Flamed With A Lawsuit

Stratton Oakmont Inc. is no stranger to trouble. The Lake Success (N.Y.) investment bank last year settled charges with the government that it had engaged in an illegal penny-stock scheme. But its executives found themselves in unfamiliar territory this fall when a user of Prodigy Services Co., the popular online computer service, accused the firm of fraud stemming from one of its initial public offerings. The user said Stratton Oakmont disclosed that a client had lost its biggest customer only after it launched the offering. "This is fraud, fraud, fraud, and criminal!" the user wrote on Oct. 23 on Money Talk, an electronic bulletin board operated by Prodigy.

Stratton fired back--not on the bulletin board, but in court. It filed a $200 million libel suit on Nov. 7 against Prodigy, based in White Plains, N.Y., and John Doe, the anonymous flamer. Stratton argues that Prodigy, which removed the derogatory remarks from its network on Nov. 11, is responsible for all communication on its service. "If Prodigy is in the publishing business, then it opens itself up to libel charges," says Stratton lawyer Jacob H. Zamansky.

Stratton's case has brought to a head a long-anticipated clash between traditional law and freewheeling computer communications. Courts, businesses, and cybernauts are all now grappling with how to control the burgeoning online technology revolution, which lets users broadcast messages worldwide, without choking off free speech. The basic problem: Existing laws are outdated for today's direct, real-time communications.

Aside from libel issues, copyright and pornography laws are also bumping up against the tenets of the virtual world (table). And experts predict that other thorny legal questions, such as intellectual-property and contract disputes, online sexual and racial harassment, and the use of electronic communication to peddle fraudulent sales schemes, will emerge as more consumers get hooked in to the online world. In 1994, 5.2 million people logged on to commercial networks, up from 1.72 million in 1990.

The stakes in these legal contests, which threaten to dilute the in-your-face culture of cyberspace, are extraordinarily high. Up until now, the broad appeal of the online world has been that it enables all its users to

express--and defend--themselves without inhibition. But cyberexperts say court rulings that curtail such free speech could substantially cripple the budding online industry, a $1 billion business made up primarily of eight commercial operators. "The law is designed to protect people who have no ability to reply," says Ellen M. Kirsh, general counsel of America Online Inc., based in Vienna, Va. "But the rules do change in cyberspace," where everyone can respond. (BUSINESS WEEK is an America Online partner.)

CHAINED MELODY. Stifling the growth of online services isn't the only potential danger. Unless a solution for governing electronic communication is found soon, many computer experts fear an unparalleled litigation explosion. "If every person takes offense at everything on the Net, there wouldn't be enough resources in the infinite galaxy to cover the lawsuits," says David Banisar, an attorney at the Electronic Privacy Information Center in Washington. That is why the cyber-industry will meet in February to discuss self-regulation and possible legislation. It hopes to find an ally in House Speaker Newt Gingrich (R-Ga.), a technoid who touts electronic communications as the route to greater democracy.

Online service companies are looking to Washington and internally in the hopes of avoiding standards imposed by courts that would be virtually impossible to meet. CompuServe Inc., in Columbus, Ohio, for one, has found it hard to police the activities of thousands of subscribers using its network daily. And it argues that users don't want to feel that they're under constant scrutiny. "On the Information Superhighway, none of us wants a patrolman observing each of our actions," says Kent D. Stuckey, CompuServe's general counsel.

Stuckey is currently fending off a case filed in 1993 against CompuServe by New York-based music publisher Frank Music Corp. The company accuses CompuServe of infringing the 1955 copyright of Unchained Melody and at least 550 other compositions the music publisher owns. Frank Music claims that CompuServe is liable for the infringement even if it didn't know that its subscribers were posting and downloading protected works owned by Frank Music. CompuServe says it shouldn't be made to pay for such acts on its network unless it knew about them and deliberately ignored them.

Online services are also struggling with jurisdictional questions; that is, whose laws should govern online activity that originates in one locality but has an effect on users in other regions. For example, Robert and Carleen Thomas, who ran an adult bulletin board based in Milpitas, Calif., are now appealing a June conviction on obscenity charges by a U.S. court in Memphis. Because obscenity is traditionally determined by local community standards, pornography downloaded in Tennessee may be more offensive to locals than the same material viewed in California.

OFF THE HOOK. To clear up the jurisdictional confusion caused by communications traversing the globe, online companies prefer a community standard determined by bulletin board users themselves, rather than a myriad of real-world local rules. "Geography should have nothing to do with it," says Kirsh. "If you go into the Gay & Lesbian Forum, you should adopt a different standard from Christianity Online."

For the moment, the Prodigy libel case has taken center stage because it is a direct test of how far First Amendment protections will go in cyberspace. For its part, Prodigy says existing libel laws governing media such as newspapers, which are responsible for their content, don't apply to it because it can't edit--or even read--the 75,000 notes transmitted on its network daily. Besides, "there's no way in most cases that you could even tell whether something was [strictly] libel," says Prodigy Senior Vice-President George M. Perry.

Perry and other online defenders point hopefully to a 1991 ruling that took CompuServe off the hook in a libel case. The federal court in Manhattan said CompuServe was not analogous to a newspaper, which exerts editorial control, but instead resembled a bookstore, which distributes materials published by others but isn't responsible for their content. "We're like hotel meeting rooms," says David R. Johnson, chairman of New York-based LEXIS Counsel Connect. "We're responsible for good service but not for what's said in the room."

BARKING TIME. Instead of the courts, online service advocates say victims of

online slander should be using cyberculture--where flaming attacks can offer the most satisfying revenge--to make their cases. "Instead of picking up the phone to call up your lawyer, you should take out your keyboard and fire away," says Washington journalist Brock N. Meeks, who settled a libel suit in August for a story he published on the Internet about an allegedly dubious marketing scheme by Suarez Corporation Industries, in Canton, Ohio. When AOL's Kirsh received a complaint last year from a dog-food maker about electronic postings disparaging its product, she gave the company 10 hours of free online time to make rebuttals.

But Stratton claims that its case is different because Prodigy exercises editorial control. Until 1992, Prodigy, which markets itself as a family-oriented service, read all its subscribers' notes before running them. But the review delayed postings by 21 hours when the company started getting 1,000 notes a day. So now Prodigy relies on software to delete obscenities and racial slurs--a process that few other services use.

With its very future at stake, the online service industry and its customers will continue to challenge laws written for the real world. It will then be up to the courts and legislators to weigh the pros and cons of a free-for-all in cyberspace.

Legal Clashes In Cyberspace


Should online services be held liable for inflammatory statements posted by their subscribers? Courts will soon decide whether online companies are merely vendors, like bookstores, or have editorial control, like newspapers.


Can online services be held liable for copyright infringement even if they don't know of their subscribers' misconduct? Cyberfirms say they should only be blamed when they know about infringement and fail to take action.


Which laws govern illegal acts on electronic bulletin boards? With pornography, for example, do laws where the computer user is located apply, or should a bulletin board group be allowed to establish its own standards, superceding local law?


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