Technology & Marketing Law Blog

January 19, 2012

Just How Egregiously Must a Trademark Plaintiff Act Before a Court Awards Attorneys' Fees to the Defendant?--1-800 Contacts v. Lens.com

By Eric Goldman

1-800 Contacts v. Lens.com, 2012 WL 113812 (D. Utah Jan. 13, 2012). Prior blog posts on the case dismissal in December 2010 and 1-800 Contacts' fee dispute with its attorneys.

The federal trademark statute says judges may award attorneys' fees to the winning party in "exceptional" cases. What does it take for a case to be "exceptional"? Apparently, it has to be pretty egregious conduct, as this long-running money pit of a case illustrates.

1-800 Contacts sued Lens.com for competitive keyword advertising. Through the course of the litigation, we learn the following facts:

* 1-800 Contacts accrued $650k in legal fees pursuing the case and capped its legal fees at $1.1M before it stiffed its law firm.
* the defendant Lens.com made less than $21 in profits from its competitive keyword ad buys. 1-800 Contacts also tried to attribute to Lens.com keyword ad buys made by Lens.com's affiliates, a legal argument the court ultimately rejected.
* 1-800 Contacts had done the same thing it was suing Lens.com for doing. 1-800 bought Lens.com's keywords and made about $220k in profit from those keyword ad buys, yet it had duplicitously tried to shut down Lens.com for making less than $21.

To me, this looks like an egregious misuse of the litigation process--exactly the kind of sanctionable behavior that should be considered "extraordinary" enough to make the plaintiff reimburse the defendant for its sizable legal fees. Indeed, the court has harsh words for 1-800 Contacts, including calling 1-800 Contacts' behavior "troubling" and specifically referencing its hypocrisy for suing over behavior it had itself engaged in. The court also says "1-800 Contacts’ actions raise questions about vexatious suits to defeat competition."

Nevertheless, the court decides not to award attorneys' fees. The court cites the following factors in denying the attorneys' fee request:

* the legitimacy of keyword advertising remains legally unsettled. Even when it was clear the direct infringement case was weak, 1-800 Contacts still had a non-frivolous claim for secondary infringement.
* Lens.com did engage in competitive keyword advertising, even if its purchases were "minuscule."
* Lens.com itself was sanctioned for discovery violations.
* even though 1-800 Contacts' expert reports were largely tossed, some of the reports were admitted.

It's clear the judge had distaste for both parties. Lens.com also has a parallel antitrust claim going against 1-800 Contacts in a different forum, and the judge seemed to be deferring to that case to remediate any abuses by 1-800 Contacts. Still, given 1-800 Contacts' condemnable conduct, it's curious the judge didn't stick them with a fee shift.

I think this ruling gives us some more insight into the trademark bullying phenomenon. The mockably ridiculous USPTO report on trademark bullying noted that trademark law's fee shift provision acts as a deterrent against abusive trademark litigation. (For example, it says "the potential for an award of attorneys’ fees is an existing deterrent to misuse of the litigation process in trademark disputes.") Given how hard it is to get a fee shift in light of a ruling like this, this was just another way in which the USPTO completely understated a very real problem in the field.

Posted by Eric at 03:34 PM | E-Commerce , Marketing , Search Engines , Trademark | TrackBack

January 05, 2012

SOPA/PROTECT-IP/OPEN Linkwrap #2

By Eric Goldman

It's been a busy time for news related to SOPA (the Stop Online Piracy Act, not the Stop Online Privacy Act, although that could be an unintended result!), PROTECT-IP/PIPA, and the OPEN Act. In a bit, I'll recap some links. First, though, some general thoughts about the last month.

As I predicted, SOPA has been incredibly divisive. It has largely boiled down to Hollywood in support vs. the rest of the world against, with an emerging "with me or against me" attitude. What a shame. We get much better results when the tech and entertainment community collaborate rather than play zero-sum games.

Naturally, I think Hollywood has made several strategic miscalculations here. First, the outrageousness of its proposals has mobilized the tech community. It's been fascinating watching companies and politicians scramble to disavow themselves from SOPA when targeted by the anti-SOPA advocates. That NEVER happens when it comes to a Congressional proposal to regulate technology. Perhaps this mobilization will be a flash in the pan, or perhaps Hollywood has poked a sleeping tiger once too often.

Second, Hollywood's credibility with its financially-sponsored politicians may be wearing thin. Politicians will happily take its money, but they don't enjoy looking like fools--and many SOPA supporters have, in fact, looked pretty silly while being left twisting in the wind by their Hollywood patrons. Money will buy a lot of politician patience, but the goodwill reservoir is not bottomless.

Third, even if Hollywood can succeed in passing something like SOPA or even PIPA, I believe it would be counterproductive to its long-term interests. As I've mentioned before, we all benefit from having larger common markets (see, e.g., NAFTA or the EEC), and the Internet has emerged as the largest common market of all. A Balkanized Internet will devolve into disparate smaller markets that represent less value for everyone.

A final counterproductive point, although Hollywood may not care. SOPA/PIPA absolutely will drive US dollars--and jobs--overseas. For example, I ditched GoDaddy as my domain name registrar and took my business to a foreign registrar who won't be subject to SOPA/PIPA. If other folks make the same calculations I did, collectively it will be a boon for foreign service providers and a net loss for US service providers. At best, SOPA/PIPA preserve some jobs at the expense of others; my guess is that our economy will suffer a net reduction in jobs. Just what we need during this protracted economic downturn.

The amazing thing is: despite the complete lack of credible empirical evidence supporting SOPA/PIPA, and despite a groundswell of grassroots opposition to it, and despite companies and politicians dropping their support of SOPA/PIPA when the spotlight is cast on them, Hollywood might still be able to succeed in this rent-seeking endeavor. It's evidence of just how well Hollywood has embedded itself into Congress' psyche (and wallets).

Some news items since my last linkwrap:

* OPEN has been introduced in the Senate as S.2029.

* CDT's list of opponents. As you know, I am on it.

* Mike Masnick broke a huge story about Dajaz1.com, showing how our government repeatedly broke the law in falsely pursuing a so-called rogue website. The conduct of the government is chilling--things like this aren't supposed to happen in our democracy!--and if heads don't roll for the coverup, it will be another nail in the coffin of our republic.

* The government also lost the Rojadirecta case. Also, an in-depth look at the Operation in Our Sites bust of Ninja Video, where the government continues to make questionable interpretations of criminal copyright law.

* Constitional Law scholar extraordinare Laurence Tribe and advocate Marvin Ammori both explained how SOPA violates the First Amendment. Marvin followed up with a First Amendment assessment of the manager’s amendment. Corynne McSherry’s thoughts.

* Why aren't members of Congress listening to the opposition? Maybe it has something to do with the revolving door between government and industry. See this article: SOPA revolvers: Sixteen former Judiciary staffers lobby on online copyright issues.

* Wikimedia’s General Counsel Geoff Brigham explains “How SOPA will hurt the free web and Wikipedia”

* One of the many unanswered questions: who is a rogue website and how many are there? CNET News.com suggests that SOPA is all about taking out just one website--The Pirate Bay. Seriously, we're going to break the Internet because of The Pirate Bay? Talk about collateral consequences for something that could be handled with incredibly narrow legislative fixes—or better yet, with precise transborder enforcement cooperation.

* EFF on the good and bad in the OPEN Act.

* Mike Masnick completely destroys Lamar Smith’s so-called statement of facts in support of SOPA. Reading articles like this remind us that support for SOPA/PROTECT-IP is hardly about "the facts."

* More "fact" debunking, this time by Julian Sanchez.

* Speaking of "the facts" or the lack thereof, it appears that the House Judiciary Committee is massively overclaiming who supports SOPA. Misleading the American public apparently is just business as usual in DC.

* Meanwhile, companies are realizing that being listed as a SOPA supporter isn't necessarily good for business. SOPA opponents targeted GoDaddy, who instantly declared their lack of support for SOPA but remains completely untrustworthy and hypocritical.

* Meanwhile, SOPA is turning into an election-year issue, and politicians are beginning to learn the power of Reddit.

* If you want to speak up, check out SOPA Track and find out where your legislators stand. My Congresswoman, Anna Eshoo, has been firm in her opposition to SOPA, but the California senators are both PIPA co-sponsors because they too deeply in bed with Hollywood to listen to other constituents. So fair warning to Sen. Boxer and Feinstein--I plan to vote for your opponents, whoever they are, in the next election cycle.

* Great article about how SOPA will become a Trojan horse for all types of online content censorship, not just the suppression of rogue websites.

* Opposition to SOPA is bipartisan: “I suggest the left and right unite and pledge to defeat in primaries every person named as a sponsor on H.R. 3261, the Stop Online Piracy Act.”

Just a reminder because everyone knows SOPA is so ridiculously extreme: PROTECT-IP is NOT an acceptable "compromise" to SOPA. PROTECT-IP is also extreme. As I indicated previously, if we're going to have any legislative discussions about rogue websites, we should start with the OPEN Act and iterate from there. In light of the action in the courts (see the links below), any legislative solution should be coupled with increased immunities for Internet intermediaries so that they don't just coddle the rightsowners irrespective of the legislation.

FWIW, I have called Rep. Eshoo to thank her for her opposition to SOPA, and I've contacted Sens. Feinstein and Boxer to let them know that I disagree with their positions on PROTECT-IP. Have you contacted your legislators to tell them how you feel? If you don't speak up, they won't know where you stand.

Prior blog coverage of SOPA/PROTECT-IP/OPEN:

* More on Ex Parte Cutoffs of Foreign "Rogue" Domain Names
* Does the House Judiciary Committee Debating SOPA Know What's Going On In the Courts?--Philip Morris v. Jiang
* If You Dislike SOPA, You'll Dislike This Case Too--True Religion v. Xiaokang Lei
* The OPEN Act: Significantly Flawed But More Salvageable Than SOPA/PROTECT-IP
* I Don't Heart SOPA or PROTECT-IP: A Linkwrap
* Ad Network Avoids Contributory Copyright Infringement for Serving Ads to a Rogue Website--Elsevier v. Chitika
* Court OKs Private Seizure of Domain Names Which Allegedly Sold Counterfeit Goods--Chanel, Inc. v. Does
* Why I Oppose the Stop Online Piracy Act (SOPA)/E-PARASITES Act

Posted by Eric at 09:15 AM | Copyright , Derivative Liability , E-Commerce , Trademark | TrackBack

January 04, 2012

Keyword Advertiser Mostly Defeats Trademark Lawsuit--Scooter Store v. SpinLife

By Eric Goldman

Scooter Store, Inc. v. SpinLife.com, LLC, 2011 WL 6415516 (S.D. Ohio Dec. 21, 2011). The Justia page.

This is a spirited litigation between two retailers of wheelchairs, motorized scooters and related items. Maybe that retailing sector is so profitable that it warrants a litigation cat-fight, but my guess is these litigants are spending their retirement money beating up each other in court.

Today's ruling deals with SpinLife's AdWords advertising triggered on keywords such as “the scooter store,” “scooter store,” “my scooter store” and “your scooter store” as well as the inclusion of such terms in the spinlife.com's metatags. The plaintiff (let's call them TSS) has registered trademarks in "The Scooter Store" in certain classes but not for retail stores, because the PTO rejected that usage as generic. TSS asserted that SpinLife's keyword ads and metatags infringed its trademark rights.

The court ultimately concludes that "The Scooter Store" is generic for retail stores. This isn't surprising; the PTO had said the same thing to TSS. In fact, I've argued that all "[noun] store" marks (where the store sells the noun) are generic. Surprisingly, a different court ruled otherwise with respect to Apple's claims over "app store." I still think that court got it wrong.

Weirdly, having held the term generic, the court then spends several pages considering the question: "Can SpinLife's use of generic phrases cause consumer confusion?" What??? TSS tried to argue that it's enforcing its trademarks from other classes, not the generic term. The court wisely rejects that. If a term is generic in a class, then it's free for competitors to use in that class--FULL STOP, end of story.

The weirdness continues when the court doesn't dismiss the state anti-dilution claim based on TSS's purported rights in a generic term. WHAT??? Apparently the court is willing to consider TSS's trademark registrations in the other classes for dilution purposes, even though the court just said the registrations were irrelevant for infringement purposes. I understand that dilution claims cut across classes, so that part makes sense, but it's crazy to consider that a registered mark could control the term's use in a class where it's generic. The federal anti-dilution statute has a number of defenses that would clearly free the defendant, so the court's ambivalence may just be a quirk of Texas' anti-dilution statute. In any case, I imagine the judge will get to the right place eventually, but the fact it didn't get there instantly is puzzling.

Before the court declared TSS's marks generic, SpinLife argued that buying trademarked keywords is categorically permissible under trademark law per 1-800 Contacts v. Lens.com. The court rejects this strong proposition, saying "this Court will not rely on a single out-of-circuit case to conclude that the Adword purchases are not actionable under any circumstances." The court's decision isn't surprising given the diversity of rulings we've seen over trademarked keywords, although I think the world would be a better place if the court did adopt the strong proposition.

In the end, the court says SpinLife is free to use "scooter" and "store" in AdWords and its metatags without restriction. Furthermore, TSS ends up with weaker assets than it thought it had pre-litigation (see, e.g., American Blinds which exited its keyword advertising enforcement case similarly bereft) and a clear signal that it should stop spending money on its lawyers and start investing those dollars towards competing on the merits.

Other cases in the category of irrational enforcement actions against keyword advertisers:

- King v. ZymoGenetics. The defendant advertiser got 84 clicks.
- Storus v. Aroa. The defendant advertiser got 1,374 clicks over 11 months.
- 800-JR Cigar v. GoTo.com. The search engine defendant generated $345 in revenue from the litigated terms.
- Sellify v. Amazon. The defendant got 1,000 impressions and 61 clicks.
- 1-800 Contacts v. Lens.com. 1-800 Contacts spent no less than $650k (and was willing to spend $1.1M) to pursue Lens.com, which made $20 of profit from competitive keyword ads. It also tried to hold Lens.com responsible for affiliate ad buys which generated about 1,800 clicks, which under the most favorable computations were worth about $40k.
- InternetShopsInc.com v. Six C. The defendant got 1,319 impressions, 35 clicks and zero sales.

Posted by Eric at 09:00 AM | E-Commerce , Marketing , Search Engines , Trademark | TrackBack

December 16, 2011

Does the House Judiciary Committee Debating SOPA Know What's Going On In the Courts?--Philip Morris v. Jiang

[Post by Venkat Balasubramani, with comments from Eric]

Philip Morris USA, Inc. v. Jiang, 11-cv-24049 (S.D. Fla.) (TRO entered on Nov. 16, 2011) (Prelim. Injunction Entered on Dec. 12, 2011)

This is yet another case where a court orders broad remedies to a rightsowner who alleged that various foreign domain names were selling infringing products. See our recent blog posts on the Chanel and True Religion cases.

The plaintiff in this case is Philip Morris, who alleges that an investigator purchased products from various websites. The investigator forwarded the products to a Philip Morris representative, who alleged that "what appeared to be Marlboro cigarettes were in fact counterfeit." Additionally, the representative

reviewed and visually inspected the internet websites operating under each of the subject domain names, as well as pictures of items bearing the Philip Morris USA Marks offered for sale on the internet websites, and determined that the products were not genuine and/or authorized Philip Morris USA products.

The court issues a TRO that is similar in scope to the Chanel TRO. (The same lawyer was involved in both cases on the plaintiff's side, so this is probably more of a function of the fact that Chanel and Philip Morris sought similar relief.) The TRO contains the following:

- Defendants are enjoined from using any Philip Morris marks, in websites, domain name extensions, links to other websites, search engine databases.
- The domain name registrars are directed to transfer the domain name certificates to plaintiff (for deposit with the court).
- The registrars are directed to transfer the domain names to GoDaddy, who will "hold the registrations for the . . . domain names in trust . . . during the pendency of [the] action."
- GoDaddy shall also update the DNS data so it points to a copy of the complaint, summons, and court documents (<http://servingnotice.com/jiang/index.html>).
- Finally, Western Union is directed to "divert" transfers made by US consumers to three named individuals

The court later extends the TRO and enters a preliminary injunction with substantially similar terms. The orders in this case don't order any sites de-listed, but are still pretty extraordinary in scope. The fact that the court orders the complete disabling of websites and orders registrars to transfer domain names to GoDaddy based solely on the strength of the declarations Philip Morris's investigator and representative is really surprising. Of course, ordering (on an ex parte basis) the diversion of funds transmitted through Western Union is extreme.

As with the Chanel and True Religion cases, the same questions remain. Is there a relationship between the various defendants and the domain names? What type of notice of the lawsuit did defendants actually receive? Was there actually infringement or counterfeiting? The plaintiffs in these cases end up convincing the court of a key fact: immediate, ex parte relief is necessary because defendants will hide assets and shift operations. Courts seem to take this allegation at face value. (The court does authorize service via alternate means and Philip Morris filed affidavits of service in accordance with the court's directive, but this seemed like an afterthought.)

Yesterday's SOPA hearings caused many observers to cringe (see, e.g., Mike Masnick's horrifying recap). I think it's worth revisiting the question of how courts appear already open to remedies people think are objectionable in legislative proposals that are being considered.

Related posts:

If You Dislike SOPA, You'll Dislike This Case Too--True Religion v. Xiaokang Lei
Court OKs Private Seizure of Domain Names Which Allegedly Sold Counterfeit Goods--Chanel, Inc. v. Does
Why I Oppose the Stop Online Piracy Act (SOPA)/E-PARASITES Act
____________

Eric's Comments

In our True Religion post, I asked just how many similar cases are in the system. Unfortunately, there's not an easy way to quantify the litigation activity. For example. in the True Religion case, the entire action was sealed for a couple of weeks. Even without the seal, I don't know how to find these ex parte rightsowner enforcement cases against foreign rogue websites other than laboriously reviewing every federal filing, having readers tip us off or serendipity.

However, with today's case representing the third foreign rogue website enforcement case we've found in the past month, I'm going to guess that more enforcement actions are out there today or are coming imminently. This seems to suggest that rightsowners have figured out a way to work with the current system without any additional legislation.

The fact that rightsowners are making progress on their own without help seems quite relevant to the debates about SOPA taking place right now in the House Judiciary Committee. Unfortunately, those debates are so ungrounded from reliable fact-based deliberation that the unpersuadable committee members wouldn't care if we found a million of these cases. In contrast, if they were willing to consider the facts on the ground, the possibility that courts are giving rightsowners what they want is a strong indication that SOPA doesn't need to be slammed home on the fast track without proper deliberation.

From my perspective, the three cases demonstrate the problems with ex parte judicial oversight. Only hearing one side of the story isn't enough to trigger the kind of draconian remedies the courts are granting. In particular, in this case, interdicting money being sent via Western Union is quite troubling. Basically, the court says that money being sent by customers who may have done nothing wrong goes into a holding tank--the customers don't get their money back now (and maybe never?) even if the transaction didn't consummate. It seems like rejecting the money transfers, rather than interdicting the money, would have a lot fairer to the buyers caught in the middle. But they aren't in court to defend their interests, and no one else is speaking up on their behalf, so the rightsowner can make a pure cash grab from potentially innocent buyers. That kind of result wouldn't happen with real due process.

Instead of insulting each other on Twitter or reading the sports pages, what the House Judiciary Committee should be doing is putting the existing legislative proposal to the side, taking a close look at what's going on in these cases, figuring out how much relief rightsowners are getting today from the courts, and then deciding if any incremental legislation is necessary to fill any gaps or--equally importantly--curb any rightsowners' abuses of the ex parte process. Instead, sadly, the House Judiciary Committee will continue its bizarre form of political theater until the rightsowners get what they paid for.

Meanwhile, I would be interested in trying to curb the ex parte abuses in court, but I don't know how. We are finding out about these orders after-the-fact, and I don't know how to get ahead of the curve. If the affected domain name owners aren't complaining after-the-fact, perhaps that's a sign that the rightsowners are truly hitting only the bad guys. On the other hand, if the process remains ex parte, inevitably rightsowners will make some serious mistakes that will have terrible consequences for legitimate players. I wish I could figure out a way to sensitize the judges about those risks before they rotely accede to the rightsowners' requests.

Posted by Venkat at 09:46 AM | Domain Names , E-Commerce , Trademark

November 21, 2011

Can A Copyright Be Assigned By Email?--Hermosilla v. Coca-Cola

By John Ottaviani with comments from Venkat and Eric

Vergara Hermosilla v. The Coca Cola Company, No. 11-11317 (11th Cir. Nov. 3, 2011).

Can a copyright be assigned by an exchange of emails? Section 204(a) of the Copyright Act provides that a transfer of copyright ownership is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or by such owner’s duly authorized agent. The 11th Circuit has recently affirmed a lower court’s decision that an exchange of emails was sufficient to constitute a contract to assign a copyright. The court’s decision, however, does not seem to adequately address whether the email exchange satisfies the “writing” requirement in Section 204.

Background

The dispute arises out of Coca Cola’s worldwide marketing campaign for the 2010 FIFA World Cup soccer tournament. As part of its advertising campaign, Coca Cola enlisted recording artist K’Naan to create a new version of his song “Wavin’ Flag,” and called the new version the “Celebration Mix.” Coca Cola had certain lyrics in the “Celebration Mix” adapted and sung in different languages by local artists and K’Naan. In 2009, Coca Cola contacted Jose Puig, a representative of Universal Music Latin America, to produce a Spanish version of the Celebration Mix. The Spanish lyrics were to be sung by David Bisbal, a Spanish language singer. Puig was referred to the plaintiff, Rafael Vergara Hermosilla, in November 2009. Vergara adapted the Celebration Mix into Spanish, and subsequently delivered the Spanish lyrics to Puig in December 2009. A dispute later arose over Vergara’s compensation for the adaptation.

Puig and Vergara negotiated a settlement. After a phone conversation about the terms of the deal, Vergara wrote this email:

[B]ecause I am a man of my word and honor, that is not moved by economic motives, my only request is the my credits are respected as producer and adapter of the Spanish version (that every time the name of any composer of this version appears, my name appears as adapter), and obviously, the credits for the production that are detailed in the invoice sent for this production, which I have detailed below.

For the adaption, you may consider it a work for hire with no economic compensation to that respect. I believe what’s legal is a dollar.

I hope this leaves clear what my work was and what my good intentions were from the beginning.

The next day, Puig responded by email to Vergara to the effect that “You can count on the credits on the track. I am resending you the contract.”

Puig subsequently sent draft contracts confirming the assignment, but inadvertently omitted the provisions that would give Vergara the credits. So Vergara rejected what he characterized as his “proposal” and filed a lawsuit in the Southern District of Florida to enjoin Coca Cola from using the Spanish version of the Celebration Mix without giving him proper credit.

After initially enjoining Coca Cola in May 2010 from disseminating the Spanish version of the Celebration Mix without giving credit to Vergara as the adapter, in February 2011 the District Court granted a summary judgment in favor of Coca Cola. The district court found that the e-mail exchange constituted an assignment by Vergara of his copyright in the adapted lyrics. The court characterized the exchange of emails as an offer and acceptance, “and at that moment the deal was made irrevocable.” The court determined that Puig’s sending of formal contracts that did not reflect all of the terms of the earlier emails was not a “counteroffer which is labeled as an acceptance, but adds new terms” (which typically is not binding under Restatement (Second) of Contracts §59), but was an offer to modify an existing contract. Although Vergara rejected this offer, the court found that this did not impact the initial agreement to assign the copyright.

In a brief aside, the district court also recognized that Section 204 of the Copyright Act requires a signed writing for a conveyance. However, the district court simply noted without discussion that “Courts have found emails to constitute signed writings.” (citing Lemel v. Mattel, Inc., 394 F.3rd 1355 (Fed. Cir. 2005) and the federal E-Sign Act).

11th Circuit Decision

The 11th Circuit opinion is relatively short and to the point. After reciting the facts, the 11th Circuit found that, under Florida law, “the record established without dispute that Vergara assigned his copyright interests to Universal.” The court used a traditional contract analysis to characterize Vergara’s e-mail as an offer and Puig’s e-mail as an unconditional acceptance, which together were effective to create a contract.

Discussion

Unfortunately, while the 11th Circuit found that the e-mail exchange constituted a binding contract under Florida law, the court did not address whether the e-mail exchange constituted a “writing” for purposes of Section 204 of the Copyright Act. Prior to the adoption of the E-Sign law, courts differed as to whether an e-mail exchange would satisfy the writing requirements of Section 204. Section 7001(a)(2) of the federal E-Sign Act, which was enacted in 2000, provides in relevant part that “a contract relating to [a transaction in or affecting interstate or foreign commerce] may not be denied legal effect, validly or enforceable solely because an electronic signature or an electronic record was used in its formation.”

Few courts have addressed what consitutes a "writing" for purposes of E-Sign. Earlier this year, the Arkansas Supreme Court found that a waiver of coverage in an online insurance application constitutes a "writing" for purposes of the Arkansas insurance law requirng such waivers to be in writing. In 2010, the federal district court in Colorado found that an e-mail summary of a settlement meeting could consitute a "writing" for purposes of the Colorado Statute of Frauds, but that the summary could not be enforced as a contract because it was written by an administrative assistant and was not "subscribed by the party to be charged."

But does E-Sign apply to transactions involving transfers of copyrights? Professor Nimmer notes that “[n]othing about the ESIGN Act overtly mentions copyrights in particular or other federal enactments in general.” He further notes that E-Sign does purport to apply “to any transaction in or affecting interstate or foreign commerce,” with some exceptions. It remains to be seem, then whether courts will treat e-mail as having sufficient formalities to satisfy the writing requirement in Section 204 of the Copyright Act.

The 11th Circuit decision also ignored the fact that Vergara’s email characterized the adaptation as a “work made for hire.” Would the decision have come out any differently if analyzed under the “work made for hire” provisions? Probably not. Under Section 101 of the Copyright Act, certain works qualify as a work made for hire if “the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.” The court did not discuss the question whether the adaptation qualified as one of these specially ordered works (at best it might be viewed as a part of an audio visual work, or as a translation, but probably not). Even if the adaptation did qualify as a work that could potentially be a “work made for hire,” does the exchange of emails constitute “a written instrument signed by them?” I find it harder to classify the exchange of e-mails as an “instrument’ within the meaning of the work made for hire definition. This may be why the 11th Circuit decided the issue on contract grounds, but it would have been nice to have some analysis of this issue.
_________

Comment from Venkat:

This is a great post by John that delves into the interplay between the federal ESIGN Act and the Copyright Act. I wonder whether an email disclaimer would have affected the analysis. There’s been a lot written on the efficacy and the desirability of email disclaimers in other contexts, but I wonder if an email disclaimer that said

Nothing in this email is intended as an offer and the author disclaims any intention to make an offer or create an enforceable agreement through any email messages. Any agreement with the author of this email must be in a signed paper document!

would have protected Hermosilla? I’m guessing the court would have said that Hermosilla’s unequivocal intent to reach an agreement trumped anything in an email disclaimer. It may not have been useful here, but it would be useful in other contexts, such as where people exchange email messages in an attempt to settle a dispute and one party tries to use an email along the way to say that the parties reached a settlement and tries to enforce a settlement on this basis. I’m not a fan of email disclaimers, but this type of a disclaimer may be worth exploring.
_________

Eric's comments.

To me, the legal doctrine in this case seems pretty straightforward. If the parties formed a contract or did a proper contract amendment, the fact that the contract was made via email should satisfy the Section 204 "writing" requirement per E-SIGN/UETA. After all, Section 204 is a statute of fraud, and E-SIGN/UETA were designed to say that emails satisfy the statute of frauds. See, e.g., the many real estate cases reaching this result and John E. Theuman, Satisfaction of Statute of Frauds by E-Mail, 110 A.L.R.5th 27 (2003). I don't see any reason why copyright law would be handled differently under E-SIGN or UETA. My analysis is the same for the "work for hire" statute of fraud.

For me, the harder part is whether the email exchange properly formed a contract/contract amendment and, if it did, if Coca-Cola (or its assignor) violated one of the contractual conditions such that their failure to perform negated the contract. If this situation didn't have a whiff of the content creator changing his mind with venal intent, I think other courts might have been more sympathetic on that point.

Posted by John Ottaviani at 08:50 AM | Copyright , E-Commerce , Licensing/Contracts | TrackBack

October 15, 2011

Q3 2011 Quick Links, Part 5

By Eric Goldman

See the other quick links posts in this series:

* Q3 2011 Quick Links, Part 4
* Q3 2011 Quick Links, Part 3
* Q3 2011 Quick Links, Part 2 (Trademarks/Domain Names Edition)
* Q3 2011 Quick Links, Part 1 (Copyright Edition)

Trade Secrets

* Congressional proposal to add a private cause of action to the federal Economic Espionage Act. David Almeling supports the general idea. My take from an email list:

I don't understand the incremental value of a federal private cause of action beyond the current state laws for the described situations. I also wonder if this is the beginning of the end for federal deference to state regulation of trade secrets. If the amendment get adopted, it would be entirely logical to see the restrictions relaxed over time to make it into a general-purpose private right of action for any trade secret misappropriation. For an analogous regulation, see the significant expansion of the CFAA over the past quarter-century, and especially the growing number of cases involving CFAA violations because former employees continued to access their former employees' hardware (and, presumably, misappropriate trade secrets).

* Mattel's lawsuit against MGA over the Bratz dolls has gone sour for Mattel in a big way. It was hit with another $225M in damages, bringing the amount it owes MGA to $310M. Oops.

* Probation for two individuals in the first lost iPhone prosecution, but no charges against Gizmodo. Yet, somehow, Apple apparently lost yet another "priceless" iPhone prototype at a bar.

Patents

* Bessen et al, The Private and Social Costs of Patent Trolls:

In the past, non-practicing entities (NPEs) — firms that license patents without producing goods — have facilitated technology markets and increased rents for small inventors. Is this also true for today’s NPEs? Or are they “patent trolls” who opportunistically litigate over software patents with unpredictable boundaries? Using stock market event studies around patent lawsuit filings, we find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010, mostly from technology companies. Moreover, very little of this loss represents a transfer to small inventors. Instead, it implies reduced innovation incentives.

* Joe Mullin is blogging again on patent matters, especially NPE issues! From his blog, check out his co-blogger's post on Innovatio, which is sending licensing demands to hundreds of companies who are offering industry-standard wi-fi to consumers.

E-Commerce

* After tossing its CA affiliates aside like rag dolls, Amazon and CA struck a deal on sales taxes that reinstated its CA affiliates (1, 2).

* Businesses using Groupons may be getting lower Yelp reviews.

* Dan Ariely deconstructs online retailers and websites to show how they are using psychological forces to get us to do what they want.

* Earll v. eBay, 5:11-cv-00262-JF (N.D. Cal. Sept. 7, 2011). eBay could be exposed to claims under the Disabled Persons Act and the Unruh Act.

* Foley v. JetBlue Airways (N.D. Cal. Aug. 3, 2011). Federal aviation law preempts California law regarding disability accessibility to airline website.

* Weinstein v. eBay. StubHub wins an anti-scalping case under New York law.

* NYT: Good example of how a properly managed consumer review website can improve marketplaces.

Contracts

* David Stebbins is at it again. He sued Google to enforce his purported $500 billion arbitration win. The magistrate recommended dismissing the case as frivolous. Stebbins sued Microsoft too; see the long interview with him and a link to his video.

* Davis v. Avvo, 8:10-cv-02352-JDW-TBM (M.D. Fla. Sept. 13, 2011). Forum selection clause in Avvo’s user agreement upheld.

* Fusha v. Delta Airlines (D. Md. Aug. 30, 2011). Venue selection clause in check-the-box user agreement upheld.

* TradeComet.com LLC v. Google, Inc., 2011 WL 3100388 (2nd Cir. July 26, 2011): "a district court is not required to enforce a forum selection clause only by transferring a case pursuant to § 1404(a) when that clause specifies that suit may be brought in an alternative federal forum. Rather, in such circumstances, a defendant may seek to enforce a forum selection clause under Rule 12(b)."

A separate summary order upheld the applicability of Google's forum selection clause against TradeComet. The court says Google's clause doesn't overreach because "Google unquestionably holds a ‘special interest’ in making sure that it is not subject to suit in numerous different fora for claims arising from its agreements with over a million advertisers."

* Marso v. United Parcel Service, Inc., No. 09 CVS 2582 (N.C. App. Ct. Sept. 20, 2011). UPS required customers to go through a mandatory clickthrough agreement on computers in its store, but...

plaintiff asserts that defendant's employee entered the information into the computer, and that "[n]o one advised [plaintiff], orally or in writing, about any UPS Tariff, waybill, or service guide," or advised him that he could request a copy of the same….plaintiff suggests by his argument that he did not assent to the terms of service identified in the UPS Tariff, which would limit defendant's liability for the fraudulent cashier's check collected by defendant upon delivery of plaintiff's package to Mr. Thompson, and instead asserts that he formed an oral contract with defendant's employee which obligated defendant to be liable to plaintiff for $12,145.00 without limitation. Thus, there appears to be a genuine issue as to whether plaintiff assented to be bound by the limiting terms of the UPS Tariff, and whether defendant presented plaintiff with actual or constructive notice of the terms set forth by the UPS Tariff.

* Truong v. eBay, Inc., 2011 WL 3716999 (Cal. App. Ct. Aug. 24, 2011). This is a busted eBay Motors transaction where eBay warned the winning buyer not to complete the transaction and the seller sued for tortious interference with contract:

eBay raised the immunity provision of the federal Communications Decency Act (47 U.S.C. § 230). As appellant pointed out to the trial court, and as that court ruled, the pertinent provision of that statute makes the law applicable to an action taken by an internet service provider to restrict access to or availability of material that is obscene, harassing, “or otherwise objectionable.” The conduct alleged against eBay was not editing or policing content of items posted on its marketplace, but interfering with a contract. (See 47 U.S.C. § 230(c)(2)(A).) eBay does not urge this ground in its respondent’s brief.

* Added to my RSS feed: The Tech Contracts Blog by David Tollen.

Miscellaneous

* ABA Journal on electronic service of notice.

* James Grimmelmann's Internet Law casebook.

* On TWiL in late August, I discussed privacy and MP3Tunes with Denise Howell, Evan Brown and David Snead. The recording.

* Top 15 most popular "Damn You Auto Correct" postings of all time. Hilarious.

* Good news: I will receive the 2011 "IP Vanguard Award" (in the Academic/Public Policy category) from the California State Bar's IP Section.

Posted by Eric at 07:02 AM | E-Commerce , Licensing/Contracts , Patents , Trade Secrets | TrackBack

September 13, 2011

Ninth Circuit Upholds Web Host's Liability for Counterfeiting Retailers--Louis Vuitton v. Akanoc

By Eric Goldman

Louis Vuitton Malletier SA v. Akanoc Solutions, Inc., No. 10-15909 (9th Cir. Sept. 12, 2011). Prior blog posts:
* Another Bad Ruling in Louis Vuitton v. Akanoc
* Making Sense of the $32M Contributory Trademark Infringement Judgment Against a Web Host
* Web Host Faces Potential Contributory Trademark Liability

This cases involves a US web host, Akanoc, that hosted Chinese retailers selling counterfeit Louis Vuitton goods. The web host apparently ignored numerous takedown notices from Louis Vuitton. Louis Vuitton sued for contributory copyright and trademark infringement, and the result has been a string of troubling rulings. For a sample of those, consider the trial court's rulings that individuals directly infringe copyrights when browsing a photo of a counterfeit good, and a 512 agent for service of notice could be personally liable for any infringements. Ugh. The coup de grace was a massive $32+M jury verdict against the defendants for willful infringement.

On appeal to the Ninth Circuit, the court issued a characteristic "omnibus" opinion that resolves lots of contentions in relatively short order. Opinions like this rarely become major precedents, which is fine by me given the results. Overall, the court rejects all of the defendants' arguments except one, but that one saves the defense over $10M.

Some of the more interesting points:

* MSG leased equipment to Akanoc. The jury held MSG liable, but the trial court reversed that. On appeal, the Ninth Circuit agreed that MSG wasn't liable for the retailer counterfeiting because "Louis Vuitton presented no evidence that MSG had reasonable means to withdraw services to the direct infringers."

* the defendants argued that its customers' websites were the "means" of trademark infringement, not the hosting services to them. The court rejected the argument as irrelevant:

websites are not ethereal; while they exist, virtually, in cyberspace, they would not exist at all without physical roots in servers and internet services....Appellants had control over the services and servers provided to the websites. Stated another way, Appellants had direct control over the “master switch” that kept the websites online and available.

This seems to resolve one of the open issues from the Ninth Circuit's 1999 Lockheed v. NSI case, which is the circuit's benchmark opinion on contributory trademark infringement online. That case said NSI as a domain name registrar wasn't responsible for an infringing domain name, but it implied that vendors closer to the infringement--such as web hosts--could be. This ruling confirms our assumption that web hosts have more affirmative obligations to intervene against trademark infringement than domain name registrars do.

* "providing direct infringers with server space" qualifies as a material contribution for contributory copyright infringement.

* the court touched on the required scienter for both contributory trademark and copyright infringement, but this discussion goes nowhere given that the jury found willful infringement.

Even though the defendants did not prevail on its doctrinal arguments, the appeal was partially successful because the court reduced the damages award over $10M (the jury had awarded $32+M against three defendants; the judge post-ruling had dismissed MSG, which cut the award to about $21M; this panel reduces it further to $10.8M). The trial court judge's jury instructions allowed the jury to cumulate awards against each defendant for the same infringements, rather than forcing them to make a single award joint-and-several. The appeals court fixed that perplexing error.

Even so, the lesson remains that any web host that fails to promptly honor takedown notices--copyright or trademark--does so at extreme peril. We don't have an express notice-and-takedown scheme for trademarks, but we've gotten there on a de facto basis.

Posted by Eric at 09:05 AM | Copyright , Derivative Liability , E-Commerce , Trademark | TrackBack

September 07, 2011

Reflections on the DOJ-Google Half-Billion Deal over Illegal Pharma Ads (July-August 2011 Quick Links, Part 2)

By Eric Goldman

I haven't previously written on the DOJ's bust of Google over illegal pharmaceutical ads, partially because I couldn't reconcile my views about this enforcement action. From my vantage point, this action equally fits into two dichotomous stories, and these stories may not be mutually exclusive.

Story #1: Google's massive revenues and profits are significantly inflated by illegitimate ads. Here, we learn that Google was raking in millions of dollars from ads for illegal pharmaceuticals. We also know Google has struggled with gambling ads (1, 2), ads for bogus ringtones, ads that trademark owners consider infringing, and other problematic ads.

The sources of Google's revenues may be like the log that no one wants to turn over to see what's under it. I bet that if we could get a detailed line-item breakdown of where Google's revenues come from, more than a few folks would be queasy about some key revenue categories.

Over the years, Google has taken some baby steps to screen out bogus advertisers from its network, but I wonder if Google's "Must. Be. Scalable!" mantra--and the concomitant profits that come from willful blindness--has inhibited Google from undertaking some needed, but necessarily manual, steps to police its ad network more aggressively.

Story #2: The incumbent DC regulators view Google's emerging power as unwanted competition to their regulatory power, and like typical incumbents, the DC regulators are closing ranks on the start-up--meaning they have become hellbent on busting Google, legitimately or not. To me, the Google Buzz settlement is a clear example of how DC regulators are unnecessarily flexing their muscles against Google.

Some details made me wonder if the DOJ misused its power in this enforcement action:

* the Rhode Island's US Attorney's post-announcement attack on Larry Page, declaring that he knew of the illegal ad sales. Given the DOJ's subsequent rhetoric, it makes me wonder if the DOJ threatened Page with criminal prosecution. If nothing else, the personal prosecution threat would have a powerful in terroram effect to goad Google to take a deal, warranted or not.

To be clear, the non-prosecution agreement doesn't explicitly protect Larry Page, but I think a personal prosecution is super-unlikely at this point. The agreement might insulate his acts on the company's behalf, and I can't imagine the DOJ will want to spend further prosecution resources after getting such a big score already. So the net effect is that this deal should end the matter.

* the deal was structured as a civil forfeiture. Note the DOJ (or any other federal agency) would have encountered significant problems bringing a civil action against Google over the third party ads. 47 USC 230 would have preempted the action, and with a half-billion dollars at issue, Google surely would have litigated any statutory ambiguities rather than roll over. Therefore, as Peter Henning explains, the government avoided pursuing a doctrinally questionable criminal prosecution and simultaneously bypassed a likely 47 USC 230 immunity of any civil action. Pretty tricky navigation by the DOJ.

* finally, Google disgorged both its revenues AND ITS ADVERTISERS' REVENUES from the illegal ads. I can't think of any comparably sweeping remedy in any other advertising lawsuit (am I forgetting something?). I simply can't believe the DOJ could have gotten a judge to order a similarly expansive disgorgement. Thus, it appears the DOJ asked for way more cash than the law actually allows--and yet a pliable target forked it over.

If Story #2 is true, the deal could be an unholy pact: Google bought the freedom of its CEO for a check that is a pinprick compared to its cash on hand; and the DOJ got a huge taste of Silicon Valley's wealth and publicly blare that justice was served--even if the DOJ vastly exceeded current law to get there.

One more reason that story #2 could be plausible. The DOJ portrays this as a case about illegal pharmaceuticals, but it imprecisely lumps together a variety of factually different situations into that category, including:

* pharmaceuticals that are never legal in the United States
* fraudulent pharmaceuticals, i.e., sugar pills sold as brand X
* counterfeit pharmaceuticals, i.e., bioequivalent pharmaceuticals sold as brand X but made by someone else
* prescription pharmaceuticals that aren't fraudulent or counterfeit but are being sold without a prescription
* prescription pharmaceuticals that aren't fraudulent or counterfeit that being sold with a prescription, just not one recognized by US law

Note that the consumer harm in the last 3 circumstances is unclear. It's possible that some consumers win in each of those cases by getting the desired pharmaceutical at a cheaper cost than US drugs. Such consumer wins don't make the pharmaceutical sales legal; but it raises the question of whether the US government was pursuing the best interests of its citizens

One final point: the DOJ press release describes the illegal pharmaceutical advertisers as "rogue" websites. That's an interesting characterization. It seems to tie into the DHS ICE's domain name seizures and the proposed PROTECT IP Act. At minimum, the DOJ enforcement action reinforces how desperately DC regulators want Internet companies to do more of their policing work. Also, perhaps the deal's template shows how the DOJ thinks it can achieve PROTECT IP irrespective of whether Congress enacts the law.

More links to check out:

* the non-prosecution agreement
* the DOJ's announcement
* the general NY Times article announcing the deal
* Also in the NY Times, Peter Henning parses some of the deal's legal oddities
* Techdirt's skeptical coverage
* Plaintiffs' lawyers will be partying with the non-prosecution agreement. The first wave: stockholders' lawsuits.

Posted by Eric at 02:10 PM | Content Regulation , E-Commerce , Marketing | TrackBack

August 30, 2011

Second Circuit Says No First Sale Doctrine for Works Manufactured Outside the U.S. -- Wiley & Sons v. Kirtsaeng

[Post by Venkat Balasubramani]

Wiley & Sons, Inc. v. Kirtsaeng, 09-4896-cv (2nd Cir. Aug. 15, 2011)

Wiley asserted copyright infringement claims against Kirtsaeng, who imported into the United States and sold "foreign editions" of Wiley textbooks. The books had legends printed on them which indicated that they were "Authorized for sale in Europe, Asia, Africa and the Middle East Only," and any exportation or importation to another region was prohibited. Kirtsaeng, who sold the books to finance his education, reportedly earned a tidy profit (between $900,000 and $1.2 million). The jury found Kirtsaeng liable for willful infringement and imposed $75,000 in damages for eight separate works. The district court judge disallowed Kirtsaeng's first sale defense, and on appeal, the Second Circuit addressed the issue of whether it should have been available to Kirtsaeng.

A section of the Copyright Act (section 602(a)(1)) provides that unauthorized importation is a violation of the copyright owner's exclusive distribution right:

Importation into the United States, without the authority of the owner of copyright under this title, of copies . . . of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute . . . .

Separately, the section codifying the first sale doctrine (section 109(a)) provides that:

the owner of a particular copy . . . lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy . . . .

The key question was whether the "lawfully made under this title" language of the first sale section refers to items that were physically made in the United States or whether it encompasses copies that were licensed by a United States copyright holder but manufactured abroad. There's obvious tension between section 602(a)(1) and section 109(a). Allowing importers to take advantage of the first sale doctrine with respect to works manufactured abroad would limit the copyright owner's rights under section 602(a)(1), as the owner would not be able to prevent the importation of copies once sold.

The Ninth Circuit recently took up this conflict, and ruled in Costco v. Omega that the "lawfully made under this title" language in section 109(a) only applied to items that were produced in the United States. The Supreme Court accepted cert. in the Costco case but affirmed without providing any guidance due to a 4-4 split among the Justices (Justice Kagan recused). A prior Supreme Court case dealing with the interplay between section 109 and 602(a)(1) (Quality King Distributors, Inc. v. L'anza Research International, Inc.) held that the first sale defense is available to imported goods, but that case involved goods that were manufactured within the United States, sent abroad, and then imported. The Ninth Circuit held that Quality King did not overrule existing Ninth Circuit precedent which restricted the first sale defense to goods that are "legally made and sold in the United States."

Wiley argued in the Second Circuit that, because the Copyright Act (Chapter 17 of the US Code) did not apply extraterritorrialy, "lawfully made under this title," should mean "lawfully made in the United States." The Second Circuit found that the textual argument was not determinative. Among other things, copyright protection can apply to works published in foreign nations, and elsewhere in the Copyright Act Congress used the phrase "lawfully made under this title" and did not limit it to items that were produced in the United States. Nevertheless the court held that any conflict between sections 109(a) and 602(a)(1) was best reconciled by limiting the first sale doctrine to "works manufactured domestically." According to the court, this was the approach the Court hinted at in Quality King and the approach that best comports with the overall structure of Title 17.

The court also pointed to some drawbacks of the approach suggested by Kirtsaeng. Under his approach, copyright holders could control importation either only where (1) the importer does not legally "own" the copy or (2) where the work is produced in a country where US copyrights are not protected (i.e., by treaty). From the court's perspective, this was untenable, because in order to be able to control importation, copyright owners would have to either not sell their works or would have to produce them in countries "that may not honor their copyright in the first place." Kirtsaeng also argued that US copyright owners could take advantage of the importation bar to circumvent the first sale defense by outsourcing all of their manufacturing to foreign countries and ship them back into the US for domestic sales. While this seemed farfetched to me, the court said this was a policy matter that did not affect its interpretation of the statute.

Judge Murtha dissented, pointing out that in Quality King, the Court noted that the bar on importation without permission "is an infringement of the . . . distribution right." Because the rights of distribution are expressly "'subject to sections 107 through 122,' the copyright owner's power to limit importation is qualified by the first sale doctrine . . . . " He also argued that the overall structure of the Copyright Act and other provisions support Kirtsaeng's position. In other sections of the Copyright Act, Congress expressly referenced the location of manufacture, and if it wanted to limit the first sale doctrine only to works manufactured in the United States, it could have easily done so. He also argued that economic justifications favor Kirstaeng's position. Allowing a copyright owner to freely limit importation would lead to uncertainty in the secondary market. It would also "provide an incentive for U.S. copyright holders to manufacture copies of their work abroad," since works manufactured abroad would in practical terms be entitled to greater copyright protection.
__

Although the policy clearly should favor the re-seller here, I didn't see a clear solution to the statutory conflict, and don't see either side as having a particularly compelling argument. The place of manufacture as a basis for a distinction seems arbitrary to me, particularly when it comes to something like content. I would expect that this may not be the last word, and the Supreme Court may end up weighing in on this case.

My understanding is that the publishing industry has traditionally treated the domestic and foreign markets separately and, as a matter of long-standing practice, has charged different prices for domestic and foreign editions of books. This pricing structure depends on being able to limit the availability of foreign editions in the domestic market. At first glance, this is precisely what section 602(a)(1) facilitates. I don't think this is a practice that should be encouraged, but it's one that publishers have long engaged in and that courts have supported. (See Eric's post on a case from the Southern District of New York, which reaches the same conclusion: "Resale of International Textbooks to US Students Not Protected by First Sale Doctrine--Pearson v. Liu.")

On the other hand, does it make sense to limit the copyright owner's control to new versions of the books? Should the resale market remain free of the copyright owner's control? Wiley's approach ends up allowing for greater copyright protection for works in the foreign markets, which is odd from a copyright standpoint. But will this realistically result in some sort of offshoring push by publishers? I wasn't sold on this argument.

One tweak in the case is that Wiley included a legend in one of the foreign editions which referenced US copyright laws:

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form . . . except as permitted under Section 107 or 108 of the 1976 United States Copyright Act.

As the dissent notes, it's awkward for Wiley to be able to rely on rights under the Copyright Act but for Kirtsaeng to be deprived of the protections afforded by the same act. Interestingly, the majority references this legend in a footnote states that they "are . . . somewhat puzzled as to why Title 17 is invoked." I wasn't sure if this referred to Wiley invoking Title 17 in the legend, or Wiley bringing an infringement claim under Title 17 rather than some other cause of action. (An interesting sidenote: Kirtsaeng was located in the US and sold the books via eBay; what result if he had been located off-shore and sold to US consumers via eBay?)

As books, including textbooks, migrate to devices and are sold or licensed in digital form, the focus of this battle will shift away from first sale to DRM. Although it's early to tell, my impression is that thus far, content owners are winning that battle.

[An interesting footnote to the case is that Kirtsaeng consulted, among other sources, "Google Answers" in order to determine the legality of his practice. It's unclear what answer he was provided, but he either didn't get the right answer, or got the right answer and disregarded it.]

Other coverage:

Poking More Holes in the First Sale Doctrine (EFF)
Legally Bought Some Books Abroad? Sell Them In The US And You Could Owe $150k Per Book For Infringement (Techdirt)

Previous related posts:

Software Vendor Trumps First Sale Doctrine via License--Vernor v. Autodesk
UMG Can't Enforce "Not for Sale" Restrictions on Promo CDs -- UMG v. Augusto
Supreme Indecision: Costco v. Omega Gums up the (Watch)Works

Posted by Venkat at 04:39 PM | Copyright , E-Commerce

August 15, 2011

Missouri Federal Court Says LegalZoom Could be Engaged in the Unauthorized Practice of Law -- Janson v. LegalZoom

[Post by Venkat Balasubramani]

Janson v. LegalZoom, Inc., 2:10-CV-04018-NKL (W.D. Mo. Aug. 2, 2011)

Background: LegalZoom offers "blank legal forms that customers may download." In addition, LegalZoom makes available an internet portal. Here's how LegalZoom describes this aspect of its services in an advertisement:

Over a million people have discovered how easy it is to use LegalZoom for important legal documents, and LegalZoom will help you incorporate your business, file a patent, make a will and more. You can complete our online questions in minutes. Then we'll prepare your legal documents and deliver them directly to you.

Another advertisement states that after answering a "few simple online questions . . . you get a quality legal document filed for you by real helpful people."

Through its portal, LegalZoom makes available various documents, including entity formation documents, estate planning documents, pet protection agreements, and copyright, trademark, and patent applications. Customers pick what type of document they wish to have prepared and answer various questions via a "branching intake mechanism." The questionnaire process is "fully automated," although LegalZoom sometimes provides recommended selections based on how a majority of previous customers answered a particular question. After customers complete the questionnaire, a (human) LegalZoom employee reviews the data for errors or inconsistencies. After the data file is approved, LegalZoom's software creates a document based on the customer's input. A (human) LegalZoom employee then reviews the document again and fixes any formatting problems. The completed document is then mailed (and in some cases emailed) to the customer where the customer can choose to execute the document or take it to a real live lawyer and have him or her advise as to next steps. (This is the process the court describes for agreements, wills, and similar documents. The process for filings varies.)

Plaintiffs sued, asserting that LegalZoom was engaged in the unauthorized practice of law. Plaintiffs also asserted claims for "money had and received" and the Missouri Merchandising Practices Act. Plaintiffs never had any personal interactions with LegalZoom employees; nor did they believe that they were "receiving legal advice while using the LegalZoom website."

Discussion: The court starts with a review of Missouri precedent interpreting Missouri's unauthorized practice statute. Although the statute contains definitions for the "practice of law" and "law business," the court notes that it's ultimately up to the judiciary--which is the "sole arbiter of what constitutes the practice of law"--and not the legislature to determine what crosses the line.

The two main Missouri cases on the unauthorized practice issue were Hulse v. Criger and In re Thompson. Hulse involved a real estate business which prepared legal documents as an "ancillary" service to Hulse's business as a realtor. The Missouri Supreme Court said the preparation of legal documents did not violate unauthorized practice rules, as long as the document preparation services were ancillary to the main business and no separate fees were charged for preparing documents. In Thompson, the court said that the sale of "do-it-yourself divorce kits" was fine, as long as no "personal advice as to the legal remedies or the consequences flowing therefrom" is given.

The court concludes that LegalZoom's sale of blank forms is not the problem. The court finds problematic fact that LegalZoom prepares a document in accordance with a customer's preferences, and conveys the impression that LegalZoom does something more than allowing the customer to pick and choose among various clauses:

LegalZoom's internet portal offers consumers not a piece of self-help merchandise, but a legal document service which goes well beyond the role of notary or public stenographer. The purchaser [in Thompson] understood that it was their responsibility to get it right. In contrast, LegalZoom says 'Just answer a few simple online questions and LegalZoom takes over. You get a quality legal document filed for you by real helpful people.'

Interestingly, the court finds that even LegalZoom's decision tree questionnaire, which allows the customer to craft his or her own document, may be problematic:

LegalZoom's branching computer program is created by a LegalZoom employee using Missouri law. It is that human input that creates the legal document. A computer sitting at a desk in California cannot prepare a legal document without a human programming it to fill in the document using legal principles derived from Missouri law that are selected for the customer based on the information provided by the customer. There is little or no difference between this and a lawyer in Missouri asking a client a series of questions and then preparing a legal document based on the answers provided and applicable Missouri law....

The Missouri Supreme Court cases which specifically address the issue of document preparation . . . make it clear that this is the unauthorized practice of law. The fact that the customer communicates via computer rather than face to face of that the document is prepared using a computer program rather than a pen and paper does not change the essence of this transaction.

The court rejects LegalZoom's request for summary judgment and says that there is a factual question as to the role played by LegalZoom in the transaction. LegalZoom also raises First Amendment and Due Process arguments but the court rejects these as well.

___

The court's conclusion that LegalZoom's software service may constitute the unauthorized practice was interesting. Is there a key difference between what LegalZoom does and "document assembly" services? The court says that offering "blank forms" is clearly OK, but what if someone offered blank forms that could be customized by the client? What if, along with a blank set of forms, someone offered a database and a FAQ that allowed customers to weigh the benefits of various contractual provisions and select the ones that the customer felt was most appropriate for his or her situation? Should it really matter that LegalZoom made this easier by taking in the customer's input through a decision tree and then spitting out a legal document? The line between offering a large variety of forms and offering a customized document where the customer gives input to determine clauses seems awfully thin.

One of the potential problems for LegalZoom is that its advertisements (cited by the court) did not square with its service. At its core, LegalZoom seems like a turn-key document generation service, but its advertisements do not embrace the image of the self-reliant non-lawyer drafter of legal documents. LegalZoom says that "it" will take care of preparing your legal documents, and as a bonus, LegalZoom's team of "real helpful people" will be available to assist. It was entirely predictable that LegalZoom's marketing wanted to put out the image of LegalZoom "taking care of everything" for the customer and, to the extent LegalZoom's marketing and legal departments had any sort of a battle over this issue, the marketing department apparently won out. (It is really a selling point that you are entrusting your legal document to a software application?) Not that it would have necessarily helped, but I'm surprised also that LegalZoom did not have its customers agree to any sort of disclaimers.

Eric pointed out via email that this factual scenario is hardly new. Unauthorized Practice of law Committee v. Parsons Technology, Inc. was a dispute (in 1999!) over whether "Quicken Family Lawyer" violated the unauthorized practice rules in Texas. Like LegalZoom's service, QFL also asked "a series of questions relevant to filling in the [relevant] legal form" and generated a document. As described by the court:

[Plaintiff] alleges that QFL acts as a 'high tech lawyer by interacting with its 'client' while preparing legal instruments, giving legal advice, and suggesting legal instruments that should be employed by the user.' In other words, QFL is a 'cyber-lawyer.'

The court there had no trouble concluding that the QFL service violated the unauthorized practice rules, so the result in the LegalZoom case is hardly unprecedented.

A few other oddities about this case. The court says that it's solely the province of the courts (and the Missouri Supreme Court) to determine what constitutes the unauthorized practice, but it looks like the decision may end up falling to a jury rather than the court. To the extent there is a mechanism available to it, I'm surprised the court did not just certify the question to the Missouri Supreme Court. I also wondered about the availability of a Section 230 defense for LegalZoom. Its advertisements and human intervention likely make for a Section 230 argument difficult to make. Even removing these two elements, to the extent the defense was available, the case looks like it would make for a fun application of the Ninth Circuit's Roommates decision.

Finally, the court mentions the fact that the plaintiffs in question "never believed that they were receiving legal advice while using the LegalZoom website," and did not have any contacts with LegalZoom employees. While the court's overall conclusion on the unauthorized practice issue is certainly defensible (in light of the statute and case law), the court does not reconcile its decision with these bad facts with respect to the two named plaintiffs, or any procedural class action issues that this raises.

This may seem like a snarky afterthought, but I'm surprised LegalZoom didn't clear these issues with local jurisdictions in advance. They may end up winning (either at this stage or the next) but I wondered what this ruling does for public confidence in their services.

Additional coverage:
Order in LegalZoom Case (Richard Zorza's Access to Justice Blog)
Is Legal Software Conduct? True or False? (eLawyering Blog)
Class Action Claims Online Legal Forms Pose Threat To Consumers (WSJ)

Posted by Venkat at 09:11 AM | E-Commerce

August 12, 2011

The 9th Circuit Tackles a Pair of Internet Jurisdiction Cases

[Post by Venkat Balasubramani]

I'm inclined to agree with Eric that internet personal jurisdiction cases are not the most exciting. The resolution of a question over whether personal jurisdiction is proper often has more to do with whether the court likes your case or finds it interesting than with whether the non-resident defendant satisfied the "Zippo's sliding scale" or some other test. It ends up being a crapshoot much of the time, albeit one that's informed by the court's view of the equities.

The Ninth Circuit issued two new decisions dealing with personal jurisdiction online. Both applied the Supreme Court's recent decision in J McIntyre Machinery, Ltd. v. Nicastro [pdf]. How did that precedent change things? As best as I can tell, it didn't--personal jurisdiction cases continue to be as erratic as always.

Mavrix Photo v. Brand Technologies [pdf]:

Mavrix is a Florida-based photo agency that licenses celebrity photos. It has a California presence. It maintains an office in Los Angeles, employs LA-based photographers, and has a registered agent in California. Brand is an Ohio corporation which runs celebrity-gossip.net. The court notes that celebrity-gossip.net is ranked number 3,622 out of approximately 180 million websites (per Alexa) and receives "more than 12 million unique visitors and 70 million U.S. page views per month."

In 2008, one of Mavrix's photographers shot photos of Josh Duhamel and Stacy Ferguson ("better known by her stage name 'Fergie' . . . [whose group] has sole some 56 million records in the last decade and has won Grammy awards for such hit singles as 'I Gotta Felling' an 'My Humps.'"). Brand allegedly reposted the photos to Brand's website, and Mavrix sued for copyright infringement. The district court dismissed, finding that personal jurisdiction was not proper. The Ninth Circuit reverses.

The court finds that Brand "continuously and deliberately" exploited the California market, but the facts it points to are somewhat curious. Brand's site has third party advertisers and these "third-party advertisers on Brand's website had advertisements directed to Californians." The court relies on this to conclude that Brand "knows--either actually or constructively--about its California user base, and . . . it exploits that base for commercial gain." At the same time, the court also notes that there was nothing in the record to show that "Brand marketed its website in California local media."

The court does not point to any facts that Brand itself targeted Brand's website to California residents. Third party advertisers may have done so, but obviously advertisers will be interested in targeting locally and offering local products or services. Typically, personal jurisdiction cannot be exercised absent a showing that there is some sort of targeting on the part of the non-resident defendant. In tort or infringement cases, courts tend to imply purposeful direction where the non-resident takes acts which the defendant knows or reasonably should know will be felt in the forum state. Causing harm to a celebrity who is a California resident is the classic example of this (this was the result in Calder v. Jones, which employed the "effects test" to find jurisdiction). That wasn't the case here. Although Mavrix's business revolved around celebrity culture, it was a Florida corporation.

Ultimately, the Ninth Circuit relies on the online version of the stream of commerce analysis, under which an online publisher or infringer who has substantial traffic from all fifty states can be sued anywhere (in any state):

where, as here, a website with national viewership and scope appeals to, and profits from, an audience in a particular state, the site's operators can be said to have 'expressly aimed' at that state.

But I thought this is exactly the opposite of what the Court said in J. McIntyre, where the Court found the stream of commerce approach--which looked to the forseeability of the product ending up in a forum state as a basis for personal jurisdiction--problematic:

The owner of a small Florida farm might sell crops to a large nearby distributor, for example, who might then distribute them to grocers across the country. If foreseeability were the controlling criterion, the farmer could be sued in Alaska or any number of other States’ courts without ever leaving town.

McIntyre resulted in a fractured opinion with no clear majority. Mavrix takes the approach that any highly trafficked website whose advertisers engage in local targeting can be sued pretty much anywhere. It's almost as if the Ninth Circuit is sending out a flare to the Supreme Court, asking for this case to be taken up.

[Eric's brief note: this reminds me a little of the old LICRA v. Yahoo battle from over a decade ago, where the fact that Yahoo (as an ad network) targeted ads to French users supported French jurisdiction. That was a bad decision even then. But at least in that case, Yahoo built and ran the geo-targeting technology. Here, the court doesn't close the loop to establish that Brand cultivated advertisers seeking to target CA residents or otherwise affirmatively try to connect its CA readers with advertisers. Bad ruling.]

CollegeSource v. AcademyOne [pdf]:

This is a crazy, long, drawn out dispute over . . . wait for it, digitized versions of college course catalogs. CollegeSource has digitized a significant volume of catalogs and is the established player in the space. AcademyOne comes along and asks about licensing CollegeSource's catalogs but CollegeSource declines. AcademyOne then hires a foreign contractor to collect catalogs from the internet. Somehow AcademyOne ends up with a slew of CollegeSource catalogs. Although it's not totally clear, it looks like AcademyOne's contractor accessed catalogs from the websites of colleges and universities, but in many instances, the institutions simply linked to the files as they resided on CollegeSource's server. Thus, AcademyOne appears to have obtained several course catalogs which were digitized by CollegeSource and which contained CollegeSource's watermark.

CollegeSource sued, alleging Computer Fraud and Abuse Act and terms of use (breach of contract) violations. (Here's a post on the Pennsylvania edition of the dispute between the parties: "College Course Description Aggregator Loses First Round in Fight Against Competitor in Scraping Case.")

The district court granted AcademyOne's motion to dismiss for lack of personal jurisdiction, and the Ninth Circuit reverses. The court says that general jurisdiction is not proper because AcademyOne is a Pennsylvania corporation that does not have any sort of a significant presence in California. However, the court says that specific jurisdiction is proper. Why? Because AcademyOne knew that it was taking acts which would harm a California company when it downloaded course catalogs owned by CollegeSource. AcademyOne approached CollegeSource about a potential licensing relationship and most likely learned that CollegeSource is a California company in this process. AcademyOne (or its contractor) also saw the CollegeSource watermark when they downloaded the course catalogs. Finally, AcademyOne, as the entrant in a very small competitive space would undoubtedly be aware of CollegeSource. The court finds these facts, along with the fact that some of AcademyOne's employees registered to try out CollegeSource on a trial basis (and would have presumably learned of CollegeSource's location this way), sufficient to establish personal jurisdiction over AcademyOne.

It's unclear as to whether the actions of AcademyOne's contractor will be attributed to AcademyOne for all purposes or just for jurisdictional purposes. It looks like the parties will have to duke out the issue of derivative liability under the Computer Fraud and Abuse Act and California's anti-hacking statute in the next chapter of this litigation. This particular chapter ends with a win for CollegeSource.

__

I'm trying to make some sense of the two opinions (you almost wish the court would have compared the two opinions since they were issued together and both authored by Judge Fletcher).

In both cases the court rejected general jurisdiction, finding that the "exacting" standard for establishing general jurisdiction had not been satisfied. In the CollegeSource case, the court noted that AcademyOne advertised to California-specific AdWords, but this did not move the needle for purposes of general jurisdiction. Interestingly, in CollegeSource the court did not rely on targeting to find specific jurisdiction proper. The court instead relied on AcademyOne's awareness (or imputed awareness) of where CollegeSource was located. These types of facts were almost non-existent in Mavrix--there was nothing to show that Brand knew in advance where Mavrix was located. This wouldn't have mattered anyway because Mavrix was headquartered in Florida, not California. It looks like Mavrix takes a "general jurisdiction for infringing content" approach to jurisdiction. If your content or website infringe and you have enough traffic and locally target, you can be sued in any state, even one where the plaintiff does not reside. A somewhat scary result for larger publishers and websites.

Oddly, in Mavrix, the court notes that things have changed since the advent of Zippo's "sliding scale" approach--the court rejects Mavrix's attempt to argue that Brand is subject to general jurisdiction because it had a highly interactive website:

Many of the features on which Mavrix relies to show Zippo interactivity--commenting, receiving email newsletters, voting in polls, uploading user-generated content--are standard attributes of many websites. Such features require a minimal amount of engineering expense and effort on the part of the site's owner and do not signal a non-resident defendant's intent to 'sit down and make itself at home' in the forum by cultivating deep, persistent ties with forum residents. To permit the exercise of general jurisdiction based on the accessibility in the forum of a non-resident interactive website would expose most large media entities to nationwide general jurisdiction. That result would be inconsistent with the constitutional requirement that 'the continuous corporate operations with a state' be 'so substantial and of such a nature as to justify suit against the nonresident defendant on causes of action arising from dealings entirely distinct from those activities.'

While the Ninth Circuit cautions against a test for general jurisdiction which would cast an overly broad net in terms of personal jurisdiction over non-resident defendants, that seems to be the precise result of the court's specific jurisdiction analysis.

Posted by Venkat at 01:03 PM | E-Commerce

August 09, 2011

Zynga Wins Arbitration Ruling on "Special Offer" Class Claims Based on Concepcion -- Swift v. Zynga

[Post by Venkat Balasubramani with comments from Eric]

Swift v. Zynga, 2011 WL 3419499 (N.D. Cal.; August 4, 2011)

The US Supreme Court decided AT&T Mobility v. Concepcion earlier this year, and a question left open in that decision is how the Federal Arbitration Act's preemption of state laws which disfavor arbitration clauses would play out in the online context. Most people thought that this decision would allow internet companies to push consumer claims into arbitration through provisions in relevant terms of use agreements, and a recent ruling involving Zynga seems to confirm this.

Background: Swift alleged that she accepted "special offers" while playing Zynga's Facebook apps. She argued that the special offers were misleading, and sued Zynga as well as two of its advertising partners. The lawsuit was originally filed in late 2009 and amended in February 2010. Following the Supreme Court's decision in Concepcion, Zynga moved to compel arbitration and to stay the litigation in light of the Supreme Court's ruling.

Plaintiff received the allegedly misleading offers through Zynga's "YoVille" app, which during the relevant time period contained the following arbitration provision:

You agree that any suit . . . arising out of or relating to these Terms of Use or any of the transactions contemplated herein or related to the Service or any contests or services thereon . . . shall be resolved solely by binding arbitration before a sole arbitrator under the rules and regulations of the American Arbitration Association ("AAA"); provided, however that notwithstanding the parties' decision to resolve any and all disputes arising under these Terms of use through arbitration, Zynga may bring an action in any court of applicable jurisdiction to protect its intellectual property rights or to seek to obtain injunctive relief or other equitable [sic] from a court to enforce the provisions of these Terms of Use or to enforce the decision of the arbitrator. The arbitration will be held in San Francisco.

This agreement was silent as to whether the claims could be aggregated. The terms were presented to Swift when she first decided to start playing the game via a link under a button titled "allow access," which provided notice that the application would access Swift's Facebook profile information. Under the "allow access" button, the app presented the following text:

By proceeding, you are allowing YoVille to access your information and you are agreeing to the Facebook' terms of service in your use of YoVille. By using YoVille, you also agree to the YoVille Terms of Service.

In August 2009 Zynga implemented a "Universal TOS," which contained terms that were different from the YoVille Terms of Service. As relevant to the present dispute, these terms required arbitration on an individual basis, and excluded disputes relating to "theft, piracy, invasion of privacy" from their scope. [I'm not sure what Zynga's rationale is for excluding privacy-related claims from the arbitration clause, but this could end up being relevant to the growing number of privacy lawsuits against Zynga.]

Discussion:

Was there a binding agreement requiring arbitration? Swift argued that she did not assent to the YoVille terms because the terms were not presented in a leakproof manner--i.e., she could access the application without affirmatively representing that she agreed to the terms. Swift relied on Specht v. Netscape and Hines v. Overstock for the proposition that "submerged" terms cannot be enforced by an online merchant. The court disagreed and held that Specht and Hines were distinguishable. In both cases, the consumer would have to hunt around to find the terms, whereas in this case, the terms were presented right underneath the button which allowed Swift to access the application. The court pointed to the fact that Swift did not affirmatively put forth any evidence that she did not read or agree to the terms. The court also pointed to Register v. Verio, where the Second Circuit enforced the online terms and rejected Specht's implication that an "I agree" button was a prerequisite to enforcing online terms.

Did plaintiff's claims fall within the arbitration clause? Swift argued that since claims involving "theft" were excluded from the arbitration clause, her claims were not subject to arbitration. The court doesn't treat this argument very seriously, noting that the "complaint against Zynga cannot reasonably be construed as including a claim for "theft," and therefore the complaint is not expressly exempted from the arbitration clause."

Did Zynga waive the right to arbitrate its claims? Swift also argued that Zynga waived the right to arbitrate its claims, by never raising the issue of arbitration and litigating the case for over a year and a half before raising the issue of arbitration. She also pointed to a clause in the universal terms which said that if the bar on class arbitrations is found to be unenforceable, then the dispute will be litigated. She brought up a variety of arguments in support of this claim (e.g., Zynga acted inconsistently with its right to compel arbitration; she will be prejudiced) but the court rejects all of these arguments. Because Zynga could not have compelled arbitration pre-Concepcion, and since no court found the arbitration clause unenforceable--thus requiring the parties to proceed in court--nothing stops Zynga from seeking to compel arbitration based on Concepcion. In the court's view, because:

Zynga acted promptly following the change in the law by ceasing litigation activity and moving to compel . . . it acted consistently with its rights.

Are the Universal Terms unenforceable because they are unconscionable? Plaintiff raised an unconscionability argument but seems to have pursued it in a lackluster manner. The court notes that "Plaintiff presented no evidence that might support [its procedural unconscionability argument]."

How about the third parties? The non-Zynga defendants tried to latch on to Zynga's request to compel arbitration but they were not so lucky. They argued that the definition of "Zynga Parties" in the limitation of liability section of the terms was broad, and thus they should be able to invoke the arbitration clause. However, the arbitration clause did not mention "Zynga parties," and the court concludes that the two sections have to be read separately. They also argued that as "agents" they should be entitled to enforce the arbitration clause, but the court sides with the plaintiff on this issue, noting that although initially plaintiff labeled these defendants as "agents" after conducting some discovery, she called them independent contractors. Finally, these defendants argued that they were third party beneficiaries. Citing to Balsam v. Tucows, the court rejects this argument as well.

The End Result: After concluding that Zynga is entitled to invoke the arbitration clause and the other defendants are not, the court nevertheless stays the lawsuit as to the non-Zynga defendants and orders the claims with respect to Zynga to be arbitrated. In response to the ruling, Swift decided to dismiss her claims with Zynga with prejudice so she could proceed against the non-Zynga defendants in court. This means Zynga is off the hook.
___

To come back to the initial question, as a result of Concepcion, a lot of online disputes--particularly class actions--are going to end up in arbitration instead of the courts. Even if a dispute has been pending for awhile, a defendant who has the option available is going to push for arbitration. This makes me wonder whether online terms typically contain arbitration clauses which bar class claims or whether companies and their lawyers shied away from those terms in response to decisions which struck down arbitration clauses which barred class claims? Including a class action bar runs the risk of the entire agreement being invalidated, so you certainly can't fault a company for not including this provision in online terms. Going forward, I wonder if online terms will become even more one-sided--since companies have greater assurances that arbitration clauses will be enforced, will this cause them to load up agreements with more onerous terms?

The argument over whether there was a meeting of the minds as to the online terms was interesting, but Zynga's placement of the terms (in a location where plaintiff could not credibly claim she did not read them before she clicked "allow access") made the "I didn't read the terms of use" argument difficult to make. Nevertheless, I still like the idea of having a box that users check that says "by checking this box, I am saying that I have read and agree to the terms." There's a minor distinction between a user clicking "allow access" or installing the application and actually having to check a box saying he or she read and agreed to the terms. I like the insurance that the latter approach provides, but as this decision indicates, it's not essential. Also, from the decision, it seemed that Swift did not access the app from her mobile device, but if she did, I wondered how this would affect the court's analysis of whether she had imputed knowledge of and agreement to the terms.

Second, there is virtually no discussion in the order of how Zynga amended its terms to substitute the "Universal Terms" for the "YoVille Terms" which Swift initially agreed to. The court summarily notes that the initial terms contained provisions to the effect that Zynga "had the right to change the terms at any time" and "use after notice of [a] change in terms constitutes acceptance of the changes." The court surprisingly does not delve into the issue of what notice Zynga attempted to provide Swift (if any) or any of the other circumstances behind the revisions of the terms (or the substitution of the Universal Terms for the YoVille Terms). As mentioned in this post about Roling v. E-Trade Securities, it's pretty risky to include a provision in the agreement that says "we can amend this agreement any time and the revised version is effective after posting." In this day and age, particularly where there may be some ability to message the end user or post messages that the end user will have a tough time arguing they did not read or see, there is no reason to play with fire with respect to this issue. I don't know why companies continue to do it. (The agreement did say that it's effective after "posting" which is better than nothing.)

Given the Court's decision in Concepcion that laws which disfavor arbitration conflict with the Federal Arbitration Act, I wonder if the focus of disputes around the arbitrability of online terms will shift from substantive to procedural? Swift did not appear to make much of an argument as to procedural unconscionability, so it's unclear how much traction this type of argument will get in other cases. Cases poking holes in forum selection and arbitration clauses have focused on both. (See, e.g., Bragg v. Linden Research, Inc., 487 F. Supp. 2d 593 (E.D. Pa. 2007).) Concepcion just speaks to arbitration clauses so there's still some room for consumer plaintiffs to argue unconscionability if they are presented with an extreme set of terms (e.g., terms that are on-sided as to forum, costs, disclaimers). It will be interesting to see how courts resolve these arguments and whether consumer plaintiffs are able to use these as an end run around Concepcion. I think this is an important unresolved question at this point, and would caution against loading up online terms with overly one-sided provisions in response to Concepcion.

Zynga has to be happy about this ruling. As a result of invoking the arbitration clause, it got the plaintiff to dismiss her claims with prejudice against Zynga.

Previous related posts:
* Second Life Forum Selection Clause Upheld--Evans v. Linden
* Another Ruling Challenging "Check the Website for Amendments" Contract Provisions--Roling v. E*Trade
* Stop Saying "We Can Amend This Agreement Whenever We Want"!--Harris v. Blockbuster
* Clickthrough Agreement With Acknowledgement Checkbox Enforced--Scherillo v. Dun & Bradstreet
* Ninth Circuit Strikes Down Contract Amendment Without Notice--Douglas v. Talk America
_____________

Eric's Comments

As this case illustrates, the Supreme Court's Concepcion decision could be a potential game-changer for online user agreements. Even so, I believe that today's best practices are:

1) A mandatory non-leaky clickthrough formation procedure.
2) Mandatory venue in vendor's home court with an arbitration option. See the discussion in Evans v. Linden.
3) No use of arbitration as a waiver of class action rights. Concepcion suggests that more aggressive arbitration clauses, including those that preclude consolidated arbitration, might work. This would be terrific news for vendors if true, but I'll believe it when I see more rulings than this one, especially given that this court basically punted on unconscionability. There are strong public policy norms working against an arbitration clause or other contract provision that prevents class formation.
4) Contract amendments take effect only when users are actually given notice of the amendment. See the Ninth Circuit's Douglas case for the minimum steps required. An opt-in is legally stronger but has a number of procedural problems.
5) Irrespective of the contract language, users are in fact given actual notice of any amendments.

Zynga may have cut corners on some of these fronts but got a favorable bounce in court. Kudos to them and their lawyers. Still, based on the precedents, I wouldn't anticipate the next defendant with identical facts will be so fortunate. Because of the low odds of a repeat victory, I don't recommend any changes to the best practices based on this opinion.

This opinion deals with contract formation for Facebook apps, and its reasoning could extend to Facebook Connect as well (which has a different UI, I believe). (I vaguely recall a prior case on contract formation via Facebook Connect before but now I can't remember it--any help?) The opinion provides some reason for optimism about contract formation procedures by the many apps/websites who rely on Facebook's existing user registrations instead of creating direct user account registrations. In this case, notice that the dialog box apparently treated an "allow" as "yes" to four different issues--if the user wanted to proceed, if the user wanted Facebook to transfer its info to YoVille, if the user agreed to the applicability of Facebook's TOS, and if the user agreed to the YoVille user agreement. That's a lot of work from one dialog box acting as an interstitial to the user's destination. This court gives the participating app effectively a free pass, saying:

Zynga persuasively counters that the dialogue box in question is Facebook’s standard dialogue box presented to users wishing to access any number of Facebook applications, and Zynga followed the norm for Facebook applications and was not attempting to hide its terms of service.

(An aside: I've always been troubled by Facebook Connect because participating websites put Facebook in total control of their user relationships. Should Facebook's winds shift capriciously, Facebook could easily lock out the participating website's entire registered userbase. After-the-fact antitrust claims won't resuscitate the dead businesses. Websites, listen carefully: if you put all of your registered user eggs in the Facebook Connect basket, you may get a jumpstart on your registered users but don't expect my sympathy if all the eggs break.)

An unfortunate collateral consequence of this ruling and the resulting Zynga dismissal: with Zynga out of the case, we may not get any further clarification to fix the troubling Swift v. Zynga ruling on 47 USC 230. AdKnowledge (which the opinion repeatedly spell-check corrected into "Acknowledge"--whoops) is still a defendant in this case, so perhaps they will push 47 USC 230 further. Otherwise, we'll just cross our fingers that the prior 230 ruling is an aberration that most other judges will smartly ignore or distinguish.

Posted by Venkat at 09:07 AM | E-Commerce , Licensing/Contracts

July 09, 2011

"App Store" Isn't Generic, But Apple Can't Enforce Its Purported Trademark in the Term--Apple v. Amazon

By Eric Goldman

Apple, Inc. v. Amazon.com Inc., 2011 WL 2638191 (N.D. Cal. July 6, 2011)

Apple's enforcement campaign over the term "App Store" is ridiculous. Apple is trying to prop up a farcically weak trademark claim--and to what end? To prevent its competitors from using the only logical term to describe their venue? Apple's efforts to control the term seem to be anti-consumer because Apple wants to make consumers think harder to figure out the relationships between various vendors. I'm glad Microsoft and Amazon are fighting Apple's overzealousness.

The judge apparently didn't think much of this dispute either, because she almost certainly had a law clerk do the heavy lifting on this opinion. The opinion doesn't start its analysis until page 11 (of 18); the prior material being an uninsightful summary of the parties' contentions. I can read the contentions in the parties' briefs if I really care, thank you very much.

When the opinion actually starts cooking, it breezily dismisses Amazon's claim that "app store" is generic:

The court does not agree with Amazon that the mark is purely generic, for the reasons argued by Apple

Okay...

The opinion next concludes that Amazon didn't create a likelihood of consumer confusion by offering an "appstore." The LOCC factors:

* "App Store" isn't a strong mark.
* even though the parties' services are related (both are app stores using that term in the proper generic sense), Amazon's apps only run on Android, not iPhones.
* the terms are identical in sight/sound/meaning, but the opinion again notes the Android/iPhone divide.
* no evidence of actual confusion.
* the point on marketing channels was incoherent and irresolute.
* the parties' arguments on purchaser care were too speculative.
* the intent factor favors Amazon because it believes the term is generic.
* the product line expansion point was also irresolute. The court says Amazon would like to offer iPhone apps but needs Apple's permission to do so.

Here's how the court summarizes the LOCC analysis:

Thus, two of the eight factors somewhat favor Apple, and three factors somewhat favor Amazon. The remaining three factors are neutral, or do not clearly favor either side. Accordingly, under this analysis, the court finds that Apple has not established that it is likely to prevail on the “confusion” element of its infringement claim.

This is what happens when you use the LOCC test to adjudicate a generic term. The LOCC test isn't insightful in that case, and some of the factors will weigh in favor of the plaintiff because the defendant is just trying to use the dictionary term for its dictionary meaning. Microsoft is still fighting Apple's trademark registration application in the TTAB, and I'm hoping the TTAB's expertise with trademarks will help it do what this judge seemed afraid to do: call the term generic.

The opinion allocates another 5 pages to a dilution analysis, although most of those pages are also a recap of the parties' contentions. The court's complete analysis of dilution issue:

The court finds that Apple has not established a likelihood of success on its dilution claim. First, Apple has not established that its “App Store” mark is famous, in the sense of being “prominent” and “renowned.” The evidence does show that Apple has spent a great deal of money on advertising and publicity, and has sold/provided/furnished a large number of apps from its AppStore, and the evidence also reflects actual recognition of the “App Store” mark. However, there is also evidence that the term “app store” is used by other companies as a descriptive term for a place to obtain software applications for mobile devices.

With regard to the statutory “blurring” factors, the marks are similar, but “App Store” is more descriptive than it is distinctive. Apple did have substantially exclusive use of “App Store” when it launched its service a little over three years ago, but the term appears to have been used more widely by other companies as time has passed. The mark does appear to enjoy widespread recognition, but it is not clear from the evidence whether it is recognition as a trademark or recognition as a descriptive term. Moreover, there is no evidence that Amazon intended to create an association between its Android apps and Apple’s apps, and there is no evidence of actual association.

With regard to tarnishment, there is no evidence to support a likelihood of success on this part of the claim. Apple speculates that Amazon's App Store will allow inappropriate content, viruses, or malware to enter the market, but it is not clear how that will harm Apple's reputation, since Amazon does not offer apps for Apple devices.

This discussion is so garbled, I'm not even sure where to begin. Let's drill down on the blurring discussion. In the LOCC analysis, the court assumed without deciding that "App Store" had achieved secondary meaning. Here, the court apparently undercuts that assumption by implying (saying?) that the mark isn't "distinctive"--in other words, lacking secondary meaning.

If the court intended to conclude that App Store had secondary meaning, then stacking up new definitions for the term is exactly what blurring is supposed to prevent, so the court should allow Apple to shut down Amazon and all of the other parties who are adding those new definitions. Or, if the court is saying that the term was once "distinctive" but now isn't, that's genericide. I don't know of a way for a descriptive term to obtain secondary meaning and then lose it without that term becoming generic for trademark purposes.

We all know what really happened--the term was generic from the moment Apple started using it, and the term has been proliferating through the English language as new useful dictionary terms tend to do. The court's timidness in reaching that conclusion forces it to contort the rest of its doctrinal analysis.

Despite the doctrinal mush, one thing seems pretty clear to me. Apple may have delayed the genericide death of its App Store trademark claim, but I don't see any situations where Apple can enforce its mark currently. I read this opinion as saying that so long as the term isn't being used in connection with a store for iPhone apps, there won't be any consumer confusion or dilution. But my understanding is that Apple isn't letting other stores offer iPhone apps, so the defendant pool should be a nullset. So whether it's because of genericism or the impossibility of consumer confusion, this opinion signals to Apple that it's wasting everyone's time and money trying to protect the App Store term.

Posted by Eric at 12:47 PM | E-Commerce , Trademark | TrackBack

July 04, 2011

June 2011 Quick Links, Part 2

By Eric Goldman

Social Media

* The Third Circuit issued its en banc rulings in Layshock v. Hermitage School District and J.S. v. Blue Mountain School District, both involving school discipline against kids who created fake MySpace profiles of school administrators. Prior blog post on both cases. The good news is that the kids won in both cases; the courts held that the administrators overreacted. However, the decisions don't resolve any of the fundamental issues about the legitimacy of school discipline for kids discussing school-related issues online.

* Too Much Media, LLC v. Hale, 2011 WL 2305620 (N.J. June 7, 2011). A blog commenter doesn’t qualify for the NJ reporter shield law.

* Dr. T.S. v. Plain Dealer, No. 96201 (Ohio App. Ct. June 16, 2011). Uploading a 20 year old version of a newspaper doesn’t reset the single publication rule, even if the article becomes newly indexable in Google.

*Back in September 2010, Xcentric v. Bird settled in a no money deal. The settlement agreement. Ripoff Report's appended response to the original blog post. Prior blog post.

* Scott P. v. Craigslist dismissed. It appears Scott P. gave up against Craigslist. Prior blog post.

* News.com: Is the FTC going after Twitter...again?

* Another PR agency loses a client account over an ill-advised tweet.

* NY Times tries to deconstruct the Twitter hashtag convention.

* Art of Living Foundation v. Does, 2011 WL 2441898 (N.D. Cal. June 15, 2011). Griping bloggers about Ravi Shankar and his organization avoid defamation and trade secret liability for now.

* Jakobot v. American Airlines, 2011 U.S. Dist. LEXIS 64824 (S.D. Fla. June 20, 2011). In a battle over whether the plaintiff lives in Florida or Texas, the court says: “The internet is often filled with old, out-of-date, unsubstantiated, self-aggrandizing and misleading information. It is not enough to submit a selective chunk of Plaintiff's 'Google footprint' and note every time that a tie to Florida appears -- Defendant must do more to connect the dots.”

* State v. Hanson, 2011 WL 2301801(Minn. App. June 13, 2011). Statutory rape conviction reversed based on a mistake of age defense when the victim misreported her age to MySpace. Prior blog post.

* The Duluth doctor is appealing his defamation lawsuit loss against a patient's family member who criticized him online.

* Marin IJ: "A Greenbrae cosmetic surgeon who filed a defamation suit against an online reviewer was ordered to pay nearly $20,000 in attorney's fees after a judge dismissed the case."

* IT World: Is Facebook really 'hated' more than Bank of America?

* Job opening: Executive Director, Public Participation Project, to work towards a federal anti-SLAPP law. Spread the word!

Google

* Reuters on how the FTC's investigation of Google could chill innovation regardless of its outcome. Google's blog post about the investigation.

* In June, I participated in a TechFreedom panel on search engine bias on Capitol Hill. Declan McCullagh moderated. His writeup: "On Capitol Hill, it's all about beating down Google". The video.

* News.com: Google's Enemies: a Primer.

* Google hires TWELVE lobbying firms to fight the FTC (on top of the 6 they already had).

* Neeley is appealing his loss to Google. Prior blog coverage.

Spam

* Spam filters have taken a huge bite out of spam. See my 2003 article expressing confidence that technology would do a much better job fighting spam than legislation.

* Amazon's Kindle hit by spammed e-books. Another example that service providers have to exercise editorial control to curb spam.

Miscellaneous

* The FTC approved the final order in the Chitika case.

* CA enacts an Amazon tax and Amazon instantly tosses its affiliates overboard--including me! More evidence that the taxman will effectively kill the affiliate industry.

* Weinstein v. eBay Inc., 2011 WL 2555861 (S.D.N.Y. June 27, 2011). As a secondary market, StubHub does not need to comply with NY state law requiring printing the face value on tickets.

* Ni v. Slocum, A128721 (Cal. App. Ct. June 30, 2011). Rejecting electronic signatures in support of a ballot petition. Contrast Anderson v Bell in Utah about the application of UETA to election petition signatures.

* Zamora Radio, LLC v. Last.fm LTD., 2011 WL 2580401 (S.D. Fla. June 28, 2011). A defense-favorable Internet personal jurisdiction ruling: "the AccuRadio website reflects a low quality of commercial activity; visitors cannot purchase products or download music and are primarily limited to live streaming audio. Moreover, Plaintiff has not established that (1) Florida constitutes a principal consumer base for AccuRadio's service; (2) AccuRadio.com makes any reference to Florida, or directs visitors to any Florida establishments; (3) AccuRadio has engaged in any print, radio, television, or Internet advertising targeting Florida residents; or (4) AccuRadio has in any way specifically encouraged Florida residents to visit AccuRadio.com." The court distinguishes co-defendant Last.fm: "AccuRadio users do not have to download a program to access and listen to AccuRadio's programming and AccuRadio users do not download music from AccuRadio's website....Further, AccuRadio's website is not specifically directed at Florida consumers and local information about concert events is not provided on AccuRadio's website."

* Take James Grimmelmann's Internet Law exam.

Posted by Eric at 08:43 AM | Content Regulation , E-Commerce , Search Engines , Spam | TrackBack

June 07, 2011

Site Moderators Weren't Agents of the Site--Cornelius v. BodyBuilding.com

By Eric Goldman

Cornelius v. BodyBuilding.com, LLC, 2011 WL 2160358 (D. Idaho June 1, 2011)

This case involves a nutritional supplement called Syntrax, which is available for sale on an e-commerce site BodyBuilding.com. The site supports users comments and message boards and deploys user-moderators to oversee the conversations. Moderators "may, among other things, edit and delete posts, move threads, and ban forum users for violations of the forum’s terms and conditions." Moderators self-nominate but are elected by the community. Moderators don't get paid, but they get a discount for onsite purchases and a free trip to Boise.

This ruling involves three posts made by user "deserusan" and one by "INGENIUM" that made critical remarks about Syntrax. A Syntrax competitor, Gaspari, later hired deserusan as a part-time CSR, and deserusan disclosed that employment status in his onsite signature block. However, perhaps unexpectedly, when deserusan updated his signature block, the update automatically propagated to all of deserusan's old posts, thus making it appear that deserusan was bashing Syntrax as an official employee of a competitor. Meanwhile, INGENIUM subsequently became an onsite moderator, so his legacy posts (including the one at issue) got the elevated visibility given to posts by moderators, even though it was written when INGENIUM wasn't a moderator.

Syntrax initially sued more than 15 defendants over these posts. The case has generated a number of interesting and confused rulings along the way, and we've blogged it three times before:

* "Website Privacy Policy Supports Pseudonymous Poster's Expectation of Privacy -- Cornelius v. Deluca"
* "Troubling Ruling About 47 USC 230 and Moderators--Cornelius v. DeLuca" (which included the classic analysis of whether calling someone a "Cornholio" is defamatory)
* "Online Retailer Isn't Liable for User Comments--Cornelius v. DeLuca"

Gaspari and BodyBuilding.com are the only defendants remaining, and in this ruling, the court grants both summary judgment.

Regarding Gaspari's liability, deserusan had made the offending posts before becoming an employee, but the court had previously ruled that it could be liable if "Plaintiffs could prove that Gaspari intentionally and unreasonably failed to remove the allegedly defamatory posts after notice and opportunity to do so." The court concludes that Gaspari lacked adequate knowledge. It didn't know about the posts when hiring deserusan, it didn't know he changed his signature block or that doing so would affect old posts, and it didn't control the posts. Also, similar to Ripoff Report, BodyBuilding.com restricted its authors' ability to delete their old posts.

[In our exchange about this post in draft mode, Venkat wondered about the legal test the court used here. This is the standard legal test for, say, a business that leaves a defamatory comment posted on the bathroom wall. I don't know if the test makes sense in the context of an employer reviewing a new employee's old online activities, but the court gets to the right place either way.]

Regarding BodyBuilding.com's liability for the remaining claim of Lanham Act unfair competition, the plaintiff contends that "Bodybuilding.com endorsed or “adopted” INGENIUM’s statement – and therefore became responsible for it – when it failed to remove the post after INGENIUM became a moderator." This should have been an easy 47 USC 230 dismissal--even if the post was by a moderator, the website is never liable for it--but the court had previously ruled otherwise. This led to an inquiry whether the moderator was the website's agent.

The court concludes that moderators weren't acting within any agency scope when posting online, and nothing created apparent authority for those posts. Separately, the court says there may not be any damages because it's unclear if anyone saw the post during INGENIUM's time as a moderator.

With all of the facts on the table, it's easy to see why this case took so many rulings to resolve. Users changed their status to employees/moderators, which in turn changed how their posts were presented. It takes a little while to unpeel these layers. On the other hand, this shows why 47 USC 230 is so helpful. If the court had taken the position all along that a moderator's post was third party content, the case would have been tossed a long time ago, and the parties would have saved a lot of time and money.

The court reached a good place in declining to hold that agency law made the site responsible for its moderator's post. However, even if 47 USC 230 didn't apply, the entire inquiry was flawed because independent user-moderators should almost never be considered agents of the site, and therefore courts should screen out agency arguments much earlier in the process. We don't get too many agency arguments as bypasses to 47 USC 230, but this case leaves plaintiffs with some reason to explore those doctrinal interstices.

Rebecca is also covering this suit.

Posted by Eric at 09:28 AM | Derivative Liability , E-Commerce , Marketing | TrackBack

May 26, 2011

Online Insurance Application Constitutes “Writing” for Purposes of Waiving Insurance Coverage for Medical Benefits--Barwick v. GEICO

By John Ottaviani

Barwick v. Government Employee Insurance Co., Inc., 2011 Ark. 128 (March 31, 2011) [link]

Although 47 states, the District of Columbia, Puerto Rico and the Virgin Islands have adopted the Uniform Electronic Transaction Act (UETA), we have had very few cases discussing or interpreting UETA. Here, we have a case where the court is asked whether a waiver in an online insurance application is a “writing” for purposes of a state insurance law that requires coverage waivers to be in writing.

The facts are fairly simple. In 2009, a woman (who subsequently married the plaintiff) purchased automobile insurance coverage online at GEICO’s website. In the online application, the woman rejected coverage for medical benefits as permitted under Arkansas law. The online form bore the woman’s electronic signature. In a discovery deposition, the woman also acknowledged that she completed the form on the website, that she did not select the coverage for medical benefits, and that she signed the application electronically.

The lower state court granted summary judgment to GEICO and dismissed the husband’s claim for medical benefits. On appeal, the husband argued that the electronic application containing his wife’s electronic signature did not meet the requirement that a rejection of coverage be “in writing” under the terms of Arkansas Code Annotated Section 23-89-203 (Repl. 2004). The husband argued that because a general statute does not apply when a specific one governs the subject matter, the insurance statute requirement that the waiver of coverage be “in writing”, takes precedence over the more general provisions in the UETA. He also argued that pressing a computer button did not constitute a “writing” for purposes of waiving coverage.

The Arkansas Supreme Court reviewed the history of UETA and noted that Arkansas had adopted UETA in 2001 to facilitate electronic transactions. The court found that the online application was an “electronic record” under UETA. The Court also found that there was no conflict between the insurance statute and UETA, and that the two provisions can be read “harmoniously” to mean that an electronic record can fulfill the requirement of written rejection for coverage. As a result, the Arkansas Supreme Court affirmed the lower court’s grant of summary judgment to GEICO.

A few thoughts:

• The court’s analysis is straightforward and correct. One would think that the legal issue is obvious, but there have been very few cases interpreting UETA to date (perhaps because the statute is so simple?). UETA was drafted so that the state legislators did not have to amend the numerous statutory requirements for “writings” in each statute. Instead, UETA provides a global approach that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form, and a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. But it’s nice to now have a case to point to when a client questions the validity of online agreements.

• GEICO also argued that the plaintiff should be estopped from questioning the validity of the electronic waiver of coverage, because he is also seeking to benefit from the insurance policy obtained throughout the online application. Because the court dismissed the appeal on the UETA grounds, it did not need to address the estoppel argument.

• There do not seem to be any evidence issues in this case. The woman in question did not deny that she completed the online application and affixed an electronic signature. She also gave a deposition testimony that she completed the form on the website, that she and did not select coverage for medical benefits, and that she signed the application electronically. Query whether or not the court would have denied summary judgment if any of these facts had been in dispute.

• Unlike the court in Colorado last year, the Arkansas Supreme court correctly determined that EUTA, and not the federal Electronics Signatures In Global and National Commerce Act (commonly known as “E-Sign”), applies to this case. E-Sign has a peculiar “reverse preemption”. E-Sign governs in the absence of a state law or in states that made modifications to UETA that are inconsistent with E-Sign. In effect, Congress forces a state to adopt UETA in a uniform manner, by providing that the state version of UETA controls over E-Sign if UETA is adopted without modification. Here, Arkansas appears to have adopted UETA without any significant modifications, so UETA’s provisions should govern questions of contract formation and enforceability in Arkansas.

See also this brief post on a Federal Circuit UETA case.

Posted by John Ottaviani at 07:00 PM | E-Commerce , Licensing/Contracts | TrackBack

Ninth Circuit: FACTA Does not Cover Emailed Receipts -- Simonoff v. Expedia

[Post by Venkat Balasubramani]

Simonoff v. Expedia, No. 10-35595 (9th Cir.; May 24, 2011)

FACTA is a statute which requires merchants to truncate the customer's credit card information on receipts that are "electronically printed." Plaintiffs have brought claims against online retailers for including credit card information on emailed receipts. Courts have not been receptive to these claims, and in Simonoff v. Expedia, the Ninth Circuit joins other circuit courts in holding that FACTA does not apply to email receipts.

Venue Selection

Before getting to the substantive issue, the court addressed the parties' arguments regarding the applicability of the forum selection clause. Expedia's online agreement provides that users

consent to the exclusive jurisdiction and venue of courts in King County, Washington.

Simonoff argued that "courts in King County" referred only to state courts, and therefore jurisdiction was not proper in federal court. The court disagrees, noting that if the online agreement used the words "courts of King County," this would have mandated a different result, because:

the phrase "the courts of" a state refers to courts that derive their power from the state—i.e., only state courts—and [a] forum selection clause, which vested exclusive jurisdiction in the courts "of" [a particular state, would limit jurisdiction to courts of that state.]

[It appears Expedia heeded the Ninth Circuit's advice from Doe 1 v AOL. Note to self! I think saying "federal or state courts" works, if you are open to jurisdiction in federal or state courts, but if you used this language you would say "federal or state courts in King County."]

FACTA and Electronic Receipts

On the issue of whether FACTA applies to emailed receipts, the court followed the approach taken by other circuits, including Shlahtichman v. 1-800 Contacts, Inc., discussed in this blog post: "Electronically Printed" Does not Include Automated Merchant Email." The court notes that although the technologies around the dissemination of information have changed over the years, "print" still means to imprint onto something tangible—no one ever says "print this to your iPad":

'Print' refers to many different technologies—from Mesopotamian cuneiform writing on clay cylinders to the Gutenberg press in the fifteenth century, Xerography in the early twentieth century, and modern digital printing—but all of those technologies involve the making of a tangible impression on paper or other tangible medium. Although computer technology has significantly advanced in recent years, we commonly still speak of printing to paper and not to, say, iPad screens. Nobody says,"Turn on your Droid (or iPhone or iPad or Blackberry) and print a map of downtown San Francisco on your screen." We conclude that under FACTA, a receipt that is transmitted to the consumer via email and then digitally displayed on the consumer’s screen is not an "electronically printed" receipt.

Congress's use of the term "electronically printed" isn't particularly precise, but the court finds that if Congress intended the statute to cover email receipts it could have easily said so:

in enacting FACTA, Congress did not use language that would have clearly extended FACTA’s protection to electronically mailed receipts. For example, Congress could have applied FACTA to 'electronically printed or transmitted receipts,' to 'electronically printable' receipts, or to 'electronically displayed' receipts. Congress, however, chose not to do so, even though it has referred to digital methods of communication and commerce in numerous other statutes. We can’t fill in the blanks with words that Congress didn’t supply. [emphasis in original]

The court also notes that the structure and staggered implementation of FACTA supports its interpretation that "electronically printed" does not cover emailed receipts. The statute is intended to cover the printing of receipts to the extent this is within the merchant's control, and not a situation where the printing or display happens at the consumer's end:

if computer screens were deemed to 'print' receipts within the meaning of the statute, merchants' liability would hinge on the date the customer purchased and began using a computer screen—an unintended, nonsensical, and unpredictable result.

The statute was intended to protect against identity theft, and it is difficult to see where the risk of identity theft is when the customer is emailed a receipt. To the extent the risk exists, it is something the customer, and not the retailer, is better situated to protect against. In any event, as the court in Shlahtichman noted, there are other statutes directed at protecting against identity theft when the information is stored or transmitted in electronic form (e.g., the Computer Fraud and Abuse Act).

At the end of the day, this was another attempt by plaintiffs' lawyers to push the envelope and sue under a statute which created a civil cause of action without any showing of harm. The court smacks down the plaintiff's attempt.

Other coverage: "Ninth Circuit: FACTA does not apply to credit card receipts sent via email" (Evan Brown)

Posted by Venkat at 02:11 PM | E-Commerce

May 05, 2011

Court Finds Webloyalty Rewards Program Disclaimers Sufficient to Defeat Misrepresentation Claims -- Berry v. Webloyalty

[Post by Venkat Balasubramani]

Berry v. Webloyalty.com, Inc., et al., 10-CV-1358-H (CAB) (S.D. Cal.; Apr. 11, 2011)

This is another online membership program case. Plaintiff purchased tickets from movietickets.com using his debit card. He alleges that he was offered a $10.00 discount and, when he took advantage of this discount, he unwittingly signed up for a rewards program operated by a third party that resulted in monthly recurring charges. Plaintiff asserted a variety of claims, including for unfair business practices against defendants. Based on the disclosures at the time of the transaction, the court rejects the claims and dismisses the case.

The court cites to and reproduces the disclosures in its order, and finds that:

the explicit and repeated disclosures that Defendants made in their enrollment page suffices to defeat the . . . claims.

Plaintiff cited to Keithly v. Intelius, where the court found that disclaimers did not defeat a plaintiff's claim of being misled into signing up for a rewards program. ("Intelius May be Liable for Deceptive Online Marketing Practices Based on Third Party Transaction at Checkout.") The court notes that in contrast to Keithly, in this case, the customer was not taken through a byzantine transaction process. Here, the plaintiff took a "voluntary step to click on the coupon offer" that looks like it was presented in the page before the checkout page. As the court notes, in all, the plaintiff "took three affirmative steps to accept the terms of the club membership," and had an opportunity to decline. The court held that the disclaimers around the offer were "sufficient to place reasonable consumers on notice that they are entering into the Shopper Discounts & Rewards club and that they are accepting the offer by clicking on the 'YES' button."

The Defendants used the same strategy used by defendants in similar cases to focus on the screenshots of the signup process and thereby limit discovery. Defendants initially presented the screenshots. Plaintiff challenged the authenticity of the screenshots. The court allows limited discovery into the issue of authenticity, and plaintiff is unable to come up with anything to adequately challenge the authenticity of the screenshots. As a result, the court takes judicial notice of the screenshots and adjudicates the issue on the basis of the pleadings and the screenshots of the signup process. The court also takes judicial notice of the acknowledgment page, confirmation email, and account history as well. This is a good strategy on the defendants' part to narrow the case and take a case that may have otherwise resulted in a potential discovery quagmire and focus it on the individual signup process for the plaintiff in question.

This case is distinguishable from Keithly on the basis that in Keithly, the checkout process was much more convoluted. On the other hand, in Keithly, the court expressly cites to the "least sophisticated consumer" standard, and there's no such reference by the court in this case. The implication is that any consumer who is duped into signing up for the rewards program in this case is per se unreasonable. In addition, although it did not apply to the conduct in question since it had not been enacted at the time of the transaction, the recently passed "Restore Online Shoppers' Confidence Act" speaks directly to the issue of post-transaction offers that result in recurring charges for the consumer. The statute prohibits the passage of credit card or billing information from one online merchant to another, finding that:

[t]he use of a 'data pass' process defied consumers' expectations that they could only be charged for a good or a service if they submitted their billing information, including their complete credit or debit card numbers.

Plaintiff tried to rely on this and requested that the court take judicial notice of this Congressional finding, but the court says that the Congressional statements issued in the statute "are subject to dispute." Ordinarily, it does not make sense for a court to take judicial notice of a particular industry practice since the experience in a particular case may vary, but I wonder if the court should have given greater weight to the findings, at least with reference to the question of whether a particular online practice was reasonable. As to the point quoted above which relates to billing information being transmitted to a third party, there is no dispute that Webloyalty engaged in this practice and that Congress thinks it's sufficiently out of touch with consumers' expectations that it should be prohibited. Either way, it's worth mentioning what the statute covers:

- before obtaining billing information, the third party seller has to clearly and conspicuously disclose the material terms of the transaction;
- the fact that the third party seller is not affiliated with the initial merchant has to be disclosed to the consumer;
- the third party seller has to obtain (directly from the consumer) the consumer's billing information, name and address and contact information, along with the consumer's affirmative consent.

The statute imposes a blanket ban on the practice referred to as "data-pass" - i.e., disclosure of the consumer's credit or debit card or other account information by the initial merchant to the third party merchant. The statute also prevents "negative option marketing," where a merchant interprets the consumer's failure to take action as assent for future charges.

Previous posts:
Fifth Circuit Blesses Vistaprint's Rewards Program Sign-Up Process -- Bott v. Vistaprint USA Inc.
Internet Rewards Program Class Action Survives Initial Motion to Dismiss -- In re Easysaver Rewards
Intelius May be Liable for Deceptive Online Marketing Practices Based on Third Party Transaction at Checkout -- Keithly v. Intelius
Intelius Dodges a Bullet Over Allegedly Deceptive Online Marketing Practices -- Hook v. Intelius

h/t: "Screenshotapalooza:Webloyalty disclosure sufficient as a matter of law" (Professor Tushnet) ("The court, however, found that the disclosures were prominent enough that no reasonable consumer could have been fooled by them (essentially deeming all the people who feel cheated by programs of this type unreasonable).")

Posted by Venkat at 04:36 PM | E-Commerce

April 08, 2011

Intelius Dodges a Bullet Over Allegedly Deceptive Online Marketing Practices -- Hook v. Intelius

[Post by Venkat Balasubramani]

Hook v. Intelius, 10-CV-239(MTT) (M.D. Ga.; Mar. 28, 1011)

I mentioned a class action in Washington against Intelius over its online sales practices in a couple of weeks ago. ("Intelius May be Liable for Deceptive Online Marketing Practices Based on Third Party Transaction at Checkout.") Although the Washington court denied Intelius's motion to dismiss and allowed the claims to go forward, a judge in Georgia came to a different conclusion and dismissed a similar complaint against Intelius.

Motion to Strike the Screenshots: Intelius took an interesting approach in its motion to dismiss. It attached archived versions of the screenshots which reflected the webpages which the plaintiff ostensibly viewed when he made the purchase at Intelius. Intelius also convinced the court to allow limited discovery on the authenticity of the screenshots, and if found to be authentic, rule on the motion to dismiss while considering the screenshots. The court finds that there is no evidence to indicate that the screenshots were not authentic representations of

the webpages that resulted from running [plaintiff's] email search request on the regenerated archived code from [the date in question].

Plaintiff argued that Intelius's evidence could be self-serving and that Intelius representatives could have concocted a scheme to conduct a fraud on the court, but the court finds that there's no evidence to back this up (and that if such a scheme existed and was discovered, it would "subject the Defendants and their attorneys to the harshest possible sanctions"). [Convincing the judge to allow limited discovery into the webpages in question was a creative approach by Intelius to avoid lengthy drawn out discovery that would otherwise accompany a lawsuit.]

The Transaction Process: The court describes the flow of the transaction in "laborious" detail. In the first step, the customer conducts a search for an email address (at one of Intelius's partner sites). In the second step, the customer "lands" on the Intelius site. The results page are displayed on the third step. On the fourth page, the customer is presented with pricing information for the first time. "Identity Protect," the product that plaintiff claims he unwittingly signed up for is also mentioned. Here, the customer can choose between the standard pricing ($4.95) and a "special price" of $1.95:

[t]he unmistakable impression one gets from viewing this page is that there are two purchase options: one, at the "Regular Price" of $4.95, and another at the "Special Price!" of $1.95, which is 60% off and comes with a "FREE Identity Protect Trial." However, it is not clear at this point that the 60% discount is conditioned on the customer selecting the free Identity Protect trial.

The fifth page contains an explanation of Identity Protect, as well as the fact that the customer is charged $19.95 if the customer does not cancel after the 7-day trial. As the court notes:

At this point, the ambiguity of the previous page with respect to the Identity Protect trial's relationship to the discount is resolved, one can only receive the $3.00 discount by signing up for a free, seven-day trial of Identity Protect.

After the fifth page, there are five additional pages - the customer actually receives the requested information at the tenth page. The confirmation page does not provide any information about how to terminate the Identity Protect membership.

EFTA Claim: Plaintiff claimed that Intelius engaged in an "unauthorized fund transfer." The court says no, the transfers were "clearly . . . preauthorized."

ECPA Claim: Plaintiff also claimed that Intelius unlawfully intercepted an electronic communication. The court rejects this claim as well, finding that Intelius was a party to the communication (i.e., was intended to receive plaintiff's credit card information) and "used the information for the purpose it was given."

Unjust Enrichment: The court also rejects plaintiff's unjust enrichment claim, finding that Intelius performed according to the terms of its agreement with plaintiff, and plaintiff took six months to cancel the trial membership. Unjust enrichment applies where there is no contract and here there was a contract which both sides performed.

Georgia Unfair Trade Practices Claim: Plaintiff had a few theories as to how Intelius violated Georgia's unfair trade practices statute, but the court shoots them all down. With respect to the core claim that Intelius failed to disclose material facts about the membership program, the court states:

Intelius disclosed the details of the Identity Protect program at least five times before the Plaintiff made his purchase. One wonders, if these five disclosures were not sufficient to make the Plaintiff aware of the nature of the transaction, what would have been?

___

The tenor of this court's decision is different from the Washington court's. There, Judge Lasnik noted that

[t]he capacity of a marketing technique to deceive is determined with referenced to the least sophisticated consumers among us.

The court here did not delve into the standard but one does not get the sense that the court evaluated the transaction from the perspective of the "least sophisticated internet consumer."

On the other hand, the transactions in question were slightly different. I've uploaded the pages from the court's order which contain the screenshots in question (which are worth a look and which you can access here), and there is a fair amount of disclosure that if you don't cancel the Identity Protect trial within seven days, you will be billed $19.95 monthly. However, you do get the sense that customers are put through a transaction labyrinth to make it hard for the customers to jump between the two tracks. Once the customer goes down the free trial path, the customer is not given much of an opportunity to simply remove the free Identity Protect trial and continue with the transaction. Unlike the Georgia court, the Washington court focused on the process and whether it would be deceptive to the consumer.

One thing is for sure, Intelius is definitely not taking the "one click" approach to online transactions!

Previous post:

"Intelius May be Liable for Deceptive Online Marketing Practices Based on Third Party Transaction at Checkout"

Posted by Venkat at 12:07 PM | E-Commerce | TrackBack

April 07, 2011

StubHub Denied Section 230 Defense in Scalping Case--Hill v. StubHub

By Eric Goldman

Hill v. StubHub, Inc., 2011 WL 1675043 (N.C. Super. Ct. Feb. 28, 2011). My previous blog post in this case.

This is a putative class action lawsuit against StubHub for violating North Carolina's anti-scalping laws, which both restrict the resales prices of tickets and service fees charged for the resale. The plaintiffs claim StubHub violates both provisions.

StubHub interposed a 47 USC 230 defense, something that StubHub has asserted with mixed success before. The court rejects the defense.

The court begins with a survey of Section 230 jurisprudence. Principally building off the bloated statements in Roommates.com, the court summarizes its legal assessment:

A review of the cases below leads this court to conclude that an internet service provider crosses the line and becomes liable for content on its website when the internet service provider (“ISP”) materially contributes to and/or specifically encourages the offending content. To “materially contribute” in this context means to influence the offending content in a way that promotes the violation of law that is represented by the offending content. To “specifically encourage” means to elicit and make aggressive use of the offending content in the business of the internet service provider. Each case must be decided on its own facts, giving deference to the public policy embodied in the statute. Cases in which the offending content is unlawful require a heightened degree of materiality and specificity. Intent to violate the law is not required. Conscious disregard by an internet service provider of known and persistent violations of law by content providers may impact the courts’ determinations of the service provider’s claim to immunity, especially where the ISP profits from the violations.

Elsewhere, the court says Section 230 "protects those ISPs which are truly innocent bystanders in use of the web."

What is the court talking about? It is a weird way of trying to distill the state of the law (which the court mischaracterizes by saying the "case law governing the question of loss of immunity as an internet service provider is not extensively developed"). Oddly, after spending 40% of its opinion supporting various cases that led it to draw this legal conclusion, the court doesn't explicitly use this recap to guide its analysis. Yet another reason not to give the recap much credit. One other point that undercuts the court's credibility: the court didn't address the highly relevant Milgram v. Orbitz case which reached the opposite result on similar facts.

In my opinion, the most interesting part of the court's opinion relates to Section 230's application to the ticket price. The court acknowledges that each seller sets his/her own price for the ticket. Nevertheless, StubHub can be responsible for the price sellers choose because StubHub does a number of things to manage prices on the site. (StubHub wants sellers to sell at the highest obtainable price because that maximizes StubHub's fees; but prices above the market-clearing price mean that no deals are done, in which case StubHub doesn't get any cut).

The court enumerates several ways that StubHub shapes the prices:
* StubHub decides which events it supports in the first place (it doesn't allow ticket sales for every event)
* "It actively solicits listings for high-demand events. It monitors its competition for listings."
* It cuts special deals for "LargeSellers" (a point also raised in the NPS v. StubHub case). The court says "StubHub influences the pricing of the LargeSellers" through various programmatic details.
* StubHub shows sellers pop-up windows telling them if their price is out of a targeted pricing range and encourages sellers to rethink the price.
* Later, the court gives other examples of how "StubHub is in total control of the transaction."

The court summarizes and concludes the pricing discussion:

StubHub’s business model does not require scalping practices. It encourages them. It is designed to produce the highest volume of ticket sales at the prevailing market price for events which are sold out, and thus likely to generate market prices higher than the face value of the tickets irrespective of the fees involved on both sides. Having engaged in detailed studies of pricing and pricing habits of its users and competitors, it strains credulity that StubHub had no information about the relation of market value to face value. It could not reasonably drive its customers’ prices to market value without that information. It does not provide information on the face value of tickets to buyers on its website. Further, it controls its website to prevent communication between buyers and sellers, thus facilitating its role as the arbiter of market price.

I feel like I'm missing something pretty fundamental. Don't all retailers--even marketplaces like eBay--try to drive their prices to "market prices"? Is there any other logical pricing outcome?

In its conclusion, the court says that StubHub

directly participated in developing the pricing on its system....StubHub encouraged illegal content. Phrased differently, the use of its website to scalp tickets in violation of North Carolina law was a predictable consequence of its business model. StubHub encouraged, materially contributed to, and made aggressive use of the pricing content on its website. It profited from tickets sold at prices higher than face value. It was consciously indifferent and willfully blind to the illegal prices being posted, knowing that the predictable consequences of its pricing model would be the generation of illegal prices. It is not entitled to immunity. It does not qualify as a Good Samaritan.

The odd thing about the court's pricing discussion is that, by the court's own admission, StubHub is usually encouraging sellers to reduce their offered prices. So if StubHub changes its practices in response to this opinion to improve its Section 230 defense, ironically consumers will likely pay higher ticket prices, not lower. Talk about a Pyhrric victory.

If it holds, this ruling about steering price-setting might apply to any e-commerce site that wants Section 230 protection for seller pricing choices. For that reason, obviously this opinion has risk for StubHub's parent, eBay, but I would note that the reason could be applied to Google's AdWords auctions. Google does a number of things to affect advertisers' bids in the auction, and this ruling could potentially affect Google's Section 230 coverage for those auctions. On the other hand, so much of the court's opinion turns on the illegality of scalping. If the marketplace auctions lead to a legal price, this opinion's rationale might drop away.

Then again, retailers have an increasingly tough time claiming 230 immunity for items they sell, especially items delivered offline. See, e.g., my post about Parisi v. Sinclair. Clearly, this judge thought StubHub was closer to a retailer than a marketplace.

The court says StubHub's buyer's fee is also illegal under the anti-scalping law.

StubHub's counsel has told me that they plan to appeal this opinion. It will be interesting to see how this ruling fares on appeal.

A final note: this ruling is just the latest detritus from the legally disastrous 2007 Hannah Montana concert tour. The legal developments arising from that tour have been horking the law for years--Ticketmaster v. RMG being the flagship example. Add this ruling to the list of reasons why Cyberlawyers should hate Hannah Montana.

Posted by Eric at 12:14 PM | Derivative Liability , E-Commerce | TrackBack

April 05, 2011

March 2011 Quick Links, Part 2

By Eric Goldman

Trademark

* Apple is on the road to CrazyTown with its attempt to secure and protect trademark rights in “App Store.” Among the "highlights" this month:
- it sued Amazon. Marty’s comments. The Justia page.
- Microsoft has been scoring a lot of points in its TTAB opposition. My comments on the latest developments. This battle is so pitched, it’s devolved into a font war.
- Apple successfully “persuaded” MiKandi, an "app store" for adults, to change its description to "app market."

* Google's trademark win for "Android" is being appealed to the Seventh Circuit.

* Advocate General's opinion in the EU keyword advertising case of Interflora v. Marks & Spencer. Let me know if you have the patience to read the whole thing. I don't.

* Jim Jansen: "it probably doesn't pay, on average, to bid on competitors branded phrase."

* At SSRN: Counterfeiters: Friend or Foe? The article tries to evaluate when knockoffs create demand for the original or act as substitutes: "The advertising effect dominates substitution effect for high-end authentic product sales, and the substitution effect outweighs advertising effect for low-end product sales."

* BoingBoing: NYT shuts down the @freeNYTimes auto-retweeting account on trademark grounds because the re-tweet service blows apart NYT's paywall. BTW, given its holes, I don’t think it should be called a “paywall.” Maybe more like a “pay-chain-link-fence”?

* GoDaddy takes down a website that tried to emulate Reed College's website.

* Washington Post caves in response to demand from Washington Redskins' team and changes a blog name from "Redskin Insider" to "Football Insider."

Retailing and Manufacturing

* WSJ: Manufacturers and retailers are beginning to push back on the paradox of choice. AdAge on Walmart using its market share to promulgate private regulations on its suppliers.

* Fast Company: How to sell more carrots? Market them like junk food.

* Illinois is the latest state to enact an "Amazon tax," so Amazon and Overstock tossed their Illinois affiliates overboard. When are states going to learn that the Amazon tax doesn't actually improve their financial situation? They don't get the increased sales tax revenue, and they lose the income tax from state-based affiliates. This is the opposite of a Pareto optimal move--no one gets made better off, but some get made worse off. This is also a good example of how state tax policy can degrade our national economy.

* SaferProducts.gov is now live.

* NYT: Car manufacturers are asserting copyright to prevent the National Highway Transportation Safety Administration from republishing their “technical service bulletins” describing warranty extensions and other unusual problems with their cars.

Privacy

* From the FTC: "in the last 15 years, the FTC has brought more than 300 privacy-related actions, including: 32 data security cases, 64 cases against companies for improperly calling consumers on the Do Not Call registry, 86 cases against companies for violating the Fair Credit Reporting Act (FCRA), 97 spam cases, 15 spyware (or nuisance adware) cases, and 15 cases against companies for violating the Children’s Online Privacy Protection Act (COPPA)."

* FTC busts Chitika for having opt-out cookies expire in 10 days. According to ClickZ, Chitika claims it was a bug; the cookie was supposed to expire in 10 years.

* ClickZ: "Device Fingerprinting Could Be Cookie Killer." A follow-up story on privacy concerns.

* Time Magazine: Data Mining: How Companies Now Know Everything About You

* The FTC gave final approval to its settlement with Twitter. Prior blog post.

* Jane Yakowitz, Tragedy of the Data Commons. Brooklyn VAP Jane Yakowitz takes on Paul Ohm's reidentification paper. The abstract:

Accurate data is vital to enlightened research and policymaking, particularly publicly available data that are redacted to protect the identity of individuals. Legal academics, however, are campaigning against data anonymization as a means to protect privacy, contending that wealth of information available on the Internet enables malfeasors to reverse-engineer the data and identify individuals within them. Privacy scholars advocate for new legal restrictions on the collection and dissemination of research data. This Article challenges the dominant wisdom, arguing that properly de-identified data is not only safe, but of extraordinary social utility. It makes three core claims. First, legal scholars have misinterpreted the relevant literature from computer science and statistics, and thus have significantly overstated the futility of anonymizing data. Second, the available evidence demonstrates that the risks from anonymized data are theoretical - they rarely, if ever, materialize. Finally, anonymized data is crucial to beneficial social research, and constitutes a public resource - a commons - under threat of depletion. The Article concludes with a radical proposal: since current privacy policies overtax valuable research without reducing any realistic risks, law should provide a safe harbor for the dissemination of research data.

* Woodrow Hartzog, Promises and Privacy: Promissory Estoppel and Confidential Disclosure in Online Communities, 82 Temp. L. Rev. 891 (2009). The abstract:

Online communities often provide significant support for those who seek it. Yet in order to take advantage of that support, users must frequently disclose sensitive information such as dating profiles, candid thoughts, or even past substance abuse. What happens when other community members fail to keep this potentially harmful information confidential? Traditional remedies will likely fail to protect people when members of an online community violate the confidentiality of other members. In this Article, I contend that promissory estoppel, an equitable doctrine designed to protect those who detrimentally rely on promises, can ensure confidentiality for members of online communities. The application of promissory estoppel via a website's terms of use agreement as a method for protecting disclosure has substantial advantages over tort-based, technological, or contractual remedies. Under the third-party beneficiary doctrine or the concept of dual agency, these agreements could create a safe place to disclose information due to mutual ability to enforce promises of confidentiality.

Posted by Eric at 02:33 PM | E-Commerce , Privacy/Security , Trademark | TrackBack

Online Booksellers Get 47 USC 230 Immunity for Publisher-Supplied Marketing Collateral--Parisi v. Sinclair

By Eric Goldman

Parisi v. Sinclair, 2011 WL 1206193 (D.C. D.C. March 31, 2011). The complaint. More source documents.

Sinclair self-published a book that Parisi believes defamed him. The book showed up in Books-a-Million, B&N and Amazon. All of the retailers published an allegedly defamatory promotional statement supplied by the "publisher" (in this case, the author). In B&N and Amazon's cases, it appears that Sinclair's self-publication venue, Lightening Source, supplied a data feed that they used to automatically build a display page containing the allegedly defamatory statement.

With respect to the publisher-supplied promotional statement, the online booksellers claimed 47 USC 230 immunity. This proves to be an easy case because the online booksellers simply republished the third party-supplied content. The court explicitly rejected an argument that Books-a-Million "adopted" the publisher's collateral as its own. This is consistent with the uncited Black v. Google opinion. The court also explicitly granted Books-a-Million's 12(b)(6) motion to dismiss, saying that was appropriate when the immunity is apparent on the complaint's face, as it was here. (B&N and Amazon brought summary judgment motions).

Despite this being an easy 230 case, the court delineates two 47 USC 230 boundaries. First, it refuses to embrace the Perfect 10 v. ccBill conclusion that 230 preempts state IP claims, but it doesn't accept the alternative proposition (from the Project Playlist and Friendfinder cases) either. Instead, it dismisses the false light claim (which the court liberally construed as a publicity rights claim) on newsworthiness grounds.

Second, in FN3, the court says that B&N and Amazon can't claim 47 USC 230 immunity for the online sale of physical books delivered in realspace. The court distinguishes the republication of marketing collateral, which are covered by 230, from sale and delivery of the physical books themselves, which are not. This seems like a sensible distinction. Even though 230 immunizes offline conduct when the claim is based on online communications (see, e.g., Doe v. MySpace), offline deliveries of tortious material by the defendant should be outside the scope of 230. For more on this, see the uncited Curran v. Amazon.com case. The court suggests that a Kindle sale--where the online retailer sells third party materials but delivers them electronically--would also drop out of 230's protection. This is consistent with the uncited the Accusearch case, although I personally think 230 can apply in that situation.

Even though 230 isn't availing for the book sales themselves, the booksellers exit the case because they lacked the required actual malice.

Despite the two 230 limits identified by the court, this case is a good 230 win for the defense. Among other things, it reminds us that online retailers are fully eligible for 47 USC 230's immunity if they meet the requisite elements. Also, at our 230 retrospective, Kai Falkenberg of Forbes expressed a worry that this case may require online publishers to clearly demarcate their content from third party content. As it turns out, the consumers' perceived source of the allegedly defamatory content didn't come up in the court's discussion.

Posted by Eric at 10:12 AM | Content Regulation , Derivative Liability , E-Commerce | TrackBack

April 01, 2011

Trademark Owner Gets Injunction Against Keyword Ad Campaign That Generated No Sales for the Advertiser

By Eric Goldman

InternetShopsInc.com v. Six C Consulting, Inc., 2011 WL 1113445 (N.D. Ga. March 24, 2011)

[I know the headline sounds like an April Fools joke, but no April Fools here...although, as I will show, this case definitely involved some foolishness.]

I hate sounding like a broken record, but I'll say it again. Most keyword ad lawsuits are not economically justified, so trademark owners are almost invariably making a bad business decision bringing them. Check out this beautiful case study of that principle.

The plaintiff has a trademark in "Dura Pro" for practice golf mats. Six C is a competitor who outsourced its PPC campaign to Channel Advisor. Channel Advisor placed competitive keyword ads triggered by "Dura Pro." In January 2009, the trademark owner complained to Six C, who promptly told Channel Advisor to drop the keyword. Channel Advisor didn't follow this instruction completely, meaning that some ads continued despite Six C's instructions. The plaintiff sued March 2009, and the court indicates that Channel Advisor fully dropped the term by April 2009 (although elsewhere it says the rogue ads persisted for 14 months).

For reasons not explained in this opinion, Six C admitted that its keyword ad buys constituted trademark infringement, narrowing the issues in this case to remedies for the admitted infringement.

The court rejects the plaintiff's claims for lost sales. The plaintiff submitted a spreadsheet showing a decrease in sales, but the court says the spreadsheet showed monthly fluctuations in sales, and the plaintiff only showed correlation, not causation, with the post-advertising decrease.

The plaintiff also sought the defendant's profits from the keyword advertising, and this is where the lawsuit gets farcical. It turns out that the defendant only got 1,319 impressions on its Dura Pro ads, 35 clicks from those impressions (2.6% clickthrough rate) and NO SALES from those clicks. Are you kidding me? The plaintiff sued over a keyword ad campaign that generated ZERO SALES for the defendant? It seems like the plaintiff should have been thrilled that its competitor was wasting money on an ineffective campaign. Instead, foolishly, the trademark owner spent its own money to pay its lawyers to get the defendant to stop wasting its advertising dollars. Great business decision, guys.

The court also denies attorneys' fees, citing Six C's responsiveness to the trademark owner's initial C&D (even if Channel Advisor didn't properly execute Six C's instructions). The court does award the trademark owner the court costs of the action, but these should be relatively small.

Finally, the court grants the trademark owner's request for an injunction (with the exact restrictions to be hashed out), but big whoop. Six C dropped the keyword a long time ago, and given the keyword's conversion rate, that wasn't really a sacrifice. The court says that the trademark owner was suffering irreparable injury "regardless of the fact that defendant's unauthorized use appears to have been unintentional, and that it did not result in any readily quantifiable harm to plaintiff." I think the judge could have more aggressively scrutinized the trademark owner's arguments on this point, but an injunction is a logical outcome for an admitted trademark infringement, even if it's mostly inconsequential in this case.

Notice that the defendant gets a decent outcome here in large part because it chose to quickly drop the keyword at the trademark owner's request. Not all advertisers would be so risk-adverse. Then again, I would expect most advertisers to fight the trademark infringement claim rather than admitting to it.

I'm adding this outcome to the list of irrational keyword ad lawsuits. Other precedents in that genre:

- King v. ZymoGenetics. The defendant advertiser got 84 clicks.
- Storus v. Aroa. The defendant advertiser got 1,374 clicks over 11 months.
- 800-JR Cigar v. GoTo.com. The search engine defendant generated $345 in revenue from the litigated terms.
- Sellify v. Amazon. The defendant got 1,000 impressions and 61 clicks.
- 1-800 Contacts v. Lens.com. 1-800 Contacts spent no less than $650k (and was willing to spend $1.1M) to pursue Lens.com, which made $20 of profit from competitive keyword ads. It also tried to hold Lens.com responsible for affiliate ad buys which generated about 1,800 clicks, which under the most favorable computations were worth about $40k.
- and now InternetShopsInc.com v. Six C. The defendant got 1,319 impressions, 35 clicks and zero sales.

Posted by Eric at 11:56 AM | E-Commerce , Marketing , Search Engines , Trademark | TrackBack

March 16, 2011

FTC Online Endorsement Guidelines Strike Again - FTC Dings Legacy Learning Over Allegedly Misleading Affiliate Reviews

[Post by Venkat Balasubramani with some comments by Eric]

In re Legacy Learning Systems, Inc., FTC File No. 102 3055 [FTC Release] [Complaint (pdf)]

An FTC press release notes that the FTC settled with Legacy Learning over allegations that Legacy improperly utilized affiliates to "promote its courses through endorsements in articles, blog posts, and other online editorial material." Specifically, the FTC complaint alleges:

[Legacy] recruited "Review Ad" affiliates for [Legacy's affiliate program], who promote Legacy’s instructional courses through positive endorsements in articles, blog posts, or other online editorial copy that contain hyperlinks to Legacy’s website in close proximity to the endorsements. [Legacy's] Review Ad affiliates often post such endorsements using statements that give readers the impression the endorsements have been submitted by ordinary consumers.

As noted in the release, the guidelines - which govern endorsements or testimonials - require disclosure of a material connection between a reviewer and a company. Under these guidelines, a positive review from a person connected with the seller or product ("someone who receives cash or in-kind payment to review a product or service" or who gets a cut of the sales) should come with a disclosure. The complaint alleges that twenty-five of Legacy’s "review ad" affiliates were responsible for at least $5 million in sales of Legacy's products.

What did the reviewers do wrong?: Reviewers did not disclose that they were affiliates of Legacy - i.e., received a cut of the sales, and in some cases were paid to review Legacy products . These were not "the independent reviews reflecting the opinions of ordinary consumers." (Examples of the reviews can be found in Exhibit A to the Complaint [pdf].) In some cases, the reviewer websites had disclosures, but the disclosures were anemic at best and were not contained in the posts themselves (e.g., "we are paid by some of the companies who's [sic] products we review" - not exactly a robust disclaimer). [Italics added.]

Where did Legacy go astray: For one thing, Legacy called these affiliates "review ad" affiliates. I would probably avoid this terminology. The complaint did not include a copy of the affiliate terms, so we don't know whether Legacy contractually required the affiliates to comply with the FTC's guidelines or explained how to comply. The complaint also does not specify whether Legacy paid the reviewers for their reviews (it alleges that the affiliates received a cut of the sales), but judging from some of the reviews and the websites of the reviewers, and from Legacy's suggestions to its affiliates, this seems to be the case (at least with some reviewers). Legacy offered suggested disclaimers (to affiliates) on its website but even these were ambiguous ("Affiliate Disclosure Requirements and Examples Legacy Learning Systems"):

[Suggested] Disclosure: We are a professional review site that receives compensation from the companies whose products we review. We test each product thoroughly and give high marks to only the very best. We are independently owned and the opinions expressed here are our own. [emphasis added]

Regardless of what Legacy may have suggested or required of its affiliates, Legacy also did not have any sort of compliance program to make sure that its affiliates made the necessary disclosures.

As part of the (proposed) settlement, Legacy will:

- pay $250,000;
- monitor and submit monthly reports about their top 50 revenue-generating affiliate marketers;
- make sure that affiliates disclose they earn commissions for sales and are not misrepresenting themselves as independent users or ordinary consumers.

Professor Goldman has posted a bunch about possible section 230 issues with the FTC's guidelines ("Do the FTC's New Endorsement/Testimonial Rules Violate 47 USC 230?"; "A Fuller Explanation of Why the FTC Endorsement/Testimonial Guidelines Violate 47 USC 230"). The facts are somewhat similar to those alluded to in his example. Here, Legacy set up an online affiliate program (on its site, using ShareASale). Legacy is the provider of an interactive computer service. Its affiliates are third parties, and Legacy is being sued for content generated by third parties (its affiliates). This looks like Blumenthal v Drudge, where AOL was sued for allegedly defamatory content provided by Drudge and AOL had paid Drudge for the content. The only difference is that here, Legacy was subject to potential liability for content that was placed on the affiliates' websites, whereas AOL was sued for content which Drudge submitted to AOL's website. I don't have a good answer on the Section 230 issue (here's a response to Paul Levy to Professor Goldman's posts on the FTC guidelines and Section 230: "Do the FTC's New Advertising Guidelines Run Afoul of Section 230?"), but it looks like the FTC isn't too worried about Section 230 acting as a bar to enforcing their guidelines against companies whose products are promoted without proper disclosures.

Previously, the FTC went after a company which posted fake reviews on behalf of its client. ("FTC Dings PR Firm for Fake Reviews -- In re Reverb Communications.") The FTC also issued a warning shot to AnnTaylor over gifts to bloggers. ("FTC Drops Investigation of Advertiser Who Gave Gifts to Bloggers.") This time, rather than merely firing the warning shot, the FTC went after Legacy, and extracted a settlement.

_________________

Eric's Comments: I agree with Venkat's post, especially the questions about 47 USC 230's applicability to this situation. I should note that my view on 47 USC 230's applicability is idiosyncratic. In addition to Paul's post, Rebecca Tushnet has also voted that my arguments are bunk. Rebecca Tushnet, Attention Must Be Paid: Commercial Speech, User-Generated Ads, and the Challenge of Regulation, 58 Buff. L. Rev. 721 (2010). Nevertheless, I would love to see someone test the FTC's theory here. I don't see it as a slam dunk that a judge would accept the FTC's theories.

For this post, I'll raise a different issue. I wonder if this case is another step in an ongoing winddown of the online affiliate industry. We're already seeing a big contraction of online affiliate programs due to states' adoptions of the "Amazon tax." As we've seen repeatedly, Amazon and others toss their affiliates overboard when states adopt these laws. (Which ironically makes these laws a type of fool's gold for state legislatures: the laws have failed to generate new sales tax revenues but have reduced income tax bases for the states that have adopted them).

Now, the FTC is taking the position that an affiliate program operator is legally responsible for consumer reviews written by its affiliates that failed to make appropriate disclosures. Furthermore, the program operator's main crime is that it failed to check out these affiliates and find out what they were writing and whether they had made adequate disclosures. The FTC's fix is to require the program operator to monitor 100 affiliates (the top 50 plus another randomly selected 50) each month to see if they are up to no good. What a hassle. The FTC settlement also requires than any non-complying affiliates are supposed to get the axe immediately, without notice or a cure period--a one-strike rule. Nice. At the peril of an FTC investigation, who needs crap like this? For most affiliate program operators, the profit-maximizing response is to just cut loose the long-tail affiliates or shut down the program entirely. Combining this effect with the Amazon tax sweeping the nation, the affiliate industry is on the run.

Another ironic note: I bet many of the program operator's affiliates are, in fact, experts in that market niche and therefore are better positioned than many other consumers to evaluate the product offerings in the niche. So the FTC crackdown may counterproductively reduce the flow of USEFUL consumer reviews about products.

A final irony: courts are less willing to extend liability to affiliate program operators than regulators are. As the most recent example, see the 1-800 Contacts v. Lens.com ruling. We didn't see an affiliate program operator-friendly ruling in the Amazon tax litigation in New York, but I keep hoping that gets reversed on appeal. If it does, and if anyone actually stands up to the FTC juggernaut, perhaps we'll see the courts revitalize the affiliate industry. If not, I say we're at the beginning of the end for affiliate programs as we've known them for the past 15 years.

Posted by Venkat at 02:54 PM | Content Regulation , Derivative Liability , E-Commerce , Marketing

March 15, 2011

Intelius May be Liable for Deceptive Online Marketing Practices Based on Third Party Transaction at Checkout -- Keithly v. Intelius

[Post by Venkat Balasubramani]

Keithly v. Intelius, No. C09-1485RSL (W.D. Wash.; Feb. 08, 2011)

A district court judge in Washington held that Intelius could potentially be held liable for allegedly deceptive marketing practices based on its making available third party services as part of the online checkout process.

Background: Intelius offers "background check" and look-up services to customers on the web. Customers brought a putative class action alleging that they were deceived during the online check-out process into buying third party subscription services.

The plaintiffs' experiences varied slightly, but some of the plaintiffs alleged that after they selected the desired services from Intelius, they were offered these services for $49.95, but were also presented with an option to enroll in a "mysterious 'Identity Protect'" service and pay $39.95 (i.e., get a $10 discount on the product which they ordered). These customers were taken through several pages which mention the basic and add-on services, and in one of the pages, the customer was informed that enrolling in 'Identity Protect' would result in the customer's credit card being billed monthly (if the customer did not cancel after the seven day free trial).

At this point the customers could complete the order, but another group of customers were told that they could take a "Community Safety Survey," and receive $10.00 cash back, when they tried the "Family Safety Report." Customers who responded favorably to this were then presented with a survey - one of the questions is related to community safety, and the other question is billing related. Here, the customer is again presented with (what the court describes as) confusing options, one of which allows the customer to complete his or her order, and the other which sends the customer further down the path which ultimately results in the purchase of the "Family Report" service. As the court describes it, "[n]o information is provided regarding the company that is offering this service."

As alleged by plaintiffs, the services are offered after the customer has input his or her payment information and were offered by third party defendant Adaptive Marketing. [Intelius settled with the Washington AG's office in late 2010 around marketing practices that look similar to those alleged here. Adaptive parent's company was also recently hit with a big ($32.6 million) judgment in Iowa: "Judge hands down $32.6 million consumer protection verdict; hundreds of thousands of Iowans could receive restitution."]

Washington Consumer Protection Act: Defendants argued that the complaint failed to adequately allege deceptiveness. In order to satisfy the deceptiveness element, a plaintiff "need not show that defendants intended to deceive or defraud, but only that the practice had the capacity to deceive a substantial portion of the purchasing public." Additionally, deception (which is evaluated by the "net impression" created by the solicitation) "may result from the use of statements not technically false or which may be literally true." Under this standard, the court finds that two of the three marketing techniques were deceptive.

Identity Protect Plaintiffs: This group of plaintiff selected the background report for purchase. They had to click two different "continue" buttons to complete the transaction, and in between the two steps, "Identity Protect" was added to their orders, "without any meaningful disclosure regarding the service or its price." At some point down the road (in step 4), the pricing details of "Identity Protect" were revealed, but they were the least conspicuous elements on the page. As described by the court:

[t]he elements that are most noticeable at Step 4 convey the impression that the consumer is purchasing a background report for $39.95 (a savings of $10.00) and that Identity Protect costs nothing. A reasonable consumer in Keithly's position could believe that clicking the red "Continue" button would answer his every need: it would allow him to purchase the product he wanted for a total of $39.95. Nothing about the key design elements would suggest that Keithly should be hunting for other terms and conditions and, and even if he did, the details of the offer blend in with the description of "Identity Protect Benefits" and the site security information to such an extent that he could miss them. The consumer could reasonably believe that clicking "Continue" would complete the order he had initiated at least four screens ago.

After step four, these consumers were not presented with any opportunities to remove Identity Protect, despite the transaction running the course of "ten screens." Similarly, after step four, there were no other disclosures regarding the pricing or terms for the Identity Protect service. In fact, "every order summary presented between Step 4 and the end of the transaction indicated that Identity Protect would cost $0.00." The court does note that not everyone would be fooled by this marketing technique:

[s]ome individuals would understand that obtaining something for nothing is a rare event and, at Step 3, would decline the offer of a $10.00 discount on the assumption that there was a catch. Others would take the time to read every word of the screen shot labeled Step 4 and realize that the advertised $0.00 price tag for Identity Protect would jump to $19.95 per month after the first seven days. But not everyone is so wary and/or detail-oriented, nor is the CPA designed to protect only those who need no protection. The capacity of a marketing technique to deceive is determined with referenced to the least sophisticated consumers among us. The FTC has noted that on-line consumers do not read every word on a webpage and advises advertisers that they must draw attention to important disclosures to ensure that they are seen.
[emphasis added]

In other words, online retailers should not hide the ball as to what is being purchased, or as to the terms of the purchase. This applies to the text of the webpage, but also applies to the checkout process itself. If the process is confusing, it does not matter is the text is technically accurate! Consumers should be able to assume that they can "safely complete an uncomplicated internet transaction without fear of being swindled or saddled with unwanted goods and services if her reviews the order summary and clicks on the link or button that purportedly completes the purchase."

The court ruled with respect to a second group of Identity Protect plaintiffs that the practices were - as a matter of law - not deceptive because there was a disclosure on every screen that Identity Protect could be cancelled any time, but that "[a]fter [the] trial, [the consumer] will be billed $19.95 per month."

Family Safety Report Plaintiffs: The court similarly finds that the Family Service Report transactions could be deceptive. After the consumer bought the report from Intelius (and after the consumer clicked on the "show my report button") the consumer is presented with an option to "take the 2008 Community Safety Survey and claim $10.00 CASH BACK when you try Family Safety Report." Here the consumer is presented with a choice to try the Family Safety product or not, but the option to try the Family Safety Report is more prominently presented. If the customer clicks on the "Yes" button and provides his or her email address, the customer actually authorizes Intelius to "transfer" the customer's account information to the undisclosed third party who is offering the service. The court points to the design elements on the page that all fail to highlight that the consumer is actually signing up for something that he or she will be on the hook for:

None of the normal cues related to a consumer transaction are presented: no product is selected, no order summary is provided, no payment information is exchanged, and no confirmation of the transaction is generated. By providing an email address and clicking the red button, the consumer will have purchased an on-going service from an undisclosed entity. Unless the consumer had the forethought to print the webpage before moving on, he will have no idea how to contact the purveyor of the service once the subscription fee starts showing up on his account statement.

__

I blogged about the VistaPrint case where the plaintiffs argued that they were improperly signed up for a rewards program. There the district court and Firth Circuit both found that a disclaimer and the language of the transaction effectively undermined the claims. The court in this case disagrees with the approach in VistaPrint, noting that such "a truncated analysis is improper under Washington [law]" because the court should look at the transaction as a whole. Aside from the deference given to any disclaimers or disclosures, the processes in VistaPrint and in this case appear fairly different. There the customers had to check the box saying they agreed to the terms, enter their email address twice, and most importantly, the rewards program offer was presented after the transaction with VistaPrint.

In contrast, in this case, the court intimates that the merchant was doing everything it could to thwart the effective completion of the transaction, and the consumer is guided through a maze of steps where the merchant or third party tries to add an unwanted product into the consumer's shopping cart at each step. A big takeaway is that the flow of the transaction and overall impression to the consumer is equally as important to the text, and if the overall process is viewed as deceptive, a few disclaimers will not save you. Here, it was obvious that (taking the plaintiffs' allegations as true), customers were being put through a maze of a checkout process, with numerous traps along the way.

The practice of injecting third party service (with recurring billing) into a transaction has drawn the ire of regulators. State AG's have gone after companies, and recently President Obama signed the Restore Online Shopping Confidence Act. (Here's an interesting background article on this statute: "How an Oil Baron's Heir Cleaned Up a $1.4 Billion Internet Scam.") The act covers sales by "third party sellers," and prohibits the data pass that the plaintiffs are complaining about here. The act requires the third party seller to disclose the terms, and the fact that the third party seller is not affiliated with the merchant. The act also requires the third party seller to obtain "the express informed consent" for the charge by obtaining the account number, name and address, and a means to contact the consumer from the consumer, and requiring the consumer to check the box of perform some other affirmative act to indicate consent. It looks like the transactions in question would have been covered by the statute. The act is intended to be enforced by the FTC and the State Attorneys General, but it does not rule out private enforcement, and I'm sure plaintiffs will be citing it aplenty.

Previous posts:

"Fifth Circuit Blesses Vistaprint's Rewards Program Sign-Up Process -- Bott v. Vistaprint USA Inc."
"Internet Rewards Program Class Action Survives Initial Motion to Dismiss -- In re Easysaver Rewards"

Posted by Venkat at 04:39 PM | E-Commerce , Licensing/Contracts

March 01, 2011

Jan.-Feb. 2011 Quick Links, Part 3 (Trademarks, Domain Names and Trade Secrets Edition)

By Eric Goldman

Trademarks and Domain Names

* From my perspective, the Department of Homeland Security (DHS) domain name seizures are one of the US government’s top 5 all-time worst assaults on the Internet’s integrity. DHS’s ICE division is grabbing domain names—the virtual equivalent of printing presses—citing half-baked legal theories and poorly researched factual claims without any advance notice or adversarial proceedings. This is exactly what we expect our government won’t do.

Yet, I haven’t seen a proportionate blowback. Why aren’t affected domain name owners suing the government for improperly seizing their printing presses? (This takes me back to the 2-decade-old Steve Jackson Games case and the EFF’s founding). Why aren’t there Congressional hearings asking DHS to defend its behavior? Where aren’t other parts of the administration forcing DHS to justify itself? Why aren’t judges pushing DHS to do a better job of demonstrating their cases on an ex parte basis? I’m a little baffled why there hasn’t been a revolt against the DHS’s baldfaced abuse of government power. I confess I’m part of the problem in that I haven’t grabbed the pitchforks either, but I’m not sure how I can best help. If you have any thoughts, I’d welcome them.

A linkwrap on this topic:

- Techdirt raises some general questions.
- One of the DHS affidavits. Techdirt deconstructs it.
- Sen. Wyden seems like our only legislator paying attention.
- Wendy Seltzer explores the due process problems.
- An ICE representative tried to defend its actions, with no success.
- Another 18 names seized.
- In a crackdown aimed at child porn, DHS took down 84,000 websites "by mistake." This is exactly the kind of “mistake” that would not happen if due process were followed and speech restrictions were subject to adversarial proceedings.
- EFF on what the repeated DHS screwups teach us about the "wisdom" of COICA:
- Techdirt: “ICE Boss: It's Okay To Ignore The Constitution If It's To Protect Companies”

* Private Career Training Institutions Agency v. Vancouver Career College (Burnaby) Inc., 2011 BCCA 69 (BC Ct. App. Feb 11, 2011): "The burden was on the appellant to satisfy the judge that there were reasonable grounds to believe that the respondents’ use of keyword advertising was actually or potentially misleading. He found as a fact that the appellant had not established that the respondents’ keyword advertising was actually or potentially misleading. He stated that the appellant had not persuaded him that the respondents’ use of its competitors’ names in keyword advertising “could...lead a student astray or into making a harmful error of judgment”. There was evidence to support those findings."

* NY S953: New York is trying yet again to ban domain name sales to terrorist groups. My prior blog post.

* Kim v. Coach: class action suit for Coach sending trademark takedown notices to eBay for the resales of legitimate goods. AP story.

* Joe Mullin recaps our efforts to crack open the Rosetta Stone v. Google joint appendix.

* LinkedIn allows ad targeting by company name. Competitive poaching, anyone? Will they be the newest defendants in keyword ad lawsuits?

* Rebecca covers an interesting and complicated dispute over a comparable drug being linked to a patented drug in a pharmaceutical reference database, with some parallels to keyword advertising.

* The Supreme Court denied certiorari in the latest appeal in Moseley v. V Secret Catalogue Inc. Prof. McCarthy on the ruling for which certiorari was sought.

* Law.com: Digital Chocolate and Zynga Settle over 'Mafia Wars'

* Ford sues Ferrari for naming one of its race cars "F150" in celebration of Italy's 150th anniversary of unification.

* Subway seeks to trademark "footlong."

* Las Vegas Sun: Double Down Saloon v. Double Down Lounge.

* Technolawyer tries to enforce a trademark in “SmallLaw.”

* Fleischer Studios v. AVELA (9th Cir. Feb. 23, 2011). The Ninth Circuit says that the Betty Boop character is in the public domain. This is quite a remarkable opinion, but I particularly call your attention to the discussion about trademarks and merchandising (cites omitted):

Even a cursory examination, let alone a close one, of “the articles themselves, the defendant’s merchandising practices, and any evidence that consumers have actually inferred a connection between the defendant’s product and the trademark owner,” reveal that A.V.E.L.A. is not using Betty Boop as a trademark, but instead as a functional product. Just as in Job’s Daughters [a 1980 9th Circuit case the majority cites even though it wasn't cited by either party or the district court], Betty Boop “w[as] a prominent feature of each item so as to be visible to others when worn . . . .” A.V.E.L.A. “never designated the merchandise as ‘official’ [Fleischer] merchandise or otherwise affirmatively indicated sponsorship.” Fleischer “did not show a single instance in which a customer was misled about the origin, sponsorship, or endorsement of [A.V.E.L.A.’s products], nor that it received any complaints about [A.V.E.L.A.’s] wares.”...“The name and [Betty Boop image] were functional aesthetic components of the product, not trademarks. There could be, therefore, no infringement.”

The court goes on to discuss Dastar:

If we ruled that A.V.E.L.A.’s depictions of Betty Boop infringed Fleischer’s trademarks, the Betty Boop character would essentially never enter the public domain. Such a result would run directly contrary to Dastar.

I applaud the majority opinion's spirit, and this could be quite a revolutionary opinion if it truly sets Ninth Circuit precedent. However, I’ve repeatedly criticized the Ninth Circuit for making up the rules panel-by-panel (I know I'm not the only one), and I suspect this is just another one-off. Kate Spelman thinks this is a good case for en banc review (I agree).

* WSJ: A quick survey of major legal issues in franchising law.

* Meth Lab Cleanup LLC v. Spaulding Decon, LLC, 2010 WL 5572397(D. Idaho Oct. 25, 2010): "the mere fact that resulting harm from the alleged confusion over the contents of the parties' websites may be incurred by an Idaho company is not sufficient to show that Spaulding “directed” its conduct toward Idaho."

* Walgreens is elevating the profile of its house-branded products.

* Index of WIPO UDRP Panel Decisions

* Oddee: 12 Hilarious Knock-off Fails

Trade Secrets

* Has the original Coca-Cola recipe leaked out?

* Reality Blurred: The producers of Survivor sue over leaked information about the upcoming season, but they drop the suit once they learn the leak source.

* David S. Almeling et al, A Statistical Analysis of Trade Secret Litigation in State Courts

Posted by Eric at 01:44 PM | Domain Names , E-Commerce , Internet History , Trade Secrets , Trademark | TrackBack

February 17, 2011

eBay's Venue Selection Clause Upheld in Missouri--Earll v. eBay

By Eric Goldman

Earll v. eBay, 2011 WL 497781 (W.D. Mo. Jan. 4, 2011). The initial complaint.

Earll, who is deaf, sued eBay for violations of the Americans with Disabilities Act (ADA) and the CA state law analogue. Her complaint relates to the fact that eBay telephonically confirms sellers, which poses a problem for deaf sellers. As part of the signup process, Earll clicked on eBay's user agreement, which included eBay's standard venue selection clause specifying its home court as the mandatory venue for lawsuits. eBay invoked the clause against Earll to move the suit there.

Earll tries to knock out the user agreement by arguing that it was fatally defective for not disclosing the telephonic verification requirement. The court deems that omission immaterial.

Earll then argues that the venue selection clause covers only a subset of claims a plaintiff might bring, and therefore it does not apply to her civil rights claim. The court rejects the argument because her claims "relate to her inability to sell items on eBay's website."

Earll then argues that some courts have rejected venue transfers in disability-related cases where a transfer would prevent disabled people from litigating, and thus undermining the law's policy objectives. Acknowledging that, the court says that Earll never indicated that she would abandon her claim if it was transferred, and California courts are just as capable of adjudicating ADA claims as the Missouri courts.

Having rejected Earll's arguments, the court orders the venue transfer. This is a nice win for eBay on two fronts. First, it's yet another case upholding its venue selection clause. I just blogged on a similarly favorable case (Evans v. Linden Research) where Second Life, invoking a clause copied from eBay's, also successfully invoked the clause. In light of the confusion we had after Comb v. PayPal, it's nice to see more predictable contract interpretation results.

Second, ADA claims are very dangerous for online sites. See, e.g., the NFB v. Target case. Having the case in eBay's home court surely helps eBay's odds of success in a risky case.

Related blog posts:

* eBay Venue Selection Clause Upheld in Texas
* Terminated eBay Vendor Gets Day in Court Against eBay--Crawford v. Consumer Depot
* Note about Tricome v. eBay
* Note about Universal Grading Service v. eBay
* eBay User Agreement Upheld, Part II--Durick v. eBay
* eBay User Agreement Upheld--Nazaruk v. eBay (upheld on appeal)

Posted by Eric at 10:39 AM | E-Commerce , Licensing/Contracts | TrackBack

January 29, 2011

Class Action Brought by "Lonely and Vulnerable" Men Against Online Cupid Site Moves Forward -- Badella v. Deniro Mktg.

[Post by Venkat Balasubramani with some comments by Eric]

Badella v. Deniro Marketing LLC, 10-03908 CRB (N.D. Cal.; Jan 24, 2011)

This is a good one.

A group of plaintiffs brought a putative class action against an online dating website that they alleged contained predominately fake profiles. As Judge Breyer describes it in more colorful language:

This is a putative class action purportedly a vast, fraudulent scheme centered around an internet dating website that lures 'often lonely and vulnerable men' into joining . . . with the false promise that they are communicating with real women in their area who are interested in dating and/or intimate relationships.

Plaintiffs brought claims for fraud, RICO and California's anti-spam statute against multiple defendants. They alleged that they were "drawn" to the website fraudulently (e.g., via "spam, internet pop-up ads, or social networking scams"), induced to sign up for free, and then induced to upgrade to paid memberships.

Fraud: With respect to the fraud claim, defendants argued that the website terms of use undermined plaintiffs' reliance on any purported misstatements. The website terms stated:

This Service is for Amusement Purposes only.
You understand and accept that our site, while built in the form of a personals service, is an entertainment service. . . You are not guaranteed that you will find a date, a companion, or an activity partner, or that you will meet any of our members in person.
Online CupidTM Communications: You understand, acknowledge and agree that some of the user profiles posted on this site may be fictitious, and are associated with . . . our "Online CupidsTM", ("OC"). Our OC's work for the Site in an effort to stimulate conversation with users, in order to encourage further and broader participation in all of our Site's services, including the posting of additional information a.or pictures to the users' profiles.

Judge Breyer found that the terms did not undercut reliance for three reasons: (1) plaintiffs alleged that nearly all (as opposed to some) of the profiles are fictitious; (2) the fake profiles were not always labeled "OC," as promised; and (3) the plaintiffs alleged a "widespread and pervasive effort on Defendants' part to make the website appear to be a legitimate dating service." The disclaimer did not defeat reliance because defendants allegedly used a "wealth of information" to create a false impression, and the disclaimer was not as prominent as the information which created the false impression. In rejecting the claims, the court suggested what an appropriate disclaimer would look like, and contrasted this with the one from the website terms:

THIS WEBSITE USES FICTITIOUS PROFILES - READ THIS DISCLAIMER [or] THE MAJORITY OF PROFILES YOU SEE WILL NOT CORRESPOND TO ACTUAL WOMEN - READ THIS DISCLAIMER.

Disclaimers have achieved mixed results against claims of misleading website practices. (See, e.g., Vistaprint; Easysaver Rewards; Duffy v. The Ticketreserve, Inc.) I found the court's conclusion plausible, although a part of me said that an average person reading this disclaimer would conclude that they weren't visiting a typical dating website. Maybe the court figured - as many people do - that people rarely read or digest website terms?

Defendants also argued that the fraud claims were not pled with particularity. The court held that with respect to initially being drawn to the site, the plaintiffs failed to allege the particulars of how they were fraudulently drawn to the site. With respect to being persuaded to register and upgrade to paid memberships, the court held that these allegations were pled with particularity, since plaintiffs' allegations referenced specific messages sent by fake profiles which were not so labeled. Interestingly, plaintiffs alleged that in order to make the fake profile messages more compelling, defendants did not rely on "canned or automatic messages . . . [they employed] actual individuals who control hundreds of fictitious profiles." [Reasonable minds can disagree about the quality of the copy, but my feeling was that anyone who has ever moderated blog comments or been exposed to blog spam would be able to spot this as the same type of copy from a mile away.]

RICO: For the RICO claim, plaintiffs argued that defendants engaged in a conspiracy to commit wire fraud and access device fraud. The underlying fraud plaintiffs alleged was that defendants set up numerous entities to fraudulently obtain merchant accounts and then used these merchant accounts to process credit card payment for the websites in question.

The court does not give defendants' argument much credit here and declines to dismiss the RICO claims. I didn't check to see whether RICO claims have been successfully brought in the online context, but this seems like a way to attack a bunch of people in the chain of a transaction and drastically expand the scope of liability. A charge of conspiracy was successfully brought by the government in Kilbride, a criminal CAN-SPAM case. "Defendants Convicted in 1st Criminal CAN-SPAM Trial." There, among other things the government alleged that defendants used fictitious entities to register domain names. The court in Kilbride also relied on the use of privacy protection services to register the domain names. The RICO claims will have to be fleshed out and no one knows how they will fare, but plaintiffs' theory sounds pretty expansive.

Spam claims: Plaintiffs brought claims under California's spam statute. The court concludes that these claims are barred by the one year statute of limitations, thus avoiding the preemption question that has been plaguing California courts for some time, including in Reunion.com, another case where plaintiffs alleged they were induced to sign up (and upgrade) using unsolicited messages and allegedly bogus "friend messages." ("Reunion.com Revisited Again: Claims Under CA Spam Law Not Preempted by CAN-SPAM -- Hoang v. Reunion.com.") Interestingly, an appeals court in California recently held that under the California statute claims for actual damages must be brought within three years of the receipt of the emails, while claims for statutory damages can only be brought one year within the receipt of the emails. The court's opinion here does not contain a discussion of whether plaintiffs sought actual or statutory damages, but if they sought actual damages, the dismissal does not jibe with the recent appeals court ruling in Hypertouch. ("CA Appeals Court: Claims Under State Spam Statute Not Preempted by CAN-SPAM - Hypertouch v. Valueclick.")
___

It's hard to not be judgmental about this suit. People - specifically "lonely and vulnerable men" - sign up for these random "dating" websites and then complain because a greater than anticipated number of the profiles are fake (??). I can just picture one of the plaintiffs saying: "I'm playing the odds by going on this site. I don't know what the odds are (no one does), but they were different from what you promised!" It's also hard to fault the court for deferring the underlying issue of whether the users were misled to the factfinder, but unless the plaintiffs are chosen carefully, they are not going to have an easy time credibly explaining how they were misled. In the meantime, we can take comfort that the interests of lonely and vulnerable men trolling internet dating sites for dates can be protected.
___

Comments by Eric: It's interesting how Venkat concludes his post, because in fact I have zero sympathy for the website (treating the allegations as true, as the court was required to do on this motion to dismiss). I'm trying to imagine a world where customers would pay substantial fees to a "dating" site where much/most of the interaction was with automated scripts. (I also couldn't get Austin Power's "fembots" out of my mind reading this case). The silly disclaimers--that the site was for "amusement" and that paying customers should expect automated interactions--clearly weren't likely to be read by anyone who actually paid money to the site. So it seems axiomatic to me that the only people who paid should have been the people who didn't get the message.

Thus, this seems like one of those cases where the fine print ("we're just going to send you canned messages if you pay us a lot of money") is designed to completely contradict the big print ("we're a dating site"). You can't do that.

This case brought to mind the old Anthony v. Yahoo case, where Yahoo allegedly retained profiles of expired/terminated members so that it looked like it had a bigger dating pool. (Yahoo ultimately settled for up to $4M). We talk about how it can be a jungle out there for single people, but oh man, at least their dating services shouldn't be lying to them. Clearly, before you starting "dating" your dating site, you need to diligence it too.
___

Related (coverage of a recently filed class action against Match.com over an alleged excessive number of inactive or fake profiles):

"Lawsuit Claims More Than Half Of Match.com Profiles Are Inactive Or Fake" (Joe Mullin)
"Love’s Labour’s Lost in Cyberspace" (Danielle Citron/Concurring Opinions)

Posted by Venkat at 08:30 AM | Content Regulation , E-Commerce , Marketing , Spam

January 20, 2011

CA Appeals Court: Claims Under State Spam Statute Not Preempted by CAN-SPAM - Hypertouch v. Valueclick

[Post by Venkat Balasubramani with some comments from Eric]

Hypertouch, Inc. v. Valueclick, Inc., et al., B218603 (Cal. Ct. App.; Jan. 18, 2011)

A California appeals court weighed in on a long-running debate: whether CAN-SPAM preempts California's spam statute. This is a significant decision that covers a lot of ground (I think it mentions just about every major spam case), and it is sure to be appealed.

Background: Two of the seminal anti-anti-spam cases were Mummagraphics and Virtumundo. Mummagraphics said that CAN-SPAM is intended to cover material misstatements in emails and preempted contrary state laws (to the extent they imposed liability for immaterial misstatements). Virtumundo said that only legitimate ISPs that have suffered actual harm can sue under CAN-SPAM. In Virtumundo, the Ninth Circuit also rejected the plaintiff's claims under Washington's email statute. The plaintiff in Virtumundo was pushing the envelope, and it was unclear as to whether the Ninth Circuit's rejection of his state law claims was restricted to the plaintiff's fanciful claims which clearly stretched the scope of Washington's spam statute to the breaking point. Mummagraphics and Virtumundo were from the Fourth and Ninth Circuit respectively, and they left open the question of how other state spam statutes would fare, including California's, which is one of the most expansive (and important). Lower federal courts courts struggled with applying Virtumundo and Mummagraphics to the preemption question in California, and decisions were all over the place. Some courts held that CAN-SPAM's savings clause only saves state statutes that sound in traditional fraud, and since California's spam statute didn't require proof of reliance and damages, it did not fall into this category and was preempted. (Here's my April 2010 post on Hoang v. Reunion.com, a case that struggled with the preemption question: "Reunion.com Revisited Again: Claims Under CA Spam Law Not Preempted by CAN-SPAM -- Hoang v. Reunion.com.")

Factual Background: Hypertouch brought claims against Valueclick, various Valueclick subsidiaries, and PrimaryAds for violating section 17529.5 (California's spam statute). As the court describes it, Hypertouch is a small provider of email service to about 100 customers. Valueclick provides online marketing services to:

third-party advertisers who promote retail products. . . . Valueclick contracts with these third-party advertisers to place promotional offers on websites that are owned and operated by various Valueclick entities. Consumers, in turn, can visit Valueclick's websites and earn rewards in exchange for participating in the advertised promotional offers.

Valueclick contracts affiliates who "drive traffic" through methods chosen by the affiliates in their discretion. Valueclick provides the affiliates the creatives for a promotion, and the affiliates promote as they see fit (in many cases hiring sub-affiliates to effect the promotions). Valueclick alleged that it had no "knowledge of, or control over, the email delivery methods or header information used by [affiliates] or their sub-affiliates." [This is a risky admission!] PrimaryAds looks like it's similar to Valueclick - PrimaryAds operates a website which contains third party offers. PrimaryAds contracts with affiliates who download materials from PrimaryAds' website, engage in promotions (which are tracked by PrimaryAds). PrimaryAds requires its affiliates to sign agreements stating that the affiliates will comply with all laws, including anti-spam laws, in carrying out their promotion activities. PrimaryAds also alleged that it had "no control over the email delivery methods used by affiliates."

Hypertouch argued that Valueclick and PrimaryAds were advertised via emails that violated California spam statute in three ways: (1) the emails contained deceptive header information (because the from and to fields did not accurately reflect the sender or recipient); (2) the subject lines were likely to mislead recipients into thinking they would receive free stuff; and (3) the emails used third party domain names without the third party's permission. The trial court granted defendants' motion for summary judgment. The trial court held that defendants could only be held liable for emails they sent or caused to be sent (which cut out a chunk of the emails in question). The trial court also found that CAN-SPAM preempted state spam statutes which regulated misleading emails, unless the statutes covered "common law fraud or deceit." Since the claims did not cover the elements of common law fraud, they were preempted. Significantly, the court awarded defendants $100,000 in costs.

The appeals court's decision: The court reversed and ruled for Hypertouch, with an order that dramatically expands the reach of potential liability for products or companies that are advertised via email (regardless of whether they send the email). It's a blockbuster ruling for the anti-spam community.

Preemption: CAN-SPAM's preemption provision states that it preempts state statutes that regulate the use of commercial email "except to the extent that any such statute prohibits falsity or deception in any portion of a commercial email." The court acknowledges that CAN-SPAM's preemption was intended to accomplish a uniform standard for email regulation (to avoid requiring compliance with a "patchwork" of laws). The court also cites to a Senate Report that says that states laws prohibiting things like "fraudulent or deceptive headers, subject lines, or content" should not be preempted "because they target behavior that a legitimate business trying to comply with relevant laws would not be engaging in anyway."

The court disagrees with the trial court's conclusion on preemption and provides two main reasons, along with a lengthy discussion (and canvassing of the case law): (1) the language of the preemption clause does not support a finding of preemption; (2) allowing state law claims that reach misleading but not fraudulent emails would not undermine a national standard.

Hypertouch's claims survive summary judgment: Defendants argued that Hypertouch failed to put forth evidence that defendants either sent the emails or "knew" they were being sent by an affiliate in a misleading manner. The court responds that:

the plain text of 17529.5 indicates that its application is not limited to entities that 'send' the offending emails nor does it require plaintiff to establish that defendant had knowledge of such emails. Rather, the statute imposes liability on any 'person or entity' that 'advertises' in an email containing any of the forms of deceptive content described in section 17529.5 [(a)(1)-(3)].

Do the emails Violate the Statute?: Although plaintiffs asserted that the emails at issue violated three different prongs of section 17529.5, the court doesn't discuss the other two prongs, and merely focuses on the subject line prong. Section (a)(3) is the no misleading subject line prong, and the court finds that the following representative subject lines potentially violate the statute:

Get a FREE Golf Retreat to 1 of 10 destinations;

Let us know your opinion and win a free gift card;

Do you think Hillary will win? Participate now for a Visa card

In support of its summary judgment burden, Hypertouch put forth the testimony of its president (?) who says that he clicked on links in these emails and found out that in order to receive anything for free, you had to purchase something. As the court phrases it, the statute requires the subject line to mislead a recipient about a "material fact," and

if a subject line "creates the impression that the content of the email will allow the recipient to obtain a free gift by doing one act (such as opening the email or participating in a simple survey) and the content of the email reveal [sic] that the 'gift' can only be obtained by undertaking more onerous tasks . . . the subject line is misleading about the contents of the email.

1 year statute of limitations on liquidated damages claims: The California statute allows for statutory damages or actual damages. If the statutory damages are considered a penalty, then they are subject to a one year statute of limitations under California law. Hypertouch argued that statutory damages should not be subject to the one year time-bar because they are discretionary, but the court disagrees, holding that although the court has discretion with respect to the amount of damages it awards, it must award some amount of damages. Therefore, the court concludes that Hypertouch may seek actual damages for emails within three years of their receipt, but may only seek statutory damages for emails within one year of their receipt.

___

This is a big ruling on several levels.

The big practical effect is that it provides an avenue for California spam plaintiffs to seek relief under the California statute. Previous spam cases have backfired on spam plaintiffs due to over-reaching, but I wonder if the preemption argument backfired on defendants due to their over-reaching. Arguing that the preemption clause only saved claims which sounded in actual fraud was a stretch, and both Ethan and I expressed discomfort with rulings that embraced this standard. The court almost has an easy argument to knock down, and it happened to be an aggressive interpretation of the preemption clause that defendants were responsible for pushing.

The even bigger effect of this ruling is the fact that persons or entities who do not themselves send email but who are advertised in non-compliant email can now be held liable, without a showing that they knew or should have known that they were being promoted via non-compliant spam. This is going to throw a big monkey wrench in affiliate programs. Previous cases dealing with affiliate liability in the CAN-SPAM context required plaintiffs to show some sort of knowledge or facts sufficient to impute knowledge. ("Affiliate Spam Liability is Fact Question--US v. Cyberheat"; "Affiliate Liability Extravaganza".) .

In fact, the court expressly embraces a strict liability standard for affiliate liability. This is going to lead to some wacky results - for example, think of the case where a company located outside California is being promoted via email but does not know that its affiliates are emailing to California residents (the affiliates themselves may not know). All of a sudden, they find themselves subject to liability in California for violations of the California spam statute? (Does this present a section 230 issue, since neither of the defendants created the copy which allegedly violated the statute?)

The court's assessment of the substantive violations of the statute is cursory. The court tackles the subject line violations but where's the court's assessment of the violations of subsections (a)(1) (the domain name prong) and (a)(2) (misleading or forged header information prong). Setting aside the fact that the court's interpretation of the subject line prong is charitable (and aimed at protecting people who take on face value a claim via email that the recipient is getting something for free), there's no discussion from the court on how the emails violate the prong which prohibits the use of third party domain names without permission. The court similarly doesn't deal with the misleading header information prong, but Hypertouch's claims sound similar to the claims the Ninth Circuit rejected in virtumundo ("there is . . . nothing inherently deceptive in Virtumundo's use of fanciful domain names").

Interestingly, the California Supreme Court weighed on its spam statute just once. In a ruling last year in (Kleffman v. Vonage) the court held that use of random and multiple domain names even if they were intended to bypass spam filters does not violate California spam statute. ("Use of Multiple (Even Random or Garbled) Domain Names to Bypass Spam Filter Does not Violate Cal. Spam Statute -- Kleffman v. Vonage.")

Additional coverage: "C.A. Revives Action Charging Advertiser Under Anti-Spam Law" (Metropolitan News-Enterprise)
______

Comments by Eric:

This is an incredibly noteworthy opinion for several reasons.

First, published opinions on Internet law from California appeals courts are becoming rarer than a hen's tooth, so this is likely to be one of the few citable opinions by a California state court on spam issues for the foreseeable future (unless the Supreme Court takes it on appeal). As a practical matter, then, this opinion not only sets California law, but all federal courts interpreting federal law will also have to acknowledge this opinion. I anticipate this will be a heavily cited opinion in the future.

Second, the court's imposition of strict liability for advertisers promoted by spam is breathtaking. The court says "imposing strict liability on the advertisers who benefit from (and are the ultimate cause of) deceptive e-mails, forces those entities to take a more active role in supervising the complex web of affiliates who are promoting their products." Well, that's true in theory, but it's completely divorced from reality. Because of strict liability, even advertisers who undertake substantial efforts to police their affiliate network ARE STILL LIABLE FOR ANY PROBLEMS CREATED BY AFFILIATES. Maybe the court got confused about what it meant to impose STRICT LIABILITY. In reality, many advertisers won't rely on affiliates at all if they are strictly liable for what they do. I bet this court would view that as a perfectly fine outcome, but the it's disingenuous to say that strict liability will ratchet up the policing effort. A negligence standard might have done that; strict liability squashes the endeavor altogether.

For that reason, the strict liability standard for advertisers is the #1 thing (of a pretty long list) that needs to get fixed on appeal.

Venkat raised the issue of 47 USC 230's role here. I haven't had a chance to see if the issue was raised by the litigants, but my initial instinct is that an advertiser's 230 defense for ad copy written by a third party sounds pretty meritorious.

Overall, rulings like this reinforce to me how desperately we need to get states out of the business of trying to regulate the Internet. First, Congress built a structure to hold advertisers should be liable for spam violations in CAN-SPAM (a narrow liability scope, although I question the wisdom of even that). If California can impose a supplemental and much more expansive advertiser liability doctrine, Congress clearly did a crummy job with its preemption clause (so what else is new?). Second, this liability rule, if it sticks, is terrible policy destined to generate lots more of wasteful profit-seeking litigation. Third, it's unclear how California's policy would affect interstate advertising campaigns--a question we shouldn't even have to ask when dealing with Internet activities. We really, desperately, need to rethink our governance scheme that puts states in the business of regulating the Internet. IT DOESN'T WORK, and we lose a lot in the process.

Finally, a gossipy note. This is an unusual spam opinion in that it had big firm lawyers on both sides (Steptoe on the plaintiff side; Gibson Dunn on Valueclick's defense). I wonder if the court's decision to write a lengthy, detailed, footnoted and published opinion is the result of that.

Posted by Venkat at 05:22 PM | Derivative Liability , E-Commerce , Marketing , Spam

January 05, 2011

Lawyer-Spam Plaintiff Loses in the Sixth Circuit Over Allegedly Misleading DISH Network Emails -- Ferron v. Echostar

[Post by Venkat Balasubramani]

Ferron v. Echostar Satellite LLC, 09-4407 (6th Cir.; Dec. 28, 2010)

Ferron brought claims against Dish Network and its retail and marketing partners alleging that he had been deceived by the terms of email offers sent by defendants. According to defendants, Ferron's strategy was to actually sign up to receive emails which he claimed were deceptive. However, prior to receiving any emails, he allegedly called to verify the terms of Dish Network's service:

according to defendants, Ferron purposefully provided his email address to the approximately twelve satelitte dish websites from which he later received advertisements. Before he provided his email address to the websites, Ferron contacted Dish network call centers to obtain information about the terms and conditions of various Dish Network products and services. Accordingly, Ferron was aware of the terms allegedly excluded from the deceptive emails before he received them.

The trial court granted summary judgment, and the Sixth Circuit affirms in an unpublished opinion.

Ohio Consumer Protection Statute: Ferron claimed that he did not need to have been deceived personally to bring a claim under the OCSPA - it was sufficient that the emails contained objectively misleading information. The court disagrees. Citing overwhelming precedent in defendants' favor, the court concludes that a plaintiff must have been actually deceived in order to bring a claim under the OCSPA (i.e., individual plaintiffs cannot take the private attorney general route). Although Ferron argued that a ruling to this effect would foreclose legitimate claims, this argument didn't get much traction with the court:

Simply put, the only persons foreclosed by today's ruling are individuals who solicit emails from an advertiser after having researched and discovered the additional terms the advertisement allegedly excludes.

Ouch!

The Publisher Exception to the OCSPA: The Sixth Circuit also affirmed the trial court's ruling that one of the defendants (Hydra) who was a mere intermediary was entitled to the "publisher exception" to the OCSPA. As an initial matter, the court concludes that Hydra "was not involved in the creation of the . . . advertisements," and thus was precisely the type of entity who could take advantage of the publisher exception. Ferron argued that Hydra was not the type of publisher the legislature intended to fit within the exception, because Hydra received a referral fee each time a customer signed up (instead of a flat fee per ad, or a monthly fee). The court rejects this argument, reasoning that regardless of the fee structure, the publisher always has an interest in ensuring that customers respond to advertisements. Ferron also argued Hydra should not be entitled to take advantage of the publisher exception with respect to any ads transmitted by Hydra after the filing of the lawsuit. The court rejects this argument as well, since the mere filing of Ferron's complaint is not indicative of a violation of the statute (just that Ferron alleged that defendants violated the statute).

Request for Sanctions: Ferron requested sanctions on the basis that defendants did not maintain the ads in their native form (i.e., he could not click through and access the underlying links and graphics). The Sixth Circuit affirms the district court's rejection of Ferron's request for sanctions, noting that Ferron himself had the emails in question and should have saved them.
__

The court's description of the facts makes me think a section 230 defense may have been available to Hydra, not that it ended up needing it anyway.

The bigger takeaway? When it comes to spam litigation at least, courts seem more than able to ferret out what they see as unworthy claims. This is one of a long line of losses by plaintiffs who seem to have made it a part of their business to seek out and sue people to send them unsolicited email (see Gordon v Virtumundo, Mummagraphics, etc.).

A couple of days after the Sixth Circuit issued its opinion in this case, it issued its ruling in Charvat v. Echostar, a case where Ferron was counsel for the plaintiff. This case involved alleged do-not-call violations against Echostar and third parties brought by Philip Charvat, whom the court describes as not being "shy in taking on the role of private attorney general under the Telephone Consumer Protection Act" and listed him as a plaintiff in 13 TCPA lawsuits. The Sixth Circuit delves into the thorny jurisdictional issues, but ultimately ends up punting to the FCC on the interesting issue of whether Echostar could be liable for TCPA-violating calls made by third party independent contractors/affiliates. The FCC's amicus brief in this case suggests that it has an expansive (and perhaps troubling) view of such imputed liability.

Previous post: "Email Ad Network Isn't Liable for Unsolicited Email--Ferron v. Echostar"

Coverage of an earlier Ferron lawsuit: "Q1 2009 CAN-SPAM Quick Recaps"

Posted by Venkat at 02:14 PM | Content Regulation , Derivative Liability , E-Commerce , Spam

January 02, 2011

Nov.-Dec. 2010 Quick Links, Part 5

By Eric Goldman

Taxes

* Amazon.com, LLC v New York State Dept. of Taxation & Fin., 2010 NY Slip Op 07823 (N.Y. App. Div. Nov. 4, 2010). A NY appellate court rejected Overstock's/Amazon's facial challenges to "affiliates tax" but revived the as-applied challenge. The court distinguishes between "solicitation" of business for Amazon (collection obligation imposed) and passive advertising for Amazon (no collection obligation), but doesn't clearly explain why Amazon affiliates are engaged in solicitation and not passive advertising. Among other things, the court says [I reordered quotes]:

An advertisement in a newspaper is clearly not solicitation, as it is geared to the public at large. Likewise, the maintenance of a Web site which the visitor must reach on his or her own initiative is not, under the statute, or the advisory opinions, a solicitation. On the other hand, the targeting of a potential customer by the transmission of an e-mail is no different from a direct telephone call or a mailing to a customer. Both constitute active initiatives by a party seeking to generate business by pursuing a sale...When a representative can only receive compensation for an actual sale, it is much more likely that the representative will actually solicit, rather than passively maintain a Web site.....Nevertheless, we remand for further discovery so that plaintiffs can make their record that all their in-state representatives do is advertise on New York-based Web sites.

Although I think the court's analysis is wrong, it is not fatal to affiliate programs. For example, it seems like Amazon could fix its program by (1) prohibiting email marketing by affiliates, or (2) moving to a CPC model for affiliates.

* Colorado FYI Sales 79:

"If such retailers have total annual gross sales in Colorado of $100,000 or more, such retailers must: Provide notice with each purchase (the “transactional notice”). The transactional notice must:
• State that the retailer does not collect Colorado sales or use tax.
• State that the purchase is not exempt from Colorado sales or use tax merely because it is made over the Internet
or by other remote means.
• State that State of Colorado requires Colorado purchasers to file a sales or use tax return at the end of the year
for all taxable Colorado purchases that were not taxed, and pay tax on those purchases
• The notice must be easily seen and located near the total price.”

Miscellaneous

* Ars Technica on the Comcast/Level 3 spat. Is it a Net Neutrality red flag or a garden-variety peering disputes?

* Putting an end to one of the most over-hyped stories of the year, Craigslist shut down its adult services category globally.

In an unrelated development, Craigslist got a $6M+ judgment against ezadsuite.com, which "developed, advertised, and sold software programs to automate posting ads on Craigslist’s website and utilized other automated devices and related services meant to circumvent Craigslist’s security measures." This is one of those doctrinally troubling rulings that I choose to ignore because it's a default judgment. See the magistrate report and the judge's adoption.

* Latest NYT article hand-wringing about cyberbullying. WaPo has a myth-busting article on bullying.

* Specht v. Google, 2010 WL 5288154 (N.D. Ill. Dec. 17, 2010). Google wins a trademark battle over the term "Android." Some interesting parts:
- "on its own, the use of a domain name or e-mail address to identify an Internet host computer does not constitute a bona fide use in commerce. The use of a website address containing a trademark is not the same as use of the mark."
- "The androiddata.com website served as a remnant of a closed business. A "ghost site" such as this is not a bona fide use in commerce that can prevent the abandonment of a mark. The cost is small to maintain a domain name registration and host a several-page promotional website without e-commerce functionality, such as that which Plaintiffs contend existed at androiddata.com....Allowing a mark owner to preserve trademark rights by posting the mark on a functional yet almost purposeless website, at such a nominal expense, is the type of token and residual use of a mark that the Lanham Act does not consider a bona fide use in commerce."

* Oklahoma HB 2800: Executors can take over web accounts of the deceased.

* In theory ending another one of the year's most overhyped stories, the Borings got $1 for their trespass claim against Google. Previous blog coverage (1, 2, 3).

* Reuters: “A Reuters Legal analysis found that jurors' forays on the Internet have resulted in dozens of mistrials, appeals and overturned verdicts in the last two years.” Previous blog coverage.

* The Starwood v. Hilton Hotels corporate espionage lawsuit has settled. I tested this dispute on my IP course last year (see the exam and sample answer).

* California State Bar Standing Committee on Professional Responsibility and Conduct Opinion No. 2010-179:

Whether an attorney violates his or her duties of confidentiality and competence when using technology to transmit or store confidential client information will depend on the particular technology being used and the circumstances surrounding such use. Before using a particular technology in the course of representing a client, an attorney must take appropriate steps to evaluate: 1) the level of security attendant to the use of that technology, including whether reasonable precautions may be taken when using the technology to increase the level of security; 2) the legal ramifications to a third party who intercepts, accesses or exceeds authorized use of the electronic information; 3) the degree of sensitivity of the information; 4) the possible impact on the client of an inadvertent disclosure of privileged or confidential information or work product; 5) the urgency of the situation; and 6) the client’s instructions and circumstances, such as access by others to the client’s devices and communications.

* Another ill-conceived California law: large companies have to disclose on their websites their efforts to reduce slavery and human trafficking in their supply chains. Are you kidding me???

* Fun with Google Books Ngram viewer: cyberlaw vs. other terms; but different results when the terms are capitalized.

* Inside Higher Ed: "professors ‘caught on tape’ is a growing genre, and some think it could have a chilling effect on academe."

* HuffPost: You're Out: 20 Things That Became Obsolete This Decade.

* Tell your favorite male bloggers (besides Venkat and me, of course) how you really feel about their strengths.

Posted by Eric at 07:54 AM | E-Commerce , Marketing , Privacy/Security , Trade Secrets | TrackBack

January 01, 2011

Nov.-Dec. 2010 Quick Links, Part 4

By Eric Goldman

Blogs and Boards

* Reuters on the wild-and-wooly world of investor message boards.

* KingCast.net v. Friends of Kelly Ayotte, 2010 WL 4683829 (D.N.H. Nov. 2, 2010). Blogger's unsuccessful lawsuit to gain mandatory access to a candidate's campaign events as a journalist.

* Mealer v. GMAC Mortg. LLC, 2010 WL 4586183 (D. Ariz. Nov. 2, 2010). A lawsuit against General Motors for an employee's allegedly disparaging blog post is dismissed because the new GM isn't liable for the old GM's activities.

* ABA Journal: some attorneys are using independent contractors to “ghost write” blog posts for them. This seems like a practice filled with legal landmines.

Contracts

* Florencia Marotta-Wurgler, Does Disclosure Matter? The abstract:

Disclosure has long been the preferred regulatory approach to curtail one-sided standard form contract terms....The appeal of disclosure is that it is relatively low cost, improves consumer decision-making and preserves consumer choice. For disclosure to be effective, however, it must increase readership and understanding of contracts to a meaningful rate, and, conditional on readership, contract content must be relevant to purchase decisions. This paper tests both these necessary conditions. We follow the clickstream of 47,399 households to 81 Internet software retailers to measure contract readership as a function of disclosure. We find that making contracts more prominently available does not increase readership in any significant way. In addition, the purchasing behavior of those few consumers who read contracts is unaffected by the one-sidedness of their terms. The results suggest that mandating disclosure online should not on its own be expected to have large effects on contract content.

* S. 3386, Restore Online Shoppers' Confidence Act, signed into law Dec. 29, 2010. The bill prevents online merchants from passing shoppers' credit card numbers to other merchants without requisite consent. It also restricts negative option sales without adequate disclosure, consent and ability to terminate.

Jurisdiction

* Penachio v. Benedict, 2010 WL 4505996 (S.D.N.Y. Nov. 9, 2010). "Defendants are not subject to personal jurisdiction in this Court. The preparation and dissemination of the defamatory material occurred outside of New York. Although the [YouTube] videos bear a relationship to the proceedings in New York and Defendants' alleged commercial interest in New York, Defendants' interaction with New York during the publication of the videos is too marginal to rise to the level of purposeful availment."

* Miller v. Kelly, 2010 WL 4684029 (D. Colo. Nov. 12, 2010). "Defendant's LiveJournal blog appears to the Court to have been merely a passive website that allowed internet users to access and view information posted by Defendant. Accordingly, the Court finds that Defendant's authorship of a LiveJournal blog is an insufficient basis for the exercise of general personal jurisdiction over her....the Defendant's authorship of an entry on the blog was not an act purposefully directed at Colorado. Although the blog entry was allegedly accessed by Plaintiff in Colorado, no allegation or evidence has been presented to indicate that Defendant expressly aimed the entry at Colorado."

* State v. Pierce, 2010 WL 4941473 (Minn. App. Ct. Dec. 7, 2010). A man was ordered not to contact his ex-girlfriend. He violated the order by sending her a MySpace message, but prosecutors could not establish that he sent or she received the message in their county, so the conviction was reversed.

Posted by Eric at 01:14 PM | Content Regulation , E-Commerce , Licensing/Contracts | TrackBack

December 22, 2010

Court Rejects Plaintiff's Proposal of Class Notice via Twitter, SMS, and Email -- Jermyn v. Best Buy

[Post by Venkat]

Jermyn v. Best Buy, No. 08-Cv-00214-CM-DCF (S.D.N.Y.; Dec. 06, 2010)

Plaintiffs brought a class action against Best Buy alleging that Best Buy failed to honor its price-match guarantee. The court certified the class with respect to New York residents who had bought certain items from Best Buy since 2002 and who were denied Best Buy's price guarantee.

The named plaintiff suggested several forms of notice to potential class members, including notification via: (1) Best Buy's "Twelpforce" Twitter account, (2) SMS, and (3) email. Noting that overinclusive individual notice is not required, and that Best Buy is only required to undertake "reasonable steps" to identify individual affected class members, the court rejects all three suggestions.

Notice via Twitter: The court conducted a random sample of Best Buy's "Tweplforce" account and concluded that it was primarily a medium for providing technical support to customers:

As an online help desk--primarily focused on providing technical advice-- Twelpforce is not tied to Best Buy's price-match guarantee in any way and therefore there is no evidence that customers denied a valid price match use or even know of Twelpforce. Further, as Best Buy points out, Twelpforce is a nationwide help desk and Best Buy cannot limit its "tweets" by geographic area. Thus, a "tweet" about the pending class action will likely reach a nationwide audience--a group that is significantly broader than the defined class.

The courts rejects this form of notice, observing that:

Notice via Twitter is a form of individual notice (akin to notice via mail).

Notice via SMS: As with respect to the suggested notice via Twitter, the court accepts Best Buy's argument that notice via SMS was overinclusive, based on Best Buy's argument that:

Best Buy is unable to restrict its text messages to class members. Best Buy's list of mobile telephone numbers includes the telephone numbers of employees (who are excluded from the class) and select high-level Reward Zone members (i.e., members of Best Buy's loyalty program). Although Best Buy may be able to restrict its text messages to New York customers, there is no link between the list of mobile telephone numbers (which includes individuals excluded from the class definition) and class members. Moreover, the list of mobile telephone numbers is underinclusive because it contains only a select group of Reward Zone members and Best Buy employees.

Notice via email: The proposed email notice suffered the same fate, since Best Buy was "unable to restrict notice via email to only class members . . . [it] only collected customer emails when a customer makes a purchase on bestbuy.com; when a customer obtains a protection or service plan for an item purchased at bestbuy.com or at a Best Buy store; or when a customer voluntarily shares her email address when visiting bestbuy.com."
__

The court's treatment of Twitter as an form of individual notice was interesting, and not entirely accurate. Tweets are not "individualized messages" in the sense that the list of recipients is not controlled by the sender (there's not a finite list) - the list of recipients includes people who follow the general stream of Tweets as well as those who have opted in to receive messages. Additionally, tweets can be disseminated further by those who see initial tweets, increasing the odds that the word would get out to its intended audience.

It's also worth noting that the "Twelpforce" account is not Best Buy's only Twitter account. For some reason, plaintiff didn't suggest notice via Best Buy's main account, which has approximately 123,000 followers. Given that the costs involved in disseminating notice via Twitter are de minimis, I'm surprised the court wasn't more open to the suggestion. Also, I was surprised that neither party brought up Facebook as a possibility. Best Buy's Facebook page is approaching 2 million followers, and offers a similarly inexpensive way to get the notice out to a broad group of interested people. I would think Best Buy's resistance stems from not wanting to suffer any negative branding implications from including news of this class action in its overt marketing channels, but I would have thought the minimal cost would have swayed the court.

The accepted form of class action notices will evolve over the years (the court agreed that notice via Best Buy's website was proper, and Best Buy did not object to class counsel setting up a website where it would disseminate notice). Interestingly, the court approves notice via the New York Times, and suggests a few other local newspapers where notice is appropriate, even though there's no empirical evidence that these methods of notice are any better targeted to reach prospective class members than the ones proposed by class counsel, and undoubtedly they are more expensive. (I don't know where revenue from this notice fits into a newspaper's revenue stream, but it's nice to see that the court is looking out for the dying print media.)

I was somewhat surprised - given the infinite degree of targeting and consumer tracking companies are portrayed as engaging in - that the court did not push Best Buy to take additional steps to identify individual customers within the class. Under the rules as articulated by the court, only class members that can be identified through "reasonable steps" should receive individual notice, but I would have thought Best Buy would have ample "reasonable" means at its disposal to identity affected customers.

Posted by Venkat at 01:53 PM | E-Commerce , General

November 12, 2010

Amazon Isn't Liable for Rogue Affiliate's Keyword Ad Buys--Sellify v. Amazon

By Eric Goldman

Sellify Inc. v. Amazon.com, Inc., 2010 WL 4455830 (S.D.N.Y. Nov. 4, 2010). The initial complaint.

Christopher Maki runs Sellify, which in turn runs a website/eBay store called OneQuality.com. An Amazon affiliate, "Cutting Edge Designs," purchased the keywords "onequality" and close variants in Google AdWords and displayed ads saying “Don't Buy from Scammers” or “Beware the SCAM Artists” and linking to Amazon (presumably using CED's Amazon affiliate ID in the link). Sellify contacted Amazon regarding these ads but reached the wrong internal department, which was unsurprisingly unhelpful. Sellify then sent Amazon a demand letter, which prompted Amazon to tell CED to cut it out. Apparently CED didn't, so Sellify sent Amazon a second demand letter, and Amazon then terminated CED's affiliate status and withheld accrued commissions. The ads stopped shortly thereafter.

Logically, the matter should have ended there. Instead, Sellify sued Amazon under the Lanham Act and ancillary claims, seeking $2.4M in damages.

Legal Analysis

The court quickly rejects Amazon's direct liability for a Lanham Act violation because Amazon didn't buy the ads in question.

The court then discusses Amazon's vicarious liability for any Lanham Act violations. The court's discussion is a little confusing because it never establishes that CED violated the Lanham Act, nor does it resolve the test for vicarious liability. Instead, it says that some courts establish vicarious Lanham Act liability based on either actual authority over the agent or apparent authority:

Actual Authority: CED did not have actual agency authority from Amazon. Amazon's affiliate agreement (the "Operating Agreement") expressly disclaims such authority. "Further, Amazon did not control the form or substance of Cutting Edge's ads, and it is undisputed that Amazon had no authority to remove the Cutting Edge ads from the Internet. "

Apparent Authority: The court rejects apparent authority because Amazon never communicated anything validating CED's ability to act as its agent. Amazon only communicated that affiliates like CED could link to its site.

The court also rejects Amazon's contributory Lanham Act liability, citing the Tiffany v. eBay case. The court says "In this case, there is no evidence that Amazon had particularized knowledge of, or direct control over, Cutting Edge's disparaging ads." The court disregards Sellify's initial misdirected contact with Amazon. Then, "upon receipt of Sellify's May 2009 demand letter, Amazon promptly initiated enforcement action against Cutting Edge, and eventually terminated its contractual relationship with the company in large part because it continued to infringe on plaintiff's mark." Once again, although trademark law doesn't have a statutory notice-and-takedown procedure akin to 17 USC 512, adhering to a trademark notice-and-takedown procedure is clearly a best practice.

The court rejects all of Sellify's state law claims, saying they require "proof that either Amazon itself placed the Cutting Edge ads or that Cutting Edge acted as Amazon's agent in placing the ads," and the court already said that Sellify couldn't show that. This is a good move, but it would have been even better if the court discussed how 47 USC 230 immunized Amazon for its affiliates' acts.

Implications

Affiliate Tax. I wonder how this ruling might bear on the Amazon affiliate tax battles? In NY, Amazon and Overstock are battling over whether their affiliates are "sales representatives" that allow the state to impose sales tax collection obligations on them. Here, we get a federal judge in NY saying that affiliates aren't "agents" for purposes of a variety of legal doctrines. The efforts to use affiliates as a basis to impose sales tax collection obligations has always a crock; this opinion indirectly reinforces that.

TM Liability for Affiliate's Ads. Other lawsuits have tried to impose trademark liability on an affiliate program operator for the ads placed by affiliates. See my recap here. I can't recall any of the other cases reaching a final conclusion. I don't think this case is the final word on the subject, but it may reinforce that those cases are meritless.

Keyword Ad Lawsuits Are Economically Irrational. As I've repeatedly indicated, keyword advertising lawsuits usually make no economic sense. See, e.g.:
- King v. ZymoGenetics. The defendant advertiser got 84 clicks.
- Storus v. Aroa. The defendant advertiser got 1,374 clicks over 11 months.
- 800-JR Cigar v. GoTo.com. The search engine defendant generated $345 in revenue from the litigated terms.

In this case, CED's ads generated about 1,000 ad impressions and 61 clicks. No matter how you slice it, bringing a lawsuit against Amazon over the diversionary effect of 1,000 ad impressions and 61 clicks is a terrible economic decision. The court especially guffawed at the $2.4M damage request--even more farcical given that OneQuality.com was generating a total of about $50k of annual profits. No matter what, Sellify should have dropped the issue once it succeeded with the takedown. Running to court was an unnecessary waste for everyone.

Rebecca's post on this ruling.

Posted by Eric at 11:30 AM | Derivative Liability , E-Commerce , Marketing , Trademark | TrackBack

November 05, 2010

October 2010 Quick Links

By Eric Goldman

Copyright

* Greg Sandoval discusses copyright trolls with Cindy Cohn. You may recall I had an "interview" with Cindy as a guest lecture in my Internet Law course. And a belated congratulations to Cindy for her recognition by the CA State Bar IP Section. BTW, have you considered supporting the EFF financially? I do, because I sleep better at night knowing Cindy and her colleagues are on the beat looking out for our interests.

* Triton Media settles with movie studios for providing too much support to pirate movie websites.

* Did you know that California has a law (Educ. Code 66450-66452) prohibiting the commercialization of class notes from academic courses? It raises interesting First Amendment, copyright preemption and 47 USC 230 issues.

Trademarks

* The initial interest confusion doctrine appears to be infecting EU trademark law.

* Reuters reports on buying counterfeit goods from China over the Internet.

* News.com: Trademark issues on Etsy.

* DSPT v. Nahum (9th Cir. Oct 27 2010). "Even if a domain name was put up innocently and used properly for years, a person is liable under 15 U.S.C. § 1125(d) if he subsequently uses the domain name with a bad faith intent to profit from the protected mark by holding the domain name for ransom. The evidence sufficiently supported the jury’s verdict that Nahum did so, causing $152,000 in damages to DSPT."

* Hearts on Fire v. Blue Nile settled in January. Prior blog post.

* WaPo on universities cracking down on high school teams copying the university's logos.

* An interview with Google's chief trademark counsel Terri Chen.

Content Regulation

* Lichter v. Martin, 2010 WL 3913601 (Cal. App. Ct. Oct. 7, 2010). Blog post protected by anti-SLAPP laws.

* Eoin O'Dell discusses secondary online defamation liability in Ireland. The post illustrates why we should be grateful for 47 USC 230.

* Kash Hill reports on a professor who got busted for possessing child porn, some of which allegedly was collected for an academic research project.

* The Register published an important and thought-provoking article on restitution in child porn cases.

* Doe v. Shurtleff (10th Cir.). Utah law requiring sex offenders to turn over their usernames to the government survives First Amendment challenge.

Consumer Protection

* NYT: "Under the deal with the French Competition Authority, Google agreed to adopt conditions, including a three-month notification period, when it rejected some ads from appearing next to its search results in France. The specific conditions apply only in France, and concern only ads for tools aimed at helping drivers avoid speeding tickets." Search Engine Land has more.

* Target avoids class certification in lawsuit over its website's allegedly inaccurate but obscurely presented references to "Made in the US." Rebecca's coverage.

* PA Bar Opinion: "It is the opinion of the Pennsylvania Bar Association Unauthorized Practice of Law Committee that the offering or providing [in Pennsylvania] of legal document preparation services as described herein (beyond the supply of preprinted forms selected by the consumer not the legal document preparation service), either online or at a site in Pennsylvania is the unauthorized practice of law and thus prohibited, unless such services are provided by a person who is duly licensed to practice law in Pennsylvania retained directly for the subject of the legal services."

* Rebecca on the Ewert v. eBay class certification.

* The Supreme Court denied cert in Tricome v. eBay, Inc., 2010 WL 3525737 (U.S. Nov. 1, 2010)

Miscellaneous

* Streaming video version of Alex Macgillivray's lecture at SCU from a month ago.

* Mike Godwin has left his role as Wikimedia's GC.

* Virtual world enthusiast Greg Lastowka has posted his new book Virtual Justice under a CC license.

* Pelican Trading Inc. v. Proskauer Rose LLP, 2010 WL 3905750 (D. Nev. Sept. 28, 2010). A law firm's blog post about a Nevada law did not help confer jurisdiction in Nevada.

* School district settles spy webcam case. Surprise! Lawyer gets 70% of the money.

Posted by Eric at 06:51 AM | Copyright , Domain Names , E-Commerce , Trademark , Virtual Worlds | TrackBack

November 01, 2010

Auction Platform Protected by 47 USC 230 for a Rogue Auction--Simmons v. Danhauer

By Eric Goldman

Simmons v. Danhauer & Associates, LLC, 2010 WL 4238856 (D. S.C. Oct. 21, 2010)

Proxibid provides an online auction platform similar to eBay, except that Proxibid vets auctioneers before they can conduct an auction. Danhauer used Proxibid's platform to conduct an auction. Simmons cast the high bid in a Danhauer auction that had two alleged irregularities. First, with the help of a Proxibid CSR, Danhauer unilaterally extended the auction's closing time. Second, Danhauer allegedly cast shill bids in the auction under a different account. The plaintiffs were understandably miffed, and they sued both Danhauer and Proxibid. Simmons apparently settled with Danhauer, leaving open for this ruling the claims against Proxibid. The court dismisses those claims on summary judgment.

The court buzzes through Simmons' claims based on the prima facie elements. It dismisses the negligence claim because the core harm here is an alleged breach of contract (Danhauer's failure to consummate the transaction with the high bidder), and the contract breach can't support a tort claim. Without a tort claim, the unfair practices claim also fails. The conversion claim fails because Simmons had not yet obtained a possessory interest in the goods. The fiduciary breach claim fails because Proxibid only provided customer support to Danhauer. The contract interference claim fails because, at most, Proxibid simply followed Danhauer's instructions.

In addition to the claims' failures on their faces, the court concludes that Proxibid qualifies for 47 USC 230 immunity. The court's entire discussion of the issue:

Plaintiffs have essentially asserted that Proxibid is liable to them in tort for tortious interference with a contract, aiding and abetting a breach of a fiduciary duty, negligence, unfair trade practices, and conversion because Proxibid allegedly helped Danhauer deprive Plaintiffs of the items for which they were the highest bidder in the auction at 4:00 a.m. Plaintiffs' sole bases for maintaining these claims against Proxibid arise from Proxibid's facilitation of Danhauer's reopening of the auction and Proxibid's alleged failure to thwart Danhauer's efforts to bid in its own auction in violation of the website rules. Plaintiffs do not dispute the fact that Proxibid is a website service provider, much like Ebay. Plaintiffs also do not dispute that Danhauer was responsible for conducting all aspects of the auction. There is no evidence that Proxibid posted any information or conducted any actions other than those provided by or at the direction of Danhauer. In this case, Proxibid is nothing more than an interactive computer service provider and cannot be held liable for the information and actions originating from Danhauer. Accordingly, Proxibid is also entitled to the immunity provided under the CDA, and Plaintiffs may not pursue the tort claims in their Complaint against Proxibid.

The case doesn't break much new ground. It's just another easy defense win in an obvious 230 case.

Posted by Eric at 06:50 AM | Derivative Liability , E-Commerce | TrackBack

October 18, 2010

First Sale and Exhaustion Doctrines in IP Conference, Nov. 5, SCU

By Eric Goldman

I've mentioned our First Sale and Exhaustion in IP conference before, but now it's less than 3 weeks away. If you were thinking about coming, now is a good time to confirm your spot.

As regular readers know, first sale issues are swirling around us. On the copyright front, we are working through a troika of Ninth Circuit cases in Vernor v. Autodesk (now subject to an en banc hearing request), UMG v. Augusto and Blizzard v. MDY. I've also blogged about some transborder importation cases involving cheap textbooks (e.g., Pearson v. Liu). On the importation topic, the US Supreme Court granted cert in another Ninth Circuit case, Costco v. Omega, and oral arguments are imminent. [UPDATE: I've been informed the oral arguments will be on Nov. 8, just a few days after the conference!] And many folks continue to lament the absence of a first sale doctrine for digital files.

On the trademark front, we've discussed how manufacturers are battling back against unwanted eBay sales (see Mary Kay v. Weber and Beltronics v. Midwest). Simultaneously, manufacturers are embracing minimum resale prices following the Supreme Court opinion in Leegin. We haven't blogged too much on patent exhaustion, but the recent Quanta v. LGE Supreme Court ruling casts a large shadow over both patent exhaustion as well as other types of exhaustion. Interwoven into all of these topics are questions about whether statutory first sale/exhaustion rights are waivable or conditionable by contract.

As you can see, we have a lot to talk about.

I'm particularly excited about this conference because that we won't look at IP exhaustion principles in doctrinal "silos." Instead, we've taken an holistic approach to the topic, so that we can see how the exhaustion principles might be similar and different across the various IPs. We hope this will yield some powerful insights that otherwise would be lost in a silo-by-silo analysis.

Our agenda for the day:

8:15 – 8:45 Registration

8:45 – 9:00 Welcome Remarks

9:00 – 10:20 Justifications for the First Sale/Exhaustion Doctrines
Moderator: Lee Ann Lockridge, Louisiana State University Law Center
Vince Chiappetta, Willamette University College of Law
Anne Layne‐Farrar, LECG
Rahul Telang, Heinz College, Carnegie Mellon University
Molly Shaffer Van Houweling, UC Berkeley School of Law

10:20 – 10:40 Break

10:40 – 12:00 Channel Management Issues
Moderator: Mark P. McKenna, Notre Dame Law School
Dale D. Achabal, Santa Clara University
Mary Huser, Bingham McCutchen
Ariel Katz, University of Toronto
Catherine Sandoval, Santa Clara University School of Law

12:00 – 1:10 Lunch
12:40 Mark A. Lemley, Stanford Law School

1:20 – 2:40 Transborder and Comparative Issues
Moderator: Colleen Chien, Santa Clara University School of Law
Frederick M. Abbott, Florida State University College of Law
John A. Rothchild, Wayne State University Law School
Irene Calboli, Marquette University Law School
Cynthia Ho, Loyola University Chicago School of Law

2:40 – 3:00 Break

3:00 – 4:20 Copyright Issues
Moderator: Brian Carver, UC Berkeley School of Information
Neel Chatterjee, Orrick, Herrington & Sutcliffe LLP
Raymond T. Nimmer, University of Houston Law Center
Tyler T. Ochoa, Santa Clara University School of Law
Jason Schultz, UC Berkeley School of Law

4:20 – 4:30 Closing Remarks – Eric Goldman, Santa Clara University School of Law

4:30 – 5:30 Reception

Please register at the conference page. Hope you can join us on Nov. 5.

Posted by Eric at 09:15 AM | Copyright , E-Commerce , Licensing/Contracts , Patents , Trademark | TrackBack

October 11, 2010

Class Action for Misleading Pop-up Ads Against McAfee Survives Motion to Dismiss -- Ferrington v. McAfee

[Post by Venkat]

Ferrington v. McAfee, Case No. 10-cv-01455-LHK (N.D. Cal. Oct. 5, 2010)

There have been a few rulings involving class actions from customers alleging that an online merchant partnered with a third party who improperly piggybacked on to the merchant's transaction (and in the process the customer ended up buying something he or she did not want to purchase). (See In re: Easysaver Rewards Litigation -- Internet Rewards Program Class Action Survives Initial Motion to Dismiss and Fifth Circuit Blesses Vistaprint's Rewards Program Sign-Up Process.) Congress is taking a look at these types of practices and New York's Attorney General has settled with several companies who allegedly engaged in these types of practices. A lawsuit against McAfee alleging similar claims recently survived a second motion to dismiss.

Background: As alleged by the plaintiffs, McAfee, the computer security software seller partnered with

Arpu . . . a company that places online advertisements that enable consumers to purchase products 'with a single click, using credit card information already on file'. . . . Arpu partnered with McAfee to place ads on McAfee's website that would appear after a customer completed a purchase of a McAfee product. If a customer chose to subscribe to the product or service offered in the Arpu ad, McAfee transmits [the customer's] billing information to Arpu for use in the purchase of the Arpu product. . . . . After [plaintiffs] completed their transactions, but before they downloaded the McAfee product, an Arpu pop-up ad appeared on their computer screens with the button reading 'Try it Now.' Believing that clicking on 'Try it Now' would download the McAfee software they had just purchased, plaintiffs clicked on the button. They later learned that clicking on 'Try It Now' authorized McAfee to transfer their billing info to Arpu, enrolled them in a 30-day free trial of a non-McAfee product called PerfectSpeed, and authorized Arpu to charge them a $4.95 monthly subscription fee after the expiration of the free trial period.

Plaintiffs brought claims under California's unfair competition law and the California Consumer Legal Remedies Act, along with a few other claims.

The Court's Ruling:

Screenshots: As an initial matter, McAfee tried to rely on screenshots of the online sign-up process and have these screenshots judicially noticed. Predictably, the court declines McAfee's offer, because among other things, McAfee itself admitted that it "recreated the image Plaintiffs would have seen . . . [since] the pop-up [ads at issue were] no longer running." [emphasis added] Plaintiffs also disputed McAfee's representation that the ads were identical to what the plaintiffs saw during the purchase process. McAfee also tried to rely on documents from Arpu (e.g., terms of use, purchase confirmation emails, etc.). This request suffered the same fate, because among other things, McAfee failed to provide an explanation of the source of the documents. (Even if McAfee explained where they came from, these documents were not properly subject to judicial notice. They would have been contested anyway, so I'm not sure why McAfee thought it could have the court judicially notice these documents.) As in the Easysaver Rewards case, plaintiffs requested the court to judicially notice a Senate Report titled "Aggressive Sales Tactics on the Internet and their Impact on American Consumers," and two similarly themed FTC reports. The court acknowledged that these reports were prepared, but did not take notice of the findings and opinions contained in those reports.

Unfair Competition Claim: McAfee initially argued that plaintiffs could not obtain damages under 17200 since they had not paid McAfee any money - i.e., plaintiffs paid money to Arpu which plaintiffs were improperly trying to recover from McAfee. The court rejects this argument, concluding that if plaintiffs had paid money to a third party as a result of McAfee's unfair trade practices, plaintiffs could recover this money as restitution, even though they paid it to a third party. It was not lost on the court that McAfee and Arpu likely had some sort of financial arrangement pursuant to which Arpu would pay McAfee amounts for customers that clicked through.

As far as the merits were concerned, the court looked to two tests for evaluating plaintiffs' 17200 claim that McAfee engaged in an "unfair" trade practice: (1) the amorphous balancing test (where the harm to the consumer is balanced against the utility of the defendant's practice) and (2) the test that looked to whether the defendant's conduct was unfair in light of public policy "tethered" to an actual law or statutory provision that was intended to carry out public policy. With respect to the tethering test, the court found that plaintiffs could not point to any statute or rule to which they could tether their unfairness claim. However, the court found that plaintiffs could assert a claim under the balancing test. Here the court balanced the harm to the plaintiffs from the allegedly misleading statements against the utility of the advertising by McAfee. Surprisingly, the court seemed to struggle with the balancing, in light of the purported utility of pop-up ads. Not shockingly, McAfee could not argue that pop-up ads served a useful purpose, beyond pointing out that the pop-up ads were useful in the same way that any garden variety advertisement was "useful." [I'm not sure who will testify on McAfee's behalf that this is actually the case, but I'm sure some internet user exists out there somewhere that can testify to this.]

Plaintiffs also asserted a claim under the "unlawful prong" of 17200, which allows plaintiffs to borrow from other statutes and use violations of these other statutes to support a 17200 claim. The court held that a plaintiff could assert a 17200 claim based on a Lanham Act violation because the Lanham Act cases do not reflect an intent to bar an independent private right of action. Nevertheless, the court held that the plaintiffs did not adequately state a claim here, because the plaintiffs had not alleged "the existence of a valid and protectable mark that is being used [by McAfee] without authorization." Plaintiffs also asserted that McAfee engaged in an unlawful trade practice alleging that McAfee violated the Consumer Legal Remedies Act.

CLRA Claim: The CLRA prohibits unfair practices undertaken in the context of a transaction involving the "sale or lease of goods or services." McAfee argued that the CLRA did not apply because the McAfee transaction involved software which is not a good or service covered by CLRA. As McAfee notes, the CLRA defines goods as "tangible chattels." McAfee analogized software to insurance and credit, which courts have previously held are "intangible chattels," and not covered by the CLRA. McAfee also cited to secured transaction provisions of California's version of the Uniform Commercial Code, which defines "general intangibles" to include software and which exclude computer programs from the definition of "goods."

The court noted the mixed authority on this issue but ultimately concluded that "the software [plaintiffs] purchased is not a good covered by the CLRA." The court additionally concluded that software "generally is not a service for purposes of the CLRA." (CLRA defines service as "work, labor, and services . . . including services furnished in connection with the sale or repair of goods.") In addition, the court rejected plaintiffs' argument that the particular subscription provided by Arpu should be considered a service, on the basis that plaintiffs had not alleged "sufficient facts as to the nature of the services provided by [Arpu] to allow the court to draw that conclusion." The court granted plaintiffs leave to allege this in an amended complaint.
__

My first reaction is . . . what the heck were McAfee's marketing folks thinking signing up Arpu's services? McAfee, as a provider of computer security software, offers a third party's product that customers are prompted to purchase through a pop-up ad at the point of sale? Worse yet, McAfee allegedly transferred the plaintiffs' credit card information to a third party based on plaintiffs' assent to terms that were vaguely displayed in a pop-up ad? As detailed in the post about Vistaprint, a robust disclosure may insulate an internet merchant who refers its customers to a rewards program at the point of sale, but the plaintiffs' allegations (and the dispute as to the terms that were presented to the consumers) easily take this case outside this category. Again, setting aside the legal issues, where - other than out to lunch - was McAfee's brand manager in this transaction? McAfee bills itself as a company who makes available products to protect consumers from shady websites and software, but taking plaintiffs' allegations as true, isn't McAfee engaging in the very conduct that its services are designed to protect against? Regardless of how the lawsuit pans out, plaintiffs' allegations put McAfee and its brand in an uncomfortable spot.

The case offers teaching similar to Vistaprint and Easysaver: if you are going to inject a third party transaction in the context of an online sale, your documentation better be bulletproof and should make crystal clear to the consumer that a third party is involved. And if you are going to seek judicial notice, the online terms have to be truly indisputable. The court in this case contrasts Vistaprint by noting that in Vistaprint, (1) customers were required to enter their email addresses, (2) the pop-up offer terms were presented in close proximity to where consumers had to enter their email addresses, and (3) the ads in Vistaprint "clearly identified the third party receiving" the billing information from Vistaprint. Regardless of the disclosure, the whole "transferring a customer's payment information to a third party" sounds like a practice that internet merchants may want to steer clear of.

I'm not sure what to make of the Lanham Act ruling, but the CLRA ruling is interesting. Article 2 of the UCC contains a broad definition of goods, and software (particularly off-the-shelf software) has been classified as a good for Article 2 purposes. A finding that this type of software is not subject to the CLRA certainly narrows the scope of remedies available to consumers, but is defensible in light of the narrow definition for goods employed by the CLRA. (“Goods” are defined as “tangible chattels,” and “services” are defined as “work, labor and services . . . ” under Cal Civ. Code §§ 1761(a) and (b).)

Posted by Venkat at 11:14 AM | E-Commerce , Licensing/Contracts , Marketing

September 28, 2010

Washington Anti-Online Gambling Law Survives Dormant Commerce Clause Challenge -- Rousso v. State

[Post by Venkat, with brief comments from Eric]

Rousso v. Washington, Case No. 8040-1 (Wash. S.Ct. Sept. 23, 2010)

Professor Goldman blogged recently about a case from the Washington state Supreme Court interpreting the state's online gambling laws: "P2P Gambling Site is Illegal Bookmaker." The same court just issued an opinion rejecting a dormant commerce clause challenge to Washington state's online gambling laws.

Lee Rousso, an online poker aficionado and Washington state resident, brought a declaratory judgment lawsuit seeking a declaration that Washington's online gambling statute violates the dormant commerce clause. The trial court and the court of appeals rejected this challenge, and the Washington Supreme Court affirmed.

No delegation of authority

The court first noted that existing federal laws regulating online gambling did not delegate to the states authority to regulate online gambling. The court rejected the State's argument that the Unlawful Internet Gambling Enforcement Act of 2006 and the Wire Act contained language from which the court could find that Congress delegated the matter to the states.

Court finds that the statute does not discriminate

The court next applied the traditional discrimination test to determine whether the Washington law discriminated in language or effect against out-of-state commerce. The language of the statute was not discriminatory - "it equally prohibits internet gambling regardless of whether the person or entity hosting the game is located in Washington, another state, or another country." The court could not find any discriminatory effect on interstate commerce, since the statute prohibits internet gambling "evenhandedly, regardless of whether the company running the web site is located in or outside the state of Washington." Rousso argued that in reality, since there were no Washington-based internet gambling sites, the effect of the ban was to favor in-state brick and mortar gambling services. Citing CTS Corp v. Dynamics Corp, 481 U.S. 69, 87-88 (1987), the court rejected this argument.

Rousso also argued direct discrimination because banning internet gambling will "have a secondary effect of promoting in-state, Internet gambling substitutes . . . ." The court rejects this argument as well, noting that internet gambling and brick and mortar gambling are "two different activities, presenting risks and concerns of a different nature . . . ." According to the court, purchasing substitute goods and services (whether that is brick and mortar gambling or "buying more snacks for an in-person poker game among friends") is not a direct discriminatory effect.

The burden is not "clearly" excessive in relation to the local benefit

Finding no overt discrimination, the court engaged in commerce clause balancing and asked whether there is a legitimate state purpose for the ban, and whether the burden imposed as a result of the ban is "clearly excessive" in relation to the local benefit. Interestingly, the court credits the State's arguments regarding the State's interest in regulating online gambling on the basis that online gambling (as opposed to in-person gambling) presents unique harms:

Internet gambling introduces new ways to exacerbate [the same threats to health and welfare as off-line gambling] . . . . Gambling addicts and underage gamblers have greater accessibility to on-line gambling--able to gamble from their homes immediately and on demand, at any time, on any day, unhindered by in-person regulatory measures. Concerns over ties to organized crime and money laundering are exacerbated where on-line gambling operations are not physically present in-state to be inspected for regulatory compliance. Washington has a legitimate and substantial state interest in addressing the effects of Internet gambling.

The court found that the burden on interstate commerce is "comparable" to the substantial state interest in protecting health, welfare, safety, and morals.

Regulation vs. an outright ban

Rousso argues that the State had a less restrictive alternative to address these concerns: regulating (rather than banning) internet gambling. The court again recited the "unique dangers and pitfalls" presented by online gambling, and concluded that it wasn't clear regulation could adequately address these issues, and in any event, it wasn't up to the court to second guess the legislature's decision to ban, rather than regulate, online gambling. The court further noted that regulating online gambling would be "an interstate-commerce burdening nightmare." [It wasn't clear to me that an outright ban presents less of a burden than regulation.] Regulation would require Washington to inject itself into the universe of non-Washington (and off-shore) online gambling entities, and "foreign operations would need to be reorganized in conformity to Washington regulations. . . . When a foreign operation failed to conform, all Washington commerce on that web site would be precluded."
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I wasn't sold on the Court's conclusion. The Washington Supreme Court previously rejected a dormant commerce clause challenge to Washington state spam laws (See State v. Heckel, 24 P.3d 404, 406 (Wash. 2001)), but as the court of appeals noted, Heckel differs from this case since the law here applies to "passive" websites. Also, Washington's spam statute (like most others) also contains a geographic limitation. In fact, I may be missing something pretty basic, but I don't see an express geographic limitation in the statute. RCW 9.46.240 states:

Whoever knowingly transmits or receives gambling information by telephone, telegraph, radio, semaphore, the internet, a telecommunications transmission system, or similar means, or knowingly installs or maintains equipment for the transmission or receipt of gambling information shall be guilty of a class C felony . . . . However, this section shall not apply to such information transmitted or received . . . relating to activities authorized by this chapter . . . .

Not only does the statute not contain an express geographic limitation, it also exempts the identical conduct when engaged in by brick and mortar retailers. As I read the statute I wonder whether it allows gambling establishments that are authorized in the State of Washington to conduct operations on the internet? I think the State's argument breaks down here, because entities that are authorized (i.e., regulated) can engage in the conduct, but 100% of them will be in the state.

It was also interesting that the court so quickly and easily concluded that a ban did not affect out-of-state and foreign businesses because of their ability to screen customers geographically:

those businesses can easily exclude Washingtonians. If an individual during registration marks his or her location as the state of Washington, the gambling web site can end the registration there.

The court of appeals also mentions this ease with which an online business can exclude a resident from a particular state, but neither the court of appeals nor the Washington State Supreme Court cite much evidence for this proposition. (Here's a pdf link to the opinion: Rousso v. State, which discusses American Libraries Ass'n. v. Pataki, 969 F.Supp. 160 (S.D.N.Y.1997), and other decisions that came after it.)

The fact that this is a criminal statute dealing with the transmission of information makes this problematic. Would an out of state business violate the statute because a patron happen to use the service without disclosing that the patron was a Washington resident? The statute does not provide a simple answer to this.

I think this case is much tougher than the court gives it credit for being. It's worth noting that Justice Sanders, who authored the opinion, is well known for his libertarian leanings.

I also think the statute raises First Amendment concerns, but a quick online search did not turn up any challenges to the statute on this basis.

Related:

"State Efforts to Regulate the Internet" (Cyberlaw Cases) (discussing court of appeals opinion)

"Washington State Supreme Court Upholds Internet Gambling Law" (PokerNewsDaily) (discussing Rousso)

"No On-line Gambling for You, Minnesotans" (Info/Law) (discussing 2009 effort by Minnesota to impose filtering on ISPs)
______

Eric's comments: I continue to believe that any state regulation of the Internet presumptively violates the dormant commerce clause, especially when the statute does not contain any geographic limitations in its express terms.

It's true that a gambling website can block a state's residents if the site asks the user to report the geography and if the user accurately self-reports. However, a state law requiring websites to ask users to self-report geography governs conduct wholly outside the state because websites located outside the state who serve non-state residents would still have to comply. This extraterritorial reach, in turn, makes the law presumptively violative of the DCC, negating the applicability of the Pike balancing test. So from my perspective the court badly whiffed this ruling.

For my other ruminations on the problems with states regulating the Internet, see Geolocation and A Bordered Cyberspace (Nov. 2007).
______

UPDATE: John Ottaviani sent the following:

After rereading a number of dormant Commerce Clause Internet cases, I just come down on the side that the Internet is an inherently interstate entity, incapable of regulation by the states, as did the courts in Pataki and Dean (Am. Libraries Ass'n v. Pataki, 969 F. Supp. 160 (S.D.N.Y 1997); Am. Booksellers Found. v. Dean, 342 F.3d 96 (2d. Cir. 2003)). So I never get to the Pike balancing test. Even on the Pike balancing test, the Washington court gives short shrift to its treatment of the burden on interstate commerce, and is overly glib in its assertion that the websites can simply block the Washington users by refusing to register users with a Washington zip code. One of the reasons state lotteries and other "legal" forms of gambling have not proliferated on the Internet in the United States is the fear of criminal prosecution due to the inability to restrict users by geographic location to the degree felt necessary to avoid criminal prosecution. Users can lie about their address, or can be using service providers located in a different state than the user. The problem is exacerbated now with the proliferation of mobile devices, as users are no longer even tied to a particular fixed location. If a Washington resident is gambling on his Blackberry while on vacation in San Francisco, is that considered a violation of the Washington statute? What if the user lies and provides a California address and zip code?

The Rousso decision is consistent with the Washington court's decision in State v. Heckel, 24 P.3d 404 (Wash. 2001), where the Washington court rejected a dormant commerce cause challenge to its anti-spam law (prior to the enactment of the federal CAN-SPAM law). In Heckel, the court also gave a cursory treatment to the burden on interstate commerce, finding the only burden was the burden for spammers to refrain from deception, which the court found did not burden interstate commerce at all.

I'm not sure how the case would come out if the Supreme Court accepts a cert petition. Scalia is on record as not liking the Pike balancing test.

Posted by Venkat at 09:57 AM | E-Commerce

September 20, 2010

Fifth Circuit Blesses Vistaprint's Rewards Program Sign-Up Process -- Bott v. Vistaprint USA Inc.

[Post by Venkat]

Bott v. Vistaprint USA Inc., No. 09-20648 (5th Cir.; Aug. 23, 2010).

I recently blogged about an online rewards program class action which survived a motion to dismiss. (In re: Easysaver Rewards Litigation: "Internet Rewards Program Class Action Survives Initial Motion to Dismiss.") Defendants in that case tried unsuccessfully to rely on a trial court's dismissal of a similar class action against Vistaprint. The Fifth Circuit recently affirmed the district court's decision in Vistaprint, endorsing Vistaprint's process for signing up online and its disclosures. The Fifth Circuit issued a per curiam decision, highlighting the reasoning of the district court in Vistaprint.

The Vistaprint and Easysaver cases differ in one important procedural respect: in Vistaprint, there was no dispute about the sign up process and consumer experience. In Easysaver, partially because the sign up process seemed to change over time, the court did not accept as fact the webpages put forth by Easysaver that supposedly represented the consumer experience. [It would be helpful for the court to have actually reproduce the webpages in question in an appendix to the court order.] In both cases, defendants brought an initial motion to dismiss. In Vistaprint, the court granted the motion and dismissed the case. In Easysaver, the court held that motion was properly brought as a summary judgment motion and declined to dismiss the case at the initial stage. (In contrast to Easysaver, in Vistaprint, the plaintiffs did not dispute the authenticity of the webpages submitted by Vistaprint along with its motion to dismiss.)

The Vistaprint district court decision is worth reading because it shows how details in an online transaction matter, and what types of thing courts point to when they decide to not credit the "I didn't read the online disclaimer" argument:

1. the text itself indicated that the rewards program offer was presented after the transaction with Vistaprint;
2. the Vistaprint program had a disclosure which was presented to consumers above the space for entry of the consumers' email address;
3. consumers had to check the box indicating that they had read and agreed to the (rewards program) offer details;
consumers had to enter their email address twice, the second time to confirm that they wished to enroll;
4. the "offer details" specified the terms of the offer and were "in the same size and color as most of the [other] print on the webpage except that the title [was] in bold print . . . ."

The court held that the disclosures were provided in a "clear, prominent, and conspicuous manner," and that:

a consumer cannot decline to read clear and easily understandable terms that are provided on the same webpage in close proximity to the location where the consumer indicates his agreement to those terms and then claim that the webpage, which the consumer has failed to read, is deceptive.

The court also rejected plaintiffs' Electronic Funds Transfer Act claims. With respect to the class of plaintiffs who used credit cards, the court held that the EFTA does not apply to these claims. With respect to the plaintiffs who used debit cards, the court held that there was no EFTA claims because the initial transfers were authorized and defendants did not continue any transfers after plaintiffs provided notice to their financial institutions that the transactions were not initially authorized. In addition to the EFTA claim, the court also dismissed a slew of ancillary claims.

[Oddly, the Vistaprint terms had a forum selection clause which provided for venue in Bermuda (??). The court rejected Vistaprint's attempt to rely on the forum selection clause on the basis that Bermuda's consumer protection rules did not have extraterritorial application.]

I'd slot this case (roughly) in the same category as Scherillo v. Dun & Bradstreet, discussed by Professor Goldman here: "Clickthrough Agreement With Acknowledgement Checkbox Enforced." Both cases contain useful teaching on how careful drafting of online terms can undercut a plaintiff's argument that they didn't read an online contract.

Posted by Venkat at 02:08 PM | E-Commerce

September 07, 2010

Online Ticket Resellers Get Significant 47 USC 230 Win--Milgram v. Orbitz

By Eric Goldman

Milgram v. Orbitz Worldwide, LLC, ESX-C-142-09 (N.J. Super. Ct. Aug. 26, 2010)

Introduction

It's been a relatively quiet year for 47 USC 230, in a good way. We've had a few minor aberrational rulings (Subway v. Quiznos, Cornelius v. DeLuca, Scott P v. Craigslist) but, for the most part, the immunity has been working exactly as we'd expect.

Given the quiet year, this could be the most interesting 47 USC 230 decision of 2010 so far. Orbitz and TicketNetwork (part of CheapTickets) get a decisive 230 win against the New Jersey attorney general for reselling third party tickets. In addition to reaching the right result, the opinion is thoughtfully drafted and well-structured. It would make a great teaching case. It's worth reading.

Facts

This lawsuit relates to a private label site operated by CheapTickets (TicketNetwork) and branded by Orbitz. (Is it this site?). Orbitz specified the branding and design elements of the private label site. Orbitz also had the power to request content be removed from the site; to insert text and links for specific ticketed events; and to set prices of the offered tickets.

TicketNetwork hosted and operated the private label site as well as its own site. It sent confirming emails to buyers, processed the credit cards, and handled customer support inquiries. Perhaps most importantly, TicketNetwork handled the relations with third party ticket brokers who submitted offers to the site. It pre-approved brokers and attempted to factually verify the event information in submitted offers. TicketNetwork also provided consumers with various performance guarantees, including that the tickets would be valid and would arrive on time.

The specific offers giving rise to this lawsuit relate to Bruce Springsteen's Fall 2009 concert tour, which made a multi-date stop at the now-demolished Giants' stadium in East Rutherford, NJ. I imagine this event had significant local interest; the Boss is a native son of NJ, and his music has (for decades) addressed issues that relate to NJ. The NJ AG alleged that the sites offered 900 concert tickets 6 days before the official on-sale date; some of those tickets were not actually in the seller's possession/control before being offered for sale; and a few of the tickets listed seat numbers that didn't actually exist. The investigator purchased two tickets and confirmed that the seller pre-sold them before he/she had the tickets in hand; although band insiders and other dignitaries may have legitimately gotten ticket commitments before the on-sale date.

Legal Analysis

The state AG sued TicketNetwork and Orbitz for violations of NJ's Consumer Fraud Act and Advertising Regulations. Orbitz and TicketNetwork defended on 47 USC 230 and other grounds.

The court does a textbook 3 pronged 230 analysis:

1) Orbitz and TicketNetwork were providers of interactive computer services.

2) The claim treats them as publishers/speakers. The NJ AG argued 230 does not apply because of the defendants' "commercial" conduct--including charging service/administrative fees to ticket sellers. The court does not cite many of the cases upholding a publisher's 230 eligibility for advertising (I last aggregated 230-and-advertising cases in this post), but citing the Jurin ruling, the court nevertheless makes it clear that web publishers aren't liable for third party advertisements. The court says:

The fact that the defendants charge "service" or "administrative" fees is irrelevant to the CDA analysis. Plaintiffs seek to enjoin defendants from "advertising and selling concert tickets to consumers without actually having those tickets in their possession or control." This conduct, however, conduct [sic] fits squarely within the CDA's purview.

3) Orbitz and TicketNetwork don't qualify as "information content providers." Citing Donato v. Moldow (an NJ case from 2005 binding on the court here) and the Carafano case, the court rejects the NJ AG's efforts to treat Orbitz and TicketNetwork as ICPs because they helped create/develop the content at issue. The court correctly says the potentially liability-creating content at issue (the offer of misleading/inaccurate tickets) came from third parties, and Orbitz/TicketNetwork did not make "a material, substantive contribution to the ticket listings" sufficient to change its third party character.

The court distinguishes Roommates.com by reading its holding narrowly. The court says "the linchpin of the Ninth Circuit's decision was the fact that Roommates.com was actively participating in creating the objectionable content, i.e., by providing the illegal questions and by requiring users to answer them." In contrast, here the defendants "do not supply the content to which plaintiffs object -- the inaccurate or misleading ticket listings....Defendants do not ask ticket sellers to provide any information for any unlawful purpose, nor have they designed its [sic] Internet marketplace to violate any federal or state laws." Yet another case where the court ultimately cites Roommates.com in siding with the defense.

The court also distinguishes a pretty similar case, NPS v. StubHub. The StubHub case arose in a very different context--the New England Patriots were trying to get control over secondary ticket resales--but both lawsuits involve a website allegedly violating the law by reselling tickets. This court first questions the StubHub court's factual predicates and then rejects the case as "in contradiction with the spirit of Donato, and [thus it] cannot be relied upon by the court."

The court's conclusion is worth highlighting:

Defendants' services help to create and maintain a vibrant, competitive, market for consumers looking to purchase travel and entertainment related products and services online. As a result, defendants' services are consistent with the Congress's intent to encourage commerce over the Internet and ensure interactive computer services are not held responsible for how third parties use their services. Accordingly, defendants' motions for summary judgment are granted as plaintiffs' state law claims are barred by the CDA as a matter of law.

A subtle but unmistakable rebuke to the state consumer watchdogs that they barked up the wrong tree.

Implications

There are a number of interesting implications of this ruling:

* Rare defeat for a consumer protection agency. Many consumer protection agencies (both state and federal) are in partial denial that 47 USC 230 might apply to their enforcement actions. This ruling reminds them that 230 is a powerful restriction on their enforcement territory.

Further, consumer protection agencies usually win if they get into court. Judges are very sympathetic to consumer protection issues when the government raises them. Here, the clear-thinking judge recognized that NJ's enforcement action was not necessarily in the consumers' best interests.

* NPS v. Stubhub rejected. We've had a very small number of post-Roommates.com plaintiff wins where Roommates.com was cited favorably for the plaintiff. The NPS v. StubHub case is one of them. Here, the court rejects that precedent, potentially limiting the case's incursion into 230's immunity.

* 230 protects e-commerce sites. Curiously, the court doesn't mention FTC v. Accusearch, one of the other plaintiff wins post-Roommates.com, which had some factual resemblances. In the Accusearch case, the defendant resold pretexted phone records. Unlike Orbitz/TicketNetwork, Accusearch actually fulfilled the purchase. However, I've seen some discussion that the Accusearch case signals that e-commerce sites will get limited protection under 230. Here, TicketNetwork processed the payments and provided sales guarantees, yet the listings were still third party content. This case reinforces that e-commerce marketplaces still get 230 for third party commercial activity, even if the marketplace provides services to the vendors.

* Legal battles over online tickets aren't going away. Online tickets have become a major subfield of cyberlaw. Consider some of the following posts we've made over the past 3 years:

- Online Sports Ticketing Exchange Wins Dismissal Under Website User Agreement -- Duffy v. The Ticketreserve, Inc. (July 2010)
- NPS LLC v. StubHub, Inc. (April 2009)
- StubHub Wins 230 Dismissal in Anti-Scalping Case (Sept. 2008) [note: this one also involved Springsteen's tour]
- StubHub Denied 230 in Hannah Montana Ticket Scalping Case--Hill v. StubHub (July 2008)
- Ticketmaster Wins Big Injunction in Hannah Montana Case, But Did the Public Interest Get Screwed?--Ticketmaster v. RMG (Oct. 2007)

We've also mentioned the various state legislation governing online ticket sales (mostly along the lines of squelching line-jumpers).

Perhaps 2010 being a down year for concerts will help take some of the legal edge off the battle for tickets. Otherwise, I expect more litigation over the online resale of hot tickets until we see one of two structural changes in the ticket sales market: (1) ticket buyers can't transfer their tickets easily because they are just a database code attached to the initial buyer, or (2) tickets are sold via auction. Personally, I hope we see more of #2 rather than the continued litigation madness.

Conference Reminder

It's still 6 months away, but we've opened registration for our 47 USC 230 blowout party on March 4. I anticipate a possible sell-out situation, so get your tickets while there are still plenty. We aren't auctioning the tickets off, and I'm not sure if our anti-gaming devices will be strong enough to suppress robo-buyers if they sweep through.

Posted by Eric at 12:10 PM | Derivative Liability , E-Commerce , Marketing | TrackBack

September 03, 2010

P2P Gambling Site is Illegal Bookmaker--Betcha v. Washington

By Eric Goldman

Internet Community & Entertainment Corp. v. Washington State Gambling Commission, 82845-8 (Wash. Sup. Ct. Sept. 2, 2010)

Betcha is one of those too-clever-by-half dot com ideas that practically beg VCs to roll the dice. Rather than allow illegal gambling on its site, Betcha styles itself as a P2P betting platform. Effectively, it is a messaging service for people making bets with each other, where Betcha charges the parties to talk with each other. Betcha also escrows the wager, but it allows the losing bettor to renege. Exercising that right, however, has bad reputational consequences that I suspect are tantamount to on-site seppuku.

From a realpolitik perspective, we all know what's going on here (i.e., illegal gambling). Betcha crapped out at the district court, but the appellate court reversed in a split opinion. Unfortunately, Lady Luck has stopped smiling on Betcha as the Washington Supreme Court reversed 9-0. I guess if you're going to lose, you might as well lose big. This makes me wonder: did any Betcha users make bets on the outcome of this case? Maybe someone other than the lawyers got lucky from Betcha's legal misfortune.

The court's opinion makes it clear that expansive anti-gambling laws leave almost no room for entrepreneurial yet legal Internet gambling enterprises. Here, Betcha is tripped up by the definition of "bookmaking," defined as "accepting bets, upon the outcome of future contingent events, as a business or in which the bettor is charged a fee or ‘vigorish’ for the opportunity to place a bet." This strikes at Betcha's model of charging the parties to communicate with each other regarding betting. The court is not swayed by Betcha's formalist argument that because the loser could renege on the bet, the wager did not meet the statutory definitions for gambling. The court says the bookmaking definition applies whether the bets are made for money or not.

The statute also restricts sending or receiving "gambling information." The court said that because Betcha was running a professional gambling site (under the statutory definitions), it also tripped over this definition. This confused me because this provision should be preempted by 47 U.S.C. 230, at least as applied to Betcha. The court says the "information on wagers and odds it received from its users must be presumed, under the plain terms of the statutes, as intended for use in professional gambling," but that goes straight into a 230 immunity. However, 230 wasn't discussed at all. Because this was only one of several legal problems for Betcha, a 230 immunity on this point would not have changed the outcome.

The court also said that Betcha illegally possessed "gambling records." It wasn't clear if this referred solely to user information or to Betcha's own business records, so I couldn't tell if 230 (also not discussed) would have been relevant.

With the court's expansive definitions of bookmaker, gambling information and gambling records, my not-so-creative mind could not easily think of any easy ways to circumvent the statute and legally run a P2P site enabling betting or gambling. However, I would love to see a more cogent discussion about the 230 overlay before reaching a definitive conclusion.

Posted by Eric at 08:57 AM | Content Regulation , Derivative Liability , E-Commerce | TrackBack

August 26, 2010

Internet Rewards Program Class Action Survives Initial Motion to Dismiss -- In re Easysaver Rewards

[Post by Venkat]

In re: Easysaver Rewards Litigation (S.D. Cal.) (Aug. 13, 2010)

Plaintiffs brought a class action lawsuit against Provide-Commerce (which operated Pro.Flowers.com). The lawsuit alleged that effecting transactions on the Proflowers website resulted in plaintiffs being unwittingly enrolled in a rewards program and being charged credit card fees. The court denied the motion to dismiss brought by defendants.

Background: Provide operated ProFlowers.com. At the time of completion of transactions on ProFlowers, consumers were offered a chance to enroll in a "rewards program" which was operated for Provide by Encore Marketing. Plaintiffs alleged that they were "unwittingly" enrolled in the program:

Plaintiffs allege that Provide leads customers to believe they will receive a complimentary $15.00 gift code to use on their next flower order as a thank you gift. After Plaintiffs completed the purchase of flowers on Provide's website by providing their personal and payment information, 'a window popped up that thanked Plaintiffs and Class Members for their order and offered a gift code for $15.00 off their next purchase at ProFlowers. The window also contained a link for Plaintiffs and Class Members to click on to claim the gift code.' Plaintiffs contend the pop-up window is part of an intentionally misleading and deceptive scheme, jointly orchestrated by Provide and EMI.

The named plaintiffs all testified to slightly different experiences. Some closed the pop-up window and did not provide any personal information, others responded to the pop-up by clicking on "I accept" and entering their personal information. Ultimately, plaintiffs were unable to have the charges relating to the EasySaver program reversed, and brought a variety of claims against both Provide and Encore.

Discussion:

Breach of Contract Claims:

Provide first argued that the privacy policy is not "an actionable contract" but was instead a "general statement . . . of policy." The court doesn't treat this as a colorable argument, citing to the alleged user experience and plaintiffs' reliance on the privacy policy and terms of use, which popped up every step of the way. (But see In re JetBlue, discussed in Professor Goldman's post here: "When Does a Privacy Policy Breach Support a Breach of Contract Claim? In re JetBlue.")

Provide also argued that the applicable privacy policy allowed it to transfer information to third parties, but the court holds that there is a disputed factual issue as to whether Provide agreed to only transfer the information with consumers' "informed consent or authorization," and would not share the information "beyond that which was necessary to complete the flower order."

Finally, Provide argued that the "EasySaver Rewards Policy" was not supported by an exchange of consideration, since it only came up after the flower transaction was complete. The court rejects this argument as well, finding that the rewards program was "part and parcel of the underlying flower purchase."

Provide also tried to disclaim liability for Encore's actions by arguing that it was not responsible for anything Encore did. The court cites to language in the description of the rewards program that indicates the program was jointly operated (the program was described as "our" program and Encore was described as Provide's "partner").

A separate sub-class of plaintiffs brought contract claims against Encore. These plaintiffs argued that they did not "knowingly" consent to the rewards program, and even if they did, Encore breached the terms of the program by not providing the stated benefits. Encore argued that these plaintiffs could not have it both ways - either they enrolled in the program (in which case plaintiffs accepted the terms were clearly stated) or they didn't. The court finds that plaintiffs could plead in the alternative that they did not enter into an agreement, and even if they did, Encore breached the terms of the agreement.

Fraud Claims: Provide raised a variety of arguments against plaintiffs' fraud claims (failure to plead fraud with particularity, failure to allege causation). The court rejects these arguments, holding that whether plaintiffs read the privacy policy or had adequate notice is not something that was amenable to resolution at the motion to dismiss stage.

Conversion: Plaintiffs argued that defendants converted plaintiffs' "private payment information." With respect to plaintiffs' conversation claim, the court notes the historical trend away from limiting conversation claims to tangible property (citing to Kremen v. Cohen, among other cases). The court analogizes conversion of plaintiff's "Private Payment Information" to conversion of bank account information, and finds that plaintiffs adequately state a claim based on conversion of private payment information.

EFTA: The Electronic Funds Transfer Act prohibits, among other things, unauthorized billing. Provide argued that it was Encore and not Provide who engaged in the unauthorized billing. The court agrees and grants Provide's motion to dismiss as to the EFTA claim, finding that there is no liability under the statute for aiding and abetting an EFTA violation. With respect to Encore, the court denies the motion to dismiss. Among other things, the court rejects Encore's argument that the plaintiffs agreed to the membership charges by "entering [their] email address[es] and zip code[s] and clicking the green acceptance button."

___

Defendants will have another opportunity to show that plaintiffs' claims are without merit, but I think the court's resolution at the pleading stage is interesting. A more robust disclaimer and a non-leaky acknowledgment would have no doubt been useful here. (See professor Goldman's post on Scherillo v. Dun and Bradstreet for some good pointers.)

The case also illustrates the importance of the transaction flow and process (the user experience). Often lawyers provide advice, but implementation is left to the business or marketing folks. This case illustrates that in addition to the language of the terms, courts will look to the transaction process to poke holes in the contract formation argument.

Data breach claims alleging a breach of the applicable privacy policy have met with little success. (See, e.g., Ruiz v. Gap, discussed in this post: "9th Circuit Affirms Rejection of Data Breach Claims Against Gap.") Where there is out of pocket loss that is a result of a violation of the privacy policy, plaintiffs have a much easier time bringing claims for violation of the privacy policy. In this case, defendants didn't even raise the argument that plaintiffs had not suffered out of pocket loss or lacked standing - it was a nonstarter.

It was also interesting that defendants tried to rely (and have judicial notice taken of) the online terms, but the court refused to do so, in light of the changing content of the webpages. When defendants pushed this argument, the court predictably trotted out the "[i]nformation from the internet does not necessarily bear an indicia of reliability" argument.

Related: "Cuomo says 6 settle on hidden online shopping fees."

Posted by Venkat at 11:45 AM | E-Commerce

August 18, 2010

The Problems With Google House Ads

By Eric Goldman

[Note: This blog post has taken me 7 months to write, so I'm glad to be sharing it finally. I am cross-posting it to Search Engine Land.]

Introduction

Many publishers run “house ads” to self-promote their own offerings. Google does too. However, Google differs from most publishers because it auctions ad space on its network. Thus, when Google runs house ads, it simultaneously conducts the auction that it is bidding in—an impermissible conflict of interest. This post explains when Google uses house ads, why I think Google house ads undercut the auction integrity, and what Google should do differently.

Google’s House Ads

I have seen Google house ad campaigns in at least three circumstances:

1) Occasionally, Google uses AdWords ads to explain problematic organic search results. Two prominent examples are the search results for “Jew,” which regularly displays an anti-Semitic organization as a top organic result, and “Michelle Obama,” which last year displayed an offensive image as a top organic result. In these situations, Google runs an AdWords ad that links to an explanation of its search algorithms.

2) Google promotes its own services to increase their visibility. In preparing this post, earlier this year I approached Google about its usage of house ads, and a Google spokesperson informed me that Google has “run search marketing campaigns on Google for search products like iGoogle, Google Maps, and mobile products as well as for specific issues in order to provide information to our users.” Barry Schwartz recently gave an example of an image house ad promoting image ads. The latter point may include defensive keyword purchases, such as when it displayed ads for some of the search terms it highlighted in Google’s Super Bowl commercial.

In some cases, Google’s house ads appear in ad spots unavailable to other advertisers, such as its promotion of Nexus One on its home page. Barry Schwartz has catalogued examples of Google’s home page advertisements. This post focuses on house ads in AdWords, but I will come back to these non-traditional ad spots in a bit.

3) As a type of public service announcement, Google runs house ads in AdWords during crises to promote a crisis response page—mostly recently, in response to the BP oil spill.

Why Google House Ads in AdWords Are Problematic

Google characterizes AdWords as an advertising auction system for advertisers to bid on keywords against each other. Google runs these auctions as the auctioneer—a term Google doesn’t use and presumably would avoid, but an appropriate descriptor of Google’s proclaimed role vis-à-vis advertisers. Because Google merely conducts the auctions for advertisers, Google argues that it does not set AdWords advertising prices; instead, the prices are set by the market (i.e., the collection of advertisers’ auction bids). Google’s positioning as an auction conductor has emerged as a central defense to the increasing antitrust attention being paid to Google’s remarkable share of the search advertising market.

However, Google’s positioning breaks down when Google buys house ads via AdWords. In those situations, Google is both running the auction and bidding in that auction as an advertiser. The conflicts of interest in this situation should be self-evident, but let’s look at them in more detail.

Google Can Win Every Auction It Enters.

When Google runs a house ad in AdWords, it does not cost Google anything out-of-pocket. However, those clicks aren’t necessarily “free” because Google’s ads have opportunity costs. Clicks on Google’s house ads may siphon away clicks from revenue-generating ads, which may reduce Google’s revenue from the bidded term.

Google’s spokesperson told me that Google’s house ads “are subject to internal marketing budgets.” I assume this means that a Google department running house ads must “pay” for its clicks by transferring money from its department budget to a different Google department. In theory, the scarcity of marketing budgets forces Google departments running house ads to internalize the opportunity cost, even if no cash changes hands.

However, I don’t believe this cures the defects in auction integrity for at least four reasons. First, Google’s behavior lacks any auditability or verifiability; as outsiders, we have no idea what Google is doing under the hood. Second, Google has access to better information to optimize its bidding than any other bidder. That information may not be functionally available to individual employees placing auction bids, but because of the first point (lack of auditability/verifiability), we as outsiders don’t know that either. Third, because all Google bids just involve internal funds transfers and no out-of-pocket cash payments, Google can easily increase departmental budgets to enable more aggressive bidding—after all, if no cash changes hands, it’s just funny money anyway. Fourth, actual ad placement depends on ad quality scores, and Google has acknowledged that it has “exceptionally high Quality Scores” which should automatically give it a bidding advantage over everyone else. And, once again, no one else can audit or verify Google’s self-designated ad quality scores.

As a result, Google’s advantages over other bidders should allow it to “win” its auctions whenever it decides to bid.

Google’s Bids Can Affect the Prices Paid by Its Advertisers.

As far as I know, Google has never publicly addressed how its house ads affect the prices paid by other bidders. In response to my inquiry, the Google spokesperson opaquely informed me that “Google's ads are not guaranteed to appear in any given spot. How this affects CPCs depends on the quality scores and bids of others in the auction.” I interpret this to mean that Google’s presence in the auction could affect the CPCs paid by other bidders. Let’s take a look at how this might happen.

Google auctions aren’t winner-take-all. Instead, Google runs a “second-price auction.” As Google describes it, each advertiser-bidder pays “the minimum amount necessary to maintain their position on the page,” which is the amount bid by the next-lowest bidder. To illustrate this, assume a keyword with the following bids:

Bidder 1 bids $1.25 per click
Bidder 2 bids $0.75 per click
Bidder 3 bids $0.50 per click

Pursuant to the second-price auction, Bidder 1 pays $0.75 per click (i.e., the amount that Bidder 2 bid). After all, if Bidder 1 had only bid $0.75 per click, it still would have shown up as the top bidder. Bidder 2 pays $0.50 per click, the amount required to stay in the second position.

[Note: my examples assume that the bidders have the same ad quality scores and that one bidder’s presence or behavior does not cause Google to recompute the ad quality scores of other bidders.]

Now, consider what happens when Google enters a bid in this auction.

Google bids more than $1.25 per click [the result is the same if Google bids $1.25 or $1M per click]
Bidder 1 bids $1.25 per click
Bidder 2 bids $0.75 per click
Bidder 3 bids $0.50 per click

I’ll just focus on Bidder 1, who was getting first position for $0.75 per click before Google’s entrance. Due to Google’s entry into the auction, Bidder 1 now pays the same per-click amount to show up in second position rather than first.

Bidder 1’s reduced position may change the commercial value of the consumers who investigate the links. That is, the consumer who clicks on the second ad may have a different profit potential than the person who clicks on the first ad. In some cases, clicks on lower-placed ads may be more profitable per click, so we don’t know a priori if this is good or bad for any particular advertiser.

We can anticipate that Bidder 1’s lower position will reduce the overall volume of clicks it gets at that price. A second position ad usually gets substantially fewer clicks than the first position ad. Further, if Google syndicates the house ad via AdSense, then Bidder 1’s ads may no longer be syndicated in AdSense (for example, if Google syndicates only 1 ad via AdSense). [Note: when Google house ads are syndicated, Google pays the AdSense publisher for clicks out-of-pocket—but presumably Google pays a wholesale discounted price, while all other advertisers must pay the 100% retail price.]

Naturally, some advertisers will seek to reclaim their prior ad position by increasing their bids. Indeed, Google’s AdWords tools will automatically encourage advertisers to pay more to generate more clicks. For advertisers using Google’s automated bidding tool (sometimes called the “Budget Optimizer”), Google may automatically increase an advertiser’s bid to increase click volume. Thus, Google’s entry into the auction could cause other bidders to increase their bid amounts in a variety of ways.

Let’s revisit my discussion about Google’s opportunity cost of clicks on house ads. If the other bidders’ prices stay the same and Google siphons away some clicks from them, Google’s ads have a clear opportunity cost. However, if Google’s entry into the auction prompts other bidders to pay more, some or all of that opportunity cost will be made up by increased revenue on the remaining clicks. It’s even possible that Google’s house ads could create net new profit. From an auction integrity standpoint, it’s unacceptable for Google’s entry into the auction to affect the prices bid or paid by other bidders (its advertisers), whether Google’s profits increase or decrease.

Alternatives for Google

Google’s spokesperson told me that “[l]ike hundreds of thousands of other businesses, we believe in the value of search marketing to connect with web users.” That makes sense to me, and I encourage Google to go for it—just not by bidding against its other advertisers. Google can benefit from keyword advertising other ways without undermining its auctions’ integrity.

First, Google can buy keyword ads from third parties. Apparently Google already does this regularly, including buying ads from Yahoo and Bing. See this comprehensive survey as well as this example.

Second, as Google already does on occasion, Google can create new ad units outside AdWords exclusively for house ads. Running ads in a separate ad unit would obviate the need for Google to compete with advertisers in an auction, although I imagine some advertisers still will be annoyed by any click siphoning.

Third, Google could refuse all advertiser bids on terms that Google chooses to use for house ads. Advertisers wouldn’t be thrilled if Google did this either, but it would maintain the auction integrity for those terms. This would be the most expeditious way for Google to handle objectionable organic search results, although creating a new unit outside AdWords would work as well.

Conclusion

I feel a little silly writing nearly 2,000 words explaining why auctioneers should not bid in the auctions they run. We all already knew that. Yet, Google apparently violates this basic rule every time it runs house ads in AdWords auctions. Google should fix this—and restore integrity to its AdWords auctions—by no longer competing with its advertisers in those auctions.

UPDATE: A Google spokesperson sent me this response:

"As we've always said, all search engines run ads to inform users about services that they provide. Google is no exception to this practice. We believe in the value of our advertising platform and use it in the same way that other advertisers do."

Posted by Eric at 10:07 AM | E-Commerce , Marketing , Search Engines | TrackBack

August 17, 2010

"Electronically Printed" Does not Include Automated Merchant Email -- Shlahtichman v. 1-800 Contacts

[Post by Venkat]

Shlahtichman v. 1-800 Contacts, Inc., Case No. 09-4073 (7th Cir.; Aug. 10, 2010)

The Seventh Circuit recently concluded that the words "electronically printed," as used in the Fair and Accurate Credit Transactions Act of 2003, does not include a computer generated email receipt sent by a merchant. The opinion is a fun read and offers a look at how courts deal with changing technologies and commercial practices, when construing legislation.

Background: Shlahtichman purchased contact lenses over the internet at 1-800 Contacts. 1-800 Contacts emailed him a confirmation of his order which contained the expiration date for Shlahtichman's credit card. FACTA includes a prohibition on including the expiration dates of a credit card but this prohibition only applies to "receipts that are electronically printed." The question addressed by the Seventh Circuit was whether an automatically generated email confirmation message is a receipt that is "electronically printed."

Discussion: Most courts had construed the term "electronically printed" to refer only to paper receipts, incorporating the ordinary meaning of the term "print," and the court here takes the same route:

What FACTA covers are printed receipts. The Same technological advances that have given consumers multiple means of paying their bills and purchasing goods and services have also made it possible for the receipts confirming those transactions to be provided in the form of a voicemail, email, and text message as well as the traditional paper receipt. But when one refers to a printed receipt, what springs to mind is a tangible document. To "print" a receipt thus ordinarily connotes recording it on paper. That is why [the plaintiff] had to print a copy of his receipt to get it off of his computer; it is why the machine used to transfer text from a computer to paper is called a printer, and it is why a judge who asks a law clerk to print a case does not intend for the clerk to merely display the case on his computer screen. [Wait, Seventh Circuit judges don't read cases on their iPads?]

The court looks to the dictionary definition of "print" and notes that it typically refers to the transfer of information to paper (although, as the court acknowledges, you can "print to pdf"). Shlahtichman argued that the addition of the word "electronically" suggests Congressional intent to modernize the definition of the word "print," but the court disagrees, noting that this suggests intent to capture receipts that are printed by a machine rather than credit card slips or receipts that are imprinted or handwritten. The court notes that where a receipt is automatically emailed by a vendor, the printing is done by the consumer, rather than the vendor (at whom the statute is aimed). Taking Shlahtichman's logic to its conclusion, a vendor "prints" a receipt "simply by sending [an] email to the consumer." As the court notes, this is contrary to the ordinary or natural meaning of the term "print."

The court also looks to the context of the statute and notes that the prohibition on printing expiration dates is aimed at receipts "that are printed and 'provided to the cardholder at the point of the sale or transaction.'" This raises a host of issues - most importantly,

[w]here is the point of sale for such a purchase - the consumer's computer? the vendor's headquarters? the vendor's server? cyberspace generally?

The statute references "cash registers" as a typical point of sale example, as the statute was written during a time when email receipts were not necessarily the norm. Indeed, since the enactment of the statute, consumer-owned devices [you guessed it, the iPad] have emerged that function as the equivalent of the cash register. [The court cites to a TechCrunch article by Erick Schonfeld: "Square Turns Your iPad Into A Cash Register."] Nevertheless, the court notes that even at the time the statute was enacted, e-commerce was "common," and the statute does not contain any references to terms such as "Internet" and "email." Coupled with the fact that the statute expressly refers to cash registers, the court concludes that the absence of any reference to electronic receipts evinces Congressional intent to not capture those types of receipts.

Finally, the statute contains two different effective dates: one effective date for "cash register[s] or other machine[s]" in use before January 1, 2005 and an earlier effective date for "any such machine or device" that is first used on or after January 1, 2005. To the extent electronically printed can include material that is printed on a customer's computer or equipment, having an effective date that is tied to when this equipment is first put into use problematic, since the effective date is made "dependent on a fact . . . that [is] wholly beyond the contemplation and control of the vendor facing liability."
__

I'm not sure where to begin with this one. The first point that jumps out at me is that courts are routinely criticized for not staying up to date on the latest technological advances. This decision makes clear that at least some courts are not so clueless when it comes to the latest technology. If anyone deserves the "out-of-touch-with-tech" label, I think it's the drafters of legislation. Regardless of where you come out on the merits of the case, it's tough to argue with the fact that the court took a careful and informed look at changing practices in construing the statute. [You have to give the court kudos for citing to TechCrunch!]

I didn't see overwhelming evidence cited in the court's opinion for this, but it's possible that Congress intended the statute to cover harm caused by improper access of a paper receipt containing credit card information (such as through dumpster diving). There is risk of harm from improper access to credit card information when stored in electronic (non-paper) form, but as the court noted, other laws are directed towards this (e.g., the Computer Fraud and Abuse Act).

This case is somewhat reminiscent of another case involving the application of a consumer protection statute to changing internet merchant practices: Powers v. Pottery Barn. In that case, the plaintiff brought claims alleging that Pottery Barn improperly collected personal information (an email address) in violation of a California statute that limited the type of information a merchant could collect at the point of transaction. The defendant (Pottery Barn) argued that to the extent the California law extended to the collection of email addresses, it was preempted by CAN-SPAM. The court didn't reach the issue of whether the statute covered email collection and instead concluded that the statute fell under CAN-SPAM's exceptions to preemption. (Ethan's blog post: "CAN-SPAM Doesn't Preempt CA Privacy Law--Powers v. Pottery Barn.")

Finally, FACTA is similar to CAN-SPAM in that often plaintiffs who suffered no apparent "injury" sued to obtain statutory damages under the statute. In the process, they stretched the statute to fit some far out fact patterns. Congress should keep these examples in mind as it enacts statutes which provide for civil causes of action along with statutory damages (particularly in the realm of informational or privacy harms).

[I thought it was also worth noting the court's usage: capital "I" "Internet" and no-hyphen "email" (and "voicemail" as one word). I agree with Tom O'Toole, who favors "internet" and "website" ("Web site, Website, web site, Internet, internet") but neither the prevailing style guides nor the Seventh Circuit (which seems to be a trend-setter of sorts in matters of style) are on board with this.]

Posted by Venkat at 02:30 PM | E-Commerce

August 09, 2010

July 2010 Quick Links, Part 1 (IP Edition)

By Eric Goldman

Trademarks

* Rebelution, LLC v. Perez, 2010 WL 3036217 (N.D. Cal. July 30, 2010). The plaintiff is a band named Rebelution. The defendant is a music performer named Pitbull who released an album "Pitbull Starring in Rebelution" without intending to reference plaintiff. No summary judgment to defendant. Wikipedia has a disambiguation page for "Rebelution."

* Southeastern Pennsylvania Transportation Authority v. Mednick Mezyk & Credo (E.D. Pa. complaint filed June 21, 2010). Interesting trademark lawsuit. A government transit authority, SEPTA, has sued personal injury lawyers for the ways they advertise that they represent plaintiffs against SEPTA. I think SEPTA has a tough argument, and they sure look thin-skinned.

* Ryan Gile: "New York New York Hotel/Casino Successfully Hijacks NewYorkNewYork.com"

* Can Chevrolet get people to stop calling it "Chevy"? Not likely.

* The latest article addressing the Trademark Use in Commerce debate: Lee Ann W. Lockridge, When Is a Use In Commerce a Noncommercial Use?, 37 Florida State University Law Review 337 (2010)

Copyright

* The Copyright Office issued new circumvention exceptions for 17 USC 1201 exceptions. The EFF breaks it down.

* MGE UPS Systems v. GE Consumer and Industrial Inc., 08-10521 (5th Cir. July 20, 2010). A significant (and possibly incorrect) ruling on 1201: “Because the dongle does not protect against copyright violations, the mere fact that the dongle itself is circumvented does not give rise to a circumvention violation within the meaning of the DMCA.”

* Mattel Inc. v. MGA Entertainment Inc., 09-55673 (9th Cir July 22, 2010). Another Kozinski bull-in-the-china-shop opinion, it is studded with important legal statements. Among the most interesting: an employee agreement purporting to assign copyrights from the employee failed when the language read more like a patent assignment. But read the whole thing.

* Teter v. Glass Onion, Inc., 5:08-cv-06097-FJG (W.D. Mo. July 12, 2010). Troubling ruling. An art gallery selling an artist’s painting does not make a fair use when making and then publishing thumbnail images of the paintings on the gallery’s website. No first sale defense for making the thumbnail images, either, although I’m not sure how the gallery can advertise the paintings for sale online without the thumbnails. The trademark infringement claim for referencing the artist’s name also survives because of the possibility the gallery looked like an authorized dealer when it wasn’t.

* We learned how much the Viacom v. YouTube ruling cost Google: $100M. Can you imagine what good things might have come if YouTube and Viacom had poured their legal fees into innovation rather than litigation? Also, this is a prime example of just how much it costs when a well-funded company (Google) decides to treat a lawsuit as bet-your-business. No way that most start-ups could have coughed up $100M for the lawyers.

* Scott v. Scribd settled. My original blog post on the case.

* Cable v. Agence France Presse, 2010 U.S. Dist. LEXIS 73893 (N.D. Ill. July 20, 2010), A professional photographer’s claim for 17 USC 1202 for removal of copyright management information survives a motion to dismiss.

* Las Vegas Sun does a thorough expose on alleged copyright troll Righthaven (look at the "related stories" too).

* Copyright enforcement mill gets caught red-handed committing copyright infringement on its website. Whoops!

* SAP has stopped contesting liability in the Oracle/TomorrowNow lawsuit.

* Miller v. Facebook, 2010 U.S. Dist. LEXIS 75204 (N.D. Cal. July 23, 2010). A software copyright registration for a literary work (i.e., the source code) was sufficient to uphold a pleading that the defense infringed the software's look and feel (i.e., an audio-visual work). My most recent post on this case.

Other IPs

* Bimbo Bakeries v. Botticelli: Bimbo Bakeries [great TM!], makers of Thomas English Muffins, gets an inevitable disclosure injunction against a departed employee who knows how to make their "nooks and crannies" and went to a rival baker. See also this post from Trading Secrets.

* Agora Financial LLC v. Samler, WDQ-09-1200 (D. Md. June 17, 2010). This case is similar to the more high-profile Barclays v. theflyonthewall case. The newsletter publisher plaintiff provides stock recommendations to its readers; the defendant republishes the tips on TipsTraders.com. The magistrate rejects a default judgment against the defendant because (1) the hot news doctrine is preempted by copyright law, and (2) even if it isn’t, the “plaintiffs’ writers’ investment recommendations are copyrightable” and therefore ineligible for hot news protection. Ruh-roh. The judge should have stopped at #1. Even the plaintiff admitted that the recommendations were uncopyrightable facts. So now what? Does this now mean everyone who republishes the recommendations is a copyright infringer?

Posted by Eric at 01:25 PM | Copyright , E-Commerce , Trade Secrets , Trademark | TrackBack

July 28, 2010

E-SIGN Prevents Enforcement of Emailed Contract Terms--Buckles v. Investordigs

By John Ottaviani

Buckles Management, LLC v. Investordigs, LLC, No. 10-cv-00508-LTB-BNB (D. Colo. July 23, 2010).

It has been about 10 years now since Congress adopted the federal Electronic Signatures in Global and National Commerce Act (commonly known as “E-Sign”). Cases interpreting E-Sign have been relatively rare. A Colorado federal court judge last week purported to decide whether an e-mail could constitute an enforceable contract under E-Sign, and concluded that the e-mail in question could not be enforced as a contract. Unfortunately, the Court (and the parties briefing the motion) did not realize that this was not an E-Sign case. The Court should have analyzed the case under the Colorado Uniform Electronic Transactions Act. Had it done so, the result may have been different.

Background

The case involves a failed business relationship that is all too typical. An investor provides money, consulting services, and commercial space to a struggling company, without any legal documents to evidence such terms as whether the transaction is a loan or an investment, etc... When the business relationship falls apart, the parties meet to discuss how to end their relationship. After the meeting, a few e-mails are circulated to memorialize the terms discussed. Attorneys are asked to draft documents, but nothing is ever signed; and the parties disagree as to whether or not there was a final agreement.

The investors filed a lawsuit, asserting claims for enforcement of the purported settlement agreement, breach of loan, breach of a lease agreement, unjust enrichment and accounting. In response, the company and individual defendants asserted counterclaims for breach of contract, unjust enrichment, negligent misrepresentation, breach of fiduciary duty and fraud and false misrepresentation.

Decision

The decision in question arises from defendants’ Motion for Summary Judgment, where they maintain that the Colorado Statute of Frauds, which provides that any agreement not to be performed within one year must be in writing and subscribed by the party to be charged, renders the settlement agreement unenforceable. In response, the plaintiffs argued that the parties exchanged a writing that contained the material terms of the agreement sufficient to satisfy the Statute of Frauds. Specifically, the plaintiffs relied on an e-mail, containing a list of the purported agreed-upon settlement terms, sent from the e-mail account of one defendant (who was a principal of the corporate defendant) to another employee at the company, who in turn forwarded the e-mail to four or five other people (including one of the plaintiffs) with the message “thanks to everyone for participating today.”

The court’s basic framework for analyzing the issue seems correct:

• May an e-mail exchange satisfy the Colorado Statute of Frauds writing requirement?
• If so, does this particular e-mail constitute a “writing subscribed by the party to be charged” within the meaning of the Colorado Statute of Frauds?
• If so, does this e-mail adequately describe the terms of an enforceable contract?

The court embarked on a discussion as to whether the e-mail satisfied the Colorado Statute of Frauds. Initially, the court got the analysis right, and concluded that under Colorado law, an e-mail exchange may satisfy the “writing” requirement of the Statute of Frauds.

With respect to whether the e-mail constituted a writing “subscribed by the party to be charged” under the Colorado Statute of Frauds, here the court got off track, with the help of counsel for the parties. The plaintiffs argued that the e-mail contained an “electronic signature” under E-Sign. Section 106(5) of E-Sign defines an “electronic signature” as “an electronic sound, symbol or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” The defendants argued that E-Sign did not apply because the settlement agreement did not affect interstate or foreign commerce. The court concluded that E-Sign did apply, but that the e-mail was actually sent by an administrative employee who did not have authority to bind either the corporate defendant or its individual principal. As a result, the court concluded that the signature was not “executed or adopted by [the principal of the defendant] with the intent to sign the record,” so it was not a proper electronic signature under E-Sign. The court concluded that if there was no proper "electronic signature," then the e-mail was not “subscribed by the party to be charged” under the Colorado Statute of Frauds.

Analysis

Unfortunately, the court and the parties missed the fact that the case is governed by the Colorado Uniform Electronic Transactions Act (“UETA”), not the E-Sign Act. E-Sign has a peculiar “reverse preemption.” Those who have been around long enough recall that in the late 1990's states were adopting electronic transaction laws, but in a non-uniform manner. In 1999, the National Conference of Commissioners on Uniform State Laws issued its final draft of the UETA, but states continued to enact UETA in a non-uniform manner. These non-uniform enactments were in part responsible for Congress passing E-Sign in 2000. In effect, Congress forced states to adopt UETA in a uniform manner by providing that the state version of UETA would control over E-Sign if UETA were adopted without modification. In most cases, then, if a state has adopted UETA substantially in final form, the state’s version of UETA is controlling over E-Sign. (To date, 47 states, plus the DIstrict of Columbia, Puerto Rico and the U.S. Virgin islands, have adopted UETA).

Would the analysis have been any different under UETA? It might be, because UETA is more comprehensive than E-Sign, including areas not covered by E-Sign.

Under Section 24-71.3-107 of the Colorado UETA, a contract may not be denied legal enforceability solely because an electronic record was used in its formation. So the court was correct in concluding that an e-mail exchange may satisfy the Statute of Frauds “writing” requirement.

But what about the e-mail exchange in this case? The Colorado definition of “electronic signature” is the same as the E-Sign definition. But Section 109 of UETA also allows for signatures to be “attributable” to a person where the person may not have “signed” the record himself (for example, a human agent with authority signs the record). The court concluded that the e-mail was not signed by the indiividual principal of Investordigs, but by an administrative employee. Under Section 24-71.3-109 of the Colorado UETA, whether the e-mail sent by the administrative employee could be attributed to the defendant “may be shown in any manner”. Thus, there is room for the investor to argue that the e-mail was sent on behalf of the principal of the company or that the administrative employee was acting as an agent of the principal. Unless there are additional facts not appearing in the court’s opinion, this would seem to be a classic issue of material fact, sufficient to defeat summary judgment. It is not clear from the record why the plaintiffs did not make this argument.

If the case does not settle, then it is likely that this decision will be remanded on appeal for findings of further fact consistent with the application of UETA, not E-Sign. It may be that, in the end, the investors will not be able to enforce the settlement agreement if they cannot attribute the e-mails to the company itself or the principal, or if the terms are not sufficiently definite to warrant enforcement. But, for the sake of argument, what if the employee was charged with taking notes for the meeting or was otherwise instructed by the principal to send out the e-mails containing the terms? Then it may be that the plaintiffs will be able to resurrect their claims.

Posted by John Ottaviani at 08:32 AM | E-Commerce , Licensing/Contracts | TrackBack

July 20, 2010

Book Review: Building Web Reputation Systems by Farmer & Glass

By Eric Goldman

Building Web Reputation Systems by F. Randall Farmer & Bryce Glass (O’Reilly 2010) [affiliate link]

As you may know, for the past couple of years, I have been researching how we regulate reputation systems. My most recent recap of my progress-to-date. As part of researching other disciplines’ approaches to reputation systems, I was pleasantly surprised to find this book, which discusses web reputation systems from a technical/product development standpoint. I'm not aware of other books directly on point, so that alone makes the book noteworthy. [If you know of analogous books that I should look at, I'd be grateful for the references.]

The word “reputation” is a complex and nuanced word. This book defines reputation as “information used to make a value judgment about an object or a person.” Notice how this definition treats reputation as actionable information (i.e., making a “judgment”). I favor that approach; my work also uses an actionable definition of reputation.

Their definition equally treats both objects and people as having “reputation,” and this does not work. In general, people are dynamic, i.e., they can change behavior; while content is static, i.e., an item of content does not change its character unless subsequently edited. This single definition of "reputation" created significant tension throughout the book. Recognizing this, the authors often bifurcated the discussion to separately address the process of establishing a person’s “reputation” (which they confusingly called “karma”). However, the book primarily focuses on grading and sorting content items, especially user-generated content, and I personally would not describe content items as having a “reputation.” As a result, I think the book is mistitled. It principally addresses content filtering, not “reputation” as I use the term.

Although this analytical tension pervades the book, the book nevertheless contained a lot of useful insights about both content filtering and establishing user trustworthiness. The authors have a lot of experience building filtering systems for different websites, so the book is packed with the kind of first-hand observations that only an insider can offer. There’s no substitute for the voice of experience when designing Web 2.0 UGC systems, and this book provides an easy and accessible way to learn some tips and tricks.

The book emphasizes the authors’ contributions to the reputation system at Yahoo Answers, and rightly so. Yahoo Answers has emerged into a bona fide success story and recently trumpeted its billionth answer. In my opinion, the book’s high point is Chapter 10, a case study of how Yahoo Answers developed a new filtering and reputation system that helped turbocharge the Yahoo Answers community.

Although the book doesn’t say this directly, two key lessons from Yahoo Answers’ evolution are:

1) UGC websites should let users vote on content, but not all user votes should be weighted equally.

2) UGC websites do not need to publish all user-supplied content items in an equally prominent manner. Perhaps some content should be obscure/hard-to-find until other users validate it.

The book pitches these conclusions as novel, but they seemed fairly intuitive to me. We implemented a very similar system embodying these two points back in 2000-01 at Epinions. Epinions allowed users to grade each others’ content; we weighted votes differentially based on users’ credibility; and we displayed ungraded and poorly graded content only to registered users (a small fraction of our readers). The fact that the authors “discovered” these conclusions at Yahoo Answers shows the dire need for books like this to help websites implement best UGC management practices without reinventing the wheel.

The fact that the authors didn’t acknowledge the Epinions precedent (and other systems like it) highlights another weakness of the book. There is a deep academic literature addressing the book’s topics (especially on content filtering and user incentive systems), but the book barely acknowledges this literature. For example, several times the authors cite Dan Ariely's Predictably Irrational for descriptions of human psychology and foibles. That's a perfectly credible citation, but it should be one of many literature citations, not the only citation. Instead of dipping into the rich academic literature, the book almost exclusively relies on the authors’ experience-based impressions. These impressions are a valuable information source that makes the book worth reading. However, because those impressions aren’t tempered with more rigorous academic findings, it’s not clear to me at all that the authors’ conclusions represent true best practices...or even state-of-the-art.

Because of its many structural flaws, this edition will not become a classic. Nevertheless, I have enthusiastically recommended the book to several UGC start-ups because the book provides a good repository of high-value experience-based perspectives that are not readily available elsewhere. Even if the book’s recommendations are debatable, it’s a debate worth having.

Posted by Eric at 06:39 AM | E-Commerce , Internet History | TrackBack

July 15, 2010

eBay Venue Selection Clause Upheld in Texas

By Eric Goldman

In re eBay, Inc., 2010 WL 2695803 (Tex. App. Ct. July 8, 2010)

In Comb v. PayPal, 218 F. Supp. 2d 1165 (N.D. Cal. 2002), PayPal defended a putative class action by invoking the arbitration clause in its user agreement. Judge Fogel tossed the arbitration clause on unconscionability grounds, noting (among other defects) the cost/benefit problem facing plaintiffs: their case values individually were much smaller than the arbitration costs, and arbitration blocked class adjudication. This ruling was quite influential. Since then, online user agreements--and especially mandatory venue selection clauses--have become vulnerable to unconscionability challenges and other collateral challenges on their enforceability. At this point, a vendor's attempt to destroy class consolidation through a mandatory arbitration clause is virtually per se unconscionable.

The Comb case involved PayPal's venue selection clause, but eBay's user agreement had a basically identical clause. With this clear warning sign, eBay revised its venue selection clause. eBay now uses a bifurcated approach. The baseline is mandatory venue in a Santa Clara County, California court. However, if the dispute amount is less than $10,000, the plaintiff can select arbitration that does not involve in-person hearings. I personally think eBay's approach is pretty savvy, and I have modeled some clients' venue selection clauses on it. It responds to the Comb v. PayPal concerns about the arbitration costs for small disputes by creating a "fast lane" for small disputes, while still keeping the important disputes in eBay's home court.

This recent ruling shows the strength of eBay's current approach. Richards is the victim of a busted eBay Motors transaction, apparently incurring an $18,000 loss. eBay apparently takes the position that the transaction took place off-website and therefore outside the scope of eBay's Vehicle Protection Program. Richards sued eBay and the car seller in his home court. eBay responded with its mandatory venue selection clause. Apparently, the trial court rejected eBay's motion, but the appellate court easily reverses the trial court and orders the trial judge to enforce eBay's clause.

Richards attacked the venue selection clause per Comb. The court distinguishes Comb on several bases:

* PayPal had frozen small amounts of money; there is nothing like that at issue here.
* there was no issue about case consolidation. Instead, Richards chose to pursue his case individually.
* Richards didn't show that his unrecoverable costs to litigate in California were greater than litigating in Texas.

From my perspective, the key is that Richards' dispute value of $18,000 exceeds the threshold for efficient ADR option in the user agreement; but it's also a big enough case value for the court to accept that Richards could afford to litigate the case individually (as, in fact, he was doing in Texas).

Related blog posts:

* Terminated eBay Vendor Gets Day in Court Against eBay--Crawford v. Consumer Depot
* Note about Tricome v. eBay
* Note about Universal Grading Service v. eBay
* eBay User Agreement Upheld, Part II--Durick v. eBay
* eBay User Agreement Upheld--Nazaruk v. eBay (upheld on appeal)

Posted by Eric at 07:33 AM | E-Commerce , Internet History , Licensing/Contracts | TrackBack

July 14, 2010

Funky Ninth Circuit Opinion on Domain Names and Nominative Use--Toyota v. Tabari

By Eric Goldman

Toyota Motor Sales, U.S.A., Inc. v. Tabari, 2010 WL 2680891 (9th Cir. July 8, 2010)

Every time I see a federal appellate opinion on domain names, I'm vaguely reminded of the Country Joe song I-Feel-Like-I'm-Fixin'-To-Die Rag, whose chorus goes "And it's one, two, three, what are we fighting for?" Fortunately, domain name disputes do not lead to the senseless loss of life we experienced from the Vietnam War. Unfortunately, lengthy domain name litigation usually has little more strategic value. Invariably, the domain name litigation has less to do with rational economic decision-making and more to do with chest-beating and posturing.

I bring this up because the Ninth Circuit's latest domain name opinion involves litigation that makes no financial sense for either side. The Tabaris are independent auto brokers that help their customers find and buy Lexus vehicles from an authorized Lexus dealer. They run a business called Fast Imports from the domains buy-a-lexus.com and buyorleaselexus.com.

What is Lexus’ problem with those domain names? The Tabaris are helping people buy Lexuses, so Lexus is going to get its fair share no matter what. The appellate opinion did not indicate that the Tabaris are crooks or trying to divert Lexus customers to other brands. So Lexus, why sue your friends? The opinion hints that Lexus was trying to improve dealer relations by squelching a broker who plays dealers off each other, but hey, that’s fair competition.

From the Tabaris’ perspective, losing these domain names should not be intrinsically fatal to their business. The Tabaris could set up shop at any number of other domain names, in which case they would lose only the built-up clicks from existing links to the site (I wonder how many of those there were in this case) and any extra Google juice from having a seasoned domain name with the trademark in it. I always find it weird when appellate courts treat a defendant’s domain name as the dispositive linchpin of communication between interested parties rather than just one of many SEO tools.

Refreshingly, this opinion does not overestimate the domain name’s value. However, it doesn’t see any reason to consider a switch either: "the Tabaris needed to communicate that they specialize in Lexus vehicles, and using the Lexus mark in their domain names accomplished this goal. While using Lexus in their domain names wasn’t the only way to communicate the nature of their business, the same could be said of virtually any choice the Tabaris made about how to convey their message."

While the opinion focuses on domain names, the Tabaris' websites also, at some point, used copyrighted Lexus photos and displayed the Big L logo. Normally, a photo rip and unauthorized logo display will get a district court judge to rule in favor of the IP owner. Before Lexus sued, the Tabaris cleaned up those issues, so the Ninth Circuit panel focuses solely on the two domain names (because an injunction was the only remedy at issue). This is a logical move by the Ninth Circuit, but most courts will not be so forgiving of sites that borrow the official logo and copyrighted photos.

With the Tabaris' use of the two domain names in their auto brokerage business the only issue on appeal, this should be an easy call per the nominative use doctrine. However, the words "easy" and "nominative use doctrine" go together like peanut butter and artichokes. Personally, I still have no idea when businesses outside a manufacturer's authorized channel can legally include the manufacturer's trademark in their name. Each case seems to be sui generis.

To segregate legitimate from illegitimate uses of third party trademarks in domain names, the opinion lays out a surprisingly lucid taxonomy with 3 categories of presumptively illegitimate domain names:

1) "When a domain name consists only of the trademark followed by .com, or some other suffix like .org or .net, it will typically suggest sponsorship or endorsement by the trademark holder." This makes sense intuitively, but (A) the court doesn't address the seemingly contradictory Lamparello case, and (B) the opinion’s reasoning remains predicated on dicey assumptions about consumer search behavior, such as consumers typing in trademark.com into their web browser address bar—an assumption that has grown dicier with the rise of omniboxes.

2) "Sites like trademark-USA.com, trademark-of-glendale.com or e-trademark.com will also generally suggest sponsorship or endorsement by the trademark holder."

3) "domains like official-trademark-site.com or we-are-trademark.com affirmatively suggest sponsorship or endorsement by the trademark holder and are not nominative fair use"

By implication, other domain names generally should be eligible for nominative use. At minimum, buy-a-TRADEMARK.com and buyorleaseTRADEMARK.com should be fair game for resellers and related parties like buying agents. In support of this, the court rejects Lexus' argument that there was something untoward about the Tabaris brokering other auto manufacturers if their customers decided they didn't want a Lexus. For more on this, see my Brand Spillovers article.

The opinion suggests that the following domain names should qualify for nominative use or otherwise be permissible as well:

* mercedesforum.com
* mercedestalk.net
* starbucksgossip.com
* frys-electronics-ads.com
* mercedesboots.com
* mercedeshomes.com [although I wonder about dilution with these two]
* comcastsucks.org

Procedurally, the opinion addresses several key issues about the interaction between the nominative use test and the likelihood of consumer confusion test. The opinion says that an evaluation of consumer confusion is implicitly built into the New Kids on the Block nominative use test. Therefore, "if the nominative use satisfies the three-factor New Kids test, it doesn’t infringe" without needing to consider the likelihood of consumer confusion test at all. Thus, "nominative fair use 'replaces' Sleekcraft as the proper test for likely consumer confusion whenever defendant asserts to have referred to the trademarked good itself." Further, once a "defendant seeking to assert nominative fair use as a defense...show[s] that it used the mark to refer to the trademarked good," the trademark owner bears the burden of disproving nominative use. All of these procedural points have been hotly contested in prior cases.

The court concludes that the district court's injunction against the Tabaris using "Lexus" in domain names was too broad and remands the case to the district court to try again. Although the court doesn't tell the district court exactly what to do, it does indicate: "At the very least, the injunction must be modified to allow some use of the Lexus mark in domain names by the Tabaris."

This is a rich and multi-faceted opinion written in a confident and emphatic style…perhaps too emphatically, as the opinion swings around like a bull in a china shop, breezily overturning or sidestepping numerous 9th Circuit precedents on both domain names and nominative use. Were this opinion to become the definitive 9th Circuit statement on either domain names or nominative use, this case would be a landmark opinion. However, the 9th Circuit's Internet trademark jurisprudence has awkwardly accreted on a case-by-case basis for more than a decade, and I doubt this opinion will meaningfully affect the next 9th Circuit panel’s considerations.

Even so, this case has to be good news for shopbots. Although the Tabaris were “manual” shopping agents, the case's reasoning should apply equally well to all shopbots comparison search engines and review sites that use third party trademarks as part of their taxonomy. These sites regularly get nastygrams from trademark owners. It will be interesting to see if this case helps turn that tide.

A final oddity: Judge Kozinski wrote both this opinion and the recent eVisa decision. Although the opinions involve different trademark doctrines applicable to domain names (a nominative use defense instead of dilution), their spirit couldn't be more different. The eVisa case was decidedly pro-plaintiff, while this opinion is very defense-favorable. I wonder if Kozinski bent over backwards to help a pro se litigant (the Tabaris represented themselves), or perhaps Lexus' anti-competitive intent set him off. Otherwise, although the split opinions in theory can be harmonized on numerous bases, they struck me as schizophrenic.

More comments from Rebecca Tushnet (smart and challenging, as always—especially about the numerous empirical deficiencies in the opinion), Ryan Gile and Tom O’Toole.

Posted by Eric at 01:08 PM | Domain Names , E-Commerce , Marketing , Trademark | TrackBack

July 09, 2010

Online Sports Ticketing Exchange Wins Dismissal Under Website User Agreement -- Duffy v. The Ticketreserve, Inc.

[Post by Venkat]

Duffy v. The Ticketreserve Inc. (FirstDIBZ.com), Case No. 09 C 1746 (N.D. Ill. July 6, 2010)

FirstDIBZ.com operates an online market place where end users can "buy, sell, and trade options to purchase tickets to sporting events." Plaintiffs who attempted to purchase tickets to the 2009 Super Bowl brought claims alleging fraud and breach of contract. FirstDIBZ scores a win. While plaintiffs get another chance, it's unlikely that they're going to be able to make out a complaint that survives a second motion to dismiss. The case overflows with interesting issues.

Background: FirstDIBZ essentially "operates as a futures market for tickets [for sporting events]." [This probably explains why I've never heard of it.] A "DIBZ" is an instrument which (i) gives the holder the right to purchase a ticket for an event, or a possible event and (ii) obligates the holder to purchase the ticket if the event occurs. As an example, the court notes that if you bought a DIBZ for Game 1 of the World Series at Wrigley Field,

in the event . . . the Cubs overcome their decades-long World Series Drought, the happy fan would then be guaranteed the right to purchase the ticket for Game 1 at face value. Should the Cubs disappoint, the DIBZ-holder would receive nothing and would lose the money she paid for the DIBZ.
[footnote referencing "DA CURSE OF THE BILLY GOAT: THE CHICAGO CUBS, PENANT RACES, AND CURSES" omitted]

FirstDIBZ operates two types of marketplaces. In the "FirstDIBZ-supplied" marketplace, FirstDIBZ guarantees the authenticity of the listings. In the "consumer-supplied" marketplace, FirstDIBZ only "acts as an exchange."

Plaintiffs brought tickets to Super Bowl 2009 in the consumer-supplied marketplace and their DIBZ turned out to be bogus - i.e., the sellers did not actually have the ability to procure Super Bowl 2009 tickets.

Plaintiffs agreed to a website user agreement that contained a description of the consumer-supplied marketplace which said that sellers "assume responsibility for . . . their listings." The agreement also contained a broad release pursuant to which users released FirstDIBZ and its affiliates "from claims, demands and damages . . . of every kind and nature . . . arising out of or in any way connected with [any disputes with Sellers]." The agreement also contained standard "as-is" and disclaimer language and contained a limitation of liability.

Discussion:

The release language: The court looks to the release and concludes that it applies to any breach of contract claims against FirstDIBZ. Plaintiffs tried to argue that their claims were not related to a dispute between plaintiffs and sellers, but rather were based on the acts or omissions of FirstDIBZ. The court rejects this argument, finding that plaintiffs' claims are "undoubtedly connected" to the underlying dispute between plaintiffs and sellers. The court notes that the claims relating to FirstDIBZ's failure to release certain funds from plaintiffs' online wallet accounts may not fall under the release, but cautions that if this is all that there is left, this probably presents a jurisdictional problem for plaintiffs (who alleged federal jurisdiction under the Class Action Fairness Act).

Warranty disclaimers and limitation of liability: The court finds the warranty disclaimers and the limitation of liability enforceable because they met the test under Illinois law that they could be reasonably construed with the remainder of the agreement and were "sufficiently conspicuous." The court did some fancy footwork around terms in the FirstDIBZ user guide which stated that "One DIBZ guarantees one face-value ticket," and that users could "sell [their] DIBZ to other fans . . . at any point during the season." The court finds that this only applies to holders of genuine DIBZ and does not amount to a warranty that any DIBZ would, in fact, be genuine.

Fraud and Illinois Consumer Fraud Act: Plaintiffs argued that they were misled regarding the authenticity of the DIBZ in statements made by FirstDIBZ in its marketing materials and in the media (which were posted on FirstDIBZ's website). The court finds that these arguments are precluded by the broad release. The court also dismisses the claims under the Illinois Consumer Fraud Act, finding that these claims are just dressed up versions of plaintiffs' contract claims.

Unjust enrichment: Finally, the court dismisses the claims for unjust enrichment, finding that this claim is quasi-contractual in nature and a party cannot circumvent a losing contract claim by bringing a claim for unjust enrichment.

__

Section 230: When I first read the case, I thought: what about Section 230? Courts have granted entities like eBay robust immunity against claims from purchasers who bought items that turned out to be not as advertised. (See, e.g., Gentry v. eBay (sale of fake sports memorabilia); Stoner v. eBay (sale of bootleg recordings).) However, this case in some ways reminded me of Mazur v. eBay, where eBay lost a section 230 defense in a case that revolved around live-bidding on eBay, which eBay supposedly screened. Here is Professor Goldman's post on the case: "eBay Denied 230 Defense for Its Marketing Representations--Mazur v. eBay." (Mazur was settled after the court denied class certification.) As his post notes, Mazur seemed to open up a website to a claim that would otherwise be covered by Section 230, by a plaintiff's allegation that "a website made a marketing representation somewhere that says or implies the tort wouldn't occur." (See also Barnes v. Yahoo, discussed in this post: "Ninth Circuit Helpfully Amends Barnes v. Yahoo Opinion".)

User Agreement/Release: Ultimately, the court bypasses the Section 230 discussion and looks to the user agreement, finding that the broad release precludes plaintiffs' claims. FirstDIBZ dodged a bullet for sure, and a big takeaway (which is nothing new) is that websites should keep close watch on their marketing representations, whether those representations are contained in a press release, sales materials, or off-the-cuff statements made by people at the company. I could see a court going the other way on this and finding that the FirstDIBZ marketing materials contained affirmative representations which modified and limited the effectiveness of the online terms and the release. The court's decision to rely on the release (which appeared to be cut and pasted from the eBay user agreement) instead of 230 is reminiscent of the Grace v. eBay appellate court decision, which the CA Sup Ct ultimately depublished. (The Citizen Media page provides background: "Grace v. Neeley.")

[Eric's comment: I've always been a big fan of contractual releases as a belt-and-suspenders risk management backstop to a 230 immunity. This case, combined with the lessons from the Grace v. eBay detritus, is a good reminder of the value of savvy contract risk management provisions as a complement/backstop to the statutory immunity. If you're drafting user agreements, you should consider the possible role of contractual releases from the user as part of the package. All too often, I see contracts where the drafters hope the warranty disclaimer and limits of liability achieve that result indirectly instead of just including an explicit release.]

The Scalping Problem: The court notes that neither party addresses whether FirstDIBZ's exchange runs afoul of laws prohibiting scalping. FirstDIBZ's exchange brings to mind the the hotly contested "Hollywood Futures" market, which is currently the subject of a few legislative skirmishes. (LA Times: "Watching a big bet on box-office futures go sour.") The FirstDIBZ market is a way that people can bet on teams. This raises an unclean hands problem. Except that everyone's hands are a bit dirty, so I'm not sure which way unclean hands would cut, and I suspect the parties weren't either, so they wisely left that issue to the side. (The plaintiffs could have attacked the legality of the whole scheme since FirstDIBZ didn't pay out due to capitalization issues, but the plaintiffs did not focus on this.) The scalping issue also has the potential to affect the Section 230 analysis. In a dispute between the New England Patriots and StubHub (where the Patriots were trying to prevent ticket resales through StubHub) the court recently ruled at summary judgment that a finding that StubHub contributed to a violation of anti-scalping laws by its users could result in a loss of Section 230 immunity. ("Two 47 USC 230 Defense Losses--StubHub and Alvi Armani Medical".)

Were Plaintiff's Acting Reasonably?: I go back and forth on whether the plaintiffs deserve sympathy here. I would think the whole point of an options exchange is to facilitate transactions where people actually have the right to sell what they are purporting to sell. I'm not familiar with options marketplaces, and I don't advocate looking to what a "reasonable online consumer" would perceive, but I would think customers would look at an options marketplace and think that the marketplace had some mechanism in place to verify what was at the selling end of the transaction. You would think the contingency would be in the sports team making it to the Super Bowl, not whether the seller turned out to actually have tickets. In a sophisticated financial marketplace, maybe things vary, but in the context of Super Bowl 2009 tickets, I can see where customers are coming from complaining that their DIBZ turned out to be bogus. That said, the terms clearly spelled out the differences between the two marketplaces and if the plaintiffs are using FirstDIBZ as a way to skirt the rules, I'm not sure how much sympathy they deserve.

Either way, an interesting case.

Posted by Venkat at 10:28 AM | E-Commerce , Licensing/Contracts , Marketing

July 07, 2010

Q2 2010 Quick Links Part 2

By Eric Goldman

Marketing and Advertising

* Good talk from FTC Chair Leibowitz: “we have great hopes for self-regulation….So long as self-regulation is making forward progress, the FTC is not interested in regulating” behavioral targeting.

* NYT on teaching middle schoolers how to interpret ads. We're going to need to teach kids how to consume information if we have any chance to survive infoglut.

* The LA Times and Chicago Tribune are integrating paid text links into story content.

* Search Engine Land: Google: Now Recommending Brands For Searches.

* Keeller v. Groupon Inc., No. 10 CH 8666 (Ill. Cir. Ct. Cook Cty. March 2, 2010). Groupon settles lawsuit over expired and unused coupons.

* NYT: Online coupons may not be as anonymous as people assume.

* An inside look at the MPAA's self-regulatory effort to police movie ads.

* Avi Goldfarb & Catherine Tucker, Privacy Regulation and Online Advertising.

* Microsoft sues for click laundering. Coverage at Search Engine Land and WSJ

* The FTC shut down Pricewert/3FN.net.

Contracts

* News.com: Second Life sued by its users for changing the terms of land “ownership.” Evans v. Linden Research complaint.

* Shell v. AFRA: website venue selection clause not binding just because web visitors viewed it.

* Omri Ben-Shahar & Carl E. Schneider, The Failure of Mandated Disclosure. This paper shows why mandatory disclosures fail in part because regulators think in terms of what consumers SHOULD want to know rather than what information consumers ACTUALLY want to know.

* WaPo: Reality TV secrets are hard to keep in the age of social media. My 2003 analysis of using contract law to keep reality TV secrets.

* Want to be on the TV show Survivor? Check out its contract first.

* Anderson v. Bell, No. 20100237 (Utah June 22, 2010): “electronic signatures may satisfy the Election Code’s requirements under section 20A-9-502 regarding unaffiliated candidates wishing to run for statewide office.” Tom O’Toole’s writeup.

Trademarks/Copyrights

* Jim Jansen: “Only 4% of sponsored ads were triggered by competitors’ trademarked terms. When it does happen, the results are pretty much what consumers are use to seeing, so there doesn't appear to be many negative consequences….Thus, competitive use of trademarked terms to trigger online ads does not appear to be a widespread phenomenon and is similar to the query suggestion feature that many search engines employ.”

* Michael Geist on the first Canadian keyword advertising ruling (a nice defense win).

* 2010 Joint Strategic Plan on Intellectual Property Enforcement.

* Qassas v. Daylight Donut Flour Company LLC, No. 09-663 (N.D. Okla. June 10, 2010). A company and its entrepreneur are liable for their web developer's infringements when creating the company's own website.

Miscellaneous

* Stephen Wu on Estate Planning for Online Assets

* Declan at News.com lauds Justice Stevens' Internet jurisprudence. We owe Justice Stevens many thanks for helping the Internet bloom.

* Anthony v. Yahoo!, Inc., 2010 WL 1552819 (9th Cir. April 20, 2010). Upholding Yahoo's settlement in a class action lawsuit over its online dating site. My original blog post on the case.

* Tom O'Toole reports on various stupid state efforts to regulate technology, inadvertently making the case that they are a terrible laboratory of experimentation.

* Vacation Club Services Inc. v. Rodriguez (M.D. Fla. April 22, 2010). No CFAA action against the buyer of data from a database the seller allegedly acquired in violation of the CFAA.

* Lawyers behaving badly on the Internet.

* 23 state AGs have contacted Topix about its takedown procedures, including its fee for expedited takedown review.

Posted by Eric at 03:18 PM | Copyright , E-Commerce , Licensing/Contracts , Marketing , Privacy/Security , Search Engines , Trademark , Virtual Worlds | TrackBack

June 29, 2010

Payment Service Providers May Be Liable for Counterfeit Website Sales--Gucci v. Frontline

By Eric Goldman

Gucci America, Inc. v. Frontline Processing Corp., 2010 WL 2541367 (S.D.N.Y. June 23, 2010)

This case relates to an online seller of Gucci counterfeit goods called TheBagAddiction.com, run by Laurette. Gucci already successfully shut down the counterfeit website, but it remains on the warpath, looking to nail more defendants. It has sued three additional companies, Durango, Frontline and Woodforest. Durango helps hard-to-service merchants such as TheBagAddiction and other sellers of "replica products" find payment service providers. Frontline and Woodforest are both payment service providers that service Visa, Mastercard and AmEx (Frontline also services Discover). Thus, in this action, Gucci is chasing the payment service providers who helped the counterfeit site get paid. In this respect, the case is analogous to Perfect 10's suits against ccBill and Visa, except that Gucci is proceeding on a trademark claim and not copyright.

In this ruling, the court says that Gucci's contributory trademark claims survive the defendants' motion to dismiss. The court dismisses the direct and vicarious trademark claims.

The court says that Durango, the matchmaker/finder, could be liable on an inducement theory because it advertised its services as finding payment services for "high risk" merchants such as those selling "replica" merchandise. Gucci is basically taking the realpolitik position that everyone knows that high-risk merchants selling replicas are just counterfeiters and so Durango should be brought to justice for assisting that retailer niche. Gucci also alleges that Durango encouraged merchants to reduce chargebacks by including a checkbox on the consumer checkout screen saying that they acknowledged they were buying replicas. Although the checkbox didn't help Durango here, I wonder what it will do to the underlying questions of consumer confusion about product source.

In contrast, Frontline and Woodforest didn't induce because "they did not bring [the website] to the table the way Durango allegedly did." While that's true, I'm not clear about the line the judge is drawing.

The court instead evaluates Frontline's and Woodforest's contributory trademark liability (as well as Durango's) under the following legal standard: "if it supplied services with knowledge or by willfully shutting its eyes to the infringing conduct, while it had sufficient control over the instrumentality used to infringe." This appears to be a further bastardization of the loosely-drafted and gratuitous language in Tiffany v. eBay about "willful blindness." As I wrote in my post about the Tiffany ruling, "I expect plaintiffs to get frisky with this 'willful blindness' toy and start asserting that defendants had 'reason to suspect' user infringement and 'ignored that fact.'" This case appears to be an example of that friskiness.

Gucci's allegations against Durango satisfied the scienter requirement because:

Durango allegedly held itself out to high risk replica merchants. Its sales agent, Counley, traded emails with the Laurette Counterfeiters who expressly told him that they were unable to get credit card services because they sold “replica” items. Counley later wrote back to say he had found a U.S. bank that “can do replica accounts now.” Surely, a connection between an inability to get the services needed to transact goods online and the sale of replicas should have attracted Durango's attention.

[note: throughout this post, I have removed some citations from the blockquotes]

Gucci's allegations against Frontline satisfied the scienter requirement because:

Laurette completed an application to obtain Frontline's services, and Nathan Counley, though a Durango employee, is listed as Frontline's sales agent. Counley “acted as Frontline's agent in soliciting and directing credit card processing business from replica merchants like the Laurette Counterfeiters” and therefore Frontline may be charged with his knowledge, including his understanding of Laurette's difficulty to obtain services for selling replicas. Gucci alleges that the “replica acknowledgment” described above that was created for the Laurette website with Counley's assistance was also reviewed by Frontline, who made suggestions as to where they should place this warning on the website. Even more significantly, Frontline allegedly performed its own investigation of products sold through TheBagAddiction.com as part of Frontline's chargeback reviews. When faced with a chargeback, Gucci claims that Frontline received supporting documentation from Laurette that included information about the specific item ordered, including a description of the item purchased. Not only did Frontline allegedly review the specific item description, Plaintiff also claims that the relatively small price tag for the item, as well as specific complaints from customers who made chargebacks about not receiving what the website purported to sell, e.g. a product made of genuine leather, should have alerted Frontline that these were infringing products. These fact-specific claims are enough to at least infer that Frontline knew or consciously avoided knowing that the counterfeit products were sold on TheBagAddiction.com

There are a number of analytical problems with this reasoning, but I'm still stuck on the argument that the payment processor is charged with the knowledge of a third party entity's salesperson. What?

Gucci's allegations against Woodforest satisfied the scienter requirement because:

As was the case with Frontline, Counley represented himself on Laurette's application as Woodforest's sales agent. The application itself said that Laurette was a “wholesale/retail designer [of] handbags,” and listed the supplier as a Chinese bag manufacturer rather than Gucci. Gucci also claims that Woodforest specifically reviewed the website and the products listed on it as part of its initial decision to do business with Laurette. A Woodforest employee allegedly completed an “Internet Merchant Review Checklist,” which required him or her to review the website and confirm whether it contained a complete description of the goods offered. Based on these claims and the website images provided by Plaintiff, even a cursory review of the TheBagAddiction.com would indicate that they claimed to sell replica Gucci products. Indeed, Plaintiff alleges that Woodforest printed out a number of pages that displayed goods that were for sale, including counterfeit Gucci products, and maintained these pages as part of their business records. Woodforest would also perform a second-level review, performed repeatedly after it accepted the business, where an employee would complete a purchase and request a refund. Finally, like Frontline, Woodforest investigated chargeback disputes and received supporting documentation that allegedly should have tipped them off to the infringing conduct. These claims are more than sufficient to suggest, at this stage of the litigation, that Woodforest knew or shielded themselves from the knowledge that Laurette was selling counterfeit Gucci products with their credit card processing system.

Even with the court's generous standards for scienter, what about control over the infringing instrumentalities? In Lockheed v. NSI, a domain name registrar lacked that level of control because it simply provided a matching service between domain names and IP addresses. In contrast, in Louis Vuitton v. Akanoc, Akanoc arguably had the requisite control because it hosted the sites. Here, Durango was just a matchmaker between merchants and payment service providers, and on that ground lacked the requisite control. However, Gucci sufficiently alleged the requisite control by the payment service providers:

Gucci's complaint indicates that Frontline and Woodforest's credit card processing services are a necessary element for the transaction of counterfeit goods online, and were essential to sales from TheBagAddiction.com. Although other methods of online payment exist, such as online escrow-type services like PayPal, generally speaking “credit cards serve as the primary engine of electronic commerce.” Perfect 10, 494 F.3d at 794. Indeed, Gucci points out that Durango's website claims that “9 out of 10 people use a credit card for their online orders.” As such, without the credit card processing operation set up by these two defendants, Gucci alleges that TheBagAddiction.com would largely have been unable to sell its counterfeit Gucci products. They further support this claim with an affidavit by one of the website owners, who states that “[a]pproximately 99% of payments from my customers were made using credit cards.” Both Frontline and Woodforest processed transactions for cardholders with major credit card institutions-Visa, MasterCard, and so forth-and, according to Gucci, Laurette sold over $500,000 in counterfeit products “during the time they utilized Defendants' merchant bankcard services.” By processing these transactions, both companies allegedly earned significant revenue from the transaction fees they charged. Put another way, “[t]hey knowingly provide a financial bridge between buyers and sellers of [counterfeit products], enabling them to consummate infringing transactions, while making a profit on every sale.” Perfect 10, 494 F.3d at 810-11 (Kozinski, J., dissenting). Though both Frontline and Woodforest insist they are middlemen with no ability to prevent a transaction, they do not dispute that they could have simply refused to do business with “replica” internet merchants, just like the flea market purveyor who refuses to provide a booth to a counterfeiter. See Compl. ¶ ¶ 87-89 (Woodforest and Frontline “facilitated the Laurette Counterfeiters ability to quickly and efficiently transact sales for Counterfeit Products through their website by enabling customers to use personal credit cards to pay for purchases on TheBagAddiction.com”). According to one of the website operators, “[i]f I did not receive an approval for a credit card charge, I would not ship the customer's order.” These allegations indicate that the infringing products “are delivered to the buyer only after defendants approve the transaction ... This is not just an economic incentive for infringement; it's an essential step in the infringement process.” Perfect 10, 494 F.3d at 811-12 (Kozinski, J., dissenting).

While all of this is true, how does this relate to the *instrumentality* used to infringe? The court closes the loop by effectively reading that requirement out of the test, saying "instrumentality in this case is the combination of the website and the credit card network, since both are allegedly necessary elements for the infringing act-the sale and distribution of the counterfeit good." But using this standard, every "sine qua non" vendor to a counterfeit website is an instrumentality--the power company, the water company, the landlord, etc. That's exactly what the 9th Circuit rejected in Perfect 10 v. Visa. The court weakly distinguishes that case by noting the difference between rivalrous and non-rivalrous goods; the copyright infringing websites could continue publishing the non-rivalrous goods without credit card payment, while the Gucci counterfeit site wouldn't ship the rivalrous goods until credit card payment was made.

This is a terrible ruling on both a doctrinal and normative level. On a doctrinal level, the court bypassed the main holdings of Tiffany v. eBay (binding on the court), Perfect 10 v. ccBill and Perfect 10 v. Visa. Instead, the court stitched together crappy dicta from the Tiffany v. eBay case with Kozinski's dissent in Perfect 10 v. Visa to come up with an expansive secondary trademark liability rule applicable to vendors to counterfeit websites. I expect payment service providers to become the latest defendant-du-jour among trademark plaintiffs looking for deep pockets in web infringement cases. Something to look forward to.

Normatively, this ruling raises the specter that payment service providers will attempt to exercise even more business control over the businesses they service, effectively deputizing the payment service providers into cops on the Internet beat. As I mention in my notes about the OECD efforts on Internet intermediaries (which I will post soon), this deputization of private vendors into content cops has numerous disadvantages. I'm hoping this ruling gets fixed by the judge or on appeal so that we don't suffer the logical consequences of this bad ruling.

Posted by Eric at 12:19 PM | Derivative Liability , E-Commerce , Trademark | TrackBack

June 03, 2010

April-May 2010 Quick Links Part 1 (IP Edition)

By Eric Goldman

[Note: I just got back from the Netherlands, where I had extremely limited Internet connectivity, so sorry for my absence in the last week (although you were in good hands with Venkat). I will be posting more material from my Netherlands trip to my personal blog and Twitter. You might want to follow me at those places too. I have a long list of "quick links" to share with you as I get the opportunity. The first installment:]

Copyright

* NYT: Current TV defeats a claim that in-line linking is copyright infringement.

* Google won a copyright challenge against Image Search in Germany, apparently on implied license grounds.

* Smoking Gun reports that ESPN sportscaster Erin Andrews has acquired the copyrights to the peephole videos made of her, which should make it a little easier for her to go after online republishers.

* UMG v. Veoh has been appealed to the Ninth Circuit. Although Veoh declared bankruptcy, its law firm, Winston & Strawn, is still fighting it. Ben Sheffner has posted the amicus briefs on behalf of UMG.

* Ben Sheffner also reports that Scott v. Scribd did not get class certification. My initial blog post.

* Arista Records LLC v. Doe 3 (2d Cir. April 29, 2010). P2P file sharer can't claim anonymity to resist copyright owner's subpoena. This ruling also signals that the Second Circuit will take a dim view of fair use claims in P2P file sharing cases and might import the Napster standards for secondary infringement claims.

* Lyrics website hit with preliminary injunction, but not the shutdown requested by the plaintiffs. The court rejects a 17 USC 512 defense because the defendant did not file the required agent designation with the copyright office.

* The RIAA’s campaign to sue file sharers led to a bubble in copyright litigation activity. Ars Technica suggests the bubble may be coming back.

* International Swaps and Derivatives Ass'n, Inc. v. Socratek, L.L.C., 2010 WL 1780999
(S.D.N.Y. 2010). Socratek aggregates agreements from EDGAR and resells them on its website. The plaintiff is upset that Socratek aggregated and resold the plaintiff’s allegedly copyrighted order form for ordering derivatives. The plaintiff sells blank forms, but Socratek grabbed completed versions that had become material agreements for SEC filing purposes. The court denies Socratek’s dismissal motion but also denies a preliminary injunction.

* The Second Circuit upholds the dismissal of Bio-Safe v. Hawks. My initial blog post.

* Zusha Ellison of the Recorder catches up on three copyright First Sale cases pending before the Ninth Circuit. This is a good time to remind you about our November 5 conference on the First Sale doctrine.

* Cosmetic Ideas v IAC InteractiveCorp (9th Cir. May 25, 2010): "receipt by the Copyright Office of a complete application satisfies the registration requirement of § 411(a)."

Trademark

* Google has won the Rosetta Stone case, but we’re waiting to see the written opinion to figure out why (and how good the win is).

* Au-Tomotive Gold v. VW (9th Cir. May 6, 2010). Post-sale trademark confusion trumps the First Sale doctrine. We'll also be discussing trademark exhaustion at the November 5 conference!

* Boston Marathon sues CafePress and Zazzle for trademark infringement.

* Dan Burk, Cybermarks, Minnesota Law Review. The abstract:

The commercial development of the Internet has been punctuated with legal disputes over the use of trademarks as domain names, as metatags, as search terms, and as advertising keywords. As in previous disputes in copyright over the legal status of software, these Internet trademark disputes arise from the overlap of communicative and functional symbols in information technology. Such “cybermarks” are not merely indicators of product source, but function both as symbolic indicia for human recognition and as strings of computer code in the operation of automated search and indexing mechanisms. Application of trademark law’s functionality doctrine, perhaps with some modest amendment, could begin to resolve disputes over the use of cybermarks.

* Nature’s Footprint, Inc. v. Providnet Co Trust, 2010 WL 1903183 (W.D. Wash. May 11, 2010): “The Court is convinced that plaintiff sought to use its superior position vis-a-vis the trademark to, cause harm to a competitor. Given this Court’s strongly-held belief that a significant part of this litigation was motivated by plaintiff’s desire to quash competition, no fees will be awarded under the Lanham Act’s ‘exceptional case’ authority.”

Posted by Eric at 11:06 AM | Copyright , E-Commerce , Marketing , Privacy/Security , Trademark | TrackBack

May 25, 2010

Life May Be "Rad," But This Trademark Lawsuit Isn't--Williams v. CafePress.com

By Eric Goldman

Williams v. Life's Rad, 2010 U.S.Dist. LEXIS 46763 (N.D. Cal. May 12, 2010)

This lawsuit bummed me out. The trademark at issue--the surfing-inspired "Life's Rad"--is supposed to lift people up, but it's hard to maintain a sunny outlook once the lawyers take over. It reminds me of other hippie-dippy icons that have been the basis of IP legal battles, such as the "Keep on Truckin'" logo, color designs for tie-dye shirts (Banzai v. Broder) and the smiley face. IP lawsuits like these really harsh my mellow.

Both Life's Rad and "Life is Rad" (Williams' offering of radiology-related apparel--get it?!) sell merchandise via CafePress, which means they both agreed to CafePress' user agreement. [An aside: does anyone still use the slang "rad" any more? I thought it died out with "bitchin," "tubular" and "grody."] Life's Rad sent a takedown notice to CafePress, which CafePress honored. Life's Rad seems a little thin-skinned here given its trademark's significant contextual distance from radiology-themed schwag. Further, perhaps CafePress should not have been quite so trigger-happy, although their position is understandable in light of trademark's amorphous boundaries. Williams protested the takedown to no avail and then sued both Life's Rad and CafePress. Williams proceeded pro se. In this ruling, CafePress exits the lawsuit.

Williams tried several of the typical legal arguments that customers trot out when vendors terminate them, such as due process violations (nope--no state action), unfair competition (no--CafePress just exercised its rights under its user agreement) and interference with prospective economic advantage (the court calls that "frivolous"). I haven't pulled the filings to see if CafePress argued 230(c)(2), but that also should have been a possibility.

Williams also tried some unusual legal twists. He argued that CafePress violated the DMCA put-back provisions (17 USC 512(g)). This is misguided on several fronts. First, 512 only applies to copyright, not trademark. Second, CafePress' user agreement authorized its takedown. Third, Williams did not send a proper 512(g)(3) putback request. Fourth (a point the court doesn't note), 512(g) is an option available to a service provider to minimize its liability, not a mandatory requirement to put back content at the user's request.

Williams also claimed that CafePress' takedown violated his trademark rights. The court tosses this aside because (1) Williams didn't claim a trademark in "Life is Rad," (2) CafePress' user agreement authorized the takedown, and (3) "Plaintiff has not identified (nor has the Court been able to identify) any provision of the Lanham Act that restricts an internet service provider's discret