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Improper hyperlink use now carries liability risk

Rochester Business Journal
May 26, 2000
Public and private companies are responsible for the accuracy of their statements that can reasonably be expected to reach investors or the securities markets, regardless of the medium through which such statements are made, including a company's Web site. This obviously is true for statements made directly by the company. According to a May 2000 release by the Securities and Exchange Commission, companies also might be responsible for third-party information hyperlinked to their Web sites if the company has been involved in the preparation of the information or has explicitly or implicitly endorsed or approved such information.

Companies hyperlink to third-party Web sites to provide viewers access to other

information found on the Internet. These companies increasingly use hyperlinks to access analysts' reports and other materials, such as news articles, industry publications, stock prices, consensus earnings estimates and related information. The practice offers viewers valuable information, but what happens when the information is incorrect? Increasingly, third-party information can subject companies to potential liability.

The SEC's recent release identifies three factors to determine if the hyperlinked information of a third party can be attributed to a company: the risk of confusion regarding the origin of the information; the context of the hyperlink; and the presentation of the hyperlinked information.

To avoid the risk of confusion, hyperlinked information on a third-party Web site may be less likely to be attributed to a company if it makes the information accessible only after a visitor to the Web site views an intermediate screen that clearly indicates that the visitor is leaving the company's Web site and that the information viewed subsequently is not the company's. The practice of "framing," or opening the content of another site within the frame of the company's site, also can increase a company's potential liability for adoption of the material on the third-party's site.

To avoid the risk of attribution through the context of a hyperlink, a company should be cognizant of what it says about the hyperlink, what is implied by the context in the placement of the hyperlink and whether the company explicitly endorses the hyperlinked information. For example, a hyperlink might accompany a statement that explicitly endorses the information such as "Company XYZ's Web site contains the best description of our business that is currently available."

The information also might suggest that the hyperlinked information supports a particular assertion on a company's Web site. For example, the hyperlink may incorporate a statement such as, "As reported in XYZ Magazine, our company is the leading producer of ABC product worldwide." In addition, if the company remains silent concerning the hyperlink, the context and presentation of the hyperlink information may imply that it is attributable to the company.

A company's presentation of the hyperlink and the logistical layout of the screen where the hyperlink resides also are important. It is more likely that hyperlinked information will be deemed to have been adopted by the company if the company differentiates a particular hyperlink from other hyperlinks on the company's Web site, through its prominence, size, appearance (color, font, etc.), location or an affirmative statement by the company that it favors the hyperlinked information over other information available to the investor on or through the site.

Directing a viewer's attention to information available via a hyperlink also might lead to a determination that the information has been adopted by the company. For example, where a company hyperlinks to information that is considered a "wealth of information," a company's creation and maintenance of such a link may be an endorsement of the selected information. Similarly, a company that selectively establishes or terminates hyperlinks to third-party Web sites based on the content of the information about the company on those particular sites may be viewed as an attempt to control the flow of information.

Companies often use some form of disclaimer in an attempt to disassociate themselves from the content of hyperlinked external sites, but the SEC warned that cautionary statements and disclaimers will not automatically insulate a company from liability for hyperlinked third-party information.

Currently, there are three principal approaches on which companies rely when using disclaimers on their Web sites. Companies often will provide the full text of the disclaimer on the same screen as the information to which it relates or simply create a hyperlink from the information to the disclaimer. Companies that hyperlink to a disclaimer typically place the link either next to the subject information, on a menu bar generally located on the top or left side of the screen, or at the bottom of the screen, with a label such as "important legal information" or "terms and conditions." As a third option, some companies will use a "click-through" disclaimer that pops up on the screen. This is the wisest option to follow, because it forces the viewer to acknowledge the disclaimer before accessing the desired information.

Whatever approach ultimately is taken, disclaimers should be used to inform the viewer that the hyperlinked information is external information prepared by third parties. The disclaimer should state the company provides these links as a convenience and is not responsible for the content found on external sites; nor does it sponsor, endorse or approve these sites or their content. To clearly separate linked sites from the company's Web site, "framing" should be avoided.

Public companies also are advised not to post or hyperlink stock to analysts' reports or link to the Web site of an analyst's investment bank. Providing access to consensus earnings estimates, even with an associated disclaimer, could cause concern if management knew the estimates posted at that time were inaccurate.

Public and private companies disseminate vast amounts of corporate and marketing information via their Web sites to online audiences around the world. Clearly, any company will be liable for material misstatements or omissions of information disseminated directly by the company, if an investor relies on such information to its detriment. The new SEC release clarifies that such liability also will apply to third-party information hyperlinked to a company's Web site, if the company helped to prepare or appears to endorse the external information.

Because a public company has a readily available market for the purchase and sale of the company's securities, it may have a heightened sensitivity to its duty to investors under the anti-fraud provisions of the securities laws and the implications of the new SEC release.

However, the potential liability addressed in the release also should concern private companies. When a private company begins the process of raising capital in a private offering, potentially misleading information on a hyperlinked third-party site could expose it to liability. The new SEC release makes it clear that regardless of whether a company is public or private, both types of entities must be cognizant of the new liability concerns involving the content of a company's Web site and the potential dangers of unmonitored hyperlinks to third-party sites.

(Justin P. Doyle is a partner with Nixon, Peabody LLP. His colleague, Kendal Tyre, assisted with this article.)

5/26/00--Rochester Business Journal

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