August 28, 2008
SEC Proposes that Companies Should Be Liable for Content Linked from the Company's Website
By Eric Goldman
[Note: I haven't had a chance to blog the Veoh case--coming soon!]
The Securities and Exchange Commission (the SEC) is proposing an interesting policy with respect to a securities issuer linking to discussions about it. See pages 31-37 of this document. Effectively, the SEC is proposing that a securities issuer can be liable for any misstatements on linked pages if "the context of the hyperlink and the hyperlinked information together create a reasonable inference that the company has approved or endorsed the hyperlinked information." The SEC's discussion about linking also has some interesting and largely exceptionalist discussion about the ontological meaning of a link.
At minimum, the SEC's proposed position may create a fascinating doctrinal clash with 47 USC 230, which seems to preempt any liability for content on third party websites--even if the linker "endorses" the linked content, and even if the SEC says otherwise (unless the SEC makes it part of federal criminal law, which is excluded from 230's immunization). If anyone is interested in working with me to submit a comment to the SEC (due Nov. 5) to explain why 47 USC 230 may preclude the SEC's approach, let me know.
This proposal raises an even broader issue how 47 USC 230 overlays on securities laws generally. I can't really think of a defendant who has litigated 230 as a defense to securities fraud claims, but it seems like a tenable defense for any online securities marketing done by third parties--a result which might wreak havoc on existing secondary doctrines of civil liability for securities fraud. This looks like an excellent but complicated paper topic.
UPDATE: James Grimmelmann takes exception to my reference of the SEC's policies as exceptionalist. I didn't build out the concept in this brief blog post, but I am thinking about making it part of the comments to the SEC, so I'm planning to elaborate on why I think it's exceptionalist soon.
August 27, 2008
7Search Sues McAfee For Red Flagging It
By Eric Goldman
I don't have a good sense of how many lawsuits have been filed against anti-spyware vendors for classifying third party software as "adware" or "spyware." I've blogged on a few (including Kaspersky, PC Tools and Symantec v. Hotbar), and Ben Edelman maintains a larger catalog of such lawsuits (not sure how up-to-date this is). However, I don't know if these lawsuits are relatively rare (as Ben's chart implies) or if they are multitudinous but most quietly fly under the radar screen.
If there aren't many unpublicized lawsuits, that may reflect that suing an anti-spyware vendor over its classification decisions almost never makes sense. First, many vendors have a private adjudicatory/appellate process that resolves many potential disputes without a lawsuit. Certainly, most vendors don't want to make errors, which undermines their own credibility, and most reputable vendors want to fix their mistakes. Second, lawsuits bring generally unwanted publicity to the plaintiff, calling extra attention to their alleged deficiencies and bringing out all of the gripers. Third, the costs of the lawsuit may be more than the value of any frustrated transactions. Finally, many of the lawsuits have low probabilities of legal success for the reasons I'll discuss in a moment. So there is good reason to believe classification-related lawsuits such as this one are rare. (I'm not saying that grumbles or C&Ds are rare; I'm just referring to formal lawsuits).
In this lawsuit, 7Search says that it was in the toolbar business but stopped offering downloads from its site in 2003. However, McAfee's SiteAdviser gives 7Search the big red X and says "Feedback from credible users suggests that downloads on this site may contain what some people would consider adware, spyware, or other potentially unwanted programs." 7Search claims that this statement is false because it isn't offering any downloads at all. 7Search thus alleges false advertising (Lanham 43(a)), deceptive trade practices, defamation and unfair competition.
The most obvious barrier to 7Search's lawsuit is 47 USC 230. Both (c)(1) and (c)(2) could be implicated. (c)(1) is less likely, but if in fact McAfee is republishing information from third parties (as suggested by the statement's reference to "credible users"), they may be able to claim (c)(1) for the republication. Either way, (c)(2)--the immunization for filtering decisions--is directly on point and potentially immediately fatal to the lawsuit. Zango's lawsuit against Kaspersky was soundly and quickly knocked out on 230(c)(2) grounds (though that is now on appeal to the Ninth Circuit), and a district court in Illinois gave broad deference to the Zango ruling in finding that Comcast could claim 230(c)(2) for email filtering decisions.
At the same time, 7Search alleges that McAfee's classifications were in bad faith. If so, then 230(c)(2) wouldn't apply even under the liberal Kaspersky or Comcast approaches, both of which required subjective good faith. We'll have to see how McAfee responds to determine if 7Search's allegation has any chance of getting traction.
There are two other possible holes in the potential 230 coverage for this lawsuit. First, courts have been inconsistent whether a false advertising 43(a) claim under the Lanham Act fits within the "IP" exclusion to 230. Second, most of 7Search's gripe goes to McAfee's statement that bad downloads are available--words chosen by McAfee to describe its filtering decision. It remains unclear if 230(c)(2) protects an intermediary's characterization of its filtering decision as much as it protects the filtering decision itself--just like 230(c)(1) may protect against liability for third party information but may not protect against marketing representations rendered untrue by third party content or actions.
In any case, I think this lawsuit and others over classification decisions raise interesting and important issues that I plan to explore in my Economics of Reputational Information project. We want skillful intermediaries to digest the overwhelming amount of information available in the marketplace and make reputational judgments that speed up our consumer decision-making. On that basis, we definitely don't want reputational judgments removed from marketplace actors and put into the hands of the judges. However, we also want the reputational intermediaries to make factually accurate judgments because their misjudgments also could distort marketplace decision-making.
August 26, 2008
Court Slams Competitive Metatagging and Keyword Advertising--Soilworks v. Midwest Industrial Supply
By Eric Goldman
Soilworks, LLC v. Midwest Indus. Supply, Inc., 2008 WL 3286975 (D. Ariz. Aug. 7, 2008)
All too frequently, we get an opinion where the judge clearly didn't grasp current implementations of keyword advertising and metatagging. Often, it's simply a bad luck of the draw; in other cases, the defense lawyers may have failed to educate the judge properly (IMO, the Axiom case is an example of the latter).
This opinion, an outgrowth of patent litigation involving two competitors in the soil anti-erosion business, is a good example of a judge who just doesn't get it. The advertiser's misdeed is that it "uses the [trademarked] phrase 'soil sement' in keyword advertising on an Internet search engine and uses variations of the phrase in metatags for its websites." The opinion doesn't specify if the advertiser triggered ads on the term "soil sement" or displayed the trademark in the ad copy, nor does the opinion specify which metatags (keyword, description, others) contained the "soil sement" references.
Those "details" don't matter to this judge, though, because the initial interest confusion doctrine provides a cure-all for any factual or analytical deficiencies. Even though there was zero evidence that the advertiser's behavior actually or might have confused consumers one bit, the court says that the potential for attention diversion from keyword advertising and metatagging was sufficient to constitute initial interest confusion ("the wrong in a metatag initial interest confusion case is ... the diversion of the consumer's initial attention to the defendant's website using the plaintiff's trademark and goodwill"). Unfortunately for the analytical rigor of the judge's discussion, it's already well-established that (1) keyword metatags have no meaningful diversionary power, and (2) as I've explained here, it is impossible to conclude that consumers were diverted until we can confirm where the consumers were trying to go in the first place (and a simple keyword search can't tell us that). (There are plenty more bases to attack the "logic" here; I'm trying to be selective). As a result, this court's reliance on attention diversion concerns is anachronistic at best and pernicious at worst.
This opinion is too inscrutable to draw many useful lessons from it. However, it reinforces a broader lesson that there remains significant legal downside, and minimal marketing upside, to including competitive trademarks in keyword metatags. Therefore, I continue to strongly suggest that advertisers should avoid this practice.
For more, see Rebecca's commentary, where she says she's "depressed" by rulings like this.
August 21, 2008
Fair Use - It's the Law (for what it's worth)--Lenz v. Universal
DMCA notice & takedown provisions upheld in Lenz v. Universal
By Ethan Ackerman
A recent ruling in Lenz v. Universal shows just how far being right about something can get you - barely past a motion to dismiss. It just may force a bit of change, too.
Wednesday's ruling in Lenz v. Universal is being characterized by most press coverage as "requiring copyright owners to consider the fair use doctrine before issuing takedown notices." For most purposes, that's an accurate summary of the ruling.
The statute requires it, right?
What the court gets right in Lenz is its conclusion that the statute means what it says. More specifically, Lenz upheld the statutory requirement that a notifier have a "good faith belief that use of the material in the manner complained of is not authorized by ... law, as stated in 17 USC 512(c)(3)(A). One of Lenz's core claims in the case was that her use of Universal's music was a fair use, and thus "authorized by law." The fact that it was authorized by the fair use provision of copyright law made Universal's assertion otherwise a misrepresentation, Lenz contended.
Judge Jeremy Fogel agreed, holding that "an activity or behavior 'authorized by law' is one permitted by law or not contrary to law" and since "fair use is a lawful use of a copyright,...in order for a copyright owner to proceed under the DMCA with 'a good faith belief that use of the material in the manner complained of is not authorized by the copyright owner, its agent, or the law,' the owner must evaluate whether the material makes fair use of the copyright."
Faced with such clear statutory language, Judge Fogel found Universal's arguments, roughly that 'fair use is hard to figure out' and 'fair use isn't really law so much as an exception to the law,' were lacking.
So how's this not a win for Lenz?
While the opinion so far seems a pretty cut-and-dried win for Lenz (and her attorneys at the EFF,) Judge Fogel looks to the next step of this litigation and points out that being right on the law isn't enough. There are facts that must be proven too. In a complex judicial process called 'telegraphing an opinion and dropping hints,' Judge Fogel states that "the Court has considerable doubt that Lenz will be able to prove that Universal acted with the subjective bad faith required...."
These DMCA notice provisions are a two-edged sword, and 9th Circuit precedent has further narrowed the provisions such that the other edge is sharp indeed. The notice provision requiring a "belief" that the post isn't authorized by the owner or the law merely requires that the notifier have a "good faith belief," not a legal certainty. Additionally, Judge Fogel points out under a prior case, Rossi v. MPAA, that "subjective bad faith" must be shown to disprove good faith. In other words, Lenz has to show that Universal (roughly) knew, or possibly should have known, the use was fair and sent the notice anyway. While EFF has made a point of lining up an impressive array of facts that may push this particular case over the edge, bearing the evidentiary burden of proving the actions and intentions of an adversary is a heavy burden indeed.
But wait, what if this letter wasn't even under the statute?
Another unsettled issue in this case may pop up on appeal or in similar cases. As detailed above, Lenz came out this particular way because the judge followed the clear wording of the DMCA provisions. An unaddressed part of Universal's argument, and one likely to pop up again in similar cases or possibly on appeal, seems like it may well moot this holding. Universal argued (albeit just in a footnote) that the DMCA statute didn't apply from the get-go because Universal didn't send a DMCA notice. Universal argued that it shouldn't be held to the particulars and penalties of the DMCA because its letter to YouTube wasn't a DMCA notice, just a request letter.
Judge Fogel's order simply doesn't address this argument. It's a good one (or a particularly bad one, depending on one's view) too, especially in light of other recent litigation developments and the procedural history of the DMCA notice provisions. These DMCA provisions make up a regime for take-down notices and copyright safe harbors, but they likely aren't the only regime in town.
Even before the DMCA was enacted, an ISP was often not liable for the infringements of its users. Similarly, pre-DMCA a content owner could ask that an ISP remove content via a nice (or not) letter to the ISP. The DMCA legislation created a structured system to give more legal certainty in this area, but it is likely not the exclusive way in which content owners can notify ISPs - at the very least no court, including Lenz, has yet said it's the exclusive way.
The Lenz judge treated Universal's letter as a DMCA notice, even though it said on its face it wasn't. A good argument could be made on the facts of this case that it had to be treated as one, but that may not always be the case. Content owners increasingly seem to be making similar claims outside of the DMCA process, or even arguing that DMCA safe-harbor compliance isn't enough, and at some point a court might well accept such an argument.
[Eric's addition: I think Ethan is onto something regarding the types of takedown notices that trigger 512(f). For example, would an inappropriate NOCI under the eBay VeRO program be governed by 512(f)? This issue was sidestepped in prior litigation over 512(f) and eBay NOCIs. See Dudnikov v. MGA Entertainment. However, in the future, as Ethan points out, 512(f) defendants might claim that their C&D or other takedown request wasn't made under 512(c)(3) to try to escape liability under 512(f).]
August 20, 2008
Competitive Pop-up Ads Aren't Unfair Competition or Tortious Interference--Overstock v. SmartBargains
By Eric Goldman
Overstock.com, Inc. v. SmartBargains, Inc., 2008 UT 55 (Utah Sup. Ct. Aug. 19, 2008)
In light of the death of adware and the fact that almost all of us have moved on, it is jarring to see adware opinions still emerging. This case, percolating in the courts four years, is quite a throwback.
In 2004, Overstock sued SmartBargains for buying adware-delivered pop-up ads that were triggered by user visits to Overstock.com. There have been a lot of keyword advertising cases since then, but this case is unusual because (for reasons not clear to me) Overstock did not make the more typical trademark infringement claim or even the less common trademark dilution claim.
Instead, Overstock asserted three causes of action: (1) violation of the initial Utah Spyware Control Act passed in 2004, (2) unfair competition, and (3) tortious interference with prospective business relations. The Spyware Control Act claim was mooted when the statute was deemed unconstitutional and further mooted when the legislature amended the law, so Overstock did not pursue that claim further. The district court also ruled against Overstock on the other 2, and Overstock appealed to the Utah Supreme Court. [for reasons that aren't clear to me, this case apparently bypassed the Utah appeals court.]
The Supreme Court had little difficulty disposing of the remaining claims. The pop-up ads didn't constitute unfair competition (in Utah, an anti-passing off claim) in this case because SmartBargains' pop-ups appeared in a separate window and displayed the SmartBargains' logo. The tortious interference claim gets tossed for exactly the right reason--competitive ads are a good thing, not bad. The court says "SmartBargains’ pop-ups indisputably exist to compete with Overstock. Competition is not an improper purpose, even though other byproducts of competition may exist." Case dismissed.
In one sense, this case isn't all that important. With respect to lawsuits over competitive online ads, most of the action relates to trademark infringement and particularly what constitutes a trademark use in commerce. But this case is important because it's fairly typical for plaintiffs in those lawsuits to add a laundry list of additional claims with the hope that something sticks. As this case shows, the laundry list claims are junky and easily disposed of, and a state supreme court ruling to that effect is a nice and useful precedent for defendants.
Even so, I wonder about the political ramifications of this ruling. Overstock's attitude towards keyword advertising has been erratic. On the one hand, it went to the Utah legislature to protest the Utah Trademark Protection Act because it apparently buys keyword ads on third party trademarks. On the other hand, it supported Utah's initial Spyware Control Act, it was the first to try to take advantage of the law, and it was willing to pursue this silly lawsuit for over 4 years. In response to this loss, will Overstock flip--just like its Utah Internet retailing peer 1-800 Contacts flipped--and go seek out a friendly and easily persuaded Utah state legislator to give it a tailor-made anti-keyword advertising statute? Stranger things have happened in Utah...
HT: Evan Brown
August 19, 2008
State of the Net West 2008 Recap
By Eric Goldman
Earlier this month, the High Tech Law Institute co-sponsored "State of the Net West," an event designed to facilitate a conversation between DC policy makers and Silicon Valley technology folks. We had a terrific turnout (especially given that we held it during peak vacation season) and some stimulating conversation. We recorded the discussion, so take a listen [these are at iTunesU, so you need the iTunes client to access them]:
* Welcome and Panel 1 on reputation, anonymity and social networking
* Panel 2 on 47 USC 230. See Larry Magid's writeup of this panel.
* Panel 3 on cloud computing and the privacy of remotely stored information. See a writeup of this panel.
Some interesting tidbits from the day:
* Rep. Goodlatte's son now works at Facebook
* Rep. Lofgren called the Roommates.com decision a "real stretch"
* Michael Fertik said that it only takes 20 minutes to ruin someone's reputation online while it can take 20-200 hours to repair the damage
* there was some discussion about ways that copyright law attempts to protect individual privacy. Copyright law wasn't designed to do that, so it functions poorly in that regard (and probably others). If you're looking for a paper topic, there may be some merit to exploring copyright's role as a privacy protection tool.
August 15, 2008
Principal Loses Lawsuit Against Students and Parents Over Fake MySpace Page--Draker v. Schreiber
By Eric Goldman
John O. and I have previously blogged about teenagers creating fake web pages targeting someone at their school. See, e.g., 1, 2, 3, 4. I must confess to having an odd fascination with these cases because if I were 13 years old in 2005 or 2006, I probably would have done something similar and mistakenly thought it was both knee-slappingly funny and satisfyingly vindictive.
But it's no laughing matter when these pages lead to lawsuits, and that seems to be happening all too frequently. The more typical fact pattern is that the student sues the school for unwarranted discipline meted out in response to a fake MySpace page. In contrast, today's lawsuit is unusual because the vice-principal Draker, in addition to disciplining the students and turning them over to the cops, took her case to court to demand accountability and cash from the students and their parents.
It doesn't look like she is going to get either. The district court dismissed her claims for defamation and intentional infliction of emotional distress, and in the latest ruling, the appellate court upholds the dismissal. The trial court dismissed the defamation claims apparently on the basis that the MySpace page's over-the-top statements were not objectively verifiable facts, and Draker did not appeal that ruling. The intentional infliction of emotional distress claim was dismissed because under TX law the cause of action is a gap-filler, and there was no gap given that the defamation doctrine putatively governs these facts. To me, this seems a little odd--the court simultaneously says that defamation doesn't apply, but there's no gap left to be filled--but the court explicitly acknowledged this seeming inconsistency and was unanimous about it. Case dismissed.
As a parting shot, however, one of the judges issued a stinging concurrence, blasting the students for "outrageous" conduct and admonishing that the "school children of this state should know that appropriating the identity of a teacher or school administrator to create a fraudulent internet social profile is unacceptable, and that engaging in such conduct will have consequences." I'm sympathetic to her concerns, and I'd love to get in the face of some of these teens and shout "WHAT ARE YOU THINKING?" At the same time, I think the seemingly overwhelming prevalence of teen-authored fake anti-authority MySpace pages raises some complex questions about the allocation of responsibility among teenagers, their parents, MySpace, the targets of the criticism, and readers of Internet content. Except in the most extreme cases, I find it hard to believe that the best resolution involves principals, teachers or other school administrators dragging their students (and their parents) down to the courthouse.
August 14, 2008
Fall 2008 Cyberspace Law Syllabus
By Eric Goldman
I've posted my latest Cyberspace Law course syllabus. Some changes from last year:
* added an August 2007 Search Engine Land article by Chris Silver Smith on geolocation technologies and their efficacy.
* added California Penal Code Sec. 502.
* added my slides on trespass to chattels and related doctrines (to save some classtime laying out these complex doctrines).
* added my Fair Use Cheat Sheet (I had routinely distributed it to students during the semester, but this year I finally remembered to include it in the reader).
* substituted the Second Circuit ruling Cartoon Networks v. CSC for the district court ruling in Cablevision. I deleted the Field v. Google case because it became largely redundant with the Cartoon Networks ruling for the pedagogical point about volitional activity.
* substituted the amended Ninth Circuit opinion in Perfect 10 v. Amazon.
* added the Ticketmaster v. RMG case. I'm not sure what to do with this case, but I'm thinking of using it as a mid-semester mini-review.
* deleted the Lockheed v. NSI case and added the Tiffany v. eBay case. The Lockheed case is probably more general in nature and is a 9th Circuit case (and it's a lot shorter!), so this was a tough call. On the other hand, I think the facts in the Tiffany case better reflect the modern web economy than the 1990s-era Lockheed case.
* substituted the Roommates.com en banc ruling for the 3 judge panel ruling. Fortunately, last year, by the time I got to Roommates.com, the 3 judge panel ruling had already been wiped away by the en banc grant, so I never had to teach that hairball.
* substituted the FTC's updated CAN-SPAM regulations.
* deleted the module on spyware/adware. I've not been able to get there in the past 2 years, and I don't see how that will change this year.
Cases from this year that barely missed the cut:
I need to look at yesterday's Federal Circuit Jacobsen case. This may be a post-printing addition.
There are still some areas I'm not happy with:
* the Perfect 10 troika of cases regarding secondary copyright liability. They are a big chunk of reading with a low pedagogical payoff because the legal rules are incoherent.
* the keyword advertising cases. I'm still waiting for a great teaching case on keyword advertising. The FragranceNet case is an OK summary of the discussion, and the Playboy v. Netscape case has a number of useful pedagogical angles, but neither is ideal.
* my Fall 2007 syllabus recap
* my Fall 2006 syllabus recap
* my Fall 2005 syllabus recap
* my Cyberspace Law course page listing all of my syllabi, exams and sample answers from the past 14 years
* my essay on Teaching Cyberlaw
August 13, 2008
Economics of Reputational Information Talk
By Eric Goldman
Meanwhile, I'm now moving on to my next major project, which I am currently calling "the Economics of Reputational Information." This project isn't an IP paper specifically, but it is a natural extension of my last couple of papers that discussed how trademarks could suppress socially useful Internet content. I presented some very initial thoughts about the project at IPSC last week at Stanford. My slides.
August 12, 2008
Google Denied Attorney's Fees in 230 Dismissal--Steele v. Mengelkoch
By Eric Goldman
Steele v. Mengelkoch, 2008 WL 2966529 (Minn..App. Ct. Aug. 5, 2008)
A professor at Bemidji State University wrote a story saying some putatively unflattering things about a local journalist, who didn't take kindly to the allegations and brought a lawsuit alleging defamation and related torts against a number of defendants, including seeking $50 BILLION from Google. (GOBOGH!) This opinion is unclear exactly how the plaintiff alleged that Google was involved in the defamation, but it wouldn't matter because we know that 47 USC 230 fully protects Google in all cases. The trial court knew this too, and granted a dismissal per 230. The trial court went further and sanctioned the pro se in pauperis defendant under the state law equivalent of Rule 11 by sua sponte ordering him to pay Google's attorney's fees of over $12k. As far as I know, this was the first time a judge issued Rule 11 sanction for filing a lawsuit preempted by 47 USC 230.
The appellate court glibly upholds the 230 dismissal, but it reverses Google's attorney's fees award on a technicality--Google didn't ask for the sanctions and the plaintiff didn't have the chance to withdraw the filing before being punished, which precluded Rule 11 sanctions in this case. However, even though this plaintiff dodged the bullet here, make no mistake--courts are getting tired of lawsuits that are plainly preempted by 230, and I expect judges to become increasingly willing to do more than just kick out a lawsuit quickly. Even if the sanction award didn't stick this time, it's only a matter of time before it will. Just one more reminder for plaintiffs to pick the right defendants to try to hold responsible for their alleged wrongs.
August 11, 2008
Minnesota Court Says Keyword Advertising is TM Use in Commerce--Hysitron v. MTS
By Eric Goldman
Hysitron Inc. v. MTS Systems Corp., 2008 WL 3161969 (D. Minn. Aug. 1, 2008)
In a brief and pedestrian opinion, another court outside the Second Circuit said that buying a trademarked keyword is "use in commerce" under the Lanham Act even if the trademark doesn't appear in the ad copy. The court says:
This Court adopts the majority view that using a trademark to generate advertising constitutes a “use in commerce” under the Lanham Act. This approach adheres to the plain meaning of the Lanham Act's definition of “use in commerce.” The language used in the definition suggests that a “use in commerce” is not limited to affixing another's mark to one's own goods but also encompasses any use of another's mark to advertise or sell one's own goods and services.
The court is right about the majority vote, but it's hardly a strong majority. According to my count, the vote was 7-to-6 before this ruling. However, all 6 no votes are in the 2d Circuit, so geographically there is a stronger basis to characterize the rule as the majority rule.
The court also denied the defense SJ motion because more discovery is required to determine consumer confusion.
August 08, 2008
Affiliate Liability Extravaganza
By Eric Goldman
[Note: I recently published a version of this article at InformIT. Here's the pre-edited version I sent them.]
This article discusses marketers’ liability for the actions of their marketing affiliates (what I refer to as “affiliate liability”). The affiliate liability issue has become red-hot recently because numerous plaintiffs have taken aggressive legal positions seeking to expand the boundaries of affiliate liability. In three recent rulings, courts have emphatically rejected these expansive liability arguments. Even so, it seems likely that plaintiffs will continue to look for ways to expand affiliate liability, and despite the favorable rulings, defendants often settle a lawsuit alleging affiliate liability rather than establish their rights in court.
Affiliate Marketing—Good and Bad
Marketers create affiliate programs to outsource marketing decisions to domain experts. For example, independent third parties may have better or cheaper access to subcommunities of potentially interested consumers than a marketer’s employees. An affiliate marketing program compensates these local experts for work and expertise involved to take the marketer’s message to those consumer communities. When it works properly, affiliate marketing programs can play an important role in the broad “invisible hand” economic phenomenon of allocating scarce resources to consumers who value them the most.
Affiliate marketing doesn’t always have this salutary effect. Affiliate marketing programs create payoffs to motivate affiliate behavior, and inevitably some affiliates will try to obtain the payoff without doing the desired activity. Thus, even if the marketer would prefer otherwise, some affiliates might do “whatever it takes” to get paid, including using false advertising or illegitimate marketing mechanisms. Further, the fact that the marketer outsources some choices to affiliates (a necessary part of any affiliate program) can lead to “diffuse responsibility” where the marketer and affiliates point fingers at each other if something goes wrong. Sometimes, when there are multiple tiers of affiliates, it can become effectively impossible to assign responsibility for the wrongdoing.
To bypass these legal entanglements, plaintiffs have sought ways to hold marketers vicariously (automatically) liable for their affiliates’ actions. However, these efforts “break” standard tort law by trying to treat independent contractors as if they are principal-agents without the requisite supervision or authority that typically triggers agency liability. As a result, overexpansive theories of affiliate liability cause marketers to internalize too many costs, curtailing potentially socially beneficial marketing activities or leading to overinvestment in socially wasteful liability minimization schemes.
Plaintiffs Gone Wild: Two Recent Efforts to Expand Affiliate Liability
There have been countless affiliate liability enforcement actions, but I’ll focus on two recent initiatives.
New York Sales Tax Law
State and local taxing jurisdictions have long coveted a way to impose sales tax collection responsibilities on non-resident Internet vendors. In general, these efforts have been stymied by the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which requires a vendor to have a physical presence in the jurisdiction before the taxing entity can impose sales tax collection obligations on it.
New York, however, developed a nifty workaround. In April, it passed a law (Chapter 57, N.Y. Laws of 2008) declaring that a vendor’s marketing affiliates in New York constituted a physical presence in New York by the vendor. If so, New York can impose sales tax collection obligations on remote vendors due to their New York affiliates. As part of its crafty plan, New York tried to induce compliance with a carrot—if remote vendors voluntarily agreed to collect and pay sales tax from New York residents going forward, then New York would grant them amnesty for any back sales tax collection obligations.
Neat trick, but…a small problem: affiliates are independent contractors of the vendor, so this effort to treat them as legally related entities surely doesn’t comply with the Constitution. I suspect a court will confirm this flaw because both Amazon and Overstock.com have sued New York over the law. At the same time, to minimize its risk, Overstock has also tossed all of its New York affiliates overboard. One might question the wisdom of the New York legislators prompting marketers to cut off opportunities for New York online entrepreneurs.
Trademark Owners Claiming Marketers Are Liable for their Affiliates’ Marketing
Another trend: trademark owners are trying to hold a marketer liable for the alleged trademark infringement committed by its affiliates, such as when affiliates purchase the third party trademark as a keyword trigger for search engine ads. Plaintiffs have alleged affiliate liability in at least three lawsuits in the past couple of months:
Courts Weigh In—and Plaintiffs’ Expansive Theories Don’t Fare Well
The efforts to extend liability in the sales tax and trademark contexts are novel, and it’s hard to predict the final outcome because we have limited direct precedent to consult. However, looking at some recent rulings in other contexts, there is good reason to believe that both legal theories go way too far.
Unlike many other areas of the law, CAN-SPAM (15 USC 7705 and 7706) specifically authorizes affiliate liability in the statute. The Federal Trade Commission (FTC) has routinely invoked this provision in its pursuit of marketers promoted by affiliate-initiated spam (for one of the more recent examples, see the FTC’s press release on one of its porn spam busts and settlements). Further, typically when the FTC targets a marketer on an affiliate liability theory, the marketer rolls over and settles rather than fight.
But…a small problem: the FTC’s expansive interpretation of the affiliate liability statute—the basis it has used to procure these settlements from marketers—may not actually reflect the law. In an outcome that didn’t get nearly the press it deserved, in an lawsuit against Impulse Media earlier this year, the FTC took its affiliate liability theories to a jury and lost. This is a huge verdict because (1) the FTC rarely loses in court, and (2) perhaps more importantly, when average citizens evaluate the FTC’s expansive affiliate liability theories, they may balk.
Oddly, the FTC didn’t take no for an answer. It subsequently asked the judge to enjoin Impulse Media even though Impulse Media won the jury verdict. Talk about chutzpah! Not surprisingly, the court declined the request. US v. Impulse Media, 2008 WL 1968307 (W.D. Wash. May 1, 2008).
In another lawsuit, ASIS Internet Services, v. Optin Global, Inc., 2008 WL 1902217 (N.D. Cal. March 27, 2008; unsealed April 29, 2008), a civil plaintiff, ASIS (a serial anti-spam litigant), invoked the CAN-SPAM affiliate liability provision in its anti-spam lawsuit against 20 defendants. One defendant never showed; 18 defendants settled up (as mentioned, the typical response); and only one defendant—Azoogle—persisted in court.
Azoogle is a lead generation company for upstream marketers, and it relies on downstream affiliates to help it generate leads for its clients. Some of those downstream affiliates generate leads via spam. In this ruling, the court rejects Azoogle’s liability for spam sent by its marketing affiliates:
Although ASIS has pointed to significant evidence that Azoogle, during the relevant time period, did little to investigate the third party vendors it engaged, there is no evidence in the record from which a jury could conclude that Azoogle, in contracting with Seamless Media, made a deliberate choice not to know that Seamless Media would engage third parties to send out spam on Azoogle's behalf. The evidence cited by ASIS to establish knowledge on Azoogle's part is entirely speculative. Even assuming it is true that the Emails were sent by a single individual and that the lead was typed into a web site that was copied from Azoogle's lowrateadvisors site, this is insufficient to show that Azoogle consciously avoided knowing that the Emails would be sent. Further, while ASIS relies primarily on the allegation that Azoogle failed to adequately investigate its third-party vendors, ASIS has pointed to no evidence that if Azoogle had investigated Seamless Media prior to entering into the Insertion Order, it would have learned facts sufficient to show that Seamless Media was likely to engage in CAN-SPAM violations. There is no evidence in the record that would put Azoogle on notice that Seamless Media, or Seamless Media's vendors, obtained leads from spammers. Indeed, the only evidence on this subject is that Seamless Media had a good reputation at the time, and was obliged by its contract with Azoogle to follow the law.
Another recent affiliate liability decision is the remarkable ruling in People v. Direct Revenue LLC, 2008 WL 1849855 (N.Y. Sup. Ct. March 12, 2008), another case that did not get the attention it deserved. Disclosure note: I helped file an amicus brief in this case.
In 2006, the NY Attorney General’s office (NYAG) made the apparent decision that adware vendor DirectRevenue needed to be shut down by any means necessary, and it launched a multi-front attack on DirectRevenue. It publicly posted a website with information about DirectRevenue that had no apparent purpose other than to denigrate DirectRevenue’s reputation. It bullied DirectRevenue’s advertisers, ultimately procuring, and then releasing a hyperbolic press release about, an insignificant settlement that spooked potential advertisers away from DirectRevenue. And finally, it sued DirectRevenue directly.
The NYAG’s actions had their desired effect. Perhaps due in part to the NYAG’s campaign to close DirectRevenue down, DirectRevenue did in fact go out of business. Congratulations to the NYAG for achieving its apparent goal.
But…a small problem: the NYAG’s assessment of DirectRevenue’s legitimacy may have, in fact, been itself lawless, because the court emphatically rejected all of NYAG’s legal theories. This might be amusingly ironic if the NYAG’s anti-DirectRevenue campaign wasn’t such a chilling and crushing misuse of governmental powers.
The opinion is worth reading in its entirety, especially where the court affirms the EULA formation and limits extraterritorial liability. However, apropos to this post, the court rejected DirectRevenue’s liability for allegedly illegitimate software installations made by its affiliates, saying “petitioner has not shown that respondent should be held liable for the actions of those third parties under a theory of agency or ratification, or otherwise.” The court explains:
Dismissal is required with respect to the 22 [installations by] third parties, who petitioner concedes were independent contractors rather than agents of Direct Revenue. A principal is generally not liable for the acts of an independent contractor because of the lack of control over how the contractor's work is performed (Chainani v. Bd. of Educ., 87 N.Y.2d 370, 380-81 ). Neither may the principal be charged with the conduct of even more remote subcontractors (People v. Synergy6, Inc., Index No 404027/03 [Sup Ct N.Y. Co 2006][unpublished disposition][Attorney General's action for deceptive practices and false advertising under GBL dismissed as against email marketing company where fraudulent emails were sent by company retained by agent]). Although exceptions exist, such as where the contractor was negligently retained or supervised (Saini v. Tonju Assocs., 299 A.D.2d 244, 245 [1st Dept 2002]) or where the principal has ratified the wrongful acts (Kormanyos v. Champlain Valley Fed. Sav. and Loan Assoc. of Plattsburgh, 182 A.D.2d 1036, 1038 [3d Dept 1992]), the record here does not support any grounds for departure from the usual rule.
As noted, under the SDA, Direct Revenue contractually required its distributors to obtain consent of consumers consistent with the terms of the EULA. The SDA also forbade the distributors from holding themselves out as respondent's agents. Respondent was not authorized or obligated to control their work, particularly since many of them additionally acted as distributors for various other advertisers. Although in Sotelo v. Direct Revenue, 384 Supp2d 1219 (ND Ill 2005) the court upheld a cause of action against respondent for negligent supervision of distributors, the issue arose on a motion to dismiss and the court thus restricted its inquiry to the four corners of the complaint. Notably, the court stated that it was precluded at that procedural juncture from considering respondent's evidence that the distributors were independent contractors, evidence which, as here, included the SDA.
The theory that respondents ratified the alleged third party misconduct also fails. The allegations that respondent had general and/or constructive knowledge of some distributors' wrongful practices are insufficient to impose liability (see, Synergy6, supra; Del Signore v. Pyramid Sec. Servs., Inc., 147 A.D.2d 759, 760-61 [3d Dept 1989][mere knowledge of litigation and complaints against security company for undue force by guards insufficient to impose liability upon hiring firm]; see also Hamilton v. Beretta USA Corp., 96 N.Y.2d 222, 237 ). Moreover, it is conceded that in those few instances in which respondent obtained actual knowledge of a distributor's misconduct, it took significant steps to modify its procedures. A finding of ratification cannot be found upon such facts, notwithstanding that respondent may have benefited financially from its relationship with the distributors before remedial measures were implemented (see Synergy6, supra).
It is my understanding that the NYAG has filed a notice of appeal in this case to preserve its options, but it is still deciding if it will pursue the appeal.
Unfortunately, I’m not aware of the Synergy6 opinion being available electronically, which is a shame because it’s an interesting and relatively early rejection of the NYAG’s expansive affiliate liability doctrines. Due to that ruling (which involved email marketing instead of adware), the NYAG already had good reason to suspect that its predicate theories were dubious, which makes its decision to pursue those theories against DirectRevenue even more lamentable.
This post highlights two seemingly inconsistent trends. Trend #1 is that plaintiffs (private actors or government agencies) are taking very expansive positions on affiliate liability. Trend #2 is that when tested, expansive affiliate liability theories are failing in the courts. These two trends seem to be in conflict with each other. My hope is that trend #2 becomes so strong that it overrides trend #1, i.e., plaintiffs and government actors get the message that they have gone too far.
Unfortunately, in the interim, many defendants will capitulate and settle an expansive affiliate liability claim—even if it’s lawless—because it’s the cheapest path to resolution or because the precedent isn’t strong enough to ensure victory. Perhaps some defendants will realize that the trend is in their favor and will fight back accordingly. More judicial clarity about the line between permissible and impermissible behavior would benefit everyone.
It is also possible that the legal ambiguities of affiliate liability will be resolved by statute. However, despite the defendants’ string of court victories, I see the chances of legislative intervention to curtail expansive affiliate liability doctrines as nil. If anything, it’s more likely that future legislation will codify liability expansion.
For a rare in-depth analysis of affiliate liability, see Jean Noonan and Michael Goodman, Third-party liability for federal law violations in direct-to-consumer marketing: telemarketing, fax, and e-mail 63 Bus. Law. 585-596 (2008) [ABA subscription required to download].
August 07, 2008
July 2008 Quick Links, Part II (Non-IP Edition)
By Eric Goldman
* Google explains all of the ways that it reinterprets the actual search query provided by a consumer to deliver results for words the searcher didn't use. As I've said before, Google's intermediation makes it impossible for a judge to assume that a defendant's website was ranked based on the search terms selected by the searcher.
* In the vein of In re Yahoo, Google was hit with two class action lawsuits alleging that Google failed to disclose that AdWords ads were going to be placed on undesirable pages liked parked pages. See Levitte v. Google (complaint and Justia page) and RK West v. Google (complaint and Justia page).
* Google was denied attorneys fees in the long-running Parker v. Google case. Parker v. Google, Inc., 2008 WL 2600299 (E.D. Pa. June 30, 2008).
* Defamation lawsuit against Wikimedia tossed per 230. I've been waiting for the actual ruling to do a complete writeup. If you see it, please pass it along.
* NYT: "Wikipedia Tries Approval System to Reduce Vandalism on Pages." Surprised?
Trespass to Chattels
* In the latest development in Oracle v. SAP/TomorrowNow, SAP has shut down TomorrowNow, the subsidiary that prompted the lawsuit from Oracle. The Second Amended Complaint expands the finger-pointing at SAP for supervising its subsidiary. Still unresolved: the size of SAP's check to Oracle, and possible jailtime for TomorrowNow folk.
* Thomas O'Toole: Illinois adds anti-scraping provision to its attorney discipline website to block Avvo's crawlers.
* 50 Cent is back in court on another questionable legal theory (see our first deconstruction of his litigation tactics). This time, Taco Bell tried a quasi-ambush marketing stunt to get something for free that he thinks they should have paid for.
* Rebecca on the latest ruling in NetQuote v. Byrd, the "lead fraud" case. Also, the ruling has some interesting discussion about whether a competitor who clicks on a competitor's ads in AdSense is guilty of a tort of "click fraud." The court says not in this case.
* TRUSTe is converting from a non-profit to a for-profit company.
* ACLU v. Mukasey (I've lost track of the number of AGs who have been the named defendant in this lawsuit). The Third Circuit struck down COPA for the third time.
* PC Magazine: RIP Usenet, killed by the New York AG office's campaign against child porn traded on USENET.
* A bizarre article on "Internet trolling" in NYT Magazine. With its rambling and scattered discussion, I have no idea what the author defines as trolling. However, the article did bring to mind a much better 1994 article from Wired, The War Between alt.tasteless and rec.pets.cats.
* Steinbuch v. Cutler, 2008 WL 2622853 (E.D. Ark. July 1, 2008). The court denied a motion to transfer the long-running case to DC.
* If a caffeine-addicted blogger goes off about your business, it's risky to fight back.
* Mike Masnick: Keeping The Benevolent Dictators of Silicon Valley Honest
* Wed, Aug. 13, 1-2 Eastern time, David Donoghue, Evan Brown and I will be doing an ALI-ABA teleseminar about the latest developments in 47 USC 230. Details. Mention coupon code TSPV02EG and save $30.
August 05, 2008
July 2008 Quick Links, Part I (IP Edition)
By Eric Goldman
* Granger v. Gill Abstract Corp., 2008 WL 2791264 (S.D.N.Y. July 18, 2008). A title company admitted infringing the defendant's copyrighted "rate calculator" by posting it to the title company's website. The plaintiff demanded actual damages of $766 MILLION on the theory that the title company's entire revenues were attributable to the rate calculator on the website. The court dismisses this argument as "preposterous." Instead, the plaintiff admitted that its licensing rate is $500/year, so the court awards a maximum of $1,500 for three years of infringement, an amount that the defendant surely would have happily paid to settle before going to court if the plaintiff would have accepted it. Instead, this is great example of a dispute that had no chance of settling because the plaintiff’s demands were so out of this universe. For another example of irrational plaintiff damage demands faring poorly in court, see the Gregerson case.
* An update on Designer Skin v. S&L Vitamins. You may recall that S&L Vitamins lifted product shots from Designer Skins, and in the previous ruling, the court said that such copying isn't fair use. However, in a July hearing, the court subsequently concluded that Designer Skin suffered no actual damages from the copying when S&L marketed legitimate Designer Skin goods using the images, netting the plaintiff zero dollars. An injunction may still be possible. Of course, plaintiffs in the future will try to register their product shots on a timely basis, positioning themselves for statutory damages and attorneys' fees, so this ruling is helpful only in the cases where the registration isn't timely.
* Chronicle of Higher Education: "When Web Sites Post Test Answers Online, Professors Worry"
* 11th Amendment geeks will be interested in the CRS on Infringement of Intellectual Property Rights and State Sovereign Immunity, July 23, 2008.
* Nothing spoils a good birthday party like trademark concerns.
* Paul Levy informs us that the ABA IP Section has finally given up their pointless quest to opine on the keyword advertising issue.
* CafePress has settled a trademark infringement lawsuit by Hustler magazine.
* This month, several interesting trademark academic articles emerged:
1) Margreth Barrett, Finding Trademark Use: The Historical Foundation for Limiting Infringement Liability to Uses 'In the Manner of a Mark' Prof. Barrett does some historical sleuthing to determine the scope of trademark use in commerce” doctrine, and she offers a suggested multi-factor test for defining use in commerce in the future. I previously blogged on one of Prof. Barrett's earlier papers on this topic.
2) Bill McGeveran, Rethinking Trademark Fair Use. Prof. McGeveran discusses trademark rules vs. standards and the interplay between the plaintiff’s prima facie case and the defenses.
3) Ken Port, Trademark Extortion: The End of Trademark Law. Prof. Port marshals some empirical evidence to argue that the quantity of trademark lawsuits is dropping but more trademark demands are settling on extortionate terms prior to a lawsuit being filed.
August 04, 2008
"DVR as a Service" Isn't Copyright Infringement--Cartoon Network v. CSC Holdings
By Eric Goldman
The Cartoon Network LP v. CSC Holdings, Inc., No. 07-1480-cv(L) & 07-1511-cv(CON) (2d Cir. Aug. 4, 2008)
The Second Circuit has issued an interesting and potentially important ruling that Cablevision's DVR as a service does not infringe copyright law. This ruling reverses the district court's summary judgment for the plaintiff and opens the way for Cablevision to roll out its DVR service offering in the Second Circuit.
The good news is that the opinion eliminates the odd regulatory distinctions between DVRs as a device and DVR as a service. The bad news is that to reach this conclusion, the Second Circuit has to override a lot of adverse precedent, and I'm not sure that other circuits will find this panel's arguments entirely convincing. As a result, it will be interesting to see if Cablevision interprets this opinion as a greenlight for a national rollout.
Thus, while the opinion is good news for DVR service offerings, the opinion leaves open a lot of questions that will have to be answered in the future. I think it's safe to say that this opinion is hardly the last stop in our journey.
Buffering Isn't Infringement
Cablevision's DVR service splits a broadcast feed into two streams, including a "buffer" copy that goes to a router where it is stored for no more than 1.2 seconds as the router looks to see if any consumers have asked for the program to be recorded for them. If yes, the data goes into their private storage areas; if no, the stream is discarded. The court holds that this buffer copy isn't fixed because it's not embodied "for more than a transitory duration."
To reach this conclusion, the court has to fight against a lot of precedent, especially the MAI v. Peak holding that a copy into RAM is fixed, even though that copy may be embodied for even less time than the buffer copy at issue here. The court says that MAI v. Peak stands for the proposition that these short-duration RAM copies can be fixed but are not automatically fixed. The court says that in MAI (without citing any actual facts from the MAI case), the software surely was resident in RAM for "at least several minutes" while in this case the copies exist for only 1.2 seconds, and this factual difference explains the different conclusion regarding fixations.
There is a major slippery slope problem with this conclusion. Is 3 seconds fixed? 10 seconds? I could keep going, and the court deftly side-steps this problem. Nevertheless, this holding offers some promise for certain types of web activity. First, this ruling might excuse copies made by scrapers/robots who download copyrighted pages to extract unprotectable information on the page. This case suggests that the copies made to download the page and perhaps to process it are not fixed, at least so long as they are flushed really quickly (1.2 seconds or less would be good). Second, this case seems to provide another defense to the otherwise problematic argument that web browsing is infringement; so long as the user hits the back button (and kills any local cache) really fast, no fixation of the web page. The opinion deliberately limits itself to Cablevision's system of overwriting the data, so that may limits its overall applicability, but this case creates a new category of copies that are embodied in a medium but are not fixed, and this offers some hope for defendants.
Users, Not Cablevision, Make the Other Copies
Even if the buffer copies aren't fixed (and therefore cannot support an infringement claim), Cablevision still stores a copy of the broadcasted works in its storage area, where users can download the programs. There's no fixation problem with these, so plaintiffs challenge these copies as both impermissible copies and public performances. The court rejects these arguments, concluding that Cablevision is a sufficiently passive entity that the users and not Cablevision are doing the legally significant activity. Thus, Cablevision is at most exposed to contributory liability for these user activities. Because the plaintiffs had waived allegations of contributory infringement, Cablevision gets summary judgment.
To reach this conclusion, the court ignores Cablevision's active role in setting up its systems and providing ongoing services, including selecting which broadcast channels are DVRable in its system. Instead, the court sees this fact pattern as identical to DVR as a device, where the DVR manufacturer isn't directly liable for how the DVR is used. This is consistent with the uncited Field v. Google case, but it conflicts with numerous copyright cases where the service provider's hosting of files gives the provider more legal responsibility over the system usage than a device maker would have. Similarly, the court distinguishes the coursepack cases on the basis that a human employee of the copyshop presses the "copy" button, because here the system works automatically without manual intervention from Cablevision.
Note, of course, that the court didn't discuss contributory liability, which also raises the ugly and risky question of whether Cablevision users are directly infringing by using the DVR as a service. I think there is helpful language in the Sony Betamax case about DVRing as a fair use, but I doubt anyone wants to see that battle relitigated.
Similarly, with respect to the argument that the distribution of the files from Cablevision's storage area is a public performance, the court says that Cablevision isn't "transmitting" as required by the statute because the user is making the legally significant action.
Further, Cablevision's delivery of the file isn't "to the public" as required by the statute. This latter conclusion is totally fine with me as a matter of common sense interpretation of those words, but it runs contrary to numerous messy and analytically questionable precedents regarding the central serving of copyrighted works to private spaces, such as Redd Horne and On Command. The court deftly tries to evade those, but after 2 readings I still can't figure out what the court said. Maybe the third time will be the charm. I think it has something do with the fact that Cablevision encoded each file delivery to its consumers so that each file delivery could be consumed only by a single playback machine. Let me know if you can figure out what the court was saying here and how it might apply to anyone else. Because the ruling seems to let Cablevision freely broadcast third party content to potentially all of its subscribers without constituting a public performance, I think there may be some exploitable holes here.
One more open question: this opinion makes me wonder if the MP3.com opinion from SDNY is still good law. I'd need to go back through that opinion, but as I recall, a lot turned on the fact that MP3.com tried to act as a proxy for its users. Here, the court treats such proxy activities as passive, and perhaps that analysis would fit the MP3.com facts as well.
I'm excited about this opinion because it eliminates some of the legal anomalies between DVR as a device and DVR as a service. In many situations, DVR as a service will be a better consumer experience, and it is unquestionably better for the environment, so I'm happy that this opinion tries to get copyright law out of the way to enable this result. At the same time, the appellate court set up enough conflicts with other precedent, and sufficiently caveated its opinions to address the narrow facts in Cablevision, that I expect this case resolved nothing definitively. That will have to wait the many cases in our future.
Even so, I remain amused (in a cynical way, not a funny way) that the broadcasters are still fighting against giving consumers what they really want, which is to consume their content at the time and place of the consumer's own choosing. Eventually, broadcasters are going to have to bite the bullet and post their content onto the Internet for viewers to enjoy at their convenience. There always will be consumers who want to consume the content upon first release, but after that, content that's unavailable to consumers is just wasting away instead of continuing to make money for the broadcasters.
August 01, 2008
Domainer Loses Cybersquatting Lawsuit--Verizon v. Navigation Catalyst
By Eric Goldman
Verizon California, Inc. v. Navigation Catalyst Systems, Inc., 2008 WL 2651163 (C.D. Cal. June 30, 2008). The Justia page. A page with some of the early filings.
[Sorry for the delay blogging this--it just showed up on my radar screen]
This is an extremely interesting and potentially precedent-setting case regarding domaining and domain name tasting. The court condemns both practices, leading to a preliminary injunction against the domainer and its registrar based on the Anti-Cybersquatting Consumer Protection Act (ACPA). As far as I can recall, this is the first time that a domainer has lost an ACPA lawsuit in court, and it provides an important data point confirming that domaining can be cybersquatting (a previously unresolved issue). I also believe that this is the first time a domain name registrar has lost an ACPA lawsuit. Although the court wasn't asked to assess damages (it was just an injunction request), it's clear from the strongly worded opinion that Verizon will get paid if the case gets that far. As a result, this is a major loss for domainers and might very well force them to change their practices.
The defendants are Navigation Catalyst, a domainer, and Basic Fusion, its registrar. Navigation Catalyst engaged in some common domainer practices, including:
* high volume automated domain name tasting. Many of the registered domains have nothing to do with anyone's trademark, but some were typographical error versions of Verizon's trademarks (allegedly, nearly 1400 were variations of Verizon's trademarks)
* trademark "scrubbing" of domain names during the tasting period (both an automated blacklist and a manual review)
* disabling ads on any challenged domains and offering to transfer those domain names to the trademark owner
Despite the scrubbing, Navigation Catalyst registered and kept 126 domain names that Verizon alleges infringe its trademark. Navigation Catalyst also tasted nearly 1300 other challenged domains, and as the court points out, made some money from those domains during the tasting period.
Navigation Catalyst's main defense is that it merely reserved the domains during the tasting period instead of "registering" them (the ACPA statutory requirement) because they hadn't paid for the domains prior to the end of the grace period. Not surprisingly, the court is completely unimpressed with this sophistry.
Further, the court determines that domain tasting is a bad faith intent to profit under the ACPA:
It is clear that their intent was to profit from the poor typing abilities of consumers trying to reach Plaintiffs' sites: what other value could there be in a name like ve3rizon.com? Further, the sites associated with these names often contained links to products directly competitive with Plaintiffs' cellphone and internet businesses, potentially diverting consumers who would otherwise have purchased goods or services from Plaintiffs away from Plaintiffs.
Finally, the defendants tried to argue that Verizon had unclean hands because of Verizon's monetization of wildcard traffic in its FIOS service. Despite some pretty apparent duplicity on Verizon's part, this argument also fell on deaf ears.
While this is a big loss for the domainer, it's a shocking ruling against the registrar. After all, the ACPA specifically limits injunctions against domain name registrars (see 15 USC 1114(2)(d)(i)(II)), and the court did not discuss this section at all or otherwise why an injunction against the registrar was appropriate. I suspect the registrar should be able to get the court to clarify or reconsider its ruling if it asks.
It will be interesting to see how this ruling affects the domainer industry. There is absolutely no good news for them in this ruling. This court rejected the standard risk-management that domainers claim protect them from cybersquatting liability. Further, the big win will only encourage Verizon--already one of the most aggressive plaintiffs against domainers--to keep suing, and it might spur other trademark owners to join the party. Although a single ruling like this often doesn't change an industry overnight, I wouldn't be surprised if we look back in a couple of years and point to this ruling as the beginning of the end of standard domaining practices circa 2007-08.