E-Business 101 Parts 1 and 2: Taxonomy and Anatomy

Continuing advancements in communications and software technologies have enabled existing businesses to attract and engage customers in remarkable new ways while creating opportunities for new businesses that did not previously exist. In just a few short years, the World Wide Web (the “Web”) has revolutionized how customers locate information and make purchasing decisions, as well as how businesses attract, interact with, and retain customers. The Web enables instant gratification and convenience for anyone who can access the resources connected to it.

Technological advances routinely create new legal problems and opportunities. This was true with the telephone, television, and the photocopier. The Web is no exception. The new business paradigm enabled by the Web has also created new legal problems and opportunities for solution. The legal issues will effect not only the owners and operators of “dot.coms,” but also the traditional businesses that use web sites to transact or promote their businesses or that conduct transactions with e-businesses.

This Article is the first in a series that  to help readers recognize the legal issues related to e-commerce and deal with them proactively. In this first part, different classifications of Web-based businesses are explored (the taxonomies) and the various types of assets of web-based businesses are examined (the anatomy).

While no clear consensus exists as to what constitutes an “e-commerce” business or “e-business,” one general characteristic is that an e-business must operate a web site. The web site might be the sole vehicle of communication with the business’ customers. Alternatively, the web site might be used in conjunction with a traditional “bricks and mortar” store operated by the business. There are many ways in which a web-based business or a business’ web site may be classified, each of which provides a different outlook on the legal needs of the business.

{mospagebreak title=Taxonomy – Classification of E-Businesses}

In a simple taxonomy, web-based businesses or their web sites may be classified according to the characteristics of their customer base, the two most prevalent classifications being “B2B” (business-to-business) and “B2C” (business to consumer). As its name implies, a B2B web-based business focuses primarily on selling goods and services to other businesses, as opposed to consumers. Chemdex.com, which provides researchers a one-stop shop for laboratory supplies, is an example of a B2B web-based business.

In contrast to B2B web-based businesses, B2C web-based businesses focus primarily on selling goods and services to consumers. Amazon.com which sells books, compact disks, electronic products, etc. directly to consumers is an example of B2C web-based business. Of course, there are web-based businesses that sell products to both consumers and businesses, Ladderman.com is one such example.

As will be discussed in more detail in a later article in this series, businesses with a Web presence need to address the issue of customer privacy. A web-based business targeted to consumers may face more stringent requirements with regard to privacy issues and a higher level of scrutiny by federal agencies (e.g., Federal Trade Commission) and state agencies. Furthermore, federal (e.g., 1998 Children’s Online Privacy Protection Act) and state statutes limiting the collection and use of information from children may also come into play more for B2C oriented businesses than for B2B oriented businesses.

In a second taxonomy of web sites, businesses’ web sites may be classified according to their level of visitor engagement. For example, a web site may be classified as “passive” if it merely provides information to visitors, but does not transact business, such as accepting orders or sell products or services. Many law firms, accounting firms, and other businesses operate passive web sites to provide information about the services and products they offer (e.g., Alderman.com, WalkerDigital.com). Thus, a passive web site has a relatively modest level of engagement with visitors to the web site and may act primarily as marketing tool for a business or as an information resource for people desiring to learn more about the business. A web site may be classified as “active” if the web site processes orders for products and services offered by the web site or otherwise has a higher or more sophisticated level of engagement with visitors to the web site. Amazon.com, Priceline.com and goSKInewengland.com are examples of active web sites. While the terms “passive” and “active” are used here as a matter of convenience, the level of engagement of a web-based business with consumers via a web site may be crucial in determining if personal jurisdiction can be exercised over the business by a court located in a different state from the business. This will be discussed in great length in a later Article.

In a third taxonomy, web-based businesses or their web sites may be classified according to their revenue models. For example, web-based businesses such as Yahoo.com, Excite.com and other web portals generate a majority of their revenue from advertising on their web sites. In contrast, web-based businesses such as Amazon.com generate the majority of their revenue from the sale of products via their web sites. Different revenue models create different tax and accounting issues for different web-based businesses and may require different types of agreements with visitors to web sites and content or product suppliers.

In a fourth taxonomy, web sites may be classified according to the business models underlying the web sites. For example, web-based businesses may be classified as having or operating: 1) An auction web site (e.g. Ebay.com); 2) a reverse auction web site (e.g., Priceline.com); 3) An exchange web site (e.g., Ace.Asia.com); 4) A trading hub web site (e.g., Amaxon.com); 5) A government agency web site (e.g., SEC.gov); 6) An educational institution web site (e.g., Yale.edu); 7) Web portals (e.g., Yahoo.com); 8) A gaming oriented web site (e.g., The-London-Casino.com); 9) A buying club web site (e.g., Shopucc.com); 10) A peer-to-peer organization web site (e.g., Napster.com), 11) A public service oriented web site (e.g., BBB.org); etc. Such distinctions may cause the web sites to fall within the governance of different international, federal or state regulations or have different concerns regarding intellectual property, privacy, taxation, etc. For example, Ebay and Yahoo have recently run into trouble with German and French laws regarding the auctions and sale of Nazi related paraphernalia on their web sites.

In yet another taxonomy, web sites may be classified according to the nature of the goods and services available from the web sites. This taxonomy may break down the goods offered by a web site into tangible goods (e.g., books, compact disks, etc.) versus intangible goods (e.g., electronic or digital versions of books, music, software, domain names, etc.). Such a distinction may be important in evaluating tax consequences relating to the sale or license of such goods, as well as the terms of the sale or license.

The foregoing taxonomies are useful because they help us, as lawyers, identify the issues that our clients may face.

{mospagebreak title=Anatomy – The Asset Structure of an E-Business}

It is equally important to understand the anatomies of web based businesses and their assets. The location of the Assets may have significant implications for tax liabilities, the methods for recording ownership and perfecting security interest, and jurisdiction.

One of the key aspects of the Web is the relationship between a CLIENT and a SERVER. The Client and server need not be in geographic proximity.

The CLIENT accesses a web site via a BROWSER (commonly used Browsers include, Netscape Navigator, Microsoft Explorer and AOL’s browser). The Client may be a desktop computer, a laptop computer, a personal digital assistant (PDA) or a web enabled wireless phone.

Somewhere there will be a SERVER: Hardware on which the data and programming that forms the basis of a web site is stored and operated (many e-businesses will, in fact use multiple redundant servers). In some cases, its location will impact which courts have jurisdiction over disputes. If the Server is owned by the e-business then the hardware is personal property that should be considered Equipment under Article 9 of the Uniform Commercial Code (CGS §42a-9-109). If the e-business leases the Server, then the lease agreement should be treated as an executory contract.

Each Server is identified by its IP ADDRESS. The IP Address is a numerical code attached to a specific server, much the way that a telephone number is associated with a specific telephone line. In today’s environment, there is probably not much real value in any specific IP Address. Like a telephone number, the IP Address will constitute an intangible asset under CGS §42a-9-106.

In some cases, the crown jewel of a website may be the DOMAIN NAME. The Domain Name is the alphanumerical code used to identify a particular IP Address such as the ones for the Servers for goSKInewengland.com or Priceline.com. Domain Names can be worth many millions of dollars. When a user types the domain name into a browser, the browser will retrieve the first page of the web site associated with the Domain Name (usually index.html) from the server whose IP address is associated with that domain name. The Domain Name is an intangible asset under CGS §42a-9-106. The Domain Name may also represent a valuable TRADENAME, TRADEMARK or SERVICEMARK. The web site may also have other intellectual property such as additional Trademarks and Servicemarks. In subsequent issues we will discuss the methods for protecting rights and interests in Domain Names and the related trademarks.

Many web sites will also include unique CREATIVES (copyrighted or copyrightable artwork, graphics, animation and sounds) and DELIVERABLES (data, software, music, etc. that can be downloaded from the website) as well as proprietary SOURCE CODE (the code that tells the user’s browser how to manipulate the data to form images on the screen and to perform other functions and services provided by the web site). With the Source Code one can modify or copy portions of the software. For this reason, software creators guard their code jealously. What they tend to distribute is a licensed version available in compiled form that is readily usable, but not subject to editing or reverse engineering. The Source Code may be protected by copyright. In some circumstances it may also possible to treat the Source Code as a trade secret. These too are general intangible assets as defined by CGS §42a-9-106. In subsequent issues we will discuss the methods for protecting rights and interests in these intangibles and issues to watch out for, like inadvertent copyright infringement.

{mospagebreak title=Customer Lists and Opt-In Email Lists}

CUSTOMER LISTS and OPT-IN EMAIL LISTS and the information gathered about visitors to a website may also constitute significant assets of the business. As mentioned above, we will discuss the legal issues related to this information in later Articles. Opt-in email lists, in which members request email regarding a specific topic are highly effective. The value of the list will depend upon the number of members who have opted in and the relative commercial value of the topic. An opt-in email list is another asset to the business. Like the custom list, this is an intangible asset.

Many aspects of the web site may also be protectable under the United States Patent Laws. While, there is some disagreement about the ultimate enforceability of specific patents, the United States Patent Office has been issuing business method and software Patents which may afford significant protection for web-based businesses.

In addition to the equipment that comprises the Server and the intangible assets unique to the operation of an e-business, an e-business is likely to also have either an interest in real estate, furniture, equipment, bank accounts and the other assets typical to other “bricks & mortar” businesses.

A proper taxonomy of the nature of an e-business and a complete understanding of the anatomy of the assets of the e-business is critical to our ability as lawyers to identify legal issues and properly protect the interests of our clients. In subsequent parts to this series we will address many of these issues in greater detail.

Attorney Alderman  regularly represents businesses as creditors, licensors, licensees, and other parties in interest in Commercial Transactions, Business Restructurings, e-commerce  and Complex litigation. Since 1995, he has helped clients protect over $100 million dollars worth of Intellectual Property.

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