Taking Intangible Electronic Files is Criminal Fraud–NM v. Kirby

By Eric Goldman

New Mexico v. Kirby, 2007-NMSC-034 (N.M. June 13, 2007)

This is a very confusing case, so maybe you can help me figure out what it means. At minimum, this case highlights the problems that can be arise when a web design/development relationship goes sour. More broadly, it also contributes to the already confused case law about when intangible electronic records can be “stolen,” but this lesson comes at a high cost–in this case, 18 months of jailtime for the defendant.

Facts

According to the Supreme Court’s statement of facts, Kirby retained Collett, a website designer, to “develop[] and/or improv[e] a World Wide Website to be installed on the client’s web space on a web hosting service’s computer.” I believe the site at issue is environmentalbenefits.com. The agreement specified that Collett retained the copyright “to the finished assembled work of web pages” and Kirby would be “assigned rights to use as a website the design, graphics, and text contained in the finished assembled website” after Kirby paid the contract price of $1,890 plus tax.

But Kirby never paid Collett–although, according to this site, Kirby paid with an allegedly bum check. Kirby also changed the password for the designed website, which effectively cut off Collett’s ability to access those files–the files that, per the contract, Collett still owned.

If Kirby stiffed Collett, it seems like Collett had several legal options, including breach of contract and copyright infringement. Instead, this case went to state prosecutors, who prosecuted Kirby for criminal fraud based on Kirby having taken “a Website Design belonging to Loren Collett, by means of fraudulent conduct, practices, or representations.” The jury convicted Kirby, and the Supreme Court affirmed. According to this site, Kirby was sentenced to 18 months in jail.

Questions

This case raises some tough issues, including:

* Why did NM prosecutors pursue this case? On its face, this looks like a garden-variety $2000 commercial dispute. Heck, it could have been handled in small claims court. Instead, Kirby get a felony conviction and jailtime. Huh?

* Did Collett retain a duplicate copy of his files in his possession? If so, how did Kirby “take” non-rivalrous electronic files?

* In that vein, why isn’t this crime preempted by copyright law? Copyright preemption is inherently confusing, so I don’t feel too bad about being confused here. Indeed, on its face, a commercial fraud crime should be sufficiently removed from copyright law to avoid preemption easily. But in this case, Kirby was prosecuted for converting Collett’s intangible files. This sounds a lot like copyright infringement to me. Of course, this ruling isn’t completely unprecedented: cases like Kremen v. Cohen and Thyroff have held that intangible electronic records can be converted, though I think the copyright preemption analysis in these cases is hardly satisfying (plus, the recent Utube case held that an intangible asset could not result in trespass to chattels). Though the case talks about copyright a lot, there’s no reference at all to preemption–perhaps it wasn’t raised by the public defender?

Lessons

1) This case reminds us of the importance of drafting a website development agreement properly. For example, the contract’s provision that Kirby would be “assigned rights to use” the website is fatally ambiguous. I wrote a lot on the issues associated with web development agreements in the 1990s; see, e.g.,

* A Fresh Look at Web Development and Hosting Agreements (1998) with sample web development agreement

* Top 10 legal issues for clients of Web developers (1996)

* Pitfalls in Outsourcing Your Website (1996)

In particular, the excerpted contract language indicates that the parties were struggling with defining their respective ownership interests. This is a typical area of confusion; I racked up a fair amount of billable hours in the late 1990s on this very point with people (including opposing lawyers) who didn’t get it. Even when the deal value is low, a savvy lawyer can add significant value, at relatively low cost, helping the parties understand this topic.

2) This case reminds us that, unless the contract specifies otherwise, the web designer owns his/her web development work product even if the retaining party pays for the work. This isn’t new either (web development lawsuits from the 1990s addressed this point), and here the parties actually expressed addressed ownership in their contract. Nevertheless, caveat emptor!

3) This case extends the meme that intangible electronic records are just as tangible as chattel for conversion purposes. I remain concerned in general about this trend. We may benefit from a careful rethinking about the implications of rivalrousness on conversion doctrines.

4) I’m trying to figure out how broadly this case could apply. For example, would it apply in other circumstances where a party cuts off another party’s access to electronic files by changing a password? With little effort, I can think of two: (1) divorcing spouse cuts off spouse’s access to shared account containing copyrighted works, and (2) website terminates customer by changing the password, cutting off access to copyrighted material stored in the account (I’m assuming the contract doesn’t expressly grant this right). Each fact pattern appears indistinguishable from the elements at issue in this case, although there may not be the requisite scienter to find fraud. if there were (for whatever reason), this case could expand the realm of criminality much further than we might have anticipated.

5) No matter what, the Supreme Court opinion and some of the source materials at this site strongly indicate that the New Mexico judicial system still doesn’t understand Internet technology very well. If this were a typical civil case, that would be a shame; if this technological confusion directly led to jailtime for the defendant, it may have produced a travesty.

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