Austin Technology Law Blog

Oracle v. Google. Did Anybody Win?

Paul Stanfield — Tue, 08 May 2012 14:27:33 -0600

Avid followers of this blog will clearly remember our discussion of the initial filing of the lawsuit involving the clash of the Larrys (i.e. Ellison [Oracle] and Page [Google]). For a quick refresher, Oracle claimed that Google infringed on Oracle's Java related intellectual property (which Oracle obtained by buying Sun) by, among other things, violating some patents and copying application program interfaces ("API") in the development of the Android operating system. There has been some question as to whether APIs are subject to protection by copyright but Oracle claims that the ones in Java are sufficiently complex that they should be protected. A recent case in Europe has held the other way.

The jury in this case held that Google did violate Oracle's copyrights but could not reach a decision as to whether the use was "fair use", a defense under the copyright act. Therefore, this is not very conclusive. The case is divided into three phases and this was the end of the first phase. The case went directly into the patent phase of the case and the subsequent phase will be the damages phase. So, a lot of work to do until this is finally decided but it is evident that this will have far reaching effects however it comes out.

Ouch. That's Gonna Sting And Leave A Mark. A LLC Gets Its Veil Pierced.

Paul Stanfield — Fri, 20 Apr 2012 15:11:08 -0600

A New York Federal Court recently found reason to "pierce the veil" of a Delaware Limited Liability Company. As we all know from Business Law 101, corporations and limited liability companies are formed to shield the assets of their owners from the liabilities of the entity. When a court finds adequate reason, it can remove the liability protection of such entities and such an action is called "piercing the veil".

In this case, Soroof Trading Development Company signed a distribution agreement with GE Fuel Cells LLC. This agreement gave Soroff exclusive rights to distribute fuel cells in Saudi Arabia. The members of the LLC were GE Microgen, Inc. and Plug Power, Inc. As luck would have it, the LLC failed to deliver the fuel cells for Soroff to distribute. Soroff was peeved. Lawsuits ensued.

The LLC was dissolved in 2006 and a certificate of cancellation was filed with the Delaware Secretary of State. The LLC also (look, this is my shocked face) had no assets at the time it was dissolved. The individual members were not parties to the distribution agreement so one way to get to them (and their assets) was to attempt to pierce the veil.

Factors that courts consider when deciding to allow such piercing include whether the entity (either corporation or LLC) acted as an alter ego for the shareholder(s) or members. If it is virtually impossible to distinguish between the operation of the entity and the business of the members, a court will find liability under the alter ego theory.

In this case, the LLC had no assets at the time of dissolution, it had no employees and the individuals working at G E Fuel Cells were employees of the members or GE, it had no office space because it used the space leased by Plug Power and it did not have any signage reflecting its presence. The Court found this sufficient to grant a partial summary judgment piercing the veil.

Now, this opinion has some hair on it (as we say on the farm) because the court failed to cite any unfairness or inequity, which is generally required to grant a piercing. It also failed to annul the cancellation of the LLC, which leaves the LLC non-existent and under Delaware law, not susceptible to suit. If the LLC is not susceptible to suit, there is no liability to flow through to the members.

Maybe this will sorted out on the next appeal.

However, lessons to be learned here are to heed the advice we give to each LLC that we form as to the steps to be taken to minimize the likelihood that this might happen to you.

Update: Website Operator Still Has "Complete Immunity" Even When They Are "Appalling"

Paul Stanfield — Fri, 20 Apr 2012 14:06:43 -0600

In another of a series of victories for website operators, a Florida appellate court has found that a website operator enjoys (that truly is the right word) "complete immunity" for anything posted on their website.

You will remember that we reported on a similar case involving PissedOff.com,

The defendants in the instant matter operated a similar enterprise called "The Ripoff Report", which similarly encouraged people to post disparaging remarks about people and businesses. In this situation, a graduate of an addiction treatment facility alleged that the owner was a felon, the facility was dangerous and they disbursed illegal medications. The proprietor of the site consistently refused to take down the offending post and even when the poster was the subject of an injunction which forbade her to leave the complaint on the site and the poster begged the site to take it down, the website operators refused.

In spite of all this, the court found that Section 420 (how appropriate for today, pot joke to follow) of the Communications Decency Act ..."creates a federal immunity to any cause of action that would make service providers liable for information originating with a third-party user of the service."

This is true even though the court thoroughly disapproved of the website's business practices (they offered reputation cleanup services for a large fee, much akin to PissedOff.com).

So, you have to do more than just be "appalling" to remove yourself from the CDA's umbrella of protection.

Update: You Can Now Look At Facebook At Work Without Committing A Crime.

Paul Stanfield — Fri, 20 Apr 2012 13:08:22 -0600

About a year ago, we posted on a case that held that misappropriation of computerized informationin violation of a company's computer use policy could be a crime. The defendant had received stolen confidential information from former coworkers. The court held that this exceeded the employer's written use policy as as such violated the Computer Fraud and Abuse Act, which criminalizes "exceed(ing) authorized access" and using this to further fraud.

On April 10, 2012, the Ninth Circuit, sitting en banc, reversed, holding that because the pilfering co-workers did have authority to access the information they stole, this did not violate the CFAA. The Court reasoned that the intention of the legislation was to prohibit hacking and not the kind of day to day activities that most slacker employees engage in (i.e. exceeding their company's policy) by surfing the web.

This doesn't get Mr. Nosal and his friends out of the woods, however, as the government is still able to pursue counts of mail fraud and theft of trade secrets.

Congress Agrees On Acronyms for JOBS and CROWDFUND. Astonishment Is Rampant.

Paul Stanfield — Tue, 03 Apr 2012 14:17:20 -0600

Given the present state of partisan hostilities in Washington these days, it is big news when the Senate and Congress can agree on anything. However, that is exactly what they did on March 27, when Congress agreed with a Senate amendment to an act that established once and for all, the acronyms JOBS and CROWDFUND. Oh yeah, they also passed an act to go along with the acronyms, which is the most astonishing of all and which is designed to stimulate the market for initial public offerings ("IPOs") and, inter alia, contains provisions allowing for "crowdsourcing" or "crowdfunding". President Obama has expressed his support for this bill and is likely to sign it in the near future.

The "JumpStart Our Business Startups" Act or the JOBS Act changed in a very significant manner, the rules relating to funding for small business startups. It even changed the definition of a small business to an "emerging growth company" that had less than $1,000,000,000 (yes, that's a billion) of revenue in the last 12 months. According to some sources, this would have covered more than 91% of the IPOs in 2011. The JOBS Act eased many of the rules for IPOs and instructed the Securities and Exchange Commission to revise and adopt other rules pertaining to these types of equities, including determining whether it makes sense to allow trading in one cent increments.

The most notable effort in acronyming, however, goes to the drafters in coming up with the "Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012". Rolls off the tongue, right? Or you can just call it the "CROWDFUND" Act. This allows the collection of investments from large numbers of people in small amounts through brokers or registered websites. It restricts the amount that can be raised to $1,000,000 annually and restricts the amount that can be raised from any one individual to the greater of $2,000 or 5 percent of their net worth or annual income if less than $100,000 or the lesser of 10% or $100,000 if annual income or net worth is greater than $100,000.

The JOBS act also exempts most of the crowdfunding activities from state securities act registration requirements but still provides oversight by such state commissions for fraud and misrepresentation.

The Act provides for much registration and restrictions on advertising and generally has most securities lawyers in a state of moderate arousal. A thorough summary of the act has been done by the firm of Andrews Kurth and can be found here.

Time will tell if this has the desired effect on increasing capital markets for "small" companies. Some of the provisions may actually encourage the delay of IPOs but it is an ambitious effort if for nothing else than the advancement of acronym art.

Flea Market Landlord Found Liable For Contributory Infringement of Louis Vuitton Trademark.

Paul Stanfield — Fri, 30 Mar 2012 12:05:38 -0600

Eisenhauer Road Flea Market is a large indoor flea market in San Antonio, Texas. Some of the tenants of booths there sold fake Louis Vuitton products.

Louis Vuitton notified the owner/landlords of the flea market and asked them to stop renting to people who sold such knock offs. The landlords said that it was not their responsibility to do Louis Vuitton's work of policing the use of their brands.

Louis Vuitton sued the landlords alleging that the landlords engaged in contributory infringement. A jury agreed after the judge gave a jury instruction that a landlord/tenant relationship could lead to contributory infringement.

The jury returned a verdict for $3.6 million dollars and the court issued a far reaching injunction. The injunction provided that the defendants were prohibited from (i) engaging in further acts of contributory infringement; (ii) leasing to tenants who the landlords knew, had reason to know or have been presented with credible evidence about their dealing in counterfeit Louis Vuitton items; (iii) manufacturing or dealing in counterfeit Louis Vuitton products; or (iv) engaging in conduct that contributes, directly or indirectly to counterfeiting by a tenant.

In addition, the defendants are required to : (i) periodically inspect the booths for evidence of counterfeiting; (ii) promptly terminate the lease of anyone they find engaging in counterfeiting or if they are presented with credible evidence of such counterfeiting; (iii) include a provision in their leases prohibiting such counterfeiting; (iv) put warning signs at all entrances indicating that counterfeit material can not be sold on the premises; and (v) allow representatives of the plaintiffs to make periodic inspections for counterfeit material.

We have not yet had the opportunity to review the transcript of the case, but this seems to indicate either a case of run away jury or of egregious behavior by the defendants that does not appear in the order. This is a case of first impression in Texas and should give all landlords reason to reassess their situations.

It is also not a large step to find internet service providers, web designers and operators or others involved, directly or indirectly, in the on-line sale of counterfeit merchandise to be in the same situation. We had reported on one before but if this decision stands, it is likely that we will see more cases of this sort, at least in the Western District of Texas.

Better To Be Pissed Off Than ... Well, You Know.

Paul Stanfield — Wed, 28 Mar 2012 14:16:28 -0600

PissedConsumer.com is a website that encourages consumers to complain about companies and products. When a complaint is lodged, PissedConsumer creates subdomains and metatags using the name of the product or company complained about in the name, e.g. productname.com/titleofpostedcomplaint.html. PissedConsumer then uses a third party to post advertisements on the complaint pages for competitors of the product or company complained about. Opinion Corp. is the company that owns and manages PissedConsumer.com. As an additional service, Opinion Corp. offers to help remedy the negative impact of the complaints in a number of ways and for a substantial amount of money.

Ascentive, LLC (software company) and Classic Brands, LLC (mattress manufacturers) were the victims of negative comments on PissedConsumer.com and separately brought suit against Opinion Corp. and some of its officers individually. Their suits were consolidated for the purpose of this action.

The plaintiffs (Ascentive and Classic Brands) alleged a number of causes of action, including a request for a preliminary injunction to disable the offending pages, counts under the Lanham Act and counts under the Racketeer Influenced and Corrupt Organizations Act ("RICO").

The counts under the Lanham Act centered around the plaintiffs' claims that the use of their trademarks in the subdomains and in metatags constituted trademark infringement, unfair competition and false designation of origin.

For the RICO allegations, they allege that the defendant's "Reputation Management Services", which allow companies (for a large fee) to respond to the reviews and alter the format in which the reviews appear were tantamount to bribery and extortion prohibited by the RICO Act.

The Court applied the preliminary injunction standard, which requires that such an injunction issue only if the plaintiffs have demonstrated a likelihood of success on the merits.

Applying this standard to the facts, this Court found that there was no likelihood of confusion as any reasonable user would understand that this was a gripe site and not a competing site and that the use of plaintiffs' marks as described did not result in such confusion. In addition, the defendant plead that they were insulated from liability under Section 230 of the Communications Decency Act because they were an "interactive computer service" and therefore not liable for the defamatory comments of their users. The Court agreed.

Consequently, the Court found that the plaintiffs had not demonstrated a likelihood of success and denied the motion for preliminary injunction even though the Court expressed some uneasiness about the defendant's business practices and ethics, e.g. eliciting (some say creating) complaints, advertising such complaints, engaging in search engine optimization to cause the complaints to appear higher in the search rankings and then charging fees to cure the situation they had created. "Ethical obligations that exist but cannot be enforced are ghosts that are seen in the law but that are elusive to the grasp." Lyrical, but little consolation to the plaintiffs.

Defending Your Sensitive Information Against Hacker Attack.

Paul Stanfield — Mon, 12 Mar 2012 11:49:00 -0600

What’s a lawyer’s worst nightmare? Well, we’ve all awoke in a cold sweat at 3 am and wondered if we had missed a deadline, but near the top is the possibility that all our clients’ confidential information and our confidential and privileged communications with them become public. If we left our office doors and file room inadequately secured and someone extracted our paper files and printed them, we would lose our client’s trust and potential clients would think twice before engaging us.

Now, think what this might mean if a firm represents high profile clients in controversial matters that stir emotions, and the person or persons mucking with the firm’s files is highly motivated, sophisticated, and infamous. However, instead of just paper files, the intruder obtained all the firm’s e-mails and other electronic records. Such is the plight of the law firm of Puckett and Faraj, PC; a multi-office firm specializing in military defense. One of their highest profile clients, Marine Frank Wuterich, was involved in the much publicized incident in Haditha, Iraq in 2005 in which 24 Iraqi civilians were killed. Mr. Wuterich plead guilty to dereliction of duty and his worst penalty could be his demotion to the rank of Private without other significant penalty.

In early February, without warning, the hacktivist group that goes by “Anonymous” hacked into Puckett and Faraj’s website, defaced it and left behind a headline that read: “ANONYMOUS HACKS PUCKETT & FARAJ – EXPOSES 3GB OF PRIVATE EMAILS DETAILING SSGT FRANK WUTERICH WHO MURDERED DOZENS OF UNARMED IRAQI CIVILIANS AT HADITHA”. You can see the entirety of the screen grab here. Anonymous also stole a large number of e-mails, trial exhibits and other confidential information that related to Mr. Wuterich but also to a large number of other clients. Anonymous has made the information available on Pirate Bay. Gawker has reviewed a small part of the information provided and has found embarrassing and sensitive material relating to defendants and persons unaffiliated with Mr. Wuterich, including the identity of some sexual assault victims.

Texas Lawyer asked us to write an article on this subject and we were glad to do so. The same article was picked up by Law Technology News. You can see the articles here and here.

Now, regardless of politics, views on the Iraq war or what a person may believe would be adequate justice for Mr. Wuterich, one of the most honored notions of our society is that everybody should be afforded the opportunity for an adequate defense and that attorneys that provide such defenses are performing a useful societal function. To be swept up in a broad brushed approach to retaliating against perceived injustices and perhaps having their reputation, firm and livelihoods decimated, seems to be undue punishment for such deeds. Also, for other people to have embarrassing and sensitive information divulged is perhaps unintended but nonetheless most unfortunate.

Common Contract Clauses We Never Think Much About, But Should.

Paul Stanfield — Thu, 16 Feb 2012 14:20:31 -0600

This is for all you contract nerds out there. You know who you are. You become aroused at the sight of a well crafted limitation of liability provision. OK, then. Well, me neither.

A recent case dealt with a choice of law provision that we routinely use and routinely don't think much about.

Oh, we fight over the choice of law provision. We usually want the choice of our state with venue and jurisdiction to follow. We haggle over New Jersey vs. New York when we probably don't have a clue as to the difference it would make on most issues. We're just looking for some home cooking. So, what happens when the parties agree in a contract as to the state whose law will be applied? In Ruiz v. Affinity Logistics Corp. (9th Cir. Case No. 10-55581, Feb. 8, 2012) the issue was whether truck drivers were independent contractors or employees and the two states involved were Georgia and California. Georgia law has a rebuttable presumption that they are independent contractors and California law would favor them being employees. The contract in question chose Georgia law and Georgia was where the defendant had its principal place of business and was incorporated. Ergo, slam dunk, right? The parties were grownups and capable of making this decision. The chosen law (Georgia) applies. The Ninth Circuit says, 'Not so fast, my friends".

The Ninth Circuit decided that Section 187 of the Second Restatement of Conflicts of Law applies. Section 187 says in pertinent part that for things that parties can resolve by a specific provision in the agreement, the choice of law of the parties will prevail. "In such instances, the forum will apply the applicable provisions of the law of the designated state in order to effectuate the intentions of the parties. So much has never been doubted." [Emphasis added]

Section 187 goes on to say that for matters that the parties can not resolve by a specific provision (e.g. making an illegal contract legal, agreeing that a party has capacity to contract when he doesn't), the choice of law in the contract will still be enforced unless the chosen state has no substantial relationship to the parties or the transaction, there is no other rational basis for selecting the state and the laws of the chosen state are contrary to a fundamental policy of another state and such state would be the choice of law absent the choice by the parties.

The Ninth Circuit then decides, without much discussion or explanation, that the provisions of the second part of Section 187 (the part about matters that the parties can not resolve by a specific contractual provision) should be applied and finally opines that California law should be applied instead of the state (Georgia) chosen by the parties. The most common reading of Section 187 of the Restatement would mandate that after the court determined that the parties chose the law of a particular state and that such choice was not obtained by fraud or misrepresentation and that the parties were capable of contracting for such a provision, the discussion would be over and the consideration of the second part of Section 187 would be unnecessary. This Ninth Circuit decision would require the consideration of all the factors listed in Section 187.

Why should we care? Well, if we know that a particular issue is treated in a particular way in a particular state and both parties desire that treatment, there should be no reason why the parties can't agree to that. It is common practice to chose Delaware law for corporations that have no contact with Delaware except that they are incorporated there because Delaware courts are perceived to be better at dealing with commercial and corporate issues. This decision calls those provisions into question.

Anonymity On The Internet. What a Concept!

Paul Stanfield — Thu, 02 Feb 2012 15:43:00 -0600

You will recall that we have discussed a few cases regarding anonymity on the internet. In one, which involved a potential securities scam, the court removed the anonymity from some people that were involved in the alleged scheme.

In another, the court allowed the anonymity of some detractors of The Art of Living Foundation to continue for a while. After publishing the post, we received a call from the attorney for The Art of Living Foundation, who indicated that he thought our post was more even handed than some regarding this subject, but he would like to send us a letter from the president of The Art of Living Foundation explaining their position. We were amenable to that and a copy of that letter follows. We reproduce it without comment nor endorsement. When we asked about the progress of the case, the attorney indicated that he felt the judge would rule in a manner that would allow them to obtain the identity of their detractors in the near future. Any updates from any of the participants would be appreciated.

The "Safe Harbor" Provisions of the DMCA Become Safer and More Harbory.

Paul Stanfield — Tue, 31 Jan 2012 16:41:34 -0600

Two recent decisions have provided context for the DMCA's "safe harbor" provisions and have given an expansive reading to such provisions.

In the Ninth Circuit Court of Appeals, the decision in a case called UMG v. Veoh (even though there are dozens of parties) has affirmed a district court's decision that a video sharing site (Veoh) qualified for the safe harbor provisions and therefore was not liable for copyright infringement. This case was decided on December 20, 2011.

In the Southern District of New York, summary judgment was entered for Photobucket.com and the Kodak Imaging Network against Sheila Wolk, an artist that claimed that Photobucket was liable because several of her works had appeared on Photobucket. For example, see here for examples on the day this post was written. The case is styled Wolk v. Photobucket and was decided on December 21, 2011.

In UMG v. Veoh, Veoh allows people to share video content over the internet. The service is free and Veoh makes its money through related advertising.

The Digital Millennium Copyright Act ("DMCA") allows "service providers" "safe harbor protection" if the service provider: (i) does not have actual knowledge that the material on the system is infringing; (ii) is not aware of facts or circumstances from which infringing activities are apparent; (iii) upon obtaining actual knowledge acts expeditiously to remove or disable access to such infringing material; or (iv) does not receive a financial benefit in cases where the service provider has the right and ability to control such activity.

Veoh employed the standard methods of having its customers agree not to upload any infringing material and the customers give Veoh a license to use and display such material. When a video is uploaded, the software resident at Veoh's site automatically (i.e. without human intervention), breaks the video into 256 kilobytes chunks that facilitates streaming and converts the video into Flash 7 format. If the customer is a "Pro" user, the software further converts the files to Flash 8 and MPEG-4 formats. The software also extracts metadata to aid in the search function for the videos. No Veoh employees review videos before they are posted.

However, Veoh uses “hash filtering” software. When Veoh is aware of an infringing video and disables access to it, the hash filtering software automatically disables access to any identical video and prohibits any subsequently submitted duplicates. Veoh also used another filtering system that compares audio on a video to a database of copyright content and if it finds a match, the video never becomes available for viewing. After obtaining this software, Veoh applied it to their catalog of previously uploaded videos and as a result, removed more than 60,000 videos, including some that supposedly infringed on UMG’s copyrights. Despite the precautions, UMG and Veoh agree that some UMG copyrighted material is on Veoh’s site. The parties also agree that UMG never gave Veoh notice of any infringing material before UMG filed this suit.
Veoh asserted as an affirmative defense that it was entitled to protection under the safe harbor provisions of the DMCA. UMG alleged that Veoh was not entitled to such safe harbor because its activities were not “infringement of copyright by reason of the storage [of material] at the direction of a user”, that Veoh had actual knowledge of infringing acts or was “aware of facts or circumstances from which infringing activity [wa]s apparent and that Veoh “receive[d] a financial benefit directly attributable to …infringing activity” that it had the right and ability to control.
The court disagreed with UMG on all three issues.
UMG had asserted that the language required that the infringing conduct be limited to storage and that Veoh’s facilitation of access to the material went beyond “storage”. The court said the statute language was “by reason of storage” and that the language was clearly designed to cover more than “mere electronic storage lockers”. The court reasoned that if Congress had intended the safe harbor to extend only to web hosts, it would not have included the language “by reason of storage”.
The court followed a line of other cases that said that just because a defendant had been notified of some infringing activities that this put it on notice for other infringing activities. It was undisputed that Veoh removed all material for which it was put on notice and that it could identify from such notices, even though UMG had not provided any such notices.
The court further stated that the “right and ability to control” requires control over specific infringing activity that the provider knows about. “A service provider’s general right and ability to remove materials from its services is, alone, insufficient. Of course, a service provider cannot willfully bury its head in the sand to avoid obtaining such specific knowledge.” The court found that Veoh had not acted in such manner.
In the Wolk v. Photobucket case, Ms. Wolk is an artist that depends on her paintings and sculptures as her sole source of income. She alleges that Photobucket facilitates the infringing of her copyrights and is not entitled to the protections of the safe harbor.
In its analysis, the court found that Photobucket met the definition of a service provider because the court believed that the definition of service provider includes a “broad set of Internet activities”. Photobucket also had a policy that allowed copyright holders to submit a takedown notice, had made that policy available on its website and had acted to remove infringing material when given notice. It also found that Photobucket met the other requirements for safe harbor and dismissed Ms. Wolk’s pro se complaint.
Both of these cases allowed immunity from activities that go substantially beyond the mere storage of materials. Decisions of this type, which most likely accurately apply the legislative intent of the DMCA, would probably come down differently under the recently proposed SOPA legislation.
This will not be the last we’ve heard of these issues.

Austin Under 40 Awards

Luke Stanfield — Fri, 13 Jan 2012 17:00:57 -0600

The Austin Under 40 Awards is a great local group that, in addition to raising money for local charities, nominates and awards certain Austinites that exemplify commitment to leadership in business and social awareness. The nominations period just ended, and we are proud to have our partner Stuart Hiserodt as co-chair of the nominations. Here he is discussing it on KVUE:

Blogs That I Follow Regularly - Texas Bar Journal Edition

Paul Stanfield — Tue, 10 Jan 2012 11:00:10 -0600

For some reason, the Texas Bar Journal asked me which blogs I read on a regular basis. I responded and lo and behold, they published it. I should warn those blogs to stand up an additional server or two to handle the additional traffic this will generate.

Technology Contract Drafting Alert: When Do "Lost Profits" Go From Being Consequential Damages To Being General Damages?

Paul Stanfield — Wed, 04 Jan 2012 15:00:45 -0600

Let me stipulate on at the outset that this is not very sexy. Most normal people don't care about the arcane distinction that we try to make in this post. However, most attorneys (by definition, not normal people) that write a lot of contracts and technology providers that sign a lot of contracts could find the distinction valuable.

The following is a common provision in the boilerplate of technology (and indeed, most) contracts:

"Neither party will be liable hereunder for penalties or for special, indirect, consequential or incidental losses or damages, such as damages for lost profits, lost or damaged data, failure to achieve cost savings, loss of use of facility or equipment, or the failure or increased expense of operations, regardless of whether any such losses or damages are characterized as arising from breach of contract, breach of warranty, tort, strict liability or otherwise, even if a party is advised of the possibility of such losses or damages, or if such losses or damages are foreseeable.

This provision flows from years of manipulation of contract language, which began with the case that all attorneys must read in the first few weeks of their Contracts course in law school: the famed Hadley v. Baxendale, 9 Exch. 341, 9 Ex. 341, 156 Eng. Rep. 145 - Court of Appeals, 1854. In that case the defendant failed to deliver a broken crank shaft to the repairman on time, so the repair man was late in getting the new crank shaft to the plaintiff and consequently, the plaintiff couldn't get his flour mill on line and sued for loss of profits for the down time. The 1854 court held that this type of damage was not readily foreseeable, was consequential (i.e. not a direct result of the breach) and therefore, speculative and non-recoverable in this instance.

So, are all lost profits non-recoverable? No, particularly when they are part of the thing the plaintiff had bargained for in the contract. Case in point is the 2007 case of Tractebel Energy Marketing v. AEP Power. As part of a highly complicated case with many issues, Tractebel sought to avoid paying AEP for the profits that it would have made had Tractebel fulfilled its commitment under a contract to purchase a minimum amount of power from AEP. The Court described consequential damages thusly:

"Lost profits are consequential damages when, as a result of the breach, the non-breaching party suffers loss of profits on collateral business arrangements. In the typical case, the ability of the non-breaching party to operate his business, and thereby generate profits on collateral transactions, is contingent on the performance of the primary contract. When the breaching party does not perform, the non-breaching party's business is in some way hindered, and the profits from potential collateral exchanges are 'lost'."

The Court then distinguished the lost profits in the Tractebel case by saying:

"By contrast, when the non-breaching party seeks only to recover money that the breaching party agreed to pay under the contract, the damages sought are general damages. *** But, in this case, the lost profits are the direct and probable consequence of the breach.The profits are precisely what the non-breaching party bargained for, and only an award of damages equal to lost profits will put the non-breaching party in the same position he would have occupied had the contract been performed. ***

AEP seeks only what it bargained for—the amount it would have profited on the payments TEMI promised to make for the remaining years of the contract. This is most certainly a claim for general damages."

Therefore, lost profits in this instance are general damages and recoverable. We have often thought that the general contract language excluding recovery for lost profits could potentially put the vendor in danger of having a defaulting purchaser say that they couldn't recover the entire contract price because part of it would obviously be profits that they lost. That probably wouldn't happen under the ruling in the Tractebel case but leaving that to the whim of the court is not good practice. For that reason, we try to add "amounts payable under this Agreement" to the usual litany (indemnity, breach of confidentiality, etc.) of things that are excepted from the limitation of liability to make it abundantly clear that these are recoverable.

OK, we'll try to make the next post sexier.

Who Owns Your Social Media Account? You Or Your Employer?

Paul Stanfield — Fri, 30 Dec 2011 13:19:49 -0600

Here's the situation: You establish a Twitter, Facebook, LinkedIn, etc. account while you are employed and use the account to tweet, post, blog, etc. about your employer. Then your employer falls out of love with you and you are no longer employed. Who owns your followers on Twitter or your Facebook or LinkedIn account? That's a really good question and one that the courts are dealing with right now.

Rich Sanchez was an anchor on CNN and has a Twitter account with the handle: "richsanchezcnn". Rich was rendered unemployed because of some ill advised statements he made. So, does CNN own the account or was Rich popular with the Twitter followers because of his good looks and sex appeal or because he was on CNN? Should he have to change his handle? This was settled out of sight, so we don't know what happened there.

On another front, a company called PhoneDog LLC filed a suit against former employee Noah Kravitz. Noah tweeted while an employee of PhoneDog under the name "PhoneDog_Noah" but then changed it to "noahkravitz" after the break up. PhoneDog alleges that Noah's 17,000 followers are worth $2.50 per month for 8 months and are asking for a $340,000 judgment against our friend Noah. PhoneDog has, for the moment, survived a motion for summary judgment with the judge finding enough question of fact about "trade secrets" in the account to let the case go on for a little longer.

Then there's the strange case of Dr. Linda Eagle, who was one of the original founders of Sawabeh Information Services. As is the case sometimes, all the founders were fired and Sawabeh alleges that it owns Dr. Eagle's LinkedIn account and that she has somehow "misappropriated" her own account. As you know, most LinkedIn accounts (as was Dr. Eagle's) are in the employee's name alone and refers to the company in the employment history and in the connections established.

We have explored the issues of who owns clients of an LLC and whether a toxic ex-spouse might have some rights in a patent in a community property state, but this is an area of the law that is developing.

In most instances, this is probably not a huge issue but employers who want to have control over these accounts (and the wisdom of this should be evaluated thoroughly), should provide guidelines in the social media section of their employment rules. If stated clearly, there seems to be no reason why the employer would not be entitled to control and ownership of such accounts if they fall into the parameters set out in such policy. Otherwise, it's pretty gray.

Seasons Greetings and Thanks For Reading Our Little Blog for Another Year.

Paul Stanfield — Mon, 19 Dec 2011 14:42:19 -0600

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Weekend Smorgasbord: Faceporn and Copyright Porn.

Paul Stanfield — Fri, 09 Dec 2011 16:44:37 -0600

Here is a couple of technology law related things that happened this week and they are only marginally connected.

1. Facebook sued a site called Faceporn in a federal court in California. They are aggressive about this. See here and here. Faceporn is in Norway but uses a .com website. They also have 250 users in California and 1000 users in the U.S. Faceporm failed to file an answer and Facebook moved for default judgment. The Court denied the motion, finding that it did not have personal jurisdiction over Faceporn in that personal jurisdiction requires more than "simply registering someone else's trademark as a domain name and posting a web site on the internet". Hence, no default judgment.

2. In a recent case in Massachusetts involving the claim of copyright infringement for an adult film, the judge wondered aloud in a Footnote 2 whether there was actually any copyright protection available for a pornographic product. A couple of cases had refused to provide such protection (beginning in the early days of Broadway, see Martinetti v. Maquire, 1867) but basically on the grounds that scant dialog and nude women were not a dramatic composition and therefore not entitled to copyright protection. A 1979 case allowed for such protection because found that the concept of decency and pornography is constantly changing and "denying copyright protection to works adjudged obscene by the standards of one era would frequently result in lack of copyright protection (and thus lack of financial incentive to create) for works that later generations might consider to be not only non-obscene but even of great literary merit". It seems incongruous that porn is not entitled to any copyright protection but cases as late as 1998 found that hard core porn that was "bereft of any plot and with very little dialog" was not entitled to injunctive relief against copyright infringement.

So, lack of personal jurisdiction just because you have a .com domain and a question raised about copyright protection for pornography. How do these affect technology and law? Well, the internet issue for personal jurisdiction will continue to develop over the years, copyright issues for any medium is a hot item in technology protection and any mention of porn lights up the search engines and gets us more readers. Reasons enough?

Scam Alert! Especially For Attorneys.

Paul Stanfield — Fri, 02 Dec 2011 16:24:17 -0600

Suppose you are hard at work doing your lawyer stuff one day and you get this e-mail:

"Greetings Counsel:

I need your legal assistance. I provided a friend of mine Mr Philip Anderson a business loan in the amount of $350,000. He needed this loan to complete an ongoing project he was handling in 2009. Mr Anderson is well based in your city and the loan was for 24 months and interest rate of 7.85%. The capital and interest were supposed to be paid on April 15th, 2011 but Mr Anderson has only paid $50,000.

Please let me know if this falls within the scope of your practice so that I can provide you with the loan documents and any further information you need to know.

Thanks,

John .F.Chao"

You think "Whoopee! New business. Just what I need." At least that's what I thought today, when I got this very e-mail.

You should wait a minute. It's a scam. See here for a description. Apparently, this has been circulating for some time.

Here's how it works, courtesy of AvoidAClaim Blog:

"In this type of scam a lawyer is contacted to help an overseas lender collect on a business debt from a purported borrower in the lawyer’s jurisdiction. The fraudster will provide documentation about the loan. A retainer agreement will be signed, but the fraudster will delay in paying the retainer fee. Instead, the lawyer will be asked to deduct any fees from the debt payment.

When the lawyer has sent a demand letter (or sometimes, before any letter has been sent) a cheque will arrive. The lawyer will be asked to deposit the cheque in the trust account and wire the balance (after fees are deducted) to an overseas account. Of course, the cheque is fraudulent and the lawyer will be left with a shortfall in the trust account."

And then, sure enough, something that sounded too good to be true, was.

StartUp America Launches In Austin

Paul Stanfield — Thu, 01 Dec 2011 14:51:02 -0600

StartUp America is an initiative started in the White House in early 2011 to provide for the creation of resources around the country to facilitate in the creation and fostering of small companies. The Austin version of that launched yesterday as the seventh one of this variety in the U.S. Its website is here and it promises to provide much good information and valuable resources.

Give it a look.

OK, Maybe You Can Be Anonymous And Your Scream Can Be Heard In Cyberspace.

Paul Stanfield — Tue, 29 Nov 2011 10:33:14 -0600

Hard on the heels of the Doe v. SEC case discussed in the immediately preceding post, another case where anonymity is sought comes through the Northern District of California. In Art of Living Foundation v. Does 1 - 10, the plaintiff seeks the identity of one of the defendants in an action for copyright infringement, among other things.

The plaintiff is an international foundation that teaches the philosophy of Ravi Shankar, the spiritual leader, not to be confused with famed sitarist, Beatles confidant and Norah Jones' father of the same name.

One of the defendants goes by the online pseudonym of Skywalker and has been critical of the teachings of the Art of Living Foundation. In addition, Skywalker put one of the manuals used by the Foundation online. The Foundation sued Skywalker and others for defamation, copyright infringement, trade libel and misappropriation of trade secrets. The Foundation moved for a subpoena to Skywalker's blog host seeking Skywalker's identity. Skywalker, anonymously, through an attorney, moved to quash. The magistrate allowed the subpoena and Skywalker brings this appeal.

The magistrate applied the standard of Sony Music Entertainment Inc. v. Does 1 - 40, 326 F. Supp. 2d 556 (S.D.N.Y., 2004) and found that Plaintiff had alleged a prima facie case of copyright infringement due to the online publishing of the manual, the subpoenas were targeted to obtain information to identify the defendant, Plaintiff had no other means to identify Skywalker, without such identity, it would be prohibitively expensive to conduct discovery and even if Skywalker had engaged in protected speech, he had no expectation of privacy because "the First Amendment does not shield copyright infringement".

On appeal, Skywalker alleged that because his speech concerned a matter of public interest, the Court should apply the more rigorous standard used by Highfields Capital Management L.P. v. Doe, 385 F. Supp. 2d 969, 975-76 (N.D. Cal. 2005).

The Court of Appeals stated that the more rigorous standard in the Highfields case required (in addition to the factors considered by the magistrate) that the court balance "the magnitude of the harms that would be caused to the competing interests" by their ruling. The Court held that because of the nature of Skywalker's speech (i.e. more political, religious or literary rather than commercial), the Highfields approach balances the parties' interests better than the Sony approach. The Court also found that evidence of copyright infringement does not automatically remove the speech at issue from the scope of the First Amendment.

The Court found that, to the extent that Skywalker's anonymity facilitates free speech, the mere disclosure of his identity is itself an irreparable harm and that the plaintiff can continue its case, in view of the fact that Skywalker has been participating in the case through his attorney. The Court quashed the subpoena.

It is possible that the Court would have reached a different result if Skywalker had not removed the manual from his blog because of a DMCA take down notice or if Skywalker had not been actively involved in the lawsuit. In any event, Skywalker remains anonymous for a while.