November 11, 1996

A Brie BrieFeature

By: R. James Schnieders

The internet provides a fresh instrument for information gathering, social relationships, and entertainment. However, the most intriguing aspect of the electronic medium is its properties as a catalyst for new businesses. Indeed, the burgeoning online phenomenon has been described as the “new goldrush.”

A typical entrepreneur encounters insurmountable barriers in initiating a business. A good idea is often surrendered for lack of a business plan, capitalization, or marketing development. Unlike standard business venues, the internet allows the presentation of ideas directly into a very large marketplace with relatively little initial or recurring costs. However, it is just these factors which expose a small business to sharp or ignorant practices.

The elimination of common barriers allows access to inexperienced and guileless entrepreneurs. Further, where there are small fish, there are sharks; unscrupulous business practitioners and sham-artists feed on trusting new-comers through sharp business practices. Additionally, users are often camouflaged by their “screen names,” creating an environment which is equally escapable as it is accessible. Products cannot easily be returned to a virtual store without pre-planning.

Regardless of these facts, the internet has grown to be a loose arena of handshake agreements. The environment’s exponential growth rate places a premium on immediacy. M. J. Farkas is the president of Online Sports (, a San Diego based internet business. Online Sports is a hybrid online directory sports catalog which promotes and sells thousands of sports related items on its nearly 10,000 page web-site. It was recently recognized as one of the Top Five Percent of All Websites. Further, it was identified by the San Diego Union-Tribune as one of San Diego’s Top Twenty-Five Cool Tech Companies. Farkas’s initial business relationships were defined by timing. “We had to create a large inventory of complimentary goods and services very quickly. I also saw other sympathetic businesses as opportunities to increase the site’s visibility. But, I had to act immediately. In the early, less formal stages of the internet business environment, a handshake was sufficient. Now, the development of the arena, and of our business, requires more caution and definition.” In time, Farkas recognized the usefulness of a written agreement. “Because of the site’s popularity, I can afford to be more selective with my business relationships. A written agreement emphasizes professionalism and is in both parties’ best interests. If a potential business partner balks, I see that as a sign that it may not have been the best match for our business.”

Internet businesses rely on each other to grow. The typical web-site cannot demand instant attention simply on its own design or format. Browsers tend to rely on their favorite places to link with new sites. Accordingly, a strong internet business is well-connected with sympathetic businesses. Matt DeLine is the president of San Diego Hotel Reservations and Phoenix/Scottsdale Hotel Reservations ( DeLine recently began marketing his free reservation services over the internet. He views hyperlinking as a practical necessity for the marketing tool’s success. “On the internet, it’s very important for my business to be linked to other big names. People may not find my service by browsing through a search engine such as Webcrawler or Yahoo; it’s buried with 100 other related, and unrelated, articles and services. But they will be exposed to it if they are viewing, Peerless Shuttle’s, the Gaslamp Quarter’s, or the San Diego Convention Center’s homepages.”

Not unlike the primordial pool, the incipient businesses are seeking mates to ensure their survival. Deals are made quickly to gain increased exposure in the expanding market. Often, the basic principles of the agreement are understood; however, technical aspects of the transaction are ignored.

Before entering into an agreement with another internet business, an entrepreneur should beware of the dangers of operating in this relatively lawless land. As mentioned above, a business’s product, service, or idea may be sophisticated; however, the business was probably developed by a newcomer to the business world. Without experience in business transactions, these new businesses do not recognize the exposure to liability from their ideas.

Every business agreement creates rights and obligations which reflect a meeting of the parties’ minds. The agreement should be a document which eliminates ambiguity and defines the parties’ relationship. A well drafted agreement will greatly reduce honest disputes and “selective loss of memory” when a dispute arises.

The agreement should begin with a “scope of work.” The scope defines what the parties expect from each other. Begin your negotiations with a list of the parties’ respective obligations. This will serve to eliminate unfounded expectations on fundamental issues. Because each relationship will vary according to the parties’ expectations, examples are constricting. However, each agreement should consider: 1) the nature of the goods or services which are to be exchanged; 2) the timing of payment; 3) the transfer of title to goods (if any); 4) who will be responsible for creation of the site; 5) who will be responsible for accounting and invoicing; 6) who will be responsible for returns; and 7) who will maintain the site’s inventory.

Beyond this fundamental definition of rights and obligations, the parties should also define their relationship. Business contracts often bind the parties to other obligations outside the boundaries of the agreement. For example, an employer-employee relationship creates obligations for taxes and workers compensation, and may create liability for an employer in the event of an employee’s negligence. Most internet relationships can be worded to eliminate these issues. The principles of independent contracting are easily defined and should be incorporated, when possible.

Many internet relationships create accessibility by both parties to the other’s database. Beyond basic copyright and patent principles, the information may be protected through written agreement. Contracts should incorporate a devise which identifies data, ideas, marketing plans and artwork as “proprietary information.” As long as information is properly classified, a court can prevent its improper use and award damages against the pirating firm.

The primary problem for a nascent entrepreneur in any environment is its exposure to competition. As stated above, the internet spectrum is transitory by nature. If one’s business relationship is with a sympathetic business, it is a small step for a business compatriot to become a business competitor. Contracts may restrict parties from directly competing with each other for a reasonable duration of time after the termination of the contract. If there is a danger of creating competition through the agreement, such a clause should be added.

Finally, a business agreement should consider the event of a dispute. Because the internet is not geographical, the parties should define where, and by whom, a dispute will be resolved. Most large cities have many alternative dispute resolution options, including mediators and arbitrators, who can be pre-assigned by contractual language to hear disputes. If the parties are not in the same geographical area, they should also consider the venue of the action, that is, where the forum for litigation will be.

Business contracts are important tools for the protection of small businesses. The above concepts are not intended to be a complete list of issues; the parties should carefully consider plan their specific issues before drafting an agreement. A sound contract may then be drafted by the parties or with the assistance of counsel with relatively little expense.

R. James Schnieders is a North County attorney, emphasizing in internet business transactions. He can be reached at or (619) 753-5773.
Brie Le Conflit
Last Modified: Monday, November 11, 1996 12:29:02 AM