Research Trends and Conclusions: Internet & e-Commerce 2009
Emma Notfors -
Online businesses are proving to be resilient during the worldwide recession. This spring, Amazon posted a 24 per cent rise in profits while both Ebay and Google, despite a fall in profits, have performed better than analysts expected.
Because of the relative success of the online retail industry, internet and e-commerce lawyers are finding that their practice area is well-placed to weather economic storms. Part of the reason for this is that a significant proportion of new business ideas and technologies are internet-based.
Companies are competing to become involved with new internet and digital platforms such as 3G, connected television and internet television. Established online clients have been trying to move into the mobile sphere, even doing so at a loss, simply to increase market share. The vibrancy of the online business community means that lawyers must apply regulations to new platforms, which can be difficult if the rulemakers have not anticipated new technologies. As Geert Glas at Allen & Overy LLP in Belgium puts it: "The challenge is for the law to be only one step behind, rather than two or three." The speed at which the internet continues to develop means that there is a need for lawyers with specialised and up-to-date knowledge who can deal with the legal implications of new businesses and technologies.
The recent controversy in the UK over the use of IT company Phorm's software provides a useful example of a new technology whose legal implications caused e-businesses to seek advice from their lawyers. Phorm, a company specialising in advertising software developed a system that uses deep packet inspection to identify the online habits of internet users (essentially recording which pages individual users view) to facilitate personalised online advertising. This technology could increase the profitability of online marketing and lawyers were called on to advise on the implications of implementing the technology on clients' online platforms. In 2008, the technology caught the attention of the UK's information commissioner. In April 2009, the European Commission announced that it was opening infringement proceedings against the UK over ISPs use of Phorm technology, on privacy grounds.
Opinion about the launch of Google Street View (a map that uses photographs of streets that include private residences, vehicles and businesses) also remains divided and the company has had to vary its services in different countries to comply with privacy regulations. Developers of new technology must contend not only with legislation and regulators, but also with public opinion. As Alexander Carter-Silk at Speechly Bircham LLP in London pointed out, "a healthy and influential court of public opinion presides - new technology offers a world of possibility but it is not necessarily socially or morally acceptable."
While e-commerce is a robust sector when it comes to new ventures, the same is not necessarily true of established businesses trying to adapt to the brave new world of online retailing. Carter-Silk gives the music industry as a case in point. "It is an example of a traditional business model that wants to protect its distribution channel. It is so embedded that the new technologies of the internet have been difficult for it to handle. In the 1980s, huge chunks of the manufacturing industry disappeared and were replaced by the service industry. Now, it seems likely that the growth of e-commerce will result in the disappearance of whole industry sectors." Because the music industry has been unable to convert itself entirely successfully into an online distribution channel, it is trying to enforce a set of legal boundaries that, as one interviewee put it, "effectively criminalises a large proportion of consumers".
The pressure exerted by having to compete online and maintain healthy profit margins has of course been added to by the strain of the global recession. This has affected the budgets of clients. Ian Ballon, of Greenberg Traurig LLP in California, points out that, "Companies are under a lot of pressure to cut back on perceived discretionary spending," and this is echoed by Richard Kemp of Kemp Little LLP: "If new technology doesn't result in cost reduction this fiscal year, then as a rule of thumb what we're seeing in the marketplace is that it is unlikely to be implemented at the moment. There are high expectations of new ideas to deliver cost benefits efficiently and fast." This tendency applies to new technologies as well as restructuring business models and can also affect the client-lawyer relationship. One upshot is that companies "expect far more reasonable fees, which can benefit smaller law firms", according to one source. Also, there has been a marked increase in rights enforcement and of litigation generally as companies pursue IP infringements that might previously have been let slide.
Outsourcing
In these straitened times, businesses are particularly keen to reduce non-essential expenditure. We received reports of clients pursuing ‘value-for-money clauses' in contracts with their outside counsel. Companies are using benchmarking, particularly in outsourcing contracts. It has been reported that some clients have even tried to terminate a contract with their outside counsel once they have found better value for money elsewhere. As one lawyer notes, "If a company cannot get a better deal with their law firm, they might try to wriggle out of the contract, which could lead to litigation as they would aim to find breaches of contract to facilitate the means of an exit." Although it is unclear how common this is, it is an example of how economic hardship can cause strained relations between clients and their legal advisers.
Aside from this, outsourcing continues to be a major area of work for internet and e-commerce lawyers. Indeed, according to Patrick van Eecke at DLA Piper in Belgium, it "can form part of companies' strategy to tackle the downturn". The area has diversified to involve shorter contracts, co-sourcing and multi-sourcing as well as second-generation outsourcing and re-sourcing as organisations try to identify the business model that will give the best value for money. In recent years, outsourcing had become a way for organisations to enhance flexibility and responsiveness. With the onset of the recession, emphasis is being placed on the benefits of outsourcing to cut costs.
Although outsourcing should result in a considerably more financially streamlined operation, initial costs can be high - even prohibitive. The legal process of setting up a new deal can be long and complicated. "The costs associated with large outsourcings include upfront investments. At the moment, organisations are finding that the case for any large initial investment is being heavily scrutinised," according to one of our sources. Counter-intuitively, it seems that while it is still seen as a potential money-saving measure for businesses, the financial crisis has actually precipitated a backlash against outsourcing. Those organisations with an already well-established outsourcing structure will probably still benefit from the cost reductions it can offer, but those who had hoped to start outsourcing now might find it difficult. Some lawyers who specialise in this area are experiencing a decrease in the amount of work, but companies that are diversifying their outsourcing operations have taken up some of the slack.
Data protection represents an area in which outsourcers and their legal counsel must be especially vigilant. The outsourcer is often held responsible by regulators to ensure that the subcontractor also complies with the law. This is especially true of in the case of pharmaceutical companies, to whom confidentiality is of paramount importance, yet can be problematic to maintain. Electronic databases containing patient data, such as those used in clinical trials, present a particular challenge. The results of clinical trials are usually only valuable when the data refers to specific individual cases. Because the information is specific to each patient, it is difficult to make each data set fully anonymous. Regulations are strictly enforced in the pharmaceutical sector and fines can be very high. This underscores the need for skilled and specialised lawyers who can handle any problems that may arise, or, even better, prevent them from arising in the first place.
Intellectual Property
As e-commerce continues to develop as a platform for commercial activity, legal practice in this field absorbs the skills and knowledge drawn from other practice areas such as intellectual property law, life sciences, and mergers and acquisitions. "Clients are now demanding that lawyers in this area are highly specialised," says Clive Thorne of Arnold & Porter LLP in London. He goes on to explain that "internet law has become a separate field of IP practice, especially in relation to online trading and the online use of trademarks. Because it transcends international boundaries and moves so quickly, it is difficult for the law to keep up, which is why there are so many cases in this area." Intellectual property remains one of the main areas of expertise among the lawyers included in this book. New business start-ups often forgo the traditional route and begin with an online presence, which would normally involve tasks such as domain name registration and the filing of patents (especially in the US) to protect the new trading concept or business idea.
Regulators are in a constant struggle to keep up with new online businesses and the development of technologies. The Internet Corporation for Assigned Names and Numbers (ICANN), which coordinates the naming system of online locations, is expected to establish a new set of rules that will allow for a theoretically unlimited amount of global Top Level Domain Names (gTLDs). Details of possible future trademark protection relating to gTLDs have still to be worked out. ICANN is considering expanding the list of reserved gTLDs to include some well-known marks and there will be a degree of trademark protection available to holders of both registered and common law marks. Possible points of concern are that prospective trademark protection measures will stifle competition and that much of the responsibility for enforcing rights is placed with the trademark holder. ICANN recently announced delays in the implementation of this plan, and now expects that unlimited gTLDs will not be available until 2010, at the earliest.
Although regulation of domain name creation may be difficult, there is no doubt that it is necessary. Many interviewees remarked that there had been an increase in the number of global services offering specialist knowledge in domain name dispute resolution, as this has become an increasingly busy legal area. A wider trend identified by internet IP specialists is that the tendency in the United States of "letting all patents through" is being curbed, while the regime in the European Union, previously known for its stringency, is becoming more liberal. As one interviewee put it, "Unfortunately, the two
are likely to just swing past each other instead of meeting in the middle."
Internet-related dispute resolution is also being affected by the desire to cut costs and maximise income. Many clients are moving domain name disputes out of court in an effort to reduce costs. Out-of-court settlements or alternative dispute resolution, especially where domain name transfers are concerned, will often be quicker, cheaper and overall more satisfactory for both parties.
As far as litigation is concerned, a number of our sources claimed to have seen an increase in "haggling over credit support and bond arrangements while rights holders are becoming far more vocal". One California-based lawyer described the rise of the practice in which companies buy the patents of inventors who have not been able to enforce their intellectual property rights in exchange for the right to damages following successful patent infringement lawsuits. This practice is just one reason that patent litigation that has proliferated in the past five years. Arnold & Porter LLP's Clive Thorne laments the difficulty when accountants "undervalue the importance of internet IP rights, which need to be analysed in any insolvency." Recognising the value of IP assets is more important now than it has ever been. And often internet lawyers' specialised knowledge is needed if a business is going to realise the full value of these assets.
Databases & Data Protection
Most e-businesses maintain customer databases, which can be vulnerable to online piracy and breaches of data protection rules and, increasingly, customers are concerned about online privacy. Any business needs expert legal counsel to outline contingency plans, conduct due diligence reviews about data security and, in the event of a mishap, help clients deal with the aftermath. Although data breaches are unusual, vigilance in this area is necessary simply because of how valuable databases are. Hackers, in some cases, can create a ‘trapdoor' enabling illicit access to a data system and then sell the method of entry to a third party. The global nature of the internet creates further difficulty for online businesses maintaining databases along with a greater need for professional advice. The data regulations of several jurisdictions often apply, and businesses must comply with the rules in every country, most often, but not only, those in which their customer base is the strongest. The European Union is planning to implement new data breach notification laws, based on the American model, so some change in this area is inevitable and organisations will need to adapt their policies.
The intrinsic value of data, databases and online trademarks is being recognised and exploited in several ways to maximise revenue during these tough times for business. The recently published Digital Britain Report calls personal data "the new currency of the digital world" and several of the lawyers interviewed in the run-up to the publication of this article recognised the importance of these digital assets in view of the recession. As Alexander Carter-Silk points out, "Data and databases that allow access to a segment of the customer base are a core asset that will remain attractive to organisations and other companies."
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The legal implications of new technologies produce a constant stream of work for internet and e-commerce lawyers as well as regulators. Novel legal issues are continually being raised by new and converging platforms and technologies and it is the vitality of the online business sector that is causing this practice area to grow and develop. Specialised lawyers are essential to the protection of virtual assets, like electronic databases and internet intellectual property rights. The value of virtual assets is being increasingly recognised, as can be seen in the rise of IP litigation on both sides of the Atlantic as well as in the attention being paid to database security and online privacy. Outsourcing is a continuing trend, with clients diversifying their original models even if they are not drawing up new outsourcing deals. Both clients and their legal counsel are feeling the pinch, with cost-cutting exercises and heavily scrutinised fees and contracts often featuring as bones of contention. Nonetheless, as the practice area grows and internet and e-commerce lawyers become more specialised, increasingly they are essential to any business with an online presence.