Michael McKee, a resident of Washington state, filed a class action against AT&T alleging AT&T assessed city utility surchages and other usurious late fees. The trial court found the dispute resolution provision of AT&T’s Consumer Services Agreement unconscionable and denied its motion to compel arbitration. AT&T Appealed. The Court of Appeals, Division Three, certified the case to the Washington Supreme Court.

 Section 7 of AT&T’s agreement, entitled “Dispute Resolution,” requires binding arbitration of all disputes related to the agreement. It forbids class actions and requires that all arbitrations be kept confidential. The agreement also forbids joinder with another lawsuit or arbitration with a dispute of any other person. Also forbidden are class-actions. The dispute resolution section also imposes a statute of limitations of two years and limits a consumer’s right to collect punitive damages and attorney fees.

The court found that A&T's Consumer Services Agreement is substantively unconscionable and therefore unenforceable to the extent that it purports to waive the right to class actions, require confidentiality, shorten the Washington Consumer Protection Act statute of limitations, and limit availability of attorney fees. The court also agreed with the trial’s court’s ruling that the unconscionable provisions were not severable from the rest of the agreement because the provisions permeated the entire arbitration agreement. The court added that these unconscionable provisions operate in concert to eliminate any realistic possibility of relief for consumers with small claims such as McKee’s

The court stressed that these provisions have nothing to do with arbitration. Arbitrators supervise class actions, conduct open hearings, apply appropriate statutes of limitations, and award compensatory and punitive damages, as well as attorney fees, where appropriate.

View the full opinion http://www.courts.wa.gov/opinions/pdf/810061.opn.pdf.

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Businesses seeking partnerships or investment capital related to the development of new products must be diligent in ensuring that any trade secrets or other intellectual property at issue in the transaction is disclosed only according to clear, definite terms and remains protected both during and after the deal. A case pending in the U.S. District Court for the Northern District of Illinois highlights the difficulties that businesses may face when one or both of the parties allow a deal to move forward with less-than-explicit paperwork. 

In LimitNone LLC v. Google Inc. (Cas No. 1:08-cv-04178), a small software development business based in the Chicago area brought claims that Google misappropriated software LimitNone  developed to facilitate users’ transition from desktop-based office productivity software, like Microsoft Office, to Google’s Google Apps solution, in which the software is hosted at, and files are stored and accessed remotely from, Google’s servers. According to LimitNone, when the parties first met, Google had been unable to create an efficient method for its users to transfer existing Office files to Google Apps. LimitNone developed a solution to this problem (called “gMove”), and the parties began to explore the possibility of a licensing deal for gMove. LimitNone then signed a Google-drafted non-disclosure agreement (NDA) and a “Google Enterprise Professional Agreement” (GEP) governing LimitNone’s participation in the program through which Google encourages outside businesses to develop programs for use with Google Apps. Thereafter, according to LimitNone, the parties entered into beta-testing and release-version license agreements pertaining to gMove. Following the parties’ exchange of these agreements, LimitNone discovered that Google had deployed a different solution on Google Apps to allow users to transfer their documents. According to LimitNone, it would have been impossible for Google to have completed the development of the software in the time intervening between its first contact with LimitNone, at which time Google allegedly had no such solution, and its discovery of the competing tool. LimitNone then filed its lawsuit in Illinois state court.

Following its removal of the action to federal court, Google filed a motion to dismiss based on choice-of-law and forum-selection language in the NDA and GEP. LimitNone responded with a brief arguing that the dispute at hand is not within the scope of the law and venue provisions of those agreements and that, even if it were within the scope, the subsequent license agreements superseded the NDA and GEP, at least with regard to Google’s use of LimitNone’s IP. As of the date of this entry, the court has yet to rule on Google’s motion to dismiss.

It is usually in the best interest of all parties to a proposed transaction to ensure that the writings memorializing the transaction accurately and completely set forth each and every one of the parties’ respective rights and obligations.  Parties (and sometimes their attorneys) frequently overlook choice of law, venue, and merger provisions such as those involved in the LimitNone litigation, because those provisions typically appear among a laundry list of general contract terms that are perceived to be less important than the “meat” of the contract. However, when a dispute arises, it is usually the case that more ink is spilled resolving disputes as to procedure and interpretive rules, rather than the substance of the transaction. When trade secrets and other intellectual property rights are at issue, the need for careful selection and, if necessary, negotiation regarding accurate verbiage is especially important, because the rights at issue may be substantively harmed by the unintended consequences of a sloppy transaction. 

Always discuss proposed contracts and their ramifications with your attorney, and if you have any reservations or unanswered questions after doing so, seek a second opinion. The legal and financial consequences of a deal gone bad can be – and frequently are – much more costly than the marginal cost attributed to careful legal review.

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Minimum Advertised Pricing (MAP) policies prohibit resellers or dealers from advertising a manufacturer’s products below a certain minimum price. The primary purpose for implementing a MAP program is to promote fair competition across the manufacturer’s affiliate and dealer channels. MAP programs are critically important to manufacturers who sell their products on the internet in light of the extremely low costs of advertising in pay-per click, shopping comparison, and auction sites. Despite the value of MAP programs, significant legal concerns exist regarding establishment and enforcement of minimum advertised pricing policies for e-commerce companies.

Under U.S. Antitrust law vertical price fixing agreements between manufacturers and their dealers are illegal. Accordingly, when implementing a MAP policy, it is critical to establish a policy that controls the price at which products can be advertised but not the ultimate price at which the products may be sold. The law is well settled that manufacturers may set suggested retail prices and that minimum advertised pricing policies are not per se illegal but will be analyzed by the courts under a rule of reason that considers all of the relevant circumstances. When developing a MAP program for e-commerce, I generally advise my clients to:

1. Act Unilaterally – Section 1 of the Sherman Act only applies to concerted action but does not apply to the unilateral establishment of a minimum advertised price by a manufacturer.

2. Regulate Advertisements Not Prices – the law is clear that agreements between manufacturers and dealers that fix the price at which products are to be sold are per se illegal. MAP policies should focus on advertised prices in paid search ads, shopping comparison ads, and internet landing pages but not in shopping carts or other point of sale interfaces.

3. Avoid involving dealers in policing activity.

4. Avoid coercive action regarding actual prices sold.

5. Treat all dealers equally and unilaterally terminate those that don’t comply.

The law involving minimum advertised pricing for e-commerce is in flux. Before adopting a policy, you should consult with an attorney experienced in antitrust and e-commerce law.

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The Federal Circuit has held that software developers may still sue for copyright infringement when they release their software into the “open source” software community.  In Jacobsen v. Katzer, 2008 WL 3395772 (Fed. Cir. 2008), the court made it clear that when open source licenses place conditions on the use and copying of software, the holder of the copyright on the software may pursue a claim for copyright infringement.

Jacobsen manages an open source software group called Java Model Railroad Interface (“JMRI”), which involves many participants.  JMRI created an application called DecoderPro that allows model railroad enthusiasts to program the decoder chips that control model trains.  DecoderPro files are available for download and use free of charge from an open source incubator website called SourceForge.  The downloadable files contain copyright notices and refer the user to a “copying” file that sets forth the terms of the license.  Katzer/Kamind offers a competing software product called Decoder Commander that also programs decoder chips.  While Decoder Commander was being developed, one of Katzer/Kamind’s employees is alleged to have downloaded the decoder definition files from DecoderPro and used portions of those files as part of the Decoder Commander software.  The Decoder Commander software did not comply with the terms of the DecoderPro license.

Jacobsen filed a lawsuit seeking a preliminary injunction against Katzer/Kamind, contending that the violation of the terms of the DecoderPro license constituted copyright infringement.  The district court concluded that while Katzer/Kamind may have violated the license, this did not create liability for copyright infringement and that Jacobsen, at most, had a claim for breach of contract.

 The Federal Circuit disagreed.  The court noted that open source software projects allow programmers to view software code and make changes and improvements, and in exchange, the copyright holder permits users to copy, modify, and distribute the software code “subject to conditions that serve to protect downstream users and to keep the code accessible.”  Part of this protection is achieved by requiring that users copy and restate the license and attribution information. 

The court rejected the notion that because the software had not been sold for money, this affected the analysis.  “The lack of money changing hands in open source licensing should not be presumed to mean that there is no economic consideration, however.  There are substantial benefits, including economic benefits, to the creation and distribution of copyrighted works under public licenses that range far beyond traditional license royalties.”  The court concluded that open source licenses still grant copyright holders the right to control the modification and distribution of the material their own.  If a license is limited in scope and the licensee acts outside the scope of the license, the copyright holder has a claim for infringement along with a claim for breach of contract.  Because the terms of the license in this case set conditions on the use and copying of the software, failure to abide by those conditions constituted copyright infringement. 

According to the court, “copyright holders who engage in open source licensing have the right to control the modification and distribution of the copyrighted material.”  Under the license, it was impermissible to modify and distribute the materials without including the copyright notices and without tracking the modifications from the original files.  “The clear language of the Artistic License creates conditions to protect the economic rights at issue in the granting of a public license,” and Jacobsen therefore could pursue a claim for copyright infringement. 

Full opinion text: http://www.cafc.us courts.gov/opinions/08-1001.pdf 

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A federal district court has recently ruled that a plaintiff may not assert a claim for conversion of trade secrets.  Applying Texas law, the court in XPEL Technologies Corp. v. American Filter Film Distributors, Inc., 2008 WL 3540345 (W.D. Tex. 2008), held that a conversion claim may only be asserted when physical property is involved.  This holding is in conflict with a 21-year-old Texas appellate decision recognizing such a claim. 

 XPEL creates designs for headlamp protection and window film products for different models of cars.  Some of XPEL’s kits are delivered electronically through the company’s web-based proprietary software.  XPEL registered its Design Access Program 6.2 with the United States Copyright Office and required its users to assent to an End-User Licensing Agreement.  American Filter provides window film products and installation tools to professional window dealers, automotive dealerships, and others who install and sell window film.  XPEL contends that American Filter was intermittently using XPEL’s services to provide XPEL designs to its customers, that American Filter had software on its computers that could copy XPEL designs, and that American Filter used copied XPEL patterns without paying XPEL for such use.  XPEL filed suit against American Filter and other defendants for conversion, violations of the Lanham Act, copyright infringement, and other claims. 

American Filter moved to dismiss XPEL’s claims, including its conversion claim. XPEL’s conversion claim was based on American Filter’s alleged conversion of XPEL’s trade secrets.  American Filter argued that the conversion claim should be dismissed because such a claim will only lie for wrongful possession of the tangible embodiment of a work. 

The court dismissed XPEL’s claim for conversion under Texas law.  In doing so, the court noted that Texas conversion law “concerns only physical property.”  One Texas appellate court, however, has concluded that trade secrets may be subject to conversion.  See Chandler v. Mastercraft Dental Corp. of Texas, 739 S.W.2d 460, 469 (Tex. App. – Fort Worth 1987, writ denied).  The XPEL court concluded, however, that “Texas conversion law does not make a trade secrets exception to its physical property requirement.”  In reaching this determination, the court examined the elements of a conversion claim.  Among other things, a plaintiff asserting conversion must show that the defendant “assumed and exercised dominion and control over the property in an unlawful and unauthorized manner to the exclusion of and inconsistent with plaintiff’s rights.”  According to the court, “dominion and control” may only be exercised over physical property.  The Fifth Circuit may ultimately have to address how this decision may be reconciled with the Texas appellate decision in Chandler.

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Open-Source software can provide businesses with an opportunity to acquire software for little or no monetary cost.  However, businesses should carefully examine the license agreements accompanying the open-source software they incorporate into their business products.

 For example, many open-source license agreements require licensees of the software to make the source code of the licensee’s software product available if the licensee includes the open-source software in the licensee’s software.  In other words, if a business includes open-source software in the software it produces and sells, the business may also be required to make its own proprietary software code available to the public.  This can have significant effects on the business’ intellectual property interests.  A business wishing to keep private the source code of its commercially-available software should not select open-source software solutions.

 Similarly, any changes a business makes to open-source code must generally be made available as open-source code.  Changes to the original open-source code may need to be tracked and documented in a file accompanying the code that includes dates the changes were made.  Open-source code license agreements also often include certain notice requirements intended to identify to the user the original distributor of the code, the contributor to the code, and the type of license covering the code.  The actual open-source license may need to be distributed with the code, perhaps in the code itself.  The GNU General Public License defines the use terms of most open-source software.  Most distributors of open-source software use either the GNU GPL or a license based on the GNU GPL.

 Open-source software, though powerful and low-cost, may come with hidden costs and may place your business at risk of losing protection of its intellectual property.  Businesses should consult with counsel experienced in evaluating open-source license agreements before implementing an open-source solution.

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A complaint filed recently by Facebook.com in the U.S. District Court for the Northern District of California highlights some of the difficulties that Internet-based IP owners can face from others who would misappropriate their content. In the complaint (which spans 114 pages, including attachments), Facebook alleges that a German entity, StudiVZ Ltd., its parent and its affiliates misappropriated Facebook’s trade dress in the popular social networking site by setting up various, unauthorized, similar sites in German and other European languages that copy the look and feel of Facebook. Facebook also alleges that StudiVZ violated the U.S. Computer Fraud and Abuse Act by opening Facebook accounts for the purpose of copying various elements of the site and using that information to set up the infringing sites.

Popular Internet content owners must maintain vigilance against attempts to misappropriate that content. When the infringers are located in the U.S., it is often easier to remedy the problem. Online acts of copyright infringement often can be handled without ever even contacting the infringer by giving notice of the problem to the infringer’s ISP under the Digital Millennium Copyright Act. While there is no equivalent to the DMCA for alleged online trademark infringement, it is still often possible to contact the infringer’s ISP to draw attention to behavior that is, usually, a violation of the ISP’s terms of use. Even when an ISP is non-responsive to that kind of informal request, having all of the parties stateside usually makes it easier to dispose of the matter through a cease and desist letter or, when necessary, through litigation.

Foreign infringers often present additional difficulties, however, because their ISP’s may not be subject to the DMCA (though there may be other, similar, copyright-related tools in their jurisdiction), and they are likely to be even less receptive to advances from a U.S.-based business regarding allegations of infringement. In its case, Facebook had the "fortune" (if you want to call it that) of having an alleged infringer with a sufficient U.S. presence to support a claim of jurisdiction in U.S. courts. In contrast. many content owners face the challenge of dealing with content infringers who have no U.S. presence, thereby usually requiring either an unlikely informal resolution or else action in the infringer’s jurisdiction.

If you discover that your online content has been misappropriated by another party, it is important to confer quickly with your attorney to determine what, if any, remedies may be available to reach the most effective resolution available.

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The Business Software Alliance (“BSA”), a trade association representing a number of software publishers, is launching a new campaign to attract would-be informants to its reward program. The BSA’s new Know it / Report it / Reward it campaign will attempt to attract a larger number of informants through a coordinated effort involving online advertisements, radio advertisements, research reports, and other tools.

The program continues the BSA’s practice of offering rewards of up to one million dollars for qualifying reports of software piracy. Individuals allegedly possessing knowledge about a business’ software compliance practices report information to the BSA which may become the basis of a legal engagement.

Issuance of a Software Policy can also provide the education and training employees need to help the business maintain compliance. Management should clearly delineate the company’s software asset philosophy and process to ensure compliance across the organization. Companies that receive audit letters from the BSA should contact experienced counsel for assistance.

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A recent opinion written by Judge Richard Posner for the 7th Circuit highlights the importance of carefully considering some of the risks of loss for plaintiffs in proceeding with a copyright infringement lawsuit.

In Eagle Services Corp. v. H2O Industrial Services, Inc., the plaintiff, Eagle, filed suit after several of its employees, who left to form H2O, used copies of Eagle’s safety manual in operations at the new business. The manual in question consisted largely, if not entirely, of quotations from OSHA regulations, making the scope of the copyright limited to the compilation as a whole. Instead of pursuing an award of statutory damages under the Copyright Act, Eagle argued that it should be awarded all the profits that H2O made in its business before it created its own manual, because, according to Eagle, without a manual H2O could not have provided any services in its industry without violating OSHA regulations. Though the trial court allowed Eagle to present its case to the jury, at the close of its evidence, H2O moved for judgment in its favor as a matter of law, which the court granted, based on Eagle’s failure to prove that OSHA requires the companies it regulates to maintain a safety manual. However, the trial court refused to award H2O, as the prevailing party, its reasonable attorney’s fees on the ground that the suit was not frivolous and had not been filed in bad faith. H2O appealed the denial of attorney’s fees.

The 7th Circuit reversed the trial court’s decision. In his opinion, Judge Posner noted that the suit “could not have been brought in good faith,” because Eagle never had any reasonable basis to believe that the state would have shut down H2O’s operations for want of a safety manual, especially in light of the fact that, even if a manual were required, the applicable regulations would have given H2O an opportunity to procure one. Judge Posner further noted, colorfully:

So we have a suit brought almost certainly in bad faith, a frivolous suit, a suit against a newer and probably smaller and weaker firm. Under any standard we know for shifting attorney's fees from a losing plaintiff to a winning defendant, H2O (and the individuals joined as defendants along with it) would be entitled to an award of attorney's fees.

Judge Posner also noted that in copyright cases, prevailing defendants are not required to prove that the plaintiffs’ suit was frivolous in order to prove their entitlement to an award of attorney’s fees. According to Judge Posner, if there is any asymmetry in the analysis regarding whether to award attorney’s fees in copyright cases, that asymmetry actually tips in favor of prevailing defendants:

The successful assertion of a copyright confirms the plaintiff's possession of an exclusive, and sometimes very valuable, right, and thus gives it an incentive to spend heavily on litigation. In contrast, a successful defense against a copyright claim, when it throws the copyrighted work into the public domain, benefits all users of the public domain, not just the defendant; he obtains no exclusive right and so his incentive to spend on defense is reduced and he may be forced into an unfavorable settlement.

Though H2O’s success in this case did not result in the enlargement of the public domain, that fact did not rebut the basic presumption affirmed by Judge Posner that, in most cases, awards of attorney’s fees to prevailing parties are presumed to be appropriate.

This case serves as a useful reminder to businesses considering whether to file suit over infringement of its copyrighted works. The costs of federal litigation are always high, and a loss at trial could mean that the plaintiff would be out not only its own attorney’s fees, but also those of its adversary.

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It is natural for the owner of a trademark want to seek some sort of redress when another person or entity uses that mark in the URL or the content of a web site, especially when that site competes with or criticizes the owner. However, relief from such use may be unavailable under the Lanham Act when it is not possible to show commercial intent behind the use, and a recent 10th Circuit opinion suggests that the standard to prove commercial intent may be higher than some would expect.

In Utah Lighthouse Ministry (UTLM) v. Foundation for Apologetic Information and Research (FAIR), the plaintiff, UTLM, filed suit against FAIR based on a web site published by FAIR’s vice president and webmaster, a co-defendant, which parodied the content of UTLM’s site. UTLM is an organization that publishes critiques of the Mormon Church. FAIR, on the other hand, is a volunteer organization that responds to such critiques.

The description in the opinion indicates that the parody site bore many similarities to the UTLM site:

The design elements are similar, including the image of a lighthouse with black and white barbershop stripes. However, the words “Destroy, Mislead, and Deceive” are written across the stripes on the Wyatt website. Prominent text on the Wyatt website consists of a slight modification of the language located in the same position on the UTLM website. For example, the UTLM website states: “Welcome to the Official Website of the Utah Lighthouse Ministry, founded by Jerald and Sandra Tanner.” In comparison, the Wyatt website states: “Welcome to an official website about the Utah Lighthouse Ministry, which was founded by Jerald and Sandra Tanner.” (emphasis added.) The Wyatt website does not have any kind of disclaimer that it is not associated with UTLM.

The opinion also indicates that FAIR’s webmaster, through his company, also registered ten domain names, which were “combinations of ‘Utah Lighthouse Ministry,’ ‘Sandra Tanner,’ ‘Gerald Tanner,’ ‘Jerald Tanner,’ and ‘.com’ and ‘.org.’” UTLM alleged that FAIR’s parody site and its webmaster’s registration of the domain names at issue constituted trademark infringement, unfair competition, and cybersquatting. The trial court disagreed with UTLM and granted the defendants’ motion for summary judgment as to all UTLM claims. UTLM then appealed the trial court’s decision to the 10th Circuit.

In upholding the trial court’s grant of summary judgment, the 10th Circuit relied, in large part, on the fact that UTLM was able to prove no commercial intent behind the parody site or FAIR’s webmaster’s registration of the domain names. FAIR’s webmaster neither promoted nor sold any products or services at the parody site. UTLM argued that the parody site linked to FAIR’s web site, where FAIR sold books, some of which also were available through the UTLM site. However, the Court found that any connection between the parody site and the commercial activities at the FAIR site was too attenuated to support a finding of commercial intent. In reaching that conclusion, which was the 10th Circuit’s first time to analyze an argument for commercial intent based on this type of fact pattern, the Court cited to a 9th Circuit opinion in which no commercial intent was found where a parody site linked to another site operated by the same defendant, which in turn linked to a newsgroup containing advertisements for the plaintiff’s competitors. Though the “distance” between the parody site in this case and the FAIR site’s commercial activities was not as great as in the 9th Circuit case, the 10th Circuit held that the trial court had used an analysis similar to that employed by the 9th Circuit, which it believed to be appropriate.

UTLM also argued that the parody site interfered with “the ability of users to reach the goods and services offered on the UTLM website.” The 10th Circuit disagreed, stating:

In our view, the defendant in a trademark infringement and unfair competition case must use the mark in connection with the goods or services of a competing producer, not merely to make a comment on the trademark owner's goods or services. The Lanham Act addresses the specific problem of consumer confusion about the source of goods and services created by the unauthorized use of trademarks. Unless there is a competing good or service labeled or associated with the plaintiff's trademark, the concerns of the Lanham Act are not invoked. (quotations omitted)

UTLM raised a third argument regarding the general commercial nature of the Internet, but this too was denied by the Court. The Court also found that there was no likelihood of confusion between the sites at issue, especially in light of the fact that the defendants’ site was a parody site, and that UTLM had failed to prove any bad faith intent by FAIR or its webmaster to profit on the domain names that had been registered, thereby supporting the denial of UTLM’s cybersquatting claims.

Especially for businesses in the 10th Circuit, this case appears to present a significant challenge for claims of Internet-based trademark infringement where commercial intent is difficult to prove. Business considering lawsuits based on such claims should consult closely with counsel to determine whether the costs of litigation are worth the risk of loss.

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