The technology, media and telecom sector crash on both sides of the Atlantic was expected to introduce a back-to-basics approach by dot com companies. Old economy business principles were, supposedly, poised to redefine dot com attitudes, as these companies sought to persuade investors that their businesses were founded on more than just promising ideas.
However, according to a recent survey by Landwell, the correspondent legal practice of PricewaterhouseCoopers, this has not translated into a high awareness of legal risks. The report is part of a survey jointly carried out with PwC between July and October 2000, canvassing the views of 400 managers in European dot coms (split between the UK, France, Germany and the Netherlands), and including a further 100 interviews with heads of legal across a cross-section of companies operating in the B2B and B2C sectors.
For investors, analysts and advisers to the internet sector, the report adds to their worrying reading. European dot coms appear to show little interest in the threat that legal risk poses to their survival – indeed, 20% of dot coms surveyed are not worried by any legal risk. This is particularly extraordinary in the light of the avalanche of regulation and legislation at national and European levels.
During the past 12 months, about a dozen significant pieces of legislation with a direct impact on e-business have come into force, many of them on a Europe-wide level.
According to the report, dot coms are careless when it comes to protecting what is frequently their only source of value – their intangible assets. And, just as worryingly, regardless of the inescapably international nature of their business, they are oblivious to non-domestic legal issues. The combined effect is that dot coms are increasingly vulnerable to infringement and to litigation, though perhaps this fault is not entirely of their own making.
Paul Frew, a partner with Elderstreet Capital Partners, explains: “Remember that many of these companies were egged on by investment banks to build pan-European brands, with all the expenditure that that involves. The result is that they are now struggling to survive.”
Questions also need to be raised in relation to the ethos that venture capitalists have encouraged.
As venture capitalists trawl through their portfolios, deciding which companies to finance and which to drop, it is inevitable that the presence – or absence – of management and legal controls will assume mounting significance. A vulnerable dot com is, increasingly, an unattractive investment proposition.
The report shows that one-third of dot coms are failing to protect trademarks in their domestic markets, and only one in five have registered patents. There are jurisdictional variations. UK and French-based companies are most aware of the need for trademark protection, while Dutch and German companies are the most exposed to infringement. Less than 50% of dot coms have registered any trademark abroad, leaving them wide open to infringement outside their home jurisdiction. Some 40% of respondents are spending just £5,000 or less on trademark protection.
Latika Sharma, head of IP, IT and Digital Business at Landwell UK, comments: “Dot coms have been driven by the first-mover mantra and in the stampede to secure competitive advantage they have been spending heavily on brand-building, a natural consequence of attempting to build market profile from scratch. They need to appreciate that brands are worthless if their value remains unprotected and insecure. The pitfalls today are just too numerous to go on overlooking this imperative.'”
International legal risk is an accident waiting to happen, according to the Landwell report. Indeed, this is a lesson that investment banks should take to heart, just as much as dot coms. Investment websites, e-markets, online bond issues – all of these business platforms expose their owners to substantial, even unquantifiable, legal risk. The net has spawned a multi-jurisdictional legal minefield, with e-business regulation now an urgent policy priority around the world. The recent Yahoo! case, where the French courts ordered Yahoo! to stop the selling of Nazi memorabilia from its sites worldwide, was an ominous foretaste of what lies ahead. When the French court ordered Yahoo! to make a reasonable effort to identify the user’s country and to screen content to French users according to the laws of France, it underlined the global liability that goes hand-in-hand with internet activity.
Dot coms must quickly come to terms with the fact that there is no hiding place – they are global businesses and their websites can be accessed from anywhere in the world. The reality is, however, somewhat different. Fully 40% of respondents to the survey have failed even to register their domain names outside their home jurisdiction, and although most believe that their website is accessed in more than 10 overseas countries, the vast majority (80%) operates just one website from their home market.
It says much about the exuberance of this sector that 70% of European dot coms are confident that they have dealt with international legal risk. The report underlines the fact that this ostrich mentality has to end. Dot coms face a complex, interconnecting framework of contractual risk in overseas markets, as Landwell’s Sharma points out: “Consider this situation – 30% of respondents are failing to take advice on the international enforceability of their online contracts, while in France and Portugal, legally binding consumer contracts must be presented in the local language. Even the most trusting venture capitalist, or institutional investor, is likely to be concerned by this.”
In an unforgiving marketplace, dot coms’ lax legal risk management will severely undermine the development of longstanding trust-based customer relationships. Breaches in security, and contractual black holes, can irreparably damage brand reputations, as well as resulting in expensive, and potentially catastrophic, litigation. It is accepted that the biggest obstacle to e-procurement growth will be security, and yet dot coms are failing to control their liabilities in this area.
According to the survey, domestic suppliers to over 50% of respondents fail to limit their own liability for security breaches and, where international suppliers are concerned, 25% of dot coms do not even know what steps have been taken to limit liability. Furthermore, 20% of dot coms have taken no advice on the enforceability of their online contracts in their domestic markets, and over 30% have failed to ensure that their websites conform with the law when it comes to linking with other websites and allowing other people to post information on their own sites.
Simon Walker, Landwell UK’s head of e-business, stresses that data protection and consumer law are also being dangerously overlooked: “97% of dot coms claim to be confident over their compliance with data protection regulation, and yet 20% have taken no legal advice on this area.'”
Looking ahead, the survey points to potentially grim outcomes. Dot coms are, all too often, caught between a rock and a hard place. Start-ups have limited funds available, and this makes it hard for them to justify any substantial expenditure on legal fees. But at the same time, investors will inevitably demand ever more evidence of stringent risk management and capturing of asset value at an early stage in any venture. Walker says: “Dot coms need to appreciate that legal risk management is not all about damage limitation.
It also has direct benefits, including enhanced market valuations, better investor perception and strengthened brand integrity. A culture shift is needed – and, as and when this happens, investors and dot coms will profit from the results.”
The Landwell report ‘Time for law and order: European Dot coms and the Law’ can be downloaded from www.landwellglobal.com
