Starting a website from scratch can be time-consuming and expensive. Many people decide to avoid these problems by bypassing them and buying a website 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.
Buying A Website
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 purchasing the domain name and website or you buying just the content? 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,
- 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 complicated 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 work. A work can be anything from a photograph to a piece of music, but not an idea.
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, copyright law gives the author automatic 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.
When buying a website, it is critical to remember a website is a collection of copyrights. The text on the site certainly constitutes a fixed tangible work that will be considered a copyright. However, a party can also claim the HTML code as a copyright. And how about those images on the site? Yes, they are considered copyrighted works as well.
a. Copyright Audit
When purchasing a website, it is critical a copyright audit is 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 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 the original author finishes a work. When building websites, the original “authors” are often freelancers. The freelance party, and not the seller, maybe 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 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 are of high quality because of the mark. If they associate the mark with high quality, then they are more likely to buy any product that has that mark. This branding makes trade and service marks incredibly valuable.
a. Applicability to Website Purchase
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 essential 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. Has the company registered marks? There almost always is at least one. The presence of the mark then begs a simple question – is the mark a part of the sale.? If so, what rights come with the mark? Does the transfer cover the mark both online and offline? Are there any limitations? The parties must detail this information in the purchase agreement.
Open Source Software
From a legal standpoint, the web is one of the more unusual 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. My designer built the site using WordPress open source software and I provide the educational posts at no cost.
One of the significant legal problems that arise with this share and share alike approach is the legal rights associated with the use of open-source software in website designs. Generally, programmers and companies provide open-source software 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 concerning the transfer of the code. If the parties don’t read the license, a court may invalidate the purchase.
Let’s consider an example. I once ran into a situation where a party was purchasing a website built in Asia. 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 sizeable ongoing fee completely changed the dynamic of the purchase transaction, and the sale eventually fell apart. If I had not discovered the licensing quirk, the buying party could have been in for a nasty, expensive surprise.
When purchasing a website, it is critical the seller produces 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 carefully reviewed to make sure there are no legal issues triggered if the seller transfers the website.
Here’s the interesting thing about websites. Once a designer builds a website, replication is straightforward. The last thing you want to see after buying a website is the same design up on another site. To prevent this, the parties must address the topic of exclusivity in the purchase agreement.
Creating this protection can be a tricky proposition. The problem is one would typically use a non-compete agreement in combination with other legal documents. Many states, however, limit the use of non-compete agreements. In California, for example, courts will not uphold a non-compete unless the underlying sale incorporates the transfer of “goodwill” in the sale of the business. How this translates to a website is up for debate, but evidences the fact one needs to give serious thought to the language added to the sales agreement.
Taxes are an issue with any business. When purchasing a website, it is essential 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 vital 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 a tax agency issues for time periods when the seller owned the site.
Is this a perfect solution? No. It does, however, tend to flush out whether the seller has a significant tax problem. If they do, the seller will often try to back out of the deal once you raise the issue.
It is critical you understand there are a number of legal issues you need to be deal with carefully to avoid legal problems down the road when buying a website. Unless you are an expert on copyright and trademark issues, in particular, you should use an internet attorney to handle the due diligence part of the transaction.
Richard A. Chapo, Esq.