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The Legal, ethical, and regulatory aspects of running an eBusiness
Kathryn Susbauer
EBUS 500.1
University of Phoenix Online
Jim Sternieri, M.B.A
September 2, 2004

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The Legal, ethical, and regulatory aspects of running an
eBusiness
The expansion of ecommerce and the Internet has created new opportunities for
business as well as new concerns. Business is being done on the Internet either by solely
e-based businesses or businesses that have an ecommerce business and a retail business
which are referred to as “click and mortar” in this paper.
It seems that the increase of business being done on the Internet has created
concerns that current laws and regulations are not adequate. This has led to new laws and
regulations to help keep the Internet regulated. It also means that e-Businesses must also
be aware of existing and new ethical concerns being created by doing the business over
the Internet.
Businesses run through the Internet or that have Internet components must
consider the legal, regulatory, and ethical issues and ramifications when creating a
business strategy. Every year, hundreds to thousands of new e-commerce sites are
launched. Nevertheless, at the end of the same year some of those new businesses have
failed because legal, regulatory, and ethical aspects have impacted the business and the
business was not prepared. Others are out of business because their planning for start up
was not sound. According to Legal aspects of electronic commerce and their
implications for the accounting profession:
“ In early February 2000, several popular Internet sites such as Yahoo,
e-Bay, E*Trade, Amazon.com, CNN.com and others were impacted by cyber-
terrorism” (Davies, Dykstra, and Ragothaman Intro Section).

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The type of attacks used is called Denial of service attacks. The affected
businesses were faced with the possibility of lawsuits from irate customers (Davies et al
Intro). Other than lawsuits other concerns of businesses are:
• Loss of Income
• Compromised Information
Legal and Regulatory Issues in Running an EBusiness
Many legal issues also involve regulatory issues. Depending on the size and type
of the business with decide to how many legal and regulatory issues will be faced by that
company in operating over the internet. EBusinesses are currently facing many issues of
legal and regulatory nature. Some of them are:
• Jurisdiction
• Libel
o Cyber Smearing
• Sales Tax Collection over the Internet
• Encryption regulation
• E-crime
• Copyright and Intellectual properties (Davies et al Section 3)
The above-mentioned issues involve many aspects of eBusinesses. Businesses run
over the Internet must also follow the same laws and regulations that regular businesses
follow. The new laws and regulations are supposed to fill in the gaps in the laws that
were written before the Internet was invented.

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Legal and Regulatory Ramifications and Changes
Legal and Regulatory issues can led to changes. These changes affect whether a
business is successful or whether it will go out of business. The ramifications of legal and
regulatory issues can vary depending on the nature of the issue. Some of the ramifications
deal with changes to the existing laws and others deal with new laws and regulations
enacted because there have been problems and no current law or regulation covers it.
Some of the legal changes to laws and regulations that have occurred because of
eBusiness and the Internet are:
• Variations in software licences terms and conditions
• Increasing litigation for software piracy
• Altered acts & regulations affecting your business
• New & amended codes of practice
• New compliance requirements for industry and other
sectors
• New governance measures and controls
• Additional reporting to both internal & external bodies
• Changes and trends in e-Commerce activities
(http://www.pcprofile.com/ManagingClouds/Managing_Clouds.htm)
Legal ramifications in operating at eBusiness can be different depending what the legal
issue is that is being dealt with.

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Jurisdiction
Jurisdiction is an issue that has ramifications that exist both legally and
regulatorial because new laws cannot be passed or enforced until the appropriate
jurisdiction is found. In enforcement of the laws, knowing whether a case is in the
jurisdiction of the state, county, or federal government is necessary to charging the guilty.
It also influences the regulatory side in that if Congress does not have the right to create
laws over the internet then who does.
Cyber-Smearing and Libel
Another issue that has legal ramifications and potential regulatory ramifications is
cyber-smearing under libel. According to Legal aspects of electronic commerce and their
implications for the accounting profession:
“Cyber-smearing is when false and disparaging stories
about a company, management, or stock are posted on the
Internet. The increase of cyber-smearing is leading companies
affected by cyber-smearing to file lawsuits against internet
portals in effort to identify those responsible”(Davies et al
Section 3.4).
In addition, the companies, stock exchanges and the SEC are trying to curtail cyber-
smearing or at least to minimize the impact of it on business. Companies are trying to do
this by adopting new corporate policies and damage control policies to reduce the risk.
Collection of Sales Taxes
A legal and regulatory issue is related to collection sales taxes and who controls
the regulation. In the beginning, nobody really knew who regulated the taxation since the
Commerce Clause grants the power to the Congress to regulate interstate commerce. E-

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commerce that is done over the state lines is still considered interstate commerce and is
under federal jurisdiction to regulate. The Commerce clause also a requirement that part
of the test is whether a business has a substantial nexus to face state or local taxes. In
most cases, the substantial nexus is a business having a physical presence in the state.
With the Internet, physical presence cannot exist. In addition, the 14th
Amendment Due
Process clause must also be considered. This clause requires some minimum connection
between the state and the person, property or transaction sought to be taxed (Davies et al
Section 3.5).
The ramification of this issue deals with the fact that for most states that are
already budget strapped that they need all the sales tax income that they can receive from
all businesses. The lack of money has affected the states by forcing them to cut services
and cut programs.
Regulatory Ramification of Encryption Codes and software
The ramification related to the government wanting access to encrypted
information for law enforcement and national security reasons especially after the
events on September the 11th
. The ramification of the government not having
access to encrypted information like banking information, and other information.
Businesses want to protect their information and trade secrets as well as customer
information. Consumers want to be able to trust that their information is safe
being transmitted over the Internet or they will not consider doing business on the
Internet. Ramification from consumers not spending over the Internet is more
eBusinesses would fail and consumer would use the Internet less for other things.

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Ethical Problems and EBusiness
In looking at ethical problems that exist when operating an eBusiness, several
problems and concerns came up. . A few examples of problems dealing with ethics are:
• How customer data is used
• Whether customer data is sold for marketing purposes
• Monitoring of employee email and internet use in larger eBusinesses
• Outsourcing
EBusiness gathers information with every click of a mouse at a website. When a
customer registers at a website of a eBusiness they must give information that could be
used for marketing. If the customer has stated that they do not want the information
shared or they do not want to receive email trying to get them to buy something else, a
company must respect this. The ramification of this ethical problem is company wants to
make money and the more time the brand is visible to the customer the more likely the
customer will buy. But the customer in saying do not sell my information and not send
me unsolicited email that I am giving you my trust and that I hope that it is given
correctly. If a customer finds out that a customer requested the above and the company
still did it then the company is at risk of a lawsuit and will probably lose one customer if
not more.
Another ethical problem facing eBusinesses as they expand is the monitoring of
employee email and Internet use. Most businesses are setting up a written policy but in
some cases, business is not equally enforcing the policy. This leads to employees feeling
that they are not respect or that the higher you are the less you become responsible.

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In recent years, the outsourcing of IT related work to overseas countries have
created ethical problems. Business must balance profits and lower costs versus employee
loyalty and staying in the United States. The Ethical problem affects “click and mortar”
as well as established eBusinesses that must hire employees. Ethical problems related to
outsourcing are not new in the United States. Until recently, it involved manufacturing
jobs going to contracted Third World countries where the labor costs could be reduced.
The ethical problem of this for eBusiness is that if you do not know the sourcing of the
products that you are selling especially if you are running an e-commerce retail site.
Several major companies that operate as “click and mortar” have received bad publicity
because most of their manufacturing is overseas and groups have alleged sweatshop
practices. The largest to be hit with this was Nike Inc. over their Asian factories. Because
of the low cost of labor and their low minimum wages, the countries are trying to attract
businesses to set up shop. Most companies over there pay higher than the minimum wage
while some of the labor organizations act like the companies need to pay the minimum
wage mandate in the United States.
EBusiness Failure
In the past few years, there have been many failures by eBusinesses. Somewhere
eBusinesses that were website only based and others were “Click and mortar” in which
the entire business may have gone out of business. There are many reasons for eBusiness
failures and some of them are:
• Under funding on start-up
• Too much debt
• Wrong target market or audience

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• In affective Management
I chose as an example of eBusiness failure Egghead.com. Egghead.com was the
ecommerce site of Egghead. They were a retail chain that sold discounted office and
computer equipments. They also sold the accessories, supplies, and other computer
related material. When they were in business, I went to the stores in Oregon. In August of
2001, Egghead began operated under Chapter 11 bankruptcy protection. In October of the
same year, Egghead reached the point where they could not continue as an active
operation (http://disobey.com/ghostsites/show_exhibit/egghead1). Certain assets were
sold to Fry’s Electronics under the bankruptcy including the brand. When the parent
company went bankrupt then the website side of it when out of business as well.
(http://www.bizjournals.com/sanfrancisco/stories/2001/08/13/daily22.html).
Chapter 11 usually means that the business has a large amount of debts that
cannot be paid or a lack of cash and inability to gain funding through other means.
Chapter 11 allows a business to reorganize and sell part of operation off which is what
Egghead did.
Even though a good brand name was built, there also were a large number of
competitors that meant that in some areas of business they had to spend to compete. From
the availability of information on the Internet, it is hard to say whether sound financial
planning was used. Personally, if a business has too file for Chapter 11 bankruptcy
protection then there might have not been sound financial planning.
Conclusion
Whether running a website based business or a “click and mortar” several things
that both must considered are some of the following:

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• Legal and Regulatory Issues and Ramifications
• Ethical problems
• Why eBusinesses failure and importance of financial planning
The above-mentioned items are necessary to consider and analyze because to not
consider them could lead the company open to:
• Lawsuits
• Fines by regulators and government
• Loss of Income
o Loss of Sales
o Bad Publicity
• Criminal charges
EBusiness owners and managers must stay current on regulations and laws that affect the
type of business they run and what they sell. Laws and regulations over e-commerce is
still being changed by the authorities this is why business policies for eBusiness must
have some flexibility as well as be keep current.

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References and Links
Davies, Thomas. Dykstra, DeVee. Ragothaman, Srinivasan. (2000) Legal aspects of
electronic commerce and their implications for the accounting
profession[Electronic version] Human Systems Management 19(4) retrieved from
EBSCOhost on August 27,2004
Ghost Sites Web site Museum of Failure Retrieved August
30,2004http://disobey.com/ghostsites/show_exhibit/egghead1
Retrieved August 28,2004
http://www.pcprofile.com/ManagingClouds/Managing_Clouds.htm
San Francisco Business Time Retrieved on September 02,2004
http://www.bizjournals.com/sanfrancisco/stories/2001/08/13/daily22.html