Baer Business Law – Greater Philadelphia Area – Intellectual Property Law – Business Law – E Commerce – Contracts – Trademarks – Copyrights

I was going to blog about the new data breach notification regulations issued by the Department of Health and Human Services under the HIPAA law, but it’s Sunday on Labor Day weekend and the sunlight is warm and the air golden here in elysian Center City, Philadelphia. If you really want to read about the new regs, click on the link above. I’ll also do a post discussing them the next time it rains.

In any case, since I’ve written a lot of data security posts recently, thanks in no small part to the busy bees in Massachusetts, Nevada and California, let’s turn to something infinitely more fun: starting your new web business. All intellectual property and startup lawyers, myself included, have a neat dog-and-pony show we trot out for creative economy types, discussing in a tone laden with portent the dozen or so top corporate and IP complexities involved in web startups. These presentations are crystallized, meticulous and impeccable. But what if it’s just you or you and your spouse (no other partners), you’re starting the business out of your house, you don’t expect investors to pump in funds for some time, and you don’t have $20,000 to spend on attorney fees? What do you REALLY need to protect yourself right out of the gate? In other words, what needs to be done before or shortly after launch, and what can wait for a few months?

1. Entity Formation. Choice of entity is key. Find some sort of limited liability structure that gives you pass-through federal tax treatment (i.e., the entity’s income passes through to your personal tax return rather than being separately and duplicatively taxed). Either an LLC or an S Corp. would qualify. And don’t think you have to incorporate in Delaware. Pennsylvania has made a conscious effort to compete with Delaware for incorporations, and it’s really cheap and easy to form and maintain an entity here. The Pennsylvania Department of State Corporation Bureau has a website which allows you to check the availability of your desired business name and obtain the forms needed to start the business. It costs $125 to incorporate an LLC or corporation in Pennsylvania. Personally, due to the minimal registration fees, taxes and paperwork involved, I like the Pennsylvania LLC, assuming the business is headquartered here.

If you have or expect to admit partners into the business, you should have an LLC operating agreement addressing such issues as voting rights, management responsibilities, transferability of membership interests, allocation of income and losses, etc., but if it’s just you in the business for the time being, this is not critical. The bottom line is that for a small, relatively simple web startup, entity formation issues shouldn’t cost thousands of dollars in legal fees.

2. Trademarks. You or your attorney should do a quick trademark search in the searchable database on the U.S. Patent and Trademark Office website (go to www.uspto.gov and click on “Trademarks”) for the name of your business or website and any prominent catchphrase or slogan you plan to use on the site. What you are looking for are trademarks or applications for trademarks that are the same or similar to your mark and are used (or applied for) in connection with similar goods or services. This is a rough approximation of the legal standard for infringement of trademark rights (”likelihood of confusion” between two marks based on the two key factors cited above, as well as other factors like similarity of commercial impression, sophistication of target consumers, overlap of channels of trade, etc.). You should also run Google searches to identify similar terms and business names, since it is possible for another business to have “common law” trademark rights in a mark even if it isn’t federally registered.

The point of this exercise is to gain some comfort that you won’t be infringing someone else’s trademark, in which case you could be liable for damages (possibly treble damages and attorney’s fees for willful infringement) and would have to change your mark and/or domain name. The searches and analysis shouldn’t use more than a few hundred dollars of attorney time, unless the searches reveal a number of potentially problematic third-party marks and you want your attorney to investigate all of them in order to refine the risk assessment.

If a lot of money was being invested to develop a brand, you would want to perform a more rigorous (and expensive) search that would cover state trademark, business name and fictitious name registries, as well as additional “common law” sources like databases of publications, but this can cost thousands of dollars in attorney time and third-party search agency fees. A quick and dirty “knock-out” search of the type I have described should suffice for a small web startup without much seed capital.

You should also think about filing a trademark application to protect your rights in your mark against third party users, assuming that the searches of the USPTO trademark database and the Internet searches uncover no other marks that are confusingly similar, and that your mark is “distinctive,” i.e., is not a generic term for or descriptive of your goods or services. As of September 15, it will cost $375 to file a trademark application per class of goods or services ($325 if you file electronically), and each application should cost no more than $200 of attorney or paralegal time (excluding trademark search costs), unless you are applying for a lot of different goods or services. (To limit attorney and filing fees, talk to your attorney about what goods/services you should apply for now and what can wait.).

Of course, if the Trademark Office rejects your application, and you want your attorney to respond to their objections, this means more legal fees. If the Trademark Office is objecting to the mark itself (on descriptiveness or likelihood of confusion grounds, for example), rather than to some technical aspect of your application, the fees could run an extra grand or two, since your attorney will have to perform research and prepare a short brief. Having said that, you can always abandon the trademark application if it becomes too costly to proceed. Also, a good trademark attorney will be able to anticipate these types of objections at the search stage, so you should ask about your chances of actually obtaining a registration before you file the application.

You are not required to file a trademark application to use a trademark. You only need to do this if it’s important to scare off (by obtaining powerful legal remedies) third parties who may want to use the same or a similar mark. Investors will want you to register your key marks (such as your website name), but this is certainly not something that must be done prior to launch. If you decide to wait to file a trademark application, you should still make sure you place a TM (or SM for “service mark,” if you are offering services under the mark) superscript by the first prominent use of the mark on your homepage and in any marketing materials for the site.

3. Copyrights and Copyright Licenses. Website code, content and design are all copyrightable if they reflect a modicum of creativity and are not purely functional. Copyright comes into existence once a creative work is written down or recorded, i.e., you do not need to have a Copyright Office registration to own a copyright. Registration is necessary to exercise legal remedies against infringers, but again, this is something you don’t need to worry about right out of the gate.

What you do need to worry about right away is making sure you have the proper rights in all code and content used for your website. By “proper rights,” I mean owning the copyrights in materials designed or developed specifically for your site (HTML code, creative, look and feel, etc.), and suitably permissive license rights in third-party content (like clip art, stock photos and music) used on the site. With respect to the first category, specially created materials, keep in mind that the author (i.e., the programmer, web designer or web developer) owns the copyright unless he or she transfers it to you by written assignment. Therefore, without a signed development agreement or copyright assignment containing the necessary language, you get only a limited license to use developed materials, and the developer can do basically whatever they want with them or give them to someone else.

Do NOT, therefore, have someone design or develop a website for you without some sort of written contract. Investors will want to see that you own the copyrights in your site and have the documentation to prove it. The last thing you want to have happen, once your site becomes a success, is some third party come out of the woodwork claiming that they are entitled to royalties or demanding a right to consent to a planned sale, modification or exploitation of the site. An attorney can help you with this process. A simple copyright assignment should cost you $200 or less.

With respect to third-party content, make sure you read the license agreement to confirm that your planned use is within the scope of the license and there are no nasty surprises. (Of course, to do this you first need to make sure you HAVE the license agreement.) Don’t assume that because music or an image is lifted from a “stock” or “royalty free” source you can do whatever you want with it. For example, some “royalty free” licenses prohibit use of the licensed image for commercial websites or in promotional materials. You can take the first stab at looking at the agreement or agreements yourself, and bring in your attorney if you have questions. Make sure that any web developer or designer you use understands your concern about third-party licenses, and if you have a contract with them, the designer/developer should warrant that all content is either original or comes with license rights sufficient for you to operate and use the site for its intended purposes.

4. Other Contract Issues. Depending on how much you are willing to negotiate with your web developer or designer, you may also want to include additional safeguards in the contract such as business and functional requirements and specifications, acceptance criteria, milestones and deadlines, caps on fees, etc. If you are on a tight time schedule, think about negotiating a holdback of 1/3 or 1/2 of total fees until the website has been completed and you have verified there are no major outstanding issues. Again, this is not a legal requirement, just a good idea. A simple one or two page contract (which would include an assignment of copyrights) should not cost you more than a few hundred dollars in legal fees.

5. Website Terms of Use and Privacy Policy. If your website is in any way interactive, you should have legal terms of use and a privacy policy (indeed, the latter is required by the Federal Trade Commission and some states’ privacy laws if personally identifiable information such as name, address, e-mail address, Social Security or driver’s license number, and/or credit card or other account numbers are collected on the site). Contrary to popular opinion, not all terms of use and privacy policies are standard boilerplate.

With regard to terms of use, the legal risks and issues involved in a social networking site, a financial services site or an online store for power tools are going to differ from those for a passive site where users can coo adoringly over snapshots of puppies. In addition, a site that invites the submission of user content, such as blog posts, photos or videos, will need to have a Digital Millennium Copyright Act take-down policy to immunize the site operator from copyright infringement liability relating to content posted by third-party users. To be truly protective, the terms of use must be tailored to these risks and issues. Also, keep in mind that some legalese can scare website users (as Facebook learned to its chagrin earlier this year when its terms of use briefly stated that Facebook would own content that its users uploaded onto the site).

As for the privacy policy, you should think beforehand about (1) what types of personally identifiable information you will collect, (2) with what types of third parties (service providers, marketing partners?) this information may be shared, (3) what types of uses you foresee making of personally identifiable information, and (4) how, if at all, cookies, pixels and flash objects will be used on the site to collect information from users and how such information will be used and shared (e.g., will the information be shared with marketers or advertising networks for behavioral advertising?) Obviously, these decisions are partly cultural — how much comfort do you want to give your website users on privacy? If you have thought carefully about the specifics of your privacy regime (how information will be collected, used and shared) before having a conversation with your attorney, this will reduce your legal fees. If you plan to collect personally identifiable information from international users on your site, you should also bring this up with your attorney, since the European Union has much stricter privacy laws than the U.S.

Depending on the nature, features and complexity of your site, drafting the terms of use and privacy policy may mean spending anywhere from a few hundred to a few thousand dollars on legal fees. In my humble opinion — and I may be ducking rotten tomatoes from my fellow bar members for saying this! — it should not cost more than this, unless the site is extremely elaborate (Amazon) or the client extremely picayune. With that said, however, sites that offer highly regulated or controlled products or activities (such as online gambling, liquor, health supplements, contests or sweepstakes) or are targeted at children may also require additional disclosures (e.g., contest rules) or controls (e.g., a process to obtain parental consent for the collection of personal information from children under 13) beyond the terms of use and privacy policy, which, of course, will cost extra.

Painful as the legal fees may be, terms of use and privacy policies fall within the old adage, “An ounce of prevention is worth a pound of cure.” They are necessary shields against legal and regulatory liability. Additionally, with the FTC, in particular, sounding off on how certain behavioral tracking disclosures (among other things) should not be buried in legalese and also getting cranky about ways websites should notify their users about material changes in terms of use and privacy policies, you need to have these documents drafted by a pro.

6. Web Copy Review. Your attorney, who is probably thirsting for billable hours in these grim times, would love nothing better than to take a red pen to your site copy and etch out every conceivable source of risk. For most sites that are launched with little seed capital and do not feature heavily regulated or high-risk products or activities (gambling, liquor, financial services, sweepstakes or contests, material targeted to children, etc.), this is probably overkill. Having said that, it is a good idea to have a business lawyer with some experience in online promotions do a quick, high-level pass through the site to see if there are any major issues. For example, if you use certain terms like “Free” or “Guaranteed,” these carry with them special legal obligations and disclosure requirements. You also want your terms of use and privacy policy to be legally binding on your site users, so it is worthwhile to have an attorney eyeball the process or flow by which these documents are presented to and accepted by users.

To give yourself a reasonable degree of comfort, ask your attorney to spend an hour (but no more) clicking through the test site, and then see what he or she comes back with.

No doubt this quick checklist will provoke howls of outrage from some business lawyers who will note scores of issues that I have either glossed over (business structure and governance issues) or omitted entirely (patents, vesting of equity for partners who make service contributions). They are correct — this is not a comprehensive blueprint for launching a new business. If you have the legal budget for that, please give me a call. Please. My point is that if you’re just a small entrepreneur without angel investors or a powerful VC sugar daddy behind you and and you only have a couple of thousand dollars or less to spend on a lawyer, you need to know where you can get the most legal bang for your buck now, and what you can defer for a few months until the business starts to generate revenue.

Which is why I’ve discussed copyrights and trademarks (which are relatively cheap and are also easy for a web business to infringe unknowingly) but not patents (which, now that the golden age of business method patents is definitely over, are less relevant to ordinary web businesses; if you feel you’ve invented something really novel and useful, definitely raise the patenting issue with your attorney, but know that it can cost tens of thousands of dollars in legal and filing fees to apply for a patent, and, in any case, you have up to a year from your first public disclosure or commercialization of the invention to file your patent application). I could give you other examples, but you get the picture.

One additional disclaimer (of course, we love disclaimers!): the figures and ranges I have given above for attorney fees represent my opinion of what these various services should cost, not necessarily what an actual firm will charge you. They are ballpark estimates to help you decide what services are most important to you and fit within your budget. Hopefully they will also facilitate a fruitful conversation with your attorney about managing costs. If you do not have this conversation at the outset, do not be surprised if you do end up getting charged a lot more.

Consulting a good business and e-commerce lawyer is a necessary part of launching a web business. Like any other professional, we have a suite of services we want to sell you. All are useful, but they need to be prioritized. A good business lawyer will do this for you, but sometimes you have to ask.