Another Cautionary Tale of Joint Website Ownership–TEG v. Phelps [UPDATED]

By Eric Goldman

Third Education Group, Inc. v. Phelps, 675 F. Supp. 2d 916 (E.D. Wis. Nov. 25, 2009). Motion to amend denied January 19, 2010.

[UPDATE: In the initial version of this post, Richard Phelps’ story was part of a broader narrative about the potential problems of website co-ownership. However, his behavior in response to my post warrants its own discussion. Seeking to redress his perceived problems with my initial post, he has done all of the following:

* he emailed me multiple times

* he emailed my boss (the Dean) multiple times

* he emailed my colleagues multiple times

* he emailed an unrelated blogger at least two times

* he had his attorney call me to request changes to my post

* most recently, he has promised/threatened that he “will be filing a complaint about your behavior with California authorities and, for that matter, any others that might be available.”

All of this in response to a relatively obscure blog post that currently sees de minimis traffic. The stress of being uncertain about Phelps’ next moves to pressure me has literally kept me up at nights. As a result, I have decided to make changes to this post to respond to a detailed email that Phelps sent me on May 16. Normally I would post or extensively quote his May 16 email so you could read his words verbatim and form your own conclusions, but he asked me not to post it; nor can I characterize his views of the post’s deficiencies in my own words for fear of introducing new ambiguity that might generate further grist. Nevertheless, my hope is that the modifications below resolve Phelps’ concerns so that he will leave me alone. To facilitate that result, I sent him the following email:

“I am sorry for any aggravation my blog post has caused you. I have modified my blog post to acknowledge every point you raised in your May 16, 2010 email. Having done so, please do not contact me directly in the future by email, phone, letter, in person or otherwise. If, for some reason, you believe there is still something we need to discuss, please have your attorney or other representative contact me; I am willing to speak with him or her. Although my colleagues have not mentioned your emails to me (other than the Dean, who believes this is an academic freedom issue), I am sure they would be grateful if you did not contact them either.”

Most of Phelps’ concerns were based on my recap of the court’s opinion. I encourage you to read the opinion yourself so that you can decide if I mischaracterized the opinion or if Phelps seeks to relitigate factual points that the judge decided against him.]

Corporate divorces are ugly. They may lack the high-stakes drama associated with child custody disputes, but in all other respects they can be just as emotional and messy as spousal divorces. Fortunately, parties to a corporate marriage can avoid some heartache by forming proper “prenuptial agreements.” Unfortunately, the courts are filled with examples of cases where this wasn’t done (or wasn’t done properly).

A year ago, I blogged on one such case, Mikhlyn v. Bove, a fine example of a web empire literally and perhaps irreparably split in two by a falling out of the principals. Today’s case, Third Education Group v. Phelps, offers up another cautionary tale of corporate divorce along those lines. If you are jointly running a website or blog and you haven’t properly documented your relationship with your compatriots, this post is for you.

In 2002, Phelps and Thompson decided to start an online publication focused on education policy called “Third Education Group.” They effectively formed a “voluntary association” (I believe the Wisconsin equivalent of an implied partnership) to implement the journal. [UPDATE: Phelps disputes the italicized language. I was partially referring to the court’s factual finding: “In early 2002, after recognizing that they shared mutual interests and were concerned that current educational policy publications were generally devoted to the ideology of one of the two major political parties, Phelps and Thompson began discussing creating an online educational policy journal that would offer a different, middle perspective. Efforts were made, largely by Phelps, to first see if their idea for a journal could be affiliated with an existing entity, or to obtain sponsors or funding for their project.”]

In 2004, on behalf of the voluntary association, Phelps registered two domain names and applied for a trademark registration, both listing only himself as the owner. [UPDATE: Phelps disputes the italicized language. Regarding the domain names, I was partially referring to the court’s opinion: “The undisputed evidence demonstrates that the domain names and were registered for TEG and were not simply Phelps’ personal website….Although registered in Phelps’ name, at the time he registered these domain names, the evidence clearly established that he was doing so on behalf of TEG.” The court’s discussion about the trademark registration is a little more complicated but was implicit in the court’s finding that the corporation automatically obtained all of the assets (including the trademark registration) generated by the voluntary association. The court says: “The evidence demonstrates that Phelps and Thompson intended TEG, Inc. to succeed the unincorporated association; there is absolutely no evidence to permit the court to conclude that Phelps and Thompson intended the unincorporated association to coexist alongside the corporation and to retain control of the trademark or any other property. The evidence demonstrates that in every way, the parties intended TEG, Inc. to be the successor to the unincorporated association.”]

In 2005, Phelps and Thompson formed a 501(c)(3) non-profit corporation to succeed the voluntary association. Phelps was president and a director of the corporation. Phelps and Thompson did not sign any type of assignment agreement to move the voluntary association’s assets into the corporation. [UPDATE: Phelps disputes the italicized language, pointing to an IRS Form 1023 that the relevant players signed. I was partially referring to the opinion’s language that: “the property of the association passed to the corporation, and the absence of an assignment does not affect TEG, Inc.’s right to the trademark.”]

In 2006, after an editorial dispute, the parties’ relationship turned sour. In response, Phelps locked off the corporation’s websites from further changes, and the corporation stripped him of his officer and director status. [UPDATE: Phelps disputes the italicized language. I was partially referring to the court’s language that: “The evidence demonstrates that by at least March 12, 2006, two days before the resolution and thus a time when it is undisputed that Phelps was both a director and president of TEG, Inc., he blocked Thompson (and anyone else associated with the corporation) from making changes to the corporation’s website.”]

Phelps pointed the domain names to his new venture, also called “Third Educational Group, Inc.” Meanwhile, locked out of its websites, the corporation registered new domain names, copied its old articles from the old website and then reposted them on its new website. [UPDATE: Phelps disputes the italicized language. I was partially referring to the court’s findings of fact: “After being locked out of its own websites, the Wisconsin corporation copied much of its website content from the sites now controlled by Phelps, and reposted it under the domain name”] Phelps then sent 512(c)(3) takedown notices to the new website host, which successfully put the new website offline. Cross-lawsuits ensued.

[UPDATE: In my prior post, I included a reference and link to a litigation recap from Thompson’s perspective. When Phelps’ attorney contacted me, his only request was that I remove the link. The attorney did not mention any concerns about other factual characterizations. If you would like to see Thompson’s perspectives about the litigation, you can find them through a search. Meanwhile, with the hopes that the link was, in fact, Phelps’ main irritant, and given its relatively inconsequential contribution to the post’s narrative, I have removed it.]

For aficionados of disputes over jointly developed online properties, you may recognize some common elements:

* the person who controls the domain name registrations has de facto control over the empire. [UPDATE: Phelps disputes the italicized inference for reasons I did not understand.] Yet another reminder to keep domain name registration contacts up to date.

* when a business relationship turns sour, it’s not unusual for one aggrieved participant to fight the other participant in every Internet venue where the other tries to resurrect the joint effort.

* it is almost impossible to imagine that the venture produces enough cash to economically justify the type of death spiral litigation it spawned. Instead, the litigation is usually about settling personal scores–typically the most expensive litigation around.

* courts often issue a “split the baby” ruling in these cases, rarely giving one side a clean victory over the other.

This case has a classic split-the-baby result. The court concludes:

* the corporation succeeded to the legal rights in the trademark “Third Education Group.” Phelps had argued that the trademark rights remained with the voluntary association, which would have given Phelps joint rights to the trademark.

* Phelps violated his fiduciary duties as an officer and director when he locked everyone else out of the company’s website. [UPDATE: Phelps disputes the italicized language. I was partially referring to the opinion’s language that: “it is the conclusion of this court that Phelps breached a fiduciary duty owed to TEG, Inc. by asserting and retaining personal control over the corporation’s domain names.”]

* Phelps’ 512(c)(3) takedown notices did not give rise to a 512(f) claim for misrepresented takedown notices because, for several reasons, Phelps had a subjective good faith belief in their legitimacy.

* although Phelps infringed the corporation’s trademark rights in “Third Education Group” and violated his fiduciary duties, the corporation could not show any damages from Phelps’ behavior and therefore did not get any damage awards. The court specifically rejected any claim under the Lanham Act’s fee-shifting clause for exceptional cases.

* the court also rejected the corporation’s emotionally punitive injunction requests and will take a closer look at the appropriate scope of injunctive relief.

So who won this ruling? Nominally, Third Education Group did because it won on the trademark and fiduciary duty claims, but it’s not that satisfying of a victory without any damages or a punitive injunction. As usual, then, the only possible winner in messy litigation is the lawyers, and even then only if they get paid.

For another recent example of a well-meaning but under-documented collaboration that devolved into bitter litigation, see LunaTrex v. Cafasso, 2009 WL 4506321 (S.D. Ind. Dec. 1, 2009), involving a team that came together chasing the $20M Google Lunar X prize but didn’t dot the is and cross the ts well enough to avoid a messy battle. As the court says:

After a lengthy discussion of numerous ideas that evolved, the group eventually chose the name LunaTrex. (As will be seen, with the benefit of hindsight it is clear that the group also should have spent some more time talking about organization, structure, ownership, and other legal formalities.)

I’ve written more about messy online divorces in my 2006 Co-Blogging Law article. I think the Third Education Group court did a good job being sensitive to the unintended consequences of a voluntary relationship going south. For example, the court says

Phelps had much more than a mere good faith belief that he was entitled to use the mark. This was not a case of an individual, for example, mistakenly believing he had a license. Rather, in the present case, the objective evidence was on Phelps’ side. He was the one who undisputedly came up with the mark. He was the one who paid to register the mark. He was the one in whose name the mark was registered. And he was the one primarily responsible for establishing the use of the mark. He did this, not as one person in a large organization, but rather as an individual who had joined with another collaborator and in doing so, likely without an understanding of the legal ramifications, formed an unincorporated association. (emphasis added)

This is consistent with the hope I expressed in my Co-Blogging article:

the common law typically can handle the idiosyncrasies of blogging in a sensible and contextually sensitive manner. In that respect, judges evaluating blogs should recognize that unexpected or counterintuitive rulings could significantly destabilize the blogging community. Fortunately, many of the legal doctrines discussed in this essay, including partnership and employment law, are naturally flexible. Judges should use that flexibility to balance the many considerations around blogging

[UPDATE: In Third Education Group, Inc. v. Phelps, 2009 WL 5216988 (E.D. Wis. December 30, 2009), the court had more to say about this litigation. I quote a portion of the court’s opinion (rather than provide a summary that might prompt a further response from Phelps):

“Phelps should not derive any benefit from the use of the thirdeducationgroup domain names. To do so would run afoul of this court’s order. Phelps acknowledges as much and agrees to be enjoined from use, but contends that he should be permitted to retain possession of the domain names, leaving them inactive. Phelps contends that he should be permitted to retain possession because he was the one who undertook and financed the initial registration; he paid for the registration and it is his name alone on the registration. Cynically, but based on the history between the parties, one might suspect that Phelps is motivated less by notions of principle and maybe seeks to retain the domain efforts as one last ditch effort to frustrate TEG, Inc.

On the other hand, perhaps there is a good reason why the relevant domain names should be left blank. When Phelps split with TEG, Inc., TEG, Inc. went on to establish itself at while Phelps continued to operate the thirdeducationgroup websites (at least until the court determined that the trademark did not belong to him, at which point the websites appear to have gone blank). If TEG, Inc. were to suddenly reappear on the thirdeducationgroup websites, individuals who may have previously understood that these websites were under the control of Phelps might be confused and believe that it is Phelps behind the sites rather than TEG, Inc. A primary purpose of federal trademark law is to prevent consumer confusion and ordering Phelps to surrender the domain names to TEG, Inc. might only exacerbate these problems. But this is only speculation by the court.

Principles of equity warrant that TEG, Inc. control the domain names. Thereafter, it will be the decision of TEG, Inc. as to what action to take, if any, in regard to these names. It is the conclusion of the court that the thirdeducationgroup domain names are the lawful property of TEG, Inc. As the court previously noted,

The undisputed evidence demonstrates that the domain names and were registered for TEG and were not simply Phelps’ personal website. Although registered in Phelps’ name, at the time he registered these domain names, the evidence clearly established that he was doing so on behalf of TEG. As such, the domain names belonged to TEG.

(Docket No. 138 at 13 (citations omitted).)

In failing to provide access to these websites to TEG, Inc., Phelps breached the fiduciary duty he owed to TEG, Inc. Returning these domain names to the control of TEG, Inc. is required to remedy Phelps’ breach of fiduciary duty. Accordingly, the court shall order Phelps to take all necessary actions to transfer or assign any interest in and control over the thirdeducationgroup domain names to TEG, Inc.

IT IS HEREBY ORDERED that for the reasons stated herein and stated in the court’s prior decision, (Docket No. 138), the court enters a permanent injunction, which is affixed hereto, containing the following provisions:

1. Richard Phelps is permanently enjoined and restrained from using “Third Education Group” or any confusingly similar term as a name or mark for any goods, services, internet domain names, websites, or organization or other entity regarding education research, policy, or theory.

2. Richard Phelps is permanently enjoined and restrained from diluting the distinctive quality of the name and mark “Third Education Group.”

3. Richard Phelps is permanently enjoined and restrained from representing that he retains or has had any affiliation with Third Education Group, Inc. during the period of this injunction.

4. Richard Phelps shall take all necessary steps to transfer all rights and interest he has in any domain name containing the terms Third Education Group acquired prior to March 14, 2006 to Third Education Group, Inc.

5. In accordance with 15 U.S.C. § 1119, the Director of the Patent and Trademark Office shall rectify the register with respect to the registration of any party to this action so as to identify Third Education Group, Inc. as the Owner / Registrant of the mark “Third Education Group.””]