We were so busy last month telling you about Grokster, we didn’t even get a chance to mention the Supreme Court also ruled providers of cable modem services are not subject to the common carrier regulations that apply to telecommunications services—most significantly the requirement they allow competitors to connect or interconnect with their networks and provide competitive choice and equal access to consumers. Technically, the decision held that the FCC didn’t exceed its authority and has the discretion to interpret the scope of its regulation and rulemaking authority when it declined to force cable broadband providers to provide competitive access similar to that accorded the telecommunications’ common carriers. The FCC had characterized cable modem services as “information services” and thus not telecommunications services, which are subject to the common carrier (and consequently, competitive) regulations.
Click Defense, a company that sells tools for online marketing, including tools to prevent click fraud, sued Google. Why? Because it just doesn’t do enough to prevent “click fraud”—the process of deliberately clicking Web ads to run up rival advertising costs (the advertiser has to pay Google for each click). Whether it does or doesn’t do enough is a question of fact and whether it has an obligation to do something, anything, or more than it is doing is also debatable. On one end of the spectrum, liability could attach if a search engine company actually knew (or should have known) someone was doing that and did nothing to stop or prevent it. At the other end is the fact that in today’s environment, it is often difficult for these providers to monitor or determine what constitutes improper or proper clicking. After all, isn’t the goal of advertising to induce you to click? This is a sticky problem that is likely not to go away and will find different paths through the courts—there is too much money at stake. How can we help you?
Last month we teased you about legal issues that apply to interactive, web-based digital video games. How could we have known those sexually explicit scenes hidden in the game Grand Theft Auto: San Andreas would have been exposed just in time for our July Legal Bytes issue. Wow. Although the Advertising Review Council has an Entertainment Software Rating Board (“ESRB”)—a self-regulatory group that in May 2001 promulgated widely followed and accepted Principles and Guidelines for Responsible Advertising—the inability of the industry to effectively police itself, whether in connection with sexually explicit images, profanity, violence or otherwise, is coming under increasing fire as these incidents are uncovered. You all know what that means, right? Legislation, regulation and full employment for advertising attorneys who know their way around interactive, web-based digital gaming…and we have lots of those folks. You thought we were only concerned with product placement. Questions?
At least that’s what the FTC thinks. They charged BJ’s Wholesale Club with failing to maintain adequate computer security—it is the first time the FTC has used Section 5(a) (the section that says if you engage in an unfair or deceptive act, or practice in or affecting commerce, it’s unlawful). The FTC cited failures to encrypt consumer information, storing sensitive computer information for a needlessly long time in files with common or default passwords, and lax measures regarding prevention of unauthorized access, detection and security investigations: The complaint alleged that when taken together, BJ’s failed to provide legally adequate security for sensitive consumer information. The Chairman of the FTC has called for Congress to enact legislation requiring notification to consumers if there is significant identity theft risk, and has asked Congress to consider extending the Gramm-Leach-Bliley Safeguards Rule currently applicable to financial institutions, to non-financial institutions.
Literally as this issue headed to press, the Supreme Court released its unanimous decision in the case of Metro-Goldwyn-Mayer Studios v. Grokster—a decision that is likely to have monumental consequences for years to come. To summarize the basic issues, for many years peer-to-peer file-sharing networks have relied on the 1984 Sony v. Universal Studios decision (“Betamax case”) which held the distribution of a commercial product capable of substantial noninfringing use could NOT give rise to contributory liability unless the distributor had actual knowledge of specific instances of infringement and failed to act. With peer-to-peer file-sharing, the network software architecture is decentralized, making it unlikely that the provider of the file-sharing software (in this case Grokster and StreamCast) could actually know of any specific instances. Even the theories of vicarious infringement were thrown out by the lower courts because neither Grokster nor StreamCast monitored, controlled or supervised the use of the software (nor did they have an independent duty to police against infringement).
Enter the Supreme Court, which agreed to hear the case on appeal from the 9th Circuit, which held that Grokster and StreamCast could not be liable for contributory infringement because there was no ability to prove actual knowledge and the software was capable of substantial non-infringing use. To give readers context, evidence was introduced indicating that on the FastTrack and Gnutella networks, more than 100 million copies of file-sharing software had been downloaded and billions of files are shared across those networks each month! The court noted “the probable scope of copyright infringement is staggering.”
So the Supreme Court overturned the 9th Circuit decision—but not for the reasons you might think. In my view, the Supreme Court did not overturn or even modify the Betamax case. Distributors of peer-to-peer file-sharing software using a decentralized indexing system to share copyrighted songs and movies, and which is capable of substantial non-infringing use, cannot be held liable for contributory infringement absent showing the distributors had specific knowledge and made a material contribution to direct infringement. The court also confirmed that software distributors cannot be held liable for vicarious infringement without showing the ability to block direct infringement by users.
The Supreme Court went to great pains in overturning the 9th Circuit to note “this case is significantly different from Sony and reliance on that case to rule in favor of StreamCast and Grokster was error.” The Sony case applied to distribution of a product that had both lawful and unlawful uses and sought to impose liability because Sony knew some users might use the product unlawfully. That case held it is inequitable to impute fault and corresponding secondary liability based on the unlawful acts of others, where the product has substantial lawful utility.
Intermix Media has reportedly agreed to pay $7.5 million to settle a lawsuit filed by the New York Attorney General, and if true, this represents the largest fine in a consumer online privacy action to date. In addition to agreeing to hire a Chief Privacy Officer, Intermix must agree to stop distributing its adware/spyware and redirect programs which the NYAG alleged were downloaded to consumers’ personal computers with inadequate notice, and then hidden to make it difficult to remove. Besides the annoyance which consumers rail about, often such hidden programs can be part of more elaborate identity theft and security breaches, sometimes without the knowledge of the company that created them. The lawsuit’s primary claims were false advertising and deceptive business practices under New York’s General Business Law statutes.
Whatzup with interactive, web-based digital video games? Plenty, if you believe what we read…coming up in the next issue, with struggling advertising revenues on TV and moviegoers’ increasing annoyance with the resurgence of advertising (which now seems to be replacing the 20 minutes of “coming attraction” trailers), advertisers are looking beyond product placement in reality TV shows and wondering if those captive eyeballs and fanatic game players can turn an interactive gaming industry into the next frontier of advertising. Not to mention those new chipsets and handhelds that are making video game graphics look almost like the real thing. Will virtual reality supplant reality and will promotional and advertising take us there? Stay tuned. [P.S.: This is called a “teaser.”]
Florida’s Game Promotion Statute §849.094 has been modified, substantially reducing requirements for advertising games of chance in Florida—full rules are no longer required by Florida law in print advertising. Where previously a full set of full set of official rules for games of chance needed to be included in print advertisements in Florida, now advertising need only include “material terms” of the rules and regulations if the advertising includes a website address, toll-free telephone number or a mailing address where the full rules and regulations may be obtained.
The U.S. Supreme Court will help decide how content providers will operate on the Internet. The first case, involving more than 20 entertainment companies with names like Viacom, Disney and Time Warner, involves the sharing of content such as movies, videos and music by computer users who download the content from the Internet. This case involves the issue of whether copyrighted material can be shared by users on peer-to-peer networks and, if the court follows the reasoning in the Betamax case which was decided back in 1984, there is a chance the court will decide that because these networks have substantial non-infringing uses, the network operators cannot be held liable for contributory infringement based on the conduct of individuals who use the network. Stay tuned—film at 11:00!!
The Supreme Court is also deciding a ‘gatekeeper’ case related to broadband service delivery by cable operators. Today, cable operators control the broadband portal or gateway that customers can use, and while a user can go through the portal and log on to another website (say Yahoo! or AOL), they still must first go through the cable provider’s designated broadband operator. The case coming up challenges that gatekeeping role and seeks to require cable operators to give consumers the right to pick the broadband connection they wish to have through the cable. We will keep you posted as developments unfold.
According to Technology Partners International as reported in CIO magazine, Europe has now overtaken the United States in major outsourcing deals (i.e., deals valued in excess of about $50mm). In 2004, out of $76 billion in contract value, Europe garnered 49 percent beating the United States and Asia. One of the most important statistics behind those numbers is the fact that more and more outsourcing companies are becoming major players and the competition is heating up. The article lists the big-six outsourcing companies (you’ll have to call me to find out who they said they are) and notes that in 2003 these companies accounted for about 70 percent of the outsourcing contracts, but in 2004 their share dropped to just over 40 percent—a big drop in one year. What that means is that if 26 providers shared the 100 best deals in 2003, 36 shared them in 2004, and only time will tell if the outsourcing market is saturated or if more providers will jump to the front lines in 2005. One trend we are seeing is the segmentation of outsourcing arrangements by sophisticated end-user customers. Not just seeking competitive bidding among providers as in days past, these customers are actually segmenting their outsourcing requirements by function, business activity and operational needs, and seeking niche-based outsourcing providers who are best in the class in those areas.
It seems that the tempting idea of putting all one outsourcing eggs in one basket in order to make it “easier” to manage the relationship has not proved to be very smart after all. It appears that retaining the expertise necessary to manage outsourcing relationships in-house and being sure you have the right outsourcing provider with the right contractual relationship for each function or activity is the wiser course. Speaking of contractual relationships—Rimon has a team of international lawyers experienced in outsourcing. You might want to call us if your thoughts turn to outsourcing; we can and are happy to help. You might also go get a copy of the new book, Outsourcing Agreements Line by Line, written by me and published by Aspatore Publishing—it’s available online (an unabashed plug for both the book and our ability to assist with your legal needs).