PROP. 211 HEATS UP ON LINE : INTERNET FIRMS OPPOSE MEASURE THAT OPENS DOOR TO GOVERNMENT REGULATION.

Byline: P.J. Huffstutter Daily News Staff Writer

It's February 1996 and President Clinton is trying to pass legislation that will regulate the Internet. On-line companies protest the bill, insisting that they are merely conduits for Net users and not responsible for editing what the public sees.

Fast-forward to October and an initiative on the California ballot, Proposition 211, will make it easier for people to file lawsuits against public businesses. The same on-line companies, who fear their businesses would suffer because of it, protest again.

Only this time, there's a crucial difference. Instead of being a nonpartisan conduit, several of these firms have adopted an editorial stance.

The brouhaha over Proposition 211 has further inflamed the controversy over the corporate identity of Internet companies. Legal experts warn that these firms need to be decisive in their role, or the government will establish regulations that will decide the issue for them.

``It's time for these companies to grow up and decide what they are,'' said Jane Kirtley, executive director of the Reporters Committee for Freedom of the Press. ``You can't flip-flop whenever a crisis comes up and hope the law will be there to protect you. It just doesn't work that way.''

Proposition 211 has become one of the most costly ballot initiatives in California history. Advocates insist it will broaden state law to make it easier for people to file securities-fraud lawsuits when stock prices drop unexpectedly.

High-tech companies, which have watched Internet stocks wildly fluctuate this year, complain they're already targets of what they call ``frivolous'' litigation.

``It is very difficult for small start-up companies, and even companies like us, to spend a lot of money to compete against the special interests who have far more resources to bring to bear,'' said Peter Harter, public policy counsel for Netscape Communication Corp.

According to campaign disclosure statements filed with the Secretary of State's Office, hundreds of high-tech firms have funded the No on 211 campaign.

Netscape contributed $100,000 and provided free advertising on its Web site. Web-based directories Yahoo! and Excite have also weighed in - giving $25,000 and $36,000, respectively.

In all, Proposition 211 opponents have raised nearly $25.5 million, compared with the $8.3 million garnered by the Los Angeles-based Citizens for Retirement Protection & Security (CRPS).

It's not unusual for corporations to get involved with political campaigns where the outcome could impact their profits. But the situation with Proposition 211 is different because of the ill-defined nature of these high-tech companies and their dominant presence on the Internet.

The political wrangling peaked in September, when CRPS contracted with several Internet companies - software developer Netscape Communication Corp. and on-line directories Yahoo! and Excite - to buy some banner advertisements.

All three firms refused to run the ads on their Web sites. Though Yahoo! had already been paid, it returned the $1,000 check to CRPS and informed the group that it was rejecting its ad.

``These companies claim they're for open and honest disclosure to their investors. And yet they're denying the public access to information on both sides of this issue,'' said Sean Crowley, communications director for CRPS. ``It's hypocritical for these companies to lobby the federal government to deregulate the communications industry, and then self-regulate it for their own benefit.''

Most media outlets have the editorial right to turn down advertisements that clash with their interests or tastes. The problem, however, is high-tech companies haven't always identified themselves as media outlets.

Netscape has called itself a software developer and an information conduit. Yahoo!, an outspoken proponent of free speech on the Internet, has dubbed itself as the ultimate Web organizer and its site an ``electronic ontology.''

But Yahoo! officials insist they've always had the viewpoint of a publisher.

``We may not always call ourselves publishers, but we've always taken the publisher's mode of operations,'' said Jeff Mallett, senior vice president of Yahoo!

The company reversed its decision and allowed CRPS to advertise on its Web launch page. At the same time, Yahoo

also established a link to the No on Prop. 211's Web site.

``We will only run advertising when we receive requests from both sides of an issue,'' Mallett said. ``Even then, it's up to our sole discretion whether we put anything up on our site.''

Publishing begets liability

The law, however, is not so simple. If an on-line company is merely a ``common carrier'' - like the telephone company - the on-line business must accept every byte of datum that crosses its wires. The reasoning is the carrier can't physically screen each electronic transaction and should not be liable for the material.

A publisher, on the other hand, generally makes editorial decisions about the material it uses. But with editorial control and judgment comes greater liability.

Traditionally, the legal concept of who is a publisher is clearly defined. The New York Times, for example, runs business ventures outside of its newspaper - an electronic news service, a book division and an Internet publication. Though its product may be delivered in multiple media, the company ultimately remains a publisher.

The Internet has blurred this concept. Because building a site on the World Wide Web is simple, any company or individual who does so becomes an electronic publisher.

``These companies are on dangerous ground because they're trying to bill themselves as somewhere in between,'' said C. Scott Fedewa, an attorney and chief executive officer of $pottworks Inc., an on-line entertainment studio based in West Hollywood. ``Legally, that's always a scary spot to be because this is all gray area.''

Critics warn that by making editorial decisions over politically charged advertisements, these companies are setting a self-limiting precedent.

``Conduits of information don't have someone making editorial decisions about political ads on issues they have supported financially,'' said Brock Meeks, on-line expert and chief Washington correspondent for Wired magazine. ``If someone like Yahoo! looks at itself as a publisher, then they can hide behind the First Amendment. But then Yahoo! is opening itself up to a lot of other liability issues, like copyright infringement.''

Assigning accountability

A few on-line copyright infringement and defamation cases have gone to court. In general, the courts have gone against the Net.

In 1995, a New York state trial court ruled that the Internet service provider Prodigy was also a publisher, and could be liable for anonymously posted material that defamed Stratton Oakmonth Inc., a securities investment banking firm.

And last year, the Church of Scientology filed suit against Netcom, claiming that a former church official used the service to reach and post copyrighted material on a North Hollywood-based bulletin board system. The Internet service provider settled the case out of court and has agreed to investigate all future complaints over copyright issues.

Yet it's more likely that companies like Yahoo! or Excite would get in legal wranglings with an organization like the Software Publishers Association, which monitors Internet sites that offer access to pirated computer programs.

``If Yahoo! links to a site housing software that infringes on someone's copyright, they could be sued for contributory infringement,'' Meeks said. ``It's a bad strategy to cast yourself as a publisher. It's only a matter of time before the lawsuits start.''