Periodically, you make an appointment with your doctor for a checkup. You go into the medical building and, depending upon your age, are subjected to a battery of tests - an alarming quantity of blood is drained out of you; various probes inserted into various orifices; they scotch-tape wires to you and make you ride a bicycle - all to make sure everything is running correctly. The point of this month's piece is to inspire you to do a little blood work on your Internet business.
This is particularly important because so many e-businesses started with a computer in somebody's bedroom and grew very quickly to remarkable proportions. This article surveys some of the legal issues that arise where a small business is operating adult Websites. There likewise are business issues which you should review from time to time. As a general proposition, think about it this way: If you are in the business of sawing down trees, you should never get so busy sawing that you don't take time to sharpen your saws!
Your Business
Starting by talking about operating adult Websites would be putting the cart before the horse. If you are operating Websites, you are operating a business. Thus, the starting point is your business.
Organizational Structure
If you personally own your business (i.e., a proprietorship), as opposed to operating it as a corporation, limited liability company or other limited-liability entity (the options vary from state to state), you are making a serious mistake unless it really is just a hobby that earns only a couple of hundred bucks a month or less. A corporation, for example, gives you the ability to accumulate your copyrights and trademarks in a saleable entity (in case you ever want to get out of the business or add partners), can often protect you from personal liability, and has other advantages too numerous to mention here.
Three quick and important tips about your corporate existence. First, don't incorporate in Nevada unless you live in Nevada, even though you may have attended a seminar listing the alleged benefits of doing so. Not by coincidence, the seminar likely is put on by one of these Nevada incorporating outfits which may or may not be under IRS investigation. Second, consult a tax professional at the outset to consider the tax structure of your entity; for example, whether to make a Subchapter-S election. Third, have that tax professional prepare your tax returns - you almost invariably will save more in taxes than you will pay in tax-preparation fees - unless you prepare tax returns for a living. Finally, keep your personal goodies and your corporate goodies entirely separate - i.e., don't buy groceries with a corporate check. Otherwise, you might lose the limited-liability benefit of corporate existence.
Naming a Business
Thirty-some years ago, the Humble Oil & Refining Company spent millions of dollars in market research to arrive at its new corporate name, Exxon. Its reasons included the fact that one of its corporate trade names, Enco, meant something like "stalled car" in Japanese. But, Exxon's efforts in establishing its trade name punctuate the fact that selecting a name is serious business.
A more likely pitfall over the Internet is to find that someone else is already using your proposed name. And just because you can register the domain name doesn't mean that the name is available. Worse, because of the fact that you are operating an adult site, you may have problems using a name even though someone else is using it only in another category of business. For example, Delta Faucets, Delta Airlines and Delta Dental can co-exist because, for example, Delta Dental does not offer air travel and vice versa. But you might be accused of tarnishing or diluting a famous trademark if you associate it with adult entertainment. The classic example of that is the adult motion picture Debbie Does Dallas, which experienced much misery for depicting cheerleaders wearing uniforms looking too much like those found on the sidelines of the Dallas Cowboy game. Debbie Does Dallas was the exception, because the controversy made the movie famous and, as a result, one of the most successful of its era. Most adult companies accused of trademark dilution pay dearly.
The bottom line is that you need a trade name like Exxon - one that no one else uses. What you name your corporation is of little consequence. But the trade name you use (which must be registered if different from the business' actual name) - the banner you fly over your company and its Websites - is extremely important and must be selected with great care. And, because you want a catchy name, considerable thought and a trademark search are in order at the very beginning.
Employees
The minute you pay anyone else to do anything, you have employment issues. If you hire a computer consulting company to send a technician over to wire up your network, that is not an employee. You write a check to the consulting company that, in turn, pays the technician it sent, along with its other employees.
Then you decide that the company's consulting fees are a little pricey, so you decide to bring in a technician and Website designer on a part-time basis. You just write him a check as an independent contractor, so it's cheaper, right? Well, maybe not. You give him a place to work, direct him in what he does, establish working hours, and so on. That's an employee, not an independent contractor.
What can go wrong? To begin with, if he designs your Website, he might own the copyrights unless you have a work-for-hire agreement. And if he doesn't pay his taxes, you will be responsible for them - unless you can prove that he paid them. Good luck! If he causes an auto accident when he runs down to Radio Shack to pick up a replacement network hub, you may find out that your company is on the hook for the damages and that you are up the creek because you don't have workers compensation insurance. There are more nightmares in employment law.
Finally, if you have employees, you need an employee handbook. That is the contract that establishes the rights of the employer and the employees. If you have been an employee, you no doubt are familiar with employee manuals.
Insurance
Businesses need at least workers compensation coverage and a commercial general liability policy. And it is a good idea to also have property insurance (fire, theft, etc.) on your business fixtures. You may even want business-interruption coverage. This is easy, and not all that expensive. Contact a broker that specializes in business insurance. Your attorney or CPA can recommend one.
YOUR WEBSITES
There are a number of important legal issues associated with operating any Website. Adult content raises more of them.
Unfair Trade Practices
There are too many of these to mention. Suffice it to say that the Federal Trade Commission, comparable consumer-protection agencies in the various states and disgruntled customers and competitors can come after you if you engage in unfair play. Most of this is just a matter of common sense.
If you think you have a clever, money-making gimmick, describe it to a friend, telling him that your competitor is doing it, and ask if he thinks it is fair. Mousetraps, claims that something is "free" when it isn't, deceptive promises, automatic renewals disclosed only in fine print and other practices that are likely to make people angry also are likely to violate federal and state laws and regulations prohibiting unfair trade practices.
Finally, any time you give away a prize, federal and state anti-gaming laws must be examined. They are complex, and "void where prohibited by law" does not necessarily do the trick.
Trademarks
Trademark law raises two issues. You need to have attractive trademarks and trade names; you also must be sure not to infringe on those of others.
A trademark - technically a "service mark" in the Internet realm - is what distinguishes the source of one product or service from others. You cannot capitalize on the trademarks or service marks of others, and you need to be sure that they don't capitalize on yours.
To avoid getting into hot water with owners of existing trademarks or service marks, be sure that nothing on any of your Websites has the "look and feel" of some other trademark or service mark. You have to be original, as with your trade name.
Protecting your trademarks and service marks does not require registration, only use. Normally, it is a good idea to tell the world that something is a trademark- or service mark "SM" by using those little symbols. The only legal significance of the symbols is to disclose to the world you claim a mark as your banner, whether it is your site's name, a logo or a design. Since use of "TM" or "SM" is not based upon any statute or regulation, many in the adult genre use "TM" since "S and M" has a secondary meaning in adult-entertainment territory.
If and only if you have been issued a registration by the United States Patent and Trademark Office may you use the "�" symbol. And federal registration, while time-consuming and expensive, is well worthwhile.
Copyrights
Once you create anything that is arguably artistic, you own a copyright on it as soon as it is "fixed in a tangible medium," such as your hard drive. To proclaim such, you need only indicate it by the standard copyright notice, for example, "� 2001, ABC Internet Company." To put any real teeth in your copyrights, however, you need to register them. This involves sending to the Copyright Office a registration form, fee and depository copies. It is better if registration is within the first few months of creation of the work.
Turning the tables, be sure your site does not look too much like one belonging to someone else. And if it looks exactly like someone else's copyrighted photo, you need an assignment in writing because oral copyright assignments are not valid.
The Intellectual Property Rights in a Photo
A photo (or a video clip) involves two sets of rights, one set in the person pictured and another in the photographer. You need to protect these rights in your works, and be sure you have acquired all of them in works of others that you use.
A photographer owns a copyright on a photograph she took. But she cannot use that photograph without acquiring the rights of its subject. On the other hand, the subject of a photograph owns the right of publicity with respect to it, but cannot exploit it without acquiring the photographer's copyright.
Thus, when you use a photograph, you first must own its copyright or have an assignment. If you took the picture yourself, you are fine. If an employee took the picture, the employer owns it so long as it was taken on "company time." If a third party took the photograph, you need a written assignment.
You also need a release of the subject's right of publicity. This is different from the records required under 18 U.S.C. �2257, discussed below. In the adult arena, it is advisable to include in the release language an acknowledgment that the photograph will be used in a sexually explicit context over the Internet.
Records and Proof of Age
If you hire a minor to do anything, you trigger the application of federal and state child labor laws. The penalties are Draconian and regardless of fault. If you hire a minor to appear in sexually-explicit photography, the consequences spiral. And the Powers That Be will contend that you go to the hoosegow even if the subject gave you a bogus identification card.
18 U.S.C. �2257 requires that anyone who takes a photograph of sexual activity - generally meaning any time anyone touches anyone's genitals, including their own, or engages in sadomasochistic activity - must acquire copies of proof of age and other information from those pictured. Importantly, the test is not what you can see in the picture; the test is what activity is taking place when the picture is taken. Thus, camera angles that hide genital penetration, for example, are irrelevant. The photographer (or the company's custodian) must keep and index those records and make them available to the Attorney General of the United States or its "delegee" upon demand.
Significantly, because of the disaster that can result from an underage model, following this procedure for all racy photography - even swimsuits - is advisable. You cannot be too careful about checking the age of the subject.
Once such a photo is taken, it thereafter must be associated with a disclosure including who is the custodian and where the records are located. The content and the location of the disclosure - the "label", in adult video parlance - must follow a cookbook of federal regulations.
Where you acquire adult photographs or video clips, you cannot be held responsible under the federal anti-child pornography laws if you honestly believe that the subjects were adults. But you should be much more careful than that. Veterans of the adult video industry will tell you stories of the expensive miseries that they experienced during the Traci Lords debacle and others, where some forged IDs allowed minors to slip through the cracks.
"Web Legal" and Acquisition of Content
The above issues - intellectual property rights and proof of age - all roll into the concept of "Web legal content." The term denotes materials that can be used without fear of getting into legal hot water for want of proof of age, releases or copyright assignments. But let the buyer beware. If somebody sells you a CD from the trunk of a 1972 Plymouth and claims it to be "Web legal," do you figure he's going to send a lawyer to defend you if it is not? Know your suppliers!
Terms and Conditions
The "terms and conditions" on your log-on screen are important because they define the contractual relationship with your customers. Some terms and conditions are copyrighted - actually, they all are subject to the copyright rules, although there is a limit to the extent that can be enforced.
Courts have enforced the terms and conditions as a binding contract so long as the subscriber is required to click something to acknowledge accepting them. Terms and conditions then becomes the contract between you and the subscriber. Accordingly, mindlessly copying someone else's runs a huge risk, because your situation may be different and those terms and conditions may have been written by someone having no clue about contract law. Unreasonable contract terms also can constitute unfair trade practices.
The dumbest thing that appears in terms and conditions anywhere is one that requires a certification that the person logging on is not a law-enforcement official. Ask any prostitute - it isn't a defense. Moreover, it suggests that there is something illegal about the site, making great fodder for a prosecutor in an obscenity case: "Why would it say right here that you have to promise that you're not a cop if they didn't know this was illegal and obscene?!"
Obscenity
To this point, compliance with the relevant regulations is, for the most part, a cookbook process. Your attorney and CPA can give you formulas facilitating compliance. However, contrary to the beliefs of some, Websites that carry "adult" content automatically make their owners members of the adult entertainment industry, and in many ways therefore, subject to the same problems that, say, an adult video producer or cabaret have. One of those problems is that of "obscenity."
Obscenity laws are different. They begin with the proposition that all speech is not protected by the First Amendment. Along with copyright infringement, disclosure of troop movements in war time, deceptive advertising and other speech not protected by the First Amendment, erotic speech that is legally "obscene" - not lewd, lascivious, offensive, immoral, profane, indecent, gross, foul or profane - is subject to governmental regulation.
The Supreme Court has struggled with the definition of obscenity. Generally, whether a photograph, book, motion picture or other erotic expression is "obscene" is most importantly a function of local community standards, which is peculiar in the era of the Internet. Technically, the general definition of "obscenity" is that which, as a whole, lacks serious value and, according to local community standards, contains patently offensive depictions of sexual activities and as a whole appeals to a prurient interest in sex. It actually is far more complicated than that.
For this overview, however, suffice it to say that obscenity laws are complicated and unfair. There is no way to find out in advance what is obscene, but knowledge of the character or content of the material can be enough to support a conviction. And the potential punishment is mind boggling. A conviction can bring mandatory prison sentences (without possibility of probation) and forfeiture of everything.
What you must consider is whether you would feel comfortable defending your Website before a jury anywhere in the United States where the site is available. Would you feel comfortable standing before a jury of 12 random adults of Tupelo, Mississippi (home of the American Family Association) or Rome, Georgia, for example, with your freedom dependent upon convincing them that your material is acceptable to the average person according to their contemporary community standards of decency?
Because of the local-community-standards component of obscenity laws, Webmasters often consider restricting access from some geographical areas (using zip-code screening in the credit-card approval script). The penalties involved are so severe that this issue cannot be ignored.
Finally, if it isn't obvious, "Web legal" can never provide a safety net from obscenity prosecutions. What might be fine in Los Angeles could be obscene somewhere else.
COPA and Access by Minors
The federal government has thus far been prevented by the courts from enforcing laws requiring that minors be screened from access to inappropriate erotica - first the Communications Decency Act ("CDA") and now the Child Online Protection Act ("COPA"). Generally, COPA prohibits allowing a minor access to erotica, but allows a "safe harbor" where access is allowed only after a valid credit card number is verified. The questionable theory is that minors cannot have credit cards.
These laws gave rise to Adult Check� and other adult verification services. The cool thing about most or all AVS deals is that it doesn't cost anything to use an AVS to comply with COPA and to screen out minors. In fact, they pay you commissions if someone signs up from your site!
That the government thus far has not been able to enforce CDA or COPA is not necessarily a basis to ignore its requirements, for at least two good reasons. The obvious reason is that the Supreme Court may some day open the door for enforcement of COPA.
The reason which is perhaps less obvious is obscenity laws. Regardless of any instructions the judge might give the jurors in Broken Arrow, Oklahoma or anywhere else, do you think their opinion of the local acceptability of your X-rated Website might be swayed one way or another by the issue of whether a child can log right on and see it all? From the author of this article, who has defended numerous obscenity cases around the country over the years - you bet! The best theme of an obscenity defense is that adults ought to be able to think for themselves. Many who are personally offended by erotica nonetheless believe that people should be free to watch what they want. That perspective goes out the window where minors are not screened.
REVIEW YOUR LEGALS
This was a thumbnail. Its purpose is only to survey some of the more important legal issues that you confront by virtue of operating adult Websites. Like operators of atomic power plants, pawn shops, restaurants and many other, comparable businesses, operators of adult websites are in a heavily regulated industry - a far cry from the Wild Wild West era of a few, short years ago. No longer can one simply plug in a computer, put up an adult Website and earn a ton of money without incurring considerable risk. Rather, adult Webmasters join the ranks of others in the business of erotica, confronting legal issues every day and at every turn.
Operating a Web business requires a tax professional, an attorney and an insurance professional, along with the required computer and artistic expertise. All of those professionals must be in touch with what you do. In this day and age, everyone is a specialist. There are legal, accounting and insurance issues unique to your business, and it is imperative to identify those experts. The expert probate attorney that wrote your will is not the attorney to advise you on the operation of your adult Website; nor is the attorney who specializes in representing adult Websites the one to formulate your estate plan. Don't look for business insurance from the broker that sells you car insurance; and insurance for Internet businesses is a specialty all its own.
Don't fill your own teeth either.
Clyde DeWitt is a partner in the Los Angeles, California law firm of Weston, Garrou & DeWitt. He can be reached through AVN Online's offices, at his office at 12121 Wilshire Boulevard, Suite 900 Los Angeles, CA 90025 or over the Internet at [email protected]. Readers are considered a valuable source of court decisions, legal gossip, and information from around the country, all of which is received with interest. Books, pro and con, are encouraged to be submitted for review, but they will not be returned. This column does not constitute legal advice but, rather, serves to inform readers of legal news, developments in cases, and editorial comment about legal developments and trends. Readers who believe anything reported in this column might impact them should contact their personal attorneys.
