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?
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.
In February, in the Circuit Court in Miller County, Arkansas, some plaintiffs—led by Lane’s Gifts, an Arkansas retailer—sued Google, Yahoo!, Time Warner, Disney, and Ask Jeeves, among other Internet companies, alleging that these companies knowingly overcharged for the advertising they sold and that they conspired with each other in doing so! The plaintiffs now want the suit certified as a class action which relates to the growing problem of “click fraud” a practice our very own litigator and legal guru Peter Raymond knows and has spoken about. Clicking ads or even automating the click-throughs—in some cases by competitors—can illegally run up the advertising charges, and analysts estimate these can increase by more than 15 percent because of such fraud.
On April 28, 2005, New York’s Attorney General sued Intermix Media—a major Internet marketer based in Los Angeles, claiming “spyware” and “adware” were secretly installed, which, among other things, can redirect browsers to unwanted websites, can add toolbar functions and icons, and distribute ads that pop up on your monitor. The suit alleges violation of New York State General Business Law provisions against false advertising and deceptive business practices, and also alleges trespass under New York common law. Intermix’ software would download, install and then direct advertising to computers based on user activity—often without notice and without an uninstall application—when a user visited a website, played a game or downloaded a screen saver. The Attorney General’s office claims that the lengthy licensing agreement purporting to seek permission, even when used, is misleading or inaccurate.
As we mentioned in last month’s issue, sweepstakes, contests and promotions are primarily regulated by state law, although federal statutes and regulations must be considered. Jurisdiction and eligibility across borders, language, currency restrictions, licensing and export of technology, liability, billing and payment, whether a deposit to play might be construed an account for banking purposes, or whether gathering non-public, personally identifiable information about contestants may have privacy implications, are just a few of the issues that transcend the “gaming” aspects of any legal analysis.
On the U.S. federal level, although the FTC can take regulatory action and sue advertisers for deceptive or unfair acts and practices, it relies heavily on the states to regulate the industry. The FTC has, however, promulgated rules that do have significant impact on promotions. For example, the Children’s Online Privacy Protection Act (“COPPA”) was enacted to protect children from marketers who collect or use personal information obtained online from under-age children without parental permission, and authorized the FTC to develop a rule that requires “verifiable parental consent.” Because contests are extremely popular for Internet marketing, online advertisers must be cognizant of COPPA if a portion of their online traffic is, or is likely to be, children under the age of 13.
To illustrate the maze of legal and regulatory issues, let’s use an example: Joe’s Airline, Widget and Screen Door Company wants to conduct a contest on the Internet in which participants are charged $2 to play successive rounds of chess, with prizes at various levels and a grand prize of a million dollars. Our promotion is really a unilateral offer to enter into a contract, subject to terms and conditions (e.g., rules) agreed upon through some manifestation of acceptance. Participants accept the offer by performing a required act—registering, paying, selecting an “I ACCEPT” link—and a binding contract is formed. Point number 1: if Joe fails to adequately disclose the rules upon which the offer is made, the promotion could be construed as an illegal lottery, rather than a contest. Point number 2: Joe better get the rules right and disclose them properly because there are cases which indicate once a participant enters (“accepts”), Joe cannot change the rules (i.e., unilaterally amend the contract). Something to think about: Could each chess game be viewed as a new contest, permitting amendments prospectively?
In general, to qualify as a contest, skill, and not chance, must determine the outcome, and chance may not determine the winner or prize amount. Most, but not all, state laws distinguish games of skill from games of chance, although states do not use a uniform standard to differentiate between the two. While some states prohibit requiring consideration to engage in a promotion where a prize is awarded, most states do not prohibit the payment of money if the promotion is a bona fide contest of skill. What constitutes skill? Good question. The decision is often a question of fact, and when the Internet is involved, evidence can be complex and technology-based, straining judges and juries. Two criminal courts in New York judging the legality of a shell game and a card game reached opposite conclusions.
A number of states have disclosure statutes which apply. Some (e.g., California) arguably apply to skill-based contests, while others do not. Many prize notification statutes were not intended to apply to skill contests, but are worded broadly to include any promotion requiring an entry fee or a purchase. Joe should also be aware that some state gambling laws do not limit their application to games of chance, but focus on whether players are asked to risk or wager something of value. In those states, a skill-based contest that involves betting or offers prizes dependent on the number of entries or the amount of entry fees should be reviewed carefully against state gambling laws. Remember the three elements that constitute an illegal lottery? A prize, consideration and chance. By including an equal and alternate means of entry in which there is “no purchase necessary” to enter or win, and by avoiding a payment (i.e., consideration), Joe can introduce the element of chance in the determination of the winner and not be in violation of federal or state law.
In what may be the largest judgment in a suit against spammers so far, a company that offers subscribers an e-mail service in Iowa has been awarded more than a billion dollars by a federal judge; the allegations were that the company’s servers were inundated with as many as 10 million spam e-mails a day. The judgments were obtained under the Federal Racketeer Influenced and Corrupt Organizations Act (“RICO”) and the Iowa Ongoing Criminal Conduct Act. Iowa law allows damage claims of $10 per spam message and were tripled under RICO. Not particularly surprising, no attorneys for the defendants were present during a bench trial in November and the judgments were entered by default.
A federal Judge in New York State has altered the conditions that apply to the release program of a convicted child sex offender, restricting the individual’s access to the Internet. The judge ruled the use of the Internet, to find and lure victims, was such an integral part of the man’s crimes, that a ban on using the Internet is appropriate—even though his supervised work release job is computer programming. When this issue has previously been presented to a federal court in New York, Internet restrictions have been overturned. Here the judge distinguished those cases by noting that in this instance the offender had used the Internet to search for and attract new victims. Technology also played a role in this decision. Because of software incompatibilities, probation officials couldn’t monitor the individual at work. Because the employer develops software for cellular telephones, the employer was concerned about liability if a third-party is permitted to monitor the computer systems. Will this hold up? It is being appealed. Who knows? It again highlights how pervasive the Internet has become and how difficult questions continue to arise at the intersection of law and technology.
In what is being hailed as a major victory for VoIP, the Federal Communications Commission ruled that some state telecommunications regulations do not apply to providers of “voice over IP” services, and ruled that states are barred from imposing telecommunications regulations on Internet phone service providers. The FCC clearly indicated that existing regulations which rely on where a call originates and terminates (“geography-based”)—relevant when the original laws and regulations were written—are increasingly irrelevant today. The decision calls into question the validity of numerous state regulations which conflict with the Commission’s policies and regulations, but the hard work is yet to come—the FCC still must draft rules for services that rely on the “Internet Protocol,” the backbone of the Internet’s infrastructure. The Commission also did not address whether cable service providers were or were not covered by this ruling. Dozens of states are currently trying to regulate voice over IP, nervous that revenues from telecommunications taxes will diminish as businesses and consumers migrate their voice traffic to the unregulated Internet, although the FCC’s ruling does not diminish the power of state to enact and enforce consumer protection laws for the benefit of their citizens. Taxation and other regulation, however, may be a different matter.
This past June, we reported L.L. Bean filed suit against Nordstrom, J.C. Penney, Atkins and Gevalia alleging copyright and trademark infringement in connection with pop-up advertising. Bean has now settled with Gevalia and Atkins, who have agreed to damage payments (i.e., for trademark infringement), as well as agreeing not to authorize pop-up advertisements of their products on Bean’s website. Spyware has been the subject of significant controversy, and anti-spyware legislation has passed in Utah and is pending in Congress and in California, although the Utah statute is being challenged by spyware maker WhenU. It is likely lawsuits such as Bean’s will continue to be filed based on theories that not only are consumers annoyed by pop-up ads, but that they become confused by the advertisements as well.
On July 20, the U.S. District Court for the Southern District of New York imposed sanctions against UBS Warburg for destroying relevant e-mail messages during the course of litigation (Zubulake v. UBS Warburg LLC, et al., 2004 U.S. Dist. LEXIS (S.D.N.Y, July 20, 2004)). The Court ordered UBS to pay expenses and attorney fees incurred by the plaintiff, granted plaintiff’s request for further discovery, and agreed to instruct the jury that a negative inference may be drawn against UBS as a result of the missing evidence. The case provides important guidance for counsel on electronic discovery issues and record management, and the Court notes counsel is expected to take some affirmative steps: (1) “identify sources of discoverable information”; (2) “put in place a litigation hold and make that known to all relevant employees by communicating with them directly” and not only repeat these instructions “regularly” but also “monitor compliance”; (3) “call for employees to produce copies of relevant electronic evidence”; and (4) “safeguarding any archival media” the client must preserve. Given the notoriety of the case, these practices will likely become a de facto standard in evaluating electronic discovery issues and requests for sanctions. Got litigators? Call Rimon—we not only have knowledgeable litigators, but we also have an entire team of professionals skilled in data management, record retention, and compliance in and out of litigation. Try us, you’ll like us.