Covering Your Ads

UMG v. Augusto: Allowing the Sale of Promotional CDs Under the First Sale Doctrine Could Affect Much More than the Music Industry

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 17 Jul 2008 09:21:15 -0800

In a decision that could have far-reaching implications for technology licenses of all types, the U.S. District Court for the Central District of California recently held that the first sale doctrine permits a recipient of promotional CDs to sell them online without violating the license pursuant to which the CDs were distributed and without being liable for copyright infringement. UMG Recordings, Inc. v. Augusto, No. CV 07-03106, slip op. (C.D. Cal. June 10, 2008). The court granted the defendant's motion for summary judgment and rejected Universal Music Group’s (“UMG”) argument that the labeling on the promotional CDs created a license without transferring title.

Background and Facts of the Case

For many years, a common practice in the music industry has been for record labels to provide promotional CDs to radio stations, music reviewers, magazines, DJs, and other "music insiders." Before a new CD is released to the public, UMG and other record labels create and distribute such promotional CDs often labeled with language substantially similar to the following: "This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws."

Troy Augusto, not a "music insider," purchased a large collection of promotional CDs from used record stores around Los Angeles and then sold many of UMG's CDs on eBay through his business, Roast Beast Music. Acting as UMG's agent, the Recording Industry Association of America sent Augusto a cease and desist letter and many takedown notices, alleging that his sale of UMG's promotional CDs violated the terms of the promotional license and constituted copyright infringement. But Augusto continued to sell the promotional CDs, so UMG was forced to file suit, alleging that Augusto's unauthorized sale of the promotional CDs violated UMG's copyright in the sound recordings featured on the CDs.

Court's Opinion

The court held that Augusto's actions were protected by the first sale doctrine, which provides that "the owner of a particular copy or phonorecord lawfully made under [Title 17], or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord." 17 U.S.C. § 109(a). Although UMG's promotional CDs were initially distributed for free, the court cited Nimmer on Copyright for the proposition that the first sale doctrine applies to a copyrighted work after the "first authorized disposition by which title passes." Therefore, the main issue was whether UMG transferred title when it mailed the promotional CDs to "music insiders" in the first instance. If title did transfer, then Augusto would be deemed the lawful owner of the CDs at the time he sold them, and thus, not liable for copyright infringement.

The court noted that the CDs were labeled a "license," but that did not end the inquiry. Rather, in determining whether the mailing of promotional CDs constituted a license or a title-transferring sale, the court cited the Ninth Circuit's opinion in Microsoft Corp. v. DAK Industries, 66 F.3d 1091, 1095 (9th Cir. 1995), and concluded that it had to evaluate the "economic realities" of the transaction. One of those realities was that, when UMG gave away the promotional CDs, it had no intention of regaining possession of the CDs and no expectation that they would be returned. Following the Ninth Circuit's decision in United States v. Wise, 550 F.2d 1180, 1192 (9th Cir. 1977), which held the transfer of a film print from a movie studio to an actress allowing her to keep possession of it to be a sale and not a license, the court stated that "the music industry insiders' ability to indefinitely possess the Promo CDs is a strong incident of ownership through a gift or sale."

The court next stated that another hallmark of a license is a recurring benefit to the copyright owner, and the absence (in the court's view) of such a benefit to UMG supported the court's conclusion that UMG's distribution of the promotional CDs did not create a license. Distinguishing between software and music CDs, the court vaguely explained, "Unlike the use of software, which necessitates a license because software must be copied onto a computer to function, music CDs are not normally subject to licensing. Therefore, the benefits of a license for software do not exist under these facts." In the court's view, the only apparent benefit to UMG was an attempt to restrain the transfer of its music. Thus, the court held that UMG's conveyance of the CDs provided the recipient with "the right to perpetual possession and the freedom from obligations to UMG," making the transaction "a gift or sale, not a license." But cf. Academy of Motion Picture Arts and Sciences v. Creative House Promotions, Inc., 944 F.2d 1446 (9th Cir. 1991) (using the "limited publication" doctrine in noting that the Academy of Motion Picture Arts and Sciences, by awarding personalized Oscar trophies to individuals, had a limited purpose in distributing them, and that the recipients had no right of sale or further distribution).

The court found further and alternative support for its "gift" characterization under federal postal law. The Postal Reorganization Act prohibits "the mailing of unordered merchandise" without the recipient's consent, allowing such merchandise to "be treated as a gift by the recipient, who shall have the right to retain, use, discard, or dispose of it in any manner he sees fit without obligation whatsoever to the sender." 39 U.S.C. § 3009(a)-(c). Because the promotional CDs could be treated as a gift under the Postal Reorganization Act, the court reasoned, "By sending the Promo CDs to music industry insiders, UMG transferred title to those insiders and the Promo CDs are subject to the first sale doctrine." UMG filed a notice of appeal on June 13, 2008.

Possible Applications of the Ruling

This decision has implications beyond promotional music CDs. For example, this decision may affect restrictions imposed on digital files "purchased" from online retailers. Such transactions are often structured as a license permitting the consumer to retain the file and use it an unlimited number of times, but restricting the consumer's ability to burn it, copy it, or otherwise transfer the original file to a third party. If the "economic realities" standard perpetuated in UMG v. Augusto were applied to hold that such transactions are sales and not licenses, it could undermine the ability of content owners and technology providers to legally enforce such restrictions. Indeed, Augusto's counsel at the Electronic Frontier Foundation ("EFF") in San Francisco forecast the opinion's broader implications on EFF's blog one day after the opinion was issued, "With software vendors, laser printer manufacturers, and patent owners trying to strip consumers of their first sale rights with unilateral labels, licenses, and notices, today's ruling sets an important precedent holding the line against these efforts (and comes one day after the Supreme Court reaffirmed the same principle in the patent context in Quanta v. LG)." Quanta Computer, Inc. v. LG Electronics, Inc., No. 06-937, slip op. (2008).

Authored by:

Benjamin R. Mulcahy

(212) 332-3841

bmulcahy@sheppardmullin.com

and

Dante DiPasquale

Cairns Patent Once Again Provokes The Promotions Industry To Re-Evaluate Online Promotional Games

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 24 Mar 2008 09:35:06 -0800

Most major players in the promotions industry know that the so-called Cairns patent (U.S. Patent No. 6,173,267) is an online business method patent relating to online sweepstakes that involve unique codes. Although it should be clearly understood that I am not a patent attorney (a highly-technical legal specialty), and this blog entry does not constitute legal advice and most certainly does not constitute a legal opinion of this firm, there are several steps that can be taken to potentially avoid at least one of the elements, or its equivalent, for each claim of the patent.

Based on the Abstract and specifications of the Cairns patent and a summary of its various claims, the Cairns patent involves a series of steps whereby: (1) a person obtains a "unique code" from packaging or point of sale materials or through some other form of "card" (in whatever form) and is directed by such packaging, materials or "card" to visit a particular online website (the "Specified Website") for the chance to win a prize; (2) the person then takes that code and uses a computer or other device to connect to the Internet and visit the Specified Website; (3) at the Specified Website, the person enters some amount of personal information (e.g., name, address, phone number) that will allow the promotion sponsor to contact him or her; (4) at the Specified Website, the person also enters the "unique code", which can happen either before or after the personal information is entered; (5) after the "unique code" is entered, some calculation is made on the code (e.g., "the code is compared to a list of winning codes to determine whether that code is a winner at some prize level…. Alternatively, the code which is input by the purchaser may be subject to some computation, random selection, or other means for determining a winning or non-winning status, instead of the look-up list. The purchaser is then informed of his or her status based on the code, in other words, whether the purchaser has won some prize…."; and finally (6) each person who is identified as winning a prize "based on said unique code" is informed that he or she has won a prize "while [he or she] is connected [to the Specified Website]".

To avoid implicating the Cairns patent, an online promotion must avoid at least one of the elements, or its equivalent, for each claim of the patent. In other words, if any of these steps, or "claims" in patent terminology, is not present in the process, the Cairns patent is not implicated. Of course, whether or not a step, or its equivalent, is avoided requires a potentially complicated and detailed analysis of not only the patent, but its prosecution history and possibly the prior art. But merely as an example for purposes of this blog entry, if the codes that are used are not truly one of a kind for purposes of the promotion they are intended for, the promotion does not involve "unique" codes. On that point, in a case decided last month, the Federal Circuit held that a federal district court erroneously read the claim term "binary code" in a patent on a remote-control garage door transmitter to encompass trinary numbers, those based on three values. Chamberlain Group Inc. v. Lear Corp., Fed. Cir., No. 2007-1314, 2/19/08. In other words, the Federal Circuit held that "binary numbers" means "binary numbers", not trinary numbers. Analogously, "unique code" (as used in the Cairns patent) means "unique code", so if there were a series of repeating codes in a promotion, that mechanic would fall outside of the Cairns patent's "unique code" requirement.

Additionally, if users enter their personal information at the Specified Website (e.g., a registration URL) and are then taken to a different URL for purposes of entering the code and playing the game, the mechanic would involve two websites, not just the Specified Website contemplated in the Cairns patent. To further distance a promotional game from the Cairns patent claims, it is often useful to make a clear distinction in the game mechanic between entering the code and announcing that a participant has won, such as some sort of intervening act coupled with an email intercept whereby a participant is informed through an after-the-fact email that he or she has won something (e.g., "check your email to see if you've won") as opposed to being instantaneously informed while he or she is still logged on to the Specified Website.

Finally, since 2002 when the Cairns patent began to be asserted, major players in the promotions industry concluded that the Cairns patent is not implicated if the determination of whether a particular participant is a winner is based on the time the participant executes his or her entry, as opposed to being based on the code that is entered.

That position has merit, and the Cairns patent has been dormant with little or no enforcement activity against those sorts of online games for years. Indeed, the Cairns patent expired for failure to pay fees on January 9, 2005, though that failure was excused and the patent was reinstated on June 21, 2005. A few weeks ago, however, the attorney for Cairns took a broader view of its scope and wrote in a letter that's been circulating through members of the Promotion Marketing Association (www.pmalink.org), "I can see you think that the ‘267 patent requires seeded codes. You believe that random selection processes are not covered. In fact, random selection processes are described in the patent and covered by its claims. In claim 22, the purchaser is informed of a status “while . . . connected at said electronic address.” Claim 22 does not include a limitation that the status is 'based on said unique code'.” When claim 22 is read in context, however, it is arguable that the claim impermissibly broadens everything else that's otherwise described in detail in the patent, which repeatedly requires a person's winning status to be "based on said unique code". In a time-based seeding mechanic where the determination of whether someone is a winner is based on the time they play rather than the identity of the code they enter, the prize wouldn't be "based on" the code within the requirements of the Cairns patent; it would be "based on" the time of play.

Of course, there may be online business method patents other than the Cairns patent that are implicated by a particular promotion. But based on the above analysis, there are several steps that can be taken to potentially avoid several of the Cairns patent claims.

Authored by:

Benjamin R. Mulcahy

212.332.3841

bmulcahy@sheppardmullin.com

Endorsement Agreements: Guild Jurisdiction And Allocation Guidelines Both Being Challenged

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 11 Feb 2008 11:59:18 -0800

Although the WGA strike is reportedly near an end, the strike has naturally made it harder to find paid acting jobs in film and television, causing a greater number of Hollywood celebrities (and their agents and other reps) to pursue endorsement opportunities and the money that follows. The money, however, doesn't just go to the celebrities and their reps. It also goes to the trustees of the applicable guild's Pension and Health Plan. The amounts being claimed by the trustees, and in some cases the threshold issue of whether the trustees are entitled to ANY amounts, are increasingly being challenged. This blog entry briefly discusses the allocation issue and the jurisdiction issue.

The Allocation Issue.

Most celebrities that advertisers want to do a deal with are members of (or will soon become members of) the Screen Actors Guild ("SAG") or the American Federation and Television and Radio Artists ("AFTRA"). When an advertiser enters into an overall endorsement agreement with a member of SAG or AFTRA, the advertiser needs to budget an amount sufficient to pay pension and health contributions to the trustees of the applicable guild's Pension and Health Plan, not just the amount it is going to pay the celebrity directly. Pension and health contributions increase the budget by more than 14% of the gross amounts payable to the celebrity for appearing in commercials or rendering other services that are subject to SAG or AFTRA's jurisdiction ("Covered Services").

When the celebrity is being paid by a guild-signatory advertiser just to appear in a television commercial or render other Covered Services and for no other purpose, the trustees argue that the entire amount paid to the celebrity is subject to pension and health contributions under the SAG/AFTRA Commercials Contract. But when an overall endorsement agreement provides that the celebrity will render Covered Services along with non-Covered Services, such as personal appearances on behalf of the advertiser or organically incorporating the endorsed product into the celebrity's daily routine and hoping for the best, the guilds take the position that it becomes necessary to identify how much of the celebrity's total compensation should be allocated to Covered Services (thereby subjecting such amounts to additional pension and health contributions) and how much should be allocated to non-Covered Services. When the celebrity is being paid millions of dollars over a multi-year deal, or when the overall deal provides for performance bonuses if certain milestones are achieved, the pension and health contributions on the full amounts being paid to the celebrity can become significant.

To guide guild-signatories on the allocation issue, the Commercials Contract provides that the celebrity's "customary salary" shall be given substantial consideration in deciding how much of the overall compensation should be allocated to Covered Services. Because of the unique circumstances of every endorsement agreement -- including the nature of the Covered and non-Covered Services -- "customary salary" varies widely. The lack of uniformity has lead to many disputes regarding proper allocations, and ultimately lead the trustee's of SAG's Pension and Health Plans to issue Multi-Service Commercial Allocation Guidelines, updated in August of 2007 (the "Guidelines").

The Guidelines essentially provide for a minimum allocation of 40% of the amount payable to a celebrity under a multi-service overall endorsement deal. Click here. The problem is that the Guidelines have arguably become the standard by which allocations under the Commercials Contract are judged. The Commercials Contract is a collective bargaining agreement that was negotiated and agreed upon between the guilds, on the one hand, and the Association of National Advertisers, Inc. and the American Association of Advertising Agencies (collectively, "ANA-AAAA"), on the other hand. The Guidelines were not negotiated or agreed upon by the ANA-AAAA. They were unilaterally established by the trustees. Thus, to the extent the Guidelines are being used as a standard, they arguably constitute an unauthorized, unilateral attempt to amend the collective bargaining agreement.

Arguing that point, among other things, the ANA-AAAA Joint Policy Committee on Broadcast Talent Relations (the “JPC”) has filed for arbitration against SAG, seeking an arbitration award: (1) declaring the Guidelines a nullity; (2) declaring that the pension and health contribution amount may not be changed by a non-party to the Contract (i.e., the trustees); and (3) ordering SAG to engage in collective bargaining with the JPC over this issue, rather than unilaterally issuing Guidelines.

The Jurisdiction Issue.

The allocation issue will play itself out, but the threshold issue many non-signatory advertisers are raising is whether they're obligated to make ANY pension and health contributions to the guilds. Many local, and even national, advertisers do not produce their own commercials and are not signatories to the Commercials Contract. Instead, they engage advertising agencies to produce commercials on their behalf, and the advertising agencies are the signatories to the Commercials Contract. When a celebrity renders Covered Services through an agency and the agency is the "employer" paying the celebrity and making the pension and health contributions to the guild under ERISA section 515 (29 U.S.C. § 1145), a non-signatory advertiser may reasonably take the position that the amounts it has agreed to pay the celebrity under an overall endorsement agreement are none of the guild's business.

In an effort to make such amounts its business, the trustees of the guild Pension and Health plans commonly assert (1) that the non-signatory advertiser and its agency constitute "joint employers" for purposes of federal labor law, such that either the non-signatory is obligated to make contributions under the Commercials Contract that it neither signed nor assumed or the agency signatory is obligated to make contributions based on the amounts set forth in the overall endorsement agreement that the agency neither signed nor assumed, and/or (2) that the plan trustees are third party beneficiaries of the overall endorsement agreement entitled to enforce whatever allocations are made therein or, barring an allocation that's favorable for the guild, an allocation that satisfies the "customary salary" language in the Commercials Contract.

On the first point, the joint employer argument hasn't found much support. Indeed, it seems that every published decision that has considered the issue has rejected the "joint employer" argument as a basis for finding a non-signatory liable under federal labor law, with various courts holding that there are only two situations where a non-signatory can be liable (if at all) for contributions under federal labor law: (a) if the non-signatory is the alter ego of the signatory; or (b) if the non-signatory and the signatory are engaged in a fraudulent scheme to deprive the guild of contributions. See, e.g., Hotel Employees & Rest. Employees Int'l Union Welfare Fund v. Genter, 50 F.3d 719, 722 (9^th Cir. 1995).

On the second point, courts in this context have been reluctant to confer third party beneficiary status on the guild trustees just because the overall agreement provides that the advertiser will reimburse or make pension and health contributions to the plans on the celebrity's behalf. See, e.g., Transpersonnel, Inc. v. Roadway Express, Inc., 422 F.3d 456, 462 (7^th Cir. 2005) (concluding that the obligation to reimburse for contributions made by another is not equivalent to the obligation to contribute in the first instance). And once the federal labor claims have been dismissed, the guilds lose their ability to pursue the draconian penalty provisions under ERISA, and if the circumstances permit, courts may take the opportunity to dismiss the third party beneficiary issue for lack of subject matter jurisdiction. See Trustees of the SAG Pension Plans et al. v. J. Walter Thompson Co., et al., CV 06-174 RGK (PLAx) (C.D. Cal, April 14, 2006)(chamber minutes granting motion to dismiss on jurisdiction and various other grounds).

The guild contribution issues will continue to be raised in every endorsement arrangement of consequence, and some attention should be given to them in structuring the endorsement relationship and in documenting the agency and other relationships that go into activating the endorsement.

Authored by:

Benjamin R. Mulcahy

212.332.3841

bmulcahy@sheppardmullin.com

Second Life Raises Novel IP Issues

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 11 Feb 2008 11:37:26 -0800

The adult entertainment industry is responsible for bringing many of the seminal cases that have shaped intellectual property law on the Internet, from Playboy Enterprises Inc. giving rise to the "initial interest confusion" test for trademark infringement, to Perfect 10 shaping the contours of search engine liability. And now a company named Eros LLC is seeking to join their ranks. Second Life is perhaps the most closely observed virtual world in the United States. Eros claims to be one of the most successful merchants doing business within Second Life, selling adult-themed virtual assets. In an Amended Complaint filed at the end of October in the United States District Court for the Middle District of Florida, Eros claims that the named defendant (and unnamed John Does) has been making and selling numerous unauthorized copies of the virtual assets to other Second Life residents in violation of Eros's exclusive rights under copyright. If this were the "real" world, the Eros lawsuit would be an uneventful case of software piracy and reverse passing off. But this isn't the "real" world; all of the activities giving rise to this lawsuit occurred in Second Life. As such, its implications are worth noting. The following article by Ben Mulcahy was originally published in The National Law Journal.

Click here to continue reading, or visit The National Law Journal.

When Copyright and Trademark Infringement Goes Online

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 11 Feb 2008 10:07:38 -0800

Can search engines and credit card companies be secondarily liable?

Two recent Ninth Circuit decisions regarding Perfect 10, Inc., a Web site that markets copyrighted images of nude models, lay bare the issues facing plaintiffs asserting third-party copyright and trademark claims, and highlight differences between how the Ninth and Second Circuits might decide these claims. The two decisions, rendered within months of one another, address liability against search engines and credit card companies.

Click here to continue reading, or visit the New York Law Journal.

User Generated Content Promotions: Are You As Safe As You Think You Are?

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 11 Feb 2008 10:02:23 -0800

Introduction

User generated content ("UGC") is the interactive marketing and promotion industry's fixation du jour. And for good reason - UGC is being monetized on the Internet in various ways, from building multi-billion dollar valuations for social networking sites to driving consumer awareness of and enthusiasm for such products as Mentos candy and the next music single from Shakira. Other than the filters that users self-impose upon themselves, little stands in the way between users and the type of UGC that they post online in the first instance. As a result, UGC is rarely cleared for legal purposes before it is posted for the whole world to see, and a lot of UGC consists of content lifted wholesale from television shows or content that otherwise infringes upon the rights of third parties.

That reality has prompted content owners to bring several high-profile lawsuits against social networking sites and other website operators whose users have posted allegedly infringing UGC. As more websites allow users to post content to discussion boards, create assets in virtual worlds, post profiles on social networking and dating sites, or participate in UGC promotions, the number of lawsuits alleging defamation type claims and intellectual property claims (e.g., copyright, trademark, publicity, trade secrets) can be expected to multiply. Recent court decisions interpreting the Communications Decency Act ("CDA") and the Digital Millennium Copyright Act ("DMCA") are helping draw the lines between when the website operators can rest easy, and when they can't.

Discussion

To "promote the continued development of the Internet and other interactive computer services and other interactive media,” Congress enacted the Communications Decency Act ("CDA") and the Digital Millennium Copyright Act ("DMCA").

The DMCA -- 17 U.S.C. § 512 -- provides website operators with statutory safe-harbors against a copyright infringement claim for content that third parties post on their websites. To qualify for the safe-harbors, the online service must adopt and reasonably implement notice and takedown procedures that allow copyright owners to send a notice of infringing content and get it taken down. In addition, the protection only extends to third party content, not to content that the website operator is responsible in whole or in part for creating or developing. In that instance, the website operator is a content provider unable to invoke the safe-harbor.

Section 230 of the CDA, 47 U.S.C. § 230(c), offers robust protection to website operators against claims arising out of UGC. Section 230 provides that "[n]o provider of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider." 47 U.S.C. § 230(c)(e)(3). The touchstone of Section 230(c) is that interactive computer services are immune from liability for content created by third parties.

Illustrating the broad scope of immunity offered by Section 230, a federal district court held earlier this year that neither notice nor delay in removing content will bar a website operator from raising a CDA immunity defense. Eckert v. Microsoft Corp., No. 06-11888, 2007 WL 496692, at *3 (E.D. Mich. 2007). The statements at issue in that case were personal attacks on an individual's moral character, which were posted to an Internet message board entitled "Joe's Christian Debate." In granting a defendant’s Motion to Dismiss, the Eastern District of Michigan held that the mere fact that a website operator had received notice that defamatory statements were on its servers was not enough to strip a defendant of its Section 230 immunity defense. The court also held that the defendant was entitled to an immunity defense under the CDA despite a delay in removing the offensive material. The court recommended that the plaintiff pursue its claims against the actual speakers of such allegedly defamatory statements—the individuals who posted to the message board. The take away: Although complaints regarding content that may violate third-party rights should be handled judiciously, this ruling indicates that the CDA will likely provide protection for a website operator against claims that the website contains defamatory content provided by a third party, even if the injured party gives the website operator notice of the defamatory content, and even if the website operator does not quickly remove the offending material. See also Zeran v. America Online, Incorporated, 129 F.3d 327 (4th Cir. 1997) (holding that Section 230 of the CDA barred a lawsuit against an online service provider (AOL) for defamatory speech posted by a third party, even though the plaintiff claimed that AOL unreasonably delayed in removing defamatory bulletin board postings and refused to post retractions of those statements, even after the plaintiff had notified AOL of the existence of such third-party statements).

Similarly, in February of this year, another federal district court held that MySpace Inc. was immune under the CDA from injuries stemming from content posted to its site. Doe v. MySpace, Inc., 474 F.Supp.2d 843 (W.D. Texas 2007). The case was brought by a mother whose daughter was victimized by an online predator she "met" on MySpace (the child obtained the account by lying to MySpace about her age). The court found that the CDA protects interactive computer services from liability, not only for content posted to the site, but also for personal injuries stemming from such content. The take away: A website provider is immune under the CDA not only for the claims regarding content posted on its website by third parties, but also for personal injuries that stem from content posted on its website by third parties.

But the CDA is not without limits. The first limit - interactive computer services are not immune for publishing materials that they are responsible, in whole or in part, for creating or developing. That principle arises from the plain language of Section 230 itself, and was illustrated in May of this year by the case Fair Housing Council v. Roommates.com, LLC, 04-56916, 04-57173, 2007 WL 1412650 (9th Cir. May 15, 2007). Roommates.com is an online service that helps individuals find roommates based on their descriptions of themselves and their roommate preferences. Users respond to questionnaires by choosing answers in a drop down menu (gender, children, age, ethnicity), the service sends email newsletters listing compatible roommates and channeling users to the profiles they are permitted to access, and users can provide “Additional Comments” through an open-ended essay prompt.

The Fair Housing Council sued, claiming that the questionnaires and compatibility newsletters violated California's fair housing laws. The issue was whether the service involved itself in the user postings to such an extent that it affected the scope of immunity under the CDA. The Ninth Circuit held that the CDA offered no immunity for claims based on publication of the questionnaires or based on publication and distribution of the profiles because the website operator had involved itself to such an extent that it should be considered the content provider, but the website operator was immune for claims based on content provided by members in the “Additional Comments” area of the service because content posted in that area was truly the users' own. Cf. Carafano v. Metrosplash Inc., 339 F.3d 1119 (9th Cir. 2003) (recognizing that online dating service was involved in content creation by asking questions, but all content deemed provided by individual users, so CDA immunity applied); but see MCW v. badbusinessbureau.com, L.L.C., No. 3:02CV2727-G, 2004 WL 833595, *10 n. 12 (N.D. Tex. Apr. 19, 2004) (holding that defendant website operator "created and developed" the information giving rise to the plaintiff's claim because it actively encouraged and instructed a consumer to gather specific detailed information for inclusion in the "Rip-Off Report" it posted on its site, and therefore the defendant was an "information content provider" with respect to the defamatory consumer complaints that it posted and was not entitled to immunity under the CDA).

The second limit of the CDA - courts are directed to construe the immunity created by the CDA in a manner that would neither “limit or expand any law pertaining to intellectual property”. Perfect 10 v. CCBill, Nos. 04-57143, 04-57207, 2007 WL 1157475 (9th Cir. May 31, 2007), quoting Section 230(e)(2) of the CDA. Although it would be reasonable to construe this language as simply clarifying that the CDA did not create a new intellectual property right or limit any intellectual property rights that were already recognized under existing law, the courts that have addressed the issue thus far have viewed this language as substantive, as opposed to merely clarifying. As a result, the CDA does not clothe service providers in immunity from claims under “any law pertaining to intellectual property.” The Ninth Circuit interpreted what this means at the end of May in the closely-followed case of Perfect 10 v. CCBill.

In that case, a content publisher (Perfect 10) brought claims against a web hosting and payment service provider (CCBill) claiming the defendant had violated copyright, trademark, and state right of publicity laws. At issue was the scope of the intellectual property exception to CDA immunity. The court held that the CDA offered immunity only against state law “intellectual property” claims (which includes publicity claims), but not federal intellectual property claims. Perfect 10 recently filed a petition for a writ of certiorari to the United States Supreme Court, but unless and until the Supreme Court decides differently, the takeaway in the Ninth Circuit is that the CDA offers immunity against state law intellectual property claims, but federal copyright and trademark infringement claims can stand (though the DMCA, discussed above, offers protection against copyright claims). But see Universal Communications Systems, Inc. v. Lycos, Inc., 478 F.3d 413 (1st Cir. 2007) (creating a circuit split by holding, after the Perfect 10 v. CCBill case had been argued and submitted to the Ninth Circuit, that a Florida state trademark law claim was not barred by the CDA because such a claim falls within the intellectual property exception to CDA immunity set forth in Section 230(e)(2)).

Conclusion

Although the CDA and DMCA offer robust protection to website operators who run UGC promotions or otherwise allow UGC to be posted on their sites, recent cases have shown there are limits to how much a website operator can rely on those protections. When the website operator sponsors a UGC promotion and picks and posts the finalists, some care should be taken. At first blush, even if the finalist submissions infringe upon the rights of a third party, the sponsor isn't using the infringing content. The entrants are. And the sponsor hasn't granted the entrants permission to use the infringing content; that's something the entrants decided to do on their own, often against the sponsor’s wishes. The sponsor is simply arranging for an online forum for the content. Under ordinary circumstances, the CDA would protect the online forum against almost all claims except copyright and trademark infringement, and the DMCA would protect against copyright claims. Unfortunately, those protections do not extend to federal trademark claims (or state trademark claims in the First Circuit), and arguably do not apply at all where the sponsor takes such an active role that the sponsor itself is deemed to be the information content provider. Those in the interactive marketing and promotions industry should recognize that there is an important line between interactive service provider and information content provider, and that line (and the contours of the corresponding protections offered under the DMCA and CDA) will continue to be drawn by the courts.

*This article originally appeared in the 2007 Promotion Marketing Association 27th Annual Law Conference Forms Guidebook, 7th Edition*

Authored by:

Benjamin R. Mulcahy

212.332.3841

bmulcahy@sheppardmullin.com

and

Kesari Ruza

212.332.3828

kruza@sheppardmullin.com