Starting a website from scratch can be time-consuming and expensive. Many people decide to avoid these problems by bypassing them and purchasing a site that already is successful. If you’re considering this course of action, you need to keep in mind the legal issues that can come up in the purchasing process.
What Are You Buying?
Until you own a website, there’s a tendency to look at them as though they are one piece of property. In fact, a website is more like a community of houses. Each “house” is unique and presents different legal issues you must address in any purchase agreement.
Let’s start with a simple topic. Are you buying the domain name or are you buying the domain name and website or you buying just the content? The answer may seem obvious, but you would be surprised how often the seller and the buyer have different views on this topic.
If you’re buying just the domain, the transaction tends to be much simpler because the only real issues are:
- Does the seller actually own the domain,
- Does the seller have the right to sell it, and
- Does the domain name infringe on a trademark owned by a third party?
If you’re buying the actual website content in addition to the domain, things become much more complex because of intellectual property issues. Intellectual property is a legal catchall term that refers to topics such as trademarks, copyrights, trade secrets, and patents. Of these matters, trademarks and copyrights are by far the most common areas where problems pop up.
A copyright is a right to copy, distribute and perform a tangible work. This definition is simplified, but gives you the general idea behind the concept.
The individual who owns the copyright controls its use. A classic example of copyright would be a book written by your favorite author. The text of the book is a fixed work. When the author writes the book and puts it in a final form, they are automatically granted a common law copyright. The granting of this right means that anybody who wishes to use the text must obtain permission from the author with a few notable exceptions that are beyond the scope of this article. The author usually grants permission by requesting “legal consideration,” which comes in the form of monetary royalties. This process is how publishers pay authors from Stephen King to J.K. Rowling.
In many ways, a website is a collection of copyrights. The text on the website certainly constitutes a fixed tangible work that will be considered a copyright. However, the HTML code can also be claimed as a copyright. And how about those images on the site? Yes, they are considered copyrighted works as well.
When purchasing a website, it is critical a copyright audit be performed to make sure that you are not “buying a lawsuit.” The last thing you want to do is purchase a website and then be sued by a company like Getty Images for copyright infringement. A copyright audit involves metaphorically tearing down a website into its copyrighted parts and establishing the ownership and licensing rights to each section. With potential damages in the amount of $150,000 per image for a copyright infringement claim, spending the money to make sure all the copyrighted elements of the website are in order is money well spent.
There’s one other oddity that comes up with sites and copyright. If you recall from our discussion above, a common law copyright is created automatically once a work is finished by the original author. When building websites, the original “authors” are often freelancers. The freelance party, and not the seller, may be the owner of the design you are trying to buy unless that freelance party transferred the copyright ownership to the seller at the end of the project. When contacted, most freelancers are willing to sign off on a copyright assignment, but you never know until you talk to them. Regardless, you must resolve the issue before closing the transaction.
The average website is a collection of modules with unique copyright issues. Make sure you address each module before purchasing any online property to avoid being ripped off.
A trademark is actually one of two types of marks – a trademark or a service mark. Service marks are used to identify a service such as the H&R Block tax service. A trademark refers to the symbol identifying a product traded in the e-commerce market. For example, the silhouette image of Michael Jordan jumping for a dunk is a trademark for the Air Jordan shoes.
Marks are vital business assets because consumers associate the marks with particular brands. When a consumer sees the Apple trademark, they have a general impression as to whether the products being sold under that mark are of high quality or not. If they associate the mark with high quality, then they are more likely to buy any product that has that mark. This branding makes trademarks and service marks incredibly valuable.
What does any of this have to do with the purchase of a website? Most websites have a mark on them. If you visit the Google homepage, for instance, you see the “Google” mark above the search box. If you had enough money to purchase Google, would it be important to acquire the exclusive rights to own and use this mark as part of the transaction? Of course it would. Consumers would question the validity of your business efforts under the Google name if you didn’t use the mark.
Now consider the website you are contemplating purchasing. Is there a trademark associated with the business? There almost always is. The presence of the mark then begs a simple question – is the mark a part of the sale and, if so, what rights come with it? Does the transfer cover the mark both online and offline? Are there any limitations? This information must be detailed in the purchase agreement to avoid potential legal disputes and litigation down the line.
Open Source Software
From a legal standpoint, the web is one of the more amazing developments we’ve seen in the history of civilization. One reason for this is the willingness of people to create and share products and information at no cost. Consider this website as an example. It is built on the WordPress open source software and provided for free.
One of the major legal problems that arises with this share and share a like approach is the legal rights associated with the use of open-source software in website designs. Generally, the open-source software is provided via licensing agreements. Anyone purchasing a website incorporating such software needs to know what the language of the underlying licenses do and do not allow in regard to the transfer of the code. If this information is not ascertained, the purchase may invalidate the license or trigger a licensing fee provision.
Let’s consider an example. I once ran into a situation where a website built in Asia was being sold to a business in the United States. The licensing for the open source software used on the site was royalty-free so long as the business using the software was located in certain major countries in Asia. As you can imagine, the discovery of the fact the use of the open source software would incur a rather large ongoing fee completely changed the dynamic of the purchase transaction and the sale eventually fell apart. If the licensing quirk had not been discovered, the buying party could have been in for a nasty, expensive surprise.
When purchasing a website, it is critical that the seller produce a detailed list of the open-source software used in the design as well as the license associated with each piece of open source code. These licenses must then be closely reviewed to make sure there are no legal issues triggered if the website is transferred.
Here’s the interesting thing about websites. Once a website is built, it is very easy to replicate. The last thing you want to see after buying a website is the same design up on another site. To prevent this, the topic of exclusivity needs to be addressed in the purchase agreement.
Creating this protection can actually be a tricky proposition. The problem is one would typically use a non-compete agreement in combination with other legal documents to perfect the protection. Many states, however, limit the use of non-compete agreements. In California, for example, a non-compete will only be upheld if the underlying sale incorporates the transfer of “goodwill” in the business being sold. How this translates to a website is up for debate, but evidences the fact very careful thought needs to be given to the language put into the sales agreement.
Taxes are an issue with any business. When purchasing a website, it is important to understand you take on the liability for reporting and paying taxes for the business. The IRS doesn’t know the exact date you take on the obligations, so it may try to ding you for back taxes and penalties that have arisen because of the failure of the previous owner to pay taxes.
It is important to establish whether the seller has been paying their taxes are not before you purchase a website. This is the kind of sensitive information that many sellers will be hesitant to disclose. If this is the case, language can be written into the agreement in which the seller warrants and guarantees that not only have they been paying taxes on the business, but that they will cover any subsequent penalties or fines issued by any tax agency for time periods when the seller was still the owner of the site.
Is this a perfect solution? No. It does, however, tend to flush out whether the seller has a major tax problem. If they do, the seller will often try to back out of the deal once the issue is raised.
When buying a site, it is critical you understand there are a number of legal issues that need to be dealt with carefully to avoid legal problems down the road. Unless you are an expert on copyright and trademark issues in particular, it is highly suggested you use an internet attorney to handle the due diligence part of the transaction.
Richard A. Chapo, Esq.