Silicon Valley Media Law Blog

A California appeals court decision, Shisler v. Sanford Sports Cars, was certified for publication today, holding that a used car dealer in Florida cannot be sued in California because it sold a car to a California resident after advertising it for sale "worldwide" on the Internet.  

The plaintiff argued that the dealer sold cars to Californians and used the Internet to advertise cars for sale that it would ship "worldwide."  However the court concluded that these passive Internet advertisements along with a small number of car sales to the state were insufficient to subject the dealer to jurisdiction in California.

In order to satisfy constitutional due process requirements, the dealer must have sufficient minimum contacts with California.  This can be in the form of substantial ongoing contacts by the defendant with the state, for general jurisdiction, or in the form of contacts relating to the case where the defendant purposely directed his activities towards the state, for specific jurisdiction.

The court reviewed the sliding scale test for evaluating Internet activity for personal jurisdiciton purposes, adopted by the California Supreme Court in 2002 in the Pavlovich case:

"At one end of the spectrum are situations where a defendant clearly does business over the Internet. If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the Internet, personal jurisdiction is proper."

"At the opposite end are situations where a defendant has simply posted information on an Internet Web site which is accessible to users in foreign jurisdictions. A passive Web site that does little more than make information available to those who are interested in it is not grounds for the exercise [of] personal jurisdiction."

"The middle ground is occupied by interactive Web sites where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the Web site."

Applying the sliding scale test to the facts of this case, the court concluded:

"In this case, defendant’s Web site merely advertised its vehicles and (presumably) included a credit application. There is no evidence that files were exchanged via the Web site or that any business was actually conducted via the site. . . . Nor is there evidence that anything about the Web site specifically targeted California residents. Thus, defendant’s maintenance of the Web site alone is insufficient to establish personal jurisdiction."

Andrew Raff's  IPTA Blog has a thorough review of CBC Distribution v. Major League Baseball Advanced Media, the recent case holding that fantasy baseball leagues don't infringe MLB rights by using player names and statistics.    William Patry also has comments on the decision.  The Missouri district court held last week that CBC's fantasy league was engaging in protected first amendment speech and their use of the names and statistics did not violate the players' publicity rights.

What I found particularly interesting was the court's disposition of the league's breach of contract claims.  Even if a particular use of intellectual property rights is permitted under the law, it is becoming increasingly common for a plaintiff to assert a contract theory to override that permissible conduct -- especially in the Internet context where contracts and licenses are generally not negotiated.  In this case, the court found the contract terms unenforceable on public policy grounds.

CBC and MLB had previously negotiated a license agreement in 2002 covering the use of the player names and statistics.  The license agreement had terminated, however, and the league pointed to several clauses in the contract as grounds to block CBC's use of the player materials.

The agreement included a "no-challenge" clause, which stated that CBC could not during the term of the contract "dispute or attack the title or any rights of Players' Association in and to the Rights and/or the Trademarks or the validity of the license granted."

The agreement also required CBC after termination "to refrain from further use of the Rights and/or the Trademarks, or any further reference to them, either directly or indirectly".

In its holding finding the contract terms unenforceable, the court concluded:

"The court, therefore, finds that in the circumstances of this case 'the strong federal policy favoring the full and free use of ideas in the public domain' as manifested in the laws of intellectual property prevails over the challenged contractual provisions in the 2002 License Agreement.  As such, the court further finds that the no-challenge provision in the 2002 Agreement and the provision which prohibits CBC from using players' names and/or playing records without acquiring a license are unenforceable and void as a matter of public policy."  [citations omitted]

In a footnote the court clarified that the no-challenge was unenforceable only with respect to the players' names and playing records, not with respect to the league's trademarks and other intellectual property.  The court also noted that in "applying the Lear balancing test, the court must balance the concern for the demands of contract law against the concern for full and free use of ideas in the public domain."  

This ruling is subject to appeal by MLB to the 8th Circuit Court of Appeals, which last year upheld the waiver of fair use rights by contract in the Blizzard/bnetd case, Davidson & Associates v. Jung, see prior post.   And recall it was the 7th Circuit that held a decade ago in ProCD v. Zeidenberg that contract terms could limit use of public domain white page listings.  So we'll have to wait and see what happens on appeal.

Update:  My partner Glenn Colton filed this amicus brief in the case on behalf of the Fantasy Sports Trade Association.  According to Glenn:

"Judge Medler's decision reestablishes order and common sense in the ever-growing business and phenomenon that is fantasy sports. Hopefully, the leagues and the players' associations will see the light, stop threatening legitimate businesses with a flawed right of publicity theory, and work together with the Fantasy Sports Trade Association and its members to provide fans and fantasy players alike with the best possible products and services."

Spoken like a true advocate.

The FCC is proposing new rules for privacy of "customer proprietary network information" (CPNI) held by telecom carriers, see recent post at the Telecom Law Blog.

The FCC's action is in response to a petition by Electronic Privacy Information Center.

EPIC also reports that bills are moving ahead in Congress to protect resale of consumer phone information --more info here.

Greg Kopta, who contributes to the above-mentioned blog is one of the speakers at the blog law conference we are co-chairing -- see prior post for details, and hope to see/meet you there!

The Ninth Circuit issued an en banc decision last week in Yahoo! v. La Ligue Contre Le Racisme et L'Antisemitisme, Download file, and held that Yahoo! could not maintain its law suit in the U.S. against the French parties who had sued it in France over Nazi memorabilia. The case was dismissed without prejudice.

The case is 99 pages long and includes multiple concurrences and a partial dissent. It is a complicated treatment of a close question of the law, but it also serves as an excellent tutorial on the difficult issues presented by the international nature of the Internet.

An eight-judge majority of the elevent-judge panel held that specific personal jurisdiction did exist over the French litigants. However six judges voted that the suit should be dismissed -- three on the grounds that the suit did not present a "ripe" legal question, and three on the grounds that they disagreed about personal jurisdiction. At the same time, five of the judges disagreed about the ripeness issue.

Yahoo! had sued in federal district court to obtain declaratory relief that two French orders issued in 2000 could not be enforced against it here in the United States. Yahoo! had been successfully sued in France for violating French law by making Nazi materials available on its U.S. web site, and the French court issued an order requiring Yahoo! to take "all necessary measures" to "dissuade and render impossible" access by French users to Nazi materials on Yahoo!. This was in addition to a similar order issued against Yahoo! France, which proceeded to comply with the French order. In 2001 Yahoo! adopted a policy prohibiting trade in items that glorify hate groups and the like.

The majority held that personal jurisdiction existed against the French litigants, based on three U.S. contacts -- (1) the cease and desists letter sent to Yahoo!; (2) the service of process on Yahoo!; and (3) the French court order directing Yahoo! to take remedial action in California regarding its web site.

"The suit sought, and the French court granted, orders directing Yahoo! to perform significant acts in California. It is of course true that the effect desired by the French court would be felt in France, but that does not change the fact that significant acts were to be performed in California. The servers that support yahoo.com are located in California, and compliance with the French court's orders necessarily would require Yahoo! to make some change to those servers."

In dismissing the suit, the opinion notes Yahoo!'s extraterritorial First Amendment arguments and concludes:

"First Amendment issues arising out of international Internet use are new, important and difficult. We should not rush to decide such issues based on an inadequate, incomplete or unclear record."

"Yahoo! wants a decision providing broad First Amendment protection for speech and speech-related activities on the Internet that might violate the laws or offend the sensibilities of other countries. As currently framed, however, Yahoo!'s suit comes perilously close to a request for a forbidden advisory opinion."

The case turned in part on the question of whether American users would actually be harmed by implementation of the restrictive measures required by the French court. The French court's experts contended that the necessary restrictions could be implemented in large part through IP address tracking used by Yahoo! to serve French banner ads, along with voluntary disclosures of the user's location. Yahoo! contended these measures were not sufficient but did not put forth how American users would be harmed. And it was unclear whether Yahoo! was in compliance, or not, with the French court's order. So many unanswered questions remain:

"Until we know whether further restrictions on access by French, and possibly American users, are required, we cannot decide whether and to what degree the First Amendment might be violated by enforcement of the French court's orders, and whether such enforcement would be repugnant to California public policy."

The Third Circuit has held in DirecTV v. Pepe,Download file, that a private cause of action exists for violation of the Electronic Communications Privacy Act (18 U.S.C. Sections 2510-2521), for interception of encrypted digital satellite transmissions. This is consistent with rulings in other circuits.

On Tuesday, December 20th, the FTC is going to announce a cross-border initiative with the Canadian Competition Bureau and several state Attorneys General to combat illegal spam. See media alert.

The initiative is being launched in conjunction with Alan Curry's Proxypot project. His site explains that:

"An open proxy honeypot (proxypot) is a server that pretends to be an open proxy, taking requests from bad people to do bad things, and responding with a simulation instead of doing the evil deed. The goal is to fool the bad people into thinking they've done their bad thing and got away with it, while actually they didn't do it, and they got caught anyway!"

According to a recent criminal complaint filed against spammers:

"[A]ny access of Mr. Curry's proxypot for the purposes of sending bulk email would constitute an attempted violation of 18 USC 1037 (a) (2), in that it would indicate an attempt to use a protected computer to transmit unsolicited commercial e-mail."

See 2004 NPR report about spam prosecutions that includes an interview with Mr. Curry.

In terms of legal issues with running a proxypot, the Proxypot site notes that:

"A spammer, or spam-friendly law enforcement agency, might decide that a proxypot is a "wiretap" and haul you into court. Yes, there is a question as to whether, when someone is using your communication equipment without your permission, you have the right to find out what they're using it for. What do you call a million lawyers at the bottom of the ocean? Answer"

Yes, we couldn't resist the lawyer joke.

The federal wiretapping statute is here.

In Klussman v. Cross Country Bank,Download file, a California appeals court has held that a credit card agreement should be construed under California law when applied to California consumers, and under California law a hidden waiver of the right to bring classwide arbitration is unconscionable and unenforceable.

Cross Country Bank is a credit card company whose customers, according to the complaint, are "generally unsophisticated and vulnerable to financial predation." The case was brought as a class action on behalf of California customers alleging violation of the California Consumers Legal Remedis Act (Civ. Code Section 1750 et seq.) as well as the California Unfair Competition Law (Bus. & Prof. Code Section 17200 et seq.).

The relevant cardholder agreements stated that Delaware law governed except where federal law applied. In determining which law to apply, the Court stated:

"If California has a materially greater interest than the chosen state, the choice of law shall not be enforced, for the obvious reason that in such circumstance we will decline to enforce a law contrary to this state's fundamental policy."

The Court concluded that California's interest in the issue was "materially greater" than Delaware's. Relevant factors were that the plaintiff class was limited to California residents and contained claims under California consumer laws. Because Delaware law enforces class action waivers, the Court applied California law, on the grounds that the right to bring a class action implicates important policy issues in California.

The California Supreme Court in Discover Bank v. Superior Court,Download file, held earlier this year that while not all class action waivers are unenforceable, when the waiver:

"is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sumes of money, then, at least to the extent the obligation at issue is governed by California law, . . . such waivers are unconscionable under California law and should not be enforced."

In finding the class action waiver unconscionable, the Court noted that unconscionability has both a procedural and a substantive element, and that both must be present. Consumer contracts may easily satisfy the procedural element because they are generally adhesion contracts. Thus, companies should be mindful to avoid substantative overreaching in this context in order to maintain enforceable contracts.

The outcome in this case is similar to the recent ruling in Aral v. Earthlink, in which Earthlink's dispute resolution clauses were held to be unenforceable -- see prior post.

A California appeals court has held that Earthlink's arbitration and forum selection clauses in its DSL click-thru agreement are unenforceable under California law. See Download file.

The ruling was made in connection with a class action suit. The suit was brought under California's Unfair Competition Law (UCL) (Bus. & Prof. Code, § 17200 et seq.) and alleges that Earthlink charged fees to DSL customers before providing them with the necessary equipment to use the service.

According to the Court:

"Under recent Supreme Court authority, provisions in adhesion contacts that preclude class actions are unconscionable where the case involves allegations that a large number of consumers have been cheated out of a small sum of money. Moreover, EarthLink sought an order specifying that arbitration of a minor monetary claim by a California resident take place in Georgia. A forum selection clause that discourages legitimate claims by imposing unreasonable geographical barriers is unenforceable under well-settled California law."

Web site operators should revisit their terms of use in light of this holding in order to craft dispute resolution terms that are favorable to them, while avoiding terms that could be found to be unconscionable.

Texas Attorney General Greg Abbott has sued Sony BMG Music Entertainment for violating its state spyware statute by including the rootkit cloaking technology on 52 CDs by various artists. See the press release and the complaint.

The FTC obtained a preliminary injunction on October 21st in FTC v. Myrics,Download file, against the operator of MP3DownloadCity.com, which claimed that file-sharing is "100% legal." The FTC charged that the site operator violated Section 5(a) of the FTC Act, by falsely claiming that membership in its service made P2P file sharing legal. The site was not a licensed music subscription service but rather a paid tutorial service that promoted the use of file-sharing software.

The site advertisements included:

"AND BEST OF ALL PEOPLE ARE NOT GETTING SUED FOR USING OUR SOFTWARE. YES! IT IS 100% LEGAL; Why Are We The #1 Free MP3 Music Download Site? . . . Download and Watch DVDs and Movies Still in Theaters; and Rest assured that File-Sharing is 100% legal."

The order restricts misrepresentations such as these. However it also prohibits the following:

"Failing to clearly and conspicuously disclose, prior to the time that a consumer purchases any good or service from Defendant, all material information relating to the consumer's decision to purchase any good or service, including where applicable:

"1. that persons who download copyrighted material, or make it available to others, without the copyright owner's permission, may be liable for copyright infringement, which can result in significant monetary damages, fines and even criminal penalties; and

"2. that persons who subscribe to Defendant's MP3DownloadCity.com service do not thereby obtain a license to download copyrighted music, movies or games."

This consumer disclosure requirement could conceivably apply in other contexts where consumers are involved with unlicensed content, even if they the particular situation does not involve the egregious conduct in this case.

See also the complaint, temporary order, and the FTC release.

The MPAA also recently sued a number of similar web sites for inducing copyright infringement by falsely claiming that consumers can legally download copyright movies from these unlicensed web sites. See MPAA release.

The FCC has released its annual report to Congress on the state of competition in the wireless industry, aka Commercial Mobile Radio Services (CMRS), which concludes that effective competition does exist. The news release summarizes some interesting technology and growth trends:

"[N]on-price rivalry among wireless carriers is illustrated by their continued deployment of next-generation networks and their pursuit of product differentiation based on attributes such as network coverage and service quality. Over the past year, several wireless carriers deployed CDMA 1xED-VO networks, which allow typical download speeds of 400-700 kilobits per second, in markets across the country."

"Many have announced plans to launch or expand these networks, as well as UMTS (Universal Mobile Telecommunications System or Wideband CDMA) with HSDPA (High Speed Data Packet Access) technology, in the future."

"During 2004, the number of mobile telephone subscribers in the United States rose from 160.6 million to 184.7 million, increasing the nationwide penetration rate to approximately 62% at the end of 2004."

"Finally, the volume of text messaging traffic grew to 4.7 billion messages per month in December 2004, more than double the 2 billion messages per month reported in December 2003."

Meanwhile, the FCC continues its rulemaking to allocate spectrum below 3 GHz to support new advanced wireless services, including 3G wireless systems.

Governor Schwarzenegger signed legislation on September 30th to increase California's legal protections against fraudulent Internet phishing.

SB 355, the Anti-Phishing Act of 2005, makes the practice of Internet "phishing" unlawful in California. "Phishing" is the practice of posing a legitimate company in an email, Web page, or other Internet communication in order to trick a recipient into revealing personal information, which is then used for fraudulent purposes. The new law is codified at Section 22948 et seq. of the California Business and Professions Code.

"22948.2. It shall be unlawful for any person, by means of a Web page, electronic mail message, or otherwise through use of the Internet, to solicit, request, or take any action to induce another person to provide identifying information by representing itself to be a business without the authority or approval of the business."

In addition to government enforcement, civil remedies may be pursued by aggrieved businesses:

"A person who (A) is engaged in the business of providing Internet access service to the public, owns a Web page, or owns a trademark, and (B) is adversely affected by a violation of Section 22948.2."

These parties may seek to recover the greater of actual damages or five hundred thousand dollars ($500,000). Individuals who have been damaged by phishing may bring a direct action to recover the greater of three times the amount of actual damages or $5,000 per violation.

The bill was sponsored by Senator Kevin Murray (D-Los Angeles), who also sponsored SB 97, which was signed into law on September 22nd. It provides that a person who violates California's anti-spam law by sending unsolicited commercial electronic mail has committed a misdemeanor punishable by a fine of not more than $1,000, imprisonment in a county jail for not more than six months, or by both the fine and imprisonment.

Governor Schwarzenegger has signed AB 1595 into law, Download file, which prohibits persons or entities from posting or publicly displaying on the Internet the home address or telephone number of any elected or appointed official if that official has made a written demand of that person, business, or association to not disclose his or her home address or telephone number.

The new law contains an exemption for ISPs as follows:

"An interactive computer service or access software provider, as defined in Section 230(f) of Title 47 of the United States Code, shall not be liable under this section unless the service or provider intends to abet or cause imminent great bodily harm that is likely to occur or threatens to cause imminent great bodily harm to an elected or appointed official."

The 7th Circuit has held that a 572 word email did not constitute a legally binding contract in PFT Roberson, Inc. v. Volvo Trucks North America, Inc.,Download file

Volvo and Roberson were negotiating a complex fleet agreement. Volvo had sent an email captioned "confirmation of our conversation" that identified items that Volvo and Roberson had "come to agreement on", and others that the parties needed to "review and finalize".

Judge Easterbrook's opinion sensibly rejects the notion that "magic words" are necessary to avoid a binding agreement -- "the parties need not recite a formula to demonstrate that a definitive agreement lies in the future." The case was decided under Illinois law.

"If Roberson had hit the reply button in the email program and said only 'we accept,' no contract would have been formed because the email was not a definitive offer; it called for negotiation of the many open details rather than acceptance of any contract limited to a subset of the issues."

However this result came only after Roberson sued Volvo for breach of contract, as well as fraud based on Volvo's efforts to negotiate additional terms after sending the email. And only after Roberson had been awarded $5 million in damages after a jury trial. So do yourself (and your lawyers) a favor and watch those emails!

Christopher Lamparello's gripe site about Reverend Jerry Falwell has been held by the Fourth Circuit not to violate Falwell's trademark rights or to constitute cybersquatting. In Lamparello v. Falwell,Download file, the Court reversed the district court holding that had found Lamparello liable.

Lamparello's site, www.fallwell.com, criticizes Falwell over his "untruths about gay people," among other things. It includes a disclaimer on its home page that the site is not associated with Falwell, and a link back to Falwell's site, as well as the following poignant statement:

"I was just 12 years old. My family and I were on vacation in Virginia. My dad and I were watching television in our motel room. Jerry Falwell's 'Old Time Gospel Hour' was on. Reverend Falwell looked into the camera and, preaching against gay people, said, 'Even animals don't do that.' That was the first time in my life that I ever felt unworthy of the love of God."

The Court found that there was no likelihood of confusion that the the gripe site originated from Jerry Falwell.

"This likelihood-of-confusion test 'generally strikes a comfortable balance' between the First Amendment and the rights of markholders."

The Court rejected application of the "initial interest confusion" doctrine -- on the grounds that the gripe site was not diverting customers.

"The critical element -- use of another firm's mark to capture the markholder's customers and profits -- simply does not exist when the alleged infringer establishes a grip site that criticizes the markholder."

Falwell's cybersquatting claim also failed because Lamparello did not have a bad faith intent to profit from using the domain name, given that the purpose of the site was noncommercial criticism. Also, Lamparello did not register multiple domain names or attempt to bargain to sell the domain back to Falwell or to gain other advantage, which has occurred in other cases where cybersquatting by noncommercial sites has been found.

The case law on gripe sites continues to develop in a manner that recognizes the importance of First Amendment values in the trademark context, such as the 9th Circuit case of Bosely v. Kremer, decided in April, summarized here.

Paul Levy of Public Citizen Litigation Group represented Lamparello. Levy also represented the gripe site operator in the Bosely case. He received assistance from the Berkman Center for Internet and Society at Harvard Law School. The Berkman Center has further details on the case.

Governor Schwarzenegger signed SB 118 into law this week. The bill eases restrictions on online sales of wine, in response to the Supreme Court's May decision in Granholm v. Heald.

There the Court held that state laws in New York and Michigan violated the Commerce Clause by treating direct sales of wine to consumers differently depending on whether the sales were made by in-state or out-of-state wine sellers.

The new law does the following, effective January 1, 2006:

-- Allows California consumers of legal drinking age to buy wine for personal consumption directly from winegrowers in all 50 states by abolishing the current reciprocal shipping restrictions.

-- Eliminates the requirement that a California consumer must apply for a state permit in order to buy wine online.

-- Requires wine shippers to obtain a direct shipper permit.

-- Eliminates the current quantity restrictions on direct wine shipments.

-- Regulates how sales are made and delivered to adult residents.

Read the legislative analysis. See also the Governor's press release. The bill was sponsored by the Family Winemakers of California.

In Davidson & Associates v. Jung,Download file, the 8th Circuit today has affirmed the district court ruling that found computer hackers liable for breach of their end user software license agreements and for violation of the anti-circumvention and anti-trafficking provisions of the DMCA. We previously summarized and posted the district court ruling here.

By way of background, the plaintiff in the case, Davidson & Associates, which does business as Blizzard, is owned by Vivendi and sells PC games. Blizzard also offers an online gaming service called Battle.net, which enables purchasers of its games to play them through their PCs over the Internet against other players.

For authentication purposes, to ensure that the user has a validly licensed copy of a Blizzard game, the game initiates an authentication sequence of "secret handshake" between the game and the Battle.net server. In addition, to install the software and access the Battle.net site, users are required to click-thru an end user license agreement (EULA) and a terms of use for the web site (TOU).

The defendants were Battle.net enthusiasts who participated in a non-profit group called the "bnetd project". The project was focused on developing a server that could emulate the Battle.net service. In order to do so, the server needed to be compatible with Blizzard's software, and therefore use the same protocol used in the Blizzard software's "secret handshake". To develop the bnetd server, the defendants reverse engineered the software and protocols, although the EULA and TOS expressly prohibited reverse engineering.

The Court concluded that the federal copyright law does not preempt Blizzard's state law breach of contract claims. And the Court reasoned that even though the copyright law permits reverse engineering in some cases, a person can forego this right by contract. The Court cited Bowers v. Baystate Techs, Inc., for the proposition that:

"[A] state can permit parties to contract away a fair use defense or to agree not to engage in uses of copyrighted material that are permitted by the copyright law if the contract is freely negotiated."

This conclusion is troubling in terms of the viability of the fair use doctrine, although clearly it is beneficial to anyone seeking to enforce online contracts. In an electronic world where all interactions are increasingly wrapped in EULAs, TOS and the like that are not negotiated by the parties, end users may find themselves having inadvertently contracted away their fair use rights.

Given the potential impact on consumers, and their likely inadvertent waiver of fair use rights, one wonders whether the FTC might someday require prominent disclosure of this type of boilerplate, as it recently did in a case where the fine print permitted installation of adware. See our prior post on the Advertising.com case. As always, restraint is advised when drafting contract terms that could appear overreaching or unfair where consumers are involved.

The Court also affirmed the holding that the DMCA was violated. The court distinguished the case from Lexmark v. Static Control, on the grounds that the Battle.net codes were not acccessible by purchasing a product, as in the case of the Lexmark printer.

However the Court did not address whether the DMCA should have applied in light of the fact that the reverse engineering may have been fair use under the copyright law, even though the Court noted that:

"[T]he focus of Section 1201(b)(1) is circumvention of technologies designed to permit access to a work but prevent copying of the work or some other act that infringes a copyright."

Last week the Federal Circuit in StorageTek concluded that the DMCA could not be used to extend rights beyond those protected by copyright. See our prior post on the case.

This ruling is disappointing in that it lacks much depth in its analysis. In addition to rather cursory treatment of the issues above, the Court did not address the copyright misuse argument, under which a copyright holder should not be able by contract to restrict lawful fair use rights and thereby extend the bounds of their copyright monopoly. This issue was briefed by the Bnetd side. See the EFF's page with all the pleadings.

Advertising.com, aka Teknosurf.com, a subsidiary of AOL, has agreed to settle FTC charges of deceptive business practices based on the marketing of its SpyBlast security software without adequate disclosure that it contains adware. The settlement agreement is subject to final FTC approval.

The agreement provides that no representations may be made about the product "unless they disclose, clearly and prominently, that consumers who install the program will receive advertisements, if that is the case."

The FTC's analysis states:

"The proposed order is designed specifically to address the facts of the case at hand. However, the limitation in the proposed order to respondents' software programs whose principal function is to enhance security or privacy should not be read more broadly to suggest that the requirement for clear and prominent disclosure is necessarily limited to those situations. Moreover, the problem here was not the security software that Advertising.com disseminated with its adware. Instead, it was the respondents' practice of downloading software onto users' computers, without adequate notice and consent, that generated repeated pop-up ads as the computer users surfed the Web."

The product's click-thru license agreement did contain disclosure of the adware in its boilerplate, but according to the FTC:

"The hyperlink did not indicate the nature and significance of the terms of the licensing agreement - namely that adware would be installed on their computers. Consumers were not required to read the agreement before installing the software. If consumers had read the agreement, they might have seen a statement saying that by accepting the software, they agreed to receive marketing messages, including pop-up ads, based on their Internet browsing habits."

As part of the agreement, the company is required to maintain relevant records for 5 years, and the founder of the company, John Ferber, is required to report his employment particulars to the FTC for the next 10 years.

In 2000 the FTC published a guide regarding deceptive trade practices in the online context that is instructive.

Eric Goldman has blogged the ruling in Geico v. Google, calling it a "win for Google".

Yesterday the 9th Circuit decided another trademark case about use of the name "yellow cab" and held that the burden is on the owner of an unregistered mark to establish its validity and protectability.

The Ninth Circuit Court of Appeals has ruled in American Bankers Association v. Gould,Download file, that California's pro-consumer financial privacy law is preempted by the Federal Credit Reporting Act, as it relates to sharing of consumer data among affiliates of financial institutions. The case included a slew of amici on behalf of the banking industry and government agencies.

The California Financial Information Privacy Act, aka SB1, prohibits a financial institution from disclosing a consumer's nonpublic personal information to an affiliate unless the consumer first has the opportunity to opt-out on an annual basis. Cal. Finan. Code. Section 4053(b)(1).

The Fair Credit Reporting Act (FCRA) allows sharing of consumer information among financial institution affiliates by exempting so-called "experience" information from the scope of the law, and by permitting disclosure so-called "non-experience" information if consumers have the opportunity to opt out.

The district court had ruled that SB1 is not preempted by the FCRA, but the Ninth Circuit concluded that the definition of "information" under the FCRA required preemption, concluding:

"That is, SB1 is preempted to the extent it applies to information shared between affiliates concerning consumers' 'creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living' that is used, expected to be used, or collected for the purpose of establishing eligibility for credit or insurance,' employment or other authorized purposes."

On remand, the district court was instructed to determine: "whether any portion of the affiliate-sharing provision of SB1 survives preemption, and if so, whether it is severable from the portion that does not."

A recent case decided June 9th in the Second Circuit, Postlewaite v. McGraw-Hill, Inc.,Download file, addresses the obligation in a publishing contract to pay royalties upon the transfer of the contract as part of the sale of a business. While cases construing contracts are largely limited to their facts, based on the particular language of the contract in question, they can provide guidance to practitioners on matters of contract drafting and interpretation.

In this case, the authors of a treatise on partnership taxation assigned their rights to the treatise to McGraw-Hill. The publishing contract included a provision that gave them a 20% royalty on sales of the work, as well as a 20% royalty on the sale, assignment or licensing of rights to the work to a third party. McGraw-Hill transferred the publishing contract as part of the sale of a publishing division to Thomson Legal Publishing. The authors consented to the transfer, and Thomson as transferee confirmed its obligation to pay royalties under the assumed agreement.

In an earlier, related case against McGraw-Hill, the authors had previously asserted without success that the transfer of the publishing contract to Thomson was a sale of rights that entitled them to a royalty on the sale price. The district court held that the transfer was not a royalty-generating event, because the assignment clause instead governed the transfer of the contract, and the district court found it "very strange" that an author could claim royalties upon the sale of a business division.

The authors now asserted that transfer of a related software agreement for the creation of a CD-ROM based on their treatise required payment of the royalty, even though they were not a party to that agreement. The circuit court held that the software agreement was not a transfer of rights, because it did not involve the transfer of any rights to the underlying treatise - it merely involved the commissioning of a CD-ROM based on the work. The circuit court opined that:

"Plaintiffs' interpretation of the software agreement would produce some startling royalty-producing scenarios. . . . If this nexus between the agreements were interpreted to mandate a royalty in the production context, the authors would have a claim to royalties at two stages of the distribution chain - one at production and a second at the sale of copies of the Work."

This case reflects that ambiguity can arise when a contract does not state whether royalties are payable upon transfer of a contract, as opposed to sale of rights apart from the contract. In general, a royalty on sale or sublicensing of rights is usually contemplated where there is a new third-party involved who is not bound by the contract to pay the author's royalties. However, it is also possible that an author would want to receive a piece of any buy-out price in addition to on-going royalties upon transfer of his contract, and based on this case, he would need to manifest that intention clearly in the contract.

In a ruling by the California court of appeals,Download file, Borders Online has been held liable for payment of California's use tax based on its online sales to California customers. These sales totaled more than $1.5 million in the two year period in dispute in the case. Even though Borders Online does not have a presence in California, it was found liable because its affiliated sister-company Borders, Inc. accepted returns at its physical book stores in California.

Liability was based on Section 6203 of the California tax code, which defines "retailer engaged in business in this state" as:

"any retailer having any representative, agent, salesperson, canvasser, independent contractor, or solicitor operating in this state under the authority of the retailer or its subsidiary for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property."

Borders, Inc. was found to be an agent of Borders Online for the purpose of accepting return merchandise, and the imposition of the tax was held not to violate the Commerce Clause because the activities of Borders as an agent were found to satisfy the constitutional nexus requirement.

The FTC has released a request for comments on the Children's Online Privacy Rule. The comment period is open until June 27, 2005.

The review is required by COPPA, the Children's Online Privacy Act of 1998, which mandated a review five years after the rule's effective date of April 21, 2000. The FTC is also extending the sliding scale approach to obtaining parental consent until completing its review of the rule.

The agency is looking for comments on the rule's effect on online data practices relating to children, children's ability to access content online, and availability of web sites directed to children.

Also, the agency is seeking comments on four specific issues, namely: (i) should the factors used to assess whether a web site is directed at children be updated; (ii) is the term "actual knowledge" clear given that some sites allow children to revise their age submission if they entered an age that was under 13; (iii) how should credit cards be used to obtain verifiable parental consent, given that debit cards are marketed to children; and (iv) what feedback is to be had on the COPPA safe harbor program.

Given the on-going enforcement actions by the FTC around COPPA, further clarifications to promote compliance would be desirable. Last year, UMG paid a record $400,000 civil penalty for violating COPPA. It failed to obtain parental consent when it had actual knowledge of children's ages, and its web site for teeny bopper pop star L'il Romeo was found to be directed at children. This resulted in an FTC bulletin that clarified that actual knowledge can be obtained indirectly such as through asking a child about their grade level in school.

A recent case in the Northern District of California, Cairo, Inc. v. Crossmedia Services, Inc.,Download file, has held that repeated use of a web site can result in imputed knowledge of the terms of use of the site, thus forming a binding contract, even without any proof that the user had actual knowledge of the terms.

Cairo's business includes compilation of sales information from retailers' web sites, including many hosted by Crossmedia (CMS). Cairo uses automated means to crawl these sites to obtain relevant information, and sought declaratory relief that its conduct was not actionable by Crossmedia on a number of legal theories, including breach of its terms of use, which expressly prohibited use of robots or other automated processes on its site.

The Court found that "Cairo's repeated and automated use of CMS's web pages can form the basis of imputing knowledge to Cairo of the terms on which CMS's services were offered even before Cairo's notice of CMS's cease and desist letter." The Court followed the ruling in Register.com, Inc. v. Verio, Inc., decided in 2004 by the Second Circuit, which also held that knowledge and acceptance of a web site's terms of use resulted from the use of robot software.

Cairo had urged the Court to follow the ruling in Specht v. Netscape Communications Corp., another Second Circuit case from 2002, in which terms of use were not binding because they were not noticeable by the end user at the downloading of software from the web page, but rather were visible only after scrolling down to the bottom of the page.

These cases seem to reflect that courts will be more protective of consumers and less tolerant of commercial entities including those using spidering software. In this case, the Court held that Cairo was bound by Crossmedia's forum selection clause, so it would have to litigate its declaratory relief action in Chicago rather than San Francisco. The Court found that the forum selection clause was enforceable because it was not unreasonable or invalid for reasons such as fraud or overreaching.

However what if the terms of use included a more onerous clause such as a covenant not to assert patents or liquidated damages for breach? If my recollection serves me, there was a Dilbert cartoon a good while back in which a shrinkwrap license included assent to enter servitude to Bill Gates. Certainly if terms are unconscionable or against public policy they will not be enforced. If a user has actual knowledge, he can make the choice of assenting to the terms or refraining from use of the site. If repeated use will result in imputed knowledge, this would present the risk of being bound to unknown, unfavorable terms that might be upheld by a court.

Clearly the ruling is a good result for web site operators seeking greater certainty about how to ensure enforceability of their terms of use. The Court noted that the terms of use used by Crossmedia included a statement that: "By continuing past this page and/or using this site, you agree to abide by the Terms of Use for this site, which prohibit commercial use of any information on this site." The Terms of Use notice was underlined and highlighted to indicate a hyperlink to access them. They stated that " These terms of use constitute a binding legal agreement . . . If you do not accept the terms stated here, do not use the Website."

The Ninth Circuit Court of Appeals has ruled in Bosley Medical Institute v. Kremer,Download file, affirming the lower court's holding that use of a trademark as a domain name does not violate federal trademark law where the use is noncommercial. Kremer is a dissatisfied hair replacement patient who registered and uses the domain name BosleyMedical.com to run a consumer commentary site that is highly critical of Bosley Medical.

According to the Court, "The Supreme Court has made it clear that trademark infringement law prevents only unauthorized uses of a trademark in connection with a commercial transaction in which the trademark is being used to confuse potential customers." However the court reversed and permitted the case to go forward against Kremer on two grounds. First, . . .

A recent case reflects the continued trend of validating online click-thru agreements. In Davidson & Associates v. Internet Gateway, which was decided last fall, a group of hackers who created an interoperable version of an online video game, were found by a federal district court in Missouri to have breached the terms of use of the online gaming site and violated the DMCA in doing so.

Davidson & Associates, which does business as Blizzard, is owned by Vivendi and sells PC games. Blizzard also offers an online gaming service called Battle.net, which enables purchasers of its games to play them through their PCs over the Internet against other players.