I bought it. It has copyrighted and trademarked material in it. Can I sell it?

You've heard that making a profit off of copyrighted works is considered infringement. You've heard that making a profit off of someone's trademark is considered infringement. Piece of cake, right?

But what if you've legally bought a pile of DVDs of famous movies. Does that mean that you can't sell them or make a profit off of them if you do? Absolutely not. Under the "first sale doctrine" (which exists in both copyright and trademark law) as long as you purchased them legally, you can resell them anywhere, to anyone and for any amount you like.

So why doesn't that work for online movies? Well, first of all, most of the places that you can download movies on the internet from are not legal copies of the movie to begin with. So, selling or profiting in any way from those illegal copies is infringement (see last week's post for more detail).

The law is pretty clear cut for most items. If you've bought it legally, you can sell it under the first sale doctrine without legal reprecussions and liability for infringement.

The notable exception is computer software. It has been argued across the country in multiple cases that the End User License Agreement that you agree to when you buy software is not actually a sale of the software, but rather a license agreement to allow you to use the software for your personal use, but you don't actually "own" the software. So what can you do?

There's no easy answer. The courts across the country have been split on the issue. So, if you're trying to resell software that you bought online or from a store, you should really research the law in your district before doing so to make sure that your sale falls within the exception known as the first sale doctrine.

Could you be indirectly liable for infringing someone's trademark or copyright?

You've done your homework before building your site. You're not infringing anyone's trademark or copyright on your site. Or so you think.

Direct liability is pretty easy to avoid. Don't take other people's copyrighted material without their permission (No, just giving credit isn't enough) and do your due diligence to make sure that you're not using someone else's trademark.

But what about indirect liability? I hear you screaming "WHAT?!?" from here. Oh yes. You can be held liable for someone else infringing a trademark or copyright of a third party.

Have you heard of contributory infringement or vicarious infringement? No? You're not alone. Most people haven't.

The essence of these principles is that you can be found liable for someone else's infringement of copyright or trademark under certain circumstances. I'm going to try to explain it in a way that will make sense to most businesspeople, but it's confusing, even to many legal professionals.

Contributory Infringement

Contributory copyright infringement has two components. First, that the contributory infringer knew or should have known about the infringement. And, second, that the contributory infringer caused, induced or materially contributed to that infringing activity.

This one's pretty easy to understand. If you're a web designer for a company that you know is planning to include infringing material, you could be held liable for helping them to infringe. It's like being the getaway driver in a robbery.

The standard for contributory trademark infringement is similar, but not exactly the same. For a contributory infringer to be found liable for trademark infringement, the contributory infringer must "have (1) induced a third party to infringe the plaintiff's mark or (2)supplied a product to a third party with actual or constructive knowledge that the product is being used to infringe the mark."

Most businesspeople have to worry more about the second option. If you know or you should have known that the product that you're selling or giving away to another person is violating someone else's trademark, you could be found liable.

Vicarious Infringement

Vicarious infringement is a bit more tricky. Vicarious copyright infringement requires that infringers both have the (1) right and ability to control the infringing activity and that they (2) get a direct financial benefit from the infringing activity.

This is how Napster got itself into trouble and how I see a lot of posters on message boards heading down the same path. Let's say you run a website where you make your money from Google Ads and site membership fees. You allow your users to embed movie clips, mp3s or pictures on your site. In your TOS, you reserved the right to review all posts. You allow these posts to be posted because you figure that you're not the one violating someone's copyright. Wrong!

Less problematic for most people is vicarious trademark infringement. For you to be held liable as a vicarious infringer, it must be proven that you and the direct infringer "have (1) an apparent or actual partnership, (2) have authority to bind one another in transactions with third parties or (3) exercise joint ownership or control over the infringing product."

This only really comes into play when you're working with someone who, without your knowledge, infringes someone else's trademark.

Contributory and vicarious liability for copyright and trademark infringement are often overlooked by unsavvy business owners and web designers alike. Make sure you protect yourself.

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No advice given here should be reasonably relied upon by you or any third party without consulting an attorney who is aware of all of the facts and law surrounding your situation. Any advice given here is not intended to create an attorney-client relationship in any way.

Why shouldn't you use "free" Terms of Service and Privacy Policies?

I've seen this question asked over and over. And there are lots of answers from people who (for lack of a better way to put it) have no earthly idea of what they're talking about. They all say, "Sure, use one of the terms and privacy policy generators that you can find on Google." Sigh. I got tired of hearing it, so I ran a few of the generators and I was HORRIFIED at how bad the resulting terms of service ("TOS") and privacy policies ("PP") are.

Ok, people. Figure it out, you're getting what you're paying for. Nothing. The generators are not customized to your business situation, business model or to the specific details of your business.

So, if those are no good, you might then ask if you can just lift one from another website that has a similar business model to yours. Well, that's not a good idea either. First of all, it's unlikely that the owner of that website will be thrilled with your appropriation of their materials (though there is argument as to whether original portions of a TOS and PP can be copyrightable). Second, as a practical matter, how do you know that what you're taking is any good? The person who posted them on the website that you're stealing them from could be doing what you're doing, or worse yet, an idiot. How do you know where they came from, or if they're up to date with the most current legislation? You DON'T!

Here are only a couple of examples of what you need to know that you won't find from copying someone else's TOS and PP. For example, did you know that the State of California has its own rules (BPC 22575-22579) that not only spell out what needs to be included in a PP, but also has specific rules for where and how you need to post that policy? And they're not the only state that has rules about it.

Did you know that if you don't specifically exclude children under 13 from your website that your PP has to comply with the Children's Online Privacy Protection Act ("COPPA")? Not if you're using a free boilerplate TOS and PP.

The entire purpose of having a TOS and PP is twofold. First, to comply with specific state and federal laws that require you to have them. Second, to protect you in case one of your users or customers wants to sue you. You've spent a lot of time and money building your business. Why mess it up by inadequately protecting yourself? A lawsuit could cost you tens of thousands of dollars, if not hundreds of thousands.

As my grandmother used to say, don't be "penny wise and pound foolish". Spend a little bit of extra money and hire someone to draft your Privacy Policy and Terms of Service for you that knows what they're doing...

Are you going to lose your liability shield?

You filed with your state as an LLC or a Corporation (I'm going to talk here using the language for corporations, but for LLCs just substitute the word "company" where I use "corporation" and the word "members" for where I say "shareholders"). You know that you need to keep your corporate books up to date, have your shareholder meetings once a year, you're right on track. If you're sued, you've got liability coverage. At least that's what you've been told. Are you really protected?

Not necessarily. If you are a small, closely held corporation (1-3 members/shareholders, usually), if you're sued, it is likely that the attorney on the other side is going to say that your corporation is a sham, that it's merely an "alter ego" for you personally and that the court should disregard the corporate form and hold you personally liable. Freaked out yet?

I just want to impress upon you how hugely important it is to keep up with your corporate formalities. There are quite a few factors that the courts look at in deciding whether to pierce the corporate veil, but the big ones are whether you are maintaining an arm's length in transactions between you and the company (i.e., whether you are using the corporation's funds as your own, whether you're taking benefits from the corporation that you're not entitled to, etc.).

If you want to avoid having your corporate veil pierced, it's very important that you treat the corporation like the separate entity that it is. This is easy to say and difficult for many business owners to understand.

Here's what I always suggest to my clients. Pretend that your corporation is another person. Let's call him Bob (fwiw, I always call him Bob. I'm not sure why). Bob is your employer and you helped back Bob, so you are entitled to a share of Bob's profits. Bob needs to have his own bank accounts. Bob pays you a salary or dividends on a regular basis. Bob keeps track of money that he spends, whether it's on distributions to shareholders or any other expenses. If you spend your own money to buy something for Bob, you submit your receipts to Bob and Bob pays you back. Get it?

The more you're able to treat Bob like a separate person, the less likely you will be found to have been treating the corporation like your alter ego and the more likely that you will maintain your corporate shield in the event of a lawsuit.

And that's a VERY important thing...

Could you be cybersquatting?

So, you've found this really cool domain name. You bought it because it uses the name of another company and you figure that, at some point, either the company who owns the trademark to the name will want to buy it from you or someone else will want to buy it. You figure that you'll just park it somewhere. That can't get you into any trouble, could it?

Well, yeah. You're currently violating the Anticybersquatting Consumer Protection Act (ACPA) 15 USC 1125(d) which provides, in pertinent part:

"(d) Cyberpiracy prevention (1) (A) A person shall be liable in a civil action by the owner of a mark, including a personal name which is protected as a mark under this section, if, without regard to the goods or services of the parties, that person— (i) has a bad faith intent to profit from that mark, including a personal name which is protected as a mark under this section; and Factors considered in finding bad faith are listed, in pertinent part, as:(B) (i) In determining whether a person has a bad faith intent described under subparagraph (A), a court may consider factors such as, but not limited to— . . . .

(VI) the person’s offer to transfer, sell, or otherwise assign the domain name to the mark owner or any third party for financial gain without having used, or having an intent to use, the domain name in the bona fide offering of any goods or services, or the person’s prior conduct indicating a pattern of such conduct".

Now, of course there are fair uses for a site with another company's tradename or trademark in it which do not incur trademark or cybersquatting liability. For example, a satire, parody or commentary site about the trademark or tradename that is completely non-commercial, is an acceptable use. For example, a site that does not have any advertising at all that uses a famous name and the words "stinks" which is a commentary site on the mark is probably legal.

Another acceptable use for an otherwise infringing domain name is if, for example, you have a legitimate right to use the name, particularly in a different field than the famous mark. For example, if your name is Joe McDonald and you own a hardware store called McDonald's Hardware, you could certainly own the site, mcdonaldshardware.com. But what if you owned a chicken restaurant called McDonald's Restaurant. Could you own mcdonaldsrestaurant.com? Maybe, but it would be a much more difficult fight.

That being said, the best suggestion is (almost always) to not register domain names with famous marks in them. If you can find a domain names that work for you that don't include famous marks, you're going to save yourself a lot of heartache and headache...

Do you accept online payments? The IRS is coming...

So, I'm not a tax attorney, but I felt that this was important and involves many of my readers.

A new law (under the "housing rescue package"), which was signed into law last week (the text isn't available online yet, but the version that passed the House and Senate is H.B. 3221 (look it up at thomas.gov), requires all payment processors (including Paypal and other online processors) to send 1099s to each merchant and to report to the IRS the income of all merchants who are paid over $20,000 per year and have more than 200 annual transactions. That may not sound like a lot for people just starting out, but ask any eBay powerseller and they'll tell you it's not a difficult threshold to make.

The reporting will begin in 2011. But starting now, if you feel that you're near that threshold, you should start making sure that you're reporting your income properly. If you're not sure how or what you should report, now would be a good time to be working that out with a qualified tax professional.

And in case you're wondering what your tax dollars are offsetting, it's the Fannie Mae / Freddie Mac bailout... Aren't you thrilled?