by Lee Gesmer | Oct 16, 2012 | Contracts
It’s easy to create an enforceable online “click-wrap” agreement. But, as two recent cases remind us, it’s also easy to do it wrong. Two recent cases are a reminder of this.
In the first case, In re Zappos.com Security Breach Litigation, Zappos was sued in connection with a large data security breach. Responding to the predictable class action lawsuit, Zappos argued that the plaintiffs were required to arbitrate under Zappos’ online user agreement. However, Zappos didn’t have a ‘user agreement,” it only had terms and conditions. And, it did not require purchasers to “click through” to indicate acceptance of those terms. The terms, which included the arbitration requirement, were under a link users were not even required to access while making a purchase, much less consent to. Quoting the court:
we cannot conclude that Plaintiffs ever viewed, let alone manifested assent to, the Terms of Use. The Terms of Use is inconspicuous, buried in the middle to bottom of every Zappos.com webpage among many other links, and the website never directs a user to the Terms of Use. No reasonable user would have reason to click on the Terms of Use, . . .
. . . The arbitration provision found in the Zappos.com Terms of Use purportedly binds all users of the website by virtue of their browsing. However, the advent of the Internet has not changed the basic requirements of a contract, and there is no agreement where there is no acceptance, no meeting of the minds, and no manifestation of assent. A party cannot assent to terms of which it has no knowledge or constructive notice, and a highly inconspicuous hyperlink buried among a sea of links does not provide such notice. Because Plaintiffs did not assent to the terms, no contract exists, and they cannot be compelled to arbitrate.
To make those terms enforceable Zappos needed to require purchasers to affirmatively signal their assent by “clicking” their agreement to be bound. It failed to do this, and therefore the terms were not binding. Zappos might have been better off in arbitration, but it’s stuck in court.
The second case, Schnabel v. Trilegiant (2d Cir., Sept. 7, 2012), is not an online license case per se, but it makes the same point. In this case the web site, a membership organization, emailed (or, if the email bounced, snail-mailed) terms and conditions to new members after they had already joined. The terms contained an arbitration clause. Could the plaintiff be required to arbitrate based on this “after the fact” mailing? Not under the circumstances in this case. The Second Circuit held:
a reasonable person would not be expected to connect an email that the recipient may not actually see until long after enrolling in a service (if ever) with the contractual relationship he or she may have with the service provider, especially where the enrollment required as little effort as it did for the plaintiffs here. In this context the email would not have raised a red flag vivid enough to cause a reasonable person to anticipate the imposition of a legally significant alteration to the terms of conditions of the relationship with [the defendant].
Much of the case law on online contract formation between vendors and purchasers comes from the Second Circuit. See: Specht v. Netscape Communications Corp., 306 F. 3d 17 (2nd Cir. 2002); Register. com, Inc. v. Verio, Inc., 356 F. 3d 393 (2nd Cir. 2004).
You might not know it from these two cases, but this is not rocket science: require customers to affirmatively consent to online terms before they perform the transaction, and the agreement likely will be enforceable.
Oh, one more thing – don’t state that the terms can be changed at any time, at the whim of the site owner, without obtaining new assent by the customer. A lot of terms contain a provision to this effect, but as the court noted in the Zappos case, where the site owner reserves the unilateral right to revise the online terms the contract becomes “illusory, and therefore unenforceable.” The district court in Zappos cites many of the cases applying this principle to online agreements. For a 2009 blog post discussing this aspect of online agreements, see here.
by Lee Gesmer | Sep 13, 2012 | Trademark
One of the thorniest issues in trademark law is whether and when trademark law will protect the use of a single color. After all, there are an infinite number of colors, and it would hardly be fair if one company could obtain a theoretically perpetual right to exclude others from using a color. So, the law makes it difficult to achieve this.
Cases involving color marks are rare, but the Second Circuit released an important decision last week in Christian Louboutin S.A. v. Yves Saint Laurent Am., Inc., (2nd Cir. 2012). The court held that Louboutin’s trademark, consisting of a red, lacquered outsole on a high fashion woman’s shoe (the “Red Sole Mark”), has acquired limited “secondary meaning” as a distinctive symbol that identifies the Louboutin brand, but (oddly) only where the red outsole contrasts with the color of the remainder of the shoe.
The heart of the decision is the court’s functionality analysis. Trademark law recognizes two types of functionality, “utilitarian” functionality, and “aesthetic” functionality. Utilitarian functionality occurs when a product feature is essential to the use or purpose of the article, or if it affects the cost or quality of the article. The court had no difficulty finding that the red outsole was not precluded from trademark protection by reason of utilitarian functionality, since the color serves no utilitarian purpose.
However, that did not end the inquiry. The court had to determine whether Louboutin’s Red Sole Mark was barred under the doctrine of “aesthetic” functionality.
Enforceable
In doing so, the court noted the “counterintuitiveness” of this inquiry: “how can the purely aesthetic be deemed functional, one might ask?” The court answered its own question by noting that “the doctrine of aesthetic functionality bars protection of a mark that is “necessary to compete in the [relevant] market.” A mark is “aesthetically functional, and therefore ineligible for protection under the Lanham Act, where protection of the mark significantly undermines competitors’ ability to compete in the relevant market.” The Red Sole Mark easily passed muster under this test.
Unenforceable
The district court had applied a per se rule that assumed functionality (and therefore unenforceability) for color marks in the fashion industry. The Second Circuit disagreed, stating that Supreme Court precedent “requires an individualized, fact-based inquiry into the nature of the trademark, and cannot be read to sanction an industry-based per se rule.” After reviewing the record, and Louboutin’s extensive evidence supporting secondary meaning for the Red Sole Mark, the court concluded that the color mark could be asserted as a trademark only when used as a red outsole contrasting with the remainder of the shoe; it could not be used when both the sole and the remainder of the shoe were red.
by Lee Gesmer | Sep 12, 2012 | Copyright
In late August Massachusetts U.S. District Court Judge Rya Zobel refused to remit $675,000 in statutory copyright damages that a jury awarded (long ago, pre-appeal) against Joel Tenenbaum, and held that the award did not violate Tenenbaum’s constitutional rights under the Due Process Clause. (Blog post on Tenenbaum here).
Yesterday, in a case involving essentially identical issues, the 8th Circuit affirmed a $220,000 jury verdict against Jamie Thomas-Rasset.
Ms. Thomas-Rasset has had a rough six years since she was first sued for downloading 24 copyrighted songs. She has been through three jury trials, resulting in verdicts of $220,000, $1.92 million and $1.5 million.
The federal district court trial judge in Minneapolis seemed to be sympathetic to her plight, setting-aside or reducing the verdict each time. However, the recording companies persisted, and it appears that her luck may have finally run out. The Eighth Circuit Court of Appeals ordered the trial judge to enter judgment against Ms. Thomas-Rasset in the amount of the original, $220,000 verdict (as requested by the record companies). Importantly, the court rejected Thomas-Rasset’s claim that a statutory damages award of $9,166 per song violated the Due Process Clause.
Just as importantly, the court declined to be the first federal circuit court to rule on whether making sound recordings available for distribution on a peer-to-peer network (as Ms. Thomas-Rasset did) violates a copyright owners’ exclusive “distribution” right under section 106(3) of the Copyright Act, regardless of whether actual distribution (in this case downloading by third parties) has been shown.
Unless Ms. Thomas-Rasset can persuade the Supreme Court to take review (or the Eighth Circuit to reconsider it en banc), this case is over. Whether the record companies will recover any part of their judgment is an open question, given that Ms. Thomas-Rasset works as a natural resources coordinator for the Mille Lacs Band of Ojibwe Indians and reportedly has been represented pro bono in this long-running case. Nevertheless, in this case, and in the Tenenbaum case, they have made their point. However, it comes a bit late, given that the record company downloader suits have slowed, if not ceased altogether.
Meanwhile, the decision doesn’t bode well for Joel Tenenbaum, who, presumably, is weighing a Due Process Clause appeal of Judge Rya Zobel’s August decision in his case.
Capitol Records Inc et al v. Thomas-Rasset (8th Cir., September 11, 2012)
by Lee Gesmer | Sep 11, 2012 | Patents
As I’ve written before, getting sued for patent infringement in Texas (often the Eastern District, or “EdTX”) is generally viewed as undesirable by corporate America. Apparently seeking to avoid this unpleasantness, TomTom, Inc. filed a suit in Massachusetts, asking the court to declare that it did not infringe several patents held by Norman IP Holdings, Inc., over which Norman had already sued TomTom in EdTX. As its name suggets, and as best I can determine, Norman is a non-practicing entity that has been active in the courts of EdTX.
However, TomTom’s strategy of avoiding Texas appears to have failed. Massachusetts U.S. District Court Judge Saylor has upheld a decision by Magistrate Judge Judith Dein concluding that the Massachusetts court did not have jurisdiction over Norman, and therefore could not force Norman to confront it over these issues in Massachusetts. It appears that Texas is where TomTom will have to defend itself against Norman.
I will quote, not for the first or last time, the words of General Phillip Sheridan: “if I owned Texas and Hell, I’d rent out Texas and live in Hell.” Words that ring true for Texas patent defendants.
TomTom, Inc. v. Norman IP Holdings, LLC (D. Mass. September 4, 2012)
by Lee Gesmer | Sep 9, 2012 | Patents
“. . . the intolerable wrestle with words and meanings . . .” East Coker, by T.S. Eliot
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Congress enacts laws. The courts interpret and apply them in cases. Often, there is disagreement over what the words mean, and judges debate the meaning in published decisions. Judges on the same court may agree, disagree, dissent, concur, and form shifting majorities and minorities. Occasionally, congress will take notice and attempt to clarify a law by amendment. Sometimes, this only adds to the confusion.
The eleven active judges on the Court of Appeals for the Federal Circuit, the patent appeals court, exemplify this dynamic in their August 31, 2012 en banc decision in two cases consolidated on appeal, Akamai v. Limelight and McKesson v. Epic Systems (link). The decision, totaling over 100 pages, is comprised of three opinions, each with dramatically different views of a fundamental issue in patent law.
The core issue the judges on the CAFC were unable to agree upon on is this: does patent infringement occur when separate entities perform the steps of a patented method?
To take a simple example, assume that a patent claim involves just two steps: first, delivering a web page to a customer’s server, second, the some form of manipulation of the page by the customer (e.g., tagging or data hashing).*
In fact, this is, in highly simplified form, analagous to some of the patent claims at issue in this appeal. (U.S. Patent No. 6,108,703).
Until August 31st, the patent owner could not successfully claim patent infringement, because this was “divided” infringement – multiple parties (in this example two parties) performed different parts of the single claimed patent method. As the CFAC stated in BMC Resources, Inc. v. Paymentech, L.P.), “infringement requires, as it always has, a showing that a defendant has practiced each and every element of the claimed invention.”
In Akamai/McKesson the CAFC agreed to reconsider the divided infringment doctrine en banc. However, the eleven judges were barely able to eek out a 6-5 majority opinion.
Six of the CAFC judges — the thin majority — formulated a new doctrine of “induced infringement”: a party can be liable for inducing infringement if it either (1) induces several parties to jointly carry out the steps necessary for infringement, or (2) performs some of the steps of the claimed method itself and induces a third party to perform the remaining steps claimed. Under this new interpretation of the law all the steps of a claimed method must be performed in order to find induced infringement, but all the steps need not have been performed by a single entity. However, importantly, it appears that the CAFC intends only for the “inducer” to be liable for patent infringement, not the parties that directly infringe the patent claim.
Four of the eleven judges dissented, arguing that there should be no patent infringement where the steps are “divided.” In other words, this group argued for adherence to the “single-entity” rule that had been in effect.
One judge, Pauline Newman, dissented separately, arguing that under the patent statute when more than one entity performs all of the steps, the claim is directly infringed. As she states, “The court should simply acknowledge that a broad, all-purpose single-entity requirement is flawed, and restore infringement to its status as occurring when all of the claimed steps are performed, whether by a single entity or more than one entity . . ..”
What is the statutory language the judges cannot agree upon? It is this:
whoever without authority makes, uses, offers to sell, or sells any patented invention . . . during the term of the patent therefor, infringes the patent (35 U.S.C. 271(a))
While the dissenters cannot agree whether the word “whoever” requires a single actor or permits several actors to combine to infringe a patent, the majority ducks this question altogether, focusing instead on section 271(b) of the statute: “Whoever actively induces infringement of a patent shall be liable as an infringer,” and concludes that this provision permits liability based on inducement. Of course, as the dissenters point out, this approach begs the question whether there has been an “infringement” in the first place if multiple actors perform the elements of a patent claim.
The decision leaves unanswered questions and poses contradictions, not the least of which is that it appears the patent owner cannot sue the direct infringers when more than one entity participates in the infringement, an odd result indeed. It leaves unanswered whether the patent holder can obtain injunctive relief against the direct infringers, or whether the should even be named as defendants. It muddies the lines between direct, contributory and vicarious patent liability, which lines were already far from clear before this decision. And, most fundamentally, it fails to answer the question whether direct patent infringement can exist where the steps are “divided” – if it does not, there can be no “induced” infringement, since it is beyond question that direct infringement must exist before induced infringement can occur.
The fact that the en banc court was unable to reach consensus on such a fundamental issue of patent law is disturbing. Speculation that the Supreme Court will attempt to straighten out this mess began almost immediately after release of the decision. Perhaps the Supreme Court will answer the central question dodged by the majority in Akamai/McKesson, whether multiple-actor infringement constitutes patent infringement, and thereby serve as the basis for induced infringement, and vindicate one of the dissenting positions. However, the Supreme Court has been known to make matters worse, not better, when it comes to “the intolerable wrestle with words and meanings,” particularly in cases involving patent law.
Akamai Techs., et al. v. Limelight Networks and McKesson Techs., Inc. v. Epic Systems Corp.
[Update: Reversed by U.S. Supreme Court on June 2, 2014. Link]
