By: Rob HassettHassett Cohen Goldstein, LLP990 Hammond DriveSuite 990 Atlanta, GA 30328(770) 393-0990www.internetlegal.comThe writer wishes to thank his wife, Lynn Hassett, an attorney in his law firm, and Adam Alexander, formerly a law student at Emory University Law School, now practicing law at the firm of Cooper & Scully, PC in Dallas, Texas, for their help in preparing this section of these materials. Background and Summary This article first appeared in the program materials for the internet law seminar sponsored by NBI, Inc. which was held in Atlanta, Georgia on February 18, 1998. This intermediate level article addresses the subject of copyright law as it relates to the internet. (18 Pages) I. INTRODUCTION Article I, Section 8 of the Constitution of the United States reads in pertinent part:
Protection of works of authorship that are fixed in any “tangible medium of expression” is governed by Chapters 1 through 8 and Chapter 10 of Title 17 of the United States Code.(1) State law with respect to such works is pre-empted by federal law.(2) State law still applies with respect to rights in sound recordings fixed before February 15, 1972 and with respect to works that are not fixed in any tangible medium of expression. The United States has been a party to numerous treaties regarding copyright law. The most important treaty is the Berne Convention to which the United States became a party in 1989. The Berne Convention provides that each member nation will protect the works of each other member nation’s citizens at least as well as it protects the works of its own citizens; as well as sets forth standards that must be met regarding the protection of works of authorship by all member nations. The process of proposing amendments to the Berne Convention is administered by the World Intellectual Property Organization (“WIPO”) which is an agency of the United Nations headquartered in Geneva, Switzerland.(3) II. COPYRIGHTABLE SUBJECT MATTER A. General Principles 17 U.S.C.A. §102 reads in pertinent part:
In part (b), Congress codified the pre-existing case law that held that copyright law protects the expression of an idea but not the idea itself. It is thought that the idea/expression dichotomy is required by the First Amendment prohibition against enactment of any law that would abridge freedom of speech.(4) The basic concept is that copyright cannot monopolize an idea or concept. This has resulted in rules that are especially important to the Internet including:
Additionally, whether an aspect of a work is an idea or expression of an idea is a matter of degree. Exact copying of the language of a novel, play or computer program is a copyright infringement. Writing a novel using no more than the same overall general plot as another novel or writing a computer program performing the same function as another is not a copyright infringement. Paraphrasing a novel or following a detailed plot outline is an infringement. See, Twin Peaks Productions, Inc. v. Publication Int’l, Ltd., et al., 996 F.2d 1366 (2d Cir. 1993) (finding detailed plot summaries of television series to be infringement). Paraphrasing linear computer code or following the structure, sequence and organization of that code has been held to be an infringement.(6) B. Non-Literal Elements of Computer Software The non-literal elements of computer software are elements of the software other than the source code and object code such as the overall layouts, menus, structure and look and feel. At one point there appeared to be a significant amount of protection for the non-literal elements of computer software. The courts even went so far as to apply the notion that taking the “total concept and feel” of a computer program (which had been found to be illegal with respect to television characters)(7) constitutes a copyright infringement.(8) In the 1990’s the courts began restricting protection of non-literal elements in computer programs under copyright law. The two leading cases in this regard are Computer Associates, Inc. v. Altai, Inc.(9) and Lotus Dev. Corp. v. Borland Int’l, Inc.(10) In the Altai case, Computer Associates had developed a scheduling program and, separately, an “ADAPTER” to allow the scheduling program to be operated on a number of different operating systems. Altai, a competitor of Computer Associates, desired to develop an “adapter type” program to allow its scheduling program to be used on an additional operating system. Altai hired an employee of Computer Associates who, without Altai’s knowledge, brought over code from the ADAPTER program. After Computer Associates filed suit, Altai realized what had happened, admitted liability for the direct copying and reconstructed the program without any literal copying. The court had to determine whether the non-literal copying constituted an infringement. The Court of Appeals approved the statements of the district court below that had said “references to structure, sequence, and organization” are no longer necessarily relevant to how computer programming is done. With object oriented programming, and especially with Windows based object oriented programming, such as Visual Basic, it is difficult to point to any particular sequence of a computer program. The court went on to describe its three step test for determining what, if any, of the non-literal elements of a computer program are protectable under copyright law. The first step is “abstraction” where the court goes through a sort of “reverse engineering.” The court determines what are the various levels of abstraction of the program. At the lowest level are the actual instructions organized into a hierarchy of modules. At a higher level are the functions of each module. (Note that a selection and organization of modules could involve creativity that is protectable if at that level the program survives Step 2 “filtration” (discussed below), as compilations may be protectable under Section 103 of the Copyright Act.) The second step is filtration of each level of abstraction. Here the court filters out the following at each level:
The third step is the comparison test. From the filtration step, the court has determined what of the plaintiff’s program is protectable expression and then the court determines whether or not the “defendant copied any aspect of this protected expression, as well as an assessment of the copied portion’s relative importance with respect to the plaintiff’s program.” The Court of Appeals also held that the district court’s appointment of its own expert witness was appropriate. Following these tests, the court held that there was no infringement. The court did hold that there was a possibility of misappropriation of trade secrets. The court said that state trade secret law is not pre-empted under Section 301 of the Copyright Act. In Lotus v. Borland, supra, Borland had developed a competitive spreadsheet program that included an option which provided “a virtually identical copy of the 1-2-3 menu tree” contained in the Lotus spreadsheet program. There was no contention that the underlying code or protected elements of computer screen displays had been copied. Lotus’ only contention was that Borland had unlawfully copied its menu command hierarchy. The trial court concluded that Lotus’ menu hierarchy was protectable expression because, for example, many different words could be used for the same commands. The Court of Appeals reversed. Referring to 17 U.S.C. §102(b) (quoted above), the Court of Appeals said:
The Supreme Court granted certiorari to Lotus on an appeal from the First Circuit Court of Appeals decision, but the Supreme Court affirmed by default when it turned out that the Justices were equally divided on the issue.(11) As courts became reluctant to protect non-literal elements of computer programs under copyright law, courts, at the same time, became more comfortable with granting patent protection to computer programs.(12) Shifting much of the protection for non-literal elements of computer programs from copyright to patent law has created a situation that makes it much more difficult for start up companies to protect their software because of the much higher expense of filing for patent protection. In the writer’s view it also allowed for monopoly protection of some matters that would not have ever been protected by copyright law that are too easy to create in the software context to fairly be the subject of patent protection. There is so much programming code created every day that much of the software for which patent protection is granted is already being used by others in the industry who just have not gone to the trouble of applying for a patent. The writer submits that a modified hybrid of trade secret, patent and copyright law should be developed for the protection of computer software. C. Screen Displays – Web Pages The Copyright Office has taken the position that registration of an underlying computer program automatically covers the screen displays. The applicant need only describe the work as “computer programs.” However, if the application includes “screen displays” in its description of the work, the applicant will be required to include a printout or videotape of the screen display showing sufficient copyrightable authorship to support a claim to copyright in the screen display.(13) Note that computer programs are generally registered as literary works on Form TX (“TX” refers to “text”). For works on the Internet that are predominantly visual works of art, which is the typical case now, Form VA (“VA” refers to “visual arts”) should be used. Where audiovisual authorship predominates, which is likely to be more and more often the case in the future for Internet sites, the work should be registered as an audiovisual work on Form PA (“PA” refers to “performing arts”). D. Data Bases Also important to Internet issues is the protectability status of online data bases. An author has copyrights in his original contributions to a compilation, but not in the underlying works being used.(14) At one time there was a split in the circuits about whether compilations of pure facts could be protected by copyright if there was no originality involved based on the labor and effort used in the compilation. See, e.g., Leon v. Pacific Telephone & Telegraph Co., 91 F2d 484 (9th Cir. 1937). This “sweat of the brow” line of cases was overruled in Feist Publications, Inc. v. Rural Telephone Service Co.,(15) where the Supreme Court held that there was no copyright infringement in copying a telephone book because there was no creativity involved in compiling it. The Court pointed out that placing names in alphabetical order and adding addresses was standard and not creative.(16) In Matthew Bender & Company, Inc. v. West Publishing Co.,(17) it was held that copying West Publishing compilations of Federal and District Court cases was not an infringement. West had successfully argued in West Publishing Co. v. Mead Data Central, Inc.,(18) that it had a protectable interest in selection of the order in which it assembled the case decisions. At the December 1996 WIPO conference in Geneva, the United States representative proposed that the Berne Convention be amended so that the time and effort that went into developing data bases would be sufficient to allow for copyright protection – the current rule in Europe. The United States scientific community and others effectively lobbied the White House to withdraw this proposal.(19) III. EXCLUSIVE RIGHTS Section 106 of the Copyright Act reads in pertinent part:
To the extent that each of these exclusive rights have special relevance to online use, they are discussed in Part VIII below. For an in-depth discussion of how the exclusivity of these rights is affected by the doctrine of fair use under Section 107 of the Copyright Act, see the article on Fair Use In New Media Technology by Rob Hassett and Adam Alexander included with these materials. IV. OWNERSHIP Copyrights in a work of authorship vest initially in the individual author unless the work is a “work made for hire” in which case the employer is considered to be the author.(20) A transfer of copyright ownership may only be made in writing.(21) A work may be a work made for hire only if it:
Ownership can be a problem where a company employs another company as an independent contractor to create a web site. Under those circumstances, without a writing to the contrary, the commissioning company would not own the copyrights in that web site.(22) This is contrary to the law that applied before the 1976 Copyright Act became effective in 1978. Where a company pays for an independent contractor to develop a web site and does not have a written agreement as to ownership, the company would arguably have an implied license to do whatever it wished with the web site, but couldn’t prevent the independent contractor from also using those portions of the web site developed by the independent contract. Of course, the independent contractor would not be permitted to use materials contributed by others and would be subject to any privacy and publicity rights of any individuals whose name and/or likeness appeared in the web site. V. REGISTRATION Prior to January 1, 1978, registration was required to maintain ownership of a copyright in a work. Currently, all that is required for ownership is that the work be fixed in a tangible medium of expression. Registration in the Copyright Office is still advisable. With some minor exceptions, unless a work is registered before an infringement occurs, the copyright owner may not recover statutory damages (damages which a judge may award under Section 504 without proof) or attorney’s fees (which a judge may otherwise award under Section 505).(23) Additionally, with some minor exceptions, registration is required prior to the filing of a lawsuit for copyright infringement. VI. NOTICE OF COPYRIGHT Prior to March 1, 1989, when the United States became a member of the Berne Convention, it was required that copyright notices be placed on works in order to maintain ownership in the copyrights in those works. Notice of a copyright is no longer required for ownership. Nevertheless, it is recommended that copyright notices be placed on any work. Adding the notice prevents a defendant’s claim of innocent infringement in mitigation of damages on the grounds that the infringer did not realize that a copyright was claimed. A copyright notice on visually perceptible copies consists of the following:
Note that the word “Copyright” or the abbreviation “COPR” are also both acceptable but in order to comply with requirements under what is known as the U.C.C. Convention, it is recommended that a “©” be used. It is also advisable to add the language “all rights reserved” at the end of the notice as that is still required in some Latin American countries. Where the work is a sound recording and the owner wishes to give notice of the copyrights in the sound recording, a “p in a circle” should be used.(24) VII. MUSIC Rights relating to music are being treated separately in these materials. This is because the law relating to some aspects of music is different and, also, because, as a result of industry practices, music rights are handled differently from rights in other works. There are two separate sets of rights relating to every sound recording and/or audiovisual work involving music. First, there are rights in the underlying song or composition. These typically belong to the author – the songwriter or composer – and to their publisher. Second, there are rights in the sound recording itself. These typically belong to the record company. 1. Licenses of Rights in the Underlying Song Before any discussion as to the rights of the author of a musical work, it must be determined who the author is. Generally, the author is the actual writer or co-writers. However, where the writer is employed by another or is an independent contractor, the work may be deemed a “work made for hire”, and the author, and owner of the copyright of the work, may be the employer or person who commissioned the work. See, the discussion regarding “OWNERSHIP” hereinabove. With respect to songs that are released as singles, or as part of albums, most songwriters enter into agreements with publishers who pitch the song to record companies and performers and handle administrative matters for the writer. Most songwriters and composers are also affiliated with either the American Society of Composers, Authors and Publishers (“ASCAP”) or Broadcast Music, Inc. (“BMI”). These organizations license their catalogs of songs on a yearly basis to radio stations, television stations, restaurants, and other operations that publicly perform music. ASCAP and BMI then allocate and distribute the money (performance royalties) they receive based on the relative volume of use of the songs in their catalogs. The royalties are usually evenly divided between the publisher and the songwriter. However, where music is written as “works made for hire,” as is often the case for music for commercials or product jingles, the composer may not be entitled to ASCAP and/or BMI performance royalties. In addition to performance royalties, songwriters may also receive what are called mechanical royalties. Mechanical royalties are based on the number of copies of the sound recording of the song distributed. After a recording of the song is released, other performers are permitted to record their versions of the song, provided they comply with the compulsory license provisions of Section 115(c) of the Copyright Act and pay the set royalty (currently 6.95 cents per song per copy of any recording sold). This set royalty is referred to as the “statutory rate”. See 37 CFR § 255.3(h). The rate is determined by ad hoc Arbitration Royalty Panels appointed and convened by the Library of Congress. Because the compulsory processes – such as the statutory provisions for accounting and notice provisions – are somewhat cumbersome, most record companies do their own negotiating of mechanical royalties for new recordings of previously released songs. The statutory rate is still used as a basis. The Harry Fox Agency in New York City administers the issuance of mechanical licenses and the receipts of royalties for many publishers of previously recorded songs. Sometimes producers wish to include pre-existing music in their audiovisual work. For that purpose, the producer must acquire synchronization licenses for use of music embodied in their audiovisual work.(25) Synchronization licenses are generally negotiated with either the publisher or the Harry Fox Agency. 2. Rights in Sound Recordings Rights in sound recordings are treated differently. Traditionally there have been no performance rights in sound recordings. Record companies owning copyrights in the sound recordings of songs on their records, earn income from the sale of the records and from the synchronization of those sound recordings for film, television, and other audiovisual uses. Thus, unlike the owner of the underlying song, record companies do not receive any performance royalties from ASCAP, BMI or anyone else, for radio airplay and other public performance uses of the recording. It should be noted that in many other countries, especially in Europe, the owners of sound recordings do have performance rights in sound recordings. However, because the United States does not grant reciprocal rights, no royalties are collected for the performance rights for sound recordings owned by American companies when those songs are played, for example, on radio stations in countries that do recognize this right.(26) There is one exception to the rule that U.S. law does not allow for the payment of performance royalties for performances of sound recordings. On November 1, 1995, President Clinton signed into law the Digital Performance Right in Sound Recordings Act of 1995 which provides for owners of sound recordings and recording artists to receive performance royalties for certain digital performances. This Act is discussed below under Internet related issues. VIII. SPECIAL INTERNET ISSUES A. Reproduction Under Section 106(1), a copyright owner has exclusive right to “reproduce the copyrighted work … ” Whenever a computer program is used (or a web page is viewed) a copy is made on to the random access memory (“RAM”) of a computer. When copies are transmitted over the Internet, transitory copies are made throughout the transmission. Copying into RAM in conjunction with using a computer program has been held to be a violation of the exclusive rights of the copyright holder under Copyright Act Section 106(1).(27) The U.S. representative at the WIPO conference in December of 1996 urged amending the Berne Convention to explicitly provide that the making of transitory copies in connection with Internet transmissions would be an infringement. This proposal was successfully opposed by the telephone companies and Internet Service Providers (“ISP’s”) because they were concerned that it would create an additional source of liability. See, John Browning Africa 1 Hollywood 0 Wired Magazine, March 1997, at 61. Nevertheless, a statement was issued that: “the reproduction right … fully appl[ies] in the digital environment, and particularly to the use of digital works in digital form … [and] that the storage of a protected work in digital form in an electronic medium constitutes a reproduction.”(28) Although no court has decided the issue at this time, it is not clear whether the making of transitory copies as part of Internet transmissions constitutes the sort of reproduction governed by §106(a) but the copying onto RAM in connection with viewing a copy is certainly an infringement.(29) Telephone companies and routers are probably not liable for their part in transmissions over the Internet which do involve the making of transitory copies.(30) B. Performances Because the licensing rights for copying and distribution of music are handled separately from the licensing of the rights of public performances, it is necessary to differentiate online copying and distribution from online performances. The writer knows of no cases on this issue to date. Several authors have asserted that where performances can be viewed in the process of downloading, there is probably a performance, and otherwise there is not.(31) C. Criminal Liability Until recently, Section 506(a) of the Copyright Act read:
Because of the requirement of “commercial advantage” or “private financial gain” it was recently held that individuals placing copyrighted materials on the Internet where users could make copies for free had not committed any crime. This leaves copyright owners vulnerable to actions by individuals who are not concerned about civil liability. Congress has remedied this situation by passage of the “No Electronic Theft” (“NET”) Act which was signed into law by President Clinton on December 16, 1997. The Act changes Section 506(a) to read:
D. Liability of ISP’s and OSP’s Section 230(c)(1) of the Telecommunications Act of 1996 states:
This statute has been held to bar liability of an ISP or OSP for defamatory or obscene material posted by one of its customers.(33) This statutory limitation of liability for ISP’s and OSP’s has not, to date, been extended to copyright. Two bills are now pending in Congress that would limit the liability of ISP’s and OSP’s for copyright infringement by adding a Section 512 to the Copyright Act.(34) In the meantime, ISP’s and OSP’s must rely on court decisions. In Religious Technology Center, et al. v. Netcom On-Line Communication Services, Inc.,(35), the plaintiff held the copyrights in the Church of Scientology’s writings. A former member of the Church, Erlich, had placed Church of Scientology materials on a news group on the Internet through a bulletin board service connected to the internet through the national Internet service provider, Netcom. The plaintiff sued Netcom for its involvement in the claimed copyright infringement. Netcom moved for summary judgment. The court first decided that Netcom was not liable for direct infringement. Netcom had argued that Erlich, not Netcom, had actually placed the copies on the Netcom server. The court held that following the logic that Netcom had not actually made the copies and for policy reasons, Netcom would not be liable for direct infringement. The Court held that, unlike in Playboy Enterprises v. Frena,(36) Netcom was not liable for distribution or for publicly displaying the copies. In rejecting the argument that Netcom could be liable for direct infringement for distribution and public display, the court said in pertinent part:
The court next dealt with the plaintiff’s contributory infringement claim against Netcom. The court said in pertinent part:
The court held that there was a fact question about whether Netcom, after receiving notice, should have known that the copies that Erlich was posting were infringing. It stated that:
Finally, the court rejected the contention that Netcom was vicariously liable which requires:
The Court found that there was no direct financial benefit because Netcom received the same monthly sum regardless of whether Netcom did or didn’t post the material. E. Framing “Framing” is discussed in the segment of these materials relating to unfair competition. Although the writer knows of no case on point, it is likely that a court would hold that framing constitutes a derivative work. F. Music Issues On November 1, 1995, President Clinton signed the Digital Performance Right In Sound Recordings Act of 1995 into law. This act is codified in Sections 106(6), 114, 115(c)(3) and 115(d) of the Copyright Act. This new addition to the Copyright Act provides a performance right in sound recordings when the sound recordings are transmitted over a service that is either interactive (the customer can choose the song they wish to hear) or where the sender is charging a subscription fee. There is a provision for compulsory (referred to in the statute as “statutory”) licensing where the sender is charging a fee with the exception that the statutory licensing set up does not apply in certain situations where members of Congress felt that a service would in fact be providing copies, rather than performances, of the sound recordings.(37) Where the service is interactive (the customer can choose which song they wish to download) or in the other situations described in Endnote 37 below, the sender is required to negotiate a license with the owner of the sound recording, but may follow a compulsory procedure to pay a set rate for a mechanical license for the underlying compositions. Other than for subscription and interactive services, there is no performance license required, even on the Internet, for sound recordings. However, licenses are almost always necessary when a musical work and sound recordings, not owned by the web site owner, are used. Examples are:
ENDNOTES 1 Chapter 9 of Title 17 provides protection relating to the design of semi-conductors. Chapter 11 prohibits the unauthorized recording of live musical performances. 2 See 17 U.S.C.A. §301. 4 Nimmer on Copyright §1.10 [B] [2]. 5 Nimmer, at §2.18[J]. See also, Kearn River Gas Transmission Co. v. Coastal Corp., 899 F.2d 1458, 1464 (5th Cir.), cert. denied 498 U.S. 952 (1990). 6 Whelan Associates, Inc. v. Jaslow Dental Laboratory, Inc., 797 F.2d 1222 (3rd Cir. 1986). 7 See, Sid and Marty Krofft Television Productions v. McDonald’s Corp., 562 F.2d 1152 (9th Cir. 1977). 8 See, generally, Scott On Computer Law, Second Edition, Section 3.47(C)(1). 9 982F.2d 693 (2d Cir. 1992). 10 489 F.3rd 807 (1st Cir. 1995). See also, Softel, Inc. v. Dragon Medical & Scientific Communications, Inc., 118 F.3rd 955 (2nd Cir. 1997). 11 116 S.Ct. 804 (1996). 12 See the paper by Bill Marvin on Patent Law included with these materials. 13 See, 53 Fed. Reg. 21817 (June 10, 1988). 14 See, e.g., 17 U.S.C. § 103. 15 499 U.S. 340 (1991). 16 See, also, Bell South Advertising & Publishing Corp. v. Donnelley Information Publishing, Inc., 999 F.2d 1436 (11th Cir.1993); and Warren Publishing, Inc. v. Microdos Data Corp., 115 F.3rd 1509 (11th Cir. 1997). 17 1997 W.L. 266972 (S.D. N.Y. May 19, 1997). 18 616 F. Supp. 1571 (D.Minn. 1985) affirmed 799 F.2d 1219 (8th Cir. 1986). 19 John Browning, Africa 1 Hollywood 0, Wired Magazine March 1997 at 61 (www.wired.com/5.03/). 20 §201(a) and (b) of the Copyright Act. 21 See, §204 of the Copyright Act. 22 See, e.g., Community For Creative Non-Violence v. Reid, 490 U.S. 730 (1989) (holding that the employer of an artist as an independent contractor to create a sculptural work did not own the copyrights in the sculptural work after paying for it). 23 See generally, § 412 of the Copyright Act. 24 Copyright Act §§ 401 and 402. 25 Sometimes performance licenses are also required. ASCAP and BMI do not cover every type of performance – for example, they do not grant performance licenses to, or collect payments from, movie theaters. 26 Howard Siegle & Paul Karl Lukacs, A Mega-Million Dollar Musical Mea Culpa, Are U.S. Record Companies Overlooking A Fortune In International Public Performance Royalties?, 15 Ent. & Sports Law., Vol. 15., No. 303, Fall 1997. 27 Mai Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993). 28 Meca Jung and Stephen D. Rosenboro, The WIPO Treaties, The International Battle Over Copyright Cyberturf, 15 Ent. & Sports Law., Vol. 15, No. 3, Fall 1997. 29 Mai Systems Corp. v. Peak Computer, Inc., supra. Note 27. 30 See, e.g., Religious Technology Center v. Netcom On-Line Communication Services, Inc., 907 F.Supp. 1361 (N.D. Cal. 1995) (holding that an ISP wouldn’t be directly liable for material placed on its server because it would not be reasonable to hold ISP’s liable and because ISP’s are not actually the ones making the copies). 31 Jeffrey P. Cunard, et al. Internet & Online Law, Section 6.08(4) (Kent B. Stuckey, ed., 1997). 32 See the information posted regarding H.R. 2265 at http://thomas.loc.gov. 33 See, e.g., Zeran v. American Online, Inc., 958 F.Supp. 1124 (E.D. Va. 1997), aff’d 129 F.3d 327 (4th Cir. 1997). 34 See, generally, H.R. 2180 and S. 1146, http://thomas.loc.gov/ 35 907 F.Supp. 1361 (N.D. Cal. 1995). 36 839 F.Supp. 1552 (N.D. Fla. 1993). 37 The owner of the sound recordings is not required to provide a statutory license both where the license is interactive and in other situations where the drafters of the legislation felt that such transmittal could substitute for purchases of copies of the sound recordings such as situations where more than four (4) selections by the same artist are played in any three-hour period, more than three selections in total from any one sound recording are played in any three-hour period, and where a list of the sound recordings to be transmitted is being provided in advance. 38 For an in-depth analysis relating to incorporating music into a web site, see, Al Kohn and Bob Kohn, Kohn on Music Licensing, 1236 – 1250 (1996). The information above is provided for general educational purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal advice, but should always consult their own attorney regarding legal matters. © 1998, Rob Hassett, Atlanta, Georgia. All Right Reserved.
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Why Having a Corporate Name is Not Enough
By: Rob Hassett
Casey Gilson P.C.
Six Concourse Parkway, Suite 2200
Atlanta, Georgia 30328
770-512-0300
Email: [email protected]
Background and Summary
This article first appeared on the Netcelerate Home Page sponsored by the Advanced Technology Development Center at Georgia Tech. This article will assist entrepreneurs in choosing a business or company name. They will learn the difference between corporate and company names versus service marks and trade names and why it may be possible to obtain a corporate name that cannot be used as the name of the business owned by the corporation. (3 Pages)
Most business people make the error of assuming that if they are able to reserve a corporate name with the Secretary of State’s office of their State of incorporation that they may safely use that name in the operation of their business. That is not true.
Two different areas of law apply to this situation — the law relating to incorporations and the law relating to service marks.
Corporations are legal entities. Service marks are marks, such as logos, that are associated with a service. Frequently, the corporate name for a company is also used as a service mark. An example of this dual use is “Ford Motor Company.” Conversely, a corporation’s name may differ from its service marks. For example, Atlantic & Pacific Tea Company is a corporation that operates its business under the service mark “A&P.”
Rights in a service mark are obtained by using the mark in conformity with applicable law in connection with the operation of a business or by filing an “intent to use” registration in the U.S. Patent & Trademark Office in Washington (subject, of course, to no one else having prior rights in the mark and all other criteria being met). Those rights can be strengthened by registration in trademark offices of Georgia and other states and by registration in the U.S. Patent & Trademark Office. The purpose of laws relating to service marks is to protect customers from being confused concerning the sources of goods being purchased or services being provided and, in some circumstances, to protect the owner of a service mark from certain activities by others which would likely diminish the value of the mark or the reputation of the company.
Because service marks and corporate names serve different purposes in the eyes of the law and are regulated by two (2) different mechanisms, the name game can easily lead to headaches for the business person.
In making the determination of whether or not to permit incorporation under a particular name, the staff workers at the offices of the Secretaries of State of the various states are required to assure that the name requested is not reserved for and has not been issued to any other company for use as a corporate name in that state. The staff members of a Secretary of State’s office are not responsible for determining whether or not the corporate name requested is being used as a service mark by a different company, is registered in the trademark and service mark division of the same Secretary of State’s offices, is registered in the U.S. Patent & Trademark Office, is incorporated in another state, or is even in the telephone book in the same city. Although a request for incorporation of a famous mark might be denied because the staffer recognizes the names, quite frequently a person can properly and legally incorporate a business under a particular name, but not be able to use their corporate name in the operation of their business because it is another’s service mark.
The consequences to a second user of a previously established service mark would typically be the receipt of a “cease and desist letter” and a demand to change its business name. Under these circumstances, it would ordinarily be necessary for the recipient of the letter to change its business name to avoid a law suit. Such changes can cause substantial losses resulting from lost marketing momentum. Additionally, the second user may also be liable for substantial damages.
Unfortunately, there is no foolproof method for assuring that a name may be used. However, there are on-line computer data base services available for determining whether or not a service mark has been registered with the U.S. Patent & Trademark Office (e.g. www.micropat.com). Service marks registered with the U.S. Patent & Trademark Office are also available on CD ROM on the second floor of the Georgia Tech Library (Georgia Tech is a regional depository for the U.S. Patent & Trademark Office). Additionally, there are computer data base services available for determining not only whether or not a service mark is registered in the U.S. Patent & Trademark Office, but also whether the mark is registered in any state of the United States or has been referred to in numerous publications, including trade publications or other sources. Such an extensive search can be provided by companies such as Thompson & Thompson (800) 692-8833 and Government Liaison Services (800) 642-6564.
In this uncertain area of business planning, it is best to order a comprehensive name and service mark search as discussed above, and have it reviewed by an attorney to avoid misinterpretation.
The information above is provided for general educational purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal advice, but should always consult their own attorney regarding legal matters.
© 1997 Rob Hassett, Atlanta, Georgia. All Rights Reserved.
Online Contracting
by Rob Hassett
This article was prepared for the seminar on Advanced Internet and Computer Law sponsored by the National Business Institute scheduled for October 29, 1998 in Atlanta. This advanced level and lengthy article addresses legal issues relating to online contracting. (43 pages)
ACKNOWLEDGEMENTS
The writer wishes to thank Robert Port, who is of counsel to the writer’s law firm, for his help in preparing this section of these materials.
I. INTRODUCTION
Online contracting takes place over the Internet, over online services such as America Online and through private networks such as has traditionally been the case with electronic data interchange.(1) Online contracting can be broken down into four (4) categories:
(1) The online ordering of software, books, parts and other products with shipment by common carrier;
(2) The online ordering of digitally formatted products such as computer software and sound recordings followed by transmission of the products to the customer;
(3) The online ordering of, followed by access to, databases, encyclopedias and other similar services; and
(4) Any other agreements which are negotiated or confirmed online, including real estate purchases, development agreements and joint venture agreements.
The law governing online contracting is unsettled. Model acts have been proposed to clarify that law and to conform it to current commercial practices.
The subject of online contracting is addressed in this article as follows:
Section II – current and proposed laws;
Section III – requirements for a binding agreement;
Section IV – determination of terms included in any agreement
Section V – requirement that agreement be in writing and/or signed and satisfaction of those requirements; and
Section VI – applicability of implied warranties.
II. LAW APPLICABLE
A. Current Law.
In determining what body of law governs an online transaction, the first question is whether or not the transaction is governed by Article 2 of the Uniform Commercial Code (UCC). The UCC has been adopted in every state other than Louisiana.(2) Different rules apply to transactions governed by the UCC than to those outside its scope. Differences include whether or not the parties are required to agree to all of the essential terms of the agreement in order to have a binding contract, the circumstances under which the contract is required to be in writing and what, if any, implied warranties are applicable.
Article 2 is entitled “sales” and expressly covers “transactions in goods.”(3) Determining whether some transactions are covered is easy. An online agreement for the providing of services is not governed by Article 2, whereas an online contract for the sale of hardware is governed by Article 2.
What if the transaction involves the providing of both goods and services? Most courts that have addressed the issue, including the Georgia courts, apply the “predominant nature” test. Applying this test, the courts determine whether the transaction predominantly involves goods or services. If it predominantly involves a sale of goods, Article 2 applies. If services are the predominant feature of the transaction, traditional common law rules on contract interpretation govern.(4)
What about an online contract for a license for computer software? Must the transaction be a “sale” to be governed by Article 2 or is any “transaction” covered? There is no definition of “transaction” in the Uniform Commercial Code. The Uniform Commercial Code defines “goods” in pertinent part as follows:
“Goods” means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities …. and things in action.(5)
Most courts that have decided the issue have held that licenses of computer software are governed by Article 2.(6) A few courts have held to the contrary.(7)
Another question is how to treat computer software, movies and music that are ordered and transmitted online. If these products were placed on a compact disk, CD ROM or tape and shipped, they would be subject to Article 2. However, when downloaded from a web site, the answer is not clear. The writer was not able to find any case on point. There are a few cases that are somewhat analogous. An Ohio court held that the sale of metered amounts of electricity was governed by Article 2.(8) A Pennsylvania court held that the supplying of water was governed by Article 2.(9)
On the other hand, a New York court held that electricity is not governed by Article 2.(10) A Pennsylvania court held that the providing of cable television programming was not governed by Article 2.(11)
Interestingly, the United States Patent & Trademark Office views a mark associated with software transmitted over the Internet as a service mark rather than a trademark. This supports the argument that products delivered by online transmission are outside Article 2. In spite of this, the writer believes that applying current law most courts would hold that such transactions were governed by Article 2. The reason is that whether transmitted or shipped, these products are still moveable and therefore constitute goods and there is no reason to apply different rules to products that provide the same function because of the manner in which they are delivered.
What law applies to the online accessing of databases and other information? Again, there are no cases directly on point. The only somewhat analogous case is one in which an Illinois court held that demographic information and mailing lists provided to a publisher of a magazine would be covered by Article 2.(12) The writer believes that most courts would not apply Article 2 to these transactions simply because accessing information from databases is just too far removed from the definition of “goods.” It does not create an inconsistency to treat accessing of databases differently from the purchase of goods as the purposes are completely different.
There is one other Georgia Act that applies. The Georgia Electronics Records and Signatures Act was enacted in 1997. This Act defines “an electronic signature” and a “record” and provides for when an “electronic signature” and/or a “record” can substitute for a signature and/or a writing.(13)
B. Proposed New Laws.
1. Introduction. There are two model codes currently subject to review and revision which will, in some form, eventually be recommended for adoption by the states. Each would have a major impact on online contracting. One is proposed Article 2B to the UCC. The other is the Electronic Transactions Act. The scope and purpose of each are discussed below. The impact on various issues important to online contracting are discussed in later sections.
2. Article 2B. The National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) are responsible for overseeing updates to the Uniform Commercial Code. In 1995 a committee was formed to draft a separate UCC article to specifically address software licensing and electronic commerce. Various versions have been proposed and debated. The goal is to propose a version that most, if not all, of the state legislatures will adopt. The latest version was reported on August 1, 1998, which is the version referred to in this paper.(14)
Section 2B-103 of proposed Article 2B governs the scope of the Article and reads in pertinent part:
Except as otherwise provided in Section 2B-104 on excluded transactions and in subsection (b), this article applies to:
(1) Any transaction that creates a software contract, access contract, or license; and
(2) Any agreement to provide support for, maintain, or modify information related to a contract within the scope of this article.
Section 2B-102 of Article 2B provides the following definitions important to Section 2B-103:
(1) “Access contract” means a contract to electronically obtain access to, or information in electronic form from, an information processing system. ….
(24) “Information” means data, text, images, sounds, mask works, or works of authorship. (Regarding this definition, the reporter’s notes show that “works of authorship” is based on the definition set forth in Section 102 of the Copyright Act.(15) Copyright law protects work of authorship which include literary works, musical works (i.e., songs), pictorial and graphic works, motion pictures and other audiovisual works and sound recordings. Literary works have been defined to include computer programs.)
(44) “Software” means a computer program, any informational content included in the program, and any supporting information provided by licensor as a part of an agreement.
(28) “License” means a contract that authorizes access to or use of information or of informational rights and expressly limits the contractual rights or permissions granted … “License” includes an access contract …
(27) “Informational rights” include all rights and information created under laws governing, patents, copyrights, mask works, trade secrets, trademarks, publicity rights, or any other law that permits a person, independently of contract, to control or preclude another person’s use of the information on the basis of the right holder’s interest in the information.
(25) “Information processing system” means an electronic system or facility for generating, sending, receiving, storing, displaying, or processing electronic information.
Section 2B-104 of Article 2B sets forth transactions excluded from the Article, providing in pertinent part:
This article does not apply to the extent that a transaction:
….
(8) is a license of a linear motion picture or sound recording or of information to be included therein, except in connection with providing access to such motion picture or sound recording under an access contract covered by this article.
With respect to online transactions, to the extent Article 2B is enacted as currently configured:
(1) The online purchase of goods (other than computer software) followed by the shipment of the goods by common carrier would not be covered;
(2) The online placement of an order for computer software followed by a shipment or transmission of that computer software would be covered;
(3) The online ordering of audio recordings and videos would not be covered when recorded on CD ROM or by other media and shipped by common carrier;
(4) The online ordering of audio recordings and videos followed by transmission appears to be covered as it would be a “contract to electronically obtain …. Information” and is therefore an “access contract;”
(5) The online ordering and transmission of any interactive media products and any licensing of interactive media products would be covered; and
(6) The online ordering and obtaining of information over private lines, through access to web sites, through email or in any other online manner would be covered.
2. Uniform Electronic Transactions Act. In 1996 the NCCUSL approved a Drafting Committee to “draft an act consistent with but not duplicative of the Uniform Commercial Code, relating to the use of electronic communications and records in contractual transactions.”(16) The proposed Act is entitled the “Electronic Transactions Act” (ETA).
Under Section 103, the scope of the ETA would be as follows:
Except as otherwise provided in Section 104, this Act applies to electronic records and electronic signatures that relate to any transaction.
Section 104(b) provides that any transaction subject to the ETA that is also subject to the UCC or any other applicable law is to be construed consistent with that other substantive law and, where such construction is unreasonable, that the UCC or other substantive law will control.
III. WHAT CONSTITUTES AN AGREEMENT?
A. Current Law.
1. General Law. Under common law there is no agreement, even where the parties agree that there is an agreement, unless the parties have agreed to all of the terms. Georgia has adopted this principal in O.C.G.A. §13-3-1 as follows:
Essentials of Contracts Generally.
To constitute a valid contract, there must be parties able to contract, a consideration moving to the contract, the assent of the parties to the terms of the contract, and a subject matter upon which the contract can operate. Any acceptance of an offer must be unconditional, unequivocal, and without variance of any sort.(17)
O.C.G.A. §13-3-2 reiterates the above as follows:
Contract incomplete without assent of parties to terms thereof; withdrawal of bid or proposition by party
The consent of the parties being essential to a contract, until each has assented to all the terms, there is no binding contract; until assented to, each party may withdraw his bid or proposition.
2. Article of the Uniform Commerical Code. With regard to transactions and goods covered under the scope of Article 2 of the UCC, assent to all of the terms is not required for the parties to be bound by a contract. All that is required is that the parties agree, either expressly or by their conduct, that they have an agreement and agree to the quantity of goods being purchased. Section 204 of Article 2 of the UCC reads in pertinent part:
Formation in General
(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.
(3) Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
B. Proposed Laws.
1. Article 2 B.
The currently proposed version of Section 2B – 202 is composed of five provisions, three of which are the same as the three provisions of Section 204 of Article 2 except that the first provision of Article 2B Section 202 expressly provides that a contract may be formed by the “operations of electronic agents which recognize the existence of a contract.” Section 2B – 202 goes further to provide:
(d) In the absence of conduct or performance by both parties to the contrary, a contract is not formed if there is a material disagreement about a material term, including scope.
The reporter’s note to this section states that the addition of (d) emphasizes that if there is a material disagreement about a material term, and the parties’ conduct does not indicate otherwise, there is no agreement. It is likely that if there was a material disagreement about a material term in a licensing transaction, it would involve the scope of the license and make it impossible to determine a remedy. A court construing a license under Article 2 would likely treat a disagreement about the scope of a license in the same way as Article 2 treats a disagreement about quantity — determine that there was insufficient information to fashion a remedy and therefore that there was no enforceable licensing agreement.
IV. WHAT TERMS ARE INCLUDED IN AGREEMENT?
A. Current Law.
1. General Law. Inasmuch as outside the UCC the parties must agree to all material terms of the agreement in order to have an agreement, if the agreement is enforceable, all the material terms have been agreed upon. These are the terms included in the agreement.
2. Article 2. Under Article 2 of the UCC, the parties have a contract whenever they agree they have a contract or their conduct indicates that they have a contract. This is true even if they have not agreed to all the terms, provided they have agreed to sufficient terms for the court to fashion a remedy, i.e., the quantity of the goods involved. So what happens when the forms sent by each of the parties, or the parties’ conduct, show that the parties have agreed that they have a contract and agree on the quantity of goods to be purchased but have a conflict about the other terms? This is answered by Section 2-207 of the UCC. That section reads as follows:
Additional terms in acceptance or confirmation.
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless,
(a) The offer expressly limits acceptance to the terms of the offer;
(b) They materially alter it; or
(c) Notification of objection to them has already been given or is given within a reasonable time after notice of the additional terms is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this title.
The terms “merchants” and “between merchants” are defined in Section 2-104 of the UCC as follows:
(1) “Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.
(3) “Between merchants” means any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants.
Under 2-207(2) where the transaction is “between merchants” (in other words where the online customer “is chargeable with the knowledge or skill of a merchant”) then the proposed additions by the online customer could end up being additions to the contract. To avoid this kind of situation from arising, anyone selling goods over the Internet should include a clause expressly limiting acceptance to the terms of the offer and not ship where different terms are proposed by a customer.
The more interesting provision is 2-207(3), which provides that where the parties’ conduct recognizes the existence of a contract and the parties have in fact agreed on a quantity term, the terms of the contract are those on which the parties agree “together with any supplementary terms incorporated under any other provisions of this title.” This is what as known as the “Battle of the Forms” or the “knockout” clause in that the terms on which the forms of the parties “disagree” are “knocked out.” The courts are not clear as to how the battle of the forms should apply. In American Aluminum Products Co., Inc. v. Binswanger Glass Co., 194 Ga. App. 703, 391 S.E.2d 688 (1990) regarding whether specifications in a proposal were part of the contract, the court held that the counter-proposal constituted the contract and did not apply O.C.G.A. §11-2-207(3) to knock out any conflicting terms. A New York court has also held that the terms of a counter-proposal constituted the entire contract and the “knockout” rules wouldn’t apply.(18) However, there are many situations in which the “knockout” provisions have been held to apply.(19) The trick is that the rule applies only if the forms sent by each of the parties are all part of the agreement. An example would be Party A emails its proposal with its terms and conditions to Party B. Party B emails back that the proposal is accepted including its own different terms and conditions. Then Party A ships the goods. The “knockout” rule would apply. On the other hand, if Party B does not indicate acceptance of Party A’s proposal and sends a counterproposal and then Party A ships the goods then the “knockout” rule wouldn’t apply. This is because by shipping the goods, A has accepted B’s counterproposal. As can be seen from reading the cases, the actual application of all of these rules is more difficult than the discussion of the rules themselves.
The lesson here is that for mass market online transactions, the seller should make sure that goods are shipped only following express and unqualified acceptance of the seller’s terms. Those online sellers that are not involved in mass market transactions have to make sure there is a procedure to examine all messages received to avoid a “battle of the forms” surprise. Even where a seller’s proposal provides that “no change in terms is allowed,” shipping goods in response to a counterproposal that does change the terms is going to be construed by a court either to be an acceptance of the counter-proposal or as an agreement to which the “knock out” rule should apply. Note that when warranty disclaimers are “knocked out” the agreement is going to be governed by the default terms of the code which include such terms as implied warranty provisions – in other words the buyer wins.
B. Proposed Laws.
If enacted as presently proposed, Article 2B would cover online transactions involving:
(a) The online ordering and shipment or transmission of computer software, whether copies are sold or licensed;
(b) Computer software development agreements entered into online;
(c) The online ordering of “linear” movies and sound recordings followed by transmission;
(d) The online ordering and transmission of interactive media including educational CD ROM titles and computer games; and
(e) The online access to databases and/or other information.
Where Article 2B applies the following sections would be relevant to determining the terms of the agreement:
Section 2B-203. OFFER AND ACCEPTANCE, ACCEPTANCE WITH VARYING TERMS; ACCEPTANCE OF CONDITIONAL OFFERS.
Section 2B-207. ADOPTING TERMS OF RECORD.
Section 2B-208. MASS-MARKET LICENSES.
Section 2B-209. TERMS WHEN CONTRACT FORMED BY CONDUCT.
Section 2B-111. MANIFESTING ASSENT.
Section 2B-112. OPPORTUNITY TO REVIEW; REFUND.
Section 2B-102. DEFINITIONS.
Section 33. MERCHANT
Section 11. CONSUMER
Section2B-110. UNCONSCIONABLE CONTRACT OR TERM
Applying these provisions, the terms of an agreement would be determined as follows:
(1) If the terms proposed by each of the parties agree, the parties are governed by those terms, except to the extent that the court considers any of such terms to be unconscionable.
(2) The new scheme will permit sellers other than in mass-market transactions to obtain an agreement that certain terms will be subject to later agreement with minimal risk if agreement is not reached, but impose substantial costs on sellers who do not provide all the terms of the agreement to mass-market purchasers prior to purchase. In any transaction, other than a mass-market transaction, where a term is to be fixed by later agreement and the parties intend not to be bound until the term is so fixed, if the parties are not able to reach agreement on that term, each party must return all copies of information and other materials already received and return any sums paid for performance which has not been received. Contractual use restrictions will continue to apply. For mass-market transactions, terms that were not available when the purchaser obtained the software or information and to which the purchaser is not willing to later agree, entitle the purchaser to a refund, reimbursement of any reasonable expenses incurred relating to the return, and compensation for any foreseeable loss caused by the installation.(20)
(3) An acceptance which contains terms that vary, but not materially, from the terms of the offer results in the terms of the contract being those of the offer except that, between merchants, the proposed non-material additional terms become part of the contract unless notice of objection has been given or is given within a reasonable time.
(4) Where the terms that vary result in a material conflict, a contract is not formed unless all of the other circumstances, including the conduct of the parties, indicate that an agreement existed. If neither party agrees to the other party’s terms and the parties go ahead and act as though they have a contract anyway, the contract is considered to be formed by “conduct” and, rather than apply the “knockout” rules of the current Article 2, the court is supposed to take into account all relevant circumstances to determine the intent of the parties.
(5) Where either of the parties to an online transaction include in their standard form language that any agreement is conditioned on acceptance of their terms, such conditional language will have no effect unless the party using such form acts in a manner consistent with the language such as refusing to perform when its terms are not accepted.
With respect to most issues, Article 2B would simply clarify ambiguities in current law by codifying the law that the courts would likely apply anyway. There are a few differences in determining what terms would apply including:
(1) The knockout rule under 2-207 would be replaced by a sort of “all of the circumstances” determination by a court of the intent of the parties;
(2) Clickwrap licenses(21) would be enforceable but only to the extent they were accepted by the purchaser after the purchaser had an opportunity to review all of the terms. However, there would not be a lack of certainty about whether they would be enforceable at all. (Clickwrap licenses in the mass-market context would require reimbursement to the purchaser of all costs and expenses associated with a purchase if the purchaser did not accept the license after having an opportunity to review all of the terms.)
(3) With regard to access to databases which is currently governed by general common and statutory law outside of the UCC, the major difference is that where the parties make it clear that they believe they have an agreement, even if they haven’t agreed to all of the terms, they would have an agreement.
Also, it should be noted that Article 2B encourages, but does not require, that the parties set up commercially reasonable procedures for determining the authenticity of orders and provides that where one of the parties requires that a procedure be followed that is not commercially reasonable, the risk of loss falls on the party requiring such unreasonable procedure.(22)
C. Clickwrap Licenses.
Except where there may be a statute of frauds issue (requirements of writings and signatures are discussed later in this paper), clickwrap licenses are as likely to be enforceable to the same extent as agreements in any other form.(23) The writer is aware of only one case that apparently involved the enforceability of clickwrap licenses.(24) In that case, the United States District Court for the Northern District of California granted a preliminary injunction relying in part upon a claim for breach of contract for the defendant’s allegedly breaching the terms of service for using its e-mail service. The court did not discuss how the agreement was entered into and just assumed it was enforceable; however, agreements with “Hotmail” are clickwrap agreements.
Although there are no cases directly addressing the issue of enforceability of clickwrap licenses, there have been cases addressing the enforceability of shrinkwrap licenses. (Shrinkwrap licenses are licenses included with computer software that provide that the purchaser manifests assent by opening the package.) The 5th Circuit, applying Louisiana law (Louisiana is the only state that has never enacted Article 2 of the UCC), in the first case considering the enforceability of a shrinkwrap license, held that it was unenforceable.(25) In that case, the Plaintiff, Vault Corporation, had developed software which Vault’s software developer customers embedded in their software to prevent their end user customers from using the software on more than one computer. When the Vault Corporation sold its software, it included a shrinkwrap license that was expressly authorized by a Louisiana statute and prohibited reverse engineering of the software. The defendant, Quaid, had purchased the software and reversed engineered it. The 5th Circuit held that the shrinkwrap license and the related statute were unenforceable because they were “preempted” by copyright law.(26)
In Step-Saver Systems v. Wyse Technology and The Software Link, 939 F.2d 91 (3rd Cir. 1991), The Software Link had provided an operating system for Step-Saver to use for its professional office customers. The operating system did not work properly. Step-Saver had ordered many copies of the package. Step-Saver would telephone The Software Link and place an order for a number of copies. The Software Link would accept the order and promise, on the telephone, to ship the goods promptly. After the telephone order, Step-Saver would send a purchase order, detailing the items to be purchased, their price and shipping and payment terms. The Software Link would ship the order promptly along with an invoice. The invoice would contain terms essentially the same as the purchase order. No reference was made during the telephone calls or on the purchase orders or in the invoices to any disclaimer of warranties. There was a shrinkwrap license enclosed with the software packages that disclaimed all warranties and limited damages. The shrinkwrap license did provide that the customer could return the software for a full refund if the customer didn’t accept the shrinkwrap license. The court applied the “battle of the forms” rules and determined that the agreement was complete with the telephone conversation when the goods were ordered coupled with the purchase order. The court held that the shrinkwrap license was sent after the fact and therefore could have no effect under the circumstances. The Software Link’s shrinkwrap license was also held unenforceable for the same reasons in Arizona Retail Systems, Inc. v. The Software Link, 831 F.Supp. 759 (D. Ariz. 1993).
In ProCD, Inc., v. Matthew Zeidenberg and Silken Mountain Web Services, Inc., 86 F.3rd 1447 (7th Cir. 1996), ProCD had developed and was selling copies of a CD ROM with a database of telephone numbers. Zeidenberg purchased the CD ROM at a store. The box showed that inside there was a shrinkwrap license. The shrinkwrap license provided that the purchaser was only receiving a license and that the purchaser was not to make copies of the product. Zeidenberg then made copies of the database onto his own web site and was providing access to the database to customers for a fee. There was no “battle of the forms” issue because the outside of the box gave notice to Zeidenberg at the time of purchase that the purchase would be subject to a license contained inside the box. The court rejected the preemption decision of Vault Corporation, supra, and held that the shrinkwrap license was enforceable. The court thus provided a way for database developers to protect their databases (by contract) even though the database here was probably not protectable under copyright law.(27) A district court for the Southern District of California in a case involving copying from a computer game,(28) the 7th Circuit again in a case involving a shrinkwrap license sent with a Gateway computer,(29) and an appellate court in New York state which allowed Gateway 2000 to require that any disputes be resolved by arbitration in Chicago, Illinois(30) have all approved and followed the decision in ProCD, supra.
Note that as discussed in end note 24, Article 2B, Section 2B-208 would modify the ProCD case somewhat in that where a mass-market purchaser could not view the terms of the license until the mass-market purchaser had taken the package home, the mass-market purchaser would also be entitled to reimbursement of all related expenses.
V. REQUIREMENT OF SIGNED WRITING
A. When is a writing and/or signature required?
1. Current law.
(a) General.
Every state of which the writer is aware, including Georgia, has a “statute of frauds” that requires certain agreements to be in writing and signed by the party to be charged in order to be enforceable. The Georgia statute reads in pertinent part:
To make the following obligations binding on the promisor, the promise must be in writing and signed by the party to be charged therewith or some person lawfully authorized by him:
(1) A promise by an executor, administrator, guardian, or trustee [to be personally liable for the debts of the estate, etc.];
(2) A promise to answer for the debt … of another;
(3) Any agreement made upon consideration of marriage …;
(4) Any contract for sale of lands, or any interest in, or concerning land;
(5) Any agreement that is not be performed within one year from the making thereof;
(6) Any promise to revive a debt barred by a statute of limitations; and
(7) Any commitment to lend money.(31)
Every state of which the author is aware will enforce agreements that are covered by the statute of frauds, even if not in writing or not signed, under certain specified circumstances. Those exceptions are:
(1) When the contract has been fully executed;
(2) Where there has been performance on one side, accepted by the other in accordance with the contract; or
(3) Where there has been such part performance of the contract as would render it a fraud by the party refusing to comply if the court did not compel a performance.(32)
The only sections of the general statute of frauds that are likely to have much effect on online transactions are the ones relating to sales of interests in land and to agreements not to be performed within one (1) year. Where the transaction is governed by Article 2 of the UCC, there is some controversy about whether courts would still also apply the general statute of frauds. The courts of which the writer is aware have held that if Article 2 applies, the general statute does not apply.(33) That leaves at least transactions involving an interest in land and agreements providing access to databases for more than a year subject to the general statute.
Can a transaction that takes place purely over the Internet result in a writing signed by the person to be charged? The answer to this question is likely to vary from jurisdiction to jurisdiction. In Department of Transportation v. Norris, 222 Ga. App. 361; 474 S.E.2d 216 (1996) the Georgia Court of Appeals held that the plaintiff’s claim was subject to dismissal because the plaintiff had not timely provided an “ante litem” notice. The requirement was that notice of any claim against the state must be given in writing within twelve (12) months of the date the loss was discovered or should have been discovered. The plaintiff had mailed and faxed the notice within the requisite period but the mailed notice was received after the expiration of the twelve months. The court decided that the facsimile transmission did not satisfy the statutory requirement that notice be given in writing stating in pertinent part:
Such a transmission is an audio signal via a telephone line containing information from which a writing may be accurately duplicated, but the transmission of beeps and chirps along a telephone line is not a writing, as that term is customarily used.
On certiorari, the Georgia Supreme Court reversed the Court of Appeals decision holding that the mailing of the notice was sufficient and left open the question of whether the sending of a facsimile constitutes notice in “writing.”(34)
In considering what constitutes a writing, it is also necessary to consider what constitutes a signature. In Troutt v. Nash AMC/Jeep, Inc., 157 Ga. App. 399, 278 S.E.2d 54 (1981), Troutt argued, among other things, that an automobile dealer was liable for failure to “sign the installment agreement” as required by the Georgia Motor Vehicle Sales Finance Act. The Act at that time provided in pertinent part:
A retail installment contract shall be in writing, shall be signed by both the buyer and the seller …
The installment agreement was fully typed out and filled in and the name of the dealer was on the paperwork. However, no one had signed on behalf of the dealer. Even though the Georgia Motor Vehicle Sales Finance Act is separate from the Uniform Commercial Code, the court applied the definition provided under the Uniform Commercial Code which reads:
“Signed” includes any symbol executed or adopted by a party with present intention to authenticate a writing,
in holding that the printed name of the dealership on the form was sufficient to constitute a signature. If definitions under the Uniform Commercial Code are going to be applied outside the code, then it is appropriate to apply the definition of “written” or “writing” in O.C.G.A. §11-1-201 (46) which reads:
“Written” or “writing” includes printing, typewriting, or any other intentional reduction to tangible form.
Does the completion and online transmission of an order form, or other online communication such as an email message, constitute a “reduction to tangible form”? When an order or email is transmitted with the intention of entering into an agreement, it is certainly expected that the recipient will save the order or message in some way such as on the hard drive of a server. That is sufficient to meet the definition of “fixed in a tangible medium of expression” under the Copyright Act which reads in pertinent part:
A work is “fixed” in a tangible medium of expression when its embodiment in a copy or phonorecord, by or under the authority of the author, is sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.(35)
Under this analysis, it would be helpful for the parties to an agreement subject to the general statute of frauds to type in their name next to or with the addition of language substantially the same as:
I intend this to be my signature and for this document to be considered a writing.
Even assuming the Georgia appellate courts do not resurrect the rule that electronic transmissions, such as faxes, are not writings, there is a problem with the above analysis. Since the decision in Troutt v. Nash AMC/Jeep, Inc., supra, the Georgia Legislature enacted the “Georgia Electronic Records and Signatures Act” which became effective April 22, 1997.(36) Section 10-12-4. Agreement to Electronic Record or Signature reads in pertinent part:
Any person may, but shall not be required to, accept or agree to be bound by an electronic record which is executed or adopted with an electronic signature and, where that acceptance or agreement is otherwise required to be witnessed or notarized, which is witnessed or notarized, using an electronic signature. Where a person or other entity accepts or agrees to be bound by an electronic record as provided in this Code section, then:
(1) Any rule of law which requires a record of that type to be in writing shall be deemed satisfied;
(2) Any rule of law which requires a signature shall be deemed satisfied, and
(3) Any rule of law which requires a witness or notary shall be deemed satisfied by the electronic signature of such witness or notary.
“Electronic signature” is defined as:
an electronic or digital method executed or adopted by a party with the intent to be bound by or to authenticate a record, which is unique to the person using it, is capable of verification, is under the sole control of the person using it, and is linked to data in such a manner that if the data are changed, the electronic signature is invalidated.(37)
The term “Record” is defined as:
information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. “Record” includes both electronic records and printed, typewritten and tangible records.(38)
Section 10-12-2 of the Act relating to construction reads:
The provisions of this chapter shall be construed to promote the development of electronic government and electronic commerce.
So here we have a statute that was designed to promote electronic commerce but seems to provide that at least where the statute of frauds is applicable to be effective an electronic signature must be “unique to the person using it,” “capable of verification,” under the “sole control” of the person using it and be “linked to data in such a manner that if the data are changed the electronic signature is invalidated.”
Although it is by no means clear, without a new statute, it was reasonably likely that a court would have held that a clickwrap agreement or email with language showing that the parties intended that what they were transmitting be a signed writing would be held to constitute a signed agreement. With this statute, that proposition is very questionable and anyone needing to meet the requirements of the statute of frauds should assure that both parties are utilizing an encryption methodology to accomplish the requirements of the statute. It should be noted that the Georgia Electronic Signature Act is as liberal as any that have been enacted and other electronic signature statutes, such the Utah statute, require that much more elaborate procedures be followed, such as requiring the use of certification authorities.(39)
B. Uniform Commercial Code.
Although the above discussion regarding what constitutes a “writing” and/or “signature” also applies to any online transactions governed by the Uniform Commercial Code, there is more to consider with respect to transactions governed by the UCC.
2-201 of the Uniform Commercial Code entitled “Formal Requirements; Statute of Frauds” reads in pertinent part:
(1) Except as otherwise provided in this Code section, a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.
(2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) of this code section against such party unless written notice of objection to its contents is given within ten days after it is received.
(3) A contract which does not satisfy the requirements of subsection (1) of this Code section but which is valid in other respects is enforceable:
(a) If the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate the goods are for the buyer, has made either a substantial beginning of their manufacturer or commitments for their procurement; or
(b) If the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or
(c) With respect to goods for which payment has been received, made and accepted or which have been received and accepted.
Under the Uniform Commercial Code where the price equals or exceeds $500, a signed writing is required subject to the exceptions set forth above. However, the only term that must be in writing under Article 2 is the quantity of goods shown. Where the transaction is between merchants, all that is needed is a ” writing in confirmation” that is “sufficient against the sender” sent to the other party unless written notice of objection is given within ten (10) days after the writing is received.
When a transaction is between merchants, there still must be proof that a confirmation was sent.(40) The question remains in connection with an online transaction, even when the transaction is between merchants, whether the transmission of an order form and/or sending of an email constitutes a “writing” in Georgia unless it meets the requirements of The “Electronic Signatures Act” and, in other states, unless it meets requirements of other statutes of that nature.
C. Transfer of Copyrights
The Copyright Act provides that a voluntary “transfer of copyright ownership” is not valid unless made in a signed writing. The courts have interpreted this provision to also apply to exclusive licenses.(41) In order to protect one’s ownership of a copyright, or exclusive rights therein, it is necessary to record the transfer.(42) The words “writing” and “signed” are not defined in the Copyright Act. There is an open question whether interpretations of these terms under State law including construction under proposed acts would be accepted by Federal courts in construing the Copyright Act.
2. Proposed Laws
A. Article 2B. Section 2B-201 entitled “FORMAL REQUIREMENTS” provides that agreements requiring the payment of $5,000 or more are not enforceable unless there is a “record” which is “authenticated” by the party against which enforcement is sought or unless the contract involves a license with an agreed duration of less than one year. These requirements also do not apply if performance is provided and accepted or to the extent that the party against whom enforcement is sought admits the agreement. Additionally, like the Article 2 provision relating to “merchants,” Article 2B provides that between merchants where one merchant sends an authenticated record to the other merchant confirming an agreement and the other merchant does not respond within ten (10) days, such confirmation satisfies the statute of frauds with respect to both merchants. This section further provides that no other statute of frauds is applicable which has been assumed, but not expressly stated, with regard to the writing and signature requirements stated in Article 2.
Section 2B-113 entitled “LEGAL RECOGNITION OF ELECTRONIC RECORDS AND AUTHENTICATION” provides that a record or authentication may not be denied legal effect solely on the grounds that it is in electronic form.
So Article 2B, in order to avoid the technicalities that may be implied by the words “writing” and “signature,” uses the term “record” and “authentication” and expressly provides that electronic form is acceptable. To the extent Article 2B is enacted, it would be a simple matter to add language to order forms and emails so as to comply with the Article 2B statute of frauds. The problem is that even if enacted, Article 2B would not affect a substantial portion of online transactions including those involving the sale of goods, other than computer software, which are not transmitted in the online transaction.
In light of the requirements of the Georgia Electronic Records and Signatures Act, it is likely that even if Article 2B were enacted in Georgia, those transactions which are not covered by Article 2B would still be subject to unenforceability not expected by the parties acting in the ordinary course of business. Even if that statute were changed, the same risk would continue from similar and, in many cases, far stricter electronic signature statutes that have been enacted in many other states.
B. Electronic Transactions Act.
Under the proposed Electronic Transactions Act, if enacted in its current form, all online transactions in which the parties show that they intended the transmission to constitute a writing and to incorporate their signature would satisfy the statute of frauds in those states that passed that statute. Even if enacted in every state, the Electronic Transactions Act would not directly affect Section 204 of the Copyright Act and therefore would not directly apply to the transfer of copyrights.
VI. IMPLIED WARRANTIES
A major reason that licensees of software have tried to avoid application of the Uniform Commercial Code is to avoid imposition of implied warranties and the other warranty provisions of Article 2. Under common law, warranties were not implied. However, in light of the Uniform Commercial Code courts have, from time to time, applied Article 2 of the Uniform Commercial Code by analogy and held that implied warranties were applicable other than in connection just with the sale of goods.(43) The 5th Circuit in 1964 held that under Florida law implied warranties apply under common law.(44) On the other hand, there have been many cases in which the courts have held that implied warranties were not applicable outside of Article 2. With respect to online transactions, the implied warranties of Section 2-314 would apply to any purchases of goods and likely licenses of computer software and other goods, whether obtained through shipment or by transmissions. Although an implied warranty relating to accuracy of a database probably should not be governed by Article 2, any company offering information in a database would be taking an unreasonable risk not to include a disclaimer since, as stated above, courts might, by analogy, apply implied warranties to transactions that are not covered by Article 2. For example the Restatement of Torts 2d Section 552 provides that a provider of information is liable for failure to exercise care in obtaining or communicating information.
Proposed Article 2B-404 would provide that ordinarily there is no implied warranty of the accuracy of databases. Article 2B would apply the warranty only where the provider of information is a merchant in a “special relationship of reliance” with the purchaser of the information.(45)
ENDNOTES
1 Electronic Data Interchange (EDI) is the process whereby standardized forms or documents are transferred online for placing orders, billing, etc. See, Harry Newton, Newton’s Telecom Dictionary, Flatiron Publishing,1998. The ABA offers a form trading partner agreement for use in ongoing EDI transactions between the same parties.
2 Benjamin Wright and Jane K. Winn, The Law of Electronic Commerce, Aspen Law & Business, 3rd Ed. (1998)
3 See, e.g., O.C.G.A. §11-2-102.
4 See, Corporate Counsel’s Guide To The Uniform Commercial Code, Business Laws, Inc. at pp. 2.001 – 2.002 (1997) and J. Lee Gregory, Inc. v. Scandinavian House, L.P., 209 Ga. App. 285, 433 S.E.2d 687 (1993).
5 See, e.g., O.C.G.A. §11-2-105.
6 Validity, Construction and Application of Computer Software Licensing Agreements, 38 ALR 5th 1 and see, Schroeders, Inc. v. Hogan Systems, Inc., 522 N.Y.S.2d 404 (N.Y. Supp. Ct. 1987, Colonial Life Ins. Co. v. Electronic Data Systems Corporation, 817 F.Supp. 235 (D.N.H. 1993), Advent Systems v. Unisys Corp., 925 F.2d 670 (3rd Cir. 1991), and NMP Corporation v. Parametric Technology Corporation, 958 F.Supp. 1536 (N.D. Okla., 1997).
7 See, Michael D. Scott, Scott On Computer Law, 2nd Edition, Section 7.09[B].
8 See, Cincinnati Gas & Electric Co. v. Goebel, 28 Ohio Misc. 2d, 502 N.E.2d 713 (1986).
9 See, Gall v. Allegheny County Health Department, 555 A.2d 786 (Penn. 1989).
10 See, Farina v. Mohawk Power Corp., 438 N.Y. Sub. 2d 645 (1981).
11 See, Kaplan v. Cablevision of Pa., Inc., 671 A.2d 716 (1996).
12 See, Colonial Life Ins. Co. v. Electronic Data Systems Corporation, 817 F.Supp. 235 (D.N.H. 1993).
13 O.C.G.A. §10-12-1 et. seq.
14The latest versions may be downloaded from http://www.SoftwareIndustry.org and from http://www.law.upenn.edu/library/ulc/ulc.htm.
15 See, 17 U.S.C. §102.
16 See, Prefatory Note to Uniform Electronic Transactions Act. The Act is available at http://www.law.upenn.edu/bll/ulc/uecicta/98am.htm. Copies may also be obtained from the National Conference of Commissioners of Uniform State Laws, 211 East Ontario Street, Suite 1300, Chicago, IL 60611. The most recent draft of the Uniform Electronic Transactions Act (ETA) was prepared for the July 24-31, 1998 meeting of the National Conference of Commissioners of Uniform State laws.
17 See, Panfel v. Boyd, 187 Ga. App. 639, 371 S.E.2d 222 (1988).
18 See, CVS, Inc. v. Auburn Plastics, Inc., 67 A.D.2d 811, 413 N.Y.Supp.2d 50 (1979).
19 See, Corporate Counsel’s Guide To The Uniform Commercial Code, supra, pp. 2.088 and 2.089 and Diamond Fruit Growers, Inc., 794 F.2d at 1444 (9th Cir. 1986)
20 Contrary to ProCD, Inc. v. Zeidenberg and Silk & Mountain Web Services, Inc., 86 F.3rd 1147 (7th Cir. 1996), and other recent cases, a shrinkwrap license in connection with a license for computer software enclosed in a box in connection with a retail (mass market) sale where the purchaser is only notified that there is a license and for which the terms are not available until the purchaser has opened the box and/or installed the software would be subject, under Article 2B, not only to the right of refund; but also, to reimbursement of reasonable expenses and costs.
21 A clickwrap license is a license agreed to by a purchaser using a mouse to click an on-screen button to indicate assent to an agreement.`
22 Sections 2B-114, 2B-115 and 2B-116.
23 See, CompuServe, Inc. v. Richard S. Patterson, 89 F.3d 1257 (6th Cir. 1996). The 6th Circuit Court of Appeals held that an attorney who entered into a “shareware registration agreement” which required that the attorney type “agree” at various points in the document was bound by its terms including being subject to jurisdiction in the State of Ohio on any dispute regarding the agreement.
24 See, Hotmail Corporation v. Van Money Pie, Inc., 47 U.S.P.Q. 2nd (BNA) 1020 (1998); 1998 U.S.Dis. Lexis 10729 (April 16, 1998).
25 See, Vault Corporation v. Quaid Software Limited, 847 F.2d 255 (5th Cir. 1988).
26 Of course the court’s holding would imply that if preemption didn’t apply that the shrinkwrap license would be enforceable. Most courts that have decided the issue have held that agreements prohibiting reverse engineering and disclosure of confidential information are not preempted by the Copyright Act because they involve an agreement between consenting parties, and therefore are different from copyright which is imposed by law. See, e.g., Computer Associates v. Altai, 982 F2d 693 (2nd Cir. 1992).
27 See, e.g., Feist Publications, Inc. v. Rural Telephone Company Service, 499 U.S. 340 (1991). See also the section on copyright law being provided with this manual. For additional materials on copyright law, see the writer’s law firm web site at http://www.internetlegal.com. There is some concern among commentators that to allow unlimited use of shrinkwrap and clickwrap licenses to protect material not otherwise protected by copyright law could vitiate the copyright fair use doctrine.
28 See, Microstar v. Formgen, Inc., 942 F.Supp. 1312 (S.D. Cal. 1996).
29 See, Rich Hill and Enza Hill v. Gateway 2000, Inc., 105 F.3rd 1147 (7th Cir. 1997).
30 1998 N.Y. App. Div. Lexis 8872.
31 O.C.G.A. §13-5-30.
32 See, e.g., O.C.G.A § 13-5-31.
33 Corporate Counsel’s Guide To The Uniform Commercial Code, supra, at pp. 2.058 – 2.060.
34 See, Norris v. Department of Transportation, 268 Ga. 192, 486 S.E.2d 826 (1997).
35 See, 17 U.S.C. §101.
36 O.C.G.A. §10-12-1, et. seq.
37 See, O.C.G.A. §10-12-3.
38 O.C.G.A. §10-12-3.
39 See, Utah Digital Signatures Act, Utah Code Ann. §46-3-101, et. seq. (Supp. 1996).
40 See, Entertainment Sales Co. v. SNK, Inc., 232 Ga. App. 669, 1998 Ga. App. Lexis 641 (April 15, 1998).
41 See, 17 U.S.C.A. §§101 and 204.
42 See, 17 U.S.C.A. §205.
43 See, e.g., Holmes v. Worthey, 159 Ga. App. 262, 282 S.E.2d 919 (Ga. App. 1981) in which the court held that although ordinarily implied warranties wouldn’t apply, where a seller/builder is in direct privity with the buyer, the buyer has an implied warranty .
44 Sperry Rand Corp v. Industrial Supply Corp., 337 F.2d 363 (5th Cir. 1964).
45 Section 2B-404.
Rob Hassett is an attorney who practices in technology, entertainment and corporate law with Casey Gilson P.C. in Atlanta, Georgia.
The information above is provided for general educational purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal advice, but should always consult their own attorney regarding legal matters.
© 1998, Rob Hassett, Atlanta, Georgia. All Right Reserved
Historical Chart of Privacy Laws in the United States
FOR GEORGIA TECH PROFESSIONAL EDUCATION PROGRAM INFORMATION SECURITY LAW
By: Rob Hassett
www.internetlegal.com
770-393-0990
October 21, 2003
| LAW | DESCRIPTION | EFFECTIVE DATE |
| 4th Amendment to US Constitution | Prohibits unreasonable search and seizure | 1791 |
| 5th Amendment to US Constitution | Cannot be compelled to testify against oneself regarding criminal activities | 1791 |
| Bill of Rights Generally | According to Griswold v. Connecticut – right to privacy provided in bill of rights and voided statutes that made the sale or use of contraceptives illegal | 1791
Griswald v.Connecticut (1965) |
| 14th Amendment to US Constitution | All individuals born in the U.S. are citizens of state where they reside and no state shall make or enforce laws which abridge privileges or immunities and no state shall deprive any person of life, liberty or property without due process nor deny equal protection of the law |
1868 (In Roe v. Wade, the U.S. Supreme Court held that state laws that made abortion a crime were unconstitutional 410 U.S. 959, 35 Lawyers Ed. 2nd 694 (1973)) (Court held that state could exercise some regulation after the first trimester and much more after the second trimester) |
|
General state based laws regarding privacy and publicity rights |
Based on article that appeared in the Harvard Law Review and one of the first cases was a Georgia case; wrongful intrusion, wrongful disclosure of embarrassing private facts; wrongful appropriation and false light |
Article 1890; Ga. Case 1905 |
| Federal wire tap statutes 18 USC §2510 and 47 USC §605, FCC Rule 47 CFER 164.501 | Restricts listening to telephone conversations |
1934 |
| O.C.G.A. §31-12-2 | Government agencies are prohibited from identifying people with sexually transmitted diseases |
1964 |
| United States Privacy Act5 USC §552.a | Prohibits federal agency from disclosing personal data except for publicly announced purposes and requires agencies to keep an account of all disclosures |
1966 |
| Mail Privacy Statute, 39 U.S.C. §3623 | Prohibits opening of mail without search warrant or consent |
1971 |
| Family Education Rights & Privacy Act, 20 U.S.C. §1232 | Restricts disclosures of educational records |
1974 |
| The Right to Financial Privacy Act, 12 U.S.C. §3401-3403 | Restricts disclosure to government of financial records of banks and similar financial institutions |
1978 |
| O.C.G.A. §33-21-23 | HMO’s may not disclose any information pertaining to diagnosis without express consent of patient with some exceptions |
1979 |
| Identity Theft and Deterrence Act, 18 U.S.C. §1028 | Prohibits identity theft |
1982 |
| Computer Fraud and Abuse Act, 18 U.S.C. §1030 | Prohibits unauthorized access together with either obtaining financial information, causing damage, obtaining something of value or affecting medical records |
1984 |
| Cable Communications Privacy Act, 47 U.S.C. §551 | Requires notice and consent before cable service provider may collect data of viewing habits |
1984 |
| O.C.G.A. §33-39-1, et. seq. | Insurance companies are required to keep personal health information confidential with exceptions |
1984 |
| Electronic Communications Privacy Act, 18 U.S.C. §2701 | Restrictions on accessing another person’s electronic mail |
1986 |
| O.C.G.A. §24-9-47 | Information about AIDS is confidential |
1987 |
| Video Privacy Protection Act, 18 U.S.C. §2710 | Prohibits video tape sale and rental companies from disclosing data |
1988 |
| Employee Polygraph Protection Act, 29 U.S.C. §2001 | Imposes restrictions on employer use of polygraph testing employees |
1988 |
| Driver’s Privacy Protection Act, 18 U.S.C. §2721-2725 | Restricts states from disclosing state drivers’ license and motor vehicle records (held constitutional by U.S. Supreme Court) |
1994 |
| O.C.G.A. §33-54-3 | Information derived from genetic testing is confidential |
7/1/1995 |
| The Telecommunications Act , 47 U.S.C. §222 | Imposes privacy protection on information held by telecommunications companies |
1996 |
| The Children’s’ Online Privacy Protection Act, 15 U.S.C. §6501 | Restricts collection of data from children under 13 over Internet |
2000 |
| O.C.G.A. §31-33-2, et seq. | Requires healthcare providers to provide copies of medical records to patients when requested |
7/1/2001 |
| Gramm-Leach-Bliley Act | Restricts disclosure of personally identifiable information by financial institutions (broadly defined) |
Privacy rules effective 7/1/2001; security rules FTC effective 5/23/2003; security rules for FDIC, Federal Reserve System, Etc. effective 7/1/2001 |
| Georgia – Title 10, Chapter 15 | Requires shredding, erasure, making unreadable or other reasonable action regarding medical information, customer accounts or identification numbers, account balances and the like |
7/1/03 |
| Health Insurance Portability & Accountability Act |
Privacy rules effective 4/14/2003; security rules effective 4/20/2005 |
Governing the Internet
By Rob Hassett
Casey Gilson P.C.
Six Concourse Parkway, Suite 2200
Atlanta, GA 30328
(770) 512-0300
http://www.internetlegal.com
This article was prepared for the seminar on Advanced Internet and Computer Law sponsored by the National Business Institute scheduled for October 29, 1998 in Atlanta. This advanced level article addresses such questions as who “owns” the Internet, the current role of the U.S. government, and the future of the domain naming system. (25 pages)
ACKNOWLEDGEMENTS
The writer wishes to thank the following individuals for providing information and/or assistance in preparing these materials:
1. Jay Fenello, who is the President of Iperdome, Inc. (http://www.iperdome.com) Jay is currently serving as a member of the Steering Committee for the International Forum on the White Paper (IFWP) to assist in setting up the structure for a new domain name system. (http://www.ifwp.org)
2. Bruce Hassett, a brother of the writer, who is currently employed with GTE Internetworking. GTE acquired BBN, including the BBN Planet network, approximately one year ago. (http://www.bbn.com)
3. Lynn Hassett, the writer’s wife, who is an attorney in the same law firm as the writer.
4. The staff of the Competitive Pricing Division of the Federal Communications Commission (FCC) Common Carrier Bureau. (http://www.fcc.gov)
5. Ellen Rony, who is a co-author of “The Domain Name Handbook.” (http://www.domainhandbook.com)
6. Richard Sexton, who participated in some aspects of the development of the Internet.
I. INTRODUCTION
To understand the current operation of the Internet and the controversies concerning the domain name system, it is necessary to understand the relevant history.
II. ORIGINS OF THE INTERNET
A. ARPA.
In 1957, the Soviet Union launched the first man-made satellite, Sputnik, which surprised most Americans who had assumed that the United States was far ahead of the Soviet Union technologically. As a consequence, President Dwight Eisenhower established the Advanced Research Projects Agency (“ARPA”). ARPA was set up as an agency of the Department of Defense but was established for the purpose of promoting scientific research.(2)
ARPA sponsored computer research and development at major universities throughout the country including research into time-sharing systems, computer graphics and improving computer programming languages. At the time, computers were extremely expensive and the sharing of resources was difficult not only because there was no network but because the computer languages, protocols, etc. were not compatible. In 1966, officials at ARPA decided to set up a network among computers at major universities. This network became known as the “ARPANET.”(3) The contract to build ARPANET was awarded to a small consulting firm in Boston, Bolt, Bernek & Newman (which of course later established the “BBN Planet” network). BBN set up a network information processor (“NIP”) at each participating university. The NIP’s were used to send and receive all messages.(4) Performance testing was contracted to the Network Measurement Center at UCLA. Two individuals that became very prominent in the construction of the Internet, Vince Cerf and Jon Postel, were students at UCLA that worked part-time at the Network Measurement Center.(5) These individuals, as well as many others, overcame significant technological obstacles in making the ARPANET operational. Jon Postel retains a central role in the operation and development of the Internet to this day.
B. Network Working Group.
One of the problems that the universities had to deal with was that although connections could be made through the ARPANET, it was necessary to agree upon protocols to allow communications between the incompatible computers at the various universities. Representatives from the various universities met and formed an open group called the Network Working Group or “NWG.” Possibly because they had no authority, the students followed the pattern set by one of their members who wrote up minutes of their first meeting and called minutes of all of their meetings “Requests For Comments” to set the tone that anyone could contribute.(6) By 1972, Jon Postel had become the editor and distributor of the Requests For Comments.(7)
C. Other Networks.
As time went on ARPANET became obsolete. The network for military computers was taken over by the MILNET network and the academic links were taken over by the network established by the National Science Foundation (the “NSFNet”).(8) Other commercial networks were also set up.
D. TCP/IP.
In order to link the different networks, it was necessary to come up with a new advanced set of protocols which ultimately became the Transmission-Control Protocol and the Internet Protocol now referred to as “TCP/IP”. An individual named Bob Kahn, while employed by ARPANET and working with Vince Cerf, developed the first version of TCP which led to the ability to connect multiple networks of multiple computers.(9)
E. Current Configuration of the Internet.
Currently, the Internet is a network of networks. With few exceptions such as MILNET, which is operated by the U.S. Military, the networks are privately owned. GTE currently owns and operates the BBN Planet network. WorldCom owns and operates the UUNET network. AT&T, MCI, Sprint and many other companies own and operate other networks that are part of the Internet. The networks, which include all of those referred to in the previous sentence, that provide high capacity nationwide connections are also known as “backbones.”
Access to the servers and information that reside on all of the networks that form the Internet can be made through any of those networks. Such access can be obtained through the larger national (and even International) networks (run by the Tier 1 providers such as GTE, UUNET, MCI, etc.), the smaller regional networks (such as Erols, BellSouth, etc.), or the local ISP’s which buy their network transit from one of the larger providers.
How does a computer connected to any one of the networks that forms the Internet successfully connect to a computer located on a different network? The Internet works because the separate networks that form the Internet connect, or peer, with each other. There are two types of peering: public and private.
Public peering, where many networks connect to each other through a large network switching system, occurs at several different public exchange points around the world. The concept of public peering points was originally established by the National Science Foundation. There are many public exchange points. Some of the more well-known ones are MAE East (Washington, D.C., operated by MFS), Sprint NAP (northern New Jersey operated by Sprint), MAE West (Palo Alto, operated by MFS) and LINX (London). Virtually all of the networks that make up the Internet peer at one or more of the public exchange points. Because of the tremendous traffic, serious bottlenecks can occur at these exchange points.
With this in mind, many of the larger providers have established private agreements among themselves to establish private peering — i.e., transfer of traffic via a dedicated, high-speed circuit between two companies’ networks, thereby avoiding the bottlenecks at the public exchange points. Companies will only agree to peer with those companies that they expect will receive as much data as they send. With companies like UUNET and GTE, that is not a problem because both networks will dump about the same amount of traffic onto each other. However, if one company only has web sites (i.e., does not offer dial-up access or direct-connect business access), then that company will tend to dump a lot more traffic on the other networks than the reverse. This imbalance has resulted in certain networks refusing to privately peer with certain other networks.(10)
It is possible to trace the route of one’s packets(11) from one’s own computer to most web sites (tracing to some of the larger ones is blocked). First, connect to your Internet service provider, bring up a DOS prompt and at the DOS prompt type in: “tracert www.[second level domain name (such as “internetlegal”)].[top level domain name (such as “com”)]. From Atlanta it is evident that MindSpring is connected directly at least to “alternet” which is “UUNET.”
F. Initial Domain Naming System.
In 1982, Jon Postel and others developed a new standard for email which they named “simple mail transfer protocol.” As the number of computers connected to the Internet multiplied, it was necessary to develop a new addressing scheme. A group of engineers led by Paul Mockapetris, who was at that time employed by the Information Sciences Institute at the University of Southern California in Marina del Rey (“ISI”), and including Jon Postel, who was at that time and still is employed by ISI, and Craig Partridge, who was at that time employed by BBN, developed what is now referred to as the domain naming system (“DNS”). It was eventually decided that the initial generic top level domain names would be: (12)
(1) “edu” for university sites;
(2) “gov” for government sites;
(3) “com” for company or commercial sites;
(4) “mil” for military sites;
(5) “org” for non-profit organization sites;
(6) “net” for network service providers; and
(7) “int” for international treaty entity sites.
III. Ownership.
From the above, it is clear that almost all of the networks of the Internet as well as the exchanges are owned by private companies just as are most telephone facilities. TCP/IP specifications were developed by government employees. Consequently, any copyrights in those specifications are in the public domain.(13) Assuming the protocols constituted statutory subject matter and met other requirements, the United States could have owned patent rights in these protocols provided the U.S. had filed an application within the required one (1) year period, but apparently did not do so. TCP/IP is therefore available without restriction, although there may be proprietary rights in derivative versions.
IV. FCC Regulations.
The Federal Communications Commission (“FCC”) has the authority to regulate “interstate and foreign commerce in communication by wire and radio.”(14) The state public utility commissions have the right to regulate such communications that are intrastate.(15) Prior to enactment of the Telecommunications Act of 1996, the FCC made a distinction between “basic” and “enhanced” communication services. Basic services were standard voice transmission services. Enhanced services were defined as:
services, offered over a common carrier transmission facilities used in interstate communications, which employ computer processing applications that act on the format, content, code, protocol, or similar aspects of the subscriber’s transmitted information; provide the subscriber additional, different, or restructured information; or involve subscriber interaction with stored information.
Examples of enhanced services are protocol processing, alarm monitoring, voice messaging and electronic publishing as well as the provision of access to data networks such as commercial online services and the Internet.(16) Providers of basic services were considered to be communications common carriers. Common carriers are prohibited from:
Unreasonably denying requested services or from unreasonably discriminating in the terms and conditions of service, and are subject to various other requirements and fees.(17)
Although the Telecommunications Act of 1996 categorizes services as “telecommunications” versus “information,” the FCC has, for the most part, continued to apply the same dichotomy construing what were considered “basic” services as “telecommunications” services and construing what were referred to as “enhanced” services as “information” services. For telecommunications services, other than those provided over the Internet as discussed below, the FCC requires that tariffs be filed. Tariffs are documents provided to the FCC which set forth the terms, rates and conditions under which services will be provided. Telecommunications service providers are required to file tariffs for ordinary telephone services and for the portion of frame relay services which involve transport, but not for the protocol relay or addressing component. Copies of tariffs are available for a fee from ITS, Inc. (http://www.itsi.com).
Using the Internet and encryption software, it is possible to set up a virtual private network that, although in many cases where multiple sites are involved would be significantly less expensive, provides functionality that can, many times, be substituted for a private frame relay network. To this date, the FCC has chosen not to require that tariffs be filed on or to impose universal access charges (which are imposed generally on telecommunications services) either for services of Internet access providers or for transmissions over the Internet backbones.(18)
V. Government Legacy Functions.
A. Initial Structure.
There are four (4) functions essential to the operation of the Internet that continue to be provided under contracts with agencies of the United States government.(19)
(1) The assignment of numerical addresses (Internet Protocol or “IP” numbers) to Internet users. Every computer while connected to the Internet is assigned a unique IP number. Numbers can be assigned dynamically to dial-up users so that any user has a unique IP number only during the time of the connection. Therefore, to provide dial-up access, ISP’s only need to have enough IP numbers to equal the number of users at any one time. Each second level domain name requires a permanent IP address. Without a change of technology, there cannot be more than four (4) billion unique numerical addresses. One-third (1/3) of those have already been assigned. The replacement of the IP protocol with proposed IPv6 as currently configured would allow for a virtually unlimited number of IP addresses.
(2) Management of the system of registering names for Internet users. This includes the system of assigning top-level domains, second-level domains, and so on. This function, combined with “(3)” below, is referred to as the “domain naming system” or “DNS.”
(3) The operation of the root server system. There are thirteen (13) root servers including the “A” root server operated by Network Solutions, Inc. (NSI). The “A” root server contains what is supposed to be the authoritative data base of the top level domain name servers including the servers for the international top level domain names and the servers for each of the country specific domain names. All the other root servers point to the “A” server for this information. The U.S. government plays a role in about half of these root servers. From letters I have seen, the other root servers are operated by volunteers who believe that they were given that authority by Jon Postel and/or his organization, IANA.
(4) Protocol assignment. This involves management of the protocols that are used to operate the Internet.
Initially, ARPA (the name was changed to the “Defense Advanced Research Projects Agency” or “DARPA” in 1984) contracted to have the domain name functions administered by the Stanford Research Institute (SRI). (20) Through a contract with DARPA, in 1987 SRI also took over the assignment of numerical addresses from ISI. ISI continued to oversee the operation of the root server system and the protocol assignments.
B. IANA.
Jon Postel was in charge of the Internet services provided by the Information Sciences Institute. Mr. Postel named his group at ISI the: “Internet Assigned Number Authority” or “IANA.”(21) After the responsibility for the international domain names and IP numbers was transferred to the Stanford Research Institute, IANA retained responsibility, under contracts with DARPA, for the other functions referred to above and later with the National Science Foundation, for managing the .us top level domain and registering other country specific top level domains. Eventually, IANA again assumed responsibility for assigning IP numbers and assigned blocks of Internet protocol numbers to three (3) non-profit organizations, APNIC for the Asia-Pacific region, RIPE NCC for Europe, and ARIN for the western hemisphere and South Africa(22) and also to a number of profit corporations for reassignment including @Home for the cable industry, AT&T and BBN Planet. Each of these five (5) organizations act as registries for the IP numbers they assign.
There has been a lot of misinformation about where IANA’s authority came from, but the reality is that it was always through government contracts.
The IANA home page reads:
The IANA is chartered by the Internet Society (“ISOC”) and the Federal Network Council (“FNN”) to act as the clearinghouse to design and coordinate the use of numerous Internet Protocol parameters. (See, http://www.iana.org.)
This information has been quoted and accepted by the media. None of it is true. As is pointed out in The Domain Name Handbook, supra, at 123, ISOC and FNC didn’t exist in 1988 when IANA was first formed. The authors of The Domain Name Handbook, supra, quote an email they received in response to a questioning of this authority from Anthony Rutkowski, the former president of the Internet Society. Mr. Rutkowski’s letter said in pertinent part:
Just to note – in case you’re writing history here – that although Jon and some others include this rendition, there is no such thing as a charter by either the Internet Society or the FNC. I was running the Society at the time that Jon distributed an e-mail message to the Society Board that was entitled “Charter.” He was told in subsequent messages that this meant nothing. Neither the Society as a non-profit corporation, or the FNC as an interagency committee [of the United States government] are in the business of “chartering.” What Jon prepared was an excerpt of the description of the activity for which he is funded by NSF. It’s an important function – but that is what it is – an NSF funded editor activity.
C. NSF.
In any event by the end of 1989, what had been the ARPANET had been replaced by NSFNet and certain regional networks.(23) In 1991, Congress passed the “High Performance Computing Act” which authorized NSF to provide computing and network infrastructure. At that time, NSF assumed responsibility for the registration of domain names. NSF redelegated the function of registering domain names from SRI International to Government Systems, Inc.(24) Finally, NSF entered into an agreement dated January 21, 1993 transferring domain name registration activities for the international top level domain names to Network Systems, Inc. (NSI).(25)
According to Article 7 of the agreement, NSI was to provide these services through September 30, 1998. So here we are in September of 1998, when I am writing this paper, and it is still not clear who will administer the international top level domain names after September 30. It also isn’t clear who will be responsible for allocating blocks of numerical addresses, managing the root server system and managing the Internet protocol suite in the future.
D. NSI.
NSI is, understandably, fighting hard to try to retain the current top level international commercial names that it administers: .com, .net and .org. Among other arguments, NSI claims that it has ownership rights in at least a portion of the DNS database.(26) The U.S. government would argue that since NSI has been administering these top level domain names under contract with NSF, NSI hasn’t acquired any rights in those top level domain names.(27)
By Amendment 4 to its contract with NSF, NSI was, in September of 1995, permitted to start charging $100 upfront for the first two (2) years and $50 per year thereafter for all second level domain names that it issued and to retain seventy (70%) percent of those funds.(28) Beginning April 1, 1998, NSI was no longer required to remit thirty (30%) percent of its funds as directed by NSF and dropped its fees to $70.00 for the first two (2) years and $35.00 per year thereafter.(29)
NSI has had to deal with a number of lawsuits relating to domain name disputes. NSI issued its first domain name dispute policy, apparently for the purpose of protecting NSI from lawsuits, on July 28, 1995. Revisions were issued on October 23, 1995 and September 9, 1995.(30) The most recent revision is dated February 25, 1998 and is available at http://rs.internic.net/domain-info/nic-rev03.html. This policy requires that any registrant agree to defend, indemnify and hold harmless Network Solutions and its officers, directors, employees and agents for any loss or damage relating to registration of a domain name. Since most web site registrants do not sign this document, much less personally fill out any of the information or even go to the site (this is ordinarily handled by the ISP for the registrant) this indemnity is likely enforceable, if at all, only against a very small percentage of registrants.(31) In the earlier version there was an arbitration clause that any disputes were subject to arbitration in San Diego, California, where NSI’s parent corporation was located. However, that arbitration procedure is no longer included in the latest domain name dispute policy.
The newest policy favors claimants to domain names that have registered their domain name on the principal register of the United States Patent & Trademark Office or the equivalent of any other country.(32) Where the owner of a registered mark provides written notice to a domain name registrant that the registrant’s domain name violates the trademark rights of the complainant, the domain name registrant may send a copy of such notice to NSI. If the registration predates the date the domain name registrant obtained the domain name, NSI may request proof that the registrant also has a registered trademark or service mark that pre-dates the date of the notice. If no proof of prior registration is provided, and assuming no court action is filed within thirty (30) days of NSI’s request for proof of registration, NSI may then put the registrant’s domain name on hold. Just to show how absurd a policy giving priority to registered marks can be, note that although registration in the United States Patent & Trademark Office takes an average of ten (10) months, registration in Tunisia can be completed in a matter of days and doesn’t require proof of use or intent to use the mark in Tunisia or anywhere else. See, http://www.domainprotect.com.
E. Policy Oversight Committee.
Over the years, the Network Working Group appears to have been replaced by the Internet Society (“ISOC”), the Internet Activities Board and other groups in which many internet insiders including Mr. Postel, are prominent. As more and more of the .com and .net second level domain names were taken, it became apparent that additional international top level domain names should be available. There are situations in which second level domain names can be generic such as “flowers,” “schools,” and “bricks” and there can be other situations where more than one company has a legitimate right to a particular mark such as “Delta.” Additionally, having more top level domain names would allow the grouping of web sites by category. Examples would be “.law” and “.med.” Jon Postel recognized this at least as early as May 3, 1996 when he proposed the addition of up to fifty new registries that would have the exclusive right to administer name assignments. He also recommended adding thirty new international top level domains per year for five years so that at the end the fifty new registries would each have exclusive right to administer three new top level domain names.(33)
IANA, the Internet Society (ISOC), the International Trademark Association (INTA) and other organizations elected representatives to the Internet International Ad Hoc Committee (IAHC) which was formed to review Mr. Postel’s proposal as modified by ISOC. There were eleven members elected to the committee. Mr. Postel is not listed as a member. Three of the eleven were attorneys.(34) The Committee issued its “Generic Top Level Domain Memorandum of Understanding” in which it proposed adding seven new generic top level domain names and twenty-eight new registrars who would compete among themselves to register second level domains in the generic top level domains. The committee appointed a “Policy Oversight Committee” to oversee administration of the top level domain names. The POC ultimately decided the additional top level domains should be:
.arts, . firm, .info, .nom, .rec, .shop and .web.(35)
The overall policies were set forth in the POC’s Memorandum of Understanding on the generic top level domain names space of the Internet domain name system (gtld-Mou).(36) The POC also decided that additional domain names could be added “if, in consultation with the PAB and CORE, the POC should later determine, that the interests of the users of the Internet would be best served by the creation of additional gTLDs.”
The question one would ask is what caused the POC to drop from the one hundred fifty domain names initially planned by Mr. Postel to only seven. The Committee was apparently strongly influenced by the difficulties having additional top level domain names would likely create for the owners of trademarks and service marks. The more top level domain names there are, the more opportunity there is for registration of second level domains that infringe existing trademarks and service marks. The counter-argument is that not allowing additional top level domain names to avoid wrongful use of trademarks is like prohibiting the building of additional shopping centers because that makes it more likely that service marks of existing stores will be infringed.
Although a number of criteria, including payment of $10,000, were established for anyone desiring to apply to be a registrar, and there were only certain times when applications have been allowed, more than ninety have been granted to date and it was contemplated that additional registrars will be established in the future.(37) Of course, with severe restrictions on the number of generic top level domain names, it was no longer possible to give exclusive registration rights for any one international top level domain name to any one registrant.
Probably the most controversial aspect of the POC proposal is the proposal to set up a domain name challenge panel (ACP) administered through the World Intellectual Property Organization of the United Nations (WIPO) arbitration and mediation center which is headquartered in Geneva, Switzerland. Anyone registering a second level domain name would be required to agree, as a condition of registration, that any decisions regarding the assignment, registration and use of a particular domain name would be subject to arbitration before the ACP. Then any third party could challenge a domain name holder’s right to use a domain name through this arbitration process. The POC also provided for any applicant registering a domain name to elect, at the time of registering such domain name, whether to be subject to on-line arbitration of all issues (which would include such issues as ultimate rights to use the claimed service marks and damages).(38)
F. NTIA Proposal.
In recent years, there have been individuals that have attempted to introduce additional top level domain names into the Internet root system. These groups and individuals argue that, except for restrictions needed only to avoid interfering with the proper operations of the Internet, the addition of top level domain names should be governed by the market; and whoever first offers a top level domain name and is able to attract sufficient second level domain names to make the use of such domain names financially feasible should be permitted to own and operate their own international top level domain name registries. These groups and individuals have strongly objected to the gTLD-Mou proposals arguing that the proposals would create an authoritative operation answerable to no one other than themselves and which would have no free market incentive to encourage improvements and efficiency. These individuals and groups (the free market parties) relayed their concerns and objections to Congress and the White House. Ira Magaziner, who has headed up various policy initiatives for the Clinton Administration, was assigned the responsibility for putting together a task force to deal with the issues. The National Telecommunications and Information Administration of the United States Department of Commerce headed by Mr. Magaziner came out with a preliminary proposal entitled the “Green Paper” which was published in the Federal Register on February 20, 1998 in which recommendations were made.(39) Among other things, in the “Green Paper” NTIA had proposed the formation of a non-profit corporation to be fairly representative of a variety of interested communities to take over the legacy functions; but, to avoid delay, proposed to go ahead and add five additional international top level domain names before the new non-profit corporation was formed. After receiving extensive comments, NTIA issued a second paper known as the “White Paper” on June 5, 1998, in which NTIA decided to leave the addition of any new international top level domain names to the new proposed non-profit organization and essentially urged all interested groups to get together and come up with solutions that address the needs and concerns of all interested parties subject to certain overall principles.(40) The principles were that the non-profit corporation was to be established in the United States, would assure stable, undisrupted, operation of the Internet, would be representative of all the various interests associated with the Internet, would operate in an open manner, would promote competition and would come up with balanced solutions related to the trademark issues.
As an indication of the determination of the Internet insiders with regard to the MoU-POC proposal, in January of 1998, just before the Green Paper was to come out, Jon Postel, who operates the root name server located at ISI, sent emails to the operators of the other root name servers telling them to point their servers to the ISI server bypassing NSI’s “A” root server. Six of the operators complied with this request. Mr. Postel announced that this was just a test of the server system but the timing would certainly indicate that it was a threat. The White House apparently pressured Mr. Postel into discontinuing the “test.”(41)
G. IFWP.
After the NTIA in the “White Paper” had urged all interested parties to work together on a plan, a number of trade associations representing diverse Internet interests put together a working group to attempt to reach a consensus on the structure for the proposed non-profit corporation. A committee, referred to as the Steering Committee for the International Forum on the White Paper (IFWP), was formed. Four meetings were held. The first meeting took place in Reston, Virginia on July 1-2, 1998, the second in Geneva, Switzerland on July 24-25, 1998, the third in Singapore on August 11-13, 1998 and the fourth in Buenos Aires, Argentina on August 20-21, 1998. (42) No resolution has been reached by these parties to date. Consequently, it is possible that the NSF contract with NSI, that is due to expire on September 30, 1998, may have to be continued and IANA will continue to administer the functions that it oversees for some additional time.
1 The writer is currently Co-Chair of the Subcommittee on Policies for Managing Generic Top Level Domains of the Special Committee on Trademarks and the Internet of the Intellectual Property Law Section of the American Bar Association. The views expressed in this paper are those of the writer alone.
2 Katie Hafner and Matthew Lyon, Where Wizards Stay Up Late, Chapter 1 (1996).
3 Where Wizards Stay Up Late , id. at 40-42. As stated, the original purpose of the ARPANET was to allow communication and the sharing of resources between research computers. The media has reported, and it has been repeated extensively, that ARPANET was originally set up to allow military communications to survive a nuclear strike. The development of packet data technology at Rand Corporation, which was eventually useful in setting up the ARPANET, was done for this purpose, but that was never the purpose of ARPANET. Where Wizards Stay Up Late, supra, 9-10.
4 Where Wizards Stay Up Late, supra, at 102.
5 Where Wizards Stay up Late, supra, at 141.
6 Where Wizards Stay Up Late, supra, at 144.
7 Where Wizards Stay Up Late , supra, at 145.
8 Where Wizards Stay Up Late, supra, at 245 and 249. See, also, Ellen Rony and Peter Rony, The Domain Name Handbook, 1998 at 91.
9 Where Wizards Stay Up Late, supra, at 226.
10 Kate Gerwig, Service Providers Still In Peering Dither, InternetWeek, 8/31/98.
11 A packet is a set of data organized in a specific way for transmission such as over the Internet. See, e.g., Harry Newton, Newton’s Telecom Dictionary, Flatiron Publishing (1998).
12 Where Wizards Stay Up Late, supra, at 252-253.
13 See 17 U.S.C. §105.
14 47 U.S.C. §151.
15 See, e.g., O.C.G.A. §46-2-20.
16 See, Kevin Werbach, Digital Tornado, The Internet and Telecommunications Policy, March 1997, Opp. Working Paper No. 29 available at: http://www.fcc.gov/Bureaus/OPP/working_papers/oppwp29pdf.html.
17 See, Kevin Werbach, Digital Tornado, The Internet and Telecommunications Policy, supra.
18 See, e.g., The Federal Communications Commission Report To Congress released April 10, 1998 entitled “The Matter of Federal-State Joint Board On Universal Service.” (http://www.fcc.gov/Bureaus/Common_Carrier/Reports/fcc98067.html) Note that the United States Court of Appeals for the 8th Circuit recently held that FCC rules not allowing local telephone companies to assess access charges on internet service providers is a proper exercise of the FCC’s jurisdiction. See, Southwestern Bell Company, Bell Telephone Company, et al. v. Federal Communications Commission (U.S. Ct. App.). (http://www.wulaw.wustl.edu/8th.cir/Opinions/980819/972618.P8)
19 See, National Telecommunications and Information Administration of the United States Department of Commerce (NTIA) so-called “White Paper” entitled Management of the Internet Domain Name System dated June 5, 1998 (http://www.ntia.doc.gov/ntiahome/domainname/6_5_98dns.htm)
20 The Domain Name Handbook, supra, at 115.
21 National Telecommunications and Information Administration “White Paper,” supra.
22 The Domain Name Handbook, supra, at 138 and 123. See, also, the NTIA White Paper, supra.
23 See Where Wizards Stay Up Late, supra, at 256.
24 The Domain Name Handbook, supra, at 126 and 127.
25 http://rs.internic.net/nsf/agreement/agreement.html
26 The Domain Name Handbook, supra, at 171.
27 The original database was, of course, transferred from Government Systems, Inc. to NSI at the direction of NSF. Under the circumstances applicable here, it is unlikely that there are any enforceable copyrights in the additions to the database made by NSI. See, Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340 (1991). Anyone should have the right to copy the database to the extent it is openly accessible. Whether NSI would be required to turn over any confidential portions of the database would depend on the interpretation of the NSF-NSI contract which is beyond the scope of this paper. Copyright issues for this presentation are being addressed in other materials being provided with this reference manual. For other articles about copyright law, see our law firm web site at http://www.internetlegal.com.
28 http://rs.internic.net/nsf/agreement/amendment4.html
29 See the Internic Registration and Renewal (re-registration) fees: Fact Sheet (http://rs.internic.net/fees/facts.html)
30 The Domain Name Handbook, supra, at 142.
31 Of course NSI would probably argue that the ISP is acting as an agent and, acting on behalf of its customer, has agreed to the indemnification provision by submitting the application to NSI. For the enforceability of clickwrap and similar agreements, see the portion of the paper provided by this author on Electronic Commerce relating to Online Contracting included with these seminar materials.
33 The Domain Name Handbook, supra, at 522.
34 The Domain Name Handbook, supra, at 524.
35 See the gltd-Mou Request for Comments Results – Last Update March 16, 1998 (http://www.gtld-mou.org/docs/rfc-results.htm#97-02).
36 http://www.gtld-mou.org/gTLD-MoU.html
37 It would seem that having an unlimited number of registrars competing with each other and registering the same domain names would create conflicts and disagreements about who registered a particular domain name first; however, individuals working on the issue say that with available software, this should not be a problem.
38 See the Memorandum of Understanding for the Internet Council of Registrars (CORE-Mou) a copy of which is available at http://www.gtld-mou.org/docs/core-mou.htm.
39 (http://www.ntia.doc.gov/ntiahome/domainname/dnsdrft.htm)
40 See http://www.ntia.doc.gov/nitahome/domainname/6_5_98dns.htm.
41 Rajiv Chandrasekaran, Internet Reconfiguration Concerns Federal Officials, The Washington Post, 1/31/98.
42 See http://www.geneva.ifwp.org/
The information above is provided for general educational purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal advice, but should always consult their own attorney regarding legal matters.
© 1998, Rob Hassett, Atlanta, Georgia. All Rights Reserved.
The Fair Use Doctrine and New Media Technology
By: Rob Hassett
Casey Gilson P.C.
Atlanta, Georgia
770-512-0300 Ext. 557
http://www.internetlegal.com/
and
Adam H. Alexander
In-House/Corporate Counsel
Sammons Corporation
Dallas, Texas
Background and Summary
An earlier version of this article first appeared in the program materials for the conference sponsored by the Entertainment & Sports Law Sections of the Georgia, Florida & Tennessee Bar Associations which was held in Dana Point, California from November 6 through November 8, 1997. This advanced level article addresses the subject of copyright fair use on the Internet. (12 Pages)
The law of copyright has evolved with technological change, with each new technological advancement creating complicated questions of copyright interpretation and application. Nevertheless, the new technologies . . . have been made to fit within the overall scheme of copyright law and to serve ends which copyright was intended to promote. The Internet is no exception; . . . it must be judged in reference to the already flexible considerations which fair use affords.(1)
I. COPYRIGHT & DEVELOPMENT OF THE FAIR USE DOCTRINE
The policy goals of the Copyright Act are found in the Constitution. The progress of science and the useful arts is fostered by granting the individual who has expressed his or her idea the limited monopoly to profit from its dissemination.(2) This limited grant is “intended to motivate the creative activity of authors and inventors by the provision of a special reward, and to allow the public access to the products of their genius after the limited period of exclusive control has expired.”(3) In this way, the Copyright Act rewards the author and benefits the public.
An important outgrowth of this policy is the idea/expression dichotomy. This concept insures that no author can protect his or her idea; only his or her expression of that idea.(4) For reasons that will become apparent, this concept is instrumental in protecting First Amendment rights and in helping one recognize some of the goals of fair use under the Copyright Act.
With respect to the First Amendment, the idea/expression dichotomy “[strikes] a definitional balance between the First Amendment and the Copyright Act by permitting free communication of facts while still protecting an author’s expression.”(5) Because of this balance, “[c]opyright laws are not restrictions on freedom of speech [because] copyright protects only the form of expression and not the ideas expressed.”(6) An example of this idea can be found in the balance between copyright and the First Amendment rights of disseminating the news. The news element is the “history of the day” and is thus entitled to very little copyright protection.(7) However, “copyright assures those who write and publish factual narratives . . .that they may at least enjoy the right to market the original expression contained therein as just compensation for their investment.”(8)
In addition to the idea/expression dichotomy, the fair use doctrine assists in allowing others to build upon the ideas contained within copyrighted works without eliminating copyrights.(9) The fair use doctrine is an old common law idea that was not a part of original the Copyright Act in 1790. Something akin to the fair use doctrine existed in England as far back as 1710, and appeared in the States compliments of Justice Story as a judicially created doctrine in Folsom v. Marsh in 1841.(10) As Justice Story would later explain,
in truth, in literature, in science, and in art, there are, and can be, few, if any, things, which in an abstract sense, are strictly new and original throughout. Every book in literature, science and art, borrows, and must necessarily borrow, and use much which was well known and used before.(11)
Fair use remained a judge-made doctrine until the passage of the 1976 Copyright Act,(12) yet to this day remains an equitable doctrine.
II. FAIR USE DOCTRINE BASICS
The fair use doctrine is now set out in §107 of the Copyright Act and reads as follows:
Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include —
(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
(4) the effect of the use upon the potential market for or value of the copyrighted work.(13)
The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.
Section III of this article will discuss the manner in which a court determines each of these factors as well as how they are weighed together. Fair use is an affirmative defense which is raised after a prima facie case of copyright infringement has been established.(14)
When Congress incorporated fair use into the Copyright Act, it intended §107 “‘to restate the present judicial doctrine of fair use, not to change, narrow, or enlarge it in any way and intended that courts [would] continue the common law tradition of fair use adjudication.”(15) This intent, together with the language of the statute, “permits [and requires] courts to avoid rigid application of the copyright statute when, on occasion, it would stifle the very creativity which that law is designed to foster.”(16)
The application sought by Congress has been recognized and affirmed time and again by the Supreme Court. The case by case analysis is required by statute and there are no bright-line rules or short cuts.(17) Accordingly, all four factors are to be explored and weighed together in light of the purposes of copyright and never to be treated in isolation.(18) As a means of guidance, Congress provided examples of the types of uses which are generally considered fair uses. These examples are meant to be illustrative and not limiting; indeed, “whether a use referred to [as an illustration] is a fair use in a particular case will depend upon the application of the [four] determinative factors.”(19)
Case by case analysis has resulted in inconsistent, sometimes conflicting decisions in cases with similar fact patterns. Identical cases have found courts reversing each other as a case works its way through the appellate process. For example, in Michigan Document Services v. Princeton University Press, the district court found “willful” infringement and no application of the fair use doctrine.(20) A three-judge panel of the 6th Circuit Court of Appeals reversed the district court, finding that the copying was permissible fair use.(21) A rehearing en banc resulted in another reversal, with a slight majority of the active 6th Circuit judges finding that the copying in question was not a fair use.(22) These reversals and re-reversals serve not as an example of how a court misapplied the fair use analysis, but are simply illustrative of how difficult the issues can be and how “reasonable minds can differ” on close questions of judgment as different individuals weigh the different factors.(23)
Problems of analysis and precedent are often compounded by technology. The development of modern technology and communications has radically changed the way in which the public perceives copyrighted material.
The fortunes of the law of copyright have always been closely connected with freedom of expression on the one hand, and with technological improvements in the means of dissemination, on the other. Successive ages have drawn different balances among the interest of the writer in the control and exploitation of his intellectual property, the related interest of the publisher, and the competing interest of society in the untrammeled dissemination of ideas.(24)
The radio, cassette recorders, photocopiers, VCRs, and computer have all been initially thought to render the fair use doctrine obsolete.(25) However, the doctrine has remained unchanged and continues to apply successfully to new technologies. The Internet will be no different. All that will be required, as in the past, is creative thinking and logical application of the four factors while keeping in mind the goals of copyright.
III. FAIR USE ANALYSIS – STATUTORY EXAMPLES AND FACTORS
A. Statutory Examples:
Congress provided examples of the types of uses that might constitute fair use. Examples cited that may constitute fair use are those “for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research. . .”(26) It is important to realize that this list does not create a presumption of fair use, and indeed many uses that might at first seem to be included within the list have been found unfair. For example, in American Geophysical Union v. Texaco, the Second Circuit found that photocopying articles from a scholarly journal (to which Texaco subscribed) for use by Texaco researchers was not a fair use.(27) Likewise, in Los Angeles News Service v. KCAL-TV Channel 9, the Ninth Circuit held that a television news program’s use of a videotape of the Reginald Denny beating during the L.A. riots was not fair use.(28) These are just two of the numerous examples of uses that are named in the statute (research, news-reporting), yet were nevertheless found to be infringing.(29)
B. §107(1) Factor One – The Purpose and Character of the Use:
The first determination that must be made under factor one is the nature and objectives of the user.(30) Invariably, this boils down to whether the use is commercial in nature. Prior to Luther K. Campbell v. Acuff-Rose Music (the case involving 2 Live Crew’s recording of a parody version of Roy Orbison’s “Oh Pretty Woman“), it was widely believed that a commercial use by the alleged infringer created a presumption against fair use. Indeed, the Supreme Court itself had held in Harper & Row v. Nation Enterprises (where The Nation magazine had included unauthorized excerpts of former President Gerald Ford’s unpublished memoirs before authorized excerpts were to be published in Time magazine) that “[every] commercial use of copyrighted material is presumptively an unfair exploitation of the monopoly privilege that belongs to the owner of the copyright.”(31) However, in Campbell, the Court explicitly reversed itself, noting that for commercial uses to be presumptively unfair would swallow the permitted uses if they were for profit.(32)
The other side of the question regarding purpose and character of the use is whether the use is transformative. The Supreme Court described a transformative work as one which “supersedes the objects of the original,” or adds something new, with a further purpose or different character, altering the copyrighted work with new expression, meaning or message.(33) Justice Souter has suggested that using an original “to get attention or to avoid the drudgery in working up something fresh” indicates non-transformative use. The transformative nature of the new work will be considered together with the issue of whether the work is commercial. In Campbell, the Supreme Court noted that while
transformative use is not absolutely necessary for a finding of fair use, the goal of copyright, to promote science and the arts, is generally furthered by the creation of transformative works. Such works lie at the heart of the fair use doctrine’s guarantee of breathing space within the confines of copyright, and the more transformative the new work, the less will be the significance of other factors, like commercialism, that may weigh against a finding of fair use.(34)
When analyzing the commercial nature of a work with its transformative nature, a sliding scale is created. The closer the new work is to direct copy, the smaller the range of permitted commercial uses. The more transformative the new work, the greater the range of allowed commercial uses. Weighing all of these factors together, a trial court will articulate the “winner” on this factor, and to what extent that party prevailed. A finding on this first factor is not dispositive however, for all four factors must be considered together.
C. §107(2) Factor Two – The Nature of the Copyrighted Work:
This analysis focuses exclusively on the copyrighted work that has been infringed. It is made up of two major determinations: how close the original is to the “core of copyright protection” and whether the original is published. First, a court must determine what level of protection should be accorded the copyrighted work. This is achieved by determining how close the original is to the core of copyright protection – how creative or highly expressive a work is versus its being factual in nature. Copyright provides higher protections to creative works, but also “recognizes a greater need to disseminate factual works than works of fantasy or fiction.”(35) While it is obvious that a news broadcast would receive less protection than a science fiction motion picture, courts must often make difficult decisions under this factor, and reasonable people can differ as to how a work should be characterized.
[Even] within the field of fact works, there are gradations as to the relative proportion of fact and fancy. One may move from sparsely embellished maps and directories to elegantly written biography. The extent to which one must permit expressive language to be copied, in order to assure dissemination of the underlying facts, will thus vary from case to case.(36)
For example, in numerous cases in different courts over the same copyrighted material, different determinations were reached regarding the nature of the works of L. Ron Hubbard, the founder of the Church of Scientology.(37) While some judges found Hubbard’s works to be very creative and imaginative,(38) others found Hubbard’s writings more factual and informative.(39)
Second, a court will determine whether or not a work is published. While this is ordinarily a relatively easy finding, the implications are great. The scope of fair use is narrower with respect to unpublished works.(40) Again, policy goals of the Copyright Act are at work. The Supreme Court said it best in Harper & Row:
While even substantial quotations might qualify as fair use in a review of a published work or a news account of a speech that had been delivered to the public or disseminated to the press, the author’s right to control the first public appearance of his expression weighs against such use of the work before its release. The right of first publication encompasses not only the choice whether to publish at all, but also the choices of when, where, and in what form to publish a work.(41)
Thus, published works, while still protected, are nevertheless available to be transformed into new works, commented upon, criticized, or utilized in teaching or research. An example of the published/unpublished determination can be found in yet another Church of Scientology case where the court ultimately found fair use of published works, but against fair use with respect to unpublished works posted on the Internet.(42)
D. §107(3) Factor Three – The Amount and Substantiality of the Portion Used:
This factor is also made up of two elements: a quantitative analysis and a qualitative analysis. With respect to the quantitative element, the extent of the permissible copying varies with the purpose and character of the use as determined in factor one as well as foreshadowing the fourth statutory factor by revealing the degree to which the new work may serve as a market substitute for the original or its potentially licensed derivatives.(43) For example, in Harper & Row, the Court said that substantial quotations of Ford’s memoirs would have been permissible had Nation not “scooped” Time, thus destroying the commercial value of the serialization rights (factor four).
When measuring this factor, courts often use percentages to express the amount of copying that has taken place. However, because no percentage can be called a bright line, courts also will simply characterize the amount of copied material. Some will do both.(44) Because “no plagiarist can excuse the wrong by showing how much of his work he did not pirate,”(45) a second analysis is warranted.
The second portion of this analysis measures the qualitative element of the copied work. The closer the copied material comes to the “heart” of the original work, the less fair use is allowed. In Harper & Row, Nation had taken only 300 words from Ford’s entire manuscript. However, those words constituted “the heart of the book” as they dealt with Nixon’s pardon. As one editor testified at the trial, the chapter on the pardon was “the most interesting and moving part of the entire manuscript.”(46) Likewise, the Court in Campbell found that the use of the opening guitar riff from Roy Orbison’s Oh Pretty Woman, was the heart of that work. It too was the portion taken by 2 Live Crew and incorporated into the new work.(47) A problem under this determination is deciding who measures the “heart” of the work. In many cases, it is the portion taken by defendant that is deemed the “heart” of the work. In one case involving raw video news footage, the Ninth Circuit held this factor against the defendant who had taken only several seconds of footage for use on the evening news. The court reasoned that in preparing a newscast, editors selected the most effective and illustrative scenes from the raw footage available.(48) The analysis was similar in Michigan Document Services v. Princeton University Press where an 8-5 split full panel of the Sixth Circuit held that a commercial copyshop’s reproduction of substantial segments of copyrighted works of scholarship was not fair use when bound into “coursepacks” and sold to students for use in fulfilling reading assignments given by university professors.(49) The panel noted that the excerpts were selected by the professors, and that alone could serve as an indicia of the heart or “value” of the copied work.
Balancing these two determinations together provides another opportunity for courts and reasonable people to differ. While copying of entire works generally causes this factor to tilt toward the original author, other cases are not so clear cut. Courts have had to consider the amount and substantiality of portions taken from photographs(50) and film clips,(51) motion picture series characters and plots,(52) television series,(53) children’s book series,(54) and radio programs,(55) just to name a few.
E. §107(4) Factor Four – Effect of the Use on the Market:
The Supreme Court stated in Harper & Row that the fourth statutory factor, the effect on the potential market, was “undoubtedly the single most important element of fair use.”(56) Although a couple of recent appellate court opinions have suggested that the Supreme Court may have now abandoned that idea and considers no one factor to be more important than the others,(57) one can easily surmise that this is the most important factor to the litigants, and probably the motivating factor in the lawsuit.
Like the other factors and elements of the fair use analysis, the fourth factor does not operate in a vacuum. Determinations and characterizations made in factors one through three will affect the outcome of factor four. “Market harm is a matter of degree, and the importance of this factor will vary, not only with the amount of harm, but also with the relative strength of the showing on the other factors.”(58)
The burden of proof to show market effect hinges on whether the court has determined the use to be commercial or non-commercial. If the challenged use is non-commercial, the burden of showing market effect (usually harm) lies with the copyright holder. Conversely, the party asserting the fair use defense has the burden of showing no market effect if their use has been deemed commercial in nature.(59)
Once the burden has been laid upon the appropriate party, market harm (or lack thereof) can be shown several ways. First, a party can show the direct effect on the market. An example of this can be found in Sega Enterprises v. Maphia, et. al.(60) Sega involved a BBS (which is a computer bulletin board accessible to users by modem) which offered 22 video games created or licensed by Sega as well as six “beta” versions of games soon to be released. Subscribers to the BBS could upload or download games onto the system. The defendant sold “converters” that allowed the downloaded data to be converted into a game that could be played on a Sega machine. Obviously, this was not a fair use. The infringement competed in the marketplace with its original author.
A second way to measure market harm is to “show that if the challenged use should become widespread, it would adversely affect the potential market for the copyrighted work.”(61) Evidence of “substantial harm”(62) would weigh against a finding of fair use because the licensing of derivatives is an important economic incentive to the creation of originals. This is the preferred test. A commercial use infringer is thus burdened with the awesome task of showing that if its use were to become prevalent, that it still would not affect the potential market for the copyrighted work.
“Potential market” includes the market for derivative works as well as licensing possibilities. While this initially would seem to be almost limitless, it is in fact limited by common sense. As the Second Circuit recognized in American Geophysical, a copyright holder with no license agreement can always claim some degree of adverse effect on its potential licensing revenues because of the defendant’s use.(63) However, “[t]he market for potential derivative uses includes only those that creators of original works would in general develop or license others to develop.”(64) In fairness, only “traditional, reasonable, or likely to be developed markets” are considered. Evidence of a copyright holder’s current and future plans for derivative works or licensing would be highly probative in defining the copyrighted work’s “potential market.”(65) A defendant may be permitted to fill a market niche that the copyright owner has no interest in occupying.(66) Likewise, if the copyright holder has an interest or has begun to exploit a licensing market, then potential revenues from such licenses are appropriately considered under the fourth factor.(67)
An illustrative case applying this factor is Infinity Broadcasting v. Kirkwood.(68) Kirkwood had placed radio receivers in each of America’s ten largest radio markets. Through use of a touch-tone telephone, his customers could dial into a receiver in a particular city and listen to a broadcast in these cities in real-time. Kirkwood’s service thus rebroadcast copyrighted radio programs for a profit and without the payment of royalties to any of the radio stations which he made available to his customers. The court found that Kirkwood’s use was fair. This decision was based in large part on the fact that Kirkwood served a different market than the radio stations. Infinity’s purpose, the court said, was to generate revenues from advertisers and syndication rights, thus their market was the masses. The parties had stipulated however, that Kirkwood’s service was not intended for the general public, but had been marketed to radio stations, consultants, advertisers, performance rights organizations and others in the advertising and entertainment industries.(69) The court determined that Kirkwood’s service had no impact on the value of Infinity’s copyrighted programs as a means of generating advertising or syndication revenues.(70)
Other examples of the nuances of the fourth factor demonstrate that while the market must be “traditional and reasonable”, the harm experienced by that market may go beyond the normal economic harms. In Dr. Seuss Enterprises v. Penguin USA,(71) the court found market harm from the adverse affect on Dr. Seuss’s reputation and good will resulting from the defendant’s book about the O.J. Simpson murder trial.(72) In Metro-Goldwyn-Meyer v. American Honda,(73) the court found market harm in loss of potential endorsement value and “tie-in” marketing of products with motion pictures.(74) Market harm is not always found just because litigants are market competitors. In Sega Enterprises v. Accolade,(75) the Ninth Circuit Court of Appeals found that notwithstanding the fact that the parties were competitors and that Sega would suffer minor economic loss, Accolade’s copying of a limited amount of source code in the process of reverse engineering that code was permissible because it was necessary for Accolade to produce games compatible with the Sega player.(76) As these examples have shown, the fourth factor analysis has evolved into an amorphic and sometimes unwieldy determination. Counsel should always consider the wide variety of arguments that can be made under this factor.(77)
IV. INTERNET SCENARIOS/HYPOTHETICALS
As mentioned earlier, new technologies in multimedia and especially the Internet have heightened concern among many that copyrights will no longer be respected in the digital age. This has resulted in a spate of bills being introduced into Congress in an effort to amend the Copyright Act for purposes of clarification and sometimes to grant immunities.(78) Regardless of the outcome of these bills, the fair use defense still remains a viable argument in the face of infringement. The following are a series of scenarios and hypotheticals which are provided to show the range of situations in which the fair use defense could be raised in the context of the Internet.
• Al browses on-line and “surfs the web.” As he does so, Al’s computer makes copies onto its hard drive of every page viewed during Al’s on-line session. While it’s generally considered that there is an implied license for users to do this, one court has suggested that this is also a fair use.(79)
Ÿ While surfing the web at the office, Betty visits CNBC.com. There she sees an interesting but rather long story on the life of Princess Diana. Not having time to read it, Betty prints it out to read on the train ride home. Betty’s use is similar to media/time shifting which was approved by the Supreme Court in Sony.(80) It also is permissible to make copies for convenience,(81) and clearly making a single hard copy of an interesting article on the web would constitute fair use under both Sony and American Geophysical.
Ÿ Charlie is concerned about the plight of Angola. He maintains a non-commercial(82) web site espousing the increase in U.S. aid to Angola and detailing the conditions of Angolans and the corruption in their government. To lend credibility to his position, Charlie copies sections of text as well as some photos and maps from magazines and news-related web sites such as CNN.com which are incorporated into his web site. Charlie’s use of the copyrighted material is probably fair. Newsgroup discussions and web sites of current events, political or celebrity figures, social movements, news or editorial commentary would generally be fair(83) because 1) news-related and factual materials are accorded lower protections than other types of copyrighted materials;(84) 2) comment and criticism are recognized fair uses under §107; 3) the copied portions are only what was necessary to convey the facts or ideas;(85) 4) the use is non-commercial in nature;(86) and 5) there is a First Amendment free expression aspect to web sites of this type. This is reflected in the idea that the scope of fair use is wider when the use relates to issues of public concern.(87)
• Dolly is a big fan of daytime soap operas, particularly All My Children. While watching each day, Dolly faithfully takes notes detailing the plot twists of the show. Later, she updates the non-commercial web site she maintains as a sign of her devotion to the show. It contains an on-going general plot summary dating back to 1993 along with Dolly’s commentary on the characters and her predictions about where the show should go. She also provides a means for visitors to exchange commentary about the show with each other. Dolly has many “regulars” and has even proudly posted a letter she received from the head writer of All My Children commending her on her home page.(88) Dolly’s use would most likely be fair, in large part because her use is transformative, non-commercial and because she does not cause any market harm. Her commentary and predictions would be sufficiently transformative to negate what little market harm she might do to the show. Further, there seems to be little market for syndication of daytime soap operas after they have aired, and Dolly’s letter from the head writer would seem to be an acquiescence.
• Eddie, Dolly’s cousin, is a devoted fan of the sitcom Seinfeld. Like Dolly, he too maintains a web site to pay homage to his favorite show. As a matter of fact, there are about 75 other web sites maintained by people like him. But Eddie’s site is very popular, and for good reason. By visiting his page, one can download audio and video clips of the show Eddie dubbed off his VCR. Eddie also has posted the entire script (along with stage directions) of every Seinfeld episode. After Eddie started getting over a thousand “hits” a day on his site, he decided to start selling advertising on his page to off-set his expenses and make a little money on his hobby. Eddie’s use is not fair. Not only is his use commercial, but the extent of his copying rises to a level where it could potentially interfere with the market for derivative works or decrease the syndication value of the show.(89) It is possible that a person who missed Seinfeld on Thursday night could visit Eddie’s site and read the script, as well as see and hear some of the “highlights” of the show without having to rent a video or tune-in to the re-run.(90)
• Frank just developed a new technology that will provide a means by which “micropayments” can be made for viewing material on-line. For example, as a part of a user’s monthly access fee with his Internet provider, he deposits a sum into a debit account. Now when he visits the New York Times site on-line, he is presented with an initial menu page. When he selects a story to read, several cents are deducted from his account. Frank’s invention could have profound effects on the Internet, because now, every hyperlink is potentially commercial in nature(91) and market harm under the fourth factor would be more easily shown. This technology, by the way, is only a few years from reality.
• Gertrude is a consumer activist. She heads an organization called LobbyWatch which publicizes the activities of lobbyists to those outside the beltway. Her principal targets are the lobbying activities of big tobacco, the gun lobby, and insurance carriers. Gertrude’s web site regularly posts flyers and mass mailings that such groups send to their members (Gertrude is on the mailing list) and form-letters that such groups mail to Congressional representatives which Gertrude surreptitiously obtains from a friend who is a Capitol Hill staffer. Gertrude posts the letters in their entirety, and offers no comment on the page with them. In an effort to frustrate Gertrude, several of the lobbyists began placing copyright notices on their letters before sending them out . They then bring suit against LobbyWatch for copyright infringement. Gertrude’s assertion of the fair use defense presents some interesting questions. Gertrude’s use would be considered comment or criticism, and arguably news, scholarship or research. Gertrude’s use is non-transformative. Although the use of the letters would be competitive in the sense the user is criticizing the lobbying efforts, such type of use is not considered to affect the market as is relevant under the fourth fair use factor.(92) There is a First Amendment aspect to Gertrude’s use in that it fosters public debate in the marketplace of ideas. The lobbyists letters are surely eloquent, but would likely be held to be of a factual or informative nature.(93) Additionally, their nature as brief, persuasive documents would make it difficult to separate the ideas contained within them from their expression.(94)
With respect to the letters that Gertrude received from the lobbyists which they mailed to their constituents, her use would likely be held fair. The posting of documents she obtained surreptitiously however, may not be fair use. Assuming the letters to the Congressmen were held to be unpublished, this would militate against an application of fair use. Gertrude’s acts could also be found to constitute bad faith, and as such would weigh against her under the fair use analysis.(95)
This hypothetical is an example of how complex a fair use fact pattern and analysis can become in the face of competing interests and policies. The outcome of a case such as this could vary from court to court and could be easily be overturned numerous times on its way through the appellate process.
V. CONCLUSION: FAIR USE IN THE DIGITAL FRONTIER
The old adage “the more things change, the more they stay the same” is particularly appropriate when discussing the effect of new technology on the fair use defense to copyright infringement. While the fair use doctrine dates back to the English common law, it can still be applicable in today’s digital age. A steady eye on the underlying policies of the fair use doctrine and a creative commitment to applying the doctrine to the challenges of multimedia, digital and Internet technologies will allow the practitioner to confidently raise the fair use defense in the face of the most sophisticated technological infringement claims.
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ENDNOTES
1 Religious Technology Center v. Lerma, 40 U.S.P.Q.2d 1569 (E.D.Va. 1996).
2 U.S. Constitution, Art. I, Sec. 8.
3 Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984).
4 Nimmer On Copyright §1.10[B][2].
5 Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 556 (1985) quoting Consumers Union of U.S. v. General Signal Corp. 724 F.2d 195, 203 (2nd Cir. 1983).
6 Harper & Row, 471 U.S. at 556 (explaining Justice Brennan’s concurrence in N.Y.Times v. U.S. 403 US 713, 726 (1971)).
7 International News Service v. Associated Press, 248 U.S. 215, 234 (1918).
8 Harper & Row, at 556-57.
9 Luther R. Campbell v. Acuff-Rose Music, Inc., 114 S. Ct. 1164 (1994) citing Carey v. Kearsley, 4 Esp. 168, 170, 170 Eng. Rep. 679, 681 (K.B. 1803) (Lord Ellenborough).
10 See Id. at 12-13. All citations to the Campbell decision are to 1994 U.S. LEXIS 2052 pagination.
11 Emerson v. Davies, 8 F. Cas. 615, 619 (No.4,436) (CCD Mass. 1845).
12 Campbell, at 15.
13 The statute is clearly influenced by Justice Story’s early judicial doctrine. In Folsom v. Marsh, Story set forth what became the basis for statutory fair use: “look to the nature and objects of the selections made, the quantity and value of the materials used, and the degree in which the use may prejudice sale, or diminish the profits, or supersede the objects, of the original work.” 9 F. Cas. 342, 348 (No. 4,901)(CCD Mass. 1841).
14 Nimmer On Copyright §13.05; a prima facie case of copyright infringement is established by the plaintiff showing: 1) ownership of the copyright, and 2) copying of the constituent elements of the work that are original. Nimmer, at §13.01.
15 Campbell, at 16 (quoting H.R. Rep. No. 94-1476, p. 66 (1976); S. Rep. No. 94-473, p. 62 (1975)) (hereinafter Senate Report).
16 Campbell, at 16 (quoting Stewart, et. al v. Abend, 495 US 207, 236 (1990)).
17 Campbell. at 17; Nation at 560; Sony at 448.
18 Campbell, at 17.
19 Campbell, at 17 (quoting Senate Report at 62).
20 855 F. Supp. 905 (E.D. Mich. 1994).
21 74 F.3d 1512 (6th Cir. 1996); 1996 WL 648261
22 99 F.3d 1381 (6th Cir. 1996), cert. denied, 117 S. Ct. 1336 (1997).
23 “The malleability of fair use emerges starkly from the fact that all three [of the Supreme Court’s recent fair use decisions – Harper & Row, Sony, and Campbell] were overturned at each level of review, [and]two of them split opinions at the Supreme Court level.” Nimmer, at §13.05.
24 B. Kaplan, An Unhurried View of Copyright, vii-viii (1967).
25 Religious Technology Center v. Lerma, 40 U.S.P.Q.2d 1569 (E.D.Va. 1996).
26 §107
27 37 F.3d 881 (2nd Cir. 1994).
28 108 F.3d. 1119 (9th Cir. 1997).
29 Conversely, the Supreme Court found the taping of programming for later viewing to be a non-infringing fair use although “time-shifting” is not one of the named uses. Sony, 464 U.S. 417 (1984).
30 American Geophysical Union v. Texaco, 60 F.3d 913, 922, n. 8 (2nd Cir. 1994).
31 Harper & Row, at 562; citing Sony, at 451. In Harper & Row, the Supreme Court said the use of the excerpts was not a fair use.
32 Campbell, at 28-33. In Campbell, the Supreme Court sent the case back for further proceedings.
33 Campbell, at 19.
34 Campbell, at 19-20.
35 Harper & Row, at 563.
36 Id. at 563, quoting Gorman, Fact or Fancy? The Implications for Copyright, 29 J. Copyright Soc. 560, 561 (1982).
37 “[R]easonable people can disagree over how to classify Hubbard’s works.” New Era Publications Int’l v. Carol Publishing Group, 904 F.2d 152, 158 (2d Cir. 1989).
38 “The undisputed evidence shows that L. Ron Hubbard’s works are the product of his creative thought process, and not merely informational.” Bridge Publications, et. al. v. Vien, 827 F. Supp. 629, 635-36 (S.D. Cal. 1993)
39 Religious Technology Center v. Lerma, 908 F.Supp. 1362, 1367 (E.D.Va. 1995).
40 Harper & Row, at 564.
41 Id.
42 Religious Technology Center v. Netcom, 1995 U.S. Dist. LEXIS 16184 (N.D.Cal. 1995).
43 Campbell, at 34 citing Sony, at 449-50, Harper & Row, at 564, and Leval, Toward a Fair Use Standard, 103 Harv. L. Rev. 1105, 1123 (1990).
44 See Harper & Row, at 565. The Court mentions a percentage, but then says infringing article “structured around quotes which serve as dramatic focal points.”
45 Sheldon v. Metro-Goldwyn Pictures Corp., 81 F.2d. 49, 56 (2d Cir. 1936).
46 Harper & Row, at 565.
47 Campbell, at 37. The Court recognized that in cases of parodies, taking the heart of the original is necessary because it is assured of conjuring up the original in the minds of the parodist’s audience. The Court further said that a parodist should take no more than is necessary to conjure up the original.
48 Los Angeles News Service v. Audio Video Reporting Service, 973 F.2d 791 (9th Cir. 1992).
49 99 F.3d 1381 (6th Cir. 1996), cert. denied, 117 S. Ct. 1336 (1997).
50 See Art Rogers v. Jeff Koons, 960 F.2d 301 (2d Cir. 1992) (photograph of couple holding eight puppies copied by defendant in sculpture not fair use); Leibovitz v. Paramount Pictures, 948 F. Supp. 1214 (S.D.N.Y. 1996) (Leslie Neilsen advertisement for upcoming film Naked Gun 33 1/3: The Final Insult held fair use parody of Demi Moore’s nude, pregnant photo for cover of Vanity Fair).
51 See Monster Communications, Inc. v. Turner Broadcasting System, Inc., 935 F.Supp. 490 (S.D.N.Y. 1996) (court denies plaintiffs request for injunction against the release of Turner’s When We Were Kings, a movie about the life of Muhammad Ali; court finds that Turner is likely to show that its use of less than two minutes of footage from Ali’s 1974 heavyweight title fight is a fair use).
52 See Metro Goldwyn Mayer, Inc. v. American Honda Motor Co., 900 F.Supp. 1287 (C.D.Cal. 1995) (Honda Del Sol commercial which portrays “a high-thrill chase of the ultra-cool British charmer and his beautiful and alarming sidekick by a grotesque villain in which the hero escapes through wit, aided by high-tech gadgetry” held not fair use of “classic James Bond adventures”).
53 See Twin Peaks Productions, Inc. v. Publication Int’l, Ltd., et. al., 996 F. 2d 1366 (2d Cir. 1993) (Defendant’s book describing aspects of the first season of the Twin Peaks television series and which contained information on characters detailed plot summaries and trivia held not fair use of series copyrights); Castle Rock Entertainment v. Carol Publishing, 955 F. Supp. 260 (S.D.N.Y. 1997) (Defendant’s Seinfeld Aptitude Test, a book consisting of trivia about the show, identified and appropriated the most important elements of the sitcom Seinfeld – no fair use).
54 See Dr. Seuss Enterprises v. Penguin Books USA, 109 F.3d 1394 (9th Cir. 1997) (Defendant’s book The Cat NOT in the Hat about the Brown/Goldman murders and OJ Simpson’s trial held not fair use of the Cat in the Hat).
55 See Infinity Broadcasting v. Kirkwood, 965 F.Supp 553, 557 (S.D.N.Y. 1997) (court held third factor against defendant’s service based on “fairness” because neither party could show the extent of actual retransmission, let alone the content, and defendant’s service allowed subscribers to monitor radio programs in distant cities 24 hours a day).
56 Harper & Row, at 566, citing Nimmer §13.05
57 See American Geophysical, 60 F. 3d, at 926.
58 Campbell, at 42, n. 21.
59 Sony, at 451.
60 948 F. Supp 923 (N.D.Cal. 1996).
61 Harper & Row, at 568, quoting Sony, at 451.
62 Campbell, at 46.
63 American Geophysical Union v. Texaco, Inc., 60 F.3d 913 (2d Cir. 1994).
64 Campbell, at 44.
65 Litigants should always address the market for derivatives and licenses. In Campbell, 2 Live Crew asserted that its use of the song Pretty Woman was a parody. While the Court did find the band’s use to be parody, the Crew was put at a disadvantage under factor four because they failed to address the potential market for a non-parody rap version of Pretty Woman. The Court sent the case back for further proceedings on this issue.
66 Twin Peaks Productions, Inc. v. Publication Int’l, Ltd., et. al., 996 F. 2d 1366, 1377 (2d Cir. 1993).
67 American Geophysical, at 930.
68 965 F. Supp 553 (S.D.N.Y. 1997).
69 These were the typical users of Kirkwood’s service who used it to monitor advertising, gather statistical data for performance rights organizations, or audition on-air talent.
70 This is a good place to remind the reader of the impact of the other three factors in the overall outcome of a fair use determination. The court found factor one favored Kirkwood because although his retransmissions were not transformative, they were for a limited and different purpose than used by Infinity. As Kirkwood’s use was for a commercial purpose, many courts would have held that this factor favored Infinity. Factor two went to Infinity with the recognition that its copyright was predominately a compilation composed of independently copyrighted works (songs, commercials). Factor three went to Infinity as well because Kirkwood offered the possibility of retransmission of entire copyrighted works.
71 109 F.3d 1394 (9th Cir. 1997).
72 The defendant’s book was an attempt at parody entitled The Cat NOT in the Hat! The court borrowed a market harm test from the Second Circuit which sought to “strike a balance between the benefit the public will derive if the use is permitted and the personal gain the copyright owner will receive if the use is denied. The less adverse effect that an alleged use has on the copyright owner’s expectation of gain, the less public benefit need be shown to justify the use.” Id at 1403, quoting MCA, Inc. v. Wilson, 677 F.2d 180, 183 (2d Cir. 1981).
73 900 F.Supp. 1287 (C.D.Cal. 1995).
74 The court found the fourth factor to tip in favor of MGM because Honda’s use of the James Bond-like character and scenes diluted the market value of movie tie-ins and endorsements by Bond movies. The court specifically noted the arrangements to feature the BMW Z3 Roadster in the movie Goldeneye. “The court can very well imagine [that] a majority of the public, when viewing the Honda commercial and a future BMW ad, would come to the conclusion that James Bond was endorsing two automobile companies.” Id. at 1301.
75 Sega Enterprises, Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1992).
76 Significant to this case was the fact that deconstructing Sega’s code was essential to allow Accolade to produce a game to be played on the Sega game player. After noting that it was free to consider public benefit resulting from a particular use, the court held that “an attempt to monopolize the market by making it impossible for others to compete runs counter to the statutory purpose of promoting creative expression and cannot constitute a strong equitable basis for resisting the invocation of the fair use doctrine.” Accolade, 977 F.2d at 1523-24.
77 When the potentially infringing uses are parody or criticism, courts have recognized since Campbell that even if the use is commercial in nature, the parody or criticism does not generally cause market harm to the copyright holder because the two uses serve different purposes. Authors do not typically also produce parodies of their own works nor can a criticism, scathing though it may be, compete in the marketplace with the original. See Campbell, at 40-48.
78 See, e.g., WIPO Copyright and Performance and Phonograms Treaty Implementation Act of 1997 (introduced in the Senate); Digital Copyright Clarification and Technology Education Act of 1997 (introduced in the Senate). Both available at <http://thomas.loc.gov>
79 Religious Technology Center v. Netcom On-Line, et. al., 1995 U.S. Dist. LEXIS 18173 (N.D.Cal. 1995). This court suggests that browsing on-line is the functional equivalent of reading a book in a library (although thousands can read at once) and that there is not, at least at this point, a market for licensing the temporary copying of digital works onto computer screens to allow browsing. Id. at 47.
80 Sony, at 455 n. 40.
81 American Geophysical, 60 F.3d at 923.
82 The term “non-commercial” web site will be used to refer to those sites which do not derive revenues through subscriptions, passwords, advertisements or other commercial support. Such sites are typically maintained by individuals who pay for the site out of their own pocket.
83 Compare Religious Technology Center v. Lerma, 40 USPQ 2d 1569 (E.D.Va. 1996) (even though defendant’s use was non-commercial, posting entire unpublished works went beyond fair use).
84 “The law generally recognizes a greater need to disseminate factual works than works of fiction or fantasy.” Harper & Row, at 563.
85 The greater the portion taken from the original, the less it looks like fair use. “[N]o more of a work may be taken than is necessary to make the accompanying comment understandable.” Supermarket of Homes, Inc. v. San Fernando Valley Board of Realtors, 786 F.2d 1400, 1409 (9th Cir. 1986).
86 However, the more transformative the use, the more commercial the site could be. The new work must be more than “merely the product of ‘the facile use of scissors.’ [or cut and paste as the case may be].” Maxtone-Graham v. Burtchaell, 803 F.2d 1253, 1260 (2d Cir. 1986) (quoting Folsom v. Marsh, at 345). See supra Section III.A.
87 National Rifle Association v. Handgun Control Federation of Ohio, 15 F.3d 559 (6th Cir. 1994).
88 These facts are a variation on one of many Beverly Hills 90210 sites on the web. One site in particular claimed “visits” from cast members and posted a letter from the show’s executive producer who offered suggestions and inside information.
89 Seinfeld’s producers, it turns out, have asserted their rights when individuals have sought to “cash in” on the show’s popularity. See Castle Rock Entertainment v. Carol Publishing, Inc., 955 F. Supp. 260 (S.D.N.Y. 1997). The court held that a Seinfeld trivia book took too much and competed in a marketplace which the plaintiff was likely to enter.
90 In Twin Peaks Productions v. Publications International, 996 F.2d 1366 (2nd Cir. 1993), the defendant’s unauthorized book about the characters, story and social phenomena of the first season of the television series Twin Peaks was found to make an unfair use of the copyrighted scripts of the show. The defendant’s detailed plot summaries, the court said, would allow someone to read the book to find out what happened the first season instead of renting a video. “The author of Twin Peaks cannot preserve for itself the entire field of publishable works that wish to cash in on the Twin Peaks phenomenon. But it may rightfully claim a favorable weighing of the fourth fair use factor with respect to a book that reports the plot in such extraordinary detail as to risk impairment of the market for the copyrighted works themselves or derivative works that the author is entitled to license.” Id.
91 See Pamela Samuelson, The Copyright Grab, Wired, Jan. 1996, available at <http://wwww.wired.com/wired/4.01/features/whitepaper.html> Samuelson’s article, among other things, criticizes a proposal, adamantly rejected to date, to exclude any material for which payments could be collected on a reasonable basis for even de minimus copying from being available under fair use.
92 It is unlikely that a lobby group would ever license this type of use, so the market analysis may be more akin to that of parody or criticism. There is no protectable derivative market for criticism. Courts have realistically acknowledged that it is “unlikel[y] that the creators of . . . works [would] license critical reviews . . . of their own product.” Campbell, at 45. Even if a court found Gertrude and the lobbyists to be competitors, it is likely that greater principals of public concern and freedom of expression issues would be over-riding. More than one court has factored in public concern and benefit when analyzing the fourth factor. See National Rifle Association v. Handgun Control Association, 15 F.3d 559 (6th Cir. 1994) (use was fair because it was related to petitioning the government on legislation and commenting of public issues); Sega Enterprises v. Accolade, Inc., 977 F.2d 1510, 1523 (9th Cir. 1992) “Public benefit need not be direct or tangible, but may arise because the challenged use serves a public interest.”
93 See Religious Technology Center v. Lerma, 40 U.S.P.Q. 2d 1569 (EDVa 1996) (works that were intended to be informational in nature rather than creative further from the core of copyright protection).
94 See Harper & Row, at 564 (President Ford’s characterization of the “smoking gun” difficult to convey without using his exact words).
95 See Religious Technology Center v. Netcom On-Line, 1995 U.S. Dist. LEXIS 16184 (N.D. Cal. 1995) (obtaining copies in an unauthorized manner, while not fatal to a fair use defense, tends to weigh in plaintiff’s favor and will be considered among the other factors). Often in such close cases, courts will look for “bad guy” behavior on the part of one party.
The above information is provided for general educational purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal advice, but should always consult their own attorney regarding legal matters.
© 1997, Rob Hassett, Atlanta, Georgia. All Right Reserved.
The Attorney-Client Privilege in the Corporate Setting
Originally published in Lawyers’ Professionalism and Ethics, 2005 Fall Newsletter
By: Cynthia Tolbert
Of Counsel with Casey Gilson P.C., Atlanta, Georgia
770-512-0300
[email protected]
Ramifications of the disclosure of privileged materials in compliance with the governmental investigation of a corporate client
Considered near sacred in context since the sixteenth century, the attorney-client privilege has been riddled with assaults by Federal legislation, the Department of Justice, and court action alike over the past decade. The Sarbanes-Oxley Act of 2002; policy changes in the Department of Justice; and changes in various compliance procedures have had particular impact on the attorney-client privilege in corporate settings. Attorneys representing corporate clients that are undergoing investigations by governmental agencies must assess, often before the filing of a civil or criminal action against their client, what must be produced in compliance with the agency’s investigation, and what, pursuant to the attorney-client privilege, may be withheld. This article will explore the attorney-client privilege in the corporate setting and the attorney’s duty, if any, to disclose privileged materials in compliance with a governmental investigation, particularly in an effort to avoid criminal action.
I. ATTORNEY-CLIENT PRIVILEGE AND THE CORPORATE CLIENT
The attorney-client privilege found its origin in Elizabethan England, initially as a protection and consideration for the “oath and honor of the attorney,” instead of a protection afforded the client. See Radiant Burners v. American Gas Association, 320 F.2d 314, 318 (7th Cir. 1963) (citing 8 Wigmore, Evidence § 2990 (McNaughton Rev. 1961); Kelway v. Kelway, 21 Eng. Rep. 47 (Ch. 1580)). A century later, courts recognized that the client was entitled to similar protection, and by the 18th century the privilege became substantially recognized as that of the client. Id. In the early 1700’s, courts recognized that privileged communications were made, “…first, during any litigation; next, in contemplation of litigation; next, during a controversy but not yet looking to litigation; and lastly, in any consultation for legal advice, wholly irrespective of litigation or even of controversy.” Id. The parameters of the modern privilege were set out in United States v. United Shoe Machinery Corp., 89 F. Supp. 357 (D. Mass 1950.)
The privilege applies only if (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.
Id., at 358-59. Today, courts generally recognize that the attorney-client privilege is established when a communication is made between privileged persons, in confidence, for the purpose of Seeking, obtaining, or providing legal assistance to the client. Restatement (Third) of the law governing lawyers § 118 (1988.) The policy behind the privilege is to allow the client an opportunity to fully divulge all information to his attorney so that the attorney is able to give informed legal advice. Upjohn Co. v. United States, 449 U. S. 383, 389-392 (1981). Without that protection, necessary information may be withheld from the attorney, and subsequent advice may be given based on half-truths or conjecture. The privilege, therefore, evolved from common law and was subsequently codified in the Federal Rules of Evidence, as well as the Federal Rules of Civil Procedure and related state evidentiary and procedural rules. See Fed. R. Evid. 501; Fed. R. Civ. Pro. 26 (b) (3).
Federal courts have long acknowledged the attorney-client privilege, extending the privilege to the corporate client as early as 1915. See Radiant Burners, Inc. at 319 (citing United States v. Louisville & Nashville R.R., 236 U.S. 318, 336 (1915)). In the corporate setting, the attorney-client privilege is unique in that the privilege attaches to the corporate entity, typically, and not to individual employees who communicate with the attorney. Similarly, the decision as to whether to waive the attorney-client privilege belongs to the corporation, not its employees. Obviously, a corporation may only act through its agents and any communication with an attorney on behalf of the corporation must be made by an individual. Courts initially struggled with the application of the attorney-client privilege to certain individuals and the fact that the corporation itself as an “artificial creature of the law” could not communicate with its counsel. See Upjohn Co., at 389. Prior to the decision in Upjohn, Federal courts were split as to whether the privilege extended only to officers of the corporation, or whether it also extended to other employees of the corporation who had communicated with corporate attorneys. See Harper & Row Pubs., Inc., v. Decker, 423 F.2d 487 (7th Cir. 1970). Competing tests evolved for purposes of determining how and when to invoke the corporate attorney-client privilege regarding statements of corporate employees. These tests were identified as the “control group test” and the “subject matter test.” See Harper & Row Pubs., Inc., supra; General Electric Co. v. Kirkpatrick, 312 F. 2d (3rd Cir. 1962). The “control group test” recognizes that the attorney-client privilege extends to the statements of corporate employees who are in a position to control or take a substantial part in a corporate decision. See Harper & Row Pubs., Inc., at 490-491. The “subject matter test” recognizes that an employee’s statement is that of the corporation when the employee makes the communication at the direction of his superiors and where the subject matter upon which advice was given was sought by the corporation. See General Electric Co. v. Kirkpatrick, supra. Both tests were analyzed by the Supreme Court in Upjohn Co., which ruled in favor of the more broadly applied “subject matter test,” stating:
The control group test … frustrates the very purpose of the privilege by discouraging the communication of relevant information by employees of the client to attorneys Seeking to render legal advice to the client corporation. The attorney’s advice will also frequently be more significant to noncontrol group members than to those who officially sanction the advice, and the control group test makes it more difficult to convey full and frank legal advice to the employees who will put into effect the client corporation’s policy.
Upjohn, at 392.
The Upjohn case arose out of the company’s internal investigation into “kickback” payments made by certain employees to foreign officials for the purpose of securing government business. The payments exposed the company to increased tax liability, yet the company brought the issue to the attention of the Security and Exchange Commission (“SEC”) as well as the Internal Revenue Service (“IRS”). In response, the IRS issued a subpoena seeking documents related to the internal investigation, including forms completed by company employees which had been submitted to its in-house counsel. Upjohn refused to produce the forms based on the attorney-client privilege, and the IRS sought to enforce the subpoena. The Court ruled that the communications at issue were protected because (1) they were made to in-house counsel at the direction of corporate superiors; (2) they concerned matters within the scope of the employees’ in-house duties; (3) the information was not available from upper-level management; and (4) the employees were aware that they were being questioned so that the corporation could receive legal advice. Upjohn at 394-396; 397-398 (recognizing strong public policy underlying attorney work product privilege). Pursuant to the “subject matter test” therefore, the attorney-client privilege is preserved if the criteria detailed in Upjohn is satisfied, which serves to protect communications between corporate attorneys and corporate employees during fact finding investigations. Upjohn is the landmark case on the attorney-client privilege in the corporate context. See Leslie Warton, Hazards for Attorney-Client Relationship, New York Law Journal, corporate counsel, November 18, 2002. State law typically governs these issues, however, and the more rigorous “control group test” is followed in several jurisdictions. See National Tank Co. v. Brotherton, 851 S.W. 2d 193 (Tex. 1993).
Through the next decade the Supreme Court vigorously defended the attorney-client privilege against government encroachment in the corporate setting. See Swidler v. Berlin, 524 U. S. 399, 403 (1998) (public policy of attorney-client privilege was greater than the public policy of uncovering alleged wrongdoing of president); United States v. Zolin, 491 U. S. 554, 572 (1989) (to invoke crime-fraud exception to attorney-client communications challenging party must present sufficient evidence to demonstrate that the exception is warranted). But in 1999, vast policy changes in the Department of Justice (DOJ) and in 2002, the reporting requirements of § 307 of the Sarbanes-Oxley Act, served to substantially modify the application of this privilege to the corporate client. Recent changes, as late as December of 2006, substantially curtailed the more controversial DOJ policy changes affecting the attorney-client privilege. But the recent changes do not outlaw waiver demands; some threat is still directed toward the attorney-corporate client privilege during a governmental investigation.
II. INTERNAL INVESTIGATIONS AND REPORTING REQUIREMENTS
Before 1999, companies and their corporate counsel commonly conducted internal investigations regarding suspected corporate infractions without concern of waiving or forfeiting the attorney-client or attorney-work product privilege, particularly when guidelines established by Upjohn, supra were followed. See Lawrence Finder, “Internal Investigations: Consequences of the Federal Deputation of Corporate America,” South Texas Law Review, Vol. 45: 111. At that time, problems which merited inquiry would often be managed by an internal review, generally headed by outside counsel to better preserve the attorney-client and work product privileges. Id. In 1991, the Department of Justice promulgated guidelines for “Sentencing of Organizations,” which emphasized corporate cooperation during federal investigations to ensure leniency. Id. at 113-14, citing U.S. Sentencing Guidelines Manual ch. 8 (2002). At that time, the goal of most companies undergoing a federal investigation was to cooperate by disclosing” … just enough, but not too much” in an effort to avoid a waiver of the privilege and simultaneously take advantage of the promise of leniency. Id. These guidelines rewarded organizations with reduced penalties upon disclosure and further served to encourage federal prosecutors to request waivers of privilege and the production of work product underlying the internal investigations of corporations. Id.
In 1999, prosecutors from the Department of Justice became more aggressive in their inquiries and investigations of corporations following the publication of a memorandum penned by then-Deputy Attorney General Eric Holder, called the “Holder Memorandum.” Id. This memorandum, often referred to as the death knell for attorney-client privilege, identified eight factors prosecutors were to consider in their analysis of whether to file criminal charges against a corporation. Id. (citing David M. Zorrow & Keith D. Krakur, On the Brink of a Brave New World: The Death of Privilege in Corporate Criminal Investigations, 37 Am. Crim. L. Rev. 147, 147-48 (2000)). The most notable and controversial of the eight factors required the prosecuting attorney to analyze:
“[t]he corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection.”
Id. at 119.
In 2002, Congress enacted the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 746, to redress corporate fraud. This Act required the Securities and Exchange Commission to promulgate rules setting out “minimum standards of professional conduct” for attorneys appearing and practicing before the commission. Warton, Leslie, Hazards for Attorney-Client Relationship, New York Law Journal, corporate counsel, November 18, 2002. Specifically, § 307 of the Act required that rules be issued:
1. requiring an attorney to report evidence of material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer of the company…; and
2. if the counsel of officer does not appropriately respond to the evidence…requiring the attorney to report the evidence to the audit committee.
Id. (citing Sarbanes-Oxley Act, supra). The Act thus requires attorneys who suspect corporate infractions of law or fraud to report what they perceive to be “material violations” of federal law to the corporation’s chief legal officer or chief executive officer. Id. See also Report of Investigation Pursuant to Section 21 (a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Re. No. 34-44969 (October 23, 2001), available at http://www.sec.gov.litigation/investreport/34-44969.htm (Seaboard report: states that corporations can demonstrate cooperation by waiving privilege). Those officials, in turn, are required to report back to the attorney on all steps taken to correct the suspected corporate abuse or fraud. If the attorney is dissatisfied, he must then report “up the ladder,” to the corporation’s board of directors or to a designated committee. Max R. Crane, and Peter G. Verniero, Attorney Client Privilege Under Assault, The Metropolitan Corporate Counsel, Vol. 13, No. 1, January, 2005. Although under the rules the attorney’s reporting duty ends with the report he makes to the corporation’s board of directors or its appointed committee, the rules also provide that the attorney may report infractions to the SEC under certain situations. Id. If the attorney believes that investors’ interests are in jeopardy, the attorney may reveal confidential and privileged information to the SEC, without the company’s consent. Id. The attorney’s typical supportive position as an advocate for the corporate client is thus modified by § 307 of the Sarbanes-Oxley Act to that of corporate policeman. Id. The policing efforts encouraged by the Act also work to transform the attorney from advocate to whistleblower, which in turn, destroys the attorney-client privilege as applied and raises serious ethical issues for the reporting attorney.
Historically, the attorney-client privilege has not been completely impermeable. One well recognized exception to the privilege is the “crime-fraud” exception. See United States v. Zolin, supra. Under this exception the privilege does not apply to attorney-client communications if the client was engaged in a crime or fraud at the time he sought an attorney’s advice, or if the advice was sought “in furtherance of” the crime or fraud. Id. See also Hazards for Attorney-Client Relationship, supra. Attorneys are duty bound not to disclose a client’s past criminal activity, although future crimes are not protected by the privilege. United States v. Cleveland, 1997 U.S. Dist. LEXIS 5895, April 28, 1997 (citing U. S. v. Zolin, supra). In contrast, under the provisions of § 307 of the Sarbanes-Oxley Act, an attorney may report a client’s past acts. Further, § 307 provides a de facto exception to the privilege, plausibly, before corporate crime or fraud is conceived, committed, or discovered. See Hazards for Attorney-Client Relationship, supra; Report of Investigation Pursuant to Section 21 (a) of the Securities Exchange Act of 1934 and Commission Statement of the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Rel. No. 34-44969 (Oct. 23, 2001), available at http://www.sec.gov./litigatoin/investreport/34-44969.htm.
Recently, courts have applied the crime-fraud exception to the attorney-client privilege in cases where no crime or fraud was committed, but where there was evidence of intent to commit a crime or fraud. Id. In Grassmueck v. Ogden Murphy Wallace, P.L.L.C., the court held that a prima facie showing that the attorney-client communications at issue were in furtherance of criminality was not required for the exception to apply if the Plaintiffs could show that the in camera review of the evidence “…may lead to evidence that the exception applies.” Grassmueck v. Ogden Murphy Wallace, P.L.L.C., 213 F.R.D. 567,572-73 (W.D. Wash. 2003) (citing In re Grand Jury Subpoena 92-1, 31 F.3d 826, 830 (9th Cir. 1994)). The Grassmueck court further noted that the crime-fraud exception may apply to negate the privilege “…even though the attorney is unaware of the crime and takes no affirmative stop that actually furthers it.” Id. (citing In re Grand Jury Proceedings (the Corporation), 87 F.3d 377, 380 (9th Cir. 1996)). Under the more relaxed standards cited above, prosecutors and plaintiff’s counsel could easily argue that the attorney-client privilege is breached for virtually any § 307 communication, even where counsel’s initial suspicions of fraud are unfounded. See Hazards for Attorney-Client Relationship, supra.
Notably, § 307 provides no guidelines for an objective analysis of a reportable infraction and does not specifically provide for the attorney-client privilege regarding § 307 communications. Ultimately, the attorney’s own communications with corporate officials, which are mandated by the Act, may be used to prosecute the corporate client. Id. Ironically, in a situation where an internal investigation is prompted by the corporation’s attorney, under the Sarbanes-Oxley reporting mandates, the corporation may be charged with the crime that the underlying internal investigation took place to prevent or correct. Id. And the attorney’s own communications may be used to prove certain elements of the “crime.” Id.
In 2003, following the enactment of the Sarbanes-Oxley Act, the Department of Justice issued yet another memorandum. The memorandum, which was entitled “Principles of Federal Prosecution of Business Organizations” (“Thompson Memorandum” after Holder’s successor Deputy Attorney General, Larry D. Thompson), served to impose more strident requirements for a corporation’s cooperation during a governmental investigation. See Finder, Internal Investigations: Consequences of the Federal Deputation of Corporate America, at 115. This memorandum directed prosecutors who encountered companies which impeded disclosure to “weigh in favor of a corporate prosecution.” Id. Specifically, the Thompson memorandum stated:
We will not tolerate conduct that ultimately obstructs our investigations, whether veiled or overt. We are particularly watchful for: (1) overly broad assertions of corporate represent-action of employees; (2) inappropriate directions to employees to not volunteer information or decline interviews; and (3) presentations or assertions that contain misleading information or omissions.
Id. (citing Remarks of Deputy Attorney General Larry D. Thompson, Ninth Circuit Judicial Conference, http://www.usdoj.gov/dag/speech/2003/062503hawaii9thcircuit.htm (June 25, 2003)). Although disclosure is strongly encouraged, the Thompson Memorandum further stated that “…a corporation’s offer of cooperation does not automatically entitle it to immunity from prosecution.” Id. (citing Thompson Memorandum, supra, note 12, § II. A).
In response to great public and private outcry against the Thompson Memorandum, current Deputy Attorney General Paul McNulty issued his own guidelines on December 12, 2006, which curtailed some of the more egregious sections of his predecessor’s memorandum. See Memorandum from Paul J. McNulty, Deputy Attorney General, to Heads of Department Components and United States Attorneys (Dec. 12, 2006), available at http://www.usdoj.gov/dag/speech/2006/mcnulty_memo.pdf. Although the attorney-client privilege is not completely protected, the McNulty Memorandum requires prosecutors to obtain prior supervisory approval before making a demand for a waiver of the attorney-client privilege. Specifically, the McNulty Memorandum states:
Waiver of attorney-client and work product protections is not a prerequisite to a finding that a company has cooperated in the government’s investigation. However, a company’s disclosure of privileged information may permit the government to expedite its investigation. In addition, the disclosure of privileged information may be critical in enabling the government to evaluate the accuracy and completeness of the company’s voluntary disclosure.
Prosecutors may only request waiver of attorney-client or work product protections when there is a legitimate need for the privileged information to fulfill their law enforcement obligations. A legitimate need for the information is not established by concluding it is merely desirable or convenient to obtain privileged information. The test requires a careful balancing of important policy considerations underlying the attorney-client privilege and work product doctrine and the law enforcement needs of the government’s investigation.
Whether there is a legitimate need depends upon:
(1) the likelihood and degree to which the privileged information will benefit the government’s investigation;
(2) whether the information sought can be obtained in a timely and complete fashion by using alternative means that do not require waiver;
(3) the completeness of the voluntary disclosure already provided; and
(4) the collateral consequences to a corporation of a waiver.
Id. The McNulty Memorandum also imposes a “step-by-step” approach to requesting information, first requiring purely factual information, which may not be privileged, which is related to the underlying alleged misconduct. This step is identified as a “Category I” request. Id. Before requesting that a corporation waive the attorney-client or work product protections for Category I information, prosecutors must first obtain written authorization from the United States Attorney, who must in turn consult with the Assistant Attorney General for the Criminal Division before granting or denying the request. Id. The prosecutor Seeking the waiver must identify the basis for and scope of the request. Id. Significantly, a corporation’s response to the government’s Category I request for waiver of privilege may be considered in determining whether a corporation has cooperated in the government’s investigation. Id.
If the purely factual information provides an “incomplete basis to conduct a thorough investigation,” prosecutors may then request that the corporation provide attorney-client communications or non-factual attorney work product, which is identified as “Category II” information. Id. Prosecutors are cautioned that Category II information should only be sought in “rare circumstances.” Id. It should be noted that the McNulty Memorandum does not identify the “rare circumstances” in which this information may be sought. However, prosecutors are required to follow similar steps for authority to proceed with this avenue of investigation as required for Category I information, but, in addition, all requests for Category II information must be made in writing, setting forth the legitimate need for the information and identifying the scope of the waiver sought. Id. Such requests must also be maintained in the files of the Deputy Attorney General. Id. However, the memorandum notes that requests for Category II information do not include:
(1) legal advice contemporaneous to the underlying misconduct when the corporation or one of its employees is relying upon an advice-of-counsel defense; and
(2) legal advice or communications in furtherance of a crime or fraud, coming within the crime-fraud exception to the attorney-client privilege.
Id. The memorandum directs prosecutors not to take into account a corporation’s decision not to provide Category II information, which distinctly differs from the provisions of the Thompson Memorandum. The McNulty memorandum may serve to curtail some waiver demands from governmental prosecutors and further ensures uniformity in the government’s approach to the attorney-client privilege waiver during investigations. Id. See also Press Release, Department of Justice, U.S. Deputy Attorney General Paul J. McNulty Revises Charging Guidelines for Prosecuting Corporate Fraud, December 12, 2006, www.usdojgov.
Separately, Senate Judiciary Chairman, Arlen Specter (R-Pa), on December 7, 2006, proposed legislation that would completely bar prosecutors from forcing companies to waive their attorney-client privilege to avoid criminal charges. See Press Release of Senate Judiciary Committee, and Carrie Johnson, “Shift in Corporate Prosecution Ahead,” Washington Post, November 30, 2006 www.washingtonpost.com/wp-dyn/content/article/2006/11/29/AR2006112901316 pf. The proposed legislation preserves the corporation’s ability to offer internal investigation materials to federal prosecutors, but only if such an offer is voluntary and unsolicited by prosecutors.
III. DISCLOSURE AND WAIVER: THE McKESSON DILEMMA
The “post-Enron” world is fraught with concerns regarding the impact corporate fraud has caused investors and retirees alike. The reporting rules and guidelines promulgated by the Department of Justice and the Securities and Exchange Commission were developed, in part, to prevent the devastation and collapse of major corporations and individual retirement accounts. As noted above, a waiver of the attorney-client privilege is encouraged in certain circumstances by both agencies. Prosecutors may argue that the DOJ and SEC disclosure policies serve to prevent an employee from hiding his criminal activities behind the company‘s protective shield. They may also argue in support of their disclosure policies because these policies may act to prevent the errant and/or criminal actions of an individual employee, which could, in turn, expose an entire company to criminal sanction. This, as in the case of Arthur Andersen, may lead to the corporation’s demise. See Internal Investigations, at 121; Martin, James and Calvert, Winston, The Threat of Criminal Prosecution To In-House Counsel, The Tide Has Changed But It Is Not a Tsunami, ABA Section of Litigation Committee on Corporate Counsel, February 16-19, 2006. But the voluntary waiver of the attorney-client privilege in the face of a governmental investigation may also have far-reaching and devastating implications for the company and individual employees alike.
A. The Lessons of McKesson
On January 12, 1999, McKesson, a large publicly traded, health care supply management company and HBOC, a publicly traded, health care information management software company, merged and HBOC became a wholly owned subsidiary of McKesson. McKesson Corporation v. Green, 266 Ga. App. 157, 597 S. E. 2d 447 (2004) (cert. granted 279 Ga. 95, 610 S.E. 54 (2005)). Shortly after the merger, McKesson acknowledged that HBOC had improperly recorded revenue before the merger, which had artificially inflated HBOC’s value. Id. at 158. McKesson issued a revised earnings statement shortly following its discovery and publicly announced the overstatement, which caused the value of its stock to plummet. Id. In May of that year, McKesson hired a law firm and an accounting firm to conduct an internal investigation to determine the nature and extent of HBOC’s accounting improprieties. Id. In keeping with their investigation, attorneys and accountants conducted extensive interviews of HBOC and McKesson officials and reviewed documents and other related materials from each company. Id. Advisory memoranda were prepared following this investigation and review of materials. Id.
Within days of McKesson’s public announcement, the SEC began an investigation into McKesson, as well as HBOC, to determine whether either of the corporations had filed materially false or misleading financial statements. Id. at 159. During these investigations, McKesson voluntarily provided the audit documents to the SEC and United States Attorneys Office (USAO), after securing a confidentiality agreement which provided that the production did not waive the attorney-client and work product protection. Id. at 159 (citing O.C.G.A. § 9-11-26 (b)(3)). In the interim, various McKesson shareholders filed securities fraud law suits for the devaluation of their stock. Id. (citing McKesson HBOC, Inc. v. Adler, 254 Ga. App. 500, n. 1, 562 S.E. 2d 809 (2002)) (noting that more than 80 lawsuits arising out of the merger had been filed nationwide). During this litigation, the shareholders moved the trial court to compel McKesson to produce the audit documents that the corporation had provided to the SEC and USAO. Id. at 159. The trial court ruled that although the documents at issue were work product and should be protected from discovery, the fact that McKesson voluntarily provided audit documents to an adversary worked to waive the work product protection. Id. at 160 (citing McKesson HBOC, Inc., v. Adler, 254 Ga. App. at 501) (protection is not waived by voluntary disclosure to a third party, unless the third party was an adversary); United States v. Bergonzi, 216 FRD at 496-498 (McKesson and government were adversaries and did not share a “true common goal”); McKesson HBOC, Inc. v. Superior Court of San Francisco County, 115 Cal. App. 4th 1229, 1240, 9 Cal. Rptr. 3d 812 (2004) (finding that McKesson and the government were not aligned in any litigation and did not share the same stake or have the same goal); Saito v. McKesson HBOC, Inc., 2002 Del. Ch. LEXIS 125, at 6-20 (a shareholder suit in which the trial court found that McKesson did not share a common interest with the SEC at the time the documents were disclosed, that the SEC was a “foe” of the corporation, and that McKesson was aware that an adversarial relationship existed before disclosing its work product)). The trial court further ruled that the confidentiality agreement between McKesson and the SEC did not prevent a waiver of the protection. Id. at 160 (citing United States v. Bergonzi, 261 FRD at 496-497 (II) (A) (2) (b) (1), n. 10) (finding that the confidentiality agreements between McKesson and the government were not unconditional, gave the government the power to share the documents as “it saw fit,” and therefore did not prevent a waiver of the work product protection)). In addition, the shareholders asserted that McKesson disclosed the audit documents to gain leniency from the SEC, not because there was a shared interest. Id. (citing In re Steinhardt Partner, 9 F3d at 235-236 (noting that the SEC has continued to receive voluntary cooperation from subjects of investigations even absent the promise of confidentiality, because such cooperation benefits the subject by providing the possibility of leniency and limiting the duration and parameters of the investigation and resulting litigation); Westinghouse Elec. Corp. v. Republic of Philippines, 951 F2d 1414, 1429 (3rd Cir. 1992) (finding that when a party discloses protected materials to a government adversary in order to forestall prosecution or obtain lenient treatment, such disclosure waives the work product protection because both objectives are “foreign” to the rationale behind the work product doctrine)). Interestingly, in an amicus brief to the trial court in McKesson v. Greene, the SEC admitted that it “often rewards cooperation [by the subject of the investigation] with lenient treatment.” Id. at 164 (citing In re Subpoenas Duces Tecum, 738 F2d 1367, 1369 (D.C. Cir. 1984) (recognizing that the SEC’s ‘voluntary disclosure program…promises wrongdoers more lenient treatment and the chance to avoid formal investigation and litigation in return for thorough self-investigation and complete disclosure of the results to the SEC’)). The appellate court in McKesson v. Green ruled that the trial court did not abuse its discretion in granting the shareholder’s motion to compel the discovery of the McKesson audit documents which had been submitted “in confidence” to the SEC. Id. at 166. See also McKesson HBOC, Inc. v. Superior Court, _____Cal. App. 4th _____, 2004 WL 318618 (Feb. 20, 2004) (disclosure of the audit documents to the government was not required for the attorneys to provide legal advice to McKesson, and McKesson was ordered to produce the documents to Merrill Lynch).
McKesson was obligated to report its discovery of HBOC’s misrepresented valuation, which acted to not only devalue its stock but also to trigger an internal audit and investigations by the SEC and the USAO. As noted above, the government pressured McKesson into disclosing materials and memoranda from the McKesson internal audit to the SEC with the understanding that the company would be given a more lenient treatment if faced with criminal action. Even though McKesson entered into a confidentiality agreement with the government, courts ruled that the company breached the attorney-client and work product privileges by disclosing the contents of their audit to an adversary. The internal audit documents were allowed into evidence in multiple shareholder lawsuits throughout the country and led to criminal charges against the company’s chief financial officer.
On March 30, 2004, approximately five years following the disclosure of internal audit documents to the SEC, the U.S. Department of Justice issued a press release detailing what was to become one of the largest securities fraud investigations of an individual in the country. Press Release, United States Attorney for the Northern District of California, SEC, U.S. Attorney’s Office and FBI Bring Securities Fraud Charges Against Former McKesson Chief Financial Officer Richard Hawkins (April 1, 2004). The subject of the press release was the criminal and civil securities fraud charges leveled against Richard Hawkins, the former Chief Financial Officer for McKesson. Hawkins was charged with conspiracy, securities fraud and lying to the company’s auditors. U. S. v. Hawkins, 2005 U.S. Dist. LEXIS 9839, 33 Media L. Rep. 1570 (U.S.D.C.N.D. Calif. 2005). McKesson intervened in the Hawkins litigation, asserting that the results of the internal audit conducted in 1999 were confidential attorney-client communications as well as attorney work product. Id. McKesson further contended that the contents of the audit and memoranda should be sealed and kept from public purview and access. Id. The Hawkins court held that McKesson did not prove that its interests overcame the public’s right to access of the audit documents. Id. Furthermore, during the course of Hawkins’ criminal trial, statements made by witnesses during the internal investigation became relevant to the government’s and the defense’s case, which required testimony from McKesson’s outside lawyers regarding their earlier audit and investigation of McKesson/HBO, Co. See News Releases, Orrick, San Francisco, Former McKesson CFO Richard Hawkins Not Guilty on All Counts of Securities Fraud, (July 11, 2005); Orrick, Update: McKesson Acquittal Offers Insight Into Federal Prosecutions of Corporate Defendants. Hawkins was acquitted following a six week bench trial. Id.
As noted above, McKesson’s decision to “voluntarily share” the contents of its internal audit with the SEC waived the protections of the attorney-client privilege and the attorney work product doctrine. It is also apparent that the audit documents, produced to the SEC by McKesson’s outside counsel following their investigation, were used to indict Hawkins and several of HBO’s corporate officers. Even though the disclosures were apparently made to ensure governmental leniency for McKesson, the confidentiality agreement entered between McKesson and the government was invalidated and did not serve to protect any interests, including the interests of the corporation, McKesson or the interests of the corporate officers, including Hawkins. The lesson of the McKesson dilemma may be to avoid the voluntary disclosure of internal audits and privileged documents to governmental agencies, even when leniency is promised. Today, the McKesson internal audit documents would likely fall into Category I and Category II communications under the McNulty Memorandum. Therefore, today, a refusal to produce fact-based, Category I information from an internal audit may be used by the USAO to assess corporate cooperation, or, more specifically, corporate lack of cooperation. But, as noted above, the refusal to produce Category II information, which is strictly privileged, would not, as per the McNulty Memorandum, be used against McKesson today when assessing corporate cooperation.
B. To Produce or Not Produce; the Attorney’s Dilemma
Closely following the wake of the Enron scandal, in March of 2002, the Department of Justice brought an obstruction of justice charge against the Arthur Andersen firm in its entirety. See The Threat of Criminal Prosecution To In-House Counsel, supra. Arthur Andersen was charged with violating 18 U.S.C. § 1512 (b)(2)(A), which makes it a crime to “corruptly persuad[e] another person” to withhold or alter documents for use in an official proceeding. Id. See also Arthur Andersen v. United States, 125 S. Ct. 2129, 2136 (2005). None of the individuals who actually caused the destruction of volumes of documents concerning Enron were indicted. Id. In the Arthur Andersen case, Nancy Temple, who was serving as in-house counsel to the firm, allegedly in anticipation of an SEC investigation, gave instructions for Arthur Andersen employees to “follow company document retention policy,” which called for the destruction of documents after a certain period of time. Id. This action led to the indictment of the company. Id.
The guilty verdict entered against Arthur Andersen led to the destruction of the entire company, which once employed thousands. The Threat of Criminal Prosecution To In-House Counsel, supra. The company’s downfall became the bane of the Department of Justice, which was severely criticized for its decision to bring criminal charges against the firm instead of the responsible individuals. Id. Following the collapse of Arthur Andersen, certain U.S. Attorneys and a U.S. Deputy Attorney General asserted that the focus of future corporate fraud prosecutions would be on the corporate representatives responsible for the criminal conduct, including in-house counsel. Id. (citing Lanny A. Brever & Christopher J. Burke, Lawyers, Accountants and Other Capital Market “Gatekeepers” Come Under Prosecutors’ Scrutiny, Wash. Legal found: Legal Backgrounder, Aug. 22, 2003, available at http://www.wlf.org/upload/082203LBBreuer.pdf.). This initiative undoubtedly lead to the prosecution of Richard Hawkins, the McKesson CFO. See supra.
In 2003, the Department of Justice announced its intention to investigate the role of in-house counsel in corporate fraud cases. Id. In its First Year Report to the President by the Corporate Task Force, the Task Force stated:
Task Force members have recognized that many of the corporate fraud schemes under investigation could not have occurred without various professionals, including attorneys, accountants and financial advisors, sometimes facilitating, aiding and abetting the conduct being investigated. Therefore, the conduct of professionals has been a focus of the Task Force.
Id. (citing, Press Release, United States Attorney for the Northern District of California, SEC, U.S. Attorney’s Office and FBI Bring Fraud and Conspiracy Charges Against Former McKesson HBOC Chairman Charles McCall; U.S. Attorney’s Office and FBI also Indict Former HBOC General Counsel (June 4, 2003), available at http://www.usdoj.gov.sazo/can/press/htm1/2003_06_04 mekesson.htm.1). By the end of 2005, 14 in-house counsel had been indicted with criminal charges, including counsel for Rite Aid Corp.; Tollman-Hundley Hotels; Tyco International; HBO & CO.; U.S. Wireless, Inc.; KPMG; and Hollinger, Inc. Id.
In May of 2005, the U.S. Supreme Court overturned the conviction of Arthur Andersen, holding that jury instructions given in the case were “flawed.” Id. (citing 125 S. Ct. 2129, 2137 (2005)). The Court also limited criminality under 18 U.S.C. § 1512 to “persuaders conscious of their wrongdoing.” Id. (citing 125 S. Ct. at 2136). As noted above, in July of 2005, McKesson CFO Richard Hawkins was also acquitted in a bench trial. Id. Of the 14 indicted in-house counsel noted above, only seven were convicted, and two of those seven pled guilty. Id.
The issues triggering the indictments of the several in-house counsel are whether they lied; whether they participated in a “cover-up” or destruction of evidence; and/or whether they refused to produce documents or obstructed justice during a governmental investigation. Id. Clearly, the destruction of evidence, lying, or hiding evidence are all proof that the “persuaders [are] conscious of their wrongdoing.” Id. See also 125 S. Ct. at 2136. It is patently evident that destroying evidence, lying and/or hiding evidence are palpably wrong from an ethical, legal and procedural standpoint. Yet, the ethical considerations and obligations regarding the production of privileged materials during a governmental investigation are not as clear. Of some concern is whether an attorney’s or corporation’s refusal to produce privileged materials during a governmental investigation constitutes an obstruction of justice as defined by DOJ policies and rules.
IV. PROTECTING THE ATTORNEY-CLIENT/ WORK PRODUCT PRIVILEGE
Several months prior to the institution of the McNulty Memorandum by the Department of Justice, the court in U.S. v. Stein called into question several practices of the USAO regarding internal corporate investigations and practices, and how the government identified “cooperating” corporations as per the Holder and Thompson memoranda. See United States v. Stein, 435 F. Supp. 2d 330 (S. D. N.Y. 2006); Timothy P. Harkness and Carmel E. Gabbay, U.S. v. Stein: Rewriting The Rules of Corporate Cooperation With Government Investigations, The Metropolitan Corporate Counsel, August, 2006, 19 (“‘Cooperation’ has been the watchword for corporations subject to governmental scrutiny and investigation.”) Specifically at issue in Stein was Section IV of the Holder memorandum which elaborated on what was meant by “cooperation” during governmental investigations of a corporation. Stein, at 337. The court took judicial notice of the Holder memorandum and noted that prosecutors gauge cooperation by a number of factors, including the corporation’s willingness to identify the culprits in the company; its willingness to make these witnesses available; its willingness to disclose the complete results of the internal investigation; and its willingness to waive the attorney-client privilege. Id. Stein specifically turned on the following commentary from the Holder memorandum:
Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents….a corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct…. may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.
Id. Tracing the history of governmental investigations of corporations, the court further noted that the Thompson memorandum, instituted in 2003, was only moderately distinct from the Holder memorandum, yet was binding on all federal prosecutors. Id. at 338. The court observed that “all United States Attorneys now are obliged to consider the advancing of legal fees by business entities…as at least possibly indicative of an attempt to protect culpable employees and as a factor weighing in favor of indictment of the entity.” Id.
The relevant facts in Stein centered on a 2004 investigation of KPMG by the USAO and the IRS for fraud related to the planning of tax shelters. Id. at 339. At that time, government prosecutors suggested that to the extent KPMG employees needed outside counsel, that they retain attorneys who understood that “cooperation was the best way to go.” Id. at 342-43. The government further pressured KPMG not to “reward misconduct” by paying attorneys fees for those employees who refused to cooperate. Id. The government also warned KPMG that if it, in fact, had the discretion not to pay attorney fees for its employees, it would look at its decision to pay legal fees “under a microscope.” Id. at 344.
The Stein court held that the government violated the Fifth and Sixth Amendments by causing KPMG to cut off payment of legal fees and other defense costs for its employees upon indictment. Id. at 356. The court also found that government’s actions violated the substantive due process right to fairness in the criminal process. Id. at 360-62. The court specifically noted that the defendants were entitled to substantive due process protections since the government coerced a third party (KPMG) to withhold funds lawfully available to the each of the criminal defendants. Id. Thus, the court found at least one provision of the Thompson Memorandum unconstitutional, bringing into question other provisions, including the government’s demands for privilege waivers. Id. In criticizing the Thompson Memorandum, the court noted that it was designed to minimize the involvement of defense attorneys in corporate investigations, which is also a violation of the Sixth Amendment right to counsel. Id.
In 2005, the ABA Task Force on the Attorney-Client Privilege submitted a proposed resolution to the ABA House of Delegates which opposed governmental policies that erode the protections of the attorney-client privilege and the attorney work product doctrine. Jeffrey Thomas and Susan T. Stead, Attorney-Client Privilege and Confidentiality Issues, The Brief, Vol. 35, No. 4, Summer, 2006, 13-21, at 17. The resolution, which was unanimously approved by the ABA, states, in part:
… that the American Bar Association strongly supports the preservation of the attorney-client privilege and work-product doctrine as essential to maintaining the confidential relationship between client and attorney required to encourage clients to discuss their legal matters fully and candidly with their counsel so as to (1) promote compliance with law through effective counseling, (2) ensure effective advocacy for the client, (3) ensure access to justice and (4) promote the proper and efficient functioning of the American adversary system of justice; and
… that the American Bar Association opposes policies, practices and procedures of governmental bodies that have the effect of eroding the attorney-client privilege and work product doctrine and favors policies, practices and procedures that recognize the value of those protections …
… that the American Bar Association opposes the routine practice by government officials of seeking to obtain a waiver of the attorney-client privilege or work product doctrine through the grant or denial of any benefit or advantage.
Id.
The opinion published in U.S. v. Stein, the recommendations of the American Bar Association, as well as Congressional outrage, prompted recent revisions regarding the Federal prosecution of corporations as set forth in the McNulty Memorandum. Yet, the McNulty Memorandum also assesses “the value of cooperation” during governmental investigations by assessing, in part, whether the corporation at issue waived the attorney-client and work product protections; whether the corporation shielded culpable employees and agents; and whether the corporation obstructed the investigation. See Memorandum from Paul J. McNulty, supra. One element of the “obstruction of justice” analysis in the McNulty Memorandum is whether the corporation asserts “overly broad or frivolous assertions of privilege to withhold disclosure of relevant, non-privileged documents.” Id. Thus, the recent revisions to the Federal Prosecution of Business Organizations as set forth in the McNulty Memorandum provide for and even encourage a waiver of attorney-client privileges, particularly since raising the privilege may result in an obstruction of justice charge against the corporation and its attorneys alike.
The protections afforded by the Fifth and Sixth Amendments should serve, ultimately, as per Stein, to prevent a miscarriage of justice by the government against the corporate client. When faced with the threat of governmental investigation or criminal sanction, corporate clients and their attorneys should avoid the voluntary disclosure of any privileged documents to prevent a breach of the attorney-client privilege. Nonetheless, if an internal investigation is conducted, each step of the investigation may, in due course, be turned over to the government. See Internal Investigations: Consequences of the Federal Deputation of Corporate America, supra; Memorandum from Paul J. McNulty, supra.
If a corporation receives notification of a governmental investigation, outside counsel should be immediately employed to review the basis of the investigation. The in-house attorney should draw up an agreement limiting the parameters of the outside counsel’s investigations, expressly noting the confidential nature of the work. The agreement should also contain a provision requiring outside counsel to report only to in-house counsel instead of the corporate officers, or a business group to avoid a breach of the privilege. Questions directed to employees on behalf of the company must be carefully administered by outside counsel. If counsel interviews a corporate employee, the employee must be told that the lawyer represents the company, not the employee-witness. See Attorney-Client Privilege and Confidentiality Issues, at 15. Otherwise, the employee may be able to claim the attorney-client privilege and any statements made during the interview could be privileged. Id. (citing Waggoner v. Snow, Becker, Kroll, Klaris & Krauss, 991 F. 2d 1501, 105006 (9th Cir. 1993)).
To further safeguard the privilege for the corporate client, communications from counsel should be limited. Counsel should clarify with all employees questioned that interviews are conducted for the purpose of gathering information to enable the attorney to give appropriate legal advice. Id. The employee must also be advised that the interview is made on behalf of the corporation and is confidential so that the employee does not breach the privilege. Id. Outside counsel must also carefully consider whether to limit all communications regarding the internal investigation to oral communications, which may be advisable. If communications are in writing, however, the attorney-client privilege may be easier to delineate since the written document may be marked as an “attorney-client/ work product” document. In line with the McNulty Memorandum, all communications should be identified as either Category I, fact-based communications, or Category II, or privileged communications. The privileged communications should be kept separately from the fact-based, Category 1 communications.
Today there is an even greater concern regarding waiver when communications take place via e-mail. E-mails are easily transferred to third parties, and outside IT consultants may have access to the communications. Joseph L. Buckley and Michael R. Potenza, Best Practices for Maintaining The Attorney-Client Privilege in Email Communications, The Metropolitan Corporate Counsel, Vol. 12, No. 11, November 2004 (citing Ben Delsa, E-Mail and the Attorney-Client Privilege: Simple E-Mail in Confidence, 50 La. L. Rev. 935, 939 (1999)). It has been suggested that law firms enter into agreements with any and all outside IT consultants prohibiting access to the content of corporate and law firm e-mails. Id. It has also been suggested that attorney-generated e-mails be marked with the appropriate “Attorney-Client Communication;” “Privileged and Confidential;” or “Attorney Work-Product” markings as all written communications. Id. Further, all business and legal e-mail and other written communications should be kept separately. Attorney e-mails should be kept in a separately dedicated server. Id. It has also been suggested that corporations develop a document retention policy, and that all legal e-mails and other written communications should be periodically deleted in accordance with the company’s policy. Id. But this suggestion carries with it a caveat. Such “retention policies,” which are actually “document destruction policies,” could lead to a charge of obstruction of justice, particularly if the documents are destroyed in anticipation of or during a governmental investigation. See The Threat of Criminal Prosecution to In-House Counsel, The Tide Has Changed But It Is Not a Tsunami, supra.
In the event the government, following the guidelines established in the McNulty report, requests privileged information from an attorney or the corporate client, the privilege should be asserted and the documents should not be produced voluntarily. This should force the government to either subpoena the documents or formally demand the documents through court action. At this time, the corporate defendant could file a formal objection placing the matter before a court of law. A recently decided case, which is similar, factually, to the McKesson line of cases, underscores the adverse ramifications of voluntarily divulging privileged materials. See United States of America v. Gregory L. Reyes, No. CR 06-0556 CRB, N.D. Calif, December 22, 2006. In this case, Brocade, a company threatened with litigation concerning fraudulent accounting practices, hired two outside law firms to conduct an internal audit. Brocade published restatements of its valuation which, in turn, triggered multiple lawsuits, as in the McKesson situation, supra. Brocade and its attorneys conferred and agreed to meet with officials from the SEC and the DOJ. One of the law firms (MoFo) did not provide the governmental officials with written material, although attorneys from this firm prepared notes for the meeting. Instead, MoFo orally briefed the government regarding relevant facts. Its counterpart firm, WSG&R, prepared a written briefing as well as a multimedia presentation. Both firms signed confidentiality agreements with the government, specifically denying any intent to waive applicable privileges. Although the agreements restricted dissemination of information to other parties, it allowed the government agencies the discretion to reveal the disclosed information to others as their duties required.
Following the conference with Brocade and its attorneys, the United States filed a criminal action against Reyes and Jensen, who were former officers of Brocade. In this case, Reyes issued a subpoena for various documents in support of his defense, including all information and documents produced by MoFo and WSG&R. Specifically, Reyes sought information produced from Brocade’s internal investigation. Although the Court did not find that Reyes’ subpoena fell within the strict language of Civil Rule of Procedure 17(c), it did find that both law firms voluntarily waived their attorney-client and work product privileges, and that all of the documents and information could be produced for an in-camera inspection regarding their relevancy to the Reyes case. The court specifically held that MoFo and WSG&R surrendered whatever privileges may have attached to the subpoenaed materials when they shared the contents with the government. Because the law firms waived both the attorney-client privilege when they disclosed the substance of their investigative interviews, reports, and conclusions with the government, the Court found that those privileges posed no obstacle to Reyes’ attempt to subpoena them. The Court further found that the attorney-client privilege cannot be partially waived, stating that “parties cannot be permitted to pick and choose” in their disclosures, thus, “waiving the privilege for some and resurrecting the claim of confidentiality to obstruct others.” Id. (citing In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F. 3d 289,302-04 (6th Cir. 2002); United States v. Mass. Inst. of Tech., 129 F. 3d 681, 684-86 (1st Cir. 1997); Genentech, Inc. v. U. S. Int’l Trade Comm’n, 122 F. 3d 1409, 1415-18 (Fed Cir. 1997); In Re Steinhardt Partners, L.P., 9 F 3d 230, 234-36 (2d Cir. 1991); In Re Martin Marietta Corp., 856 F. 2d 619, 623-26 (4th Cir. 1988); Permian Corp. v. United States, 665 F.2d 1214, 1220-22 (D.C. Cir. 1981)). The Court further noted that the putative confidentiality agreements did not preserve the privilege. Id. Compare In re McKesson HBOC, Incl, Sec.Litig., 2005 WL 934331 (N.D. Cal. Mar. 31, 2005), with United States v. Bergonzi, 216 F.R.D. 487 (N.D. Cal. 2003). Thus, the lessons of McKesson and its progeny continue. Unless a corporation and its attorneys are comfortable with a complete dissemination of their internal audits or other privileged information, they should not voluntarily release privileged materials, information or work product to the government or any adversary.
IV. CONCLUSION
Attorneys who represent corporations involved in governmental investigations will likely need to walk a tight rope between compliance with government policies and the protection of attorney-client and work product privileges. This may require the attorney to maintain all internal investigatory documents, even if the corporate document retention policy calls for periodic document destruction, particularly if the company is on notice of the government investigation. Yet, to avoid a breach of the attorney-client privilege, these same attorneys may not voluntarily disclose the privileged documents to the government, even to avoid criminal sanction and even if a confidential agreement is in place.
Although most of the cases cited above concern investigations regarding SEC violations, these same concerns may impact other areas where regulation and reporting requirements are at issue, such as the insurance industry. See Attorney-Client Privilege and Confidentiality Issues in Internal and External Investigations, supra. It is not difficult to imagine similar issues arising during either OSHA or EPA compliance investigations.
In short, the DOJ policy, and the rules promulgated by the Sarbanes-Oxley Act which encourage if not demand a waiver of the attorney-client privilege, present serious legal and ethical issues for both attorney and client alike. It is advisable to develop a structure and corporate wide policy for a self-policing, periodic, internal corporate investigation which protects the attorney-client/ work product privilege, far in advance of any governmental inspection or investigation.
Cynthia Tolbert is of counsel with the Casey Gilson P.C. law firm in Atlanta, GA. She has practiced law for the past 20 years defending corporate clients, insurance companies, refineries and municipalities in litigation throughout the nation. Areas of particular focus include personal injury defense, products liability defense, professional liability defense, the defense of toxic tort cases including the defense of companies in the face of EPA investigations and hearings as well as the defense of commercial liability, premises liability and property damage in state and federal courts.
Personal Jurisdiction in Georgia and the Internet
By: Robert C. Port, Esq.
Business Litigation/Securities Arbitration & Litigation
Cohen Goldstein Port & Gottlieb, LLP
990 Hammond Drive, Suite 990
Atlanta, Georgia 30328
(678) 775-3550 (Direct Dial)
(770) 901-9417 (Fax)
Email: [email protected]
Web Site: http://www.cgpglaw.com
Business transacted over the Internet continues to increase in an exponential fashion. As it does, the traditional theories used to determine the propriety of a court exercising jurisdiction over a person or business are stretched to their limits. If conducting business on the Web exposes the user to being hauled into court in any state, or indeed, in any country in which its Website might be accessible, then the substantial benefits and efficiencies of e-commerce will be severely constrained.
As of the date of this paper, no reported decision of a Georgia appellate court, or a Federal Court either sitting in Georgia or applying Georgia law, has directly addressed the question of whether personal jurisdiction can be premised upon Internet usage or commerce. However, courts throughout the United States, and particularly the federal courts, are attempting to fashion an analytical framework to assess and test the assertion of jurisdiction. Presumably, the analysis developed by those courts will be relied upon when Georgia courts are faced with these jurisdictional issues. There are, however, few bright line rules in jurisdiction jurisprudence, and the developing case law in the Internet context are no different. As Justice Marshall wrote in Kulko v. Superior Court, 436 U.S. 84, 92 (1978), “few answers will be written in black and white. The greys are dominant and even among them the shades are innumerable.”
TRADITIONAL JURISDICTIONAL ANALYSIS DUE PROCESS AND “MINIMUM CONTACTS” ANALYSIS
Due process requires that a non-resident defendant “have certain minimum contacts with [the forum] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.” International Shoe Co. v. Washington, 326 U.S. 310, 315, 66 S. Ct. 154 (1945) (internal quotation marks omitted). Minimum contacts can be demonstrated through facts supporting either general or specific jurisdiction over the defendant. See Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414, 104 S. Ct. 1868 (1984).
General Jurisdiction
General jurisdiction refers to the authority of a court to hear any cause of action involving a defendant, regardless of whether the cause of action arose from the defendant’s activities within the forum state. Helicopteros, 466 U.S. at 415. In order for a court to assert general jurisdiction, the defendant must have “continuous and systematic” contacts with the forum state. Id. at 416.
Specific Jurisdiction
A court can acquire specific jurisdiction when the cause of action arises directly from a defendant’s contacts with the forum state. The defendant must perform some act or consummate some transaction within the forum by which it “purposefully avails” itself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of the forum and having “fair warning” that a particular activity may subject it to jurisdiction. See Burger King v. Rudzewicz, 471 U.S. 462, 472, 475, 105 S. Ct. 2174 (1985). The claim must be one which arises out of or results from the defendant’s forum-related activities. Finally, the court’s exercise of jurisdiction must be reasonable. Kulko v. California Superior Court, 436 U.S. 84, 93-94 (1978); Hanson v. Denckla, 357 U.S. 235, 253 (1958).
Purposeful availment is shown “if the defendant has taken deliberate action within the forum state or if he has created continuing obligations to forum residents.” Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414, 44 U.S.P.Q.2d (BNA) 1928 (9th Cir. 1997). Although contacts that are “isolated” or “sporadic” may support specific jurisdiction if they create a “substantial connection” with the forum, the contacts must be more than random, fortuitous, or attenuated. Burger King, 471 U.S. at 472-73, 475. Furthermore, a defendant need not be physically present within the forum, provided the defendant’s efforts are purposefully directed toward forum residents. Id. at 476.
Burden of Proof on Jurisdictional Challenge
Plaintiff bears the burden of establishing personal jurisdiction through a prima facie showing of jurisdictional facts. See Robinson v. Giarmarco & Bill. P.C., 74F3d 253 (11th Cir. 1996). This prima facie case must consist of enough evidence to withstand a directed verdict and the facts as alleged in the complaint must be taken as true. Robinson, 74 F.3d at 255. Conflicts in the facts are resolved in the plaintiff’s favor in determining if a prima facie case of personal jurisdiction exists. Delong Equipment Co. v. Washington Mills Abrasive Co., 840 F.2d 843 (11th Cir. 1988), en banc reh’g denied, 896 F.2d 560 (11th Cir. 1990), cert denied 494 U.S. 1081 (1990).
JURISDICTIONAL ANALYSIS UNDER GEORGIA LAW
Diversity Cases
In a federal case where jurisdiction is founded on diversity of citizenship, the court must first look to Georgia’s Long Arm Statute to determine if it has personal jurisdiction over the Defendant, and, if the Defendant can be reached by that statute, the court must then determine if an assertion of jurisdiction would be constitutional. See, e.g., Madara v. Hall, 916 F.2d 1510, 1514 (11th Cir. 1990).
The federal court considers a number of factors in determining whether the exercise of jurisdiction is reasonable: (1) the burden on the defendant, (2) the forum state’s interest in resolving the dispute, (3) the plaintiff’s interest in receiving convenient and effective relief, (4) the interstate judicial system’s interest in obtaining the most efficient resolution of controversies, and (5) the shared interest of the several states in furthering fundamental substantive social policies. See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 477, 105 S. Ct. 2174 (1985).
Georgia Cases
In an action filed in the Georgia courts, the courts undertake a similar analysis to determine whether to exercise jurisdiction over a nonresident. As set forth by the cases, there are three factors to consider: “(1) The non-resident must purposefully avail himself of the privilege of doing some act or consummating some transaction with or in the forum; . . . (2) The plaintiff must have a legal cause of action against the non-resident, which arises out of, or results from, the activity or activities of the defendant [non-resident] within the forum; and (3) If . . . the requirements of Rules (1) and (2) are [met, there must also exist] a ‘minimum contact’ between the nonresident and the forum. . . [Lastly,] the assumption of jurisdiction [by the forum] must be . . . consonant with . . . due process notions of ‘fair play’ and ‘substantial justice.’” Girard v. Weiss, 160 Ga. App. 295, 287 S.E.2d 301 (1981) (quoting Shellenberger v. Tanner, 138 Ga. App. 399, 404-405, 227 S.E.2d 266 (1976)); State of South Carolina v. Reeves, 205 Ga. App. 656, 657, 423 S.E.2d 32 (1992).
Georgia’s Long Arm Statute
The Georgia Long Arm Statute, O.C.G.A. § 9-10-91, provides in pertinent part that “[a] court of this state may exercise personal jurisdiction over any nonresident . . . as to a cause of action arising from any of the acts, omissions, ownership, use, or possession enumerated in this Code section, in the same manner as if he were a resident of the state, if in person or through an agent, he:
(1) Transacts any business within this state;
(2) Commits a tortious act or omission within this state, except as to a cause of action for defamation of character arising from the act;
(3) Commits a tortious injury in this state caused by an act or omission outside this state if the tortfeasor regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered in this state;
(4) Owns, uses, or possesses any real property situated within this state.”
Georgia’s Long Arm Statute May Not Permit “General Jurisdiction” Over Non-resident Foreign Corporations
The Georgia courts have stated repeatedly that the Long Arm Statute confers jurisdiction to the maximum extent allowable under the Due Process Clause. See, e.g., First United Bank v. First National Bank, 255 Ga. 505, 340 S.E.2d 597 (1986); Clarkson Power Flow, Inc. v. Thompson, 244 Ga. 300, 260 S.E.2d 9 (1979); Coe & Payne Co. v. Wood-Mosiac Corp., 230 Ga. 58, 195 S.E.2d 399 (1973).
However, some case law affirmatively suggests that the Long Arm Statute is more restrictive than the Due Process Clause. Gust v. Flint, 257 Ga. 129, 130, 356 S.E.2d 513 (1987)(“The rule that controls is our statute, which requires that an out-of-state defendant must do certain acts within the State of Georgia before he can be subjected to personal jurisdiction.”); Allstate Ins. Co. v. Klein, 262 Ga. 599, 600, 422 S.E.2d 863 (1992)(“The requirement that a cause of action ‘arise out of’ activities within the state (OCGA §§9-10-91), applies . . . to the exercise of personal jurisdiction over nonresidents.”); Pratt & Whitney Canada v. Sanders, 218 Ga. App. 1, 460 S.E.2d 94 (1995)(“jurisdiction over a nonresident foreign corporation can only be maintained within the confines of the Long Arm Statute. “)(emphasis added).
JURISDICTIONAL ANALYSIS AND THE INTERNET
Georgia Cases
Unfortunately, as of the date of this paper, there are no reported cases in which Georgia law has been analyzed to determine the propriety of exercising jurisdiction over a non-resident defendant. However, the analysis being developed by other courts confronted with these questions will no doubt be persuasive when the question arises under Georgia’s Long Arm Statute, O.C.G.A. §9-10-91.
Early Cases
Some of the early decisions considering personal jurisdiction in matters related to the Internet found jurisdiction based upon on the slimmest of contacts by the non-resident defendant. These early decisions seem to reflect a lack of a full understanding of the technology associated with the Internet and the various types of interactivity and business transactions possible through Web pages, email, and other Internet applications. For example, in Maritz, Inc. v. Cybergold, Inc., 947 F. Supp. 1328 (E.D. Mo. 1996), a Missouri Court exercised jurisdiction in a trademark infringement action over a California defendant “because the allegedly infringing activities have produced an effect in Missouri as they have allegedly caused [Plaintiff] economic injury.” 947 F. Supp. at 1331. The Court found the exercise of jurisdiction reasonable based upon evidence showing 131 hits from Missouri to defendant’s Web page, and that defendant “has consciously decided to transmit advertising information to all Internet users, knowing that such information will be transmitted globally.” 947 F. Supp. at 1334. Defendant had no other connections with Missouri. Similarly, in Inset Systems, Inc. v. Instruction Set, Inc., 937 F. Supp. 161 (D. Conn. 1996), a Connecticut Court found jurisdiction over a Massachusetts Web developer who posted a Web advertisement with a toll free phone number for computer support under a domain name that was similar to the plaintiff’s registered trademark. The Massachusetts developer had no contacts with Connecticut and no evidence existed that anyone from Connecticut had visited the Website or called the number listed. The District Court held that personal jurisdiction would apply for the mere use of the Internet to post an advertisement accessible to Internet users in the forum. In supporting the exercise of jurisdiction, the Court noted that at that time there were 10,000 Connecticut Internet users who could possibly access the advertisement. 937 F. Supp. at 164.
The Developing Analytical Model
The “Sliding Scale” or “Spectrum” of Internet Activity
In Zippo Mfg. Co. v. Zippo Dot Com, 952 F. Supp. 1119, 1124-25 (W.D. Pa. 1997), the plaintiff alleged trademark dilution and infringement based on the defendant’s Website domain names. 952 F. Supp. at 1121. In determining whether jurisdiction was proper, the Court applied a “sliding scale” under which “the likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet.” 952 F. Supp. at 1124. The Court categorized Internet activity into three levels:
a. Situations where a defendant clearly does business over the Internet by entering into contracts with residents of other states which “involve the knowing and repeated transmission of computer files over the Internet.” Zippo, 952 F. Supp. at 1124 (citing CompuServe, Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996)). In these circumstances, the court’s assertion of personal jurisdiction is likely to be proper.
b. Situations where a defendant has a Website that allows a user to exchange information with the defendant. In this middle ground, “the exercise of jurisdiction is determined by the level of interactivity and commercial nature of the exchange of information that occurs on the Website.” Zippo, 952 F. Supp. at 1124 (citing Maritz, Inc. v. Cybergold, Inc., 947 F. Supp. 1328 (E.D. Mo. 1996)). The additional factors which may tip the scale in favor of exercising jurisdiction are often described as “plus factors.”
c. Situations where a defendant merely establishes a passive Website that does nothing more than advertise or post information on the Internet. Zippo, 952 F. Supp. at 1124 (citing Bensusan Restaurant Corp., v. King, 937 F. Supp. 295, 297 (S.D.N.Y. 1996), aff’d, 126 F.3d 25 (2nd Cir. 1997).
The analytical model of the Zippo Court has been adopted or cited with approval by a number of circuit and district courts around the country. See, e.g., Soma Medical International v. Standard Chartered Bank, 196 F.3d 1292, 1296 (10th Cir. 1999); Mink v. AAAA Dev., 190 F.3d 333 (5th Cir. 1999); Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414 (9th Cir. 1997); Butler v. Beer Across America, 83 F. Supp. 2d 1261 (N.D. Ala. 2000); Roche v. Worldwide Media, Inc., 90 F. Supp. 2d 714 (E.D. Va. 2000); JB Oxford Holdings, Inc. v. Net Trade, Inc., 76 F. Supp. 2d 1363 (S.D. Fla. 1999); Decker v. Circus Circus Hotel, 49 F. Supp. 2d 743 (D.N.J. 1999); GTE New Media Services, Inc. v. Ameritech Corp., 21 F. Supp. 2d 27 (D.D.C. 1998); Blackburn v. Walker Oriental Rug Galleries, 999 F. Supp. 636 (E.D. Pa. 1998).
Using the Zippo analytical model and other jurisdictional analysis, certain trends are emerging in Internet jurisprudence:
A Passive Website, Standing Alone, Is Generally Not Sufficient to Provide a Jurisdictional Basis
Maintaining a Website arguably means that it is foreseeable that the residents of any state have the ability to access the site. If addresses, phone numbers, or email addresses are provided on the site, Internet users might be able to contact the Website owner to buy the products or services advertised, or otherwise communicate with the Website owner. A plaintiff might therefore argue that maintaining a Website makes it “foreseeable” to the non-resident that as a result of the site, its products or services might end up in that forum. However, it is well-established that foreseeability alone cannot serve as the constitutional benchmark for personal jurisdiction. “The foreseeability that is critical to due process analysis is not the mere likelihood that a product will find its way into the forum state. Rather, it is that the defendant’s conduct and connection with the forum state are such that he should reasonably anticipate being hauled into court there.” World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 S. Ct. 559 (1980)(emphasis added). See also, Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 112, 107 S. Ct. 1026 (1987)(the “placement of a product in the stream of commerce, without more, is not an act the defendant purposefully directed toward the forum State.”). Therefore, most courts considering this issue have concluded that an essentially passive Web presence, without more, is insufficient to establish jurisdiction.
As generally used by the courts, a “passive” Website is one which posts information only, and simply is used to advertise goods and services. See, e.g., Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119, 1124 (W.D. Penn. 1997). Some courts suggest that by providing phone numbers, postal addresses, or email addresses, the site is no longer passive, since a Web surfer can use that information to consummate a transaction with or otherwise communicate with the Website owner. However, since Georgia case law suggests that mere telephone or mail contact with forum residents, or simply placing an advertisement that might reach the forum is not sufficient, by itself, to confer jurisdiction, having contact information on a Website should not alone be sufficient to create the jurisdictional nexus. See, e.g., Wise v. State Board of Architects, 247 Ga. 206, 209, 274 S.E.2d 544 (1981)(mere telephone or mail contact is not sufficient to create jurisdiction); Gust v. Flint, 257 Ga. 129, 356 S.E.2d 513 (1987)(placing advertisements in national newspapers is insufficient to support jurisdiction in Georgia). Some illustrative and representative cases follow:
Mink v. AAAA Dev., 190 F.3d 333 (5th Cir. 1999) (jurisdiction not proper were Website provided users with a printable mail-in order form, a toll-free telephone number, a mailing address and an e-mail address, but orders were not taken through the Website)
Soma Medical International v. Standard Chartered Bank, 196 F.3d 1292, 1296 (10th Cir. 1999)(passive Website that merely provided information to interested viewers)
GTE New Media Services Inc. v. BellSouth Corp., 199 F. 3d 1343, 1346 (D.C. Cir. 2000)(“mere accessibility to an Internet site” is not enough for jurisdiction)
Ty Inc. v. Clark, 2000 U.S. Dist. LEXIS 383 (N.D. Ill. 2000)(no jurisdiction found were defendants’ Website allowed consumers to exchange information with defendants, but did not allow consumers to order or purchase products on-line, and contracts could not be formed over the Website)
Uncle Sam’s Safari Outfitters Inc. v. Uncle Sam’s Army Navy Outfitters-Manhattan, Inc., 2000 U.S. Dist. Lexis 6523 (S.D.N.Y. 2000)(the mere operation of a non-interactive Website without “something more” does not establish personal jurisdiction)
IDS Life Ins. Co. v. SunAmerica, Inc., 958 F. Supp. 1258, 1268 (N.D. Ill. 1997)(“Plaintiffs ask this court to hold that any defendant who advertises nationally or on the Internet is subject to its jurisdiction. It cannot plausibly be argued that any defendant who advertises nationally could expect to be hauled into court in any state, for a cause of action that does not relate to the advertisements.”), aff’d in part, vacated in part on other grounds, 136 F.3d 537 (7th Cir. 1998)
SF Hotel Co. v. Energy Investments, 985 F. Supp. 1032, 1035-36 (D. Kan. 1997) (no jurisdiction where defendant maintained a passive Website providing general information about its hotel)
Transcraft Corp. v. Doonan Corp., 45 U.S.P.Q. 2d 1097 (N. D. Ill. 1997)(Website containing email contact information was insufficient to create personal jurisdiction).
Bensusan Restaurant Corp. v. King, 937 F. Supp. 295, 301 (S.D.N.Y. 1996), aff’d 126 F.3d 25 (2d Cir. 1997)(In a copyright infringement action, a New York court refused to exercise personal jurisdiction over a Missouri corporation whose Website contained general information about the defendant’s club, a calendar of events and ticket information. “Creating a site, like placing a product into the stream of commerce, may be felt nationwide — or even worldwide — but without more, it is not an act purposefully directed toward the forum state”).
McDonough v. Fallon McElligott, Inc., 40 U.S.P.Q.2D (BNA) 1826 (S.D. Cal. 1996)(“allowing computer interaction via the Web to supply sufficient contracts to establish jurisdiction would eviscerate the personal jurisdiction requirement as it currently exists.”)
“Plus Factors” that May Tip the Scales in Favor of Exercising Jurisdiction
The difficult cases are those in the middle of the “sliding scale” identified in Zippo, where the courts must make a very fact-specific analysis to determine whether the non-resident defendant has ‘purposely availed’ itself of the privileges of doing business in the forum, such that it is foreseeable and not unreasonable that the defendant be hauled into court in a foreign jurisdiction. Often, the court will focus on whether the Website is ‘interactive’, e.g. whether the user can place orders or enter into a contract through the site, contact and communicate with the owner of the site, or whether the site requires payment of a subscription or fee before usage. In many of these cases, it is the non-Internet activity of the defendant, when coupled with its Internet activity, which courts rely upon in asserting jurisdiction. In determining whether to exercise jurisdiction, the courts often question whether the defendant undertook ‘deliberate action’ within the forum, whether the conduct of the defendant was ‘purposefully directed’ at residents of the forum, whether defendant’s activities in the forum were ‘substantial’, ‘continuous’, ‘systematic’, or ‘substantive’, or whether the forum was ‘targeted’ by the defendant’s Website. Some illustrative and representative cases follow:
Jurisdiction Found
Intercon, Inc. v. Bell Atlantic Internet Solutions, Inc., 205 F.3d 1244 (10th Cir. 2000) (Oklahoma court exercises jurisdiction over Delaware defendant, which despite notice, failed to correct error which mistakenly routed its e-mail customers to plaintiff’s mail server in Oklahoma)
Compuserve v. Patterson, 89 F.3d 1257 (6th Cir. 1996) en banc reh’g denied, 1996 U.S. App. LEXIS 24796, (Ohio court exercises jurisdiction over a Texas resident who entered into a contract over the Internet to distribute software through Compuserve’s Internet server located in Ohio)
Stomp, Inc. v. NeatO, LLC, 61 F. Supp. 2d 1074, 1078 (C.D. Cal. 1999)(California court asserts jurisdiction over a Connecticut defendant whose Website provided information about the company, customers, service, and technical support, and facilitated on-line purchases of defendant’s products. The court concluded that the site functioned as a “virtual store” where “consumers [could] view descriptions, prices, and pictures of various products . . . [and could] add items to their ‘virtual shopping cart’ and ‘check out’ by providing credit card and shipping information.”)
Thompson v. Handa-Lopez, Inc., 998 F. Supp. 738, 744 (W.D. Tex. 1998) (Texas Court exercised specific personal jurisdiction over California corporation that operated Internet casino. The Texas plaintiff played casino games while in Texas, the site continuously interacted with casino players, and permitted contracts to be entered into by casino players)
Telephone Audio Prods., Inc. v. Smith, 1998 U.S. Dist. LEXIS 4101, 1998 WL 159932 (N.D. Tex. Mar. 26, 1998)(Texas court exercised specific personal jurisdiction over Ohio partnership which maintained Website that contained an allegedly infringing trademark, accessible to Texas residents, attended trade show in Dallas at which infringing mark was displayed, received orders from distributors in Houston and Dallas, and advertised in magazine available in Texas)
Vitullo v. Velocity Powerboats, Inc., 1998 U.S. Dist. LEXIS 7120, 1998 WL 246152 (N.D. Ill. 1998), partial summary judgment granted on other grounds, 2000 U.S.Dist. LEXIS 5840 (N.D.Ill. 2000), (Illinois court exercises jurisdiction over Florida corporations in a products liability action. Defendants’ Website solicited residents to attend their “local boat show” and view defendants’ boats, and also provided a hyperlink with information about a boat show within the forum state)
Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119, 1125-26 (W.D. Penn. 1997)(Pennsylvania court exercises jurisdiction over California corporation where defendant contracted with approximately 3,000 individuals and several Internet access providers in the forum state)
Gary Scott International, Inc. v. Baroudi, 981 F. Supp. 714 (D. Mass. 1997) (Massachusetts court exercises jurisdiction over California defendant based on sales of infringing products to Massachusetts retailer in addition to Website advertising)
Heroes, Inc. v. Heroes Foundation, 958 F. Supp. 1, 3-5 (D. D.C. 1996) (District of Columbia court asserts jurisdiction over new York non-profit organization based on Website and advertisement in local newspaper soliciting donations)
Jurisdiction Lacking
Berthold Types Ltd. v. European Mikrograf Corp., 2000 U.S. Dist. LEXIS 6544 (N.D. Ill. 2000)(Illinois court refuses to exercise jurisdiction over German corporation. “Customers may submit suggestions [to defendant’s site] for improving services, may link to on-line service manuals, are provided a list of contact persons, and may download updates on Helios’ activities. However, this level of interactivity is insufficient to enable the exercise personal jurisdiction over defendants on the basis of their Internet activities. The exercise of jurisdiction is ultimately determined by examining the level of interactivity and the commercial nature of the exchange of information. While the Helios site does provide information on ordering products, Helios makes no commercial response to customers’ submissions. At most, Helios uses the information provided by customers to improve its site and services.”)
Molnlycke Health Care AB v. Dumex Medical Surgical Products Ltd., 64 F. Supp. 2d 448, 451 (E.D. Pa. 1999) (rejecting the argument that there was general jurisdiction based on the operation of a Website: “to hold that the possibility of ordering products from a Website establishes general jurisdiction would effectively hold that any corporation with such a Website is subject to general jurisdiction in every state. The court is not willing to take such a step.”)
Edberg v. Neogen, 17 F. Supp. 2d 104 (D. Conn. 1998)(Interactive site which allowed users to order product information and send electronic mail to defendant’s representatives. The court found that no evidence suggested that any user in the forum state accessed the defendant’s Website or purchased products based on the Website.)
E-Data Corp. v. Micropatent Corp., 989 F. Supp. 173, 176 n.2 (D. Conn. 1997)(plaintiff failed to offer any evidence “that any Connecticut resident ever accessed” defendant’s Website to purchase photographic images.)
Activities Which Permit the Court to Assert Specific Jurisdiction Based on the Internet Conduct of Defendant
At the far end of the Zippo “sliding scale” are those cases in which the defendant’s Internet activity in the forum permit the court to assert specific jurisdiction over the defendant under a traditional jurisdictional analysis. Cases arising from contracts entered into within the forum, or affecting the forum, often fall within this category. In addition, claims asserting trademark infringement, patent infringement, defamation, slander, and tortious interference with contractual relations seem particularly well suited for the finding of jurisdiction. In these latter cases, jurisdiction may attach if the defendant’s Internet conduct is aimed at or has an effect in the forum state.
Many of these cases are based on the “effects test” articulated in Calder v. Jones, 465 U.S. 783, 788-90, 104 S. Ct. 1482 (1984), where the Supreme Court found personal jurisdiction could properly be asserted over a defendant whose libelous actions were directed at the plaintiff resident of the forum state.
Some illustrative cases:
Defamation
Georgia’s Long Arm Statute:
Note that Georgia’s Long Arm Statute excludes from the scope of long-arm jurisdiction “a cause of action for defamation of character arising from [a tortious act or omission within this state]” O.C.G.A. §9-10-91(2). The Supreme Court has held that subsection (2) precludes all long arm jurisdiction in defamation cases. Bradlee Management Services, Inc. v. Cassells, 249 Ga. 614, 292 S.E.2d 717 (1982). However, “Georgia courts do have jurisdiction over nonresident defendants in defamation cases when there exist requisite minimum contacts other than the commission of the tort itself.” Id. at 292 S.E.2d 720. Accord, Process Control Corp. v. Witherup Fabrication & Erection, Inc., 439 F. Supp. 1284 (N. D. Ga. 1977). Therefore, the Calder “effects test” has no application in Georgia, and unlike many of the cases cited below, a defaming non-resident defendant cannot be hauled into a Georgia court based solely on the act of defamation.
Defamation cases from other jurisdictions:
Amway Corp. v. The Procter & Gamble Company, 2000 U.S. Dist. LEXIS 372 (W.D. Mich. 2000)(defendant had taken intentional actions, aimed at the forum state, and those actions caused harm, the brunt of which was suffered, and which the defendant knew was likely to be suffered, in the forum state)
Blumenthal v. Drudge, 992 F. Supp. 44 (D.D.C. 1998) (defendant’s Web page focused primarily on political gossip and rumor in Washington, D.C., and targeted readers in Washington, D.C.; further, defendant’s Website was not truly passive because it allowed readers to directly e-mail defendant and to request subscriptions to his report.)
Bochan v. LaFontaine, 68 F. Supp.2d 692 (E.D. Va. 1999)(Virginia resident sued out of state defendants for posting allegedly defamatory material on servers in Virginia via “AOL,” jurisdiction found on the basis that a tort had occurred in Virginia)
TELCO Communications v. An Apple A Day, 977 F. Supp. 404 (E.D. Va. 1997)(defendants were subject to personal jurisdiction in Virginia for posting an allegedly defamatory press release regarding the Virginia plaintiff on a passive Internet site because defendants should have known that the press release would be received in Virginia and would cause injury there)
Edias Software International, L.L.C. v. Basis International. Ltd., 947 F. Supp. 413 (D. Ariz. 1996) (Arizona court exercised jurisdiction over New Mexico resident who sent defamatory messages directed at forum).
But see, Lofton v. Turbine Design, Inc., 2000 U.S. Dist. LEXIS 4593 (N.D. Miss. 2000)(Mississippi Court did not have jurisdiction over claim asserting that allegedly defamatory statements were made about Mississippi corporation; Website was passive and the primary focus of the statements was a Tennessee shareholder); Bailey v. Turbine Design, Inc., 86 F. Supp. 2d 790 (W. D. Tenn. 2000)(Tennessee Court did not have jurisdiction when defendant’s passive Website merely posted the allegedly defamatory statements on the site. There was no evidence that defendant had any contacts with Tennessee other than the posting of the site, the allegedly defamatory actions were not expressly aimed at Tennessee, and no effort was made to reach out to Tennessee more than any other state).
Trademark Infringement
Jurisdiction over infringers has often been premised upon the concept that the infringement is a tortious act within the state sufficient to confer long-arm jurisdiction. See, e.g., H.K. Corp. v. Louder, 336 F. Supp. 79 (N.D. Ga. 1971)(trademark infringement in Georgia held to be a “tortuous injury” in the state by an “act or omission” outside the state by one who “derives substantial revenue” from goods sold in the state). Cases from other jurisdictions apply a similar analysis when a Website or other Internet activity allegedly infringes upon a trademark.
Jurisdiction Found
Panavision v. Toeppen, 141 F.3d 1316, 1322 (9th Cir. 1998)(California Court had jurisdiction over Illinois resident because of Defendant’s intentional reservation of Plaintiff’s trademarks as domain names, “knowing that this would likely injure [Plaintiff] in California”).
Cello Holdings, L.L.C. v. Lawrence-Dahl Companies, 89 F. Supp. 2d 464 (S.D. N.Y. 2000)(personal jurisdiction could be exercised where defendant allegedly engaged in a scheme to register plaintiffs’ trademark name for purposes of extorting money from plaintiffs)
Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119, 1124 (W.D. Penn. 1997)(defendant who entered into ongoing contracts with subscribers and Internet service providers to allow subscribers to view and download newsgroup messages from defendant’s Website was subject to specific jurisdiction in Pennsylvania, where trademark injury occurred)
Jurisdiction Lacking
Perry v. Righton.com, 90 F. Supp. 2d 1138 (D. Or. 2000) (Oregon Court refused jurisdiction where defendant did not engage in any national advertising in Oregon, did not direct any marketing activities toward Oregon, did not sell any product or service in Oregon, and did not accept inquiries from Oregon residents for the sale of any product or service. Plaintiff offered no evidence that defendant intentionally directed its acquisition of the “righton.com” domain name at plaintiff’s business in Oregon, with knowledge that plaintiff would be, or was likely to be, harmed. Defendant was unaware of plaintiff’s business and plaintiff’s claimed right to the “Righton” trademark at the time defendant selected the domain name)
Copyright Infringement
Colt Studio, Inc. v. Badpuppy Enterprise, 75 F. Supp. 2d 1104 (C.D. Cal. 1999)(defendant who entered into continuing contractual relationships with subscribers that allowed subscribers to access members-only area of defendant’s Website and download photographs was subject to personal jurisdiction in California)
CYBERSQUATTING – In Rem Jurisdiction
The Anticybersquatting Consumer Protection Act, 15 U.S.C. §1125(d) amended Section 43 of the Lanham Act to add subsection (d). The Act is directed to domain name registrants who acquire or use a domain name containing a trademark “with a bad-faith intent to profit” from the use of such mark.
Trademark holders often found that the persons listed as owners of the domain name were fictitious, and/or located in foreign jurisdictions. Personal jurisdiction over the owner of the domain name was therefore often impossible to acquire. As an alternative strategy, one trademark owner filed a “in rem” lawsuit, seeking to attach and gain possession of the “res” — the underlying registration certificates for the offending domain names. However, the case was dismissed for lack of jurisdiction. The Court concluded that the Trademark Dilution Act, 15 U.S.C. §1125(c) could not be read to permit in rem action, and further, that an in rem adjudication raised substantial due process concerns. Porsche Cars North America, Inc. v. Porsche.com, 51 F. Supp. 2d 707 (E. D. Va. 1999).
To address these problems, the Anticybersquatting Act authorized an in rem action against the domain name. 15 U.S.C. §1125(d)(2)(a). The remedies in such an in rem action are limited to (a) the forfeiture or cancellation of the domain name, or (b) transfer of the domain name to the mark’s owner. The in rem action is available if the holder of the domain name is not subject to personal jurisdiction in a federal civil action or cannot be found. The venue for the in rem action is the district in which the domain name registrar, domain name registry, or other authority that registered or assigned the domain name is located. The action can be brought against multiple defendants if those defendants all use the same registrar. See, e.g., Caesers World, Inc. v. Caesars-Palace.com, 2000 U.S. Dist. LEXIS 2671 (E.D. Va. 2000)(court denies defendants’ motion to dismiss in rem action alleging constitutional defects in statute); Lucent Technologies, Inc., v. Lucentsucks.com, 2000 U.S. Dist. LEXIS 6159 (E.D. Va. 2000)(Defendant’s motion to dismiss plaintiff’s in rem action granted; plaintiff was not entitled to proceed in rem because the identity and address of the registrant of defendant domain name had been found and in personam jurisdiction was possible.)
PRACTICE POINTERS
Website Development Considerations
Potential defendants should be able “to structure their primary conduct with some minimum assurance as to where the conduct will and will not render them liable to suit.” World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 S. Ct. 559 (1980) cert denied, 502 U.S. 1091, 112 S.Ct. 1160 (1992).
Venue and Jurisdiction Selection Clause
In the terms and conditions of use of the site, consideration should be given to including a venue and jurisdiction selection clause which visitors to the site must ‘click accept’ before any purchases, postings, or other interactive activities can be performed via the site.
A suggested venue clause follows:
This Agreement shall be deemed to have been made in the United States in the State of Georgia and shall be construed and enforced in accordance with, and the validity and performance hereof shall be governed by, the laws of the State of Georgia, without reference to principles of conflicts of laws thereof. To the fullest extent permitted by law, Purchaser/Subscriber hereby consents to submit to the jurisdiction of the courts of or for the State of Georgia in connection with any action or proceeding arising from or related to this Agreement.
In Harry S. Peterson Co. v. National Union Fire Ins. Co., 209 Ga. App. 585, 434 S.E.2d 778 (1993), the Georgia Court of Appeals adopted the United States Supreme Court’s analysis regarding the enforcement of forum selection clauses in Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S. Ct. 1907 (1972). Such clauses are prima facie presumptively valid and should be enforced unless the opposing party shows that enforcement would be unreasonable under the circumstances. Id. at 10. To invalidate such a clause, the opposing party must show that trial in the chosen forum will be so inconvenient that he will, for all practical purposes, be deprived of his day in court. Id. at 18. A freely negotiated agreement should be upheld absent a compelling reason such as “fraud, undue influence, or overweening bargaining power.” Id. at 12. See generally, Iero v. Mohawk Finishing Products, 2000 Ga. App. LEXIS 525 (April 20, 2000); Antec Corporation v. Popcorn Channel, L.P., 225 Ga. App. 1, 482 S.E.2d 509 (1997).
Blocking Access from Certain Forums
Presumably, technology exists by which the Website can be inaccessible to visitors from certain forums, or alternatively, the Website can be configured to refuse to accept orders or purchases from certain forums.
Notify Visitors that the Site’s Product and Services are Available Only in Certain States
The Website may contain disclaimer language advising that the products and services offered are not available in certain states. See, e.g., Millennium Enterprises, Inc. v. Millennium Music, 33 F. Supp. 2d 907, 909 (D. Or. 1999). Any such restrictions should be enforced vigorously and without exception.
LITIGATION/DISCOVERY CONSIDERATIONS
Plaintiff Cannot Manufacture Jurisdiction
The courts generally reject efforts by plaintiffs to contact defendants through the Website to induce defendant to conduct business in the forum. Millennium Enterprises, Inc. v. Millennium Music, 33 F. Supp. 2d 907, 911 (D. Or. 1999)(“no confusion and no harm or loss resulted from one commercial sale orchestrated by plaintiff through an acquaintance of counsel. Such questionable and unprofessional tactics cannot subject defendants to jurisdiction in this forum.”); Edberg v. Neogen Corp., 17 F. Supp. 2d 104, 112 (D. Conn. 1998)(“Only those contacts with the forum that were created by the defendant, rather than those manufactured by the unilateral acts of the plaintiff, should be considered for due process purposes.”).
Discovery in Support of Jurisdiction
In response to a Motion to Dismiss, Plaintiff should move to delay ruling on the motion, and move for leave to engage in limited discovery to prove jurisdiction. See, e.g., Soma Medical International v. Standard Chartered Bank, 196 F.3d 1292 (10th Cir. 1999).
Discovery Directed to Assessing Jurisdiction Defendant’s Internet Activities
Is the defendant’s Website a ‘virtual store’ that permits a visitor to order goods or services?
Does the defendant’s Website permit payment by credit card, electronic transfer, or other third party payment methods?
Does the defendant’s advertising promoting its site target the forum?
How may ‘hits’ have been received from the forum?
What is the volume of business derived from the forum state through the Internet, and what is the percentage of defendant’s total sales that are derived from Internet sales in the forum.
Is the defendant’s Website an interactive form that permits the visitor to communicate with the defendant via email?
Does the defendant’s Website permit the visitor to leave his/her name, address, telephone number, fax number, e-mail address, and/or provide the opportunity for the visitor to engage in other interactive contact with the site operators?
Does the defendant’s Website have hypertext links to e-mail the defendant directly?
Has the defendant had significant interaction with residents of the forum, via email or other contact developed through the Website?
Is the defendant’s Website one with requires payment of a membership fee, purchase of a subscription, does it require passwords, or otherwise limit access? If so, are a significant number of members or subscribers residents of the forum?
Does the defendant’s Website permit third-party companies to receive ‘click-through’ referrals through the Internet? Does defendant generate revenue as a result of such ‘click-through’ referrals?
Is defendant’s computer server located in the forum state?
Are a significant number of advertisers on defendant’s Website residents of the forum?
Is the content of defendant’s Website focused on local matters in the forum state (e.g., maps and directions to a business location; discussion of matters of purely local interest), or is its content generally useful to any Web Internet user?
Defendant’s General Non-Internet Activities
What portion of defendant’s revenues/profits are attributable to business with forum residents?
Has defendant obtained necessary licenses to conduct business in state?
Does the defendant own, lease, or control real or personal property in the state?
Does the defendant have employees/representatives in state?
Does the defendant have offices in the state?
Does the defendant have telephone number listings in the forum state, including ‘800’ or ‘900’ numbers targeted to residents of the forum state?
Does the defendant have resellers/retailers/distributors of product in the state?
Does the defendant have suppliers located in forum state?
Has the defendant attended trade shows in forum state?
Does the defendant target its advertising specifically at the state?
Have defendant’s personnel traveled to state on business?
Has defendant made offers to sell its products or services to citizens of state?
Has the defendant paid taxes in the forum state?
Does the defendant make continuous and regular purchases from the forum state?
Does the defendant maintain a bank account in the state?
Do shareholders of the defendant reside in the state?
The information above is provided for general educational purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal advice, but should always consult their own attorney regarding legal matters.
* Robert C. Port is a partner with Cohen Goldstein Port & Gottlieb, LLP, Atlanta, Georgia, where he practices business litigation, securities arbitration & general litigation. He received his J.D., with Honors, from the University of North Carolina in 1983.
SHOULD ENTREPRENEURS COPY THEIR COMPETITORS’ FORMS?
By
Rob Hassett
Clients often want to know if it is okay to copy what I call “Internet Related Legal Documents” (or “Internet Documents”), such as Terms of Use and Privacy Policies from unrelated websites. It may be, but here is what you should consider in deciding whether and what to copy.
Ownership of Copyrights in Forms
Does copying and using a third party’s forms constitute copyright infringement? It will if that third party owns copyrights in the form. This will help you determine if anyone owns copyrights and the chances of having to deal with a claim.:
(1) Most clauses in Internet Documents have been copied and recopied so many times that there is no way to determine who may be an owner. So if searching with Google or Bing it turns out that the same clause appears in many documents of unrelated companies, and not written by the same group of lawyers, it’s unlikely that anyone holds rights in those provisions. It would still be a good idea, as a precautionary measure, to change the wording of the clauses.
(2) Copyrights can also protect the order in which clauses appear, so It would be a good idea, if there are not many forms with the same order, to create your own.
(3) Is there any difference in risk if you copy a form written in plain English? Yes, because most plain English documents are drafted without much, if any, copying. If so, it is more likely that the owner of the website has and may assert copyrights in the form.
(4) Also, copying a form is much less likely to be the subject of a claim if there is no copyright notice on the form or the website or if the copyright has not been registered in the U.S. copyright office. — copyright.gov.. If you are relying on such lack of a notice or registration, you should have an attorney do the search to determine the truth about the situation.
Other Concerns
(5) It is highly unlikely that your business is exactly the same as another. Blind copying of forms may therefore not fit your company’s manner of doing business and could be the basis for such claims as fraud, action by the Federal Trade Commission or action by other federal and state agencies. For example a clause in an agreement for a large company may list a number of security measures that are maintained by the large company but which are way too expensive, and not required for your small company to implement.
(6) if you are sufficiently successful you may want to convert your Legal Documents to plain English. That would, in most cases, require a rewrite by your own attorneys and/or staff, but would be viewed favorably by anyone who understands how the process works.
3
WordPress, Themes and the GPLv2
by Rob Hassett and Mike Schinkel
Introduction
There has been a long brewing debate in the software world regarding whether commercial developers who write and distribute their own separate code to work with software licensed using version 2 of the GNU General Public License must license their software under that version of the GPL.
In the summer of 2010 a debate emerged on blog posts and via Twitter regarding this issue between Matt Mullenweg, founder of WordPress, Automattic and the WordPress Foundation, and Chris Pearson founder and CEO of DIYThemes. Mr. Mullenweg and Mr. Pearson resolved their differences. However the question they addressed remains unanswered.
We read many of the postings on this topic, most of which were very informative and for which we are grateful. Our goal is to provide an objective and dispassionate view of the relevant license in hopes to establish some clarity regarding the issue.
This article does not constitute legal advice and is general information only.
Background
WordPress is software that is used to create blogs and websites, including the website on which this article is posted: www.internetlegals.com. It is open source and is licensed to others under Version 2 of the General Public License, administered by the Free Software Foundation (the “GPLv2“). To operate WordPress must have what is referred to as a “Theme” which is a collection of scripts, images, and other files that collectively establish the look and some of the functionality for a website based on WordPress and WordPress itself currently includes one default Theme. Many developers, including commercial developers, offer other Themes, Plugins and other software and services for use with WordPress.
A user may separately download and install WordPress and a Theme. The user then separately opens the programs and activates the Theme, which interacts with WordPress to create websites and/or blogs.
Chris Pearson created a Theme named “Thesis “which became a popular Theme for use with WordPress. Matt Mullenweg contended that Thesis was a “work based on WordPress,” under the GPLv2, which, if true, would have serious legal consequences discussed below. Chris Pearson said it was not.
There is some indication that at some point in the past and maybe currently some of the Thesis code was copied from WordPress code. If that was true at the time of the dispute, there is no question that Thesis was subject to the requirements of the GPLv2, but that possibility is not the subject of the debate. The debate, and the focus of our analysis, is over whether add-on software, such as Theme software, that does not incorporate any code from a prior “Program,” licensed under the GPLv2, may be subject to the requirements of the GPLv2. We are not aware of any court decision that has clearly answered this question.
Requirements of the GPLv2
A developer may choose whether or not to comply with the GPLv2 with respect to a particular Program. However, if the developer copies, prepares derivative works of or distributes that Program without complying with the terms of the GPLv2, the developer would be liable for copyright infringement. If all the developer does is copy, use, study and modify the Program, without distributing it, the GPLv2 license does not require the developer to do anything.
However, if the developer distributes either the Program or a “work based on the Program,” the developer is required to meet certain requirements including, but not limited to, licensing the Program, and any “work based on the Program,” under the GPLv2 and making the source code available. So if a developer creates a “work based on the Program”, that developer may sell copies of it, but is required to provide the source code, if asked, and the purchaser is entitled to make and distribute copies of such new work in competition with the developer. It is the authors’ understanding, based on hearing Mr. Pearson’s comments on the audio interview where he discusses this issue with Mr. Mullenweg, that Mr. Pearson did not want to enable his customers to sell copies of Thesis in competition with him.
The relevant legal question then is whether a Theme that does not include code from WordPress, but works together with WordPress, will constitute a “work based on the Program” under GPLv2. If so, its distribution without compliance with the GPLv2 constitutes copyright infringement. If it is not, its distribution without compliance is permitted.
GNU and WordPress Views
Attorneys who are associated with the open source movement say that a portion of most Themes constitute “works based on WordPress.”
The following is posted on the GNU website under “Frequently Asked Questions” relating to GPLv2:
If a program released under the GPL uses plug-ins, what are the requirements for the licenses of a plug-in?
It depends on how the program invokes its plug-ins. If the program uses fork and exec to invoke plug-ins, then the plug-ins are separate programs, so the license for the main program makes no requirements for them.
If the program dynamically links plug-ins, and they make function calls to each other and share data structures, we believe they form a single program, which must be treated as an extension of both the main program and the plug-ins. This means the plug-ins must be released under the GPL or a GPL-compatible free software license, and that the terms of the GPL must be followed when those plug-ins are distributed.
If the program dynamically links plug-ins, but the communication between them is limited to invoking the ‘main’ function of the plug-in with some options and waiting for it to return, that is a borderline case.
The following are portions of an opinion of James Vasile of the Software Freedom Law Center, which was posted by Matt Mullenweg on the WordPress website:
You asked the Software Freedom Law Center to clarify the status of themes as derivative works of WordPress, a content management software package written in PHP and licensed under version 2 of the GNU General Public License.
…
On the basis of that version of WordPress, and considering those themes as if they had been added to WordPress by a third party, it is our opinion that the themes presented, and any that are substantially similar, contain elements that are derivative works of the WordPress software as well as elements that are potentially separate works. Specifically, the CSS files and material contained in the images directory of the “default” theme are works separate from the WordPress code. On the other hand, the PHP and HTML code that is intermingled with and operated on by PHP code derives from the WordPress code.
The PHP elements, taken together, are clearly derivative of WordPress code. The template is loaded via the include() function. Its contents are combined with the WordPress code in memory to be processed by PHP along with (and completely indistinguishable from) the rest of WordPress. The PHP code consists largely of calls to WordPress functions and sparse, minimal logic to control which WordPress functions are accessed and how many times they will be called. They are derivative of WordPress because every part of them is determined by the content of the WordPress functions they call. As works of authorship, they are designed only to be combined with WordPress into a larger work.
HTML elements are intermingled with PHP in the two themes presented. These snippets of HTML interspersed with PHP throughout the theme PHP files together form a work whose form is highly dependent on the PHP and thus derivative of it.
These writers focus on one or both of the following:
(1) the fact that the PHP that is incorporated into the Theme has to correspond with the PHP in WordPress, and
(2) the fact that there is heavy and extensive interaction between the Word Press and the Theme software.
Analyses
“A work based on the Program” is defined in the GPLv2 as follows:
A “work based on the Program” means either the Program or any derivative work under copyright law: that is to say, a work containing the Program or a portion of it, either verbatim or with modifications and/or translated into another language.
If this definition had ended with “any derivative work under copyright law,” it would be necessary to determine the meaning of the term “derivative work” under the Copyright Act. Instead the GPLv2 defines the term for us. To the extent important here the phrase is defined as:
a work containing the Program or a portion of it, either verbatim or with modifications
Any developer creating Themes for WordPress would generally need to either examine the WordPress software, or material about that software, to be able to understand how to create the Theme. The Theme would need to be able to communicate with, provide instructions to and receive instructions from the WordPress software. However the Theme would not need to contain any part of the WordPress software or a portion of it, either verbatim or with modifications. Therefore what is distributed would not need to be the “WordPress software or any work based on the WordPress software.”
The fact that PHP in the Theme software has to correspond with the PHP in the WordPress software is not legally relevant to whether the Theme software that is distributed contains all or portions of the WordPress software. Likewise, the fact that a lot of interaction happens between WordPress and the current active Theme after that Theme is distributed to an end user is also legally irrelevant to whether the Theme itself contains all or any part of the WordPress software.
Therefore, inasmuch as the commercial vendors of Themes, including Thesis, are able to avoid including any of the WordPress source code in those Themes, such vendors should be able to avoid being required to take any action to be in compliance with the GPLv2 .
GPLv3
Under the totally different language of the GPLv3, which was first made available for use in 2007, a provider of software, such as WordPress, would have a much stronger claim that distributing Themes without making the source code available to potential competitors was an infringement.
The revisions in the GPLv3 will not help WordPress require Themes to be licensed via GPL. WordPress, and its revisions, were licensed under the GPLv2, without any language permitting licensees to use a later version, and as such there is no actions its controllers could take that would cause future versions of WordPress to be subject to the GPLv3.
Advocacy of GPL-licensing of Themes
Even though our analysis tells us there is no legal requirement for commercial Theme vendors to license Themes for WordPress using GPLv2 we expect there will still be a strong interest on the part of “the WordPress community” to see that most if not all Themes are and/or continue to be licensed via GPLv2. One of the authors, the one who is a participant in the WordPress community, actively supports this ideal.
As such we suggest to Automattic, to WordPress and its foundation, and to the WordPress community at large that they collectively work to continue to encourage Theme vendors to license their offerings via GPL, and that they proactive look for ways to help ensure those who would otherwise choose not to license via GPL are enticed to do so because of the collective benefits they gain from the supportive community.
Or said more simply, without the GPLv2 to require Themes to be licensed via GPL it becomes an “unregulated market” and the WordPress community should employ classic market incentives to encourage adoption of the GPL.
Advisability of Settling Dispute
As far as whether Mr. Pearson’s settling was a smart move, it very likely was. First, if any of the WordPress code was copied into Thesis, his application was governed by the GPLv2 regardless of whether a court agreed with our analysis. Second, litigation is very exhausting and expensive and regardless how sure anyone is about what is the correct answer to a legal question, it is not possible to know how a court will rule. All that a lawyer can provide is an opinion. Third, he was having to deal with marketing and public relations pressure from the WordPress community that likely outweighed the value of not complying.
Rob Hassett is an attorney in technology, entertainment and corporate law with Casey Gilson P.C. in Atlanta, Georgia. He also is a co-author of volume 5, on Internet and Interactive Media law, of the ten volume publication entitled “Entertainment Industry Contracts,” published by Lexis/Nexis and has, on many occasions, taught in the Professional Education Program at Georgia Tech. Mr. Hassett is the founder, editor and publisher of this website: TellMeSomethingIDontAlreadyKnow.com
Mike Schinkel is an entrepreneur in Atlanta, Ga. He was founder and CEO of catalog mail order retailer Xtras, Inc that was recognized in 1999 by the Inc 500 as #123 fastest growing private company in the USA. Today Mike is an active participant in the WordPress developer community, a consultant advising companies on their WordPress Business Strategies, a software developer building WordPress plugins for those companies, and a co-founder of and partner in The Business Of WordPress Conference.