November 18, 2008
October 2008 Quick Links, Part 2
By Eric Goldman
Spam
* Kramer v. Perez. An Iowa court awards $236M in damages in a spam case. Venkat's comments.
* After the government lost its jury trial against Impulse Media, the court denied Impulse Media attorneys fees.
Contracts
* AT&T put its own emailed notice of amended contract terms into its spam folder. Whoops! Due to spam filters and other automated blocks, it is becoming almost impossible for websites to communicate with their users by email.
* An estimate of the massive "tax" imposed on consumers by reading privacy policies. Of course the financial drain is overstated because many people make a rational decision not to read every privacy policy, plus not every person has to read a privacy policy for marketplace responses to be effective.
* The Blizzard v. MDY WOWGlider case has reached a stipulated damages amount of $6M.
* Pulaski & Middleman, LLC v. Google Inc., 5:2008cv03888 (N.D. Cal. complaint filed August 14, 2008). The Justia page. Yet another me-too lawsuit against Google over serving ads to parked domains and error pages.
* An Israeli GPL enforcement action settled.
Trademarks/Domain Names
* Kentucky v. 141 Domain Names. Is a domain name property? Yes. See the Sex.com case. Can a plaintiff seize a domain name pursuant to a favorable judgment? Yes. Is it appropriate for Kentucky to seize domain names for gambling websites available in Kentucky? Of course not, because this would effectuate an extraterritorial reach by curtailing non-Kentucky residents from making possibly legal uses of the domain name. More recently, the seizure was stayed.
* Speaking of inappropriate seizures, the Feds are trying to seize the trademarks of the Mongols motorcycle group. DOJ press release. LA Times article.
* Best Western Intern., Inc. v. Doe, 2008 WL 4630313 (D. Ariz. Oct. 20, 2008). Prior blog post in this case. The judge is losing patience: "These filings are wasteful in the extreme. The Court is not a forum for the parties to expend every possible dollar seeking to litigate every conceivable issue, no matter how insubstantial. The Court will no longer tolerate the excesses of this case."
* The Verizon v. Navigation Catalyst Systems domainer lawsuit settled.
* 50 Cent brings yet another questionable lawsuit. (1, 2).
Advertising
* Goddard v. Google Inc., 2008 WL 4542792 (N.D. Cal. Oct. 10, 2008). The case against Google for deceptive mobile phone ads will stay in federal court.
* Eyeblaster, Inc. v. Federal Insurance Co., 2008 WL 4539497 (D. Minn. Oct. 7, 2008). This is a collateral lawsuit to Sefton v. Eyeblaster alleging that Eyeblaster distributed spyware. Eyeblaster tendered the claim to its insurer. This court holds that the CGL policy doesn't apply because the claim relates to software problems, not physical damage to the users' computers. Further the E&O policy doesn't apply because Sefton alleges that Eyeblaster intentionally installed the spyware, bumping Eyeblaster into one of the policy's exclusions.
* Are consumers becoming more tolerant of pop-up ads? For more on consumer acceptance of new advertising formats, see here.
* A big damages award in NetQuote v. Byrd.
Posted by Eric at 06:42 AM | Adware/Spyware , Domain Names , Licensing/Contracts , Marketing , Privacy/Security , Search Engines , Spam , Trademark | TrackBack
November 17, 2008
Yellow Pages Publisher Hit with $1.5M Fraud Judgment for Publishing False Ad--Knepper v. Brown
By Eric Goldman
Knepper v. Brown, CC 9903-02495 (Or. Sup. Ct. Oct. 9, 2008)
A woman got a botched liposuction job (which plaintiff's expert described as an "uncorrectable disaster") from Dr. Brown, a dermatologist. She sued the dermatologist and Dex, the publisher of his Yellow Pages' ad, for fraud based on Brown's ad. The court describes the ad and the interplay between the doctor and Dex as follows:
In 1996, Brown placed a second advertisement in Dex's Yellow Pages -- this time under the subheading "Surgery, Plastic and Reconstructive." The new advertisement stated that Brown performed liposuction, wrinkle treatments, and sclerotherapy. It also stated that Brown was "Board Certified" -- without specifying any area of certification.
The new advertisements were added at the urging of a Dex sales representative, Mueller. Brown's office manager, Newman, told Mueller that Brown was interested in attracting more liposuction patients. Mueller met with Newman to help her "mock up" a new advertisement. Mueller told Newman that the "plastic and reconstruction surgery" subheading in the Yellow Pages would be the best place to reach that target market. Mueller also told Newman that the advertisement should identify Brown as "board certified," because "patients were expecting a [board certified] plastic surgeon to do these techniques." Newman repeatedly told Mueller that she was concerned that such an advertisement would be misleading, because Brown's board certification was in dermatology, not plastic and reconstructive surgery. Mueller continued to push for a nonspecific "board certified" designation under the "Surgery, Plastic and Reconstructive" subheading, and Brown, who had the final say, acceded to Mueller's advice.
Brown (probably wisely) settled, leaving Dex as the only defendant. After a mistrial, the jury in the second trial awarded the plaintiffs $1.5M for the fraud claim against Dex. The Oregon Supreme Court upheld this judgment.
There are a number of interesting points to observe about this case:
1) I'm sure all of the lawyers reading this post are shaking their heads at the apparently rogue salesperson!
2) I understand why Dex thought it could win on the legal merits, but this looks like the kind of situation where a jury will pay the plaintiff regardless of the legal merits. Given that the doctor had settled, Dex was the only target for the jury to nail. And that's exactly what they did.
3) The dermatologist's use of the undefined phrase "board certified" is a good example of an implied false representation. It also seems like something the medical profession ought to regulate. For example, for most lawyers, there are very specific rules about how lawyers can describe themselves as "specialists."
4) Assume that Google sold the keyword "liposuction" to Brown and Brown's ad included the undefined phrase "board certified." What result? 47 USC 230 almost certainly would protect Google in that case. Of course, the Dex salesperson allegedly did far more in encouraging the falsity than Google would likely do. If an online publisher/ad network's salesperson was similarly aggressive at pushing a false representation, it may be possible that the 47 USC 230 shield would drop. Even so, this is a good example of how 47 USC 230 may privilege online publishers over offline publishers in a way that grants significant competitive advantages to online publishers.
Tom Seery at RealSelf has more to say on the case.
Posted by Eric at 05:31 PM | Derivative Liability , Marketing | TrackBack
November 11, 2008
Lambotte's Click Fraud Lawsuit Against IAC Survives Motion to Dismiss
By Eric Goldman
Lambotte v. IAC/InterActiveCorp, 2008 WL 4829882 (C.D. Cal. Nov. 4, 2008). Initial blog post on the filing of the first complaint.
Lambotte filed this putative class action lawsuit against IAC in May based on alleged click fraud. In July, the court granted summary judgment to dismiss portions of the lawsuit. Lambotte and two new named plaintiffs then filed an amended complaint in September. IAC moved to dismiss. This ruling largely rejects that motion.
The plaintiffs argued that the contract says that IAC would charge for clicks by "users," and reasonable advertisers would assume that "users" are "potential clients" for the advertiser, not bogus clickers. The judge is rightly skeptical of this argument, saying that the plaintiffs' definitions "may not be the most reasonable interpretations." At the same time, California law has a liberal parol evidence rule, so the judge gives the plaintiffs a chance to introduce evidence to support their aggressive definitions. I would be surprised if this claim ultimately prevails, but the plaintiffs can try.
The plaintiffs also argue that the implied covenant of good faith and fair dealing effectively requires IAC to prevent click fraud, and thus IAC breached that obligation. The court, citing In re Yahoo, says that this allegation survives a motion to dismiss.
As with In re Yahoo, this ruling is a win for the plaintiffs because they get to keep litigating the case. However, there remains some basic problems with the plaintiffs' allegations that should ultimately doom the lawsuit. If in fact the plaintiffs do lose the lawsuit, it's unfortunate that everyone had to incur the extra adjudication costs. More likely, if the lawsuit can survive another few rounds, IAC probably cuts a check to end the threat regardless of substantive legal merit.
Posted by Eric at 02:24 PM | Licensing/Contracts , Marketing , Search Engines | TrackBack
October 29, 2008
CAN-Spam-a-Friend?--Hoang v. Reunion.com
Hoang v. Reunion.com sidesteps an eagerly anticipated legal dispute over the legality of commercial address book scraping and 'send-to-a-friend' emails, and also highlights the damage that can cascade when a federal Circuit Court woefully misreads a statute.
By Ethan Ackerman
In July 2008, Violetta Hoang filed a class action lawsuit under California's state anti-spam laws against Reunion.com, a Los Angeles-based social network site. On October 6th, the court ruled for Reunion.com, granting its motion to dismiss, but allowing Hoang leave to re-file an amended complaint. While a less-than-3-months turnaround is admirable, this case stands as an apt reminder that haste makes waste.
What was sent?
A series of May 2008 solicitations from plaintiffs' acquaintances were the origin of this suit. More precisely, the series of emails were sent from Reunion.com mail servers but bore the names (and in some cases, addresses) of plaintiff's acquaintances in the 'From' line of the email. The emails also contained subject lines like "[Acquaintance] Wants to Connect with You." The emails were sent by Reunion.com servers because plaintiffs' acquaintances had registered with Reunion.com and at some point agreed to, or failed to opt out of, Reunion.com's address scraping practices. In the lawsuit, plaintiffs alleged that these emails were sent to plaintiffs not by plaintiff's acquaintances, as the email 'From' line and subject suggested, but by Reunion.com after Reunion.com had scraped the plaintiffs' addresses from acquaintances' address books when acquaintances became Reunion.com members. In short, pursuant to a possibly agreed-to Terms of Service, Reunion.com scraped its members' address books and then sent solicitations to the resulting addresses, but also took several steps to make it appear that the solicitation was from the member.
This email-scraping-and-dodgy-addressing practice sounds consistent with other accounts of Reunion.com's less than desirable (or legal) efforts to expand its member base. The site claims tens of millions of registered members, suggesting these email campaigns seem to work. The frequency of critical coverage over Reunion.com's various advertising and data-gathering methods also seems to suggest the tactics are as commonly objectionable as they are effective.
In February of this year, Eric highlighted a Wired article about address book scraping and other common web gathering processes. It's a very interesting area with a lot of thorny legal questions. This post, however, is just about the resulting spam.
But was it spam?
Claiming a violation of all three portions of California's anti-spam law, plaintiff's brought a claim against Reunion.com. Plaintiffs alleged Reunion.com used a falsified, misrepresented or forged 'From' line. Plaintiffs alleged that the subject lines Reunion.com used were misleading. Plaintiffs also alleged Reunion.com used a 3rd party domain name (yahoo.com) without Yahoo's permission.
[Author's aside: From the complaint, which describes several instances of 'From' line name forging, but only one instance of 'yahoo.com' appearing as part of a 'From' line, it sounds like Reunion.com's address book scraping likely picked up an email address that was stored in the name field of a member's address book, rather than some more nefarious domain name forging.]
Smells like spam, so what does the law say?
Rather than denying these accusations, Reunion.com chose to counter with a preemption defense. Reunion.com claimed that its practices were sanctioned by federal law and thus, even if actionable under California law, the federal CAN-SPAM Act preempted plaintiffs' claims.
The CAN-SPAM Act's preemption clause, 15 USC 7707 (b)1, does broadly preempt most state anti-spam laws - "This chapter supersedes any [State law] that expressly regulates the use of electronic mail to send commercial messages." This first sentence makes Reunion.com's preemption defense sound pretty plausible. But wait, as the late night infomercials say, there's more. The rest of the clause identifies a significant exception that preserves many of these state laws - "except to the extent that any such statute, regulation, or rule prohibits falsity or deception in [an email]."
So state law claims, like the plaintiffs', are preempted, except to the extent that the state law addresses falsity or deception, in which case the claims may proceed. Courts have been handling the preemption and preemption exception clauses of CAN-SPAM now for several years, and have had more or less no problem concluding that compliant state anti-spam laws can survive if they fit in CAN-SPAM's exception.
OK, so that's what CAN-SPAM says. Let's compare that to the California state law at issue. As identified above, the plaintiffs made three claims under the California law: a falsified 'From' line, a deceptive subject line, and the deceptive use of a 3rd party's domain name in an email header. All three claims address falsity and deception in an email's header, the core of CAN-SPAM's preemption exception. While Reunion.com might dispute the facts of each claim (not misleading, not false because authorized, etc.) it seems pretty clear that the claims can survive CAN SPAM's preemption test as written.
So if the law passes the CAN-SPAM test, whose preemption test is it failing?
The Reunion.com preemption defense cited two sources - the Mummagraphics holding and an FTC rule-making and policy paper on refer-a-friend email marketing.
The court accepts Reunion.com's first source, the prior Mummagraphics case, and doesn't rely on the FTC's policy paper for its holding. As a result, its discussion of the FTC guidance is a very brief discussion at the opinion's end in its discussion over whether to grant leave to amend.
A brief tangent
Before addressing the Mummagraphics precedent, I want to address the FTC rulemaking and policy paper too. Reunion.com asserts that the FTC rulemaking and policy paper permit, as a matter of law, its address book scraping and subsequent emailing. As a threshold matter, there's the fairly complex question of which portions of the FTC's Rulemaking and policy paper on refer-a-friend emails are actual Rulemakings with the force of law and which are policy guidance. Fun APA stuff. But even if the refer-a-friend portions are construed as a rulemaking, a brief read of the guidance reveals that there's, to put this politely, no sane way to conclude that the guidance makes Reunion.com's actions "as a matter of law, exempt from liability under CAN-SPAM." The guidance is page after page of non-exclusive, hedged discussions of what may make a sender liable. The FTC doesn't hand out any 'exemptions from liability' in the rules. Even this otherwise preemption-accepting court is suspicious of this assertion, stating
The FTC did not rule that a commercial entity whose message is the subject of a "forward-to-a-'friend'" email is, as a matter of law, exempt from liability under CAN-SPAM or that such entity could never be held liable, as a matter of federal law, for initiating an email containing false information. Rather, the FTC found that a determination as to whether such entity is exempt from liability under CAN-SPAM would require a "highly fact specific inquiry.
To further beat a dead horse, I'll just focus the issue a bit more. The guidance discusses when a commercially motivated refer-a-friend email is, and very infrequently isn't, subject to CAN-SPAM's provisions. It is page after page addressing when an email will be held to CAN-SPAM's standards, not on when an email will be held to, or preempted from, a state law's standards. While it may be possible that the FTC rules could categorize a given email as "not covered" by CAN-SPAM, that's not the same thing as preempted by CAN-SPAM. Buried deep within a hypothetical set of facts there might be a negative implied preemption argument that could be teased out of the FTC ruling, but Reunion.com isn't making that argument.
Back to the holding, then...
It's not that common in the development of case law that a significant intellectual error can be traced to one particular case, but that's the case here. This case errs because the court was too quick to rely on the erroneous 4th Circuit holding of Omega World v. Mummagraphics to dismiss.
The Mummagraphics court was faced with a similar suit alleging state and CAN-SPAM claims over emails with similar false and misleading subjects and headers, including subject lines falsely suggesting the recipient had requested the email, and "from:" addresses from unaffiliated domains that were not even in the actual transmission path.
A more critical argument against the Mummagraphics opinion could easily be made, but I'll simply opine that Judge Wilkerson of the Fourth Circuit sent spam jurisprudence down the wrong path in several key respects with this holding. While each of the errors will likely cause a lot of damage, several of them (e.g. the re-writing of the statute's 'materiality' standard, concluding that truthful email body text 'cures' header falsity) only have to do with claims under CAN-SPAM, and not on state law preemption. As a result, I'll focus on the error of Mummagraphics that causes so much headache for preemption claims - what constitutes a "falsity or deception" for purposes of determining preemption.
The statute says 'falsity and deception,' but this court thinks it should say fraud instead, so we now hold that it does...
The Mummagraphics court was faced with a claim under an Oklahoma statute that prohibited falsity and deception in email headers. While acknowledging that 'falsity' means just that - "erroneous, wrong," or "untrue", the court proceeded to construe the CAN-SPAM exception as preempting any state law using any standard less than "fraudulent".
This shift is no angels-on-the-head-of-a-pin difference. It's more analogous to the difference between murder and simple assault. Fraud requires misrepresentation and knowledge of falsity and intent to defraud and justifiable reliance and damage. Fraud is a significant enough legal claim that it has its own pleading standards in Federal court. In contrast, falsity or deception are just individual elements of fraud.
The Mummagraphics court dresses up this statutory re-writing by pointing to instances in CAN-SPAM where a heightened standard beyond 'falsity' is used, and argues that these other instances prove Congress intended a heightened standard. Unfortunately, this argument just proves the opposite. Far from being another instance of the same standard, the other language proves Congress knew how to state the particular standard it wanted. When 'falsity' was intended, as in 15 USC 7707(b)1, 'falsity' was used. When 'fraud' was intended, as in a mere paragraph later in 15 USC 7707(b)2, 'fraud' was used. When 'falsity' wasn't enough, but 'fraud' was too much, as in 15 USC 7701(a)1, 'materially false' was used. When Congress wanted to require actual knowledge, or a specific intent, as in 7704(a)2 and 7702(12), it used the terms "actual knowledge" and "intentionally."
Eh, so Mummagraphics was probably based on an erroneous conclusion, what's the harm?
The Mummagraphics opinion represents a Circuit-level opinion on federal law, so it is wholly binding in state and federal courts in the 4th Circuit and persuasive in all others. Additionally, it construes the scope of federal law, the CAN-SPAM Act, rather than just a particular state's law, so it is, if not controlling, at least pertinent in every case that raises a CAN-SPAM preemption defense. Not surprisingly, the opinion is having an effect. Several courts, even before Reunion.com, have relied on Mummagraphics' impossible to meet preemption standard to summarily dismiss cases raising state law anti-spam claims. State enforcers and legislatures are even starting to take notice and drafting amicus briefs and legislation to circumvent the results of the holding.
More comments about the opinion: Venkat and Tom O'Toole.
______
Eric's comments: Ethan makes a persuasive case that the statutory language in CAN-SPAM distinguished fraud from falsity. Nevertheless, I still support the Mummagraphics holding because I always thought it was unnecessary and counterproductive for Congress to let any state anti-spam statute survive preemption. From my vantage point, state anti-spam laws have done nothing useful to curb abusive spam. Instead, they have just littered the court system with junk cases, often from serial entrepreneurial litigants trying to punch lottery tickets. So if Mummagraphics provides defendants with a quick way to squelch unnecessary state law claims, I'm all for it.
I think Ethan is right that this case may misread Mummagraphics to extend the preemption even further than the 4th Circuit intended. Given my predisposition towards broad preemption, this is still a good outcome, but I am more troubled. In particular, I think the Reunion.com approach does not comfortably fit in the refer-a-friend bucket, and their efforts to leverage off the implicit social network connections bring to mind the worst aspects of the Facebook Beacon program. In this sense, the line between a true refer-a-friend program and a pretend referral that's just blatant marketing by grabbing email addresses reminds me a little of the first party/third party marketing representation distinction in 47 USC 230 jurisprudence. If the friend asks the site to send the email, it's a referral and not spam. If the friend provides the email address but doesn't endorse the message, it's governable by CAN-SPAM. This distinction is cloudy in 230 jurisprudence too, and it is giving the SEC fits too. Smells like a paper topic here.
On a personal note, mazel tov to Ethan and his wife on the arrival of their daughter Lily!
____________
10/30 UPDATE: Venkat's comments include a link to the plaintiffs' amended complaint. It takes a legally correct, tactically courageous approach. Rather than taking the Court up on its invitation to amend the pleadings to meet the various elements of a fraud standard, the plaintiffs' complaint reiterates its earlier falsity standard pleadings and then attempts to distinguish Mummagraphics, or at least limit the holding. The amended complaint distinguishes and notes that the Mummagraphics holding, for all its strong dicta about fraud and broad preemption, only held that CAN-SPAM would preempt a strict liability statute. The plaintiffs then proceed to show that the California statute is more than a strict liability statute, and even helpfully point to 9th Circuit precedent that distinguishes falsity from fraud for federal law purposes, clearly holding falsity as a lesser standard. I suspect Reunion.com could make the strong counter-argument that the Mummagraphics results matter more than the holding, because the Mummagraphics result, preemption, was of an almost identical statute that wasn't strict liability either. But making such an argument only invites closer scrutiny of Mummagraphics and highlights its error. Not only was Mummagraphics' stated holding (strict liability is preempted) inconsistent with the Mummagraphics result (a 'more-than-strict-liability' statute was preempted) but the holding was legally wrong in attempting to re-write the carefully negotiated preemption standard up from falsity to something higher. Before giving the benefit of the doubt to the Mummagraphics court in its re-writing, consider that the precise wording and standards in the preemption provisions of a federal spam law were one of its most-negotiated provisions. They changed from one Congress to the next, were different between various bills in the 108th congress, and were even switched between the different versions introduced and ultimately passed in the 108th Congress.
Posted by Ethan Ackerman at 03:55 PM | Marketing , Spam | TrackBack
October 14, 2008
September 2008 Quick Links, Part 3
By Eric Goldman
eBay
* Universal Grading Service v. eBay, Inc. More fallout from the National Numismatic v. eBay case--another lawsuit alleging antitrust and defamation because eBay designated some coin rating services as preferred and impliedly devalued others.
* Windsor Auctions v. eBay has been refiled in a new jurisdiction.
* Mehmet v. Paypal, Inc., 2008 WL 3495541 (N.D. Cal. Aug. 12, 2008). Upholding the consequential damages waiver in PayPal’s user agreement.
* A company's failure in the marketplace can drive up the value of its collectibles on eBay.
* Stelor Productions, Inc. v. Google, Inc., 2008 WL 4218107 (S.D. Fla. Sept. 15, 2008). In the lawsuit alleging that Google causes reverse confusion of Googles.com [warning: annoying music ahead], the plaintiff doesn't get to depose Sergey or Larry yet. Rose Hagan, Google’s long-time chief trademark counsel, is the lucky substitute.
* Lots of rhetoric in the Google/Yahoo ad syndication deal. Google’s advocacy website. Google Chief Economist Hal Varian explains why the deal won’t raise ad prices in the auction. Randall Stross weighs in.
* Google has changed course and now allows religious groups to advertise on the keyword “abortion.”
* Kubit v. Google Groups, 2:2008cv00738 (M.D. Fla. complaint filed Sept. 29, 2008):
I then would like to sue Google Groups for not removing the posts when I repeatedly asked them to for 2 years. I believe I am entitled to at least a small amount of compensation for the emotional distress and lost business income that has resulted from them allowing these posts to remain on their Google Groups, even though I offered them VERY solid proof that I do not have HIV. If they had stopped the posts when they first occurred, they would not have proliferated to hundreds of websites. I became suicidal for a period of time after the posts started. I incurred a lot of emotional pain and fear because of the posts and had to seek psychiatric and psychological help to get my life back together. I still suffer from fears of dating, living a public business life and trusting others.
Yes, this is a pro se complaint. Yes, it is preempted by 47 USC 230.
Marketing/Advertising
* NebuAd is dead (1, 2). Even so, the lure of intermediaries aggregating deep data about consumers for commercial purposes will never die.
* Is Gator/Claria dead?
* The EU passed a non-binding resolution against sexual stereotypes in advertising.
* Celebrity branded merchandise run amok.
Miscellaneous
* Valleywag: "The 5 most laughable terms of service on the Net." For more laughs, see Mark Lemley’s Terms of Use paper.
* Murakowski v. University of Delaware, 2008 WL 4104087 (D. Del. Sept. 4, 2008). This reminded me a lot of the Jake Baker case from the mid-1990s.
* The Virginia Supreme Court reversed itself on the Jaynes anti-spam prosecution, and Jaynes walks. Does Virginia routinely pass unconstitutional laws?
* Becker v. Toca, 2008 WL 4443050 (E.D. La. Sept. 26, 2008). Ex-wife's alleged delivery of "Infostealer" program to grab passwords from ex-husband could violate the ECPA, SCA and CFAA.
* Interesting article on ESPN’s exclusive distribution and bundling agreements with Internet access providers.
* Silly? Horrifying? A sign of the apocalypse?
Posted by Eric at 06:17 PM | Adware/Spyware , Content Regulation , Derivative Liability , E-Commerce , Internet History , Licensing/Contracts , Marketing , Privacy/Security , Search Engines , Spam | TrackBack
October 07, 2008
Email Ad Network Isn't Liable for Unsolicited Email--Ferron v. Echostar
By Eric Goldman
Ferron v. Echostar Satellite LLC, 2008 WL 4377309 (S.D. Ohio Sept. 24, 2008). The Justia page.
John Ferron is one of several "repeat" plaintiffs around the country suing over unsolicited email (perhaps not coincidentally, he's also an attorney). In this case, Ferron sued a variety of defendants associated with unsolicited email promoting dish satellite offerings for violations of Ohio's consumer protection law and the Electronic Mail Advertising Act (EMAA).
One of the defendants is Hydra, "a service that connects satellite dish service retailers with companies that advertise by email. The retailers create the advertisements. Hydra then stores the advertisements on its database. Other companies then access Hydra's database and send the advertisements to consumers by email." Hydra does not create the ad content or send the actual emails.
Ohio's consumer protection act has a defense for innocent publishers of ads. Even though the statute does not contemplate the existence of an email ad network, the court says that Hydra is only an "information disseminator" and therefore qualifies for the defense. It was also alleged that Hydra wasn't innocent because Ferron had sent it a copy of his complaint, but the court says that the complaint does not act as sufficient proof of a statutory violation.
The court declines to grant Hydra SJ on the EMAA claim, saying that while Hydra did not "transmit" the email, it could not tell if Hydra "caused" the email to be transmitted. Nevertheless, the court says that, per Mummagraphics, Ohio's EMAA is preempted by CAN-SPAM because it regulates conduct that is not sufficiently fraudulent or deceptive. As a result, Hydra gets SJ on the EMAA claim and is dismissed from the lawsuit.
From my perspective, this case is another example of the larger battle against unsolicited email using state law (such as the many state anti-spam laws). In my opinion, the heavy reliance on state law has led to enormous wasted motion, which is the direct and unfortunate consequence of (1) CAN-SPAM failing to completely preempt all state anti-spam laws, and (2) early opinions (mistakenly, IMO) holding that state anti-spam laws don't violate the dormant commerce clause even though most email senders cannot realistically "steer" their emails into or out of a state.
[This post has been amended in response to emails from John Ferron alleging that my prior post was defamatory.]
Posted by Eric at 04:32 PM | Marketing , Spam | TrackBack
September 29, 2008
Delayed Enforcement Blocks Domain Name Lawsuit--Southern Grouts v. 3M
By Eric Goldman
Southern Grouts & Mortars, Inc. v. 3M Co., 2008 WL 4346798 (S.D. Fla. Sept. 17, 2008)
I'm often baffled by lawsuits over domain names and keywords because they just don't seem to make any economic sense. This lawsuit is especially perplexing given the plaintiff's delays and the seeming impossibility of the plaintiff reaching a profitable outcome, even if it won in court. What was the plaintiff thinking?
Background
3M and SGM compete in the field of "quartz aggregate products for surface finishes." SGM has a federal trademark registration for "Diamond Brite." In 2000, 3M bought an unrelated business whose assets included a trademark in "Diamond Brite" and the domain name "diamondbrite.com." For a while, 3M redirected the domain name to the home page of the other business unit it owned. No later than July 2002, the domain name stopped resolving, but 3M continuously renewed its domain name registration. Ultimately, 3M migrated the new unit to its existing trademarks and let its acquired trademark in "Diamond Brite" lapse.
Meanwhile, in 2005, 3M did a 3 week trial buying "diamond brite" in Google AdWords, but the lawsuit only involves the domain name, not the AdWords purchase.
SGM contacted 3M three times about the diamondbrite.com domain name. No later than July 2002, SGM emailed 3M asking if it could acquire the domain name. In Feb. 2005, SGM sent a cease-and-desist letter, which 3M rejected. Then, in July 2007, SGM wrote to 3M again proposing an amicable solution, and 3M continued to resist. SGM then sued 3M in Sept. 2007.
Laches
From my perspective, this is an easy laches case. Taking 5 years to pursue the matter, with nothing resembling an ongoing dialogue, is simply too long. 3M wound down use of the domain name, so its economic expectations aren't disturbed like a typical laches case, but there is still the increased litigation costs due to the 5 year delay. The court rejects that either the AdWords purchase and the domain name renewals resetted the laches analysis.
Unfair Competition on the Merits
The court says that the mere possession of the diamondbrite.com domain name without any further use does not constitute a "use in commerce" sufficient to support Lanham Act violations. Along the way, the court distinguishes a veritable who's-who list of junky domain name cases from the turn of the century, including PACCAR, Brookfield, PETA v. Doughney, OBH and Planned Parenthood v. Bucci. The court distinguishes most on the fact that 3M didn't have an active website resolving to the domain name, but it goes further with the OBH and Bucci cases:
OBH and Planned Parenthood[] are both nearly a decade old. As with any widespread change in technology, there is a learning curve. Even if those cases were correct when decided, I decline to adopt the position today that internet users of any significant number would be frustrated or hindered by merely not arriving at the expected site the first time a web address (domain name) was typed in... With the advent of multiple, and increasingly powerful search engines, it is unlikely that a potential consumer of SGM's products would be turned away by not finding a website at diamondbrite.com. In any event, SGM has presented not a scintilla of evidence to show that consumers have been prevented from accessing SGM's own website, or prevented from obtaining any of SGM's goods or services. (emphasis added)
The bolded language, of course, is true and has been for a number of years, but it's nice to see a court expressly acknowledge that "technological facts" embedded in the precedent are now out-of-date. It's also nice to see the court clearly recognize the substitutability of the domain name system and search engines and to realize that consumers prefer search engines.
The court also rejects the precedent by pointing out that there cannot be likelihood of consumer confusion when the domain name owner doesn't resolve at all. As the court says, "The seven factors use to determine whether a likelihood of confusion exists become irrelevant if there is no “use” to compare the mark to." There is plenty of stupid precedent to the contrary (including those predicated on initial interest confusion, which the court expressly rejects), but this court nails it.
ACPA on the Merits
In my opinion, the ACPA claim is an easy defense win because 3M (and the predecessor company) had legitimate trademark interests in "Diamond Brite" prior to the domain name's registration. The court still courteously goes through the "bad faith" ACPA analysis before concluding that 3M had none. Along the way, the court soundly rejects a pretty silly argument that the domain name registration pointing to an unresolved domain name would divert consumers because frustrated consumers would do a Whois lookup query for the defunct domain, learn that 3M was the registrant and seek out 3M to transact with. Some arguments are better left unmade.
In the end, the court grants summary judgment to 3M and dismisses the lawsuit.
Lawsuit Futility
I understand how matters like this can sit on an in-house counsel's desk for years, only resurfacing every couple of years and prompting a "ping" to the other side. But I simply can't understand how, in 2007, after 5 years of irresolute progress, SGM thought the economic upside justified the expense of a lawsuit.
On the benefit side, a domain name like "diamondbrite.com" has some value, especially when it's associated with a product line bearing that name. But how much value? Assuming a lawsuit like this costs at least six figures, I can't imagine that the domain name is worth anywhere close to that. Indeed, any incremental selling power from the domain name could be cost-effectively replicated through a combination of SEO and SEM on the term "diamond brite." Better yet, SGM could have poured the money into product sales and marketing, which I'm confident has a substantially higher ROI than suing or gaming the search engines.
As further evidence of the weak value of the domain name, SGM did not cite any harm from not owning the domain name, and the matter only rose to the top of SGM's in-house personnel's desk 3 times in 5 years. Clearly, this is not a "must have" domain name,
On the expense side, these types of lawsuits are costly. In addition to the normal attorney's fees, SGM obtained at least one expert witness (and, to add insult to injury, the court bounced the expert's report), did some expensive discovery (including obtaining and reviewing 3M's portfolio of 13,000 domain name registrations) and tied up key internal personnel on the lawsuit (including testimony from the "head of information technology and the executive vice-president of SGM"). The cost of a lawsuit isn't measured just by out-of-pocket attorney expenses but by overall opportunity cost, and on that basis, this lawsuit tied up valuable resources.
Finally, the rational decision-maker multiplies the cost-benefit amount by the probability of winning, and it seemed clear to me that this lawsuit had bad odds from the get-go. The ACPA claim was destined to lose because on the high "bad faith" standards (it also makes me wonder why SGM didn't try the UDRP first) and the fact that 3M had clear legitimate rights at the beginning. The potential success of the unfair competition claim is naturally less clear, but even if SGM won this claim, they had almost no chance of recovering meaningful damages or attorney's fees. As a result, I can't see a scenario where this was a breakeven lawsuit from the beginning. Given the low odds of success, this just seems like a clearly futile waste of money from day 1.
[A personal note: I'm out for the rest of the week for the Jewish holiday and a trip to the heartland. I'll probably next see you again next week. L'shanah tovah tikatev v'taihatem!]
Posted by Eric at 09:53 AM | Domain Names , Marketing , Search Engines , Trademark | TrackBack
September 10, 2008
DMV.org Hit With SEO-Degrading Injunction--TrafficSchool.com v. eDriver
By Eric Goldman
TrafficSchool.com, Inc. v. eDriver, Inc., 2008 WL 4000805 (C.D. Cal. June 4, 2008). Permanent injunction entered Aug. 28, 2008.
[Note: I missed this case when it first came out. I recently learned about the case from Rebecca, and it's such an interesting case that it's worth blogging about at this comparatively late date. Also, just today the defendants signaled their intent to appeal, so the case is still very much alive and active.]
This case involves websites referring consumers to traffic schools and driver's education courses, a business that appears to be both lucrative and cutthroat. The plaintiffs allege that the operators of DMV.org, a referral site, engage in false advertising. The gist of the plaintiff's argument is that DMV.org falsely implies an affiliation with government DMVs, and therefore consumers believe that linked-to vendors are being recommended by a government agency. Naturally, the implicit government imprimatur on a traffic school or driver's ed course should significantly bolster consumer demand, so the plaintiffs feel disadvantaged in the marketplace. Oddly, both parties agreed that the plaintiffs' websites had better conversion than DMV.org.
70-80% of DMV.org's traffic comes from search engines due to favorable search engine indexing (in 2006, the site was the #2 organic Google link for "DMV") and aggressive search engine advertising. Consumers who reached DMV.org were shown text and graphics designed to enhance the site's credibility/authority and perhaps exacerbate visitors' perceptions that a government agency operated the site, although there was a small footer disclaimer. After the lawsuit, DMV.org was redesigned to reduce the possibility of consumer confusion about any government affiliation, but the court recounts anecdotes that consumers were confused both before and after the redesign. As a result, the court finds that the plaintiffs established a prima facie case of 43(a) false advertising.
However, the court determines that the plaintiffs have "unclean hands" because they too had registered and used various domain names containing "DMV" and had explored advertising on DMV.org. Due to their unclean hands, the court denies the plaintiffs any damages or attorney's fees.
The court does grant an injunction requiring DMV.org to display a mandatory "acknowledgement page" (we might call it an interstitial or landing page) telling consumers that the site is unrelated to any government agency and requiring them to affirmatively click through. See the page here. My hypothesis is that such an acknowledgement page wrecks DMV.org's search engine indexing by preventing the robots from seeing the page content (unless DMV.org uses grey hat/black hat techniques to present a different page to search engine robots). In partial support of that argument, when I searched today for "DMV" at Google, the site was 4th in the organic results--still excellent for such a popular term, but down from their #2 ranking in 2006. (Their continued good placement may be due to their PR7--which has been juiced by links from state government agencies that mistakenly thought it was an official site). Thus, an injunction requiring a mandatory acknowledgment page effectively will dramatically reduce the traffic--and the value--of an SEO-driven site. The defendants have also made post-injunction filings saying that a lot of visitors are backing away due to the acknowledgement page. Accordingly, the defendants are claiming that the injunction could be fatal to their business.
This suggests a possible lesson to learn from this case. The defendants had a great domain name (DMV.org) that they managed to build nicely, but they may have too aggressive about stoking consumer expectations about their affiliation with the government. The consequence of that aggressiveness is a potentially business-ending injunction, rendering the domain name nearly worthless. If the defendants hadn't played so close to the line, perhaps they would have lost some revenue but might have been able to maintain the domain name's value in the long run.
Today, the defendants filed a variety of motions indicating that they plan to appeal the ruling and asking the court to stay the injunction during the appeal. If the defendants can get the traffic-killing injunction lifted on appeal, I suspect they will consider it a win even if they have to write a check for damages.
Rebecca has more on the case.
Posted by Eric at 10:01 PM | Domain Names , Marketing , Search Engines | TrackBack
September 09, 2008
August 2008 Quick Links, Part 2
By Eric Goldman
Net Neutrality
* The FCC gets on Comcast’s case for deceptively blocking BitTorrent connections without disclosure. While I don’t know anyone who has defended Comcast’s behavior here, at the same time there is an undercurrent of concern about the FCC’s authority to regulate Internet activities. Could this be the FCC camel's nose in the Internet's tent? We will learn more about the FCC's authority because Comcast has appealed the FCC's decision.
* A topic I haven't seen discussed very much: how the doctrine of trespass to chattels intersects with net neutrality principles. The only article I found in a 60 second search on the topic was a couple of paragraphs in J. Gregory Sidak, A Consumer-Welfare Approach to Network Neutrality Regulation of the Internet, 2 J. Competition L. & Econ. 349 (2006).
Contracts
* Jacobsen v. Katzer (Fed. Cir. Aug. 13, 2008). This ruling has been hailed as a validation of open source licenses, but I’m not sure what to make of this opinion. If the opinion merely says that breach of a copyright license can support copyright infringement, that’s no big deal. However, among other conspicuous omissions, the court does not discuss how the licensor formed a contract in this case. Thus, if the court’s conclusion is that copyright owners can impose conditions on licensees’ enjoyment of their copyright without properly forming a contract, then this opinion could undo the entire scheme of online contract formation. For example, it could support a conclusion that browsewrap-style “contracts”/terms of use should be enforceable as conditions on the accessing of copyrighted web pages. See, e.g., Ticketmaster v. RMG.
* Interactive Retail Management, Inc. v. Microsoft Online, L.P., 2008 WL 3851691 (Fla. App. Ct. Aug. 20, 2008). This is a click fraud case I hadn't heard about previously. Microsoft won at the trial court on jurisdiction grounds. This court revives the lawsuit for more jurisdictional investigation.
* Jeff Neuburger on a Wisconsin case saying that the UCC governs contract formation via email instead of UETA.
* Request for your guidance. Wikipedia has some photos that simultaneously say they are released under both a Creative Commons license and the GFDL. See, e.g., this photo. The license terms are irreconcilably inconsistent. If someone wants to use such a photo, now what?
Competition Restrictions
* Edwards v. Arthur Andersen (CA Sup. Ct. Aug. 6, 2008). The Ninth Circuit was wrong to create a narrow restraint exception to B&P 16600, the California statute voiding non-compete clauses.
* XPEL Technologies Corp. v. American Filter Film Distributors, 2008 WL 3540345 (W.D. Tex. Aug. 11, 2008). Rebecca on an odd case involving (once again) the DMCA anti-circumvention provisions as an anti-competition tool.
Miscellaneous
* Two interesting studies recently about people’s response to spam. Despite the animosity, a quarter of consumers have responded to cellphone spam and 30% say they have made purchases in response to spam. For more complementary statistics and my attempt to explain this seeming dichotomy, see here.
* The First Circuit issued an interesting DMCA 1201 case that I haven’t seen discussed. The BNA summary: “District court properly granted summary judgment to plaintiff cable television service provider on claim that defendants violated Digital Millennium Copyright Act by selling low-frequency signal filters, within plaintiff's service area, that were capable of bypassing plaintiff's pay-per-view billing mechanism, since plaintiff's pay-per-view delivery and billing system is technological measure that effectively controls access to copyrighted works, and digital cable filter allows subscribers to "avoid" or "bypass" that technological measure (CoxCom Inc. v. Chaffee, 1st Cir., 8/4/08)”
* AP v. Moreover settles. My initial post on the lawsuit.
* Funny YouTube video: "Here Comes Another Bubble," set to the tune of Billy Joel's "We Didn't Start the Fire"
Posted by Eric at 08:49 AM | Content Regulation , Copyright , Licensing/Contracts , Marketing , Search Engines , Spam | TrackBack
September 02, 2008
eBay Cracks Down on Cookie Stuffing--eBay v. Digital Point Solutions
By Eric Goldman
eBay, Inc. v. Digital Point Solutions, No. 5:08-cv-04052-PVT (N.D. Cal. complaint filed Aug. 25, 2008)
It is exceedingly rare for marketers to sue affiliates who are trying to game their affiliate programs. I'm sure there have been other lawsuits, but frankly I'm drawing a blank. (The only relevant precedent that came to mind was Google's tepid enforcement actions in 2004/2005 against click frauders--see Google v. Auction Experts and US v. Bradley). [Update: A reader reminded me of Land's End v. Remy, which is an on-point precedent.] The more typical remedy when commission fraud is taking place is to cancel any unpaid commissions and write off the rest as a cost of doing business (or an uncollectible painful lesson). But if someone gamed the system big--I mean, really big--maybe it would be worth hiring fancy and very high-priced counsel to go see what they might be able to retrieve...
eBay isn't saying how much it got taken for by the defendants in the case. The complaint was conspicuously silent on that juicy detail. However, the amount appears to be enough that eBay hired the premium law firm O'Melveny & Myers for a glorified collections effort. Either that, or eBay has decided to send a remarkably expensive message to other potential fraudsters.
The complaint alleges that the defendants engaged in a cookie stuffing campaign to hijack commissions through Commission Junction. Cookie stuffing occurs when a fraudster places a cookie on a third party computer that will cause the fraudster to get paid a commission that the fraudster didn't earn legitimately by doing the things that the marketer wanted to pay for. In this case, eBay alleges that the defendants used a clever technical exploit to put cookies on users' computers even though the users had not seen the requisite ads. The complaint also alleges that the defendants deployed some tricks to cover their tracks, like deliberately not cookie-ing computers in San Jose and Santa Barbara, the homes of eBay and Commission Junction respectively, to keep employees of those companies from spotting the marauding cookies.
If in fact the defendants engaged in cookie stuffing, I hope eBay nails them. However, I must say that some of eBay's legal arguments made me nervous. eBay's alleged causes of action include:
* CFAA (18 USC 1030). The allegation is that presenting a bogus cookie to eBay's servers was a misuse of the servers. Hmm...
* fraud. Similarly, the allegation is that the defendants caused web users to make a misrepresentation to eBay's servers by presenting a bogus cookie. Hmm again...
* CA Penal Code 502. There are very few cases interpreting 502, which isn't necessarily a bad thing because the statute is so broadly over-inclusive that everyone violates it routinely. Here, it looks like the lawyers weren't quite sure how to fit cookie stuffing into the statute. Take a look at para. 60 and let me know if you agree that this is an odd pleading.
* a civil RICO conspiracy claim. Given that eBay is being sued for RICO claims in the Mazur case (and, I'm sure, others), I would think eBay would want to avoid building new legal precedent that could be applied against them in other cases.
Reading the list of causes of action, I was surprised that there wasn't a more squarely applicable cause of action that governed cookie stuffing (however, I will confess, none came to mind as I drafted this post). Maybe this is due to the fact that eBay rather than Commission Junction is the plaintiff. If there isn't a better cause of action, then perhaps there is a hole in the law. However, I'm keeping my fingers crossed that a judge won't bastardize existing legal doctrines to plug it.
Posted by Eric at 09:23 AM | Licensing/Contracts , Marketing , Privacy/Security | TrackBack
August 28, 2008
SEC Proposes that Companies Should Be Liable for Content Linked from the Company's Website
By Eric Goldman
[Note: I haven't had a chance to blog the Veoh case--coming soon!]
The Securities and Exchange Commission (the SEC) is proposing an interesting policy with respect to a securities issuer linking to discussions about it. See pages 31-37 of this document. Effectively, the SEC is proposing that a securities issuer can be liable for any misstatements on linked pages if "the context of the hyperlink and the hyperlinked information together create a reasonable inference that the company has approved or endorsed the hyperlinked information." The SEC's discussion about linking also has some interesting and largely exceptionalist discussion about the ontological meaning of a link.
At minimum, the SEC's proposed position may create a fascinating doctrinal clash with 47 USC 230, which seems to preempt any liability for content on third party websites--even if the linker "endorses" the linked content, and even if the SEC says otherwise (unless the SEC makes it part of federal criminal law, which is excluded from 230's immunization). If anyone is interested in working with me to submit a comment to the SEC (due Nov. 5) to explain why 47 USC 230 may preclude the SEC's approach, let me know.
This proposal raises an even broader issue how 47 USC 230 overlays on securities laws generally. I can't really think of a defendant who has litigated 230 as a defense to securities fraud claims, but it seems like a tenable defense for any online securities marketing done by third parties--a result which might wreak havoc on existing secondary doctrines of civil liability for securities fraud. This looks like an excellent but complicated paper topic.
UPDATE: James Grimmelmann takes exception to my reference of the SEC's policies as exceptionalist. I didn't build out the concept in this brief blog post, but I am thinking about making it part of the comments to the SEC, so I'm planning to elaborate on why I think it's exceptionalist soon.
Posted by Eric at 06:10 PM | Derivative Liability , Marketing | TrackBack
August 27, 2008
7Search Sues McAfee For Red Flagging It
By Eric Goldman
7Search.com v. McAfee, Inc., 1:2008cv04831 (N.D. Ill. complaint filed Aug. 25, 2008). The Justia page.
I don't have a good sense of how many lawsuits have been filed against anti-spyware vendors for classifying third party software as "adware" or "spyware." I've blogged on a few (including Kaspersky, PC Tools and Symantec v. Hotbar), and Ben Edelman maintains a larger catalog of such lawsuits (not sure how up-to-date this is). However, I don't know if these lawsuits are relatively rare (as Ben's chart implies) or if they are multitudinous but most quietly fly under the radar screen.
If there aren't many unpublicized lawsuits, that may reflect that suing an anti-spyware vendor over its classification decisions almost never makes sense. First, many vendors have a private adjudicatory/appellate process that resolves many potential disputes without a lawsuit. Certainly, most vendors don't want to make errors, which undermines their own credibility, and most reputable vendors want to fix their mistakes. Second, lawsuits bring generally unwanted publicity to the plaintiff, calling extra attention to their alleged deficiencies and bringing out all of the gripers. Third, the costs of the lawsuit may be more than the value of any frustrated transactions. Finally, many of the lawsuits have low probabilities of legal success for the reasons I'll discuss in a moment. So there is good reason to believe classification-related lawsuits such as this one are rare. (I'm not saying that grumbles or C&Ds are rare; I'm just referring to formal lawsuits).
In this lawsuit, 7Search says that it was in the toolbar business but stopped offering downloads from its site in 2003. However, McAfee's SiteAdviser gives 7Search the big red X and says "Feedback from credible users suggests that downloads on this site may contain what some people would consider adware, spyware, or other potentially unwanted programs." 7Search claims that this statement is false because it isn't offering any downloads at all. 7Search thus alleges false advertising (Lanham 43(a)), deceptive trade practices, defamation and unfair competition.
The most obvious barrier to 7Search's lawsuit is 47 USC 230. Both (c)(1) and (c)(2) could be implicated. (c)(1) is less likely, but if in fact McAfee is republishing information from third parties (as suggested by the statement's reference to "credible users"), they may be able to claim (c)(1) for the republication. Either way, (c)(2)--the immunization for filtering decisions--is directly on point and potentially immediately fatal to the lawsuit. Zango's lawsuit against Kaspersky was soundly and quickly knocked out on 230(c)(2) grounds (though that is now on appeal to the Ninth Circuit), and a district court in Illinois gave broad deference to the Zango ruling in finding that Comcast could claim 230(c)(2) for email filtering decisions.
At the same time, 7Search alleges that McAfee's classifications were in bad faith. If so, then 230(c)(2) wouldn't apply even under the liberal Kaspersky or Comcast approaches, both of which required subjective good faith. We'll have to see how McAfee responds to determine if 7Search's allegation has any chance of getting traction.
There are two other possible holes in the potential 230 coverage for this lawsuit. First, courts have been inconsistent whether a false advertising 43(a) claim under the Lanham Act fits within the "IP" exclusion to 230. Second, most of 7Search's gripe goes to McAfee's statement that bad downloads are available--words chosen by McAfee to describe its filtering decision. It remains unclear if 230(c)(2) protects an intermediary's characterization of its filtering decision as much as it protects the filtering decision itself--just like 230(c)(1) may protect against liability for third party information but may not protect against marketing representations rendered untrue by third party content or actions.
In any case, I think this lawsuit and others over classification decisions raise interesting and important issues that I plan to explore in my Economics of Reputational Information project. We want skillful intermediaries to digest the overwhelming amount of information available in the marketplace and make reputational judgments that speed up our consumer decision-making. On that basis, we definitely don't want reputational judgments removed from marketplace actors and put into the hands of the judges. However, we also want the reputational intermediaries to make factually accurate judgments because their misjudgments also could distort marketplace decision-making.
Posted by Eric at 03:54 PM | Adware/Spyware , Derivative Liability , Marketing , Trademark | TrackBack
August 20, 2008
Competitive Pop-up Ads Aren't Unfair Competition or Tortious Interference--Overstock v. SmartBargains
By Eric Goldman
Overstock.com, Inc. v. SmartBargains, Inc., 2008 UT 55 (Utah Sup. Ct. Aug. 19, 2008)
In light of the death of adware and the fact that almost all of us have moved on, it is jarring to see adware opinions still emerging. This case, percolating in the courts four years, is quite a throwback.
In 2004, Overstock sued SmartBargains for buying adware-delivered pop-up ads that were triggered by user visits to Overstock.com. There have been a lot of keyword advertising cases since then, but this case is unusual because (for reasons not clear to me) Overstock did not make the more typical trademark infringement claim or even the less common trademark dilution claim.
Instead, Overstock asserted three causes of action: (1) violation of the initial Utah Spyware Control Act passed in 2004, (2) unfair competition, and (3) tortious interference with prospective business relations. The Spyware Control Act claim was mooted when the statute was deemed unconstitutional and further mooted when the legislature amended the law, so Overstock did not pursue that claim further. The district court also ruled against Overstock on the other 2, and Overstock appealed to the Utah Supreme Court. [for reasons that aren't clear to me, this case apparently bypassed the Utah appeals court.]
The Supreme Court had little difficulty disposing of the remaining claims. The pop-up ads didn't constitute unfair competition (in Utah, an anti-passing off claim) in this case because SmartBargains' pop-ups appeared in a separate window and displayed the SmartBargains' logo. The tortious interference claim gets tossed for exactly the right reason--competitive ads are a good thing, not bad. The court says "SmartBargains’ pop-ups indisputably exist to compete with Overstock. Competition is not an improper purpose, even though other byproducts of competition may exist." Case dismissed.
In one sense, this case isn't all that important. With respect to lawsuits over competitive online ads, most of the action relates to trademark infringement and particularly what constitutes a trademark use in commerce. But this case is important because it's fairly typical for plaintiffs in those lawsuits to add a laundry list of additional claims with the hope that something sticks. As this case shows, the laundry list claims are junky and easily disposed of, and a state supreme court ruling to that effect is a nice and useful precedent for defendants.
Even so, I wonder about the political ramifications of this ruling. Overstock's attitude towards keyword advertising has been erratic. On the one hand, it went to the Utah legislature to protest the Utah Trademark Protection Act because it apparently buys keyword ads on third party trademarks. On the other hand, it supported Utah's initial Spyware Control Act, it was the first to try to take advantage of the law, and it was willing to pursue this silly lawsuit for over 4 years. In response to this loss, will Overstock flip--just like its Utah Internet retailing peer 1-800 Contacts flipped--and go seek out a friendly and easily persuaded Utah state legislator to give it a tailor-made anti-keyword advertising statute? Stranger things have happened in Utah...
HT: Evan Brown
Posted by Eric at 07:15 AM | Adware/Spyware , Marketing , Trademark | TrackBack
August 08, 2008
Affiliate Liability Extravaganza
By Eric Goldman
[Note: I recently published a version of this article at InformIT. Here's the pre-edited version I sent them.]
Introduction
This article discusses marketers’ liability for the actions of their marketing affiliates (what I refer to as “affiliate liability”). The affiliate liability issue has become red-hot recently because numerous plaintiffs have taken aggressive legal positions seeking to expand the boundaries of affiliate liability. In three recent rulings, courts have emphatically rejected these expansive liability arguments. Even so, it seems likely that plaintiffs will continue to look for ways to expand affiliate liability, and despite the favorable rulings, defendants often settle a lawsuit alleging affiliate liability rather than establish their rights in court.
Affiliate Marketing—Good and Bad
Marketers create affiliate programs to outsource marketing decisions to domain experts. For example, independent third parties may have better or cheaper access to subcommunities of potentially interested consumers than a marketer’s employees. An affiliate marketing program compensates these local experts for work and expertise involved to take the marketer’s message to those consumer communities. When it works properly, affiliate marketing programs can play an important role in the broad “invisible hand” economic phenomenon of allocating scarce resources to consumers who value them the most.
Affiliate marketing doesn’t always have this salutary effect. Affiliate marketing programs create payoffs to motivate affiliate behavior, and inevitably some affiliates will try to obtain the payoff without doing the desired activity. Thus, even if the marketer would prefer otherwise, some affiliates might do “whatever it takes” to get paid, including using false advertising or illegitimate marketing mechanisms. Further, the fact that the marketer outsources some choices to affiliates (a necessary part of any affiliate program) can lead to “diffuse responsibility” where the marketer and affiliates point fingers at each other if something goes wrong. Sometimes, when there are multiple tiers of affiliates, it can become effectively impossible to assign responsibility for the wrongdoing.
To bypass these legal entanglements, plaintiffs have sought ways to hold marketers vicariously (automatically) liable for their affiliates’ actions. However, these efforts “break” standard tort law by trying to treat independent contractors as if they are principal-agents without the requisite supervision or authority that typically triggers agency liability. As a result, overexpansive theories of affiliate liability cause marketers to internalize too many costs, curtailing potentially socially beneficial marketing activities or leading to overinvestment in socially wasteful liability minimization schemes.
Plaintiffs Gone Wild: Two Recent Efforts to Expand Affiliate Liability
There have been countless affiliate liability enforcement actions, but I’ll focus on two recent initiatives.
New York Sales Tax Law
State and local taxing jurisdictions have long coveted a way to impose sales tax collection responsibilities on non-resident Internet vendors. In general, these efforts have been stymied by the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which requires a vendor to have a physical presence in the jurisdiction before the taxing entity can impose sales tax collection obligations on it.
New York, however, developed a nifty workaround. In April, it passed a law (Chapter 57, N.Y. Laws of 2008) declaring that a vendor’s marketing affiliates in New York constituted a physical presence in New York by the vendor. If so, New York can impose sales tax collection obligations on remote vendors due to their New York affiliates. As part of its crafty plan, New York tried to induce compliance with a carrot—if remote vendors voluntarily agreed to collect and pay sales tax from New York residents going forward, then New York would grant them amnesty for any back sales tax collection obligations.
Neat trick, but…a small problem: affiliates are independent contractors of the vendor, so this effort to treat them as legally related entities surely doesn’t comply with the Constitution. I suspect a court will confirm this flaw because both Amazon and Overstock.com have sued New York over the law. At the same time, to minimize its risk, Overstock has also tossed all of its New York affiliates overboard. One might question the wisdom of the New York legislators prompting marketers to cut off opportunities for New York online entrepreneurs.
Trademark Owners Claiming Marketers Are Liable for their Affiliates’ Marketing
Another trend: trademark owners are trying to hold a marketer liable for the alleged trademark infringement committed by its affiliates, such as when affiliates purchase the third party trademark as a keyword trigger for search engine ads. Plaintiffs have alleged affiliate liability in at least three lawsuits in the past couple of months:
* DSW v. Zappos.com (S.D. Ohio complaint filed May 12, 2008). For more, see SEOmoz.
* NameSafe v. LifeLock (M.D. Tenn. complaint filed June 26, 2008). For more, see Techdirt and News.com.
* Rosetta Stone v. Rocket Languages (C.D. Cal. complaint dated July 2, 2008). For more, see the WSJ Law Blog.
Courts Weigh In—and Plaintiffs’ Expansive Theories Don’t Fare Well
The efforts to extend liability in the sales tax and trademark contexts are novel, and it’s hard to predict the final outcome because we have limited direct precedent to consult. However, looking at some recent rulings in other contexts, there is good reason to believe that both legal theories go way too far.
CAN-SPAM
Unlike many other areas of the law, CAN-SPAM (15 USC 7705 and 7706) specifically authorizes affiliate liability in the statute. The Federal Trade Commission (FTC) has routinely invoked this provision in its pursuit of marketers promoted by affiliate-initiated spam (for one of the more recent examples, see the FTC’s press release on one of its porn spam busts and settlements). Further, typically when the FTC targets a marketer on an affiliate liability theory, the marketer rolls over and settles rather than fight.
But…a small problem: the FTC’s expansive interpretation of the affiliate liability statute—the basis it has used to procure these settlements from marketers—may not actually reflect the law. In an outcome that didn’t get nearly the press it deserved, in an lawsuit against Impulse Media earlier this year, the FTC took its affiliate liability theories to a jury and lost. This is a huge verdict because (1) the FTC rarely loses in court, and (2) perhaps more importantly, when average citizens evaluate the FTC’s expansive affiliate liability theories, they may balk.
Oddly, the FTC didn’t take no for an answer. It subsequently asked the judge to enjoin Impulse Media even though Impulse Media won the jury verdict. Talk about chutzpah! Not surprisingly, the court declined the request. US v. Impulse Media, 2008 WL 1968307 (W.D. Wash. May 1, 2008).
In another lawsuit, ASIS Internet Services, v. Optin Global, Inc., 2008 WL 1902217 (N.D. Cal. March 27, 2008; unsealed April 29, 2008), a civil plaintiff, ASIS (a serial anti-spam litigant), invoked the CAN-SPAM affiliate liability provision in its anti-spam lawsuit against 20 defendants. One defendant never showed; 18 defendants settled up (as mentioned, the typical response); and only one defendant—Azoogle—persisted in court.
Azoogle is a lead generation company for upstream marketers, and it relies on downstream affiliates to help it generate leads for its clients. Some of those downstream affiliates generate leads via spam. In this ruling, the court rejects Azoogle’s liability for spam sent by its marketing affiliates:
Although ASIS has pointed to significant evidence that Azoogle, during the relevant time period, did little to investigate the third party vendors it engaged, there is no evidence in the record from which a jury could conclude that Azoogle, in contracting with Seamless Media, made a deliberate choice not to know that Seamless Media would engage third parties to send out spam on Azoogle's behalf. The evidence cited by ASIS to establish knowledge on Azoogle's part is entirely speculative. Even assuming it is true that the Emails were sent by a single individual and that the lead was typed into a web site that was copied from Azoogle's lowrateadvisors site, this is insufficient to show that Azoogle consciously avoided knowing that the Emails would be sent. Further, while ASIS relies primarily on the allegation that Azoogle failed to adequately investigate its third-party vendors, ASIS has pointed to no evidence that if Azoogle had investigated Seamless Media prior to entering into the Insertion Order, it would have learned facts sufficient to show that Seamless Media was likely to engage in CAN-SPAM violations. There is no evidence in the record that would put Azoogle on notice that Seamless Media, or Seamless Media's vendors, obtained leads from spammers. Indeed, the only evidence on this subject is that Seamless Media had a good reputation at the time, and was obliged by its contract with Azoogle to follow the law.
Adware
Another recent affiliate liability decision is the remarkable ruling in People v. Direct Revenue LLC, 2008 WL 1849855 (N.Y. Sup. Ct. March 12, 2008), another case that did not get the attention it deserved. Disclosure note: I helped file an amicus brief in this case.
In 2006, the NY Attorney General’s office (NYAG) made the apparent decision that adware vendor DirectRevenue needed to be shut down by any means necessary, and it launched a multi-front attack on DirectRevenue. It publicly posted a website with information about DirectRevenue that had no apparent purpose other than to denigrate DirectRevenue’s reputation. It bullied DirectRevenue’s advertisers, ultimately procuring, and then releasing a hyperbolic press release about, an insignificant settlement that spooked potential advertisers away from DirectRevenue. And finally, it sued DirectRevenue directly.
The NYAG’s actions had their desired effect. Perhaps due in part to the NYAG’s campaign to close DirectRevenue down, DirectRevenue did in fact go out of business. Congratulations to the NYAG for achieving its apparent goal.
But…a small problem: the NYAG’s assessment of DirectRevenue’s legitimacy may have, in fact, been itself lawless, because the court emphatically rejected all of NYAG’s legal theories. This might be amusingly ironic if the NYAG’s anti-DirectRevenue campaign wasn’t such a chilling and crushing misuse of governmental powers.
The opinion is worth reading in its entirety, especially where the court affirms the EULA formation and limits extraterritorial liability. However, apropos to this post, the court rejected DirectRevenue’s liability for allegedly illegitimate software installations made by its affiliates, saying “petitioner has not shown that respondent should be held liable for the actions of those third parties under a theory of agency or ratification, or otherwise.” The court explains:
Dismissal is required with respect to the 22 [installations by] third parties, who petitioner concedes were independent contractors rather than agents of Direct Revenue. A principal is generally not liable for the acts of an independent contractor because of the lack of control over how the contractor's work is performed (Chainani v. Bd. of Educ., 87 N.Y.2d 370, 380-81 [1995]). Neither may the principal be charged with the conduct of even more remote subcontractors (People v. Synergy6, Inc., Index No 404027/03 [Sup Ct N.Y. Co 2006][unpublished disposition][Attorney General's action for deceptive practices and false advertising under GBL dismissed as against email marketing company where fraudulent emails were sent by company retained by agent]). Although exceptions exist, such as where the contractor was negligently retained or supervised (Saini v. Tonju Assocs., 299 A.D.2d 244, 245 [1st Dept 2002]) or where the principal has ratified the wrongful acts (Kormanyos v. Champlain Valley Fed. Sav. and Loan Assoc. of Plattsburgh, 182 A.D.2d 1036, 1038 [3d Dept 1992]), the record here does not support any grounds for departure from the usual rule.
As noted, under the SDA, Direct Revenue contractually required its distributors to obtain consent of consumers consistent with the terms of the EULA. The SDA also forbade the distributors from holding themselves out as respondent's agents. Respondent was not authorized or obligated to control their work, particularly since many of them additionally acted as distributors for various other advertisers. Although in Sotelo v. Direct Revenue, 384 Supp2d 1219 (ND Ill 2005) the court upheld a cause of action against respondent for negligent supervision of distributors, the issue arose on a motion to dismiss and the court thus restricted its inquiry to the four corners of the complaint. Notably, the court stated that it was precluded at that procedural juncture from considering respondent's evidence that the distributors were independent contractors, evidence which, as here, included the SDA.
…
The theory that respondents ratified the alleged third party misconduct also fails. The allegations that respondent had general and/or constructive knowledge of some distributors' wrongful practices are insufficient to impose liability (see, Synergy6, supra; Del Signore v. Pyramid Sec. Servs., Inc., 147 A.D.2d 759, 760-61 [3d Dept 1989][mere knowledge of litigation and complaints against security company for undue force by guards insufficient to impose liability upon hiring firm]; see also Hamilton v. Beretta USA Corp., 96 N.Y.2d 222, 237 [2001]). Moreover, it is conceded that in those few instances in which respondent obtained actual knowledge of a distributor's misconduct, it took significant steps to modify its procedures. A finding of ratification cannot be found upon such facts, notwithstanding that respondent may have benefited financially from its relationship with the distributors before remedial measures were implemented (see Synergy6, supra).
It is my understanding that the NYAG has filed a notice of appeal in this case to preserve its options, but it is still deciding if it will pursue the appeal.
Unfortunately, I’m not aware of the Synergy6 opinion being available electronically, which is a shame because it’s an interesting and relatively early rejection of the NYAG’s expansive affiliate liability doctrines. Due to that ruling (which involved email marketing instead of adware), the NYAG already had good reason to suspect that its predicate theories were dubious, which makes its decision to pursue those theories against DirectRevenue even more lamentable.
Conclusion
This post highlights two seemingly inconsistent trends. Trend #1 is that plaintiffs (private actors or government agencies) are taking very expansive positions on affiliate liability. Trend #2 is that when tested, expansive affiliate liability theories are failing in the courts. These two trends seem to be in conflict with each other. My hope is that trend #2 becomes so strong that it overrides trend #1, i.e., plaintiffs and government actors get the message that they have gone too far.
Unfortunately, in the interim, many defendants will capitulate and settle an expansive affiliate liability claim—even if it’s lawless—because it’s the cheapest path to resolution or because the precedent isn’t strong enough to ensure victory. Perhaps some defendants will realize that the trend is in their favor and will fight back accordingly. More judicial clarity about the line between permissible and impermissible behavior would benefit everyone.
It is also possible that the legal ambiguities of affiliate liability will be resolved by statute. However, despite the defendants’ string of court victories, I see the chances of legislative intervention to curtail expansive affiliate liability doctrines as nil. If anything, it’s more likely that future legislation will codify liability expansion.
For a rare in-depth analysis of affiliate liability, see Jean Noonan and Michael Goodman, Third-party liability for federal law violations in direct-to-consumer marketing: telemarketing, fax, and e-mail 63 Bus. Law. 585-596 (2008) [ABA subscription required to download].
Posted by Eric at 08:04 AM | Adware/Spyware , Derivative Liability , Marketing , Spam , Trademark | TrackBack
August 07, 2008
July 2008 Quick Links, Part II (Non-IP Edition)
By Eric Goldman
Search Engines
* Google explains all of the ways that it reinterprets the actual search query provided by a consumer to deliver results for words the searcher didn't use. As I've said before, Google's intermediation makes it impossible for a judge to assume that a defendant's website was ranked based on the search terms selected by the searcher.
* In the vein of In re Yahoo, Google was hit with two class action lawsuits alleging that Google failed to disclose that AdWords ads were going to be placed on undesirable pages liked parked pages. See Levitte v. Google (complaint and Justia page) and RK West v. Google (complaint and Justia page).
* Google was denied attorneys fees in the long-running Parker v. Google case. Parker v. Google, Inc., 2008 WL 2600299 (E.D. Pa. June 30, 2008).
Wikipedia
* Defamation lawsuit against Wikimedia tossed per 230. I've been waiting for the actual ruling to do a complete writeup. If you see it, please pass it along.
* NYT: "Wikipedia Tries Approval System to Reduce Vandalism on Pages." Surprised?
Trespass to Chattels
* In the latest development in Oracle v. SAP/TomorrowNow, SAP has shut down TomorrowNow, the subsidiary that prompted the lawsuit from Oracle. The Second Amended Complaint expands the finger-pointing at SAP for supervising its subsidiary. Still unresolved: the size of SAP's check to Oracle, and possible jailtime for TomorrowNow folk.
* Thomas O'Toole: Illinois adds anti-scraping provision to its attorney discipline website to block Avvo's crawlers.
Marketing
* 50 Cent is back in court on another questionable legal theory (see our first deconstruction of his litigation tactics). This time, Taco Bell tried a quasi-ambush marketing stunt to get something for free that he thinks they should have paid for.
* Rebecca on the latest ruling in NetQuote v. Byrd, the "lead fraud" case. Also, the rul