Shutterfly 2009 Annual Report Download - page 36

Government regulation of the Internet and e-
commerce is evolving, and unfavorable changes or failure by us to comply with these
regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-
commerce.
Existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover
taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic
contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and
the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property use and ownership,
sales and other taxes, libel and personal privacy apply to the Internet and e-
commerce as the vast majority of these laws were adopted prior to the
advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-
commerce. Those laws that do reference the
Internet are only beginning to be interpreted by the courts and their applicability and reach are therefore uncertain. For example, the Digital
Millennium Copyright Act, or DMCA, is intended, in part, to limit the liability of eligible online service providers for including (or for listing or
linking to third-
party websites that include) materials that infringe copyrights or other rights of others. Portions of the Communications Decency
Act, or CDA, are intended to provide statutory protections to online service providers who distribute third-
party content. We rely on the
protections provided by both the DMCA and CDA in conducting our business. Any changes in these laws or judicial interpretations narrowing
their protections will subject us to greater risk of liability and may increase our costs of compliance with these regulations or limit our ability to
operate certain lines of business. The Children’s Online Protection Act and the Children’
s Online Privacy Protection Act are intended to restrict
the distribution of certain materials deemed harmful to children and impose additional restrictions on the ability of online services to collect user
information from minors. In addition, the Protection of Children From Sexual Predators Act of 1998 requires online service providers to report
evidence of violations of federal child pornography laws under certain circumstances. The costs of compliance with these regulations may
increase in the future as a result of changes in the regulations or the interpretation of them. Further, any failures on our part to comply with these
regulations may subject us to significant liabilities. Those current and future laws and regulations or unfavorable resolution of these issues may
substantially harm our business and results of operations.
Legislation regarding copyright protection or content interdiction could impose complex and costly constraints on our business model.
Because of our focus on automation and high volumes, our operations do not involve, for the vast majority of our sales, any human-
based
review of content. Although our website’
s terms of use specifically require customers to represent that they have the right and authority to
reproduce the content they provide and that the content is in full compliance with all relevant laws and regulations, we do not have the ability to
determine the accuracy of these representations on a case-by-
case basis. There is a risk that a customer may supply an image or other content that
is the property of another party used without permission, that infringes the copyright or trademark of another party, or that would be considered
to be defamatory, pornographic, hateful, racist, scandalous, obscene or otherwise offensive, objectionable or illegal under the laws or court
decisions of the jurisdiction where that customer lives. There is, therefore, a risk that customers may intentionally or inadvertently order and
receive products from us that are in violation of the rights of another party or a law or regulation of a particular jurisdiction. If we should become
legally obligated in the future to perform manual screening and review for all orders destined for a jurisdiction, we will encounter increased
production costs or may cease accepting orders for shipment to that jurisdiction. That could substantially harm our business and results of
operations.
Our practice of offering free products and services could be subject to judicial or regulatory challenge.
We regularly offer free products and free shipping as an inducement for customers to try our products. Although we believe that we
conspicuously and clearly communicate all details and conditions of these offers —
for example, that customers are required to pay shipping,
handling and/or processing charges to take advantage of the free product offer —
we may be subject to claims from individuals or governmental
regulators that our free offers are misleading or do not comply with applicable legislation. These claims may be expensive to defend and could
divert management’
s time and attention. If we become subject to such claims in the future, or are required or elect to curtail or eliminate our use
of free offers, our results of operations may be harmed.
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