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Electronic Commerce
2012
A Managerial and Social Networks Perspective
Global Edition

Efraim Turban
University of Hawaii

David King
JDA Software Group, Inc.

Jae Lee
Korea Advanced Institute of Science and Technology

Ting-Peng Liang
National Sun Yat-Sen University (Taiwan)

Deborrah C. Turban
Turban Company Inc.
with contributions by

Judy Lang
Lang Associates

Linda Lai

Macau Polytechnic Institute of China

Carol Pollard
Appalachian State University

San Murugesan
BRITE Professional Services, and University of Western Sydney, Australia

Kevin Waugh
Strategic Enterprise, LLC; Vietnam

Stanley Myles C. Seballos
COC-PHINMA Education Network, Philippines

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E-COMMERCE: REGULATORY,
ETHICAL, AND SOCIAL
ENVIRONMENTS
Learning Objectives

14..1 Et hical Challenges and Guidelines
14.2 InteUcua~
Property law
14.3 Privacy Rights, Protection, and Free
Speech
14.4 Other EC legal Issues
14.5 Consu mer and Seler Protection from
Online Fraud
14.6 Public Policy and Political ,Environments
14.7 Societal Issues and Green EC
Managerial Issues
Closing Case: Pirate Bay and t he Future
of File Sharing

Upon completion of this chapter, you will be
able to:
1. Understand the foundations for legal and
ethical issues in EC.
2. Describe intellectual property law and
understand its adjudication.
3. Explain privacy and free speech issues and
their challenges.
4. Describe types of fraud on the Internet and
how to protect against them.
5. Describe the needs and methods to protect
both buyers and sellers.
6. Describe EC-related societal issues.
7. Describe Green EC and IT.

717

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Opening Case

WHY IS DISNEY FUNDING CHINESE PIRATES?
Disney's funding arm, Steamboat Ventures, invested $10 million in a popular Chinese video- and file-sharing site called 56.com (56.com).
The site had 33 million registered members in 2009. Note that the words for "56" in Chinese sound similar to "I'm happy."

The Problem
In May 2008, The Walt Disney Company released its animated
film Wall-E; the film was released on DVD in November 2008.
However, immediately after the movie release in May, the robot
love story was available for free on the Chinese video site
56.com. In other words, Disney is funding a Chinese site that
bootlegs it own work.
The problem is that pirated movies are difficult to detect

because they appear under different names. Although 56.com
managed to remove some of the full-length bootlegged copieS;""

The Solution
One reason that Disney invested in 56.com was that it hoped
that Steamboat Ventures, as a major investor, would influence
56.com to take action against copyright violators. In other words,
Steamboat Ventures is trying to help 56.com curb pirated videos.
In the United States, you can take legal action..against
companies such as 56.com for copyright violations. For example,
media giant Viacom is suing Google's YouTube for $1 billion,
requesting access to users' IP addresses and the video identifiers

The Results
Although 56.com is still facilitating free movies, video games,
and the like, Disney seems not to be too concerned with these
actions. Its investment provides the company a distribution
channel for its products that may provide a strategic advantage
to Disney in China. In March 2009, Disney allowed You Tube to
run short videos as well as full episodes of its ABC (a television

station) and ESPN (Internet and television sports channel)
networks under an ad-revenue sharing arrangement.

many others remain. The 56.com site is often referred to as a
Chinese version ofYouTube. But unlike You Tube, 56.com and
similar sites like Toudou and Youku don't impose 10-minute limits
on uploaded videos. And that makes them a haven for illegally
uploaded videos, including full-length movies and TV episodes.
If 56.com were in any country but China, we'd expect the
Recording Industry Association of America (RIAA) and similar
organizations to put pressure on the company to remove
copyrighted materials. But China doesn't have a very strong
record of enforcing Western copyright laws.

for the entire You Tube database to see whether users are
watching infringing videos more than noninfringing videos.
The court ruled in favor of Google and no punitive damages were
awarded. The judge determined that since 2005, Via com, owner
of iFilm.com, appears to have infringed copyrighted videos in
the same manner as it had claimed You Tube was harming
Viacom's interests (Albanesius 2008). Howeve( that is not an
option (yet) in China. At best, the Chinese government will
provide a warning to violators.

In August 2009, 56.com launched 56KanKan, a fee-based
innovative video content platform that provides user-paid benefits
to original video authors, video makers, and copyright owners in
exchange for video sharing. 56KanKan obtains highly valued and
original video resources (uploaded by the original makers of the
works) and then sets a price according to the quality ofthe videos.

Sources: Compiled from 56.com {2009), Albanesuis {2008),
McBride and Chao {2008), and wikipedia.org/wikij56.com
(accessed March 2011).

c

WHAT WE CAN LEARN •.•

Violation of copyrights on computers, as well as on the Internet, is a major problem for creators and distributors of intellectual property
such as software, movies, music, and books. The problem arises not only because it is difficult to monitor millions of users and their
postings, but also because in many countries there is not much legal protection of copyright, and even if there is, it is difficult and very
expensive to enforce. Protection of intellectual property is one of the major EC legal issues presented in this chapter. An overview of
other intellectual property topics, and especially piracy, are also presented. A full analysis of the legal and ethical issues is fa r beyond the
scope of one chapter. For a com prehensive treatment and case studies, see Mann and Winn {2008). This chapter also deals with several
societal issues related to EC, especially the potential environmental impacts known as "Green EC," and how the societal issues impact
individual privacy and lifestyle enjoyment.

)

Chapter Fourteen: E-Commerce: Regulatory, Ethical, and Social Environments

14. 1 ETHICAL CHALLENGES AND GUIDELINES
Ethics describes how individuals choose to interact with one another. It is the branch of
philosophy that deals with what is considered to be right and wrong. Ethics define the
nature of duties that people owe themselves and one another. For example, one duty is to
not intrude on a person's privacy, which is the right to be left alone and free of unreasonable personal intrusions.
Issues of priV'acy, ownership, control, and security must be confronted in understanding
the ethical challenges of EC. The following are some of the daily concerns that confront
ethical officers in a company: Does information's availability justifJ its use? How much ejfort and
expense should managers incur in considering questions of data access and privacy? What can
employers expectfrom employees with 1·egard to nondisclosure when going to workfor another firm?
What part of an information asset belongs to an organization and what is simply part of an
employee's general knowledge? Do employees know the degree to which behavior is monitored? Does
data gathered violate employee privacy rights? Is accuracy an explicit part ofsomeone's responsibility?
Have the implicatiorzs ofpotential error been anticipated? Have syste1ns been reviewedfor the most
likely sources of secu1-ity breach? Whats the liability exposure of managers and the organization?
For details, see Relkin (2006).

ethics
The branch of philosophy
that deals with what is
considered to be right
and wrong.
privacy
The right to be left alone
and free of unreasonable
personal intrusions.

ETHICAL PRINCIPLES AND GUIDELINES
Law (that is, public law) embodies ethical principles, but the two are not the same. Acts that
are generally considered unethical may not be illegal. Lying to a friend may be unethical, but
it is not illegal. Conversely, the law is not simply the coding of ethical norms, and not all
ethical codes are incorporated into public law.
A common agreement in a society as to what is right and wrong determines ethics,
but they are not subject to legal sanctions except when they overlap with activities that
also are illegal.
Online File W14.1 shows a framework for ethical issues.
An example of one ethical issue is the Facebook fiasco of2009, described next.

Example: Who Owns User-Generated Content?
In February 2009, Facebook casually slipped into its terms of service an updated clause
that users must sign before joining, announcing that users give Facebook an irrevocable,
perpetual, nonexclusive, transferable, fully paid, worldwide license to use, retain, and
display content posted to the site. In other words, anything you upload to Facebook can be
used by Facebook in any way it deems fit, forever, no matter what you do later. Consumer
watchdog groups and privacy experts immediately cried foul.
The objective of this change was to enable Facebook to sell customer data to
marketers: Facebook needed more revenue sources. As a result, Facebook pointed out that
the company would not use information in a way that goes against the privacy settings
outlined by users, but retaining rights to content after the user has left is unprecedented for
a social media site.
A November 2009lawsuit, f1led in U.S. District Court for the Northern District of
California, alleged that the modifications have in reality reduced privacy protections for
Face book users rather than increasing it, as the company had claimed it would (Vijayan
2010). Facebook did not do a good enough job of communicating the changes to the
terms of service, privacy experts say. Rather than asking users to agree to the new terms,
or even sending an e- mail alert to all users, the company quietly added this line to its
terms: Your continued use of the Facebook Service after any such changes constitutes
your acceptance of the new terms. That may not be good business practice, but is it
unethical?

BUSINESS ETHICS
Business ethics is a form of applied ethics that examines ethical principles and moral or
ethical problems that arise in a business environment. In the increasingly consciencefocused marketplaces of the twenty-fmt century, the demand for more ethical business

business ethics
A form of applied ethics
that examines ethical
principles and moral or
ethical problems that arise
in a business environment.

Part 5: E-Commerce Strategy and Implementation

/

processes and actions (known as ethicism) is increasing. Simultaneously, pressure is being
applied on industries to improve business ethics through new public initiatives and laws
(e.g., higher UK road tax for higher-emission vehicles). For example, today most major
corporate websites emphasize a commitment to promoting noneconomic social values
under a variety of headings (e.g., ethics codes, social responsibility charters).
Business ethics defines how a company integrates the core values of honesty, trust,
respect, and fairnes~
into its policies and practices-and complies with legal standards
and regulations. The scope of business ethics has expanded to encompass a company's
actions with regard not only to how it treats employees and obeys laws but to the nature
and quality of the relationships with shareholders, customers, business partners, suppliers, the community, the environment, and even future generations, as well. European
companies especially have embraced this expanded definition of ethics. Under recent
clarifications of the U.S. Federal Sentencing Guidelines (ussc.gov/Guidelines), companies with credible ethics programs, as opposed to merely paper programs such as that
ofEnron, may reduce penalties or avoid prosecution for crimes committed by managers
or employees.
Because of the worldwide scope and universal accessibility of the Internet, there are
serious questions as to which ethical rules and laws apply. Since there are no U.S. federal
or state statutes that currently prohibit employers from monitoring their electronic
workplace, these questions involve an appreciation of the law that is constantly changing.
Lawsuits and criminal charges are very disruptive, expensive, and may damage customer
relations (see whitepapers.technologyevaluation.com/search!forlcorporate-e-mail- lawsuits.html).

The Issues of Internet Abuse in the Workplace
I

In 2009, the 24/7 Wall St. Company conducted a workplace study about how people spend
time online, and the actual wa~ted
time and productivity losses turned out to be staggering.
The survey found that while most workers spend about 22 hours online each week, about
a quarter of that is time spent on personal matters, or approximately about 5 hours of lost
productivity each week. In general, workers spent more than an hour per week on social
media, followed by online games and e-mail. A majority of companies have banned access
to social networks, such as Facebook, Twitter, MySpace, and Linkedln. Last year, a study
released by Robert HalfTechnology, an IT staffing company, found that 54 percent of
companies were banning the use of social networking sites like Facebook, Twitter,
MySpace, and Linkedin. The top 10 "time wasters" were: social networks (1.24 hrs/wk);
online games (0.56 hrlwk); personal e- mail (0.45 hrlwk); portals (0.24 hr/wk); instant
messaging (0.22 hr/wk); fantasy football and gambling (0.12 hrlwk); pornography
(0.13 hrlwk); video/movies (0.21 hrlwk); search (0.19 hrlwk), and online shopping
(0.15 hr/wk) (24/7Wall St. 2010).
Dealing with Internet Abuse. Instead of banning social networks at work, some
employers are following less d~coni
measures by setting the following in place:,employees are encouraged to check their social networks only once or twice a day, employees are
encouraged to consolidate their social networking streams, develop a clear social networking policy, and utilize technology made for consolidation. The social networking policy
should communicate clear guidelines from employers to employees stressing that employees do not waste more than 20 minutes per day of company time on social networks
(Nutshell Mail2010).

Monitoring Employees-Is It Ethical?
Google and several other software application providers have incorporated new spyware on
smartphones that enable employers to spy on the whereabouts of their employees using the
built-in GPS tracking systems. Latitude by Google will collect personal information of its
users' travels by sending personal data to Google mainframes for the employers to log on,
monitor, and observe employee travel. The ethical question is whether by giving Google
the ability to monitor people's whereabouts does it tempt Google too much-in that this
new power to exploit the privacy of the individual's real-time whereabouts will be given

Chapter Fourteen: E-Commerce: Regulatory, Ethical, and Social Environments

EXHIBIT 14. 1

Safeguards to Minimize Exposure to
_Risk of Criminal or Civil Char es

1. Does the website clearly post shipment policies and guarantees? Can the company fulfill those
policies and guarantees? Does the website explain what happens in case of a missed deadline?
Does it comply with Federal Trade Commission (FTC) rules?
2. Does the website dearly articulate procedures for customers to follow when returning gifts or
seeking a refund for services not received?
3. Has the company checked backgrounds before entering agreements with third-party vendors and
supply chain ·partners? Do those agreements with vendors and partners indemnify (i.e., protect)
the company against their failure to deliver goods or process transactions on time and correctly?
4. If a third-party ISP or Web-hosting service is used, are there safeguards if the site crashes, is
infected by malware, or if bandwidth is insufficient to meet all of your customers' needs?
5. Is there sufficient customer support staff, and are they knowledgeable and adequately trained
to process inquiries from customers?

over to government and its requests for such information without proper warrant (Coursey
2009). In other words, businesspeople engaging in EC need guidelines as to what behaviors are reasonable and what risks are foreseeable under a given set of circumstances. Two
major risks are a criminal charge and lawsuit (civil charge). Exhibit 14.1lists examples of
safeguards to minimize exposure to those risks. (Also see Yamamura and Grupe 2008.)

EC ETHICAL ISSUES
There are many EC- and Internet-related ethical issues that are related to legal issues
(Himma and Tavani 2008). These issues are often categorized into intellectual property
rights, privacy, free speech versus censorship, and consumer and merchant protection
against fraud.

t Intellectual property rights. Ownership and value of information and intellectual
property. Rights to intellectual property are easy to violate on the Internet, resulting in
billions of dollars of losses to the owners of the rights (Section 14.2).
t Privacy. The collection, storage, and dissemination of information about individuals.
Internet users in many countries rate privacy as their first or second top concerns.
Specifically, Internet users are concerned with broad government intrusion of privacy
(Section 14.3).
t Free speech versus censorship. The issue of attempting to control offensive, illegal,
and potentially dangerous information on the Internet is controversial. This collides
with rights offree speech (Section 14.4).
t Consumer and merchant protection against fraud. It is easy to reach millions on the
Internet and to conduct different types of e-commerce-related fraud. The success of
e-commerce depends on the protection provided to consumers and merchants
(Section 14.5).
For further discussion, see wiki.media-culture.org.au/index.php/ECommerce_-_Legal_
and_Ethical_Issues.
Examples of ethical issues discussed elsewhere in this book are channel conflict
(Chapter 3), pricing conflict (Chapter 3), disintermediation (Chapters 3, 4, and 8), and
trust (Chapter 8). Two additional EC-related ethical issues are nonwork-related use of the
Internet and codes of ethics. See also en.wikipedia.org/wiki/Ethical_code.

Nonwork-Related Use of the Internet
As described earlier, a majority of employees use e-mail and surf the Web for nonworkrelated purposes. The use of company property (i.e., computers, networks) for e-mail and
Internet use creates risk and wastes time. The degree of risk depends on the extent to
which the company has implemented policies and procedures to prevent and detect illegal

Part 5: E-Commerce Strategy and Implementation

uses. For example, companies may be held liable for their employees' use of e-mail to
harass another employee, participate in illegal gambling, or distribute child pornography
(Gray 2010).

Codes of Ethics
A practical and necessary approach to limiting nonwork-related Internet surfing is an
Internet-acceptable use policy (AUP) to which all employees must conform. It includes
EC, social networks,-and any IT-related topics. Without a formal AUP, it is much more
difficult to enforce acceptable and eliminate unacceptable behaviors and punish violators.
Whenever a user signs .on to the corporate network, the user should see a reminder of the
AUP and be notified that online activities are monitored. Such notification should be a
part of a code of ethics.
Corporate codes ofethics state the rules and expected behaviors and actions. Typically,
the ethics code should address the use of offensive content and graphics, as well as,
proprietary information. It should encourage employees to think about who should and
who should not have access to information before they post it on the website. The code
should specify whether the company allows employees to set up their own Web pages on
the company intranet and st-cfte policies regarding private e-mail usage and nonworkrelated surfing during working hours. A company should formulate a general idea of
the role it wants websites to play in the workplace. This should guide the company in
developing an AUP and provide employees with a rationale for that policy. Finally, do
not be surprised if the code of ethics looks a lot like simple rules of etiquette; it should.
Exhibit 14.2 lists severaf useful guidelines for a corporate Web policy. For a list of
website quality guidelines, see Online File W14.2. For ethics case studies,.see harpercollege.
edu/-tmorris/ekin/resources.htm.
Section 14.1 • REVIEW QUESTIONS
1. List seven ethical issues related to EC.
2. List the major principles of ethics.
3. Define business ethics.
4. Give an example of an EC activity that is unethical but not illegal.
5. How can employees abuse the Internet? How do small companies deal with this?
6. Describe the employee monitoring issue.
7. List the major issues that should be included in a code of ethics.

EXHIBIT 14.2

,C or ,o rate Web Polic

~ Guidelns

• Issue written AUP guidelines abou~
employee use of the Internet and communication systems
including e-mail and instant messaging.
• Make it clear to employees that they cannot use copyrighted or trademarked material without
permission.
• Post disclaimers concerning content. such as sample code, that the company does not
support.
• Post disclaimers of responsibility concerning content of online forums and chat sessions.
• Make sure that Web content and activity comply with the laws in other countries, such as those
governing contests and privacy.
• Make sure that the company's Web content policy is consistent with other company policies.
• Appoint someone to monitor Internet legal and liability issues and have that person report to a
senior executive or legal counsel.
• Have attorneys with cyberlaw expertise review Web content to make sure that there is nothing
unethical or illegal on the company's website and that all required statements and disclaimers
are properly included.

Chapter Fourteen: E-Commerce: Regulatory, Ethical, and Social Environments

14.2 INTELLECTUAL PROPERTY LAW
The legal system is faced with the task of maintaining a delicate balance between preserving
social order and protecting individual rights. Keep in mind that the term individual when
used in law is broadly defined to mean a person, group of people, or other legal entity, such
as an organization or corporation. In this section, we explain the various types of intellectual
property laws and the issues arising from EC.

INTELLECTUAL PROPERTY IN E-COMMERCE
Intellectual property (IP) refers to creations of the mind: inventions, literary and artistic
works, and symbols, names, images, and designs used in commerce. IP is divided into two
categories: (1) industrial property, which includes inventions (patents), trademarks, industrial
designs, and geographic indications of source; and (2) copyright, which includes literary and
artistic works such as novels, poems and plays, films, musical works, artistic works such as
drawings, paintings, photographs and sculptures, and architectural designs (see wipo.int/
about-ip/en). Intellectual property law refers to the area of the law that includes patent law,
copyright law, trademark law, trade secret law, and other relevant branches of the law, such as
licensing and unfair competition.
Intellectual property law may also be concerned with the regulation of mental products,
including creativity. It affects such diverse subjects as the visual and performing arts,
electronic databases, advertising, and video games. Creativity is an integral part of the entire
business world, as is the protection of innovation. Visit Online File W14.3 for related
intellectual property websites.
There are various intellectual property law specialties as shown in Exhibit 14.3. Those
specialty laws are interrelated and may even overlap.

intellectual property (IP)
Creations of the mind,
such as inventions, literary
and artistic works, and
symbols, names, images,
and designs, used in
commerce.
intellectual property law
Area of the law that
includes patent law, copyright law, trademark law,
trade secret law, and
other branches of the law
such as licensing and
unfair competition.

Copyright Infringement and Protection
Numerous high-profile lawsuits already have been filed regarding online copyright infringement. A copyright is an exclusive right of the author or creator of a book, movie, musical
composition, or other artistic property to print, copy, sell, license, distribute, transform to
another medium, translate, record, perform, or otherwise use. In the United States, as soon
as a work is created in a tangible form, such as through writing or recording, the work automatically has federal copyright protection. A copyright does not last forever; it is good for a
fixed number of years after the death of the author or creator (e.g., 50 years in the United
Kingdom). In the United States in 1998, copyright was extended to 70 years after the death
of the author by the Sonny Bono Copyright Extension Act. Mter the copyright expires, the
work reverts to the public domain. Copyrights are owned in many cases by corporations

EXHIBIT 14.3

- ~-

_ Their_~

Intellectual Property Laws and
-

Laws

Protection Provided by the Law

Intellectual property law
Patent law
Copyright law

Protects creations of the human mind
Protects inventions and discoveries
Protects original works of authorship, such as music
and literary works, and computer programs
Protects brand names and other symbols that indicate
the source of goods and services
Protects confidential business information
Enables owners of patents, trademarks, copyrights, and
trade secrets to share them with others on a
mutually agreed-upon basis
Protects against those who try to take a free ride on
the efforts and achievements of creative people

Trademark law
Trade secret law
Law of licensing

Law of unfair competition dealing
with counterfeiting and piracy

copyright
An exclusive right of the
author or creator of a
book, movie, musical
composition , or other
artistic property to print,
copy, sell, license, distribute, transform to another
medium, translate, record,
perform , or otherwise use.

Part 5: E-Commerce Strategy and Implementation

infringement
Use of the work without
permission or contracting
for payment of a royalty.

(e.g., the copyrights to this book). In such a case, the copyrights will potentially last forever
unless legally reassigned. The legal term for the use of the work without permission or contracting for payment of a royalty is infringement.
Legal Aspects of Infringement. In November 2010, the U.S. Senate Judiciary Committee
approved a controversial Copyright Enforcement Bill that would give the authorities dramatic
new copyright enforcement powers allowing it to take down entire domains "dedicated to
online piracy" rather than just targeting files that actually infringe copyright law. The
Combating Online Infringement and Counterfeits Act (COICA) gives U.S. law enforcement
the right to shut down websites without trial or defense if it finds the central reason for the
site is to distribute copyrighted information illegally. The act allows both civil and criminal
forfeitures of property used to commit copyright infringement and the potential impact is on
content creators, music or movie distributors and publishers. The problem is that under this
bill, most business websites are considered publishers since they post static or dynamic content
(e.g., blogs) or sales brochures. Under this act, there is significant risk of IT disruption during
the enforcement activities allowed. In the worst-case scenario, a disgruntled employee posts
copyrighted material on the company website, unbeknownst to the directors of the company,
just before being terminated. The FBI, once alerted by an anonymous whistle-blower, could,
after discovering the online distribution of possible copyrighted material, shut down the
domain name and confiscate the company's server as evidence, even if no charges are flied for
months thereafter. More practically, problems may occur should office workers innocently
share songs or videos outside the company firewall, or should an employee's PowerPoint
presentation contain copyrighted quotes or movie clips, and are subsequently distributed to
branch offices across the WAN or Internet (Gross 2008 and Fogarty 2011).

Examples of Infringement
To protect its interests, the Recording Industry Association of America (RIAA), the
recording industry's trade group, uses selective lawsuits to stamp out rampant music piracy
on the Internet. More than 7 years ago, the RIAA began its massive litigation campaign
that now includes more than 20,000 lawsuits targeting alleged copyright scoffiaws on peerto-peer networks. However, during this period RIAA has spent more than $58 million in
pursuit of targeted infringers yet has received awards of less than $1.4 million (less than
about 2 percent) (Thomson 2010).
Example 1. The file-sharing software company LimeWire lost a long-running court
battle to the major recording companies in May 2010. A judge with the U.S. District Court
in New York ruled that the company and its chairman, Mark Gorton, were liable for inducing copyright infringement. Besides the file-sharing companies and Internet service
providers, RIAA targeted the elderly, students, children, and even the dead. No one in the
United States who used Kazaa, LimeWire, or other file sharing networks was immune from
the R.IA.Ns investigators, and fines under the Copyright Act go up to $150,000 per purloined
music track (Nakashima 2010b).
Example 2. On November 5, 2010, the RIAA won a major victory over defendant
Jammie Thomas-Rasset, who lost her retrial. Rasset was the woman who was ordered to
pay a heavy fine for downloading MP3s using Kazaa, a file sharing network. She
was ordered to pay $1.5 million, or $62,500 fine per shared song, for 24 songs she shared
via Kazaa in 2006. The appeals court reaffirmed the judgment that the RIAA was awarded
in 2006 by a Minneapolis jury. Thomas-Rasset's legal team has already announced that
they will file a new appeal (Madrak 2010).
However, since 2009, court records show that new federal copyright infringement
lawsuits plummeted to a six-year low. This follows the year after the RIAA abandoned its
litigation campaign "sue 'em all" against file sharers. In July 2010, the U.S. District Court judge
reduced the jury's award from $675,000, or $22,500 per infringed work, on a student convicted
of illegal file-sharing, to $67,500, or $2,250 per infringed work, on due process grounds,
holding that the jury's award was unconstitutionally excessive. See en.wikipcdia.org/
wiki/RIAA_v._Tenenbaum and Bambauer (2010).
Furthermore, legal shields are frustrating copyright infringement lawsuits. In June
2010, a federal judge handed Google a major victory. Google rebuffed media company
Viacom's attempt to collect more than $1 billion in damages for the alleged copyright

Chapter Fourteen: E-Commerce: Regulatory, Ethical, and Social Environments

abuses of Google's popular YouTube service. The ruling by U.S. District Judge Louis
Stanton in New York embraces Google's interpretation of a 12-year-old law that shields
Internet services from claims of copyright infringement, as long as they promptly remove
illegal content when notified of a violation since YouTube had gone way beyond what is
required by law to protect copyright owners. In 2007, YouTube proved that it introduced a
ftle screening software program utilizing video recognition technology, which recognizes
copyrighted video and shuts down the streaming service in about 1 minute (Townsend
2010). Finally, pending copyright infringement lawsuits are not favored because they are
lengthy and very costly. As an alternative to lawsuits, the entertainment industry led primarily
by the Motion Picture Association of America (MPAA) and RIAA is actively pursuing
digital rights management policy initiatives through federal legislation and the courts.

Digital Rights Management (DRM)
Digital rights management (DRM) is an umbrella term for any of several arrangements
that allow a vendor of content in electronic form to control the material and restrict its
usage. These arrangements are technology-based protection measures. Typically, the
content is a copyrighted digital work to which the vendor holds rights. In the past, when
content was analog in nature, it was easier to buy a new copy of a copyrighted work on a
physical medium (e.g., paper, ftlm, tape) than to produce such a copy independently. The
quality of most copies often was inferior. D igital technologies make it possible to produce
and distribute a high-quality duplicate of any digital recording with minimal effort and
cost. The Internet virtually has eliminated the need for a physical medium to transfer a
work, which has led to the use ofDRM systems for protection.
H owever, DRM systems may restrict the fair use of material by individuals. In law,
fair use refers to the use of copyrighted material for noncommercial purposes. Several DRM
technologies were developed without regard for privacy protection. Many systems require
the user to reveal his or her identity and rights to access protected content. Upon authentication of identity and rights to the content, the user can access the content for free (see
epic.org/privacy/drm).
All is not well with DRM system applications, however, especially if it has to do with
Apple's controlled ecosystem. In July 2010, the Library of Congress ruled in favor of the
Electronic Frontier Foundation, who argued that jail breaking one's iPhone should be
allowed as "fair use," even though it required one to bypass some DRM and then to reuse a
small bit of Apple's copyright firmware code. In Apple's losing argument, it claimed that
jail breaking was not "fair use" but "terrible, ridiculous, and illegal" and that Apple's
controlled ecosystem was of great value to consumers (Kravets 2010).

digital rights
management (DRM)
An umbrella term for any
of several arrangements
that allow a vendor of
content in electronic fo rm
to control the material
and restrict its usage.

fair use
The legal use of copyrighted material fo r noncommercial purposes
without paying royalties
or getting permission.

Patents
A patent is a document that grants the holder exclusive rights to an invention for a fixed patent
number of years (e.g., 17 years in the United States and 20 years in the United Kingdom). A document that grants
Patents serve to protect tangible technological inventions, especially in traditional indus- the holder exclusive
trial areas. They are not designed to protect artistic or literary creativity. Patents confer rights to an invention for
monopoly rights to an idea or an invention, regardless of how it may be expressed. An a fixed number of years.
invention may be in the form of a physical device or a method or process for making a
physical device. In addition, some business methods are also patentable.
Certain patents granted in the United States deviate from established practices in
Europe. For example, Amazon.com successfully obtained a U.S. patent for its "One-Click"
ordering and payment procedure. Using this patent, Amazon.com sued Barnes & Noble in
1999 and 2000, alleging that its rival had copied its patented technology. Barnes & Noble
was enjoined by the courts from using the procedure. However, on May 12, 2006, the
USPTO ordered a re-examination of the "One-Click" patent. In November 2007,
Amazon.com responded by amending the broadest claims (1 and 11) to restrict them to a
"shopping cart model" of commerce. In March 2010, the revised patent was confirmed. See
en.wikipedia.org/wiki/1-Click. For a sample ofEC patents, see Online File W14.4.
In August 2010, the U.S. Supreme Court unanimously rejected the machine-or-transformation test as the sole test for process patent eligibility. H owever, the Court declined to
offer an alternative to its June 2010 vague ruling of the Bilski vs. Kappos case, leaving to

Part 5: E-Commerce Strategy and Implementation

,I

the U.S. Court of Appeals for the Federal Circuit the task of developing new criteria for
patentability. The upcoming decision may have a wide-ranging effect on the patenting
practices of e-commerce companies and may call into question the validity of thousands of
patents granted on business methods since the 1990s. For more details, see Roberts (2010).
In December 2010, Internet Licensing LLC amended a lawsuit in District Court in
Seattle, against Apple, eBay, Facebook, Google, and nine other companies for violating
four of its patents.
In April2009, Bimk of America, MasterCard, Visa, and 20 other firms were sued by
Actus, a Texas-based patent-holding company, over alleged infringements of four patents on
an electronic payment system for e-commerce. The patents in question relate to "methods
and apparatus for conducting e-commerce using electronic tokens," where digital currency is
used by customers for online payments. In March 2011, the case was still pending (Finextra
2010). In November 2009, an addition made to the congressional budget bill attempted to
reduce the risk that companies' business practices are violating someone's patent. The
addition allows companies a limited right to continue using business methods, without
paying royalties, if they provide proof that they utilized the business methods prior to learning
that they had been patented. See en.wikipedia.orglwiki/Patent.
The business methods patent is meant to protect new ways of doing business. In 2010,
the Supreme Court ruled that patents cannot cover abstract ideas. In January 2011,
Senator Leahy introduced a bill designed to reform the U.S. patent process. Senator
Schumer introduced an amendment to the bill that would authorize a pilot program to
review business method patents (Smith 2011).
Oracle Ve rsus Google. In following its legal right of enforcement, Oracle has been
mining its newly acquired patent portfolio and has been actively s.e eking and suing
infringers. Oracle has taken on Google over its Android product for using Oracle's Java
technology (copying Java code) without a license. Over the last 5 years, Google- has aggressively developed cloud computing products for business, relying on Java technology to
enhance mobile software applications. Google claims the suit is baseless. The courts will
decide. For details, see Krazit (2010).

Trademarks

trademark
A symbol used by
businesses to identify
their goods and services;
government registration
of the trademark confers
exclusive legal right to
its use.
trademark dilution
The use of famous
trademarks in public that
diminishes the capacity
of the mark to distinguish
goods or services, or
tarnishes the mark in the
eyes of the consumer.

Similar to a patent is a trademark, which is a symbol businesses use to identify their goods
and services; government registration of the trademark confers exclusive legal right to its use.
A trademark is a distinctive sign or indicator used to identify products or services to
consumers. A trademark is used by individuals, business organizations, or other legal
entities to notify consumers of a unique source, and to distinguish its products or services
from those of other entities. Trademarks protect words, names, symbols, sounds, smells, or
colors that distinguish goods and services from those manufactured or sold by others and
to indicate the source of the goods. Trademark dilution is the use of famous trademarks in
public that diminishes the capacity of the mark to distinguish goods or services, or
tarnishes the mark in the eyes of the consumer. In 2004, the Federal Trademark Dilution
Act (FTDA) was enacted to protect famous trademarks from third-party uses, which,
while not likely to confuse, nonetheless diminish the capacity of the mark to distinguish
goods or services, or tarnishes the mark.
Trademarks, unlike patents, can be renewed forever as long as they are being used in
commerce. The owner of a registered trademark may commence legal proceedings under statutory law for trademark infringement to prevent unauthorized use of that trademark.
For example, use of a trademark without permission can be considered infringement of the
trademark holder's rights. However, because registration is not required, the owner of a
common law trademark may also flle suit. One drawback to common law trademarks is that an
unregistered mark is generally not protectable outside the geographical area within which it has
been used or in geographical areas into which it may be reasonably expected to expand (see
en. wikipedia.org/wikilfrademark and en.wikipedia.org/wiki/United_States_trademark_law ).
In 2008, eBay won a landmark trademark case against Tiffany, a leading jewelry retailer,
who had sued eBay alleging that many of the items being advertised on eBay as Tiff.my
merchandise were actually fakes. Tiffany argued that eBay's action constituted deliberate

Chapter Fourteen: E-Commerce: Regulatory, Ethical, and Social Environments

trademark infringement, false advertising, and trademark dilution. EBay responded that
eBay cannot be held responsible for policing the millions of customer listings on its site for
potential misuse of Tiffany's trademark. The U.S. District judge ruled that eBay cannot be
held liable for trademark infringement "based solely on their generalized knowledge that
trademark infringement might be occurring on their websites" (Savitz 2008).

FAN AND HATE SITES
Fan and hate websites are part of the Internet self-publishing and UGC phenomena that
includes blogging (see Chapters 2 and 7). Fan sites may violate intellectual property rights.
For example, some people get advanced copies of new movies or TV programs and create
sites that compete with the legal sites of the movie or TV producer, even before the legal
site is activated. Although the producers can get a court order to close such sites, new sites
can appear the next day. Although the intention of the fans may be good, they may cause
damage to the creators of the intellectual property. Philosophically opposed to fan websites
are hate websites, which disseminate negative comments and can cause problems for
corporations, as well as for individuals.
Many hate sites are directed against large corporations (e.g., Walmart, Microsoft, Nike).
Associated with hate sites is the idea of cyberbashing, which is the registration of a domain
name that criticizes an organization or person (e.g., paypalsucks.com, walmartblows.com).
As long as these websites contain legitimate complaints that are not libelous, defamatory in
character, sponsored by competitors, or do not infringe on trademark -rights by confusing
consumers, they are protected because they fall within the protections of the First
Amendment. Material published on fan sites, hate sites, and newsgroups may also violate
the copyrights of the creators or distributors of intellectual property. This issue is another
example of the conflict between protection of intellectual property and free speech, as
discussed in Section 14.3.

Section 14.2 • REVIEW QUESTIONS
1. What is intellectual property law? H ow is it helpful to creators and inventors?
2. Define DRM. Describe one potential impact on privacy and one drawback.
3. What is meant by"fair use"? How does the "jail breaking" ofiPhones fall under"fair use"?
4. Defme trademark infringement and discuss why trademarks need to be protected
from dilution.
5. Describe fan and hate sites. How do they benefit society? Should they be more regulated?
6. Define cyberbashing. Should attempts to expose unscrupulous corporate activities be
banned?

14.3 PRIVACY RIGHTS, PROTECTION , AND FREE SPEECH
Privacy means different things to different people. In general, privacy is the right to be left
alone and the right to be free of unreasonable personal intrusions. (For other definitions of
privacy, see the Privacy Rights Clearinghouse at privacyrights.org.) Privacy has long been a
legal, ethical, and social issue in most countries.
Privacy rights protection is one of the most debatable and frequently emotional issues
in EC and SC. Here we explore the major aspects of the problem.

SOCIAL NETWORKS CHANGING THE LANDSCAPE
OF PRIVACY AND ITS PROTECTION
What are your privacy rights and what constitutes invasion of privacy? The explosion in
online communications technologies has created complex new ethical dilemmas for both
businesses and government agencies. As transaction costs for processing, storing, and
transmitting data drop dramatically and sophisticated tracking and monitoring software
become widespread, concerns arise around online cons umer privacy, free speech, and
defamation.

cyberbashing
Domain name that
criticizes an organization
or person.

Part 5: E-Com merce Strategy and Implementation

Social media appears to be causing an evolution of privacy issues online. Yet, today's
young people are less concerned about privacy-having a different standard of privacy than
their parents. T hey are connected with blogs, photos, and SMS messages. As a consequence, there is a major cultural shift taking place that appears to redefine the barriers that
marketers need to overcome to reach customers. Thought to be creepy just 10 years ago,
new opportunities for privacy intrusion by marketers exist to offer potential customers
better personalized experiences. See Bharvaga (2010) for a discussion.

Global View
N ote that privacy is t reated differently in different countries. For example, back in
November 2009, Google was sued in Switzerland over privacy concerns regarding its
Street View application. Even though Google blurs the faces and license plates that appear
in Street View, users of the service can also request that certain images, like their homes, be
removed or blurred. The Swiss government still has concerns about the application
(Pfanner 2009).

PRIVACY RIGHTS AND PROTECTION
Today, virtually all U.S. states and the federal government, either by statute or by common
law, recognize the right to privacy, but few government agencies actually follow all these
statutes (e.g., citing reasons of national security for their malfeasance). The definition of
privacy can be interpreted