Starting an Online Business: Online Marketing

If you are launching an online business you will certainly be engaged in online marketing activities. Even most brick and mortar businesses now market online. This section of the tutorial covers basic online marketing rules of the road from a legal perspective. It also points you to some tools and resources that you will want to become familiar with. A fair warning is required to the uninitiated: there is lots of online marketing snake oil being sold on the Internet and therefore buyer beware.

Anyone person or entity promising quick results and/or get rich quick solutions should raise the required red flags. The tools and techniques available are powerful (e.g. SEO, Affiliate Marketing, PPC, etc.) and cannot be ignored, you simply need to tread carefully and invest in, what amounts to a significant amount of time, in becoming literate. This is really no different than acquiring marketing acumen in general, but on the web the choices are often overwhelming and confusing.

Intellectual Property Basics

There is simply no alternative for an online entrepreneur other than to acquire a basic understanding of the intellectual property ("IP") issues that govern the Internet. You can get most of what you need by having a basic understanding of copyright and trademark doctrines. You clearly don't need the level of knowledge of an IP attorney. What is required from a basic business perspective is knowledge of what to do and what not to do, and the ability to recognize when legal help is necessary or prudent.

There are a number of online copyright myths that you should clearly understand. In short, because something is freely available does not make it free for you to use. Copyright generally attaches (with a few exceptions) to ideas that are captured in a fixed tangible medium. This includes almost everything on the Internet such as text, graphics, photos, videos, email, etc. Even in cases where the fair use doctrine legitimately applies, it pays to be cautious.

What is widely misunderstood about the fair use doctrine is that it is an affirmative defense, which from a practical perspective means that by the time you get to invoke the defense you have already been sued. With rare exceptions, unless you have deep pockets and are interested in "making law," you can't afford to defend a copyright suit. The simple harsh economic reality is that those that have the gold continue to make the rules, the rest just get to live by them. This is clearly an area where you need to look before you leap and seek the counsel of an Internet Lawyer if you have doubts regarding how to proceed.

OK, but what does this have to do with online marketing? The now famous quote by Marshall McLuhan that the "medium is the message" applies here in a slightly modified context. For our purposes the "medium is the marketing." We leverage the medium represented by the global communications infrastructure of the Internet to get our marketing messages out to the world. It is tempting to "borrow" what others are doing effectively by simply copying their work.

Instead of "borrowing" which is illegal and otherwise not all that astute from a business perspective, online entrepreneurs need to use the inexpensive enabling technologies available to them to create. This strategy not only prevents you from being sued into oblivion but also has the upside business potential of creating a meaningful and lasting brand. We now live in an intellectual capital driven economy and all entrepreneurs, but especially online entrepreneurs, need to have a basic understanding of IP simply to be effective business owners and marketers.

Online Contracts Basics

Although it is certainly not obvious that contracts are ubiquitous in cyberspace, a close inspection tells a different story. As a general rule, whenever you download software from the Internet there is contract/license agreement in play. Whenever you sign-up with a social networking site or a blogging platform, a contract is in play. When users register on your site, a contract is in play (i.e. your terms of use).

If you sign an agreement with a consulting company to develop your website, a contract is in play (or should be). If you sign an affiliate marketing agreement, a contract is in play. Contracts are as foundational to an online business as they are to businesses in general, even more so. An online entrepreneur launching a startup is likely to encounter more contracts than their brick and mortar counterparts. For example, many websites are monetized through advertising. You will need contracts with your advertisers that clearly spell out such things as payment terms and the kinds of advertisements you will or won't accept.

If you choose to market your business through brand advertising on other sites, you will certainly almost always be required to sign a contract. You will need to pay special attention to all the terms and conditions, and especially to the "legalese" regarding forum selection clauses, arbitration provisions, termination clauses, etc. In short, your online marketing activities are certain to be controlled via contract doctrine. You need to become comfortable reading contracts and seek advice of counsel where appropriate. If you choose to launch an affiliate program, the contractual relationships pertinent to your online marketing initiatives will become mission critical to your business. You are going to want to ensure that your affiliates are treated as independent contractors and not as agents of your business entity.

See the online contracts section of this tutorial for more specific information regarding various agreements.

Emerging Law

There are a number of laws the have recently been promulgated, or are about to be promulgated, that will have a direct and perhaps significant impact on online marketers. A few of these prominent laws are discussed here. However, the challenge for online marketers (and for an Internet Lawyer as well) is how to track the legal trends over time. This space is quickly evolving and privacy and security issues continue to preoccupy politicians of both parties.

Why? Because the privacy and security lobby is vocal and can readily get the attention of politicians for several reasons: 1) they vote; and 2) the laws promulgated are often "feel good" laws that although they may have serious detrimental unintended consequences for online marketers, they otherwise go largely unnoticed by the mainstream media (i.e. except media focused on these issues such as the PMA), and do not cost politicians much to enact.

We prefer to deal with the legal reality on the ground in this tutorial as opposed to making policy arguments in favor or opposition of these laws. For obvious practical reasons the reality, like it or not, is what online entrepreneurs must contend with day to day.

Restore Online Shoppers' Confidence Act (ROSCA)

ROSCA was passed in the lame duck session of 2010 in order to counter overly aggressive and questionable marketing practices imposed on unsuspecting consumers, usually by third party companies working in collaboration with reputable websites. At the heart of the issue is "data pass" financial transactions. A 2009 report prepared by Senate staffers describes the issue as follows (paraphrased):

Companies gain access to online consumers by entering into financial agreements with reputable online websites and retailers. These companies sell club memberships to consumers as they are in the process of buying movie tickets, plane tickets, or other online goods and services.

The companies insert their sales offers into the "post transaction" phase of an online purchase, after consumers have made a purchase but before they completed the sale confirmation process. These offers generally promise cash back rewards and appear to be related to the transaction the consumer is in the process of completing. Misleading "Yes" and "Continue" buttons cause consumers to reasonably think they are completing the original transaction, rather than entering into a new ongoing financial relationship with a membership club operated by these third party companies.

Consumer billing information is "passed through" to these third party companies without requiring consumers to re-enter it, thereby depriving consumers of notice that they are entering a new ongoing financial relationship with the third party company.

The full text of ROSCA is available here. Below is a summary of the prohibitions:

(a) Requirements for Certain Internet-Based Sales- It shall be unlawful for any post-transaction third party seller to charge or attempt to charge any consumer’s credit card, debit card, bank account, or other financial account for any good or service sold in a transaction effected on the Internet, unless--

(1) before obtaining the consumer’s billing information, the post-transaction third party seller has clearly and conspicuously disclosed to the consumer all material terms of the transaction, including--

(A) a description of the goods or services being offered;

(B) the fact that the post-transaction third party seller is not affiliated with the initial merchant, which may include disclosure of the name of the post-transaction third party in a manner that clearly differentiates the post-transaction third party seller from the initial merchant; and

(C) the cost of such goods or services; and

(2) the post-transaction third party seller has received the express informed consent for the charge from the consumer whose credit card, debit card, bank account, or other financial account will be charged by--

(A) obtaining from the consumer--

(i) the full account number of the account to be charged; and

(ii) the consumer’s name and address and a means to contact the consumer; and

(B) requiring the consumer to perform an additional affirmative action, such as clicking on a confirmation button or checking a box that indicates the consumer’s consent to be charged the amount disclosed.

(b) Prohibition on Data-Pass Used To Facilitate Certain Deceptive Internet Sales Transactions- It shall be unlawful for an initial merchant to disclose a credit card, debit card, bank account, or other financial account number, or to disclose other billing information that is used to charge a customer of the initial merchant, to any post-transaction third party seller for use in an Internet-based sale of any goods or services from that post-transaction third party seller.

Obviously if you were previously engaged in this kind of behavior then you must "cease & desist" or face the legal liability that is likely to ensue, given the FTC's increasingly more aggressive stance on enforcement. It is unlikely that this issue impacts many (if any) small online entrepreneurs, although it certainly could, especially high traffic sites that were looking for additional ways to monetize their content.

In addition to the above prohibitions ROSCA also addresses negative option marketing on the Internet:

SEC. 4. NEGATIVE OPTION MARKETING ON THE INTERNET.

It shall be unlawful for any person to charge or attempt to charge any consumer for any goods or services sold in a transaction effected on the Internet through a negative option feature (as defined in the Federal Trade Commission’s Telemarketing Sales Rule in part 310 of title 16, Code of Federal Regulations), unless the person--

(1) provides text that clearly and conspicuously discloses all material terms of the transaction before obtaining the consumer’s billing information;

(2) obtains a consumer’s express informed consent before charging the consumer’s credit card, debit card, bank account, or other financial account for products or services through such transaction; and

(3) provides simple mechanisms for a consumer to stop recurring charges from being placed on the consumer’s credit card, debit card, bank account, or other financial account.

ROSCA enables enforcement by the FTC and by State Attorney Generals. It clearly targets bad behavior that none of us as Internet consumers want to see continued. Commerce on the Internet must become more and more transparent if we want to see significant additional growth in online business.

Affiliate Nexus Laws (aka Amazon Law)

States are increasingly becoming more aggressive in asserting "nexus" for the purpose of having business entities collect sales and use taxes. In general, the word nexus, for our purposes, means a "connection with a state." Nexus is a term that describes the "presence" that an entity has in a state before a state is entitled to assess tax on the income generated within that state. Once nexus is established, it is the entity’s responsibility to collect and remit taxes in that state.

The determination of nexus is influenced by three key factors: 1) the business generates sales within the state; 2) the business owns or leases property within the state; 3) the business employs people in the state engaged in activities that exceed simply solicitation. The weight given to specific factors is determined by state statute, case law and/or regulations. In short, there is no national standard for determining nexus; it must be determined on a state-by-state basis, within constraints imposed by the US Constitution.

The US Supreme Court, based on a number of cases, has used the Dormant Commerce Clause to determine the "presence" in a state required for relevant tax collection purposes. The state affiliate nexus laws are also referred to as a state's "Amazon Law" because Amazon.com is the largest online retailer and has argued against these laws on a constitutional basis. Effectively these state laws treat a local affiliate website as an independent sales force creating a nexus despite the fact that the online retailer has no warehouse, headquarters or employees in the state. Amazon has responded by "firing" affiliate in states where these laws have passed.

The states enacting these laws have ignored Amazon's legal argument that the laws in question are unconstitutional. Amazon's position with respect to the recently enacted California law is as follows:

We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.

Amazon's quote above highlights the powerful business forces that are aligning on opposite sides of this legal battle. Examples of "big box retailers" that favor these laws are Wal-Mart and Target. The PMA, on behalf of its members, filed a suit in The United States District Court for the Northern District of Illinois challenging the constitutionality of Illinois' recently enacted law. This is clearly an area of the law that online entrepreneurs will want to track closely.

Federal Privacy Bill of Rights (PBR)

In December 2010 the Obama administration proposed a Federal Privacy Bill of Rights ("PBR") that could far reaching effects nationally on the commercial Internet. The US Commerce Department produced an 88 page report entitled: Commercial Data Privacy and Innovation in the Internet Economy: A Dynamic Policy Framework. The report contains the following introductory paragraph:

Beginning with the emergence of the mass-market Internet, privacy law around the world has been in transition. During the past 15 years, networked information technologies—personal computers, mobile phones, and other devices—have been transforming the U.S. economy and social life. Uses of personal information have also multiplied, and many believe that privacy laws have struggled to keep up. The lag between developments in intensive uses of personal information and the responses of current systems of privacy regulation around the world leaves consumers with a sense of insecurity about whether using new services will expose them to harm.

The Framework contains the following key recommendations:

1) Consider Establishing Fair Information Practice Principles comparable to a “Privacy Bill of Rights” for Online Consumers;

2) Consider Developing Enforceable Privacy Codes of Conduct in Specific Sectors with Stakeholders;

3) Create a Privacy Policy Office in the Department of Commerce;

4) Encourage Global Interoperability to Spur Innovation and Trade;

5) Consider How to Harmonize Disparate Security Breach Notification Rules; and

6) Review the Electronic Communications Privacy Act for the Cloud Computing Environment.

Implementing the PBR will require legislation that is potentially sweeeping in scope. It is unclear at this point what the liabilities regarding non-compliance may consist of, but one can readily imagine serious fines being imposed in the case of egregious data breaches and rules similar to what have been promulgated under the HITECH Act for the healthcare industry.

Resources

One of the challenges in keeping up with all the technologies and trends that impact online marketing is the amount of information, including legal information, distributed on this topic on a daily basis. A good place to start is the Performance Marketing Association's ("PMA") website and blog. What is performance marketing? Here's how the PMA describes it:

Performance marketing is a comprehensive term that refers to marketing and advertising programs in which marketers — also known as affiliates or publishers — are paid when a specific action is completed, such as a sale or lead. Advertising rates are only paid if and when a consumer makes a purchase or completes a lead form.

The trackability of performance marketing isn’t based on estimates. It’s based on actual results — meaning that a marketing program’s effectiveness is accurately determined, down to the mouse click.

Performance Marketing is a multi-billion dollar industry that continues to grow year-over-year. There are more than 200,000 affiliate publishers and over 5,000 advertisers in the performance marketing space.

Obviously performance marketing is not the only online marketing technique that you are likely to use. Search Engine Optimization ("SEO") is also a proven technique that you will want to leverage. SEO encompasses many different strategies and you want to make sure you get multiple perspectives. Here's a list of Top 5 SEO Blogs that should get you started in the right direction.

Pick your RSS Reader of choice to subscribe to these blogs. If you don't have a preferred reader then we recommend Google Reader because it is one of the best ones available. Its "tagging" feature will allow you to quickly implemnt an effective knowledge management strategy. Subscribing to relevant blogs and newsletters is one of the most effecitve ways to keep up with your industry, and with all the tools and techologies required to compete.

Once you get the lay of the land you will want to setup Google Alerts on various topics to aggregate news that may be of interest. Obviously, you won't have time to read all of the information that you aggregate, but you can quickly skim headlines for items of interest. This strategy applies to blog posts and newsletters as well.