Another Federal Court Dismisses CAN-SPAM Claims Due to Lack of Standing – Melaleuca, Inc. v. Hansen

[Post by Venkat]

Melaleuca, Inc. v. Hansen, No. CV 07-212-E-EJL-MHW (D. Idaho; Sept. 30, 2010)

I blogged in June about a CAN-SPAM case in the District of Idaho involving CAN-SPAM and state law claims asserted by Melaleuca, a “multi-level marketing company,” against Daryl Hansen. Melaleuca is the registrant of “iglide.net” domain name. Melaleuca provided its “marketing executives” internet access and email services “through a third-party Internet service provider.” Hansen allegedly sent emails to individuals at their “iglide.net” email addresses, and Melaleuca asserted CAN-SPAM and state law claims based on Hansen’s conduct. The magistrate judge (citing Gordon v. Virtumundo) found that Melaleuca was not a bona fide ISP, and as a result, recommended dismissal of the CAN-SPAM claims, and recommended that the court decline to take jurisdiction over the state law claims.

Melaleuca objected to the magistrate judge’s recommendation. The district judge overrules Melaleuca’s objections, and finds that Melaleuca is not entitled to bring claims under CAN-SPAM because it is not a bona fide ISP. As the court finds:

Melaleuca provides email and internet access through a third party internet service provider, IP Applications. Melaleuca does not own or operate IP Applications. Melaleuca does not have access or control over the hardware that enables internet access to iglide.net customers. Melaleuca does not control the spam filters applied to emails by IP Applications.

As such, the court finds that Melaleuca does not fall within the limited class of plaintiffs who can bring claims under CAN-SPAM. Melaleuca argued that it had obtained an assignment of claims from IP Applications, but the court notes that this occurred “after [Melaleuca filed] its complaint and before [Melaleuca filed] its response.” Since standing is determined at the time of filing, Melaleuca’s attempt to create standing through the assignment fails. The court also finds that Melaleuca was not “adversely affected” by the emails at issue. While the court agrees with Melaleuca that “spam ‘in general’ increases the cost [Melaleuca] has to pay to its ISP,” the court finds that “Melaleuca has not established any direct adverse affect or additional costs” due to the emails at issue. The court also rejects Melaleuca’s speculation that it somehow lost “goodwill” based on the six complaints it received due to the emails at issue.

Surprisingly, the court dismisses the CAN-SPAM claims without prejudice. I may be missing something, but as the court notes, although Hansen filed a motion to dismiss, the magistrate judge converted the motion into a motion for summary judgment and properly considered the motion under summary judgment standards. The court’s determination on the no “adverse effect” issue should be conclusive, and Melaleuca should not get another shot at asserting these claims (and neither should IP Applications, since it assigned the claims to Melaleuca).

Even more surprisingly, Melaleuca is appealing this decision. I can’t see the Ninth Circuit viewing this appeal with much favor. Additionally, as I mentioned in my previous post on this case, Melaleuca may have to deal with an adverse fee award, since Hansen (as the prevailing party) may be entitled to fees under CAN-SPAM.

Added: John Levine comments on this ruling at CircleID (“Yet Another Unfortunate CAN SPAM Case“). John notes an interesting quote from the court’s order:

[T]he harm must be both real and of the type experienced by ISPs. While the harm need not be significant in the sense that it is grave or serious, the harm must be of significant to a bona fide IAS provider, something beyond the mere annoyance of spam and greater than the negligible burdens typically borne by an IAS provider in the ordinary course of business.

While John concludes that the judge here correctly followed the law, he finds that Ninth Circuit precedent is really the problem: “[the] unfortunate fact is that if you want to have any hope of winning a CAN SPAM case, don’t file it on the west coast.” I’m not so sure about this. This case is one of many (many) examples of CAN-SPAM plaintiffs going to court with flimsy damage arguments. While the line quoted by John hints at an evidentiary problem that a real CAN-SPAM plaintiff could face, the evidence in this case was clear that Melaleuca did not offer any internet access services. It contracted with a third party to do so, and then tried to assert the third party’s claims relying on a belated assignment of claims. Courts have sniffed out these attempts to “create damages” time and time again. Also, it’s worth noting that the seminal appeals court precedent that was unfavorable to CAN-SPAM plaintiffs came from the Fourth Circuit (in Mummagraphics), and not the Ninth Circuit. (See “Fourth Circuit Rejects Anti-Spam Lawsuit–Omega World Travel v. Mummagraphics.”)

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