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It's called newsmine and works with onmouseovers. A small menu popup opens with links to related stuff from the network. In Lycos speech those are scrollovers.
Lycos information page [news.lycos.com] on newsmine claims it
analyzes stories, identifies keywords by places, businesses, people or topic trends and then offers an extensive selection of related information for you to explore.
The newsmine technology automatically finds and tags words and phrases in texts on Lycos news pages.
In this example from today [news.lycos.com] the story is from AP.
What are the legal and ethical consequences of such a tagging of copyrighted material?
Here is a story on it:
[boston.internet.com...]
and Lycos press release
[terralycos.com...]
What newsmine does, is putting words from articles originally published by others into a proprietary context. A story copyrighted by Reuters mentions the White House, which is linked to Barnes & Noble.
You are right - Lycos does not do this to your pages. More importantly it's done on a website, not in a viewer.
But when a internet giant like Terra Lycos, whose "mission is to become the world’s leading online destination", with sites in 40 countries adopts such a dubious while immature technique, than this deserves some attention
What are the legal and ethical consequences of such a tagging of copyrighted material?
There are indeed some copyright issues, but as mbauser2 writes, they do this to their own site the problem is between the published and the content providers.
If the technology is adapted to work when framing content from other sites, it will be a problem. Not only a copyright issue. (I just hate it when I see someone browsing my online shop with the Alexa toolbar enabled, picking up my book titles and presenting them as Amazon links with Alexa affiliate tags.)