More fundamentally, it may be necessary to reconsider the premise that an individual has no reasonable expectation of privacy in information voluntarily disclosed to third parties. E.g., Smith, 442 U. S., at 742; United States v. Miller, 425 U. S. 435, 443 (1976). This approach is ill suited to the digital age, in which people reveal a great deal of information about themselves to third parties in the course of carrying out mundane tasks. People disclose the phone numbers that they dial or text to their cellular providers; the URLs that they visit and the e-mail addresses with which they correspond to their Internet service providers; and the books, groceries, and medications they purchase to online retailers. Perhaps, as JUSTICE ALITO notes, some people may find the “tradeoff” of privacy for convenience “worthwhile,” or come to accept this “diminution of privacy” as “inevitable,” ***  and perhaps not. I for one doubt that people would accept without complaint the warrantless disclosure to the Government of a list of every Web site they had visited in the last week, or month, or year. But whatever the societal expectations, they can attain constitutionally protected status only if our Fourth Amendment jurisprudence ceases to treat secrecy as a prerequisite for privacy. I would not assume that all information voluntarily disclosed to some member of the public for a limited purpose is, for that reason alone, disentitled to Fourth Amendment protection.

Justice Alito, joined by Justices Ginsburg, Breyer and Kagan, declined to sign on to the majority opinion and concurred only in the judgment. In contrast to Justice Scalia’s 18th-Century-centric analysis, Justice Alito engaged the issues that are presented by the use of tracking technologies, not only in criminal cases but generally. His opinion was much more receptive to the “mosaic theory” expressed in the Court of Appeals ruling: that while limited tracking may not violate an individual’s privacy, sustained tracking may cross the line. This is a disagreement that was telegraphed to some extent in the oral argument in United States v. Jones.

Justice Scalia’s and Justice Alito’s respective views on how new technologies must be considered also echo their similar diametric divide in Brown v. Entertainment Merchant's Association (U.S. 2011). In Brown, the Justices agreed that video games are entitled to First Amendment protection, with Justice Scalia writing for the majority, that a video game is no different than a book. Justice Alito agreed with the result in Brown but suggested in a concurring opinion that video games are not the same as books, and that in the future. consideration would have to be given to the impact that this new technology might have on constitutional values.

Justice Alito takes a similar approach in United States v. Jones to his view in Brown. Although a point-by-point analysis of his opinion is beyond the scope of this blog post, it should be required reading (along with all the opinions in Jones) for technology lawyers interested in the attitude of the nation’s highest court toward developments in technology. Justice Alito argues for the “reasonable expectations of privacy” test, although recognizing the challenge that test may present in a world in which smartphone GPS tracking, closed circuit video monitoring, toll-road electronic and other electronic tracking may have on such expectations.

We’ll close with this quotation from Justice Alito's concurring opinion in Brown v. Entertainment Merchants Association, expressing sentiments that easily could find a place in his most recent opinion in Jones:

In considering the application of unchanging constitutional principles to new and rapidly evolving technology, this Court should proceed with caution. We should make every effort to understand the new technology. We should take into account the possibility that developing technology may have important societal implications that will become apparent only with time. We should not jump to the conclusion that new technology is fundamentally the same as some older thing with which we are familiar.

 

Judge Noce noted precedent in the Eighth Circuit, as well as other circuits, for warrantless GPS tracking in similar situations. Relying on that precedent, he concluded that the tracking did not constitute either a search or a seizure, nor did it violate the defendant’s First Amendment associational rights.

The GPS tracking of the defendant’s automobile was conducted by the public corruption squad of the FBI, whose agents tracked the defendant using physical surveillance techniques for an unspecified period of time. This personnel-intensive technique was later replaced by a GPS tracking device that was magnetically attached to the defendant’s automobile while it was parked on a public street near his residence. The result was 24-hour tracking of the defendant’s automobile over a three-month period. The tracking revealed, according to the Government, that the defendant’s employment time sheets were false.

In concluding that the installation of the device did not constitute a search requiring a warrant, the magistrate in United States v. Robinson relied on United States v. Marquez, 605 F.3d 604 (8th Cir. 2010), which involved GPS tracking of a drug suspect for six months. The court in Marquez concluded that the GPS tracking did not constitute a search because the defendant did not have a reasonable expectation of privacy in the exterior of his vehicle; the installation of the GPS tracker was “non-invasive” and the vehicle was in a public place when the device was attached.

Neither was there a seizure of the defendant’s property as a result of the GPS device installation, the magistrate concluded, referencing the Seventh Circuit ruling in United States v. Garcia, 474 F.3d 994 (7th Cir.), cert. denied, 552 U.S. 883 (2007). That ruling also focused on the non-intrusive nature of the GPS device and the fact that it was battery-powered and did not utilize the car’s power system; did not affect its driving qualities or carrying capacity or even alter the vehicle’s appearance.

The magistrate separately considered the use of the GPS device to obtain tracking information, and concluded that it did not constitute a search requiring a warrant, again relying on Garcia and Marquez, as well as the Ninth Circuit ruling in United States v. Pineda-Moreno, 591 F.3d 1212 (9th Cir. 2010).

The magistrate also discussed the District of Columbia Circuit Court of Appeals ruling that is now before the Supreme Court in United States v. Antoine Jones (captioned below, United States v. Maynard, 615 F.3d 544 (D.C. Cir. 2010). The Maynard opinion includes the notable passage that distinguishes the privacy implications of GPS tracking of a single public journey with prolonged, 24/7 GPS tracking of numerous journeys that cumulatively may reveal “information about one’s lifestyle, personal affairs, and other intimate matters.”

Judge Noce was unmoved by the so-called “mosaic theory” expressed in the Maynard opinion; in fact, he commented that the rulings in the Jones/Maynard case and the Marquez ruling were not so very far apart, and “disagreed in degree, not principle: Marquez permits warrantless use of a GPS tracker device ‘for a reasonable period of time’ while Maynard prohibits ‘prolonged’ warrantless GPS surveillance.” Although it should be noted, the Marquez ruling OK’d warrantless tracking over a six-month period, while the D.C. Circuit in the Jones/Maynard case had problems with tracking over a one-month period.

The oral argument before the Supreme Court in United States v. Antoine Jones appeared to reveal a court that was not so sure as Judge Noce of the right result with respect to GPS tracking. In fact, some commentators who heard the oral argument have judged the ultimate ruling in Jones as too close to call, including criminal law expert Orin Kerr, and Greg Nojeim, Senior Counsel for the Center for Democracy and Technology. Nojeim has even predicted that the result in Jones might cut across the Court’s traditional liberal/conservative lines. That would recall the result in another recent case in which the Court struggled with the implications of new technology: Brown v. Entertainment Merchants Association (U.S. June 27, 2011), in which the Court struck down the California violent videogames law. Justice Scalia, writing for a majority that included Justices Kennedy, Ginsburg, Sotomayor and Kagan, held that violent videogames were entitled to the same constitutional protection as violent books. The gist of his opinion is that use of new technology doesn’t justify the creation of new legal principles. Justices Thomas and Breyer each dissented, with Justice Breyer in particular expressing concern over the potential negative effects of new media such as videogames.

But of course, the Justices expressed attitudes toward new content delivery technology won’t necessarily map to their views on the use of GPS technology for surveillance.

If you have a spare hour, you can judge for yourself how the Court may rule on GPS tracking; the audio recording of the oral argument is available on C-SPAN.

Note also, that Magistrate Judge Noce’s opinion is a Report and Recommendation that may be overruled by the District Court. The parties’ objections to the Report are due on January 13, 2012.
 

(Of course, Colonial Americans probably didn’t have bulletin boards in their front yards, or if they did, it has escaped the notice of history. But they had town criers, newspapers, letters and tavern gossip, with which they managed to launch a Revolution. But I digress.)

The indictment charged violations of the federal interstate stalking statute, 18 U.S.C. §§ 2261A, which criminalizes the use of interstate communications to engage in a course of conduct with the intent to place a person in reasonable fear of death or serious bodily injury. As amended in 2006, the statute additionally criminalizes the use of interstate communications, including an interactive computer service, with the intent to harass or intimidate or cause “substantial emotional distress.” As the court in United States v. Cassidy noted, the 2006 amendments to the statute significantly broaded its scope.

Cassidy moved to dismiss the indictment, alleging that the statute was unconstitutionally overbroad and vague, and was unconstitutional as applied to him.

The court assumed for purposes of analysis that the tweets and blog posts that Cassidy was alleged to have published anonymously in fact inflicted substantial emotional distress on their target; the court described them as “anonymous, uncomfortable Internet speech addressing religious matters.” (The messages are catalogued in an appendix to the court’s opinion.) Nevertheless, the court concluded that Cassidy’s publications are not within one of the categories of speech that fall outside of First Amendment protection: “obscenity, fraud, defamation, true threats, incitement or speech integral to criminal conduct.” Citing both Reno v. American Civil Liberties Union (U.S. 1997) and the Supreme Court’s recent ruling in Brown v. Entertainment Merchants Association (U.S. 2011), the court commented: “Even though the Internet is the newest medium for anonymous, uncomfortable expression touching on political or religious matters, online speech is equally protected under the First Amendment….” Slip. Op. at 12.

The court rejected the Government’s argument that the Government has a compelling interest in protecting victims from emotional distress sustained through an interactive computer service, and further rejected the argument that the statute regulated conduct rather than speech. It is on this point that the court’s analogy between Colonial bulletin boards and blogs was brought to bear.

While prosecutions for making harassing telephone calls have been upheld, the court acknowledged, phone calls and e-mails are communications that are directed at a particular victim and received outside a public forum. In contrast, the court concluded, “Twitter and and Blogs are today’s equivalent of a bulletin board that one is free to disregard ….”

Having found that the statute was unconstitutional as applied to Cassidy, the court declined to reach his facial overbreadth and vagueness challenges to the statute.

It will be interesting to see if the court’s analysis holds up in other cases, either under the federal statute or under a similar state law. The Amicus Brief submitted by the National Center for Victims of Crime and Maryland Crime Victims’ Resource Center in support of the Government’s position pointed out that anti-stalking laws have been enacted in all 50 states, and some of those statutes encompass so-called “cyberstalking,” “cyberharassment” or “cyberbullying,” variously defined.

 

 

 

Whose Tweet Is It Anyway?

PhoneDog LLC v. Kravitz, No. 113474 (N.D. Cal. Nov. 8, 2011), involves a Twitter account that was used by an employee to publish product reviews and other messages on behalf of his employer. The handle on the account, “@PhoneDog_Noah,” incorporated both the employer’s name and the employee’s name. According to the employer’s complaint, the employee was quite successful in his marketing efforts using the account, generating approximately 17,000 Twitter followers.

When the employee quit, he retained the account and began using it on behalf of a competitor of the employer, having changed the handle on the account to his own name, “@noahkravitz.” The employer brought an action in federal court alleging claims of trade secret misappropriation, intentional and negligent interference with prospective advantage and conversion, and asserting damages in excess of the jurisdictional amount of $75,000. Specifically, the employer alleged that the value of each individual Twitter follower, according to “industry standards,” is $2.50 per month; multiplied by 17,000 followers, multiplied by eight months (the period of time over which the employee refused to turn over the account) yields damages of $340,000. In the context of determining whether the federal jurisdictional minimum was met, the court concluded that the employer’s calculation of the value of the account was sufficient, but only as a preliminary matter.

The court refused to dismiss the employer’s trade secret claims, finding that the complaint had sufficiently alleged that both the password and the names of the followers were protected trade secrets. The court also refused to dismiss the employer’s conversion claim finding that it had sufficiently alleged that it owns or has the right to possess the account, and that the employee knowingly or intentionally refused to relinquish the account.

But the court dismissed the employer’s intentional and negligent interference with prospective economic advantage claims, finding that actual disruption of the employer’s relationship with the Twitter followers and economic harm had not been sufficiently alleged.

Although the employer has been at least partially successful on some preliminary motions in this dispute, as a practical matter, nothing has changed and the employee still maintains control of the Twitter account. What could the employer have done differently to avoid this problem?

Whose Blog Is It Anyway?

Ardis Health, LLC  v. Nankivell, 2011 U.S. Dist. LEXIS 120738 (S.D.N.Y. Oct. 19, 2011), involves a situation similar to that in PhoneDog v. Kravitz, and is instructive on legal measures that an employer can take to improve its position with respect to a dispute over an online account. In Ardis, the employee had control over a number of social network and Web site accounts that the employer used to advertise its business, and was able to obtain a preliminary order requiring the turnover of the accounts.

The court concluded that the employer’s reliance on its online presence to advertise its business supported a finding of irreparable harm and the issuance of the preliminary injunction requiring the turnover of usernames and passwords enabling access to the Web sites and online service accounts controlled by the former employee. The court noted that the employer required access to the sites to continuously update profile information and pages and react to online trends, and that its inability to do so would have an unquestionably negative effect on its reputation and ability to remain competitive.

The court also suggested that the unauthorized retention of the account access information could form the basis for a claim of conversion, citing Thyroff v. Nationwide Mutual Insurance Co. (2d Cir. 2006). Unlike the situation in PhoneDog, where the employee claimed the right to control the Twitter account, the court in Ardis found that there was no dispute that the employer owned the rights to the accounts in question. The court noted that the employee had executed a Work Product Agreement that required, among other things, the return of the employer’s confidential information upon request, and providing that any breach of the agreement would cause the employer irreparable damage and injury.

Whose Tea Party Is It Anyway?

The Tea Party Patriots, a nonprofit organization that grew from a small group of like-minded activists to a force in U.S. politics, learned that disputes over ownership and control of online accounts can impair the ability of an nonprofit organization to pursue its business and require costly litigation to resolve.

One of the founders of the organization, Amy Kremer, registered domain names and set up a Web site and social network accounts on behalf of the organization in 2009. But Kremer was ousted from the group’s board of directors following a dispute over the group’s policies. Kremer retained control over some of the accounts, as well as an online e-mail list, allegedly after having changed the account password.

The group’s remaining board members filed suit against Kremer in Georgia state court. The board ultimately prevailed, but only after a week-long jury trial over the ownership of the accounts. No reported opinion was issued in this case.

Practical Lessons

One important difference between these three cases is that the Work Product agreement in Ardis v. Nankivell appeared to foreclose any argument over ownership rights in the accounts. In the employment context, employers should consider explicitly nailing down that issue even further in their proprietary rights agreements with employees, as well as their Internet use and similar policies that cover the use of company online accounts on behalf of the employer, with an express provision covering the ownership of such accounts.

Employers should also consider a practical protocol covering online accounts that requires registration in the name of the employer where possible, or inclusion of the employer's identifying information in the account registration. Duplicate recordation of account registration and access information in a place within the company’s control should also be required. Quick action by the employer to change account access information when an employee leaves may avoid the cost and delay involved in litigation to recover account control.

It is also important to note that this issue arises not only in the case of employees, but also in the context of agents and contractors as well. For example, often an advertising agency will register a Twitter account for a client, or a developer or designer will register a domain name, create a blog or other online presence. It is essential that the agreements with such agents expressly address ownership of the credentials to such accounts, and that the agent is expressly required to provide those credentials to its principal.

Furthermore, it should be noted that traditional editorial functions often include subjective judgments informed by political and financial considerations. *** Determining what motives are permissible and what are not could prove problematic. Indeed, from a policy perspective, permitting litigation and scrutiny motive could result in the "death by ten thousand duck-bites" against which the Ninth Circuit cautioned in interpreting § 230(c)(1) [citing Fair Housing Council v. Roommates]. *** As illustrated by the case at bar, finding a bad faith exception to immunity under § 230(c)(1) could force Yelp to defend its editorial decisions in the future on a case by case basis and reveal how it decides what to publish and what not to publish. Such exposure could lead Yelp to resist filtering out false/unreliable reviews (as someone could claim an improper motive for its decision), or to immediately remove all negative reviews about which businesses complained (as failure to do so could expose Yelp to a business's claim that Yelp was strong-arming the business for advertising money). The Ninth Circuit has made it clear that the need to defend against a proliferation of lawsuits, regardless of whether the provider ultimately prevails, undermines the purpose of section 230.

In accordance with this conclusion, the court dismissed the business owners’ claims under California Business and Professions Code § 17200, as well as civil extortion and attempted extortion claims.

Plaintiffs Boris Levitt, et al, filed a notice of appeal to the Ninth Circuit on November 7, 2011.

 

Finally, other than excusing non-performance, what are the other implications of a force majeure clause?  Sometimes, force majeure provisions have termination rights associated with them, whereby the party not affected by the event can terminate the contract if the inability to perform extends beyond a certain amount of time.  To the extent Hurricane Irene leaves service providers out of commission for any extended period of time, this may become relevant.  Also, an inability to perform due to a force majeure event sometimes allows the client to procure the services from an alternate supplier – and sometimes converts an exclusive relationship to a non-exclusive one.

Companies affected by Irene – either themselves or through the impact of the storm on business partners – should be thinking about their force majeure clauses.   Service providers should consider whether the force majeure clauses in their contracts offer any relief to hurricane-related problems.  Customers should be asking what are their service provider’s rights and responsibilities regarding hurricane-related problems.

In any case, attorneys are well-advised to keep Irene in mind the next time they are tempted to skim over the force majeure provision in a difficult contract negotiation.
 

While I do not dispute the adoption of a broad approach to immunity for on-line service provider under the CDA, an interpretation that immunizes a business’s complicity in defaming a direct competitor takes us so far afield from the purpose of the CDA as to make it unrecognizable. Dismissing this action on the pleadings is not required by the letter of the law and does not honor its spirit. (Judge Lippman, dissenting)

 

 

 

J.N. v. Facebook, Inc.,  No. 11-cv-2128 (E.D.N.Y.) (complaint) is an action brought by the parent of a minor user of the Facebook social networking site, alleging that the minor’s name and likeness was appropriated for commercial advantage without the consent of his parents, as required by New York Civil Rights Law § 50. Section 50 provides that a living person’s name, portrait or picture may not be used for advertising purposes without the person’s written consent, “or if a minor of his parent or guardian.”

Although many Web sites and online service require users to affirm that they are over the age of 12 (the age below which the requirements of the Children’s Online Privacy Protection Act kick in), relatively few restrict users between the ages of 13 and 18 from their sites and services. The question arises, do users in this age group have the capacity to contract, for example, to assent to online terms of use that may contain an express or implied waiver of publicity rights? The issue of a minor’s capacity to assent to such terms has been litigated rarely and not definitively addressed in the online context.

The complaint targets the functionality of Facebook’s “like” button, which offers users the ability to indicate their endorsement or approval of a Facebook page or event. The complaint alleges that when a minor user “likes” a Facebook brand page or RSVPs to an event, the service dislays the minor’s name and likeness both on the “liked” page and in an advertisement displayed on the home page of the minor’s friends. This, the complaint asserts, violates Section 50, and entitles the plaintiff (or plaintiffs, if a class is certified) to relief under New York Civil Rights Law § 51, including gross revenue and profit attributable to violations of § 50.

The complaint also targets the Facebook “Friend Finder” functionality on similar grounds, contending that the names and likenesses of minor users of Facebook have been displayed to other users in order to encourage them to user the functionality to solicit their friends and contacts to join the service, all to the benefit of Facebook and its advertising revenue.

The complaint asserts that although the Facebook terms of use purport to allow the service to utilize a user’s name or likeness for advertising purposes when the “like” function is utilized, assent to those terms is not sufficient consent to such use. Further, the complaint asserts that even if assent to the terms of use on the part of an adult does amount to consent to commercial use of the adult’s name and image, it does not constitute consent on the part of the parents of minor users as required by Civil Rights Law § 50.

This is not the first lawsuit to raise the issue of consent of minor users to Facebook’s use of their names and likenesses for advertising purposes, although previously filed lawsuits have asserted violations of California law. David Cohen v. Facebook, Inc., No. BC 444482 (Cal. Super Ct., Los Angeles Cty), alleges claims under California Civil Code § 3344 (requiring parental consent for the use of a minor’s persona in advertising), the California Constitution, Art. 1, section 1 (right of privacy), and California Business and Professions Code §§ 17203 and 17204 (unfair competition law). See also Meth v. Facebook, Inc., No. BC45479 (Cal. Super. Ct. Los Angeles Cty) (raising similar claims as to a minor user of Facebook).  [Motion papers seeking to consolidate the David Cohen and Meth cases, available here, contain the complaints in both cases.]

Note also, that a separate federal lawsuit filed in California alleges similar claims as to adult users, see Robyn Cohen v. Facebook, Inc., No. 10-cv-05282 (N.D. Cal.). Facebook’s motion to dismiss that action on the ground, among others, that the users consented to the use of their names and likenesses, was filed in January and a ruling is currently pending.




 

***

A panel of the U.S. Court of Appeals for the Ninth Circuit has ruled that an employee’s violation of an employer's computer use policy can support a criminal charge of exceeding authorized access under the Computer Fraud and Abuse Act. United States v. Nosal, No. 10-10038 (9th Cir. Apr. 28, 2011). The case involved access to an employer’s computer network for the purpose of copying the employer’s proprietary information for the benefit of a competing enterprise.  

In so ruling, the panel explicitly limited the applicability of the 2009 panel ruling in LVRC Holdings, LLC v Brekka, No. 07-17116 (9th Cir. Sept. 15, 2009) (see prior blog post), a case involving a civil action under the CFAA. In that case, a different panel of the Ninth Circuit upheld the district court's holding that an employee’s disloyal act does not terminate the prior authorization by an employer to access its computer network.

An important point for employers is that the Nosal panel distinguished the prior panel opinion on the ground that in LVRC v. Brekka there was no employment agreement in place that limited the authorization of the employee to access the employer’s confidential data.

The Nosal opinion delves into the language of the CFAA, and the interpretation of the two phrases that define its scope: The Act provides that access to a computer network that is “without authorization” or that “exceeds authorized access” is subject to both criminal prosecution and a civil action, under specified circumstances. The interpretive challenge that the federal courts have struggled with is determining to what extent the Act applies where a party who has been authorized to access information on a computer system does so for a disloyal or unauthorized purpose. This is an issue that comes up routinely in cases such as Nosal and LVRC v. Brekka where an employee copies and removes an employer’s proprietary data in order to start a competing business or provide it to a competitor.  

Is access for a disloyal purpose “without authorization,” or does it exceed authorized access under the CFAA?

The panel in Nosal, reversing the district court (see prior blog post on the district court ruling), held that “an employee exceeds authorized access when he or she obtains information from the computer and uses it for a purpose that violates the employer’s restrictions on the use of the information.”  With respect to the disagreement in the federal circuit courts over this issue, the panel explicitly weighed in on the side of the other circuit courts that have addressed the issue, including United States v. John, 597 F.3d 263 (5th Cir. 2010), United States v. Rodriguez, 628 F.3d 1258 (11th Cir. 2010), and EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577 (1st Cir. 2001).

The panel took care to preserve the prior panel ruling in LVRC v. Brekka by distinguishing it factually: “By contrast [the employees in Nosal] were subject to a computer use policy that placed clear and conspicuous restrictions on the employees’ access both to the system in general and to the Searcher database in particular.”

Judge Campbell filed a dissenting opinion.

Given the disagreement in the federal appellate courts over the construction of the CFAA, and the prior ruling in LRVC v. Brekka, as well as Judge Campbell’s dissenting opinion, it would not be surprising to see this case remain on the Circuit docket in a rehearing en banc.

• Prince paid Bright Builders $10,000 for a package of services that included coaching and mentoring services aimed at teaching Prince how to build his online business.
• The coaching and mentoring services included one-on-one discussions with an advisor who encouraged Prince’s efforts.
• Bright Builders created and developed Prince’s Web sites, which it knew or should have known were meant to sell counterfeit golf equipment, based upon the chosen domain name of “copycatclubs.com” and the inclusion of the following statement in the text on the site: “your one stop shop for the best COPIED and ORIGINAL golf equipment on the Internet.”

Roger Cleveland Golf Company, Inc. v. Prince (D. S.C. Dec. 3, 2010).  The court also concluded that Bright Builders's motion was so deficient that the defendant should show cause why attorney fees should not be assessed against it for a bad faith attempt to increase the plaintiff’s litigation costs.

Prof. Eric Goldman’s December 2010 blog on the summary judgment ruling analyzes the facts alleged by the plaintiff relative to the asserted claims in more detail.

This is not the first time that liability for contributory trademark infringement has been assessed against an “Internet intermediary.” In Gucci America, Inc. v. Frontline Processing Corp. 2010 U.S. Dist. LEXIS 62654 (S.D.N.Y. June 23, 2010) (see prior blog post), the court refused to dismiss secondary trademark infringement claims against companies that provided credit card processing services to online retailers found to have been engaging in the sale of counterfeit goods.

Gucci v. Frontline followed on the lawsuit against the retailers, who admitted the sales of counterfeit goods and consented to the entry of judgment in a separate action. The court in Gucci v. Frontline found that a jury might find that the necessary knowledge to impose contributory liability on the payment processors in the fact, among other things, that they processed credit card “chargebacks” resulting from customer complaints concerning the receipt of counterfeit merchandise, and, therefore, they should have known the nature of the goods being sold on the site. The court also cited the allegation that the processing firms charged higher fees to sites, such as the one found to have been infringing, that sold “replica” merchandise and were consequently considered to be “high risk” merchants.

See also Louis Vuitton Malletier, S.A. v. Akanoc Solutions, Inc., 2010 U.S. Dist. LEXIS 34021 (N.D. Cal. March 19, 2010). The court upheld upholding a multimillion dollar verdict for contributory trademark infringement against a Web hosting company that provided services to retailers of counterfeit goods.

• The defandant’s re-posting of an entire news article to educate the public is transformative from the current copyright holder’s use, which is "nothing more than litigation-driven."  Thus, the court said, the defendant’s use “does not constitute a substitution for plaintiff’s use.”  (The court did note, however, that the former copyright owner did use the article for news-reporting purposes.)
• The purpose of the use was non-commercial because the defendant was an educational, non-profit organization.
• The purpose of the news article is informational and thus the work entitled to less copyright protection than a “creative work of entertainment.”
• The use of the entire article was reasonable because the purpose was to educate the public and the factual nature of the information made it "impracticable" to cut the article or edit it down.
• No market harm was demonstrated by the plaintiff.

Righthaven, LLC v. Jama and Center for Intercultural Organizing, 2:10-cv-01322-JCM -LRL (D. Nev. April 22, 2011).

*****  ORIGINAL POST ****

We recently wrote on the copyright enforcement lawsuits brought by Righthaven LLC, the intellectual property enforcement firm, and in particular, on a pending ruling on the issue of fair use in the Righthaven litigation against the Center for Intercultural Organizing (CIO).

On Friday, March 18, Judge James Mahan, who is presiding over Righthaven LLC v. CIO in the District of Nevada,  announced that he would dismiss Righthaven's lawsuit on the grounds of fair use. The lawsuit involves the posting of an entire article from the Las Vegas Review-Journal on the organization's Web site. According to a news article in the Las Vegas Sun, Judge Mahan indicated the following in a ruling from the bench:  

• that the CIO was using the article for educational purposes and not to raise money;   
• that the article was primarily factual as opposed to creative;  
• that its use did not harm to the market for the article.   
• that Righthaven was remiss for not notifying CIO in advance of the lawsuit.  
• that the copyright in the article, once transferred to Righthaven by the Las Vegas Review-Journal, was entitled to lesser protection under the Copyright Act.   
• that the use of the copyright in the article (presumably as the basis for a lawsuit) has a chilling effect on free speech and doesn't advance the purposes of copyright. 

In response to the statement by Righthaven's attorney that the company intended to appeal, the judge commented, according to the Las Vegas Sun article: "I realize this is going to be appealed. I tell litigators 'that's why God created San Francisco," (i.e., the location of the U.S. Court of Appeals for the Ninth Circuit.
 
See Steve Green, "Righthaven loses second fair use ruling over copyright lawsuits," (Las Vegas Sun, March 18, 2011), available here.
 

Verizon isn’t alone in alleging that the campaigns are fraudulent and deceptive. The Texas Attorney General has filed a complaint under that State’s consumer law against Cylon and most of the same defendants in the Verizon action, alleging that they engaged in “cell phone cramming” through misleading and deceptive acts and practices, resulting in millions of dollars of unauthorized charges on consumers' phone bills.

The complaint alleges that Cylon, a mobile marketer that had contracted to conduct short code campaigns over the Verizon Network in 2009, ran afoul of Verizon’s contract compliance procedures and had its access terminated for failure to comply with the required double opt-in procedure mandated by the MMA Guidelines. The Guidelines place very specific and detailed requirements on marketers to disclose the cost of premium text messaging services to customers prior to enrollment, down to the type size of disclosures, the placement of price information on the opt-in Web page, and the transmission of a confirming text message to the customer. The marketers must disclose to the wireless carrier (in this case, Verizon) the URL of the opt-in Web page, so that the Web site can be checked for compliance with disclosure requirements.

In order to avoid a similar termination in the future for non-compliance, it is alleged that Cylon created a series of entities that it controlled through employees. These entities entered into separate agreements with Verizon, which both masked their connection to Cylon and buffered against the termination of all of its campaigns if any one of them was found to be non-compliant.

But the scheme went further than the creation of these multiple entities, according to the complaint. Cylon sought to evade Verizon compliance audits by creating two opt-in Web pages for each campaign by its controlled entities. Only the URL of the compliant Web page was provided to Verizon for compliance purposes. Customers were presented with a second, non-compliant Web page that obscured pricing information. Taking the evasion up a notch, the complaint alleges that Cylon filtered IP addresses directed to the non-compliant pages, and re-directed requests coming from known Verizon auditors to the compliant pages. Cylon also filtered for multiple requests coming from the same IP address, and re-directed second requests from the same IP address to the compliant Web page, so that a customer who signed up for service via a non-compliant Web page could not later reproduce the sign-up procedure by accessing the non-compliant site a second time.

In an ex parte temporary restraining order issued on March 10, the court granted Verizon’s request that the defendants be required to preserve evidence relating to the scheme alleged in the complaint. Although on March 11, the court denied Verizon’s request for a more extensive temporary restraining order barring the defendants from continuing some of the misleading conduct alleged in the complaint, on the ground that the requested order was too general. The court also denied the defendants’ request for a temporary restraining order against Verizon’s actions that are the subject of its counterclaims. The court’s language was favorable to Verizon’s position as alleged in its complaint:

Plaintiff has submitted specific evidence that Defendants are doing business through shell corporations, using false business addresses, using websites that do not comply with industry standards and that trick consumers, and using diversionary software to prevent Plaintiff from discovering these activities. Doc. 8. Defendants have submitted a declaration in support of their TRO that generally denies these allegations, but that fails to present any specific evidence to support the denials or to refute the allegations of wrongdoing contained in Plaintiff's evidence. Doc. 32. Because Defendants have failed to counter the very specific evidence of wrongdoing submitted by Plaintiff, the Court cannot conclude that Defendants have shown that they have a fair chance of succeeding on their claim that Plaintiff's conduct is improper, for purposes for the tortious interference claim, or that Plaintiff's statements are false, for purposes of the disparagement, libel, and slander claims. In the absence of a fair chance of success on the merits, the Court cannot conclude that Defendants have established the existence of serious questions warranting issuance of a TRO.

A hearing will be held at a future date to hear arguments on Verizon’s request for a preliminary injunction.


 

Righthaven LLC is an intellectual property enforcement firm that was formed by a group of copyright attorneys and Stephens Media, the publisher of the Law Vegas Review-Journal. The company has been making a name for itself; since early 2010, has brought two hundred copyright infringement suits in the District of Nevada alone against Web site owners, forum operators and bloggers alleged to have unauthorized copies of the Review-Journal’s articles on their sites. Recently, it has added other media company clients and expanded its enforcement efforts to other federal districts.
Righthaven is also drawing considerable fire from critics who have denounced the company as a copyright troll, and an attack dog. The criticism is directed at Righthaven’s business model.

The lawsuits target individuals and small, usually non-profit entities and other Web sites that have failed to take advantage of the DMCA safe harbor protection against liability for material posted by a third party. Righthaven makes no takedown demands prior to filing its complaints, which seek not only damages but transfer of the defendant’s domain name. The company then presses for a quick settlement.

So far, about half of the Righthaven lawsuits have settled, probably for the low four figures. Righthaven Lawsuits, a Web site that tracks the Righthaven litigation, estimates that Righthaven has taken in about $364,000 thus far.  But some Righthaven targets are fighting back, raising defenses such as copyright fair use and implied license, in several cases with the assistance of the Electronic Frontier Foundation.

Righthaven’s lawsuits in the District of Nevada have so far yielded two rulings on the copyright fair use defense and the doctrine of implied license, and may soon yield further rulings on those issues. These opinions should be noted by content owners. The opinions in Righthaven v. Klerks and Righthaven v. Realty One Group suggest a broad view of the fair use doctrine in the online context, and perhaps a potentially even broader view of the application of the doctrine of implied license.

Jan Klerks raised the defense of fair use after he learned from a newspaper reporter that Righthaven had brought an action against him and was about to obtain a default judgment. Klerks, the complaint alleged, was the registrant of a domain name at which an online forum was hosted; the article in question had been posted by a third party user of the forum. In Righthaven v. Klerks, in an opinion rendered on September 17, 2010, Judge Gloria Navarro agreed that Klerks's fair use defense was "sufficiently meritorious" to warrant reopening the case.

Judge Navarro found that the use of the entire article weighed against a finding of fair use, but concluded that two of the other fair use factors weighed in favor of Klerks. Regarding the purpose and character of the use, Judge Navarro concluded that "it could be found" that the third-party user who posted a complete copy of the news article did so "for the non-commercial purpose of sharing information and not for making a profit for the reader or the site." Regarding the nature of the copyrighted work, the court found that the article was "primarily informational," and, therefore, favored a fair use finding. The court left for future consideration, as a question of fact, what effect the posting of the article had on the market for or value of the copyrighted work.

The Defense of Implied License

Judge Navarro also found that Klerks had made a plausible argument that his use fell under the doctrine of implied license, pointing to the fact that the newspaper publisher "encouraged people to save and share the article with others without restrictions, and permitted users to "right-click" and copy the article from its website." Judge Navarro found that Klerks had made a plausible argument that there was an implied license "especially in light of the established and accepted custom of users freely and openly sharing certain information posted on the Internet."

Righthaven v. Realty One Group – Fair Use as a Matter of Law

Righthaven sued Realty One Group and its agent Michael Nelson, who maintained a blog on which he posted an eight-sentence excerpt from a thirty-sentence Las Vegas Review-Journal article, along with a link to the source. On October 19, in Righthaven v. Realty One Group, Judge Larry Hicks dismissed the action as to Nelson, finding that the his use of the article was fair as a matter of law.

Judge Hicks found that while Nelson's blog was both educational and commercial, its underlying purpose was to promote Nelson's business, thus this factor weighed against a finding of fair use. But the three other fair use factors weighed in favor of Nelson. Judge Hicks found that the article contained both factual news reporting and reporter commentary, and the broker copied only the factual portion of the article, not the commentary. As to the amount used, the court pointed to the fact that only eight out of thirty sentences were used.

In contrast to Judge Navarro, who found that the effect of the use upon the potential market for the work requires fact-finding, Judge Hicks concluded as a matter of law that this factor favored Nelson. He reasoned that because Nelson did not copy the reporter's commentary, "his use does not satisfy a reader's desire to view and read [the entire article including] the author's original commentary and thereby does not dilute the market for the copyrighted work." The court also noted that Nelson had included a link to the source of the article containing the full text.

Although Righthaven ultimately settled with Nelson, the company deliberately suffered the entry of an adverse judgment with respect to Nelson’s employer, Realty One, and filed a notice of appeal to the Ninth Circuit on February 11.

Righthaven v. Democratic Underground – The Copyright Troll Defense

Righthaven v. Democratic Underground is one of the cases in which the EFF has become involved. The defendants are an online political forum and its operator, David Allen. Righthaven seeks to hold them responsible for the posting of an article by a third party user of the forum. In addition to raising fair use and implied license, the EFF’s answer and counterclaim filed in the case challenge every aspect of Righthaven's litigation campaign, describing is as "a particularly abusive instance of a broad and aggressive strategy" by a "sham" plaintiff.

The EFF has focused on Righthaven’s status as an assignee of the rights that it asserts, alleging that it has filed multiple lawsuits, that it is in the business of enforcing copyright rights, and that it does not otherwise exploit the assigned rights. As to Stephens Media, the original copyright owner, the answer and counterclaim details at length various aspects of its online presence, including the fact that, according to the EFF, Stephens Media has not properly filed a proper designation of agent to receive notices of infringement under the DMCA. The legal relevance of these and other assertions going to the conduct of Righthaven and Stevens is left unstated.

The EFF has also raised the implied license defense noted by Judge Navarro in the Klerks case, asserting that the Law Vegas Review-Journal makes its news articles available for copying and downloading "at least 19 different ways," including bookmarking them on social media sites, e-mailing them, and printing physical copies.

EFF v. Righthaven

Following the ruling in the Realty One case in which Judge Hicks found fair use as a matter of law, Righthaven sought to voluntarily dismiss the complaint in the Democratic Underground case, which is factually similar in that it involves a five-sentence excerpt from a 54-sentence article. Stating that it disagreed with the Realty One ruling, Righthaven asserted that it was nevertheless moving to dismiss “in the interest of judicial economy.” The EFF objected, arguing that the action was "meritless from its inception" and should only be dismissed on the condition that the defendants be permitted to apply for an award of attorney fees. The respective motions are pending.

The EFF is also involved in the representation of the defendants in Righthaven v. Center for Intercultural Organizing, which involves the posting of an entire article by the operator of the CIO site. On the same day that Righthaven filed its motion to dismiss the Democratic Underground case, Judge James Mahan, who is presiding over the CIO case as well, sua sponte ordered a hearing on whether that case should be dismissed on grounds of fair use as well. The parties are now contesting the need for further proceedings, with Righthaven arguing that further fact-finding is needed before the fair use issue is decided and the EFF pressing for an immediate decision. The court has allowed the submission of a amicus brief on the issue of whether further fact-finding is needed to determine the fair use issue, over Righthaven’s objection that the amici, Professor Jason Schultz of Boalt Hall School of Law, is affililiated with the EFF.

The motion in the CIO case is set for hearing before Judge Mahan in March.

The resolution of the motions in the Democratic Underground and CIO cases are likely set the direction of Righthaven litigation in the District of Nevada for the foreseeable future, at least until the Ninth Circuit rules on the appeal filed in the Realty One case.

What’s Missing from the Righthaven Rulings

Regardless of one’s position on the issues raised by the Righthaven litigation, the opinions rendered thus far are unsatisfying and incomplete in their treatment of the fair use and implied license doctrines. That may be understandable in the Klerks case, where the court was determining only whether the fair use defense was meritorious as a threshold matter. Nevertheless, some of the statements in the opinion are troubling in that they express a less than complete view of the jurisprudence on fair use.

For example, the court in Righthaven v. Klerks found that the use of an entire work merely weighs against a finding of fair use. But there is significant authority that use of an entire work weighs heavily against such a finding, even where the purpose of the use is not for profit. An example may be found in Los Angeles Times v. Free Republic, decided in the District of California in 2000, in which the court ruled that the online posting of full-text copies of newspaper articles for the purpose of criticism and comment was not fair use. "There is little transformative about copying the entirety or large portions of a work verbatim," the court in the Free Republic case found, citing numerous opinions.

As evidenced by the Free Republic ruling, fair use determinations are notoriously fact-sensitive and require careful weighing and balancing of the fair use factors, including the over-arching issue of whether the use is tranformative. Yet in the Realty One opinion where fair use was found as a matter of law, there is no discussion of whether the copying of an article excerpt was transformative.

The treatment of the implied license issue in the Klerks case was also truncated by the preliminary nature of the court’s ruling. But it is nevertheless concerning, in that it presents only one aspect of the implied license doctrine, that is, conduct on the part of a copyright owner from which consent to a use may be inferred. The court’s preliminary treatment of the issue suggests that any copyright owner that makes its content available on the Internet is, by that act alone. consenting to the unrestricted copying and dissemination of the work by third parties, in unlimited venues and contexts, including online posting. The court’s sweeping reference to the “established and accepted custom” of information-sharing on the Internet ignores the role of online terms of use in limiting the dissemination and use of works posted online.

Conclusion

There will be more to come from Righthaven, the EFF, and the courts, on the issues of fair use and implied license. But important lessons can be taken from these cases, even at this stage.

Online publishers should consider the argument the EFF is making that allowing users to share content gives rise to a very broad implied license to distribute publications online, and revisit the substance and presentation of their online terms of use. Making clear to users what kinds of sharing is permitted and what is prohibited may guard against a similar argument being made with respect to their content. For example, the Las Vegas Review-Journal’s online terms includes an express license to reproduce the headline and the first paragraph of a story, along with a link back to the source article. The effect of that provision has yet to be addressed.

The simplest lesson is for Web site owners. Those who have been sued by Righthaven as a result of material posted by users of their site could have avoided litigation by adopting DMCA-compliant terms of use and designating a DMCA agent. It costs nothing, it is simple to do, and (assuming all DMCA requirements are met), it is effective protection against copyright infringement lawsuits resulting from third-party posting.

Data pass transactions involve offers made by third-party marketers at the conclusion of an transaction between an online merchant and a customer. If the merchant's customer assents to the third-party marketer's offer, the customer's payment information is transferred directly from the merchant to the marketer, without further input of that data by the customer. In some cases, the offers entail enrollment in subscription discount programs requiring continuous payments, generically referred to as "web loyalty programs." According to the Act's findings and declaration of policy: "Because third party sellers acquired consumers' billing information from the initial merchant through `data pass', millions of consumers were unaware they had been enrolled in membership clubs."

In addition to the Congressional hearings, data pass marketing was challenged in a series of class action complaints and in consumer fraud investigations by the New York State Attorney General. The NY AG investigations were settled with payments totaling $18.5 million obtained not only from the third-party marketing companies involved, but also from the online merchants who partnered with the marketing companies that made the offers.(See NY AG press releases here and here.)

The new federal Act addresses both the provision of consumer information by online merchants to third-party marketers, and the use of consumer information by such marketers.

The Act flatly prohibits the passing of customer payment data from an online merchant to a third-party marketer, referred to in the Act as a "post-transaction third party seller," a defined term. The Act makes it unlawful for an online merchant, i.e., an "initial merchant," to provide "credit card, debit card, bank account, or other financial account number, or to disclose other billing information that is used to charge a customer of the initial merchant, to any post-transaction third party seller for use in an Internet-based sale of any goods or services from that post-transaction third party seller."

The Act also makes it unlawful for a post-transaction third party seller to charge or attempt to charge a consumer's financial account unless a description of the goods and services and their cost has been provided to the consumer, as well as a statement that the seller is not affiliated with the initial merchant "in a manner that clearly differentiates the post-transaction third party seller from the initial merchant." The seller must also obtain the "express informed consent" of the consumer in order to charge a consumer's financial account. Such consent is defined as obtaining the customer's name, address and contact information, and the "full account number of the account to be charged," as well as "requiring the consumer to perform an additional affirmative action, such as clicking on a confirmation button or checking a box that indicates the consumer's consent to be charged the amount disclosed."

The Act additionally addresses the subject of negative option marketing in online transactions, referring to the definition in FTC Telemarketing Sales Rule, i.e., "in an offer or agreement to sell or provide any goods or services, a provision under which the customer’s silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer." (See 16 C.F.R. 310.2(f) defining "negative option feature"). Charging a consumer for goods or services sold in a transaction "effected on the Internet" using a "negative option feature" is prohibited unless three criteria are met: (1) all material terms are "clearly and conspicuously disclosed" before the consumer's billing information is obtained; (2) the consumer's "express informed consent" is obtained before charging the consumer's financial account; and (3) a "simple mechanism" is provided for the consumer to stop any recurring charges on the account. This provision is not limited to third-party post-transaction offers, it should be noted.

The Act does not provide a civil right of action to individuals. The FTC and state attorneys general are given civil enforcement authority.

Online retailers should review their relationships with third-party marketers who fall under the scope of the Act and make certain that they are in compliance with the Act.

The bill was signed into law by the President on December 29, 2010. Pub. Law No: 111-345 (2010). It is effective immediately. The text of the enrolled bill is available here.

In MDY Industries, LLC v. Blizzard Entertainment, Inc., the Ninth Circuit commenced its analysis of the DMCA issues by parsing the complex interconnection between the two parallel prohibitions in the anticircumvention provisions: the prohibition in Section 1201(a) against the circumvention of a technological measure that “effectively controls access to a work protected under this title,” i.e., a copyrighted work; and the prohibition in Section 1201(b) against the circumvention of a technological measure that “effectively protects a right of a copyright owner.” It is important to note the difference between the two sections: Section 1201(a) protects measures that limit access to a copyrighted work, while Section 1201(b) protects measures that protect a right of a copyright owner.

The appeals court concluded that a copyright owner’s rights in Section 1201(a) are, in effect, broader than a copyright owner’s rights under Section 1201(b) because “preventing ‘access’ to a protected work in itself has not been a right of a copyright owner arising from the Copyright Act.” And thus, the court said, “we read this term as extending a new form of protection, i.e., the right to prevent circumvention of access controls, broadly to … copyrighted works.”

The court explicitly rejected the argument that Section 1201(a) should be more narrowly construed, and should only be applied where there is a “nexus” between the access sought to be prevented and a copyright owner’s rights under the Copyright Act. Such a nexus was required by the U.S. Court of Appeals for the Federal Circuit in Chamberlain Group, Inc. v. Skylink Technologies, Inc. (Fed. Cir. 2004), where a manufacturer of garage door openers that contained copyrighted firmware unsuccessfully sought to use the anticircumvention provisions to bar the use of third-party replacement controls that required access to the firmware in order to activate the opener.

As the Ninth Circuit in MDY v. Blizzard acknowledged, in Chamberlain, the Federal Circuit “feared that Section 1201(a) would allow companies to leverage their sales into aftermarket monopolies, in tension with antitrust law and the doctrine of copyright misuse.” The Ninth Circuit concluded that the policy concerns that the Federal Circuit relied on in Chamberlain were not present in MDY v. Blizzard, and that the potential interplay between antitrust law and Section 1201(a) could be reserved for future cases. And in any event, the Ninth Circuit concluded, those policy concerns should not prevail over the plain language of the statute, and the legislative history that it carefully and extensively examined.

The Ninth Circuit also left for future consideration the issue of whether fair use is a defense to a prima facie violation of Section 1201, because MDY did not claim that the use of Glider was protected by the doctrine of fair use.

The next question the court tackled is whether Blizzard’s Warden software either “effectively controls access” to a copyrighted work or “effectively protects a right of a copyright owner.” And that requires understanding of how the WoW software is structured, and how the Warden program works.

The WoW software consists of two components: a game client that is installed on the user’s computer, and game elements that are available only when the user is connected to the WoW servers. The court divided the protectable elements of the WoW software into three “buckets”: the literal elements of the software (the game client’s software code that resides on the user’s computer), the individual non-literal elements (individual components, such as recorded sounds and images that are stored locally and called up by the game client software in the course of play) and the game’s dynamic, non-literal elements, the “real-time experience of traveling through different worlds, hearing their sounds, viewing their structures, encountering their inhabitants and monsters, and encountering other players.” This last element is only available when the user is connected to the WoW servers.

The Warden program has two functions: first, it scans the random access memory (RAM) of a user’s computer before the user connects to WoW’s online game servers to see if a bot is running, and second, it periodically scans the user’s RAM to look for patterns of code that it has identified as belonging to bots and other cheating software. When it detects a bot before the user has connected to a game server, it prevents the user from logging on to the server, and if it detects a bot during play, it boots the player from the server.

Given the manner in which Warden functions, the court concluded that it does not prevent access to either the of the WoW elements that are stored locally on a user’s computer, because those elements are accessible to a user despite the presence of Warden. But Warden does prevent access to WoW’s dynamic, non-literal elements that are accessible only when connected to Wow’s servers. Accordingly, the appeals court found that Warden is a technological measure that “effectively controls access” to a copyrighted work, and that MDY had engaged in trafficking in a technology, Glider, that circumvents that control, in violation of Section 1201(a)(2).

MDY was not found to violate Section 1201(b). Blizzard argued that Warden effectively protected its right against unauthorized copying in various respects, but the court disagreed. Because WoW gamers are authorized to load the game code into RAM, a user of Glider who continues to load code into RAM despite Warden’s efforts to interrupt that process are not infringing, the court found. And, because WoW players using Glider who are able to log on to the game server and access the dynamic non-literal elements of the game despite Warden’s efforts, Warden doesn’t “effectively” protect against copying.

For Blizzard, although the ruling is a mixed bag, the result is certainly not a total loss. At the end of the day, its Section 1201(a) trafficking claim survived with respect to protecting WoW’s dynamic, non-literal elements from copying, and is likely to be sufficient basis for the district court to reissue an injunction and award of damages. Although summary judgment on Blizzard’s tortious interference claim was vacated, it may still press that claim on remand.

For users of software and other copyrighted works, the aspects of the ruling dealing with the issue of contract covenants and copyright conditions narrows the circumstances under which they might be found to be copyrighted infringers, should they violate a provision in a Terms of Use or similar document. Accordingly, service providers may be limited in using the stern remedies of the Copyright Act to control unwanted access to their systems, at least in the Ninth Circuit. In that respect, see, e.g., Facebook, Inc. v. Power Ventures, Inc. (N.D. Cal. May 11, 2009), discussed here.

For device manufacturers who, like the garage door opener manufacturer in Chamberlain, wish to use the DMCA anticircumvention provisions for competitive advantage, the ruling may present new possibilities for structuring their products. And of course, copyright owners generally will be advantaged in their efforts to use technical means to block unauthorized access to their works.

For the DMCA itself, the ruling in MDY v. Blizzard sets up a circuit split on the construction of the anticircumvention provisions, and presents the possibility of U.S. Supreme Court review. Or possibly, a reexamination of the ruling by the Ninth Circuit en banc, a remedy that either or both sides in the case might well seek.
 

For Blizzard Entertainment, the distributor of WoW software and the operator of the servers that enable online game play, bots are, well, a drag. Other gamers complain that they constitute cheating, and Blizzard potentially loses revenue when gamers finish the game sooner rather than later. So Blizzard added a provision to the WoW Terms of Use prohibiting the use of bots and similar third-party software. WoW also deployed a software solution, WoW Warden, that checks gamers’ computers for prohibited software and prevents their access to the server if it is present. Warden works only so-so at blocking Glider-using players, though, and it costs a lot of money to deploy and maintain.

So Blizzard also sent its lawyers to Donnelly’s home to personally demand that he cease selling the Glider program. (Whether he called them Worgen and tried to repel them with his Corpse-Impaling Spike is not part of the record.) Donnelly subsequently filed an action seeking a declaratory judgment that his sale of the Glider program did not infringe Blizzard’s copyrights, and Blizzard responded with counterclaims under copyright law, the Digital Millennium Copyright Act and state law.

Game on.

Recall that the case was argued on the same day, and before the same panel, as Vernor v. Autodesk (which we blogged about previously), in which the court defined the circumstances under which a purchaser of software is a licensee, not an owner of a copy, for purposes of the copyright first sale doctrine. That ruling comes into play in MDY v. Blizzard; in a slam-dunk application of Vernor, the court found that the WoW gamers are licensees, not owners of a copy of their WoW software, But in this post, we’ll look at a different issue addressed by the court: whether gamers who use the Glider software in violation of Blizzard’s ToU are infringing Blizzard’s copyrights. That was an essential question, because if the gamers were not directly infringing Blizzard’s copyrights, then MDY and Donnelly could not be held secondarily liable for copyright infringement for selling them the means by which to infringe, i.e., the Glider software.

MDY and Donnelly conceded that the use of Glider by WoW players violated the ToU, but they argued that Glider users were not infringers. Rather, they argued, the ToU’s prohibition against the use of bots is a covenant, not a license condition, and a breach of a covenant gives rise only to a claim for breach of contract, not copyright infringement.

The appeals court agreed with MDY and Donnelly, holding that “a potential for infringement exists only where the licensee’s action (1) exceeds the license’s scope (2) in a manner that implicates one of the licensor’s exclusive statutory rights.” The use of Glider did not implicate any of Blizzard’s exclusive rights, the court found, because its use did not, for example, either alter or copy the WoW software. For there to be infringement, the court concluded, there must be a “nexus” between the license condition and an exclusive right of copyright:

Were we to hold otherwise, Blizzard — or any software copyright holder — could designate any disfavored conduct during software use as copyright infringement, by purporting to condition the license on the player’s abstention from the disfavored conduct. The rationale would be that because the conduct occurs while the player’s computer is copying the software code into RAM in order for it to run, the violation is copyright infringement. This would allow software copyright owners far greater rights than Congress has generally conferred on copyright owners.

So, the appeals court overruled the district court’s grant of summary judgment in favor of Blizzard on its claims of contributory and vicarious copyright infringement.

Interestingly, in a footnote, the court raises a point not at issue in the case: whether the continued use of a licensed work without making required payments constitutes copyright infringement. The court comments that such a licensee:

… arguably may commit copyright infringement by continuing to use the licensed work while failing to make required payments, even though a failure to make payments otherwise lacks a nexus to the licensor’s exclusive statutory rights. We view payment as sui generis, however, because of the distinct nexus between payment and all commercial copyright licenses, not just those concerning software.

Well, maybe ALL commercial copyright licenses don’t have a nexus with payment - consider the case of open source licenses. In Jacobsen v. Katzer (Fed.Cir. 2008) (discussed here), the Federal Circuit rejected the argument that an open source license was not enforceable under copyright law because the licensed software was distributed free of charge. Further, the court held that a provision in an open source license requiring the inclusion of author, license and copyright information if the software was modified and redistributed was a condition enforceable under copyright law, not a mere covenant. The appeals court relied upon language in the license identifying the attribution requirements as a condition, and a general policy favoring the enforcement of open source licenses. The result in Jacobsen v. Katzer, if not its reasoning, is probably consistent with MDY v. Blizzard, as the rights which were being conditioned were the right to modify and distribute the software, rights that are unquestionably exclusive rights of the copyright holder.

Back to MDY v. Blizzard. Although MDY and Donnelly escaped liability for copyright infringement, the court’s ruling had the effect of boosting Blizzard’s related state law claim that MDY tortiously interfered with its contracts with WoW licensees, because, the court ruled, the Copyright Act does not preempt a breach of contract claim that is not equivalent to any exclusive right of copyright. But while the district court had granted summary judgment against MDY and Donnelly on the breach of contract claims, the Ninth Circuit reversed the entry of judgment, finding that there were outstanding material issues of fact on one of the elements of such a claim: whether MDY’s actions were “improper” under the seven-factor test of Restatement (Second) of Torts Section 767. Accordingly, among the issues to be considered on remand are “the social interests in protecting MDY’s freedom of action and Blizzard’s contractual interests,” about which the court commented:

Blizzard argues that it seeks to provide its millions of WoW players with a particular role-playing game experience that excludes bots. *** In contrast, MDY argues that Glider is an innovative, profitable software program that has positively affected its users’ lives by advancing them to WoW’s more interesting levels. MDY has introduced evidence that Glider allows players with limited motor skills to continue to play WoW, improves some users’ romantic relationships by reducing the time that they spend playing WoW, and allows users who work long hours to play WoW.

Glider has a positive effect on gamers’ romantic lives? That should be an interesting trial on the merits. 

In our next post, we will examine the Ninth Circuit’s DMCA-related rulings in MDY v. Blizzard.
 

Our keynote speaker is Barbara Anthony, the Undersecretary of the Office of Consumer Affairs and Business Regulation of Massachusetts.

Tuesday, December 14, 2010
8:00 a.m. - 8:30 a.m. Breakfast and Registration
8:30 a.m. - 11:45 a.m. Program

One International Place
Boston, MA 02110-2600

Click here to register.

The ruling will please software developers seeking to limit resales and other downstream transfers of their products, and will likely also benefit content owners who distribute their content digitally. In brief summary, the court held that “a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.”

The transaction between Autodesk and its transferee was deemed to have met that test without difficulty. Licensing attorneys should take note of the specific factors that the court considered:

• The software was initially transferred by Autodesk pursuant to a Softtware License Agreement that expressly retained title to the software.
• The SLA included express prohibitions against further transfers or leases of the software without the developer's express written consent; use outside the Western Hemisphere; modifications, translations or reverse-engineering; removal of proprietary marks on the software or related documentation; or circumventing any copy protection device.
• The SLA also provided for termination of the license for unauthorized copying by the licensee, or for failure to comply with other license restrictions.

The appeals court rejected the argument that the dispositive factor in distinguishing a license from a sale is whether the transferee was entitled to retain possession of the copy of the copyrighted work in question. The court also rejected the argument that is ruling created a split of authority with the Federal and Second Circuits.

There are some other elements pertinent to the transaction that the court recited in the opinion although it did not specify that these affected the determination of the license/sale issue, perhaps in order not to unduly narrow its ruling. Nevertheless, note should be taken of them.

• The SLA accompanying the software had to be accepted before installing the software. If a customer chose not to accept the SLA, the software could be returned for a full refund.
• The developer offered several different SLAs with different terms for commercial, educational institution and student users, with the commercial license (which applied to the software at issue) being the most expensive, but with the fewest restrictions.
• The SLA provided that if the software is an upgrade of a previous version, the customer must destroy any previously licensed copies, including those resident on a hard drive; the developer reserved the right to require proof that the copies had been destroyed.
• The developer utilized license enforcement measures that included the use of serial numbers attached to each copy. Customers were also required to input a separate activation code, obtain from the developer, within a month after installing the software. This code could be reused, however.

The Ninth Circuit panel heard oral argument in Vernor v. Autodesk in June. On the same day, the same panel heard arguments in two other cases that presented similar or related issues. The appeal from the ruling in  MDY Industries, LLC v. Blizzard Entertainment, Inc. (D. Ariz. 2008) concerns whether a purchaser of a copy of a videogame is the owner of the copy under 17 U.S.C. § 117(a).  The appeal from the ruling in Universal Music Group v. Augusto (C.D. Cal. 2008) concerns ownership of a copy of a music recording on a promotional CD.

The court has yet to release opinions in those cases.