License to Steal: The Hidden Costs of Electronic Reporting

By Danielle F. Waterfield, Esq.,
ISRI
senior director of government relations & assistant general counsel

In business it is usually quite clear when a contract exists or has been proposed.  However, even
the most savvy business owners and legal counsel in the industry are learning
the hard way how they may have entered into a binding contract that releases
their confidential records and control of proprietary data to unaffiliated
third party private sector companies for unrestricted use.

Not on my watch. I would never consent. 

These are common responses
offered when business owners are asked if they would voluntarily consent to
give an unrestricted royalty-free license to their data. In fact, even law
enforcement officers and legislators agree that such as request is ludicrous.
Yet, thousands of contracts have already been executed nationwide and most
business owners are completely unaware that the company has voluntarily –
legally speaking – entered into agreements that allow unrestricted, perpetual,
and uncompensated access to and use of their proprietary data.

How is this even possible? The answer is dangerously simple. Some
database companies are exploiting an undeveloped area of emerging law that
governs use of the Internet to collect private and confidential data. This
article discusses business concerns with mandated electronic reporting
requirements (typically as found in metals theft laws that utilize the Internet
and private companies for data collection.

Check the Box: The Veiled Practice of Licensing Data

The rapid forward movement in
technology development over the last couple of decades has provided more
powerful and less expensive options for companies. Technology is seamlessly
integrated into everyday lives, as it is used to manage inventory, track
contacts, make products, and provide speedy internal and external communication
venues. The smart use of business technology helps companies stay ahead of the
competition by improving communications, making employees more efficient and
tapping into effective marketing channels.

On the flip side, the business
advantages of technology also invite new concerns on how to maintain control of
valuable records and property that were once hardly accessible to anyone
outside the company. With the exchange of valuable information comes a need to formalize
each party’s rights to the data through licensing deals. Electronic data is
increasingly becoming more valuable than physical commodities traded on the
markets. And, as with anything valuable, you should have a right to control
access and negotiate compensation for the use of your information.

Here is a question for
you.  How much compensation would you
require before you would agree to the following licensing agreement?

“Reporting business hereby grants a perpetual,
irrevocable, unrestricted, non-exclusive, royalty-free license to use, copy,
distribute, display, reproduce, transmit, modify, and otherwise use such data
in accordance with and to the extent allowed by this agreement.  Also subject to the terms of this agreement,
Reporting Business hereby waives all rights to any claims for alleged or actual
infringements of any proprietary rights, rights of privacy and publicity, moral
rights, ownership rights and rights of attribution in connection with such
data.”

How would you respond if you
learned that your company agreed to this licensing agreement and received no
compensation at all? Don’t laugh at this seemingly ridiculous scenario. It is
all too real in the recycling industry.

Beware of the “Checkbox”

Advent of the Internet has
opened not only once unimaginable business opportunities but also a Pandora’s
box of legal vulnerabilities and questions. In the United States, eCommerce is
governed by a body of law that is constantly evolving, though it has become a
commonly accepted notion that collected data should be protected and used only
with permission of the data owner. Obtaining this permission has become so
commonplace, however, that Internet users rarely pay attention or understand
what it means to “check the box” indicating consent to use a website.

Monetizing
users’ information is a common practice for Internet-based companies. Companies
such as Facebook, Instagram, and Twitter have all publicly issued statements of
the companies’ intentions to use, modify or transmit the users’ personal
private property (i.e. data, photos, etc.) as the sites deem fit. They obtain
permission to do so through a license granted when the user continues using the
website and selects “I Agree” to the site’s user agreement. Nevertheless, in
these cases, users have a choice to not use the website if they do not agree to
authorize use of their data.

Laws typically do not restrict the use of data that is voluntarily
licensed to the company or entity collecting it. I’m often met with an
expression of disbelief when I explain to industry leaders that they may have
voluntarily relinquished control of their business records simply by complying
with an electronic reporting law. Executives are often astounded to learn that
registering to use an Internet-based company to submit data for law enforcement
purposes most often comes with non-negotiable licensing agreements.

The mechanism for this shady but perfectly legal and enforceable deal is
the “checkbox” terms-of-use agreement. Legal precedent is clear that the
affirmative act of “checking the box” consenting to the website terms-of-use
agreement is a voluntary action. Doing so typically grants the Internet-based
company rights to any data collected by that company. Unfortunately, I have
heard comments from business leaders far too often indicating they never read
the terms-of-use agreement and had no idea there was a licensing provision
within those terms that had nothing to do with the reporting law. 

What is Your Business Data Worth?

A common question I ask
business leaders is how much they would pay to ensure the confidentiality of
their company’s proprietary data. The answers usually vary in range but there
is always a quantitative value provided that reflects value of the data.

The law considers business records to be private property protected
under the Fourth Amendment of the Constitution.[i] Records
are valuable property and the courts have made it clear that a business does
not abandon its property right in the records when it makes them available for
inspection under applicable law. Furthermore, laws that require records be in
electronic format for easier access and inspection do not alter this property
right. 

With this understanding, it is hard to fathom how the government could
facilitate opportunities for a third-party to legally wrestle control of
another’s private property. Yet, this is exactly what some electronic reporting
laws have done. The government is collecting data for legitimate law
enforcement purposes but permitting its collection agents to impose an
uncompensated licensed exchange of private property under a unilateral,
non-negotiable website terms-of-use agreements.

How much would you pay to access your competitors’ business data if it
were legally available for sale?  Regrettably,
under the guise of many electronic reporting laws, the government is not only
permitting this practice, but facilitating it by refusing to monitor and
reign-in the actions of its selected exclusive database vendors. If you would
pay for your competitors’ data, you can probably bet they would pay to access
yours.

Check the
Box: Right to Contract or Not Contract

The right to contract is a long-recognized liberty interest.[ii] The
“Fourteenth Amendment liberty includes the right … to enter into all
contracts which may be proper, necessary and essential” to a citizen’s needs.[iii]
Arguably, it is also well settled law that the constitutional right to contract
entails the freedom not to contract.[iv]

So what happens if you do not
agree the terms-of-use and refuse to “check the box” on any particular
website?  Try it sometime when you want
to use Amazon.com, register for a frequent shopper card, or access your own
banking records or medical data utilizing the bank or doctor’s website portal
for example. The result is universally the same: you are denied access to the
site you wish to use, even if the data within the site is yours. 

Just as traditional
brick-and-mortar retail operations can establish their own terms of operation
and contracts within the law, so can Internet-based website operations dictate
under what conditions they will agree to allow use of their websites within the
confines of the law. It is no different than a brick and mortar bank refusing
access to your money in the vault during non-business hours or without proper
identification. Ultimately, you have the choice of whether to put your money in
the bank under those restrictions or put it in your own safekeeping. It is the
same concept with website user agreements.

A contract doesn’t have to be written in
hard-to-understand words, in fine print, or on special paper to be legally
binding. In fact, it doesn’t have to be printed at all. An oral contract is
just as enforceable as a written one. Generally, contracts require an
“offer,” a promise by one person in exchange for the promise of
another, and an acceptance, the other person’s agreement to the proposed deal.
Sometimes, these terms can be implied by actions alone, without a formal
“offer and acceptance.”

Electronic contracts are enforceable in the same manner as any other
valid contract.[v]
Just as in other agreements, an electronic contract is formed with a bargained
for exchange, mutual assent and consideration. While the governing law
continues to adjust to address technological advances, it is generally accepted
that a “clickwrap” contract on a website that requires clicking “I Agree” to
the terms and conditions of the website owner binds the user into a contract.[vi]

It is true that in a few cases a
validly formed contract will not be enforced — such as one party may be a
minor, or mentally incapable of acting. In other cases, it may be uncertain if
any contract exists at all. Some in the recycling industry are of the opinion
that terms-of-use agreements on electronic reporting Internet portals are
contracts of adhesion and not enforceable because compliance is contingent upon
access to the website. Unfortunately, there is little case law directly on this
point and the general position of the courts has consistently been that a website’s terms-of-service agreement is a legally
binding contract and may be subject to change without consultation.

Emerging questions when the law gives me no choice

The recycling industry once again finds itself in new legal territory as
legislators seek to regulate the industry under new rules that have not been vetted
by our legal system. As legislatures across the nation are increasingly
mandating data reporting in electronic format for ease of inspection, it is the
private sector that is primarily becoming data collection and management agents
for the government. And while government agents typically are restricted by
what the law allows, monitoring their activities in a digital age has proven to
be a challenge.

In the case of electronic reporting using a third-party vendor,
government agents control access to the portal required to comply with the law
and therefore have tremendous leverage over the regulated entities. The result
is an ability for the agents to effectively eliminate the user’s choice of
whether to “click the box” and force the user to enter into a contract if he or
she wants to comply with the law. The user has absolutely no bargaining ability
to decline the contract or to set agreeable terms and conditions.[vii] 

Website terms-of-use
agreements are not required though almost every legal entity with an Internet
presence will likely have them if, for nothing else, to protect their
intellectual property such as copyright and trademarks. Data use and security
laws protect consumers but only from unlawful disclosure and misappropriation
of the data they were assured was protected. A problem arises when the consumer
grants an unrestricted license to the data vis-a-vis this terms-of-use
agreement and can no longer argue that the data is being misused. But what if
the permission was essentially extorted from a reporting business by threat of
non-compliance?  The courts have not
weighed in on this question.

Mistaken Assumptions of Data Protection

I’ve had numerous discussions with business owners and legal counsel in
the recycling industry who have questioned whether the industry’s concerns with
electronic reporting were overrated. One CEO who is an attorney and well-versed
in state and federal law told me that he did not consider reporting to be
intrusive or burdensome particularly since the mechanism for reporting was
available free of charge through an easily accessible portal on the
Internet.  While he generally disliked
electronic reporting in concept, he believed it was good for his company
because it helped differentiate it from bad actors. He is not alone in his
opinion as I have heard similar comments from several business leaders in the
recycling industry.

These opinions almost always shift dramatically, however, when I explain
that reporting often includes a contract that grants an unrestricted license to
utilize the data regardless of how the vendor promises the government it will
secure the data.

The implications of compliance with electronic reporting mandates are
commonly misunderstood because more focus is put on the monetary costs of
reporting while there is little scrutiny given to exactly how and who collects
and maintains data for the government. In fact, an increasing number of local
and state governments are inadvertently condoning the relaxation of certain
data protections by allowing vendors to impose terms-of-use agreements onto
recyclers.

Most business leaders are mistakenly led to believe that the reported
data is restricted to law enforcement use only because this is stipulated in the
government’s contract with the vendor. However, database companies get around
this restriction by utilizing separate independent contractual terms-of-use
agreements that grant them license to access and use confidential records
intended only for law enforcement purposes. Again, the problem is that if the consumer grants an unrestricted license
to the data, it is hard to argue that the data is being misused.

Constitutional Liberties at Stake

While the benefits of
technological advances for business are not disputed, perhaps we should start
asking at what cost. I am not necessarily referring to the monetary costs alone
but suggesting that individual liberties and basic constitutional rights are at
risk. Businesses use websites to advertise, provide information, sell products
and reach new customers. This is all good. However, the appeal may wane when
one considers the fact that such benefits come only after one agrees to give up
one’s fundamental property and liberty rights such as the right to contract.

In theory, every contract can be negotiated. In
practice, unfortunately, many businesses offer standard terms to avoid the
costs of negotiating each contract, or changing procedures for thousands of
deals. On the other hand, depending upon how much a business wants a particular
deal, often the preprinted form serves only as the start of extended
discussions. Unfortunately, this is not the case when it comes to electronic
reporting through third-party vendors and their use of “checkbox” agreements.

There is little doubt that respectable businesses would agree to assist
law enforcement with credible investigations. This cooperation, though, should
never be confused with a waiver of the fundamental protections afforded to
every citizen. Perhaps the current situation with electronic reporting is a
result of the speed in which the Internet and electronic commerce has grown
along with a failure of the law to keep up. Nevertheless, there is an alarming
trend of legislative mandates that are going unchecked under the guise that
public safety trumps other concerns. 

Electronic reporting mandates involve questions concerning property
rights and liberties such as freedom to contract, among other things. The
astonishing thing is that citizens likely do not realize that their fundamental
protections are slowly being eroded as more laws are enacted and upheld by the
courts without a thorough analysis of the implications. Is time to put up a
challenge? The cost may be high in both time and funds, but perhaps it is time
ripe to consider whether to a stand.

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