New Media and Technology Law Blog : Technology Lawyers & Attorneys : Proskauer Rose Law Firm : Trademarks, Patents & Copyright

A lawsuit against consumer review site Yelp! has yielded an opinion that demonstrates the breadth of the protection afforded interactive service providers under Section 230 of the Communications Decency Act. In Levitt v. Yelp! Inc., 2011 U.S. Dist. LEXIS 124082 (N.D. Cal. Oct. 26, 2011), a group of putative class action plaintiffs filed an action against the site under Section 17200 of the California Business and Professions Code, claiming that the site manipulated its consumer review functionality to extort advertising revenues from the plaintiff businesses.

A key element of the business owners’ claims against Yelp! was the attempt to construct a theory of liability that would avoid the protection from liability for user content that is afforded interactive service providers under CDA Section 230. The business owners’ complaint based its claims on alleged conduct on the part of Yelp! and its employees. This approach has succeeded in a very small group of cases, e.g., Barnes v. Yahoo!, Inc., No. 05-36189 (9th Cir. May 7, 2009) (as amended June 22, 2009) (see our prior blog post here) and Anthony v. Yahoo! Inc., 2006 WL 708572 (N.D. Cal. March 17, 2006) (see Prof. Eric Goldman’s blog post here).

In an opinion rendered last spring, Judge Marilyn Patel rejected most of the business owners’ claims of “implied extortion” that were based upon allegations that Yelp! manipulated reviews in order to coerce businesses into purchasing advertising on the site, but granted leave to amend the complaint. Levitt v. Yelp! Inc, 2011 U.S. Dist. LEXIS 99372 (N.D. Cal. Mar. 22, 2011). A Third Amended Complaint was filed and Yelp! renewed its motion to dismiss. Judge Edward Chen, now assigned to the case, concluded that the Third Amended Complaint failed to cure the pleading and substantive defects identified by Judge Patel and finally dismissed the complaint without leave to amend.

The plaintiffs’ Third Amended Complaint allege!d several different categories of conduct by Yelp!: that the service removed positive reviews, resulting in a lowered overall “star” rating for a business; that the service retained negative reviews, even if those reviews violated the service’s terms of use; that the service’s own employees wrote negative reviews; and that the service said it would manipulate reviews in a positive direction for businesses that paid for advertising on the service.

Judge Chen found that the allegations that Yelp!’s own employees wrote negative reviews or paid users to do so were speculative. They relied, he said, on factually unsupported allegations that one of the plaintiffs was told by an unnamed source that Yelp! employees had been discharged for unspecified “scamming relating to advertising.”

Judge Chen then concluded that allegations that Yelp! either removed user reviews, or changed their order on the site in order to extort businesses, fall within CDA Section 230(c)(1), which prohibits treatment of a provider as the publisher or speaker of information provided by a third party.  Decisions to remove or reorder user content fall within the publisher’s “traditional editorial functions,” he concluded, citing, e.g., Fair Housing Council of San Fernando Valley v. Roommates.com, LLC, 521 F.3d 1157 (9th Cir. 2008) (en banc).

The court also rejected the theory that Yelp! created the overall “star” reviews of businesses, which were derived from aggregating the ratings of individual reviews, finding that the aggregation of user content to generate the reviews did not make Yelp! a content provider. On this point, the court cited Gentry v. eBay, Inc., 99 Cal. App. 4th 816, 834, 121 Cal. Rptr. 2d 703 (2002), which absolved eBay of liability for its star ratings of users based upon user-generated data.

The court recognized that there was a distinction in Yelp! based on the business owners’ allegations that the provider included and excluded certain user reviews upon which Yelp! star ratings are based. But Judge Chen noted that the plaintiffs’ did not argue that the inclusion and exclusion of certain reviews per se fell outside of CDA Section 230(c)(1). Rather, they argued that the inclusion and exclusion of certain reviews was done in bad faith. The court framed the issue as whether the exercise of a traditional editorial function, otherwise protected by CDA Section 230, falls outside of that protection when the provider has a bad faith motive.

Judge Chen concluded that, despite the “ethical underpinnings” of the business owners’ position, a provider’s motive in exercising its editorial function is irrelevant under the language of Section 230 as well as prior court interpretations, which have not recognized an intent test for the application of Section 230(c)(1). The court pointed out that while Section 230(c)(2), which protects a provider’s actions taken to restrict obscene and otherwise objectionable material, includes a good faith requirement, Section 230(c)(1) contains no good faith language. As to the policy of protecting possible bad-faith exercises of editorial functions, Judge Chen referred to the strong policy of Section 230 to protect providers from lawsuits over third-party content:

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.

 

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A divided New York Court of Appeals ruled on June 14, 2011, that an online forum administrator’s additions to an allegedly defamatory post by a user are protected by Section 230 of the Communications Decency Act. Shiamili v. The Real Estate Group of New York, Inc., No. 105, (N.Y. June 14, 2011). This is the first ruling by New York’s highest court on the scope of CDA Section 230, it was noted in both the majority opinion and the dissent.

For the most part, the dispute presents a typical scenario in a CDA Section 230 case: An anonymous user of an online forum posts statements that are alleged to be defamatory, the operator (often, and in this case) refuses to remove the comments, and the subject of the statements brings suit, seeking to hold the forum operator responsible. Thus stated, the case is a slam-dunk situation for the application of CDA Section 230, which protects online service providers from liability for “information” provided by a third-party user of the service. The twist in this case is that the subject of the statements, Christakis Shiamili, is the head of a real estate company, and the online forum was operated by a rival real estate company. And Shiamili alleged that the operator made additions to the user-supplied statements that took them outside the protection of Section 230.

According to the complaint, the anonymous user alleged in a comment to a preexisting discussion thread that Shiamili was racist and anti-Semetic, and that he mistreated his employees. The forum administrator copied the comment and re-posted it as a “stand-alone post,” and prefaced it with a new heading, some additional comments, and an image (later described in the majority opinion as satirical) containing the plaintiff’s name. This re-posting was followed by additional allegedly defamatory statements by anonymous users.

 In its dissection of the complaint, the majority separately considered the original comment (which is assumed was defamatory), and concluded that the defendants were protected by Section 230 because Shiamili did not allege that they had authored that post. The court rejected the argument that they should nevertheless be deemed information content providers on the theory that they created and ran a Web site that implicitly encouraged users to post negative comments about the New York City real estate industry: “Creating an open forum for third-parties to post content – including negative commentary – is at the core of what Section 230 protects.”

With respect to the moving of the comment to a new thread, the majority found that this action fell within the compass of Section 230 protection as an exercise of a publisher’s “traditional editorial function.” With respect to the additional content that the forum operator did supply, the court concluded that it was not defamatory as a matter of law.

Chief Judge Lippman, who authored the dissent, concluded to the contrary that the defendants were erroneously being shielded by Section 230 “from the allegation that they abused their power as website publishers to promote and amplify defamation targeted at a business competitor.” The operator’s actions were not merely the reposting of outrageous statements to a more prominent position on the Web site, which the dissent conceded could “plausibly” fall into the compass of a traditional editorial function. A reasonable reader could view the additional material added by the operator as endorsing the truth of the original defamatory statement, Judge Lippman opined. In concluding he emphasized that his disagreement with the majority was not on the applicable legal principles, but on the characterization of the facts, and whether the plaintiff’s claims should have survived a motion to dismiss:

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)

 

 

 

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A recent jury verdict of $770,750, in statutory damages for secondary trademark infringement against Bright Builders, a Web hosting and SEO service provider, will serve as a reminder to service providers that there is no statutory safe harbor for contributory online trademark infringement. Unlike  the copyright infringement safe harbor provisions in the Digital Millennium Copyright Act, or the protection against liability for information provided by third parties provided under Section 230 of the Communications Decency Act, online service providers must exercise common sense and best practices to reduce the likelihood of contributory trademark infringement liability . Specifically, online service providers should consider undertaking the kind of measures described in Tiffany (NJ), Inc. v. eBay (2d. Cir. 2010), to the extent that they may apply, to mitigate the risk of liability that may arise from sales of counterfeit goods on the sites to which they provide services.

Roger Cleveland Golf Company, Inc. v. Prince involved the online sale of counterfeit golf clubs by Christopher Prince, the operator of the “copycatclubs.com” Web site. Prince, by the way, got off with a mere $28,250 damage award for direct infringement. Bright Builders was not initially a defendant in the litigation. In the course of discovery, however, Cleveland Golf learned that Prince had started his online business after signing up with Bright Builders, which provided Web hosting, search engine optimization and related services to aspiring online retailers. Cleveland Golf then amended its complaint to add Bright Builders as a defendant on the theory that it was secondarily liable for Prince’s infringement.

In 2010, Bright Builders had moved for summary judgment dismissing the complaint. Its filing was met with scorn by the court, which criticized its brevity (one and one-half pages), its lack of citations to authority, and other failures to comply with court rules.  The motion papers argued very simply that Bright Builders did not know that Prince was selling counterfeit golf clubs, and that it “simply cannot be true” that merely by hosting Prince’s site, Bright Builders could be found liable for Prince’s infringement.

The court rejected Bright Builders’s motion on the merits, finding that the following allegations could support a finding of knowledge sufficient to establish contributory liability:

• 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.

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In Gucci America, Inc. v. Laurette Co. No. 1:2008cv05065 (S.D.N.Y.), the luxury goods manufacturer succeeded in shutting down a Web site called "TheBagAddiction.com" through which the defendants sold counterfeit Gucci handbags. In fact, the defendants consented to the entry of judgment and admitted liability for trademark infringement. In a subsequently filed action, Gucci America, Inc. v. Frontline Processing Corp., 1:2009cv06925 (S.D.N.Y.) the manufacturer sought to hold firms that provided credit card processing services to the operators of TheBagAddiction.com site liable for trademark infringement as well. On June 23, the court in Gucci v. Frontline refused to dismiss Gucci's complaint, finding that the two firms that processed credit card payments for transactions consummated on the site, as well as the company that brought the Web site operator and the processing firms together, may be liable for contributory trademark infringement.

Central to the court's ruling was the conclusion that Gucci had alleged sufficient facts from which it could be found that each of the defendants knew or should have known that counterfeit merchandise was being sold on the Web site, an essential finding for establishing contributory infringement.

Durango Merchant Services is a business that assists merchants in setting up credit card merchant accounts. Durango assisted the Web site operator in arranging such accounts with the two card processing services, Frontline Processing Corp. and Woodforest National Bank. In reviewing the allegations concerning the defendants' knowledge of counterfeiting on the Web site, court noted allegations in Gucci's complaint, which, if proved, could establish that the firms either knew, or deliberately shielded themselves from knowledge, concerning the nature of the items sold on the site. Among other things, Gucci alleged that:

• Durango advertised itself as specializing in "high risk merchant accounts," including sellers of "replica products," a term synonymous (according to Gucci) with counterfeit products. Durango was aware that the Web site operator had experienced difficulty in obtaining card processing services from other firms because it was selling "replica" items.
• Frontline charged higher fees for processing services for such high risk merchants.
• Durango's salesman suggested that a notice be put on the Web site stating that it sold replica items, in order to avoid credit card chargebacks from customers dissatisfied with the merchandise they ordered. The salesman's action was attributed to Frontline because the salesman was listed on the application for services as the Web site operator's agent, and because Frontline reviewed and approved the placement of the notice.
• Both Frontline and Woodforest processed chargebacks from dissatisfied customers, in the course of which they obtained documentation concerning the disputed transactions, including item descriptions, the relatively small price of items and quality complaints that should have alerted them to the fact that the products sold were counterfeit.
• Woodforest's employee reviewed the Web site and made a sample purchase of an item prior to agreeing to provide card processing services.

The court ruled that in addition to establishing the defendants’ knowledge of the infringement, Gucci also had to show that the defendants either “(1) intentionally induced the website to infringe through the sale of counterfeit goods or (2) knowingly supplied services to websites and had sufficient control over infringing activity to merit liability.

The court concluded that while Durango’s liability could not predicated on control over the Web site’s activity, the fact that the company held itself out to “high risk merchant accounts” that sold “replica items” could establish the company’s attempt to induce “less savory businesses, like those who sell counterfeit ‘replicas’ of luxury goods.” Durango’s salesman’s suggestion that customers be required to check a box acknowledging that they were purchasing “replicas” suggested an “affirmative step taken to foster infringement” or that the payment system was promoted as a means to infringe.

But sufficient control over infringing activity had been established with respect to the processing firms, the court found, because the credit card processing services provided by them were "a necessary element for the transaction of counterfeit goods online, and were essential to sales" on the Web site. The firms “knowingly provided a "financial bridge between buyers and sellers" which enabled them to consummate transactions in infringing goods. The "ability to literally shut down the web site" is not necessary to establish control, the court found, only the ability to control and monitor the instrumentality used to infringe the plaintiff's mark:

Based on Gucci’s claims, the instrumentality in this case is the combination of the website and the credit card network, since both are allegedly necessary elements for the infringing act – the sale and distribution of the counterfeit good. *** Gucci’s allegations indicate that they are concerned primarily with the sale of tangible counterfeit goods to customers around the country, which allegedly could not be accomplished without Woodforest and Frontline’s ability to process the credit card-based purchases. In the words of the Supreme Court, these defendants "furnish[ed] the means of consummating" the trademark infringement.

A point of interest in the opinion is Judge Baer’s citation of both the majority and dissenting opinions in Perfect 10, Inc. v. Visa International Service Association, 494 F.3d 788 (9th Cir. 2007). The majority in Perfect 10 v. Visa concluded that credit card companies could not be held secondarily liable for copyright and trademark infringement occurring on Web sites that hosted unauthorized copies of copyright photographs, finding, among other things, that the infringement could have occurred without the use of the companies’ payment processing services, therefore, the companies made no “material contribution” to the infringement.

Judge Baer distinguished Perfect 10 v. Visa on the ground that the infringement claimed in that case was the unauthorized display and copying of the photographs, which could have continued even if the firms withdrew their services, while in Gucci v. Frontline the claimed infringement arose from the sales that were made via the firms processing services. Judge Baer also cited Judge Kozinski’s dissenting opinion in Perfect 10 v. Visa, in which wrote he would have held the credit card companies secondarily liable on the ground (among others) that they were the “financial bridge” between the buyers and sellers of pirated works.

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