Technology & Marketing Law Blog: April 2012 Archives

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April 30, 2012

Comments on the Megaupload Prosecution (a Long-Delayed Linkwrap)

By Eric Goldman

[I've been working on this linkwrap for 3 months. Linkwraps rarely improve with age. At this point, it's not even clear the US government has a case due to its repeated gaffes. Nevertheless, I've decided to post this linkwrap now because--regardless of its disposition--the Megaupload prosecution is an incredibly important Cyberlaw development that almost certainly will make my top 10 year-end list.]

While there could be a small amount of provable criminal copyright infringement—under our modern overexpansive criminalization of ordinary daily activities—for infringing files the Megaupload principals uploaded themselves, the government ordinarily wouldn't have cranked up its massive machinery for those violations. After all, millions of Americans routinely commit violations like that, and mass panic would be at hand if the government exercises its prosecutorial discretion so loosely.

Instead, the government's prosecution of Megaupload demonstrates the implications of the government acting as a proxy for private commercial interests. The government is using its enforcement powers to accomplish what most copyright owners haven't been willing to do in civil court (i.e., sue Megaupload for infringement); and the government is doing so by using its incredibly powerful discovery and enforcement tools that vastly exceed the tools available in civil enforcement; and the government's bringing the prosecution in part because of the revolving door between government and the content industry (where some of the decision-makers green-lighting the enforcement action probably worked shoulder-to-shoulder with the copyright owners making the request) plus the Obama administration’s desire to curry continued favor and campaign contributions from well-heeled sources.

The resulting prosecution is a depressing display of abuse of government authority. It’s hard to comprehensively catalog all of the lawless aspects of the US government’s prosecution of Megaupload, so I’ll just focus on two:

1) Trying to hold Megaupload criminally liable for its users' actions. Criminal copyright infringement requires willful infringement, a very rigorous scienter level. I discuss the implications of this high scienter requirement in more detail in my decade-old article on warez trading. Megaupload’s business choices may not have been ideal, but Megaupload has a number of strong potential defenses for its users' activities, including 512(c), lack of volitional conduct and more. Whether it actually qualified for these is irrelevant; Megaupload’s subjective belief in these defenses should destroy the willfulness requirement. Thus, the government is simply making up the law to try to hold Megaupload accountable for its users' uploading/downloading.

2) Taking Megaupload offline. Megaupload's website is analogous to a printing press that constantly published new content. Under our Constitution, the government can’t simply shut down a printing press, but that's basically what our government did when it turned Megaupload off and seized all of the assets. Not surprisingly, shutting down a printing press suppresses countless legitimate content publications by legitimate users of Megaupload. Surprisingly (shockingly, even), the government apparently doesn't care about this “collateral,” entirely foreseeable and deeply unconstitutional effect. The government's further insistence that all user data, even legitimate data, should be destroyed is even more shocking. Destroying the evidence not only screws over the legitimate users, but it may make it impossible for Megaupload to mount a proper defense. It's depressing our government isn't above such cheap tricks in its zeal to win.

The government has also been shockingly cavalier about the collateral consequences of its prosecution on the marketplace. Legitimate web hosts, and their investors, are quaking in their boots that they will be next. It doesn’t help that the content industry is circulating a “kill chart” of its next desired targets.

In the end, the Megaupload prosecution demonstrates that SOPA advocates are inevitably going to win. The content owners’ ire toward “foreign rogue websites,” combined with the administration’s willingness to break the law, if necessary, to keep content owners happy, leads to lawless outcomes like the Megaupload prosecution and ICE’s domain name seizures. I'll say more about this in my long-delayed SOPA linkwrap.

Some links about Megaupload or the situation more generally worth checking out:

Source Materials

* Superseding indictment

* News.com: Some of the assets seized

Analysis of the Enforcement

* EFF: Megaupload Goes to Court: A Primer

* Ars Technica: How can the US seize a Hong Kong site like Megaupload

* Techdirt: Megaupload Details Raise Significant Concerns About What DOJ Considers Evidence Of Criminal Behavior

* News.com: How did the FBI get access to internal Megaupload conversations?

* Ars Technica: Megaupload: Erasing our servers as the US wants would deny us a fair trial

Collateral Effects

* Phil Corwin on collateral effects

* News.com: FileSonic changed its sharing practices in light of the prosecution

* TorrentFreak: RapidShare Publishes Anti-Piracy Manifesto for Cyberlockers

* RWW: Feds to Megaupload Users: Tough Luck

Revolving Doors/Patronage

* News.com: Nobody wanted MegaUpload busted more than MPAA

* News.com: U.S. Attorney chasing MegaUpload is former piracy fighter

General

* CMLP site on Megaupload

* Irina D. Manta, The Puzzle of Criminal Sanctions for Intellectual Property Infringement, 24 Harv. J.L. & Tech. 469 (2011)

Posted by Eric at 09:30 AM | Copyright , Derivative Liability | TrackBack

April 29, 2012

512(f) Plaintiff Can't Get Discovery to Back Up His Allegations of Bogus Takedowns--Ouellette v. Viacom

By Eric Goldman

Ouellette v. Viacom Intern., Inc., 2012 WL 1435703 (D. Mont. April 25, 2012)

Ouellette sued Viacom for sending allegedly bogus takedown notices for videos he posted to YouTube. His case has gone nowhere. In 2011, his ADA claims were tossed. Then, earlier this year, the magistrate judge rejected his 17 USC 512(f) claim. In this ruling, the judge adopts the magistrate's report and closes the case.

The disposition of Ouellette's 512(f) claim is hardly surprising. Putting aside his status as a pro se, even well-lawyered 512(f) plaintiffs rarely make any progress in court after the Ninth Circuit Rossi case required subjective bad faith as an element of a 512(f) claim. With this insurmountable mountain in his way, Ouellette never really had a chance.

Like so many plaintiffs, Ouellette argued that he can't fully allege Viacom's bad scienter until he gets discovery to see what they did and said. Not surprisingly, the court doesn't want to hear it:

Contrary to Ouellette’s assertion that interrogatories are the correct means for him to discover Viacom’s intent in issuing its takedown notice to Youtube.com, § 512(f) requires Ouellette to allege facts, at the pleading stage, that demonstrate that Viacom acted without a good-faith belief.

Stated differently, unless the 512(f) plaintiff has smoking-gun evidence of the copyright owner's bad intent before filing the complaint, the plaintiff has virtually no chance of getting a 512(f) claim into discovery.

The court rejects Ouellette's other contentions, including:
* Viacom's takedowns of other users' content is relevant to his situation. The court only considers Viacom's scienter with respect to the takedowns of Ouellette's content.
* Viacom's failure to sue Ouellette after the takedowns tacitly admitted that Ouellette had engaged in fair use. Obviously, Viacom could have many legitimate reasons why it didn't sue Ouellette for his uploads.

Ouellette was a lousy test case for 512(f), but his case reminds us that 512(f) plays effectively no role in 17 USC 512's overall design of checks-and-balances.

Posted by Eric at 11:48 AM | Copyright , Derivative Liability | TrackBack

April 27, 2012

Fourth Circuit Slams Juror’s Use of Wikipedia—US v. Lawson

[Post by Venkat Balasubramani]

US v. Lawson, 10-4831 (4th Cir.; Apr. 20, 2012)

Lawson and his co-defendants were convicted of violating the “Animal Welfare Act” through their participation in “gamefowl derbies” (cockfighting). One of the elements of the crime was “sponsorship” of the events in question. Shortly after the verdict was rendered, one of the jurors came forward and reported potential misconduct on the part of another juror (Juror 177). Apparently, Juror 177 had consulted “certain internet sources” the morning before the jury reached its verdict. The district court held a hearing and found that Juror 177 consulted Wikipedia for the definition of the term “sponsor.” Juror 177 printed out the definition of “sponsor” and brought it with him to the jury room. He was rebuffed by the jury foreperson, but it was clear he considered the definition, and some discussion of the Wikipedia entry took place between him and other jurors. The jury reached a verdict shortly after Juror 177's efforts.

The district court found that the juror’s consultation of Wikipedia did not prejudice the defendant. The Fourth Circuit disagrees, and in the process takes more than a few potshots at Wikipedia. The court says there is a presumption of prejudice when a juror consults outside sources, and it applies a five factor test to determine whether the government effectively rebutted the presumption of prejudice.

One of the key factors ends up being the extent to which the dictionary (or in this case, Wikipedia) definition of the term differed from the legally operative definition. The court says that it can’t compare the Wikipedia definition Juror 177 consulted with the correct definition because the juror misconduct only came to light several days after the verdict, and there was nothing in the record to indicate that the definition Juror 177 obtained was the same definition the district court looked at when it compared the Wikpedia page to the definition in the jury instructions:

[t]the government has not argued, nor has it provided evidence establishing, that the Wikipedia entry for the term “sponsor” can be retraced to its form when Juror 177 researched the term.

(The version of the Wikipedia page the district court looked at was printed out 14 days after his search of the term and five days before the district court hearing.) The court acknowledges that Wikipedia keeps an archive of changes, which the government failed to present to the district court. In any event, the court notes that even if historical edits were presented by the government, it could not consider these, absent some indication that Wikipedia archives of historical changes are “accurate and trustworthy.”

The court also considers a “catch-all” factor and notes that Wikipedia has particular “reliability” problems. Looking to Wikipedia’s own about page, the court says that Wikipedia touts itself as being edited and populated by “amateurs.” Indeed, Wikipedia itself cautions that the fact that “anyone [is allowed] to edit Wikipedia means that it is more easily vandalized and susceptible to unchecked information.” While a few courts have cited Wikipedia in their opinions and orders, the court says that litigants have been repeatedly warned against citing Wikipedia as authoritative.

A few days after this opinion was released, the Wall Street Journal’s Law Blog published a post looking at which federal appeals courts cite to Wikipedia most often: Which Federal Appeals Court Cites Wikipedia Most Often? (the Seventh Circuit and Ninth Circuit). While courts may cite to Wikipedia, it is ill-advised at best for a litigant to do so, unless it is being cited for the most menial and undisputed proposition (and even in this instance, caution is warranted). Similarly, as demonstrated by this case, a juror’s consultation of Wikipedia can topple a jury verdict.

One question you’re left with is whether the government’s failure to “retrace” Juror 177’s steps was central to the Fourth Circuit’s holding. If the government had produced historical Wikipedia entries and testimony from Wikipedia execs regarding the accuracy of the edit-archiving process, would this have made a difference? I’m tempted to say yes, although the court’s opinion is practically dripping with venom aimed at Wikipedia. It’s abundantly clear from the court’s language that it doesn’t like Wikipedia, and while litigants and judges may cite to it from time-to-time, a jury verdict that is tainted by consultation of Wikipedia is in hot water. As the court noted in Crispin v. Audigier (quoting another district court opinion), "Wikipedia is not a reliable source at this level of discourse."

[NB: the opinion is interesting in other respects, in particular the court's discussion of the term "bet" or "wager." On this score, the court says an event involves a wager where the prize depends on the number of entrants. Where the participants pay an entry fee but this fee does not determine the prize, there may not have been an underlying violation of South Carolina's gambling law.]

Posted by Venkat at 12:08 PM | Evidence/Discovery

April 26, 2012

Facebook "Likes" Aren't Speech Protected By the First Amendment–Bland v. Roberts

[Post by Venkat Balasubramani with comments from Eric]

Bland v. Roberts, 2012 US Dist. Lexis 57530, 4:11cv45 (E.D. Va.; Apr. 24, 2012)

Bland and his cohorts worked in the Hampton Sheriff’s Office, under B.J. Roberts. Roberts ran for re-election against Jim Adams, and the plaintiffs were lukewarm in their support of Roberts. In fact, three of the plaintiffs went so far as to “like” Adams' Facebook page. Roberts won the election, and he decided to not retain the plaintiffs. He justified the terminations on cost-cutting and budgeting grounds, but plaintiffs argued that their termination violated their First Amendment rights. The court grants Roberts’ motion for summary judgment.

Plaintiffs alleged they engaged in a variety of protected activities, such as placing a bumper sticker on one of their cars and attending an Adams-sponsored cookout, but the court says there is no evidence that Roberts was aware of these activities. The one activity that Roberts knew about was “the presence” of two of the plaintiffs on his opponent’s Facebook page. However, with respect to this activity, the court says that plaintiffs did not point to any specific statements they made on Adams’ Facebook page. One plaintiff claimed he posted a comment to Adams' page, but he later took it down, and the comment wasn't presented to the court. Plaintiffs “liked” Adams' Facebook page, and there was no dispute that Roberts was aware of this, but the court says this is insufficient:

[Roberts'] knowledge of the posts only becomes relevant if the court finds the activity of liking a Facebook page to be constitutionally protected. It is the court’s conclusion that merely “liking” a Facebook page is insufficient speech to merit constitutional protection. In cases where courts have found that constitutional speech protections extended to Facebook posts, actual statements existed within the record.

[emphasis added; citing Mattingly v. Milligan, mentioned in Eric’s quick links here] The court declines to “infer the actual content of [plaintiff’s] posts from one click of a button on Adams’s Facebook page.”

The court also says that plaintiffs don’t adequately state a freedom of association claim. The court cites to the standards for when it's permissible to terminate public employees for their political affiliations, but it doesn't engage in any analysis because, in the court's view, plaintiffs have not produced any evidence of association with Adams' campaign that Roberts knew about--and any Facebook association is insufficient:

[a]side from the Sheriff’s admission that he knew [two of the plaintiffs] had been on Adams’s Facebook page, there is little to no evidence that rises to the level of a genuine dispute about whether the Sheriff actually know about the Plaintiffs’ support of Adams.

Even assuming plaintiffs could point to statements or association that the Sheriff knew about and that played a part in his decision to terminate plaintiffs, the court says Roberts is protected by qualified immunity. The Sheriff had not “transgressed [any] bright lines.”
__

Gak!

The court’s conclusion on qualified immunity may or may not be defensible, but the court veered off course in concluding that a Facebook like is not speech. Maybe the court slept through Arab Spring and the many other instances of online activism in the past five years. Maybe the court is unaware of the robust body of First Amendment precedent which says that protection for expression is not limited to just actual words. Hello, Tinker (black arm bands) and Texas v. Johnson (flag burning)! More likely, as Eric notes in his comments below, the practical implications of a "like" threw the court for a loop.

It’s easy to dismiss Facebook "likes" as one of those mindless knee-jerk online activities we all routinely engage in that have little or no societal value. Courts can discount Facebook friendships in other contexts (see, e.g., Quickly v. Karkus, discussed here: “It’s Officially Legal: Facebook Friends Don’t Count”), but it’s well off the mark to say in this case that "likes" were not speech for First Amendment purposes. As menial as a Facebook like may be in the overall scheme of life, it’s an announcement to your Facebook friends that you support something, whether it’s a cause, a candidate, a company, or another person. A like also promotes a particular page or newsfeed to your friends, which sounds like quintessential expressive activity. [See Eric's comments below for various potential implications of a Facebook like.]

While I remain leery of Facebook's "like" ecosystem, I "dislike" this ruling.
____

Eric's Comments

Oh man, the technological implications of social media sure does baffle the judicial system. What does it mean to "friend" someone? What does it mean to "like" something? Most judges seem to want to curl up into a ball when posed with such thorny questions. Could you imagine a judge trying to grok what a Facebook "poke" means? [FWIW, a Westlaw ALLCASES search for "facebook /s poke" yields no results...yet.]

From my perspective, the judicial confusion about "likes" partially stems from the fact that the single technological interaction of "liking" something has multiple effects. When John Doe "likes" something on Facebook, it means:

1) When other people visit that content item/page, John Doe publicly appears as someone who "likes" it.
2) In addition, some folks are privately notified that John Doe "likes" the item/page, such as the person who posted the item/page as well as other people who are referenced on the page.
3) Depending on John Doe's privacy settings, John Doe's "like" may be communicated to his friends via his newsfeed.
4) If John Doe likes a business/interest, it may appear on John Doe's info/profile page.
5) If John Doe likes a business or ad, the business or advertiser may be able to buy an ad that redisplays John Doe's "like" to John Doe's friends.
6) John Doe may be subscribed to further content regarding the thing he likes.
7) Under the hood, Facebook treats the "like" as an affinity that modifies Facebook's perception of the relationship between liker and likee (i.e., it changes the social graph).

I'm sure there are other technological implications of "liking" something on Facebook; these are only the implications that occur off the top of my head. Perhaps Facebook's system is too complicated for lay folks to understand. The fact I can't easily enumerate the implications of a "like" is disconcerting. Personally, I think Facebook should disaggregate these implications so that a single action doesn't have so many simultaneous implications. At minimum, I am much less likely to "like" things on Facebook because there is so much import of such a simple action, and I definitely don't "like" any businesses because I think Facebook's Sponsored Stories program is not in either my or my friends' best interests. I explain these points in more detail in my post on Fraley v. Facebook.

I "like" Venkat's assessment above that "liking" on Facebook is First Amendment-protected speech. Looking at the complete list of implications above, collectively there is no question about that. But even if we focus only on implication #1, I don't even see the First Amendment issue as a close question. Listing a person's name as an "endorser" of a political candidate is core First Amendment activity. That's exactly what the "likes" did here. Perhaps, as Venkat indicates, we might otherwise excuse Roberts' firings through qualified immunity, or in fact maybe the budget cutting wasn't pretextual, but the judge's techno-confusion prevented it from reaching those questions squarely. This looks like an excellent case for an appeal.

UPDATE: On an email list, John Rothchild called our attention to Three D, LLC and Sanzone, Case No. 34-CA-12915 (NLRB ALJ Jan. 3, 2012):

Spinella’s selecting the “Like” option on LaFrance’s Facebook account constituted participation in the discussion that was sufficiently meaningful as to rise to the level of concerted activity. Spinella’s selecting the “Like” option, so that the words “Vincent VinnyCenz Spinella…like[s] this” appeared on the account, constituted, in the context of Facebook communications, an assent to the comments being made, and a meaningful contribution to the discussion....I find therefore that Spinella’s selecting the “Like” option, in the context of the Facebook conversation, constituted concerted activity as well.

Posted by Venkat at 12:22 PM | Content Regulation

April 25, 2012

MySpace Profile and Friends List May Be Trade Secrets (?)--Christou v. Beatport

By Eric Goldman

Christou v. Beatport, LLC, 2012 WL 872574 (D. Colo. March 14, 2012). The complaint. The Justia page.

[I’ve mentioned before that sometimes blog posts get stuck. This is one of those posts. I initially drafted the post a month ago discussing only the court’s opinion, but the opinion is so opaque and confused that I wasn’t satisfied. I rewrote the post after reviewing the complaint, but I'm still not sure either the opinion or this post make much sense.]

Beatport is a leading online retailer of electronic dance music for DJs. Roulier is a principal of Beatport. Christou is a dance club entrepreneur in Denver. Roulier worked with Christou for a while, then Roulier split off and formed his own dance club in Denver. There are a variety of allegations of Roulier's bad dealings, but this opinion primarily focuses on Christou's antitrust allegations that Roulier leverages Beatport's market leadership in electronic dance music retailing to get top DJs to book at Roulier's dance club instead of Christou's dance clubs. Some more background on those allegations.

The antitrust discussion is pretty interesting, but I'm more interested in the trade secret claims over MySpace pages.

Now, I freely confess that I don't really understand how MySpace worked. I rarely went there, and when I did, I found it baffling. This opinion reflects that I'm not the only person baffled by MySpace's operations.

With respect to the MySpace profiles, the plaintiffs allege that they "secured the profiles through web profile login and passwords." This is a garbled allegation. I believe the plaintiffs are alleging that Roulier impermissibly logged into the MySpace profile management area after he left Christou’s employment; by doing so, presumably Roulier could see information that was only displayed to the accountholder, and Roulier could send messages to account followers. But because profiles are normally thought of as the public-facing side of a social media account, it’s confusing to talk about “securing profiles” through passwords, and the plaintiff’s unhelpful framing undermines the rest of the discussion.

Specifically with respect to the list of MySpace friends, two prima facie elements require the court to "look at whether the alleged misappropriator could have obtained the same information from a public directory or another source outside of the plaintiffs' business"--a key point of disagreement. The court says:

The names themselves, readily available to the public, are not the important factor. The ancillary information connected to those names cannot be obtained from public directories and is not readily ascertainable from outside sources, and thus this militates in favor of trade secret classification.

Well, if the public directory is the plaintiff's own MySpace page that anyone--including competitors--may freely browse and mine, doesn't that kind of end the trade secret analysis? See Sasqua v. Courtney, reaching that conclusion without the angst of this opinion. Assuming that Roulier logged into the profile information page, what "ancillary information" could he see, and why is it relevant here?

Also with respect to the friends list, another factor asks if the list is easily duplicated. The court doesn't understand the implications here either:

Given adequate time and effort, Mr. Roulier could most likely duplicate or nearly duplicate the list of MySpace friends that SOCO had developed. However, this would involve individually contacting thousands of individuals with friend requests, and it is by no means clear that all of those individuals would grant Beatport permission to contact them.

This appears to conflate two concepts: (1) is it possible to copy a MySpace profile's friends list without violating any trade secrets, where the answer apparently is clearly yes, and (2) is it possible to contact each person who follows the ex-employer’s MySpace profile without violating trade secrets, which depends on MySpace’s technical operation and anti-spam mechanisms. If Roulier can simply direct-message each follower to invite them to follow his new venture, then there’s not a trade secret problem; if MySpace only allowed direct messages to people who were already following a profile (as Twitter does), then the court’s assertion is clearer.

Finally, the misappropriation assertion is also ambiguous:

Plaintiffs have alleged a public use of the misappropriated trade secrets, i.e., the promotion of Beatport via plaintiffs' MySpace page and friends.

What the plaintiff apparently is trying to say is that Roulier allegedly logged into an account that was off-limits to him (his former employer’s account) and sent messages promoting his new venture to his ex-employer’s followers. But that’s hardly clear in the court’s odd characterization.

In the end, the court finds the plaintiff’s trade secret misappropriation allegations survive a motion to dismiss. If Roulier did in fact log into his ex-employer’s account to post messages promoting Beatport, then perhaps some trade secret violation did occur. However, I don’t think that violation is either a misappropriation of the "profile," the “account” or the “friends list.” Instead, the case would be so much clearer if the plaintiffs had treated the login credentials as the trade secret rather than the MySpace account associated with those credentials. Protecting a social media account as a trade secret, especially the friends list, is goofy at best; it’s a much more natural fit for trade secret law to protect the keys that control access to a social media account—and the keys' concomitant ability to communicate with followers of that account. So I think this ruling is unnecessarily garbled because the court was presented with a clumsily-framed issue. I’m keeping my fingers crossed that any subsequent rulings will do a better job dividing between the unauthorized post-employment account access and claiming trade secrets in things like publicly available lists of social media friends.

FWIW, I tested on a very similar fact pattern in last year’s Internet Law exam. The exam and answer outline. Interestingly, the plaintiffs didn’t appear to allege any Computer Fraud & Abuse Act claim or analogous state computer crime claim. Perhaps such a claim would be futile after Nosal, but those doctrines played a central role on my exam.

One last point: like many of the other lawsuits over social media accounts or friends lists, I wonder how this lawsuit makes financial sense. It's probable that the litigation is being driven more by bad blood than economics. Consider, for example, this subsequent order by the judge (emphasis added):

ORDER granting 152 Motion to Clarify/Reconsideration Re: Order Dated March 23, 2012 151 . The Court grants an extension for defendants to reply to #144 to April 13, 2012. On review of the pending motions, the Court finds that the length of briefs filed by the parties, particularly by the defendants, is unreasonable to an extreme. For example, the one pending dispositive motion, defendant's motion for summary judgment [#148] is 82 pages long and is supported by 676 pages of exhibits. The mere volume makes it likely that the motion will be denied. The Court requests that plaintiffs' response be short and focus solely on whether there is a genuine issue of material fact in dispute that requires a trial. If that can be shown, motion #148 will be denied. Defendants' motion to exclude Phillips is 62 pages long. Defendants' motion to exclude Freedberg is 51 pages long. The supplemental motion for sanctions is 44 pages long. Plaintiffs too have been unable to avoid this verbose jousting. For example, plaintiffs' response to #122 is 39 pages long, and their response to #137 is 42 pages long. That is no way to persuade a court, and I now see that my attempt in my practice standards to let lawyers alone and to avoid artificial restrictions on briefs does not work with these parties and lawyers. I do not have the time to devote hours upon hours sorting through the reams of paper being exchanged in this nasty fight between Mr. Christou and Mr. Roulier. Henceforth, neither party may file a motion or a brief longer than 20 pages, with the exception of defendants' reply to #144 which is limited to 10 pages. No more extensions absent very good cause. No more motions unless the lead counsel for the parties have met, face to face, and made a good faith attempt to resolve the dispute.

When a judge issues a public bitchout like this to the lawyers, it's a pretty good sign they're doing something wrong. In my experience, a "win at any cost" approach almost always results in a big loss for everyone.

Posted by Eric at 09:25 AM | Trade Secrets | TrackBack

Misuse of Family Photograph by Photo Studio Supports Misappropriation Claim--Lee v. Picture People

[Post by Venkat Balasubramani]

Lee v. The Picture People, Inc., K10C-07-002 (RBY) (Del. Sup. Ct.; Mar. 19, 2012)

Plaintiffs had their two year old’s picture taken at The Picture People, a store engaged in the business of family photography. At checkout, the photographer asked plaintiffs if they would consent to use of one of the pictures in a contest the photographer intended to enter. Plaintiffs said no, and declined to execute the consent form that they were presented with. Although this was an in-person transaction, The Picture People’s website had a privacy policy that said The Picture People would keep any information provided by customers in connection with their use of online services secure. About a year later, plaintiffs discovered that The Picture People provided one of the pictures to their child’s day car center for advertising purposes. After plaintiffs complained, The Picture People confirmed that it did not obtain consent to use the picture and advised that it would erase all of the images from its system. Plaintiffs brought suit, alleging a potpourri of claims, on their own behalf as well as on behalf of their child. The Picture People moved for summary judgment on all claims.

Privacy claims: The court denies summary judgment as to the child’s misappropriation claim. The basic elements of appropriation without consent were satisfied. Interestingly, there is no evidence that the daycare center actually utilized the images, and the court focuses on The Picture People’s allegedly improper “distribution” of the images. The court dismisses the child’s intrusion claim, finding that the child (through the parents) consented to be photographed. In any event, the court says that use of the pictures in this manner would not be offensive to the reasonable person. (??) The court also dismisses the false light claim, finding that there was nothing false about the use of the photos. Finally, the court grants summary judgment on the parents’ own tort claim, finding that they cannot directly assert the claims of their child (whose claims proceed anyway), nor could they assert a claim for emotional distress absent physical harm, or a showing that there were in the “zone of danger.” Bottom line: the child’s publicity-rights claims go forward, and the remaining claims, including the parents’ claims in their own right, are dismissed.

IIED claim: The court dismisses the intentional infliction of emotional distress claim, finding that (1) the conduct would not be viewed as outrageous by the reasonable person and (2) in any event, plaintiffs failed to satisfy the pleading requirements for emotional damages from torts (they did not suffer injury and were not in the “zone of danger”).

Warranty claims: The court dismisses plaintiffs’ warranty claims. With respect to express warranties, the court finds that any statements on The Picture People website and in its privacy policy did not relate to the “goods” in question. The court also finds that there is no breach of implied warranties because the implied warranties, if any, relate to the quality of the products (the photographs) and do not impose a warranty regarding the use or misuse of the photographs. Plaintiffs also sought to tack on a breach of the duty of good faith but the court says this does not support an independent cause of action. Plaintiffs’ claims sound more in tort than in contract so the warranty claims fail. The court also dismisses plaintiffs’ claims under Delaware consumer fraud act and a statute that prohibits the knowing or reckless distortion of the terms of a contract. The court says that there is no evidence that The Picture People engaged in any sort of deception, or attempted to obscure or distort the terms of a consumer contract. The Picture People may have misused the photograph, but it didn’t make any representation to plaintiffs otherwise (i.e., there was no deception involved). Neither the privacy policy (which clearly did not speak to use of the photograph) nor the request that plaintiffs sign a consent form turned The Picture People’s alleged misuse of the photograph into a fraudulent or misleading act.

A reminder to parents: when you have photographs of your children taken, you may be called upon to negotiate agreements with personality and publicity rights provisions. The parents in this case smartly declined to sign the waiver, although the waiver probably would not have insulated The Picture People’s alleged conduct in this case.

[Eric's comment: Good grief, you can't even go to the mall anymore without fretting about IP rights.]

Plaintiffs made a valiant effort to rope in The Picture People's privacy policy to bolster their contract and warranty causes of action, but this ended up being a bust. In the online ad-tracking and the Facebook cases, the applicable privacy policies end up being relevant because they arguably covered the information collection and use in question; they may also provide the basis for consent. Neither was the case here. Nevertheless, it’s interesting to see this lawsuit play out similarly to other privacy lawsuits. Publicity rights violations seem to be the most viable cause of action. (See, for example, Fraley v. Facebook, discussed in Eric's blog post here: "Facebook "Sponsored Stories" Publicity Rights Lawsuit Survives Motion to Dismiss--Fraley v. Facebook.") Here, if the evidence ultimately shows that the daycare center never actually used images the question, plaintiffs' claims will get kicked. The remaining causes of action are fairly anemic at best, and in this case ended up being dismissed altogether.

Posted by Venkat at 09:07 AM | Licensing/Contracts , Publicity/Privacy Rights

April 24, 2012

Internet Intermediary Law Slides from Stanford Guest Lecture

By Eric Goldman

I recently guest-lectured at an Internet Law course at Stanford, run by Jennifer Granick and Richard Salgado. My slides.

Jennifer asked me to cover 47 USC 230 and 17 USC 512 in a single session. I know other Internet Law professors combine the topics, but I normally don't in my Internet Law course. When I cover online copyright liability, I discuss Section 512 as a defense to secondary copyright infringement. Later, I talk about publication torts, including defamation, and then talk about Section 230 as an Internet exceptionalist approach to publication torts based on third party content. I do have a wrapup slide at the end of my Section 230 (included in the slides linked up) that contrasts Sections 512 and 230, but I have never taught them together. I thought it worked out nicely, and it gave me a chance to show different ways plaintiffs are attacking UGC websites. Check it out.

Posted by Eric at 03:27 PM | Content Regulation , Copyright , Derivative Liability , Trademark | TrackBack

Court Orders Disclosure of Psychic Chat Records in Retaliation Case – Glazer v. Fireman’s Fund

[Post by Venkat Balasubramani]

Glazer v. Fireman's Fund Ins. Co., 11 Civ. 4374 (PGG) (FM) (S.D.N.Y.; Apr. 4, 2012). The complaint.

Glazer (her LinkedIn page) sued Fireman’s Fund Insurance, alleging that Fireman’s Fund retaliated against her because she complained about “discrimination against non-African Americans.” Fireman’s Fund found out that Glazer had consulted with various psychics through LivePerson’s “on-line and professional consulting services” platform. It requested disclosure of the chat records from LivePerson, after Glazer said she could no longer access them.

LivePerson objected on the basis that Glazer could produce the documents herself and had agreed to do so. Glazer says that she closed her account and her old chats were inaccessible. At the discovery conference, LivePerson says that if Glazer were to open up a new account, all of her previous chats would be available to her (minus the chats that she was unable to pay for, which a LivePerson staff person could access).

The court notes the lurking Stored Communications Act issue, under which LivePerson may either be the provider of an “electronic communications service” or a “remote computing service” (citing, among other cases, Crispin v. Audigier and Theofel v. Farey-Jones). The court also flags the issue of whether LivePerson’s privacy policy bars or authorizes disclosure. The court says that LivePerson’s policies are inconsistent. The terms of service say that information transmitted through LivePerson.com is not confidential and that LivePerson is granted a license to reproduce and “publicly perform” this information. But LivePerson's privacy policy also says that member-expert communications will remain “confidential, personal, and private” unless both parties to the communications agree to disclosure.

Ultimately, the court says that the Stored Communications Act and privacy policy issues are irrelevant:

[t]he Court need not determine whether Glazer’s communications are electronically stored, or whether Glazer consented to the disclosure of her LivePerson chats by agreeing to the Terms and Conditions, because it may simply direct that she consent to disclosure if the chats are likely to contain information relevant to this case. [citing Romano v. Steelcase, among other cases]

The court orders Glazer to open a new LivePerson account, retrieve all available chat transcripts and produce them to Fireman’s Fund. In addition to the paid chats, Fireman’s Fund also argued for disclosure of free chats, and the court says Glazer should try to retrieve these as well. To the extent she cannot, the court directs Glazer to execute a consent form so LivePerson can retrieve the chats. The court also orders disclosure of LivePerson’s billing records for Glazer, which Glazer will be able to access when she opens a new account. Finally, Fireman’s Fund asked for any documents relating to chats between Glazer and psychics through sites other than LivePerson, including some that Fireman’s Fund says occurred as late as January 2012. The court says that these records will be cumulative.
__

Psychics make me think of the online harassment case Eric blogged about a couple of weeks ago: “What Do Soymilk and Nutella Have to Do With an Online Harassment Case?--Taylor v. Texas.” As in that case, the outcome here makes you question the efficacy of the psychics in question: one wonders why the psychics didn’t advise Glazer about the possibility of disclosure of the chats to Fireman’s Fund. I guess the psychics must have told Glazer that her litigation prospects were good; otherwise Glazer wouldn't be in court.

Glazer committed a classic miscue for employee-plaintiffs—she engaged in discussions regarding her dispute through her work email account. If not for this, Fireman’s Fund may not have ever found out about the chats in question. (Note to prospective employment plaintiffs: if there is even a whiff of a dispute with your employer, you should engage in all third-party communications through your own personal email accounts, on your own time, and off your employer's network.)

The court says that a party can be compelled to produce information that is protected from third party disclosure under the Stored Communications Act. This sounds like the right result, although this court, like the others that have addressed this issue, does not delve into the details. It's good to see that the court did not require Glazer to turn over her passwords or log-in credentials to Fireman's Fund. Other courts have taken this approach, ignoring the obvious dangers presented by allowing a litigant to freely rummage around in their opponent's Facebook account. (A recent decision in a New York worker's comp case found that postings in a firefighter's Facebook page was relevant to his claim of damages: Loparcaro v. City of New York. The court in that case took a similar approach and ordered the plaintiff to turn over copies of the relevant Facebook postings to the court so the court could assess privilege and relevance issues. Here's the Justia link to the court's order in that case.)

In the meantime, this case is a good reminder that your online communications are not off-limits and that you probably cannot take refuge in the protections of the Stored Communications Act . . . even if you are engaged in chats with psychics!

[NB: the court notes that LivePerson offered chats with lawyers but there was no evidence that Glazer had engaged in chats with lawyers via LivePerson.]

Additional coverage:

Bow Tie Law's Blog: Psychic Discovery

Previous posts:

Courts Continue to Grapple with Discovery Disputes Around Social Networking Evidence
Court Orders Disclosure of Facebook and MySpace Passwords in Personal Injury Case -- McMillen v. Hummingbird Speedway
Plaintiff Can't be Forced to Accept Defense Counsel's Facebook Friend Request in Personal Injury Case -- Piccolo v. Paterson
Court Orders Plaintiff to Turn Over Facebook and MySpace Passwords in Discovery Dispute -- Zimmerman v. Weis Markets, Inc.
Pennsylvania Court Orders Personal Injury Plaintiff to Turn Over Facebook Password to Defendant -- Largent v. Reed
Judge Offers to Facebook 'Friend' Witnesses in Order to Resolve Discovery Dispute -- Barnes v. CUS Nashville

Posted by Venkat at 10:50 AM | Evidence/Discovery , Privacy/Security

April 23, 2012

SuperPoke! Pets Virtual Gold Dispute Worth Over $5 Million--Abreu v. Slide

By Eric Goldman

Abreu v. Slide, Inc., 2012 WL 1123367 (N.D. Cal. April 3, 2012). The Justia page.

Google bought Slide, which operated the SuperPoke! Pets online game. Wikipedia has some of the game's history. As part of the gameplay, users could buy virtual gold. Apparently a lot of them did; Google alleges that users bought $6M+ of virtual gold from October 2010 through June 2011. The plaintiffs allege that Slide whipsawed its users. After exhorting users to buy virtual gold, in June 2011 Slide stopped selling virtual gold and wiped out existing gold accounts, but it said the site was ongoing and told subscribing users they could enjoy premium accounts for life. Then, in August 2011, Slide announced a hard stop in 6 months, and Slide actually shut down in March 2012. By shutting down, the plaintiffs allege that Slide improperly wiped out virtual assets worth real money.

I'm torn about the underlying merits of this dispute. I'm sure Google has good explanations for the choices it made, and I staunchly defend the right of virtual world operators to control their environments as they see fit. Still, it's bad for consumer trust and the industry generally for Slide/Google to eliminate virtual assets that people bought with real money without providing some refunds, even if Slide made disclosures up the ying-yang about caveat emptor. We'll get to those more interesting questions later (if the case doesn't settle).

For now, the only issue in this ruling is whether the case stays in federal court or goes back to state court. To stay in federal court under CAFA, the case must meet certain standards, including having an amount in controversy over $5M. Google argues that it clears the threshold because users bought over $6M of virtual gold. The court says this allegation suffices, the plaintiffs can't adequately rebut it, and the case stays in federal court per CAFA.

Both Venkat and I wondered if Google's declaration of the $6M+ number will eventually come back to haunt Google. Neither of us couldn't think of a way it would. I imagine Google is going to argue that consumers got what they paid for, so the fact that there's over $6M in revenues is ultimately irrelevant.

Posted by Eric at 11:37 AM | E-Commerce , Licensing/Contracts , Virtual Worlds | TrackBack

April 21, 2012

Circumstantial Authentication Strikes Again in a MySpace Evidence Case -- State v. Tienda

[Post by Venkat Balasubramani]

Tienda v. Texas, 358 S.W.3d 633 (Tx. Ct. Crim. App.; Feb. 8, 2012)

This is another MySpace evidence case.

Defendant was convicted of murder. The victim exchanged words with a group of people outside a nightclub, and when he left to go to another club, his car came under fire from a “caravan of two or three cars.” The defendant was a passenger in one of the cars. While there was no dispute that the defendant was in one of the cars, the testimony as to his actual involvement in the shooting varied widely. The weapons evidence was also inconclusive.

At trial, the State sought to admit evidence of three MySpace profile pages purportedly created by the defendant. The MySpace pages contained quotes apparently boasting about the killing and contained a link to a song that was played at the victim’s funeral. The profiles also contained photos of the defendant, and were created with profile information that witnesses testified was likely to be associated with the defendant (the age and location of the profiles matched the defendant and the email addresses contained his nickname or last name). As part of the profiles, the state also sought to admit evidence of instant message conversations exchanged between the account-holder and others—these conversations included references to the other passengers present at the incident, details regarding the State’s investigation, and threats to individuals about “snitching.”

The state did not present any evidence from MySpace tying the three profiles to the defendant:

[t]here was no testimony elicited at . . . trial, however, and nothing on the face of the on-page subscriber reports themselves, to explicitly indicate whether any of the three User #s are [defendant’s] or whether any of the three Sign up IP numbers corresponds to a computer either belonging to [defendant] or to which he had access.

(See Fn. 4.) Instead, the State presented evidence from the victim’s sister as to how she came across profiles. The State also presented evidence from a “gang unit officer” regarding “common use of social networking media . . . by gangs to stay in touch with members and to ‘promote’ their gangs by bragging about participation in gang-related activities.” The trial court admits the evidence over a defense objection as to authenticity.

On appeal, the court acknowledges the challenges presented by the authentication of electronic evidence, and also acknowledges that social networking and electronic evidence presents special authenticity challenges. Nevertheless, the court notes that other jurisdictions have blessed “circumstantial authentication,” where communications contain information that only the purported sender would know, or otherwise tend to indicate authenticity.

The court says that sufficient circumstantial indicia of authenticity is present here. The profiles contained photos of the defendant, and they used names that the defendant was commonly known by. Most importantly, the court points to the communications in question surrounding the incident and the State’s investigation. In the courts view, the combination of the (1) photos of defendant; (2) the reference to the incident, including music that was played at the victim's funeral; (3) references to a gang that defendant was reportedly a member of; and (4) the details contained in the communications, were all sufficient circumstantial evidence to warrant admission of the profiles.

The court notes that the intermediate court of appeals relied on a Maryland decision that endorsed circumstantial authentication in a similar context but that this decision had since been reversed. (Here is a prior blog post on Griffin v. State, discussed in the court’s opinion: “Maryland Supreme Court Rejects "Circumstantial Authentication" Standard for MySpace Evidence -- Griffin v. Maryland.”) The court in this case distinguishes Griffin on the basis that there is “far more circumstantial indicia of authenticity in this case than in Griffin.”

The circumstantial authentication allowed in this case is slightly different from the type of authentication allowed by the Maryland appeals court in Griffin in that it relies on the nature of communications (rather than profile attributes) to conclude that there is sufficient indicia of authenticity. On the other hand, it's also different from the standard used by the Massachusetts Supreme Court when it allowed circumstantial authentication of email evidence. In the Massachusetts case, there was evidence that the defendant used the account in question and knew the password. (See "Massachusetts Supreme Court Finds Email Sufficiently Authenticated Based on Surrounding Evidence -- Commonwealth v. Purdy.") The evidence in this case is still entirely second-hand--from the victim's sister who saw the profiles in question (on the internet). The court acknowledges the possibility that someone who knew the defendant could have created the profiles and sent the messages in question. Nevertheless the court allows admission of the profile evidence.

Related: Survey: social media evidence soaring in court cases (Jeff John Roberts)

Prior posts:

"Maryland Supreme Court Rejects "Circumstantial Authentication" Standard for MySpace Evidence -- Griffin v. Maryland" 
"Connecticut Court of Appeals Tackles Authentication of Facebook Messages -- State v. Eleck"
"MySpace Profile Evidence Inadmissible to Show Defendant Committed 'Gangster Style' Robbery -- U.S. v. Phaknikone"
"MySpace Profile and Photo Evidence Used to Support Conviction for "Participation in Criminal Gang Activity" -- State v. McCraney"
"MySpace Photo and Internet Gang Roster Evidence Improperly Admitted -- People v. Beckley"
"Connecticut Supreme Court Says no Error in Admission of Facebook Photos at Probation Hearing -- State v. Altajir"
"Massachusetts Supreme Court Finds Email Sufficiently Authenticated Based on Surrounding Evidence -- Commonwealth v. Purdy"

Posted by Venkat at 09:10 AM | Evidence/Discovery

April 20, 2012

Cautionary Tale for Settling Trademark Cases--Tormented Souls v. Tormented Souls Motorcycle Club

By Eric Goldman

Tormented Souls Inc. v. Tormented Souls Motorcycle Club Inc., 2012 WL 1314128 (E.D.N.Y. April 17, 2012)

The parties settled a trademark litigation. The settlement agreement required the defendants to "take all the steps necessary to remove all advertisements, promotional publications, internet website, and other media wherein the public would encounter or view the use of the 'Tormented Soul' mark." I believe this is pretty standard language for trademark settlement agreements.

The trademark owner protested that it could subsequently find a MySpace profile (those still exist???) named "Tormented Souls MC" that contained seven photos of the "Tormented Souls" name and mark. The defendants' principal explained that his webhost set up the page for them, and the host hadn't given the password to the principal despite repeated requests. The court says that the principal's effort didn't satisfy the requirement to take "all the steps necessary to remove" the trademark references, and therefore the judge sanctioned the defendants for breaching the settlement agreement. The court only fines the defendants $500 (apparently liquidated in the settlement agreement) and doesn't award any extra attorneys' fees, so it turns out to be a relatively inexpensive mistake.

The court also excuses two other remaining trademark references because the plaintiff didn't show that the defendants controlled, or had the ability to remove posts from, the sites. The court further excuses the defendants from not putting a disclaimer on their current site because it was operating under a new domain name, and the settlement agreement applied only to the sites in the defendants' possession at the time of the settlement agreement.

Although the requirement that the defendants "take all the steps necessary to remove all advertisements, promotional publications, internet website, and other media wherein the public would encounter or view the use of the 'Tormented Soul' mark" may be standard for trademark settlement agreements, defendants should think carefully about committing to such an unbounded promise. Preferably, the defendants would represent exactly which sites they own and control and commit only to fix those and no others. If that's not possible, defendants should enumerate situations where they can't take down content, either because they can't access it or because the website prevents editing/deleting (e.g., Ripoff Report). In other words, defendants should not rubber-stamp this particular settlement agreement "boilerplate."

Posted by Eric at 03:46 PM | Trademark | TrackBack

April 19, 2012

Facebook Beats Class Certification in Click Fraud Case

By Eric Goldman

In re Facebook, Inc., PPC Advertising Litigation, 2012 WL 1253182 (N.D.Cal. April 13, 2012)

I don't know what I like less: click fraud, or bogus lawsuits over click fraud. This three-year-old case (see my initial blog post on filing) was questionable from day 1. The advertisers signed up to a contract that clearly told them they had no claim for click fraud. To get around this, the plaintiff canvassed every corner of Facebook's site for innocuous language that could be twisted around tendentiously, and the plaintiffs argued that they weren't suing for bad clicks but instead for invalid "phantom" clicks that never occurred. Judge Fogel, bless his heart, didn't kill the case when he had the chance; instead, he gave the plaintiffs another chance. No matter, as Judge Fogel handed the case off to Judge Hamilton when Judge Fogel relocated to DC, and Judge Hamilton properly shut down the nonsense and denied class certification. The case might still continue individually, but I can't imagine why it would.

The plaintiffs sail through the standard class action analysis on numerosity, commonality and typicality. The plaintiffs hit a small but curable bump on adequacy of representation, but it's embarrassing when the named class representatives admit that the lawyers are the real prime movers in the case (as is far too typical in class actions). The court says:

Fox is also not an adequate class representative for the additional reason that he testified in his deposition that he knows essentially nothing about the case, and indicated that he would defer to counsel in prosecuting this action.

Clients guiding lawyers, or lawyers guiding clients? The legal system assumes the former; the latter is the reality in class actions.

Despite the hiccup on adequacy of representation, the case runs into real trouble on the predominance of common issues. On the contract breach claim, the court summarizes its concerns:

plaintiffs have failed to establish that the terms of the contract that were allegedly breached by Facebook are part of any contract between CPC advertisers and Facebook; have failed to establish that there is any uniform method for distinguishing, on a classwide basis, between “invalid” clicks (at issue in the case) and “fraudulent” clicks (not at issue in the case); and have failed to establish that damages can be calculated on a classwide basis.

Particularly noteworthy is the court's rejection of the plaintiffs' efforts to stitch together various site text to tell the story it wants to tell. This passage about the plaintiffs' efforts to incorporate language from the Glossary into the "contract' is representative of the court's discussion:

Because the Glossary is not referenced in or linked to the “Place Order” page or to the SRR, it is not clear how it can reasonably be considered part of a “uniform written contract.” Not only is it unnecessary for an advertiser to review any material on the Glossary page in order to place an ad, it is also impossible to link directly to the Glossary from the “Click Agreement” or “Place Order” page, or even from the SRR.

Stepping back from the case specifics, the rulings demonstrates that publishers, guided by the right lawyers, should fight back against advertiser class action lawsuits rather than take quick settlements. Recall that both Google and Yahoo settled their click fraud lawsuits before reaching the class certification stage. They may have done so because they wanted class-wide resolution of the issues; but more likely, they were skittish about fighting to the end. Here, unlike Google and Yahoo, Facebook fought class certification rather than settling, and the ruling validates Facebook's decision. Perhaps this ruling will embolden other publishers to stick to their guns when the click fraud lawyers come a-callin'.

Posted by Eric at 09:14 AM | Licensing/Contracts , Marketing | TrackBack

April 18, 2012

Texas Ruling Shows the Benefits We'd Get From a Federal Anti-SLAPP Law--American Heritage Capital v. Gonzalez

By Eric Goldman

American Heritage Capital, LP v. Dinah Gonzalez and Alan Gonzalez, No. DC-11-13741-C (Texas District Court April 13, 2012). The amended complaint. The defendant's anti-SLAPP motion.

This may be the first application of Texas' new anti-SLAPP law to Internet postings. It's a fine example why Texas enacted the law in the first place. And it's a good preview of the benefits we could get from federal anti-SLAPP protection.

American Heritage Capital is an online lender. Apparently, AHC didn't fund a loan requested by Mrs. Gonzalez, and Mr. Gonzalez posted critical remarks about AHC at multiple websites (including Zillow, CreditKarma and Ripoff Report). Allegedly, AHC's president then sent Mrs. Gonzalez an email threatening her if she didn't remove the posts, including the following passage:

You started this. You can end it. Otherwise I will end it for you, and it won’t be pretty.

AHC then sued the Gonzalezs in October 2011. In January, AHC voluntarily dropped the lawsuit against Mrs. Gonzalez. (I asked AHC's lawyer why it did so, but the lawyer declined comment; the fact that Mr. Gonzalez admitted he made the posts may have had something to do with it). In March, the court dismissed the lawsuit with prejudice and made Mr. Gonzalez eligible for anti-SLAPP fee-shifting. Last week, the court granted the fee-shift, awarding Mr. Gonzalez:

* over $15k in attorneys' fees
* another $15k in sanctions
* additional financial concessions if AHC challenges this ruling on appeal and loses

Sadly, this situation is all too common. The Gonzalezs griped online about their experiences as consumers, AHC allegedly tried to bully the posts off the Internet, then AHC tried to use the court system to bully the posts offline. In states without anti-SLAPP laws (or with inadequate ones), AHC almost certainly gets its desired outcome (the content removed) to the detriment of other prospective consumers. Instead, thanks to Texas' new anti-SLAPP law, the Gonzalezs win quickly and the plaintiff writes a non-trivial check for their troubles (2x the attorneys fees). These are the kinds of outcomes I wish we'd see across the country, not just in Texas and California and a few other states with reasonably strong anti-SLAPP laws. That's another reason why I support federal anti-SLAPP legislation.

See more on anti-SLAPP rulings and consumer reviews.

Posted by Eric at 01:15 PM | Content Regulation | TrackBack

April 17, 2012

MapleStory Enforcement Action Leads to Ridiculously Large Anti-Circumvention Damages--Nexon v. Kumar

By Eric Goldman

Nexon America Inc. v. Kumar, 2012 WL 1116328 (C.D. Cal. April 3, 2012)

It can be disconcerting when UGC websites turn into IP enforcement plaintiffs. Perhaps the biggest offender has been Craigslist, which has brought numerous ill-advised lawsuits (see, e.g., this post) that have developed novel Internet law precedent that seems destined to come back and bite Craigslist in the ass. But I can think of many other ill-advised enforcement actions by websites that are normally defendants, including eBay, Facebook and Zynga. Just remember, guys: live by the sword, die by the sword.

Today's opinion is a default judgment brought by MapleStoy, a MMORPG, against UMaple, a service that runs an unauthorized MapleStory server, i.e., UMaple users can play MapleStory (using the MapleStory client software) without ever touching MapleStory's servers. UMaple then solicits "donations" that lead to enhanced privileges in the UMaple environment.

As usual in a default judgment, the court doesn't question the absentee defendants' liability. Thus, the action moves to damages.

MapleStory sought profit disgorgement under copyright law. All that MapleStory can make stick is UMaples' AdSense revenue, a paltry $400. MapleStory can't get at any of the alleged donations because it can't connect the dots that the revenue was solely attributed to UMaple and not other properties or activities:

Given the myriad electronic commerce transactions allowing for-even encouraging-payment processing through trusted third-party processors like PayPal, AlertPay, and Plimus, the Court could just as easily infer that the bulk of payments Kumar received through these services were earned through legal means of electronic commerce.

It's rare to see a judge so skeptical in a default judgment. This suggests that MapleStory's advocacy failed to engender a high degree of sympathy. Instead, it looks like MapleStory's advocacy (handled by a team from Mitchell, Silberberg & Knupp) alienated the judge. Later in the opinion, the judge calls out MapleStory's lawyers for their arguments about the appropriate anti-circumvention damages calculations in various precedent cases. The judge says ominously that the advocacy led "the Court to question very seriously whether Plaintiff intended to actively mislead the Court or whether these oversights were merely the result of poor legal research." If it weren't obvious, neither conclusion would be a credit to MapleStory's lawyers. The worst part is that no stretching was required in a layup case like this. It's a default judgment, and judges will usually bless all reasonable requests.

After a paltry copyright infringement damages award, the opinion turns to anti-circumvention damages. Dun dun DUN. 17 USC 1203 sets a statutory damages minimum of $200 per act of circumvention. UMaples' client, the "UMaple Launcher," allegedly bypassed the access controls in MapleStory's client software. UMaple had 17,938 users. At $200/user (assuming 1 act of circumvention per user), the tally reaches a total of $3.5M+ in statutory damages, but the judge doesn't think this is right:

even the minimum statutory amount awardable under the DMCA in this case [is] a significant windfall to Plaintiff far in excess of any amount necessary to deter future infringing conduct. Further, the minimum award here likely bears little plausible relationship to Plaintiff's actual damages.

Nevertheless, the judge had no choice based on the formula it felt was binding, so this produces a massive anti-circumvention award. If it were collectible, it would be quite noteworthy as one of the biggest anti-circumvention awards of all time. But, it's not collectible.

As a final dis of the plaintiffs, the judge rejects the attorneys' fee award automatically produced by a formula in the local rules (about $71k). Instead, the judge only promises to award actual fees incurred.

It's hard for the plaintiff to feel good about this win. You don't expect to see such palpable skepticism from a judge when the defendant doesn't even show to protect its own interests. But this case does provide an excellent example of the ridiculousness of anti-circumvention statutory damages. $3.5M+ can't be the right damages award in this case, and it's so guffaw-inducing that it further erodes the legitimacy of our copyright rules.

Posted by Eric at 09:00 AM | Copyright , Virtual Worlds | TrackBack

April 16, 2012

Terminating an NFL Player's Endorsement Agreement for Polemic Tweets May Be Contract Breach--Mendenhall v. Hanes

[Post by Venkat Balasubramani, with comments from Eric]

Mendenhall v. Hanesbrands, 2012 WL 1230743 (M.D.N.C.; Apr. 12, 2012)

This case has it all: Twitter, a pro football player, terrorism, Osama bin Laden and contract law geekiness!

Background: Rashard Mendenhall plays professional football as a running back for the Pittsburgh Steelers. Mendenhall entered into an endorsement contract with Hanesbrands, which owns the Champion brand. The agreement between Hanesbrands and Mendenhall had a “morals clause,” which originally said that Hanesbrands could terminate the agreement if Mendenhall was arrested, charged with, or indicted for a felony or a crime involving moral turpitude. This clause was later amended to provide that Hanesbrands could terminate the agreement if, in addition to being charged with or indicted for a crime, Mendenhall:

[Became] involved in any situation or occurrence . . . tending to bring Mendenhall into public disrepute, contempt, scandal, or ridicule, or tending to shock, insult, or offend the majority of the consuming public . . . . [Hanesbrands’] decision on all matters arising under [this section] shall be conclusive.

Mendenhall’s Tweets: Mendenhall is an avid user of Twitter (@R_Mendenhall) and describes himself as a “Conversationalist and Professional Athlete.” [Eric's note: sadly, the conversation stopped pretty much right after Mendelhall sued Hanes; his last post is from July.] In the wake of President Obama’s announcement of Osama bin Laden’s assassination, Mendenhall posted a series of Tweets decrying the joy that people expressed about this incident (a link to the first tweet in the series):

What kind of person celebrates death? It’s amazing how people can HATE a man they never even heard speak. We’ve only heard one side . . .

I only believe in God. I believe we’re ALL his children. And I believe HE is the ONE and ONLY judge.

Those who judge others, will also be judged themselves.

For those of you who said we want to see Bin Laden burn in hell and piss on his ashes, I ask how would God feel about your heart.

There is not an ignorant bone in my body. I just encourage you to #think [nice touch on the hashtag here]

Not surprisingly, Mendenhall’s tweets generated a negative reaction. Mendenhall issued an explanation, saying that he was encouraging people to think; his tweets were meant to “generate conversation.”

Hanesbrands issued a public statement to ESPN distancing itself from Mendenhall’s statements and saying that his statements were inconsistent with the Champion brand. It said it was terminating the endorsement contract. Mendenhall sued, asserting that Hanesbrands’ termination was a breach.

The Court’s analysis: Hanesbrands says the contract vested it with discretion to terminate the agreement, and this decision shouldn’t be second guessed by the court. The court disagrees and says that this discretion is constrained by Hanesbrand’s duty of good faith and fair dealing. (The court doesn’t explicitly say that the contract would suffer from illusoriness if Hanesbrand could terminate it for any reason, but this is the same reasoning we’ve seen in other agreements that give one party a free hand to alter the terms.)

Does Mendenhall get past the good faith hurdle—can he show that Hanesbrands’ actions were unreasonable or in bad faith? At the pleading stage, the court says yes: and points to Hanesbrands initial public statement said that it “disagreed” with Mendenhall’s statements. In contrast, the agreement requires that Mendenhall make a statement that brings him into disrepute or shocks the majority of consuming public.

Hanesbrands responded that there was no dispute Mendenhall’s statements caused a public outcry and this backlash justified its termination of the agreement. The court says there is a factual dispute about the extent of the backlash. Mendenhall submitted evidence that although many people freaked out, he received supportive tweets and some people even changed their minds, thanking Mendenhall for making them think about the situation.

Celebrities and athletes getting into hot water over incendiary tweets that are sent in the heat of the moment. Sound familiar?

I do think there’s more to the story here, though. I don’t deal with morals clauses with much frequency, but it’s interesting to see that even a morals clause has to be constrained by some standard. If the brand reserves for itself the right to freely terminate the contract any time the endorser says something the brand disagrees with, this raises the problem of the contract being illusory.

Unlike the government, which has to comply with First Amendment constraints, private employers and brands can freely restrict the speech of their employees or endorsers. (Employers have to deal with NLRB guidelines, but those were not implicated here.) The challenge is to come up with a standard that doesn’t tie the hands of the brand but at the same time provides some metric that is not totally subjective and does not give the brand unbridled discretion.

Mendenhall’s path to victory will not be an easy one. He has a pretty tough hurdle to prove that either (1) Hanesbrands tolerated his own previous statements and this established some sort of course-of-dealing, or (2) Hanesbrands tolerated similar statements of other endorsers. As to the underlying issue of whether his tweets were offensive to a large segment of the population, the parties will probably both present competing evidence, but Hanesbrands probably has a lot to drawn on from an evidentiary standpoint here. (It's unclear as to whether use of the term "majority" in the agreement will come back to haunt Hanesbrands.)

In the meantime, Tweeters beware. We don't need another cautionary tale to remind us that the ability to instantly publish our often emotional reactions to the current goings on is a double edged sword, but regardless of how it plays out, this case serves that purpose.
_________

Eric's Comments

I love love LOVE this case! It's an instant Contract Law classic. I could see the opinion, or its facts, appearing in Contract Law casebooks and courses throughout the country. In addition to the star power/pro sports angle, it's a rich springboard for intellectual pursuits:

* the value of endorsement contracts. There is significant literature questioning whether endorsement contracts are profitable for advertisers. See, e.g., AdAge, Celebrities in Advertising Are Almost Always a Big Waste of Money. When the endorsement arrangement does work out financially, I wonder if being controversial subtracts, or enhances, the endorser's value? It brings to mind the maxim "there's no such thing as bad press." Did Mendenhall's endorsement become less financially valuable after all of the press coverage he got--or more?

In Tiger Woods' case, it could be argued that Tiger Woods' brand fell so hard so fast that it instantly tainted any other brands it touched. Perhaps that's true, but his case was exceptional because he had manufactured a strong "good guy" brand before the ugly dirt got publicized. Here, I wonder if Rashard had such a strong brand that he had as far to fall...and if not, if the enhanced public recognition he got from the controversy outweighed any negative associations in consumers' minds.

* how to negotiate a morals clause in the Twitter age. When I taught 1L Contracts in 2005, I gave students a three-part skills exercise involving negotiating a morals clause. (See this page for links to the exercises and my writeups). My hypothetical was based on Tiger Woods before we learned about his sexual predilections. Tiger's ultimate fall from grace really closed the circle for those students. Thanks for the extra help with the pedagogy, Tiger!

I thought the skills exercise was effective for a number of reasons, including the fact it required students to think about how to describe normal social interactions in words. Students soon realized how our everyday foibles could have massive financial impact in the context of an endorsement agreement. I hope this lesson served them well as lawyers, because the financial downsides of our foibles applies even to us non-celebrities.

The Twitter overlay puts even more pressure on drafters of morals clauses. I love Twitter, but one of its downsides is that very smart people make ill-advised posts in the heat of the moment. (I'm not saying Rashard's posts were ill-advised--see below).

Recall, for example, how Aflac terminated Gilbert Gottfried for his tweets about the Japanese tsunami--his jokes were insensitive but timely, perhaps the most toxic brew (i.e., the same jokes told a few months later might have been less controversial, but partially because they would be divorced from the context). Or recall Ashton Kutcher's ill-timed and ill-informed remarks about the Penn State sexual abuse scandal, that were enough to temporarily kibosh Kutcher's otherwise irrepressible tweeting and induce him to get a spokesperson to handle tweeting for him.

Inevitably, celebrities' tweeting in near-real-time on current events will result in train wrecks. Without a buffer/editor to insulate the celebrity, the celebrity's direct access to his/her audience + Twitter's low-friction posting + working at Internet speed = trouble. Attorneys representing celebrities negotiating morals clauses should incorporate a "Twitter exception" to the clauses, i.e., give the celebrities a free pass for being themselves on Twitter, because that's what's going to happen no matter what the contract says. This may sound like a clause advertisers would strenuously resist, but perhaps they shouldn't. Twitter is often a big part of the celebrity's flywheel of public visibility and the value the celebrity brings to the contract, so advertisers need to give celebrities breathing room to keep tweeting to keep that flywheel turning and deliver the value sought by the advertiser.

* can endorsement contracts draft around the "implied covenant of good faith and fair dealing"? Recall that the contract clause says "[Hanesbrands’] decision on all matters arising under [this section] shall be conclusive." This raises the issue of whether the implied covenant of good faith and fair dealing can be contractually waived. (Ken Adams has covered that issue several times, somewhat inconclusively: see, e.g., 1, 2, 3). Hanes surely thought it had been waived. If Hanes lacked that unilateral discretion, the contract clause (almost certainly the product of spirited negotiation) raises some interesting evidentiary questions--most obviously, how either party could prove/disprove that Mendenhall did something "tending to shock, insult, or offend the majority of the consuming public." (Emphasis added). Does a party need to do some kind of large-scale sampling survey to establish the "majority" threshold? That sounds expensive.

[UPDATE: Frank Snyder has more to say about the lack of doctrinal novelty in this case.]

* political orthodoxy and terrorism. At the core of this case--superficially about pro football players and sports jerseys--is one of the most burning political and philosophical questions of this decade: was the United States' killing of Osama bin Laden legitimate and ethical? The government's PR machine did a wonderful job of demonizing bin Laden for a decade, so perhaps not surprisingly a consensus/orthodoxy emerged: of course it was justifiable to kill bin Laden because he was the face of evil.

To Mendenhall's credit, he challenged this orthodoxy and prompted some hard questions about the US government's own conduct and our own emotional response to bin Laden's death. One way of reading the court's opinion is that it wanted to know more about Hanes' condemnation of Mendenhall for asking tough and probing questions, however contrarian they may be.

I think it's this extra layer that makes it an especially wonderful teaching case. Getting students to question their assumptions about bin Laden's death, and its implications for an otherwise garden-variety commercial dispute, could yield some powerful pedagogical payoffs.
_________

Venkat's Follow-up Comments

As always, Eric's comments raise a bunch of interesting questions.

The suggestion to build in a "Twitter exception" to a morals clause is a good one, but is sure to encounter stiff resistance from any advertiser or brand. In fact, even raising the issue could send up red-flags and result in pushback. The whole point of a morals clause is for the brand to make the call when things take a short or long-term turn for the worse.

As Eric notes, Mendenhall raised questions about the orthodoxy, and did so in a pretty even-keeled way. Should he take a financial hit because people reacted negatively? For better or worse, this is what being a brand spokesperson is all about. You no longer get to weigh in freely on current affairs and have to be careful about what you say. Everyone pretty much agrees there was strong negative reaction to the tweets. I don't know that it makes much sense to have either side quantify this or conduct an expensive survey. I also don't know whether it makes sense for Hanesbrands to have to meet some numerical threshold to make its case. The tie should go to the brand, and not the athlete or celebrity. (It's worth noting that the data is readily available and it would be fairly easy to categorize every single online reaction to Mendenhall's tweets.)

Unless the trial is scheduled to take place in Berkeley (California), Mendenhall is unlikely to receive any help in front of the jury, who will be colored by their own views in determining whether Mendenhall's tweets were "shocking, insulting, or offensive to a majority of the consuming public."

I wonder what the prospects are for the parties to make up. How likely is it that we see an act of contrition on Mendenhall's part after which the parties resume their relationship? This assumes that Mendenhall is open to this, and it's quite possible that he's not willing to publicly apologize or retract his statements. Judging from his statement in the wake of the controversy, the answer may well be no. On the other hand, maybe Hanesbrands does not need a public apology. Perhaps our memories are, like our attention spans, getting shorter. It's possible that the public may have already forgotten about this incident.

Posted by Venkat at 09:09 AM | Licensing/Contracts , Marketing , Publicity/Privacy Rights , Trademark

April 13, 2012

"Social Media and Trademark Law" Talk Notes

By Eric Goldman

Today, I gave a talk at Suffolk University's event "Social Networking Sites: Law, Policy and Practical Strategies" on Social Media and Trademark Law. My talk notes:
_____

1. Overview

A. Trademark doctrine is inherently elastic
* Schizophrenia about consumer protection vs. producer protection
* Hard to legally model consumer mental processes
* Trademark law relies on commercial/non-commercial distinction, and that model breaks down on the Internet

B. TM doctrine becomes more incoherent as it gets further away from product counterfeiting
* Little value to marching through doctrinal analyses in other circumstances

C. Internet technologies permit TM uses completely unrelated to product counterfeiting
* Pressure on TM law
- And SNSs feel pressure to do private ordering, although their efforts are often kludgy and inconsistent
* Pressure for new or expanded para-trademark rights
- ACPA
- False advertising/false designation of origin
- Defamation
- Publicity/privacy rights
- Identity theft/E-personation (“knowingly and without consent credibly impersonates another actual person through or on an Internet Web site or by other electronic means for purposes of harming, intimidating, threatening, or defrauding another person”)
- CFAA, trade secret, etc.

2. Namespace Disputes

A. Usernames are scarce and valuable
* Namespace proliferation with every new social media
* Leads to username squatting

B. Value + emotion = messy divorces
* Co-venturers (Tea Partiers, OMGFacts)
* Employee/contractor (Maremont, PhoneDog)

C. Doctrinal Ambiguities
* Does using a username create trademark rights? i.e., is it a qualifying “use in commerce”?
* Can a username, on its own, infringe trademark rights? Analogies to domain names
* Must the namespace operator adjudicate complaints to manage its liability? Even if not required, will the operator adopt a private ordering system that is dispositive in practice?

D. Username litigation is rarely cost-justified!

3. Content Source Confusion

A. Taxonomy of types of Content Source Confusion
* Competitive Injury. Ex: Ron Paul (YouTube video)
* Griper. Ex: Iacovelli (fake posts in doctor’s name)
* Parody. Ex: LaRussa, Coventry, BPGlobalPR

B. TM law isn’t designed to protect against content source confusion, but sometimes courts do it anyway

C. Enforcement raises Streisand Effect risk and is rarely cost-justified

4. Brands Can't Control Social Media

A. Social media gives brands unprecedented engagement with customers, but things can go wrong

B. Companies can self-injure their brands with ill-timed/ill-advised posts
* Kenneth Cole: “Millions are in uproar in #Cairo. Rumor is they heard our new spring collection is now available online at http://bit.ly/KCairo -KC”
* Entemann’s: “Who’s #notguilty about eating all the tasty treats they want?!” on same day as Casey Anthony’s verdict
* Ketchum exec James Andrew tweet “True confession but i'm in one of those towns where I scratch my head and say "I would die if I had to live here!“” while on way to client, FedEx.

C. Users control brands; brands don’t control users
* Nestle: Nestle took down Greenpeace’s critical video from YouTube, users complained on Nestle’s FB page, Nestle chided them for their behavior, users went crazy
* McDonalds: hashtag #McDStories became a “bashtag”
* For more, see my Online Word of Mouth article

Posted by Eric at 01:13 PM | Derivative Liability , Domain Names , Marketing , Trademark | TrackBack

April 12, 2012

Lawsuit From Huffington Post Unpaid Contributors Gets the Boot – Tasini v. AOL

[Post by Venkat Balasubramani]

Tasini v. AOL, Inc., 11-CV-2472 (JGK) (S.D.N.Y.; Mar. 30, 2012)

I thought the Huffington Post lawsuit brought by unpaid contributors would present some interesting discussion about the arcane laws governing unpaid internships, but that’s not the case. The bloggers brought an ill-conceived lawsuit that the court smacks down.

The starting point for the court’s discussion is that the group of plaintiffs never expected compensation. Huffington “made clear . . . from the beginning that [Huffington Post] never intended to pay content providers such as plaintiffs for submissions.” There’s no dispute about this. In part through the submissions of Tasini and the other plaintiffs, Huffing Post generated a substantial amount of traffic and was acquired by AOL for around $315 million. Plaintiffs decided they wanted to get a piece of the pie and sued, asserting unjust enrichment and unfair business practices claims.

Unjust enrichment: The court surprisingly spends six pages talking about Plaintiffs’ unjust enrichment claim. Here’s the money quote:

No one forced the plaintiffs to give their work to the Huffington Post for publication and plaintiffs candidly admit that they did not expect compensation. The principles of equity and good conscience do not justify giving the plaintiffs a piece of the [pie] when they never expected to be paid, repeatedly agreed to the same bargain, and went into the arrangement with eyes wide open. . . . Quite simply, the plaintiffs offered a service and the defendants offered exposure in return, and the transaction occurred exactly as advertised. The defendants followed through on their end of the agreed-upon bargain. That the defendants ultimately profited more than the plaintiffs might have expected does not give the plaintiffs a right to change retroactively their clear, up-front agreement. That is an effort to change the rules of the game after the game has been played, and equity and good conscience require no such result.

Ouch.

Deceptive business practices: The court dismisses the unfair business practices claim as well, finding that plaintiffs failed to allege any harm to consumers. The product in question was the content that Huffington Post served to its readers, and Huffington didn’t make any misleading claims about this to the readers. Plaintiffs also tried to premise their unfair business practices claim on various alleged acts by Huffington Post: (1) hiding the amount of page views; (2) stating that traffic attributable to individual articles was unavailable when it was really available; (3) not notifying plaintiffs that their exposure was decreasing over time as additional content was added; (4) presenting Huffington Post as a “free forum . . . for ideas” when it was a product which over time built up substantial value; and (5) dissuading plaintiffs from creating their own websites. (These allegations brought to mind Cammarata v. Bright Imperial: "Free-to-Consumers Ad-Supported Website Isn't Illegally Priced--Cammarata v. Bright Imperial.")

If plaintiffs were country yokels living in the deep woods, or Amazon tribesmen, I could see their argument getting some traction, but they are people who signed up to contribute content. For free. They actively promoted the content through channels such as Facebook and Twitter. They are no strangers to the world of online content creation and distribution. (Indeed, the lead plaintiff sued the New York Times in a case that went to the US Supreme Court in 2001.) It’s not too surprising that the judge finds their arguments unpersuasive.

Eric has posted about numerous cases where bloggers don’t have clean documentation around the underlying relationship. Huffington Post did not have that problem here and since the agreement made clear that there would be no compensation for the articles submitted by these authors, there’s no claim. (Note to self: if someone makes Eric a handsome offer for the blog, I won’t have much success asking for a piece of the pie.)

We don't need a case to tell us, but this case makes the obvious point that blogs and websites can enter into relationships with contributors where no money changes hands.

[Employment lawyers: as always, please clue me in. I'm curious to know how this relates to the brouhaha over unpaid internships. In the meantime, blogs that take in content from unpaid contributors can rest easy. If you have clean documentation in place, you should be good to go.]

Posted by Venkat at 09:46 AM | Licensing/Contracts

April 11, 2012

Parents' Lawsuit Against Apple for In-App Purchases by Minor Children Moves Forward -- In re Apple In-App Purchase Litigation

[Post by Venkat Balasubramani]

In re Apple In-App Purchase Litigation, 5:11-CV-1758 (N.D. Cal.; Mar. 31, 2012)

Facebook recently dealt with a class action over sponsored stories where minors asserted violations of their publicity rights. The court enforced the Facebook terms of service and transferred the dispute to California. ("Facebook's "Browsewrap" Enforced Against Kids--EKD v. Facebook.") Apple is grappling with a lawsuit also involving minors, where parents of minor children argued that Apple’s practice of distributing free apps was misleading because minor children could purchase “game currency” for a short duration after the parents had logged in. The court denies Apple’s motion to dismiss the lawsuit.

The factual allegations are somewhat interesting, and I have to give credit to the plaintiffs’ counsel for their creativity. Plaintiffs argued that Apple distributed free apps, and users of the apps could purchase in-app virtual currency for a short duration (15 minutes) after the password authentication process. Parents supposedly downloaded apps, gave them to their kids, and in this fifteen minute duration, the kids allegedly rang up bills (ranging from $99.99 to $338.72 “at a time”).

Voidability of the contract: Apple argued that although the minors purchased the apps, the relevant contract was the terms of service in place between the parents and Apple and this was a binding, enforceable agreement. The terms of service placed responsibility for unauthorized use of log-in credentials on the end user; therefore, Apple argued it was not responsible for the in-app purchases. The parents argued that each in-app purchase was a separate and voidable contract that may be disaffirmed by the parent or guardian. The court punts on the issue and says that at the pleading stage, the plaintiffs’ arguments should be allowed to proceed. The court footnotes an interesting contract law issue, noting Apple’s argument that a contract cannot exist where an offer is made to one party (the parents) but is accepted by another party (their children) and the consideration is supplied by the original offeree (the parents). Disappointingly for afficianados of contract law, the court does not resolve this issue.

Consumer Legal Remedies Act claim: The Consumer Legal Remedies Act statute prohibits unfair or deceptive acts or practices and looks to what is likely to “mislead a reasonable consumer.” The key question was whether Apple concealed or omitted facts that it had a duty to disclose. Citing to advertising from Apple that billed the “bait Apps” as “’free’ or nominal,” the court says that plaintiffs alleged the requisite misrepresentation by Apple. Two of the plaintiffs testified that they downloaded apps because they were free and gave them to their kids, only to find out later that for fifteen minutes after they had entered their iTunes passwords, their kids could make purchases from within the apps. These allegations were sufficient at the pleading stage.

Unfair Competition Law: Finally, the court also finds that plaintiffs adequately state a claim under California's unfair competition statute. Plaintiffs' allegation that Apple violated their CLRA rights independently states a cause of action under the UCL statute. The court also finds that plaintiffs plausibly state a claim under the substantial injury/benefit test: plaintiffs alleged substantial harm with no countervailing benefit to Apple from Apple’s unfair practices.

Duty of Good Faith/Restitution: Apple gets a mixed result on these two claims. The good faith and fair dealing claim is dismissed because there is no allegation that Apple lacked subjective good faith or that it intended to frustrate the common purpose of the agreement. The restitution claim moves forward, but piggybacks on the contract, CLRA, and UCL claims.

Forming online contracts with minors always struck me as a tricky issue. While most sites get by with a provision in the agreement that the minor has obtained the consent of his or her parent or guardian, as noted in E.K.D. v. Facebook, there’s a potential disaffirmance problem. As Eric mentions in his post on E.K.D., resolution of this issue may depend on whether the benefit has already been conferred on the minor, in which case the minor can’t disaffirm the contract. (See A.V. v. iParadigms, discussed in Eric's post here: "Clickthrough Agreement Binding Against Minors--A.V. v. iParadigms".) So what happens if the minor disaffirms? Can the site cease the allegedly improper conduct on a prospective basis and avoid liability? In this case, the minors surely enjoyed the benefits of their purchases (“game currencies!”); so in order to disaffirm the agreement, they should have to return the currency, which may pose a problem for the parents. (For this reason, my instinct tells me that Apple has the better argument on the disaffirmance issue, but this is just a gut feeling.)

As always, in these cases where plaintiffs challenge Apple’s conduct in the app store, I wonder about the viability of a Section 230 defense. It doesn’t seem as viable in this case as in the typical case since plaintiffs are alleging that Apple made statements that were misleading, but the court doesn’t delve into the details on these statements so it’s tough to tell. Apple's statements may be fairly narrow and not sufficient to get around a Section 230 defense. In any event, I'm curious about Apple's reasons for not asserting a Section 230 defense.

One thing is for sure. The knives of plaintiffs’ lawyers are sharpened when it comes to online litigation. I can see Apple defeating this lawsuit eventually, but the claims themselves surprised me from a factual standpoint. I doubt Apple could have anticipated something like this.

Added: Rebecca Tushnet comments: "What, exactly, was not easy to anticipate about what would happen with "free" games suitable for kids allowing easy in-app purchases (when the phone's been handed over to the kid)?"

Posted by Venkat at 11:19 AM | E-Commerce , Licensing/Contracts , Marketing

April 10, 2012

Fourth Circuit's Rosetta Stone v. Google Opinion Pushes Back Resolution of Keyword Advertising Legality Another 5-10 Years

By Eric Goldman

Rosetta Stone Ltd. v. Google, Inc.,, 2012 WL 1155143 (4th Cir. April 9, 2012). I'm listed in the caption as a limited intervenor in the efforts led by Paul Levy to crack open the redacted material from the Joint Appendix. Paul Levy's explanation of that effort.

Overview

Lawsuits over the sales of keyword advertising seem so...2005. In an era where everyone is freaking out about behavioral advertising, lawsuits over the comparatively innocuous practices of triggering ads based on search terms feel archaic at best. After the district court opinion in the Rosetta Stone v. Google case, which slammed the door hard on the most determined plaintiff still suing Google for its keyword ad sales, I thought most trademark owners had moved on to other worries.

Sadly, this ruling--giving Rosetta Stone another chance in court--will undoubtedly revive the trademark plaintiff bar's interest in suing Google for its keyword ad practices. Just like Google got hit with over a dozen lawsuits in the wake of Google's Second Circuit "loss" in the Rescuecom case, I imagine a bunch of low-merit suits will follow this ruling too. (I put Google's "loss" in quotes because ultimately Rescuecom just gave up its lawsuit). Google will almost certainly win all of the incoming cases, just like it destroyed most of the cases filed post-Rescuecom, but it will have to spend a lot more money in legal fees to get there. Worse, it will take a while for these cases to work through the system, meaning that we aren't going to reach the inevitable final equilibrium--that keyword ad sales don't violate trademark law--for another 5-10 years. In this sense, the opinion reminded me of last week's Viacom v. YouTube ruling--both opinions were soulless omnibus rulings that give superficial (but ultimately false) hope to plaintiffs while remanding the case to an almost certain defense win (just at a much higher cost).

Also like Viacom v. YouTube, the appeals court reversed because the district court's opinion cut too many corners. I noted that when I blogged the district court's ruling:

Unfortunately for Google, the opinion contains several minor doctrinal errors that could attract attention from an appellate court. That makes this ruling vulnerable on appeal.

Nevertheless, I'd hoped the appeals court would get to the right result based on the big-picture normative conclusion that keyword ad sales shouldn't violate trademark law. The district court got the big picture right. The appellate ruling, in contrast, is so focused on correcting the doctrinal details that it completely misses the big picture. This is why the plaintiffs' bar will be unable to resist probing the opinion's interstices, even though those lawsuits will all eventually fail. If the court had more sensitivity to the big picture, it would have written an opinion that fixed the lower court's doctrinal errors but better communicated to plaintiffs not to bother suing.

Specific Doctrinal Points

Direct TM Infringement. This is probably the most obvious place where the opinion mechanically marched through the doctrinal elements without acknowledging the big picture. It's really makes no sense to hold that Google *directly* liable for trademark infringement for keyword ad sales, because Google's products/services or marketing do not confuse consumers about the source and origin of marketplace offerings. If any consumer confusion takes place, it's caused by the advertisers, and Google is at most secondarily liable for that. But the opinion is tone deaf about this key point.

On the plus side, the opinion correctly notes that the standard multi-factor likelihood of consumer confusion (LOCC) test doesn't work in nominative use situations. This is interesting on two fronts. First, I have made this point numerous times, most recently in my post on AR Pillow v. Cottrell. I hope other courts similarly rethink the multi-factor LOCC test in nominative use cases. It really don't work at all.

Second, the court implies--without saying--that Google's activities could be nominative use. This is a point I made back in 2005 in my Deregulating Relevancy article . I hope courts take a closer look at the interplay between keyword advertising and nominative use, but Google (as opposed to its advertisers) isn't referring to the plaintiff's products so much as the class of those products (what I called "associative use" in my article), so a classic nominative use argument probably still fails. Courts should think more broadly about the semantic import of keyword triggering.

On the minus side, the opinion warns lower courts not to engage in a "robotic application of each and every factor in a case involving a referential, nontrademark use." Well, that's true, but if it's truly a "nontrademark use," then what the hell is everyone fighting about??? The lack of a clear concept of what constitutes a "trademark use in commerce," and how that affects a direct trademark infringement analysis, is a key flaw in the opinion's architecture.

On the LOCC's intent factor, the court says that a jury could find Google had bad intent. The only evidence the appellate court discusses is that, in 2004, "internal studies performed by Google at this time suggested that there was significant source confusion among Internet searchers when trademarks were included in the title or body of the advertisements" and in 2009 Google liberalized its trademark policy to let more parties display third-party trademarks in the ad copy. I don't see how that provides any evidence to support a *direct* trademark infringement because Google doesn't put the trademarks in the ad copy (advertisers do).

On the LOCC's actual confusion factor, the opinion says that a variety of evidence--Rosetta Stone's deposition of five confused purchasers, evidence of other complaints Rosetta Stone received, Google's 2004 study, Google's in-house lawyers' inability to review search results to determine if they were legit and Rosetta Stone's expert report--all should have helped Rosetta Stone defeat summary judgment.

On the LOCC's sophisticated purchaser factor, the opinion says that the district court's inferences against Rosetta Stone weren't appropriate for summary judgment. The court notes some evidence--the buyers who bought counterfeit software and Google's study--could be counted against purchaser sophistication.

The Functionality Defense. One of the district court's goofiest rulings was that keyword triggering qualified for trademark law's functionality defense. Keywords do act as inputs into Google's software, so in the colloquial sense they are "functional." However, trademark law's functionality defense is narrower than that, and in practice it really only should act as a defense to trade dress claims The appellate court unsurprisingly reverses the district court's approval of a functionality defense emphatically. Among other things, the opinion says "it is irrelevant whether Google’s computer program functions better by use of Rosetta Stone’s nonfunctional mark." Many trademark geeks and commentators have already rejoiced that the appellate court fixed this issue.

Contributory Infringement. The opinion defines the applicable legal standard:

It is not enough to have general knowledge that some percentage of the purchasers of a product or service is using it to engage in infringing activities; rather, the defendant must supply its product or service to "identified individuals" that it knows or has reason to know are engaging in trademark infringement.

This is an OK standard but it is slightly different from other recent articulations of contributory trademark infringement, and I'm not sure why this panel felt the need to re-express the test in its own words. The opinion says that the district court's reliance on Tiffany v. eBay was misplaced because that ruling came after a bench trial and therefore couldn't help on summary judgment. Unfortunately, the opinion gives short shrift to what evidence from Rosetta Stone could support contributory infringement. The only evidence cited by this opinion is the fact that Rosetta Stone identified some ads from rogue sellers and Google didn't block other unidentified ads from those sellers. If that's Rosetta Stone's best argument for contributory infringement, I think it will lose the contributory claim handily.

Dilution. Characterizing keyword ad sales as dilution is unprecedented and virtually unsupportable doctrinally. This opinion doesn't address that. It simply points out minor doctrinal errors in the lower court's opinion (not surprising, as I said the lower court's "rejection of the dilution claim was bizarre"), but misses the big picture that there's absolutely nothing Google does that could dilute or tarnish Rosetta Stone's marks. (The court also doesn't discuss contributory dilution, but almost all courts have said it doesn't exist, so if the advertisers are diluting Rosetta Stone's marks but Google itself isn't, Rosetta Stone still loses this point).

The opinion says the lower court misallocated the burden about any fair use exclusion to dilution; the burden is on the defendant to show the defense, and the lower court should have held the issue past summary judgment. The appellate court's implication that keyword ad sales might be nominative use looms large here, but nominative use would be a complete defense to the dilution claim. The opinion also says the lower court truncated its analysis on the likelihood of dilution. Finally, the opinion tells the lower court to reexamine the dates on which Google commenced use of Rosetta Stone's trademark and when Rosetta Stone's trademark became famous. I don't see any way for Rosetta Stone to win the dilution claim, and nothing in the appellate court's doctrinal nitpicking changes my assessment.

Other. The court dismisses the vicarious trademark claim because Rosetta Stone didn't provide evidence that "Google acts jointly with any of the advertisers to control the counterfeit ROSETTA STONE products." The court also dismisses the unjust enrichment claim because "Rosetta Stone failed to allege facts showing that it "conferred a benefit" on Google for which Google "should reasonably have expected" to repay." The district court partially relied on 47 USC 230 to dismiss the unjust enrichment claim; the opinion expressly leaves the 230 point unresolved.

Case Library

Bonus: with the help of an RA, we scanned and posted the material from the Joint Appendix in this case. Some day I hope to blog on some of the more interesting findings (but nothing earth-shattering).

The case library (see also the Joint Appendix material):

Posted by Eric at 07:58 AM | Trademark | TrackBack

April 07, 2012

Actress Suing IMDB Can Assert Claim Based on Privacy Policy – Hoang v. Amazon.com, Inc.

[Post by Venkat Balasubramani]

Hoang v. Amazon.com, Inc. & IMDB.com, Inc., C11-1709MJP (W.D. Wash.; Mar. 30, 2012)

Hoang sued IMDB, alleging that IMDB took information she provided when she paid for her subscription and used this information to derive her birthdate. She alleges IMDB then added her birthdate to her public profile and declined to remove it despite her request. She asserts claims for breach of contract, fraud, along with claims under the Washington Privacy Act and the Washington Consumer Protection Act. (She initially filed a Doe lawsuit and argued that she should be able to proceed pseudonymously, but the court rejected this request. See coverage from Matthew Belloni here: "Actress Suing IMDB Reveals Her Real Name.")

Breach of contract: The court declines to dismiss Hoang’s breach of contract claim, finding that statements in IMDB’s privacy policy could support a claim for breach of contract. What tripped up IMDB? Flowery language in its privacy policy saying that it would use customer information “carefully and sensibly.” While there was a section of the policy which informed users what the information would be used for, it did not encompass the use of information for targeting or using the information provided by customers to obtain other information about them:

You can choose not to provide certain information, but then you might not be able to take advantage of many of our features . . . . IMDB uses the information that you provide for such purposes as responding to your requests, customizing future browsing for you, improving our site, and communicating with you.

Remaining claims: The remaining claims are largely nuked, with one big exception. The court says that Hoang fails to identify any fraudulent statements, and her broad claims about IMDB’s misuse of her information is not sufficient to state a fraud claim. Her claim under the Washington Privacy Act fails as well because this statute covers the interception or recordation of private communications, and Hoang failed to identify any communications intercepted or recorded by IMDB. The one claim which the court did not dismiss which could turn into a problem for IMDB is the Consumer Protection Act claim under Washington law. This allows Hoang to ask for treble damages plus injunctive relief (which may be something IMDB is more worried about).

Quick thoughts:

* Re-identification is risky behavior for companies.

* Finally, a privacy plaintiff who does not have an Article III standing problem! Her damages may not seem like they are the easiest to prove and they may not be astronomical. However, she clearly gets past the Article III hurdle, and if she can get in front of a jury and argue that big bad IMDB (Amazon) played fast and loose with her information, and failed to remove it upon her request, she may find a sympathetic audience.

* Flowery privacy policy language that comes back to haunt a company. This has happened time and time again and is yet another example of a court or agency latching on to flowery language to find an obligation with respect to the use of information. Twitter's language about its security practices came back to haunt it when it was investigated by the FTC: "The FTC Dings Twitter's Security Practices -- What Does This Mean for Everyone Else?" Language in RockYou's policy supported both a breach of contract claim and was cited by the FTC in an enforcement action (which recently settled).

* Here's the million dollar question: does Hoang's breach of contract claim require her to show that IMDB obtained information and caused her harm by publicly attaching this information to her profile, or would she have a claim merely based on IMDB's use of her information in a way that is not described in IMDB's privacy policy? The court does not address this issue since Hoang made the allegation that IMDB's public use of her information harmed her. I'm guessing Hoang can't make an argument that IMDB's contractual promises restricted IMDB from using the information she provided as part of the subscription process for any purpose other than to process payment (say for direct marketing or targeting)? This could be a somewhat far-reaching argument, but would run squarely into the Article III problem.

[It's also worth noting that IMDB did not try to force Hoang to arbitrate her claims. IMDB's terms do not contain an arbitration provision. I'm guessing they will consider adding one soon.]

Other coverage:

Eriq Gardner: "Judge Allows Actress Suing IMDb Over Age Revelation to Go Forward on Lawsuit"

Posted by Venkat at 01:24 PM | Licensing/Contracts , Privacy/Security

April 06, 2012

AdKnowledge Denied 47 USC 230 Immunity (Again)--Chang v. Wozo

By Eric Goldman

Chang v. Wozo LLC, 2012 WL 1067643 (D. Mass. March 28, 2012)

This case is a cross between Swift v. Zynga and Goddard v. Google. Tatto runs a website, Wozo, that sells art posters. It created a "poster of the month" negative-option club that sent 2 posters/month for $30/month until the customer opts-out. Who has enough wall space for 24 posters a year? Tatto ran ads offering a "free" poster for a 99 cent shipping fee. Unlucky customers allegedly were surreptitiously enrolled in the poster club. To sweeten the deal, Tatto bundled its free poster offer with additional incentives to consumers, including AdKnowledge's virtual currency ("Super Rewards Points") pursuant to a deal with AdKnowledge. Chang, as class representative, alleges he responded to an ad for the bundled free poster and virtual currency and got duped into the poster club.

AdKnowledge tries a number of tactics to exit the lawsuit early, but I'm going to focus only on its 47 USC 230 defense. Citing Swift v. Zynga in a footnote (in which AdKnowledge was denied a 230 dismissal in a similar circumstance), the court's rejection of 47 USC 230 is brief:

Adknowledge and Chang dispute whether the content of the internet advertisements at the heart of this case were developed solely by Wozo and Tatto or whether the content was developed at least in part by Adknowledge....This is a dispute of fact that cannot be resolved at this juncture.

Nowadays, every plaintiff asserts that a 230-immunized entity "developed in part" the offending content. Therefore, it was lazy at best for the court to simply take the statement at face value in rejecting the 230 immunity. As Judge Kozinski said in Roommates.com, the Section 230 immunity needs to be robust to avoid death by a thousand duck bites.

On the other hand, the court may be responding to AdKnowledge's contract with Tatto to advertise a bundled offering, which does raise the question of how the contract allocated responsibilities for the bundle. For example, if AdKnowledge crafted the ad copy and deliberately omitted any reference to the poster club, 47 USC 230 probably doesn't apply to the ad copy. In contrast, if AdKnowledge crafted fully legally-compliant ad copy based on everything AdKnowledge knew but Tatto independently and surreptitiously crammed the poster club onto users, 47 USC 230 might very well protect AdKnowledge for Tatto's rogue behavior. See, e.g., Goddard v. Google and Mazur v. eBay. I can see why a court would want to see more facts beyond the complaint before making assumptions on a 12b6 motion to dismiss. At the same time, I hope the court will be willing to revisit Section 230 if AdKnowledge has the facts to throw Tatto under the bus.

Posted by Eric at 11:54 AM | Derivative Liability , E-Commerce , Marketing | TrackBack

Courts Struggling Needlessly With Online Contracting Practices (Guest Blog Post)

By John Ottaviani

Fteja v. Facebook, Inc., No. 11 Civ 918(RJH), 2012 WL 183896 (S.D.N.Y. Jan 24, 2012)
Jerez v. JD Closeouts, LLC, No. CV-024727-11, 2012 WL 934390 (N.Y. Civ. Ct. March 20, 2012)

For over a decade, I have been advising clients and teaching seminars about strategies for making sure online contracts are enforceable. It's not rocket science. You just have to take traditional contract principles and apply them online. Yet, businesses (and courts) are still struggling with how to do this properly. Given that the consequences of not being able to enforce a contract can be disastrous for a business, you would think that they would take the time to get things right on their websites.

Two recent cases illustrate the problems that the courts are having in determining whether a contract was made in the first place. In one case, the court decided that it would enforce a contract that was accepted when the user clicked a "Sign Up" box, immediately below which was a hyperlink to the terms and conditions. In the other case, the court refused to enforce an agreement where the terms were accessible only after several clicks through some hard-to-find and less-than-obvious links.

Fjeta v. Facebook (See Eric's blog post on this case)

In the Fjeta case, Fteja brought a lawsuit against Facebook, claiming that Facebook discriminated against him and disabled his account improperly because he is a Muslim. Although Facebook's Terms of Use require that lawsuits be brought in a state or federal court located in Santa Clara County, California, Mr. Fteja brought the suit in the New York state courts. Facebook removed the suit to the federal district court in Manhattan, and then moved to transfer the case to California, arguing that the Terms of Use constitute a binding and enforceable contract.

One would expect that Facebook has a good sign-up process in place, although the process described by the court is different from the one currently in place on its website. According to the court, the user is asked to fill out several fields containing personal and contact information, then click a button that reads "Sign Up." After clicking this initial "sign up" button, the user sees another page entitled "Security Check" that requires the user to re-enter a series of letters and numbers displayed on the page. Below the box where the user enters the information, the page displays a second "Sign Up" button similar to the button the user clicked on the initial page. The following sentence appears immediately below that button: "By clicking Sign Up, you are indicating that you have read and agree to the "Terms of Service." The phrase "Terms of Service" is underlined and is linked to another page with the Terms.

[John's Note: Facebook may have changed its Sign Up protocol in the interim. Now, the initial "Sign Up" button is immediately below the following sentence: "By clicking Sign Up, you agree to our Terms and that you have read and understand our Data Use Policy." The phrases "Terms" and "Data Use Policy" are linked to the applicable provisions.]

Although this method of obtaining assent has been upheld in a number of cases, the hyperlink to the Terms of Use gave Judge Holwell reason to pause. Because the terms of use were not displayed on the same page as the "Sign Up" button, but were only available through the link, the judge likened Facebook's Terms of Use to a "browsewrap" agreement, where the terms and conditions are posted on the website as a hyperlink at the bottom of the screen. But then he reasoned that the terms of use were still more like a "click-wrap" agreement, because the user had to "Sign Up" and affirmatively click the button to manifest agreement to the Terms of Use. Eventually, the judge concluded that the link to the terms of use is no different than having terms and conditions printed on the reverse side of a cruise ticket or a paper contract, found that Facebook's terms were enforceable, and ordered the case transferred to California. But he took a long, meandering and unneccesary route to get there . . . he would have been better off sticking to traditional contract principles and following the analysis below.

Jerez v. JD Closeouts

This case involves a dispute over the purchase of 50,000 pairs of white tube socks. Mr. Jerez, a New York resident, apparantly was unhappy with his $7,146 purchase of the tube socks, and sought a refund in the New York courts. JD Closeouts argued that the suit should have been brought in Florida, because of the forum selection clause in its Terms of Sale. According to the decision, the website's "Terms of Sale" containing the forum selection clause were found by clicking a link on its "About Us" page.

Here, the court refused to enforce the forum selection clause. After reviewing a number of cases enforcing and refusing to enforce online terms and conditions (including the Fjeta case above), the court found that this case was more like the situation in Specht v. Netscape Communications Corp., "where 'submerged' website provisions were found insufficient to bind the company's customers." The court found that in this case the existence of the forum selection clause was not "reasonably communicated" to the buyer through a printed contract, a confirming letter agreement incorporating the terms by reference, or a "click-through" acceptance of hyperlinked terms and conditions. Because the forum selection clause was buried and submerged on a webpage that could only be found by clicking on an inconspicuous link on the seller's "About Us" page, the court refused to enforce the forum selection clause.

Analysis

Both courts seem to have reached the correct result. Facebook could have been a little safer by having the terms and conditions on the same page as the "Sign Up" button rather than a hyperlink. But the practice of disclosing the terms through a hyperlink is not uncommon, and so long as the hyperlink reasonably lets the purchaser know that there are terms and conditions that he or she should read, then courts will generally find an enforceable contract in this situation. The terms in the Jerez case were just too obscure and hard to find. Even a seasoned Internet contract attorney like me would not necessarily think to look on the "About Us' page for terms and conditions if they are not otherwise mentioned on a website.

The judge in the Facebook case seemed to have a hard time classifying the contract as a "click-wrap," a "browse-wrap," or a hybrid. In actuality, he need not have spent so much time, because the same contract formation rules apply no matter the classification.

Several colleagues and I wrote a paper a few years ago entitled “Browse-Wrap Agreements: Validity of Implied Assent in Electronic Form Agreements” (59 Business Lawyer 279 (2003)), in which we set forth a four-part test for courts to use in determining whether a user has validly assented to the terms of a browse-wrap agreement: (1) the user is provided with adequate notice of the existence of the proposed terms; (2) the user has a meaningful opportunity to review the terms; (3) the User is provided with adequate notice that the taking of a specified action manifests assent to the terms; and (4) the user takes the action specified in the notice. Subsequently, we have determined that the test applies not only to browse-wrap agreements, but is applicable to determining valid assent for ALL agreements, whether on-line or in the physical world.

While the two court decisions discussed above did not cite our article or explicitly use our test, maybe they will do so in the future if the decisions are appealed. It would help cut through a lot of the confusion caused by trying to categorize a practice as a "click wrap" or a "browse wrap" or something else. There is simply no need to make a distinction for purposes of determining whether an enforceable contract has been created.

(Originally posted at the Business + Intellectual Property + Internet Law blog.)

Posted by John Ottaviani at 09:10 AM | Licensing/Contracts | TrackBack

April 05, 2012

Second Circuit Ruling in Viacom v. YouTube Is a Bummer for Google and the UGC Community

By Eric Goldman

Viacom International, Inc., v. YouTube, Inc., 10-3270-cv, 2012 WL 1130851 (2d Cir. April 5, 2012). The companion case is the Football Association Premier League Ltd. v. YouTube, 10-3342-cv

Overview

After five years in the courts, the Viacom v. YouTube litigation has finally produced an appellate opinion. In my opinion, the result is a loss for Google/YouTube and the UGC community generally. While the court largely agrees with many of YouTube's contentions (and the ruling of the lower court), it nevertheless revives the litigation, ensuring that Google will spend millions of dollars more over the coming months/years.

Furthermore, the opinion identifies at least four "holes" in 512(c) coverage that future plaintiffs will surely attempt to exploit. (Smoking-gun internal emails; willful blindness; right and ability to control; and content syndication). This ensures that other UGC websites will spend a lot of money upfront to try to shut down those holes and spend even more money in litigation to demonstrate that it avoided those holes. So, on balance, I'm characterizing this opinion as a loss for the UGC community because this ruling increases the industry's costs even if the substantive contours of 512 don't change.

Given that the Second Circuit expressly disagrees with the Ninth Circuit's UMG v. Shelter Capital ruling on the right and ability to control issue, I expect future 512 cases will be brought in the Second Circuit, not the Ninth Circuit. I'm not sure if this conflict is strong enough to get the case to the Supreme Court if Google chose to try.

Most importantly, this opinion exposes a structural deficiency of the 512(c) safe harbor. The statute's simply too long and detailed, and if a defendant fails to satisfy each and every element, the safe harbor is lost completely. This is reminiscent of military strategy and information security: the defense has to work equally well across its entire border, while the adversary can concentrate its attack and only has to succeed on one point of attack to win. The same is true with a 512(c) defense. So, it doesn't matter that YouTube won most of the points of contention; if any single point of contention fails, YouTube's 512(c) defense fails. As I've insisted before, this provides a good lesson for drafters of safe harbors and immunities--to work effectively, the safe harbors/immunities must be pithy and categorical, or else they create too many potential points of failure.

Even though Viacom won this ruling, I still don't understand how Viacom is making progress towards any strategic objective that matters to it. Viacom long ago conceded that it didn't object to YouTube's practices after 2008 (after it got access to Content ID). Indeed, Viacom gets upset with YouTube when it removes Viacom's posts made for marketing purposes. And Viacom just expanded its licensing arrangements with YouTube. At this point, Viacom is very clear that it doesn't want YouTube to go away, nor does it want any structural changes to YouTube's current practices. So what the hell is this fight about? Viacom might still look at this lawsuit for its cash value, but it's hard to be sympathetic towards that or see that as a big strategic objective. Viacom might be looking at this case to establish favorable precedent, but it picked a well-funded and determined defendant to make the point, and the Second Circuit ruling--though opening the door for copyright plaintiffs seeking to disqualify 512(c) defenses--doesn't contain a big broad pronouncement that would constitute a strategic win for Viacom. The whole lawsuit is a big waste for all concerned, and the fact the parties can't settle this case after 5 years of costly trench warfare continues to baffle me.

[UPDATE: This post is unintentionally a little contrarian; many folks see this ruling as a win for Google and the Internet. One possible explanation for this difference is our starting baseline.

If your starting point is Viacom''s summary judgment brief and some of the extreme and ridiculous arguments it makes, this opinion is a stunning and quite satisfying rebuke of that brief and those arguments. The opinion bristles with hostility towards most of Viacom's central arguments.

However, my baseline is the Shelter Capital case, which addressed many of the same topics and already established, as Ninth Circuit law, most of the conclusions that people are viewing as wins in this opinion. Compared to the Shelter Capital baseline, this opinion creates additional holes in 512's coverage. That's why I view this opinion as a bummer. In the end, this opinion narrows the grounds of 512 fights, and that's a good thing; but because it opens up new grounds for plaintiffs to exploit, this opinion pushes back--by many years--the day when the safe harbor preempts copyright owners from bringing meritless yet ruinous anti-UGC lawsuits. To me, that's a clear loss for the Internet, no matter how many points of contention YouTube actually won today.]

Analysis of the Court's Discussion

512(c)'s Applicability to Direct and Secondary Infringement

One of the most important rulings of the court comes in an off-hand remark with minimal citation support on page 33: "The District Court correctly determined that a finding of safe harbor application necessarily protects a defendant from all affirmative claims for monetary relief." This is one of the most significant questions in 512(c) jurisprudence: does 512(c) cover only direct infringement, or both direct and secondary infringement? Most courts have assumed the latter without ever saying so, but here the court (echoing, but curiously not citing, the Shelter Capital case) explicitly says 512(c) applies to all flavors of infringement. This makes the safe harbor potentially dispositive to the case--if YouTube gets it, Viacom loses any claim to money damages and, at best, can only get a meaningless limited injunction.

Knowledge of Infringing Activity

The opinion defines three types of service provider knowledge about infringement that might disqualify the service provider from 512(c):

1) actual knowledge of specific acts of infringement. The court calls this a subjective knowledge standard.
2) "red flags" knowledge of specific acts of infringement. The court calls this an objective knowledge standard. I've long argued that the "red flags" standard has evaporated in practice because, objectively, it's impossible for anyone other than the content owner to look at a specific item of content and determine if it's legitimately posted or not. In fact, even content owners can't figure this out for themselves; Viacom itself repeatedly mistakenly identified which items of its own content were properly or illicitly posted to YouTube. If the content owner can't make that determination, I'll argue that objectively no one else could do so either.
3) willful blindness towards specific acts of infringement. Because of the nature of willful blindness, by definition it occurs in situations where the service provider otherwise doesn't have subjective or objective knowledge of the infringing activity. Unfortunately, the court doesn't say what service provider activities would demonstrate willful blindness, and many of us are scratching our heads wondering how willful blindness can occur when the service provider lacks actual or red flags knowledge. Combined with the Tiffany v. eBay contributory trademark ruling, it shows the Second Circuit is obsessed with willful blindness (though it didn’t define willful blindness there either—gee, thanks). The Ninth Circuit had a brief and oblique reference to willful blindness in the Shelter Capital opinion, but my guess is that plaintiffs will like the Second Circuit's express discussion about willful blindness even better than they liked the Ninth Circuit's casual reference.

The court identifies three pieces of evidence that YouTube may have had disqualifying knowledge:

* emails from Patrick Walker asking the team to look for and remove Football League clips
* an email from Jawed Karim indicating that there were Viacom clips on the site that may have been "blatantly illegal"
* an email exchange between Chad Hurley and Steve Chen debating whether to remove clips now or later.

The court expressly says that this evidence may not be enough for Viacom to show disqualifying knowledge (see FN9), but it is enough to get to a jury.

More generally, these emails remind us that YouTube was an unsophisticated start-up in its early days. They didn't have legal counsel reviewing these emails or answering its questions about clip removals. Most UGC start-ups now know that these conversations shouldn't be taking place over email, there should be a tightly enforced email retention policy, and active legal counsel is essential from day 1. But the modern protocol also mean that launching defensible new UGC start-ups is much more expensive.

This is especially true for UGC start-ups trying to avoid the willful blindness doctrine; I criticized the Tiffany v. eBay opinion for endorsing eBay's very expensive anti-infringement infrastructure and implicitly requiring start-ups to maintain a similarly expensive infrastructure. This opinion may have the same adverse economic consequences for other UGC start-ups trying to minimize allegations of willful blindness in the copyright context.

Because the ruling creates more ways for plaintiffs to get to a jury in 512 cases, this ruling also means 512 litigation--even if the defendant succeeds--is going to be more expensive. The needle-in-haystack hunt for smoking gun emails means both parties will spend a lot on discovery (a point I complained about in the Shelter Capital case too). Furthermore, with respect to willful blindness, unless courts aggressively police plaintiffs' allegations, it seems like plaintiffs can use a willful blindness allegation to defeat a 12(b)(6) dismissal motion; and if they can find any colorable evidence, plaintiffs can use that to defeat summary judgment and force jury trials in many future 512(c) cases.

[UPDATE: the willful blindness discussion in this case, and our confusion about what might possibly constitute it, reminds me a little of Justice Scalia's "tertium quid" reference in Walmart v. Samara. By adding another category of knowledge but not defining it, this opinion adds substantially to the transaction costs for a category that may not exist in the real world. The judges may be happy with themselves that they've done a more thorough taxonomizing job, but everyone else is miserable trying to figure out what belongs in that taxonomical node.]

Right and Ability to Control

The court blazes its own trail on what constitutes a service provider's disqualifying "right and ability to control" infringing activity. It disagrees with YouTube, the lower court and the Ninth Circuit's Shelter Capital case, all of which held that a service provider's right and ability to control only applied when the service provider had specific knowledge of the infringing activity. But the Second Circuit also disagrees with Viacom's proposition that "right and ability to control" imports its meaning from the common law vicarious infringement test. The court rightly recognizes that would render the statute internally contradictory.

So the court agrees with no one. Given that it rejected everyone else's definitions, we might expect the court to carefully lay out what it thinks the phrase means. Sadly, no. The opinion doesn't provide an express definition of what qualifies as the "right and ability to control," instead sending that issue back to the district court to figure out both the standard and whether YouTube met it. The clearest clue the court provides about the standard is it "involve[s] a service provider exerting substantial influence on the activities of users, without necessarily—or even frequently—acquiring knowledge of specific infringing activity." I have no idea what that means, other than that it's open season for plaintiff fiestas.

[UPDATE: Sherwin Siy and I had an exchange on Twitter about this:

@SherwinPK: I don't think that "exerting substantial influence on activities of users" is "open season." A bit vague, yeah, but bounded
@ericgoldman OK, what you think "exerting substantial influence on activities of users" means? That's the goal of every UGC site!
@SherwinPK Not at all. Cybernet, for instance, had the OSP literally giving pointers on layout and content. That's substantial influence.
@SherwinPK Youtube doesn't exercise an editorial function wrt to user videos. That's why there's so much dreck.
My private reply: "That's not how the plaintiffs will put it! They will argue top X lists and exhortations to post constitute "substantial influence""]

Stored at a User's Direction

The court rejects several of Viacom's arguments that YouTube's automated handling of user-supplied videos wasn't stored at the user's direction, including YouTube's transcoding and playback functions and its display of thumbnails in a "related videos" module. However, the court leaves open the possibility that YouTube's "syndication" of user videos didn't qualify for 512(c). Specifically, YouTube licensed 2,000 user videos to Verizon Wireless. It’s unclear if any Viacom videos were included. That fact question goes to trial. If no Viacom videos were included, Viacom won't get any benefit from this exception. However, the ruling leaves open future fights over what constitutes "syndication" as a way of bypassing 512(c). More plaintiff fiestas.

Case Library

Posted by Eric at 01:33 PM | Copyright , Derivative Liability | TrackBack

April 04, 2012

Tough Mudder Gets Its Hands Dirty in Trade Dress Fight (Guest Blog Post)

By Guest Blogger Tsan Abrahamson of Cobalt Law

[Eric's introduction: Tsan and I go back two decades to when we were both JD/MBA students at UCLA; then we worked together at Cooley in the second half of the 1990s before we both left to go in-house. Tsan is now one of the nation's leading experts on contests and sweepstakes; she's also an expert in trademark law and marketing law, especially kids' marketing. And she's a vegan chef and a hardcore skiier. On top of all that, Tsan has completed Tough Mudder events before, so when I saw this ruling, I immediately thought of her. I've been trying to get Tsan to guest-blog for years now, so I'm pleased to share this guest post from her.]

Tough Mudder, LLC v. Mad Cap Events, LLC, 2012 WL 760887 (M.D. Fla. March 7, 2012)

Participants in the Tough Mudder endurance race take an oath before they begin which includes the words, “I do not whine. Kids whine.” And apparently, Tough Mudder whines.

Tough Mudder recently got pissy when Mad Cap Ventures offered its own endurance race, the “Savage Race,” using colors, fonts, and images on its website that Tough Mudder believed similar to its overall trade dress. On those grounds, Tough Mudder sought a restraining order to enjoin the actual race from taking place.

In its denial, the court made quick work of Tough Mudder’s request, finding Tough Mudder had not met its burden under the legal standard required to issue a TRO. It’s difficult to find a lot of juicy bits in a 4 page denial, but the judge gives us enough to suggest Tough Mudder’s attorneys were not worthy of the orange headband the Mudder gives to those who have to mettle to cross the finish line. Alive.

The court never reached the merits of the case, seizing on the fact that Mudder hadn’t properly set forth its arguments. Whether Savage Run’s trade dress was confusingly similar to Tough Mudder’s was never actually addressed, suggesting both form and function play equally important roles in a successful motion.

Mudder’s attorneys alleged harm on the grounds that the Savage Race was an inferior race, a point not necessary for a trade dress claim where tarnishment isn’t alleged, but one where if raised, must be proved. The court seized on the fact that the claim was made without an offer of any evidence that the Savage Race in fact was inferior.

Mudder’s attorneys also failed to convince the court that its knowledge of the Savage Race was recent. The judge noted Tough Mudder’s own pleadings made clear it knew of the event at least 5 months prior to the race date, and thus viewed as dubious the sudden need to shut down the whole shebang.

The court did throw Mudder a bone at the end, however, converting the motion to “one for a preliminary injunction[.]” Perhaps while he was tapping out a procedural denial, he took an actual gander at the websites in question (or better, was himself a Mudder, and member of that small band of whack-jobs that endures scaling 15 foot walls, belly-slithering through mud, crawling into drainpipes half submerged, jumping 20 feet into freezing water, swimming under barbed wire, and running through live electrical wires, all for the prize of saying you did it; and that elusive orange headband).

The Tough Mudder website is characterized by shades of orange, gray, and black. Across the top, a horizontal screen showcases participants of the race covered in mud, water, sweat, and smiles. The liner notes use a sans-serif font, while the headers – including the logo itself – use a font designed to look like crumbling blocks. The Tough Mudder site reminds you that this is not your average mud run. Words like “kickass,” “stamina,” and “endurance” pepper the site. If you finish the race, you’re greeted with an orange headband and a beer.

The Savage Race website is characterized by shades of orange, grey, and black. Across the top, a horizontal screen showcases participants of the race covered in mud, water, sweat, and smiles. The liner notes use a sans-serif font, while the headers – including the logo itself – use a font designed to look like crumbling blocks. The Savage Run site reminds you that this is not your average mud run Words like “kickass,” “stamina,” and “endurance” pepper the site. If you finish the race, you’re greeted with a medal and a beer.

Had Mudder sought a TRO to take down Mad Cap’s site back when Mudder was actually made aware of the event, it likely would have been successful in forcing the organization to change its overall look-and-feel. The sites are highly similar – from the fonts displayed to the language used – and the similarities are clearly not coincidental. Mad Cap clearly meant to capitalize on the military style look-and-feel that Tough Mudder made popular. But Mudder got greedy, strategically trying to shut down the Savage Race altogether. Even if Mudder had properly shown the harm caused by the nearly identical website, it was – in this Mudder’s opinion – too late: the sales had already been made, the money collected. Running the course wasn’t going to change things.

Tough Mudder’s unspoken motto is “no risk, no reward.” It invites its runners to push the limits of their own boundaries and reach beyond what they thought logically possible. Applying this tactic to the law, however, was not the best strategy.

Posted by Eric at 10:46 AM | Trademark | TrackBack

April 03, 2012

Data Security Breach Settlement Class of 130M Individuals Has 11 Claimants (at a Cost of $160k Per)--In re Heartland Payment Systems

By Eric Goldman

In re Heartland Payment Systems, Inc. Customer Data Security Breach Litigation, 2012 WL 948365 (S.D. Tex. March 20, 2012). The settlement website.

[Note: I know that many big-scale class action lawsuits have similarly mockable numbers. But I thought the obvious dysfunction of this litigation was still worth deconstructing.]

At some point, I think all of those in the information security litigation industry (both plaintiff and defense) have to ask themselves--am I part of the solution, or part of the problem? I wonder that question even more after seeing the enormous transaction costs in providing de minimis relief in a case like this. Guys, what are we doing here?

Heartland is a payment-card processor. In 2007, it got hacked. The hackers got 130M credit card numbers and expiration dates, plus some cardholder names, but it didn't get mailing addresses, so the credit card numbers couldn't be used online. Heartland publicly announced the hack in 2009. Heartland preliminarily settled the lawsuits by promising to pay at least $1M to verified victims or (if not enough claims were made) to "non-profit organization(s) dedicated to the protection of consumers' privacy rights, with emphasis on advancing the implementation of end-to-end encryption of payment card authorization transactions or similar security enhancements." The named organizations are Smart Card Alliance, the Secure POS Vendor Alliance, and the Financial Services Information Sharing Analysis Center.

For sending a settlement notice, Heartland couldn't provide individual addresses because it's a payment processor, not an issuing bank. Nevertheless, advertising about the settlement allegedly "reached at least 81.4% of potential Settlement Class Members an estimated 2.5 times."

Class members tendered 290 claims, of which "Heartland estimated that perhaps 11 of those claims were valid." At a maximum payout of $175, the maximum amount of cash going to class members is less than $2k. Accordingly, effectively the entire $1M is going to cy pres, not class members. To be clear, Heartland was paying cold hard cash to affected consumers instead of issuing a coupon, but the response rates were worse than typical coupon settlements--by my math, a 0.00000846153846153846% response rate.

The opinion indicates Heartland spent $1.5M to advertise the settlement. Thus, it appears they spent over $130,000 to generate each legitimate claim. Surprisingly, the court blithely treats the $1.5M expenditure as a cost of doing business, but I can't wrap my head around it. What an obscene waste of money! Add in the $270k spent on claims administration, and it appears that the parties spent $160k per legitimate claimant. The court isn't bothered by the $270k expenses either, even though that cost about $1k per tendered claim (remember, there were 290 total claims).

Now, there are a lot of possible explanations why there was such a low response rate: maybe the hackers didn't actually capture any useful data; maybe the hackers didn't misuse the data they got; maybe the credit card companies' fraud detection systems screened out any bogus charges; maybe consumers never noticed bogus charges; maybe consumers did notice bogus charges but never saw the news about the settlement; maybe the hassle of pursuing the settlement wasn't worth the payoff or consumers couldn't figure out how to tender their claims. But whatever happened, neither plaintiffs' counsel nor anyone cheering for more information security enforcement can be particularly impressed by the minuscule response rate. It's a pretty good indicator of at least one deep structural problem with this litigation.

The court makes plaintiffs' counsel take a small haircut for their failure to deliver real value to the class. The parties had computed an attorneys' fee payoff of $725k predicated on a settlement value of $4.85M. After discounting the case value due to the cy pres payments, the court adjusts the attorneys' fee award down to a little over $600k. Still, the plaintiffs' counsel claimed they spent less than 2,000 hours on the case, so they got about $300 per average hour spent on the case--a pretty good overall rate when considering the number surely includes a good number of cheap junior associates and paralegals.

I have a forthcoming paper on privacy class action lawsuits (I'll be posting it soon) that will explicate some serious problems with class actions as a way of remediating privacy breaches. I carved out security breach litigation from the paper, but a case like this makes me wonder what in the world we're doing. As I discuss in my forthcoming paper, maybe the greater social ends justify the means, but examined in isolation, this mechanism looks horrible. In the end, to pay out $2k of actual relief to 11 people, Heartland paid over $2M in attorneys' fees and other transactions costs. Surely I'm not the only one bothered by this...am I?

Posted by Eric at 12:16 PM | Privacy/Security | TrackBack

April 02, 2012

Users Can't Sue Sony for Changing Online Terms to Require Arbitration – Fineman v. Sony Network Entertainment

[Post by Venkat Balasubramani]

Fineman v. Sony Network Entertainment, C 11-05680 SI (N.D. Cal.; Feb. 9, 2012)

In a move that caused a stir among consumer activists and others, Sony revised its EULA in September 2011 requiring PlayStation 3 users to choose between agreeing to submit dispute to arbitration (on an individual basis) or foregoing the right to access the “Sony PlayStation Network.” Plaintiff filed a putative class action alleging unfair competition and contract claims against Sony based on Sony’s imposition of the revised terms. The court rejects plaintiff’s claims.

The court says that a claim under California's unfair competition law requires a plaintiff to prove economic injury in the form of the loss of “money or property” to which the plaintiff is entitled. The diminution of a future property interest has been found to be sufficient by courts. The court nevertheless says that the two property rights plaintiff argued Sony deprived him of are insufficient: (1) the loss of the right to pursue class action claims outside of arbitration against Sony; and (2) the loss of access to the PlayStation Network.

With respect to loss of access to the PlayStation Network, the court says that plaintiff gave this up voluntarily when he made the choice to agree to the revised terms. The court also finds acceptance of the arbitration provision to be insufficient to support a UCL claim. While plaintiff may become embroiled in a dispute with Sony at some point in the future and arbitration may yield less in the way of money damages than litigation, at the present time plaintiff cannot allege that he has been economically harmed by Sony’s imposition of the arbitration clause. (In a footnote, the court distinguishes Fraley v. Facebook, where the court declined to dismiss plaintiffs’ claim that Facebook failed to compensate them for exploiting their publicity rights.)

Plaintiff also made an argument that imposition of revised terms by Sony devalued his PlayStation3 (i.e., he bought it expecting access to the PlayStation Network and now Sony is imposing an “additional charge” to access that network). This argument received little or no attention from the court. Plaintiff did not make a contractual argument as had the plaintiffs in some recent cases that Sony’s reservation of the right to modify the contract at will rendered the contract terms illusory or was a breach of the original agreement. (See Lebowitz v. Dow Jones: “No Breach of Contract Claim from Mid-Stream Change of WSJ Online Pricing.”) The court does note that plaintiff actually accepted the revised terms so he had continued access to the PlayStation Network—perhaps it would have viewed this argument differently if the plaintiff had rejected the new terms.

Finally, plaintiff made an argument that Sony breached its implied covenant of good faith and fair dealing. The court says this is basically a disguised breach of contract claim and, because plaintiff acknowledged he was not bringing a breach of contract claim, the court dismisses this claim as well.

[Plaintiff amended his claims to assert a claim for injunctive relief but the court dismisses this without prejudice for lack of jurisdiction. Plaintiff can pursue this claim in state court.]
__

Sony's move to require arbitration of disputes was in response to the Supreme Court's decision in AT&T v. Concepcion, which said the Federal Arbitration Act preempted state laws which treated arbitration agreements unfavorably. Courts appear willing to uphold arbitration provisions in the wake of Concepcion. (See Swift v. Zynga for a recent example where a court forced a consumer to arbitrate disputes based on terms of use which included an arbitration provision.) We can expect to see more companies taking this route. The dismissal of Fineman's claims shows that it won't be easy to challenge these types of changes proactively.

It's interesting that the court didn't take a rigorous look at whether Sony's revised terms affected the underlying economic deal between Sony and the end users. Did Sony advertise access to the PSN network as part of the PS3? Was it reasonable for users to expect continued access on the terms that they initially signed up for? How about the loss of any data or virtual property that plaintiff would have forfeited had he declined continued access to the network? The court's discussion is fairly cursory on these issues.

On the other hand, even when a paid service is involved, courts are sympathetic to the needs of companies to revise terms. For example, the court recently approved Dow Jones' change to WSJ online pricing, finding that plaintiff did not state a claim for breach of contract since the contract allowed for a change in terms: "No Breach of Contract Claim from Mid-Stream Change of WSJ Online Pricing."

Although California's Consumer Legal Remedies Act provides for a limited cause of action when unsoncionable terms are included in consumer contracts, Fineman did not argue that the terms were unconscionable. The court acknowledges that whether the arbitration clause is enforceable is not an issue that is before the court. If someone down the road wants to challenge enforcement of the terms based on their unconscionability, that possibility is still open. These challenges face a high bar, and this dispute will probably end up being a persuasive argument for why the revised terms were not procedurally unconscionable. Someone could also challenge the agreement on the basis that it's illusory and allowed Sony to revise it at will. (See Harris v. Blockbuster and my recent post on mixed rulings on the Qwest arbitration clauses.) However, given that Sony gave users an explicit choice and was upfront about it, I think that type of challenge would be a long shot.

Posted by Venkat at 02:55 PM | E-Commerce , Licensing/Contracts , Virtual Worlds

Brief Brand Reference in TV Ad Constitutes Trademark Dilution--Louis Vuitton v. Hyundai

By Eric Goldman

Louis Vuitton Malletier, S.A. v. Hyundai Motor America, 2012 WL 1022247 (S.D.N.Y., March 22, 2012). The ad in question (also embedded below). The first amended complaint.

Introduction

Back in 2007, we held a major academic symposium on the trademark dilution doctrine at SCU. My main goal was to see if two dozen leading trademark academics could find some justification--ANY justification--for the trademark dilution doctrine. We struck out, of course. The trademark dilution doctrine is an elegant intellectual exercise with intuitive appeal, but it has the fatal flaw that absolutely no social science supports that intuition.

Fortunately, we don't see too many egregious trademark dilution "wins" in court. Barton Beebe showed that trademark dilution and infringement are highly correlated, so it's rare that a court finds trademark dilution standing alone. Furthermore, we've recently had a pretty good string of defense wins in dilution cases, highlighted by the Chewy Vuiton (also a Louis Vuitton case) and Charbucks rulings, among others.

And then we have an opinion like this--where the court finds trademark dilution without finding infringement (not resolved yet) and in a situation where EVERYONE can immediately tell there was zero harm to the brand owner. Rulings like this make trademark academics shudder in fear that trademark dilution will swallow up all of trademark law and confer rights-in-gross to trademark owners. While I don't share those fears for reasons I'll explain in a bit, unquestionably this is a bad ruling.

The case involves a TV ad for Hyundai Sonata. Watch the ad:

Hyundai's goal was to show that it brings luxury to the masses, so it depicts a few fictional examples of what it might look like if luxury items were widely available. One of the examples shows four seconds of a group of men playing street basketball using a basketball covered with a lightly modified version of the famous Louis Vuitton "toile monogram" pattern (yes, the same one at issue with Louis Vuitton's ill-advised enforcement against a student-organized fashion law event at University of Pennsylvania). In particular, the ad shows a close-up of the basketball for about one second. Hyundai didn't seek permission from Louis Vuitton for use of the modified design (an ad agency rep said the modified design "came out of somebody's imagination, so there was nobody to go seek permission from"), but Hyundai unsuccessfully sought permission from thirteen luxury brands--including Louis Vuitton--for other possible vignettes in the ad.

Undoubtedly, if Louis Vuitton were to offer a basketball with its design, the crowds would go wild. (The opinion cites several Twitter comments coveting the fake basketball). They should be thanking (not suing) Hyundai for showing them the enthusiastic market demand for such an item. But Louis Vuitton doesn't roll that way, preferring to sue anyone who depicts the logo in unexpected contexts. Sigh.

Meanwhile, the ad was a failure for Hyundai. Still widely seen as the purveyor of cheap Korean cars, its latest attempt to try to move upscale didn't go anywhere, and Hyundai pulled the ad after 5 showings. Yes, this means that Louis Vuitton is making (and winning!) a federal case over five seconds of human history. SIGH.

The Court's Doctrinal Discussion.

Blurring. On the key question of how Hyundai's use blurred Louis Vuitton's trademark rights, the court follows the Lanham Act's 6 factor statutory test rather tendentiously, which kind of misses the big picture. By evoking the logo, Hyundai didn't introduce a new definition of the logo--and the court repeatedly notes that the depiction went past so quickly that consumers couldn't recognize the differences. Nor did Hyundai introduce a new product into the marketplace; the basketball was fictional. So to the extent "blurring" is a proxy for harm to Louis Vuitton's brand, there was no harm at all. Yet, the court mechanically breezes past this crucial point. In my opinion, it's a pretty damning indictment of the six factors as a screen for blurring.

From my perspective, Louis Vuitton's strongest evidence of "harm" is that "[a]ccording to Louis Vuitton's expert, among those who recognized the Louis Vuitton mark, sixty-two percent believed the ad was approved by Louis Vuitton." Taking this at face value, this "harm" sounds in confusion, though, not dilution. Furthermore, this type of sponsorship confusion is highly problematic; it's a one-way rights escalator as we move towards a "permission culture," and it still doesn't show how either Louis Vuitton or consumers suffered any harm (let alone a harm cognizable under dilution law) from thinking Louis Vuitton approved the ad.

Nowhere does the court connect the dots to explain how Hyundai's usage "impaired the distinctiveness" of Louis Vuitton's mark. Instead, the court condemns Hyundai for its intentional evocation of Louis Vuitton's brand without permission. For that reason alone, I think this opinion could be vulnerable to an appeal.

The court separately finds blurring under New York's state dilution law.

Willfulness. Even if Louis Vuitton establishes its prima facie case, getting an injunction isn't all that valuable because Hyundai already scuttled the ad. To get damages under dilution, Louis Vuitton has to show that Hyundai “willfully intended to trade on the recognition of the famous mark.” Generally, we've assumed this statutory language applied only when the defendant was actually selling goods bearing the brand. Here, the court finds the requisite willfulness because:

* Hyundai asked for permission for other luxury brand usages (yet another reminder that judges often punish defendants who ask for permission rather than forgiveness)
* Hyundai continued running the ads after getting Louis Vuitton's C&D
* Hyundai modified the logo so that it would still evoke Louis Vuitton's logo

Does this evidence a willful intent to trade on Louis Vuitton's reputation? No, and it's not even close. Hyundai intended to evoke Louis Vuitton, but there's no trading taking place because of that evocation. This ruling also could be vulnerable on appeal.

Fair Use. The federal dilution law expressly has a fair use defense. Hyundai fails to get it because it admitted its brand evocation was satire (a commentary on society's standards of luxury), not a parody (a commentary about Louis Vuitton's brand). Indeed, Hyundai admitted that it could have substituted other luxury brands to achieve an identical effect. Hyundai's related claim that it was making a noncommercial use of the mark failed because the subject material was an advertisement.

Consumer Confusion. The court denies Hyundai's summary judgment on the infringement claim.

Implications

If the case goes to trial, it will be interesting to see what damages a jury awards. There is no intellectually defensible way to compute damages to Louis Vuitton's brand from Hyundai's ad. They can't even value it at a hypothetical licensing fee because Hyundai only asked for free licenses and Louis Vuitton wouldn't have licensed this usage anyway. As a result, any damages computation will be purely fictional. Ideally, the jury would come back with zero damages, because that's really the appropriate way to signal the complete lack of harm here.

However, I'm hoping Hyundai will appeal this ruling. There are a number of points where the court got it wrong, fairly clearly IMO, so there are good grounds for a reversal. If it pursues the appeal, Hyundai probably ought to try new appellate counsel. The opinion bristles with hostility to Hyundai's arguments, making me think defense counsel miscalculated its pitch to this judge.

Even if Hyundai ends up losing the case at the end, I'm not sure this would signal the sky is falling due to the dilution doctrine. Although the judge never says it outright, much of the opinion is based on the fact that Hyundai referenced a third party brand in its own ad. In my Advertising Law course, I teach that when the advertiser references an individual in its ad without the individual's permission, the advertiser loses the publicity rights lawsuit. (All of the publicity rights cases in our Advertising Law casebook are defense losses). Maybe this case stands for nothing more than that a non-competitor can't reference a famous third-party brand in its ad copy without permission (a competitor may qualify for the comparative advertising exception to dilution law). While that shouldn't be the law, that legal conclusion nevertheless wouldn't be the end of advertising or of trademark law.

Posted by Eric at 08:55 AM | Marketing , Trademark | TrackBack

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Users Can't Sue Sony for Changing Online Terms to Require Arbitration – Fineman v. Sony Network Entertainment

Brief Brand Reference in TV Ad Constitutes Trademark Dilution--Louis Vuitton v. Hyundai