringement
• Patent
– Exclusive right granted by government to an
individual to make, use, and sell an invention
• To be patentable
– Invention must be genuine, novel, useful, and
not obvious, given current state of technology
• Business process patent
– Protects specific set of procedures for
conducting a particular business activity

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 Trademark Infringement
• Trademark
– Distinctive mark, device, motto, or implement
that a company affixes to goods it produces
• Service mark
– Used to identify services provided
• Trademark
– Name that a business uses to identify itself
• Common law
– Part of British and U.S. law established by the
history of court decisions

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 Domain Names and Cybersquatting

• Cybersquatting
– Registering trademark domain name
• Name changing
– Registering misspelled variations of well-known
domain names
• Name stealing
– Ownership of a site’s assigned domain name is
changed to another site and owner

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 Domain Names and Cybersquatting
(Continued)
• U.S. Anticybersquatting Consumer Protection
Act (ACPA)
– Signed into law on November 29, 1999
– Protects trademarked names from being
registered as domain names by other parties
– Parties found guilty of cybersquatting
• Can be held liable for damages of up to
$100,000 per trademark

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 Name Changing and Name Stealing
• Name stealing

– Someone other than a domain name’s owner

changes ownership of the domain name

• Domain name ownership change

– Owner information is changed in registrar’s

database to reflect a new owner’s name and
business address

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 Protecting Intellectual Property Online
• Information Technology Association of America
(ITAA)
– Trade organization representing U.S.
information technology businesses
– Proposed following solutions to problems in
digital copyright protection
• Host name blocking
• Packet filtering
• Proxy servers

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 Defamation
• Defamatory statement
– Statement that is false and injures reputation
of another person or company
• Product disparagement
– If defamatory statement injures reputation of a
product or service instead of a person
• Per se defamation
– Court deems some types of statements to be
so negative that injury is assumed

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 Deceptive Trade Practices
• Federal Trade Commission
– Regulates advertising in the United States
– Publishes regulations and investigates claims
of false advertising
– Provides policy statements
– Policies cover specific areas such as
• Bait advertising
• Consumer lending and leasing
• Endorsements and testimonials

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 Online Crime, Terrorism and Warfare
• Online crime
– Obstacles faced by law enforcement
• Jurisdiction
• Difficulty applying laws written before the Internet
became prevalent to criminal actions
• Online warfare and terrorism
– Sustained effort by a well-financed terrorist
group could slow down operation of major
transaction-processing centers

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 Ethical Issues
• Web businesses
– Find ethical issues are important to consider
when making policy decisions
• Electronic Communications Privacy Act of 1986
– Main law governing privacy on Internet today
• Differences in cultures throughout the world
– Have resulted in different expectations about
privacy in electronic commerce

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 Ethical Issues (Continued)
• Principles for handling customer data
– Use data collected to provide improved
customer service
– Do not share customer data with others outside
your company without customer’s permission
– Tell customers what data you are collecting and
what you are doing with it
– Give customers the right to have you delete
any of the data you have collected about them

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 Taxation an Electronic Commerce
• Income taxes
– Levied by national, state, and local governments
on net income generated by business activities
• Transaction taxes
– Levied on products or services that company
sells
• Property taxes
– Levied by states and local governments on
personal property and real estate used in
business
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 Nexus

• Connection between a taxpaying entity and a

government

• Activities that create nexus in the United

States

– Determined by state law and thus vary from

state to state

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 Summary
• Legal concept of jurisdiction on the Internet
– Still unclear and ill defined
• Relationship between geographic boundaries
and legal boundaries
– Based on power, effects, legitimacy, and notice
• Innocent inclusion of photographs, and other
elements on a Web page
– Can lead to infringement of trademarks,
copyrights, or patents

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 Summary
• Internet
– Can be used to perpetrate crimes, advocate
terrorism, and wage war
• Web business practices
– Have led to questions of ethics regarding online
privacy
• Companies that conduct electronic commerce
– Subject to same laws and taxes as other
companies
– International nature of business complicates their
tax obligations

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