Legal issues for online companies

Legal issues for online companies

This article was written by Michael Buckworth, a partner in Buckworth Solicitors. Buckworth Solicitors is a London based law firm specializing in assisting start-ups on a range of matters. The firm works solely on the basis of affordable fixed fees and was set up at the beginning of 2011. 

Online companies face many of the same legal issues as offline companies. However, many online companies seek to streamline the contractual process and provide a seamless online experience for their customers and users. This results in a slightly different approach to the legal documentation. Further the most valuable asset of many online businesses is their intellectual property rights and so the ownership and protection of such rights is a key consideration.

Regulating the relationship with customers

Online businesses will generally regulate the relationship with their users and customers through electronic terms of use. Acceptance of these terms of use by users and customers creates a binding and enforceable contract with the business. Ideally, on signing up to the service or using the website, users should be required to click a button to acknowledge that they have read and agree to be bound by the business’s terms of use. On occasion, users are deemed to have accepted the terms of use simply by using the service or website.

Terms of use should contain all the commercial terms relevant to the relationship between the business and its customers and users. Matters covered will include the obligations of the business to its customers and of the customers to the business, a limitation of liability provision in favour of the business, a provision dealing with ownership of any intellectual property rights and possibly a temporary revocable license to the users allowing them to use the intellectual property rights for limited purposes.

The most important (and potentially most troublesome) aspect of the terms of use is the limitation of liability provision. Particularly where services are being provided to consumers, English law requires that limitation of liability clauses are fair and are easily accessible to consumers. Further, it is not possible under English law to exclude some types of liability (such as for death and personal injury) and any attempt to do so may result in the whole limitation of liability clause being unenforceable. Businesses should seek advice on the wording of such clauses.

Some online businesses will also require a contract or terms to govern the relationship with merchants such as advertisers and supplier.

Protection of intellectual property rights

The value of many online businesses is affected by two main factors: turnover/profit and the value of the intellectual property rights it owns or controls.

Most if not all online businesses will have licensed intellectual property rights from a third party. These licenses may relate to commonly used software, or content such as pictures licensed from a provider. In addition, where online businesses are doing something innovative, they may have created (or contracted with a third party developer to create) new functionality. Generally, the intellectual property rights in new software will be owned by the business itself.

Online businesses should ensure that any agreement with a developer (whether in-house or a third party) contains suitable provisions to ensure that all intellectual property rights vest automatically in the business and, to the extent that they don’t, the business can require the intellectual property rights to be transferred to it. Failure to include well drafted and enforceable provisions to this effect can result in valuable intellectual property rights remaining the property of the developer.

Online businesses should also consider the terms of key licenses. Where a piece of software is crucial for the operation of the business, it should not, for example, contain a provision that allows termination of the license on a change of control of the business. Such a provision could prevent the sale or listing of the business or an investment where the investor takes legal control of the business.

Finally, online businesses should consider whether it is worth seeking protection for intellectual property rights via trademark and patent registrations. The cost of securing, maintaining and enforcing these registrations often far outweighs the benefit to the online business. In addition while patent protection may be granted for software-based innovations, under English law it may be that the patent isn’t actually enforceable in a court of law when the business seeks to enforce its rights against a third party. However, online businesses with innovative functionality should at least consider the possible benefits of securing these registrations.

Data Protection

The Data Protection Act 1998 requires businesses who process personal information in an automated form to notify the Information Commissioner’s Office (unless they are exempt from registration). The ICO will publish certain details of the business on its publicly available register. Failure to notify when required to do so is a criminal offence. Register entries have to be renewed annually. Failure to renew a registration if required to do so is a criminal offence.

In addition to the obligation to notify, the Data Protection Act 1998 requires businesses to provide certain information to their users and customers. This information includes details of how the information will be used, whether it will be transferred outside of the EEA and/or sold to third parties.

Online businesses are advised to seek professional legal guidance about data protection compliance. Complying with the Data Protection Act 1998 is often relatively simple, cheap and painless. Often all that is required is registration and a well-drafted privacy policy. However, it is easy to fall foul of the legislation as its scope is not immediately apparent from a reading of the guidance notes on the ICO website.


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20 January 2023 | Marketing
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