Essentials of Business Law, 9th edition
INSTRUCTOR’S MANUAL
Chapter 30 Conducting Business in Cyberspace
LESSON OVERVIEW
While the previous chapter dealt with computer privacy and speech, Chapter 30 deals with the various
aspects involved in conducting business in cyberspace. This chapter identifies six key settings in which
the law applies to conducting business on the Web, discusses the role of the Securities and Exchange
Commission in the sale and trading of securities online, elucidates how the Federal Trade Commission
protects consumers from deception in online advertising, and identifies the copyright issues associated
with selling music and other forms of entertainment online. Additionally, this chapter describes how
contracts formed online are offered, accepted, and signed; how legal disputes can be settled online
using alternative dispute resolution; and the current rules pertaining to states’ levying sales taxes for
purchases made online. Finally, students’ understanding of the topics is evaluated through
objective-type questions, discussion questions, and case scenarios. Students are encouraged to conduct
their own research through the use of the Internet and other sources.
CHAPTER OUTLINE
A. BUSINESS AND THE INTERNET (p. 504)
B. SELLING SECURITIES ON THE WEB (pp. 504-507)
1. Securities Act of 1933 (p. 504)
2. Securities Exchange Act of 1934 (pp. 504-505)
3. Insider Trading (pp. 506)
4. Recent Trends in Security Trading (pp. 506-507)
C. ADVERTISING ON THE WEB (pp. 507)
D. SELLING ENTERTAINMENT ON THE WEB (pp. 507-508)
1. The Digital Millennium Copyright Act (p. 508)
E. ENTERING INTO CONTRACTS ON THE WEB (pp. 508-510)
1. Accepting Offers on the Web (p. 508)
2. Contracts of Adhesion on the Web (p. 509)
3. Electronic Signatures (pp. 509-510)
F. SETTLING DISPUTES IN CYBERSPACE (p. 510)
G. PAYING TAXES ON INTERNET SALES (pp. 510-511)
1. Taxing Internet Access Services (p. 511)
H. CHAPTER SUMMARY (pp. 511-512)
I. CHAPTER ASSESSMENT (pp. 512-518)
1. Matching Legal Terms (p. 512)
2. True/False Quiz (p. 513)
3. Discussion Questions (p. 514)
4. Thinking Critically About the Law (pp. 514-515)
5. Case Questions (pp. 515-516)
6. Case Analysis (pp. 516-518)
7. Legal Research (p. 518)
KEY TERMS
Key terms are listed at the beginning of each chapter, posted in the student textbook margins, and
placed in bold in the copy. They are listed here for your quick reference.
§ Securities and Exchange Commission (SEC) (p. 504)
§ Securities Act of 1933 (p. 504)
§ primary market (p. 504)
§ prospectus (p. 504)
§ Securities Exchange Act of 1934 (p. 504)
§ secondary market (p. 504)
§ touting (p. 505)
§ insider trading (p. 506)
§ Dodd-Frank Wall Street and Consumer Protection Act of 2010 (p. 506)
§ Federal Trade Commission (FTC) (p. 5077
§ deceptive advertising (p. 509)
§ Digital Millennium Copyright Act of 1998 (DMCA) (p. 508)
§ Electronic Signatures in Global and National Commerce Act of 2000 (ESIGN) (p. 509)
§ alternative dispute resolution (ADR) (p. 510)
§ mediation (p. 510)
§ arbitration (p. 510)
§ nexus (p. 510)
§ use tax (p. 511)
§ Internet Tax Freedom Act (p. 511)
LEARNING OUTCOMES
The chapter Learning Outcomes will help you and the students discover the concepts and information
that should be understood upon completion of the chapter. You may want to access the PowerPoint
(PPT) slides for Chapter 30 when you begin the study of the chapter and discuss each Learning
Outcome. Each Learning Outcome will be covered separately in the Instructor Notes, but they are
shown here in total as an overview of the sections being presented in Chapter 30. The corresponding
text page numbers and PPT slides are listed next to each outcome. These slides should be used to
reinforce the main points of the lecture.
After completing this chapter, the students will be able to:
1. Identify six key settings in which the law applies to conducting business on the Web. (pp. 504,
PPT slide 2)
2. Discuss the role of the Securities and Exchange Commission in the sale and trading of securities
online. (pp. 504-507, PPT slides 3-10)
3. Explain how the Federal Trade Commission protects consumers from deception in online
advertising. (p. 507, PPT slides 11-12)
4. Identify the copyright issues associated with selling music and other forms of entertainment
online. (pp. 507-508, PPT slides 13-14)
5. Explain how contracts formed online are offered, accepted, and signed. (pp. 508-510, PPT slides
15-20)
6. Discuss how legal disputes can be settled online using alternative dispute resolution. (p. 510, PPT
slide 21)
7. Discuss the current rules pertaining to states’ levying sales taxes for purchases made online. (pp.
510-511, PPT slides 22-24)
LECTURE OUTLINE
A. BUSINESS AND THE INTERNET
The 1990s ushered in a whole new way of doing business. Words like e-business, e-tailing,
e-marketing, and e-contracts found their way into the English vocabulary, and companies started taking
the Internet seriously as an important new means of doing business.
B. SELLING SECURITIES ON THE WEB
There are two main federal statutes that cover the sale and distribution of securities in the United
States. The federal agency responsible for administering these two statutes, as well as several other
laws and regulations, is the Securities and Exchange Commission (SEC).
1. Securities Act of 1933
The Securities Act of 1933 covers the sale of securities in the primary market, defined
as the place where a corporation sells its securities to the public. This act requires that
issuers of securities that are selling them publicly must make certain necessary
disclosures at the time that the securities are issued.
2. Securities Exchange Act of 1934
The Securities Exchange Act of 1934 covers the trading of these same securities in the
secondary market, defined as the place where one member of the public sells securities
to another member of the public. Securities are regularly bought and sold electronically
on the Web. The SEC attempts to ensure that prospective investors have access to full
and correct information about the companies whose securities they are interested in
purchasing.
3. Insider Trading
Insider trading occurs when a person who has confidential information about a
particular company purchases shares of the company’s stock with the intention of selling
these shares for a higher price when the information is released to the general public. It
is important to note that trading in the stock of the firm by company officials is also
called insider trading, but as long as it is reported, it is not illegal.
4. Recent Trends in Financial Regulations
In recent years, technological improvements that allow real-time market data to be
transmitted over cyberspace have altered the way securities trading takes place.
Automated trades are frequently transacted by computer programs that analyze market
data received in cyberspace. As a result, thousands of trades can now be made within
seconds. In light of the impact such advances have had on the securities markets, the
SEC is currently attempting to establish new regulations to promote and improve the
financial markets.
In response to the recession of the late 2000s, the Dodd Frank Wall Street Reform and
Consumer Protection Act was signed into law in 2010 which is a federal law that
provides for significant regulatory changes over the financial system.
C. ADVERTISING ON THE WEB
The federal agency responsible for ensuring that advertising in the United States is truthful is the
Federal Trade Commission (FTC). A deceptive advertisement is defined as one that contains a
material (important) misrepresentation, omission, or practice likely to mislead a consumer who acts
reasonably under the circumstances.
Ads placed on Web pages are required to meet the same standards as ads placed in other media, such as
print, billboards, television, and radio.
D. SELLING ENTERTAINMENT ON THE WEB
It has become quite popular for people to download music from the Web onto digital storage devices.
Because the rightful owners of the music often have not granted permission and do not receive royalties
from the pirated music, they have made efforts to stop companies from distributing music online.
The Digital Millennium Copyright Act
Among numerous provisions, the federal Digital Millennium Copyright Act of 1998 (DMCA)
provides that ISPs are not liable for copyright infringements by their subscribers if:
• They adopt and reasonably implement a policy of terminating, in
appropriate circumstances, the accounts of subscribers who are repeat infringers.
• They accommodate, and do not interfere with, the identification or
protection of copyrighted works.
• The ISP did not have knowledge of the infringing activity.
• The ISP did not receive financial benefit directly attributable to the
infringing activity.
• Upon receiving proper notification of claimed infringement, the ISP
expeditiously blocked access to the infringed material.
E. ENTERING INTO CONTRACTS ON THE WEB
The ability of parties to enter into agreements in cyberspace raises numerous questions. Offers are
readily available on the Web.
1. Accepting Offers on the Web
Offers on Web sites include a button to be clicked by the user with his or her mouse that
indicates acceptance. Most courts acknowledge that by clicking the button, the offer has
been accepted. Simply because a user visits a Web site does not constitute acceptance of
an offer that is contained on that Web site.
2. Contracts of Adhesion on the Web
There are many instances when contracts are formed without there being any real
negotiating or bargaining by the parties. These agreements, termed “contracts of
adhesion,” are nonetheless valid unless they contain terms that are unreasonable. These
same rules apply in cyberspace.
3. Electronic Signatures
The Electronic Signatures in Global and National Commerce Act of 2000 (ESIGN),
a federal statute, states that electronic contracts containing electronic signatures are just
as enforceable as those that are printed on paper. Clicking the computer mouse on the “I
agree” button, therefore, constitutes an electronic signature that satisfies the writing
requirement of the Statute of Frauds.
F. SETTLING DISPUTES IN CYBERSPACE
Because it is expensive to proceed against a defendant in a court case, a person who is the victim of a
breach of contract will frequently seek to have the dispute resolved using alternative means.
Alternative dispute resolution (ADR) is a system in which contract disputes and other disagreements
are resolved by using means other than a lawsuit. Means of ADR include mediation, in which a neutral
third party meets with the disputants in order to have them come to some form of settlement agreement;
and arbitration, in which a neutral third party actually decides a case as if he or she were a judge and
jury.
G. PAYING TAXES ON INTERNET SALES
In 1992, the Supreme Court of the United States ruled that a location must have a link or tie to a sale in
order for the location to collect sales tax (Quill v. North Dakota, 504 U.S. 298). This link or tie is
referred to as a nexus. When a consumer shops online, the state in which the consumer resides cannot
legally collect the tax, unless the online buyer happens to be purchasing the goods from an online seller
who resides within the same state.
1. Taxing Internet Access Services
In 1998, Congress passed the Internet Tax Freedom Act, which established a
moratorium on taxing ISPs on the services they provide to computer users. The
moratorium, which is a period of time during which no state may levy sales taxes on
these ISPs, is currently in effect.
INSTRUCTOR NOTES
A resulting answer or explanation is provided below for each Learning Outcome in Chapter 30. Every
outcome is also mapped to corresponding text page numbers, PPT slides, and relevant chapter
assessment exercises and activities for ease of reference and use.
LO1. Identify six key settings in which the law applies to conducting business on the Web.
Six key settings in which the law applies to conducting business on the Web include selling securities,
advertising, selling entertainment, entering into contracts, settling disputes, and paying taxes.
Text Pages: 504
PowerPoint: Slide 2
LO2. Discuss the role of the Securities and Exchange Commission in the sale and trading of
securities online.
For online securities sales, the SEC requires that information distributed electronically to
potential investors is to be substantially equivalent to what would have been provided in paper form;
access to information is to be comparable to that afforded by paper copies; there must be adequate
notice to prospective investors of the availability of the information; and there must be evidence
demonstrating that delivery of information to prospective investors was successful.
Text Pages: 504-506
PowerPoint: Slides 3-10
Discussion Questions: 21-22
Thinking Critically About the Law: 27
Case Questions: 32
Case Analysis: 35
LO3. Explain how the Federal Trade Commission protects consumers from deception in online
advertising.
The FTC protects consumers from deceptive online advertising by ensuring that advertising is truthful
and by taking a variety of measures against online advertising that is false or misleading. If the FTC
finds that Web-based advertising is deceptive, it has several options: it can issue a cease-and-desist
order; require an affirmative disclosure; order corrective advertising; seek fines and order civil
remedies; and, in severe cases alleging fraud, ask the Justice Department to file criminal charges.
Text Pages: 507
PowerPoint: Slides 11-12
Discussion Questions: 23
Thinking Critically About the Law: 28
Case Questions: 33
Case Analysis: 36
LO4. Identify the copyright issues associated with selling music and other forms of entertainment
online.
The copyright issues associated with selling music and other forms of entertainment online involve the
problem that the rightful owners often do not grant permission for its availability online and do not
receive royalties when it is pirated.
Text Pages: 507-508
PowerPoint: Slides 13-14
Discussion Questions: 24
Thinking Critically About the Law: 31
Case Questions: 37
LO5. Explain how contracts formed online are offered, accepted, and signed.
Offers can be made online in much the same way that they are made by other means, and the rules of
acceptance are also similar. For example, by clicking a button that reads “I accept” or something
similar, a user can accept and be bound by the terms of an agreement. Silence, or not clicking such a
button, cannot be used as grounds for accepting an offer.
Text Pages: 508-510
PowerPoint: Slides 15-20
Discussion Questions: 25
Thinking Critically About the Law: 29-30
Case Analysis: 38
LO6. Discuss how legal disputes can be settled online using alternative dispute resolution.
Advantages of using ADR include speed, finality, informality, privacy, and financial savings. Means of
ADR include mediation and arbitration. These methods are also available on numerous Web sites that
have been established on the Internet to provide forums for parties to resolve their problems.
Text Pages: 510
PowerPoint: Slide 21
Discussion Questions: 26
Case Questions: 34
LO7. Discuss the current rules pertaining to states’ levying sales taxes for purchases made online.
Currently, states are losing a great deal of potential tax revenue because they are not collecting taxes on
sales made over the Internet. The reasons include the difficulty of establishing a nexus for the
transaction and of collecting use taxes in Internet-based transactions. The Internet Tax Freedom Act
established a moratorium on taxing the services that ISPs provide to computer users. However, many
states and localities are seeking to change the law so that people can be taxed on the monthly fees they
pay to have access to the Internet.
Text Pages: 510-511
PowerPoint: Slides 22-24