Phillips Nizer LLP Articles

Article - Cyber Protection and Liability - Protecting Your Company Assets and Avoiding Risk in Cyber Space

TECHVISORS SEMINAR
JULY 16, 1996

The Internet Explosion

With the veritable "explosion" in the amount of information exchanged and business transacted over the Internet, Cyberspace has become "the place to be" for businesses looking to enhance their image, to provide information on their goods and services and even to sell their products and services directly to other Internet-savvy businesses and consumers throughout the world.

As businesses establish their own home pages on the World Wide Web, offering information about their companies, advertising their products and services and offering bulletin board services for exchanging and posting information, and Internet access companies and service providers continue to plumb the farthest reaches of what has been described as a vast, largely untapped marketplace, they must be mindful of the potential liabilities that they may confront and how to avoid some of the legal pitfalls that may confront them.

Potential Liability Exposures

Increasingly, companies operating Web sites on the Internet may find themselves exposed to claims and potential liability for such things as:

• Defamation, invasion of privacy, misappropriation of the right of publicity

• Copyright and trademark infringement

• False advertising

and more.

Copyright Infringement

Service providers have already found themselves to be targets for claims of copyright infringement and, more than ever before, companies operating web sites may also find themselves exposed to this and other potential forms of publisher liability.

• For example, using "electronic bulletin boards" and Internet news groups, users can disseminate information, often with anonymity, and exchange communications with other users, that may include the copying and distribution of copyrighted materials.

• Can service providers be held liable for infringement of copyrighted material by a subscriber?

• In the Religious Technology Center case, the owners of the rights to the writings of the founder of the Church of Scientology sued an Internet access provider and the operator of a bulletin board service claiming that both parties contributed to the infringement of their copyrighted materials by continuing to provide access to a subscriber who posted the writings on the Internet in messages that were highly critical of the church and its doctrines.

• Although the court found no direct liability for infringement on the part of the service provider and the BBS operator, the court found that there was a triable issue of fact as to whether the service provider knew or should have known that the user had infringed the organization's copyrights and whether, by failing to terminate the subscriber's access after receiving notice of the infringement, and by continuing to permit the user's infringing materials to remain on their system, "materially contributed" to the infringing activity and thereby became liable for contributory infringement (United States Religious Technology Center v. Netcom On-Line Comm. Serv., 907 F. Supp. 1361 (N.D. Cal. 1995)).

• In another case, a BBS operator was held directly liable for permitting subscribers to download computerized images that included unauthorized copyrighted photographs from Playboy Magazine and thereby infringing on Playboy's display rights to the photographs, even though the BBS operator did not make copies of the photographs itself (Playboy Enter. Inc. v. Frena, 839 F. Supp. 1552 (M.D. Fla. 1993)).

• Another BBS operator was sued for contributory infringement based on the uploading and downloading by its subscribers of a video game manufacturer's games on a bulletin board linked to the Internet; a preliminary injunction was granted based on a showing that the operator knew of and encouraged the subscribers activities and provided directions and facilities for the unauthorized copying (Sega Enter. Inc. v. Maphia, 857 F. Supp. 679 (N.D. Cal. 1994

• Recently the operator of Web site based in Italy was found by a federal court in New York to have violated a 1981 injunction against using the name "PLAYMEN" in connection with the sale or offering for sale or distribution of in the United States of English language publications and related products for displaying pictorial images on the Internet, using the "PLAYMEN" name, logo and the Internet address playmen.it, even though the court recognized that the "availability of pictorial images on the Internet could not have been contemplated at the time of the 1981 injunction

• The court concluded that the images were distributed in the United States even though the defendant only posted the pictures on a server in Italy and that, like the BBS operator in the earlier case involving the unauthorized publication of copyrighted photographs from Playboy, the site constituted a distribution because, in the court's view, the Web site operator and publisher in the Playmen case "actively invited" subscribers to view and download the images; the court also found even though the Web site consisted almost exclusively of pictures, with no articles or stories, it was nonetheless a "magazine" within the meaning of the 1981 injunction because new pictures were uploaded monthly, making it, in the court's view, a "periodical" (Playboy Enter. v. Chuckleberry Publ. Inc., 79 Civ. 3525 (S.D.N.Y., June 19, 1996)).

Trademark Infringement: Internet Domain Names -- A Rose By Any Other Name?

What's a Domain Name and How Do You Get One? An Internet domain name is a unique "address," typically a business name, or the name of a university or a government agency, often in a shortened form, the so-called secondary level domain, followed by a so-called primary level domain -- .com in the case of a commercial entity, .edu for an educational institution, .org for an organization, .net for a network and .gov for a government entity -- as in microsoft.com or whitehouse.gov. Domain names are applied for and registered with Network Solutions Inc., also known as NSI, under an agreement with the National Science Foundation. Of approximately 400,000 domain names registered with NSI, challenges have made as to approximately 400 after notification and after harm was alleged by trademark holders.

Domain-Name Conflicts. There may be legitimate conflicts between two businesses using similar names, elements of a name, abbreviated names or acronyms. In many of these cases, two or more businesses, often in totally separate market sectors, may have equally strong marks in similar names or in common elements of a name.

Domain-Name "Hijacking". Some of the more hard-fought domain name disputes have arisen from one of two scenarios:

(a) one company reserving as a domain name the trademark of a competitor;

(b) an individual reserving the well-recognized name or trademark of an unrelated company as a domain name hoping to exact a price from the rightful owner of a name when it decides to do business of the Internet by forcing it to purchase rights to the domain name.

Both of the fact patterns have a single theme in common: in each case, the only purpose of the domain name hijacker is to harass or extract profit from trademark owner.

A few examples:

In Stanley Kaplan v. Princeton Review, Princeton Review reserved the domain name kaplan.com and sponsored a web page under that name to harass its largest competitor in the test preparation business, Stanley Kaplan. When Kaplan demanded that Princeton Review cease the using the Kaplan name, Princeton offered to give up the name for a case of beer. Not amused, Kaplan sued for trademark infringement and the claim was later resolved by binding arbitration. Princeton Review's president was said to have remarked after the litigation was concluded: "Kaplan has no sense of humor, no vision and no beer."

A footnote: Although the arbitrator's order did not address, the case also raised the question of the use of another business' name in an e-mail address -- it was alleged that Princeton Review also invited prospective customers to submit "horror stories" about its rival to the e-mail addresskaplan.sucks@review.com.

In another case, a journalist, Joshua Quittner, wrote an article about how many owners of famous marks had taken no steps to register their trademark as a trademark. To make the point, he registered the domain name mcdonalds.com and began using the e-mail address ronald@mcdonalds.com. When McDonalds objected, Quittner agreed to give up the name in exchange for a $3,500 contribution to a designated charity.

The first judicial determination that the use of a domain infringed a federally-registered trademark was made by a federal court in California in April, which issued a preliminary injunction prohibiting a domain name holder from using juris.com "for the advertising, operation or maintenance of any Internet site or bulletin board service." Comp Examiner Agency, the owner of the domain name, operates a web site that provides, among other things, computer software for the legal and other professions; Juris. Inc., the owner of the federally-registered trademark "Juris" is in the business of marketing management software and related services in connection with law office automation; after Juris notified NSI of its objection to the use of the domain name, Juris claimed that NSI, contrary to its domain name policy, permitted Comp Examiner to continue to use the name and to register a second domain name, juriscom.com; the domain name user filed an action seeking a declaratory judgment of the parties' rights to the domain name and cancellation of Juris' trademark and alleging unfair competition; Juris counterclaimed for trademark infringement, federal trademark dilution, false designation of origin and unfair competetion; the domain name user contended that

Protecting Your Rights.

• Arrange for a trademark and domain search to be conducted. If another company is already using the same or a closely similar name as a trademark, your reserving or using the name as a domain name could result in potential liability to the trademark owner. If you already use the proposed domain name as a trademark, you still must check to be sure the name is not reserved or already being used as a domain name by another party.

• If you do not already have a trademark in the proposed domain name, register the name as a trademark. Reserving a domain name does not, in itself, create any trademark rights in the name; it is not an insurance policy against getting sue by another party that may claim that it has superior rights to the name. And don't delay -- the trademark registration process will take more than a year to complete

• Reserve the name as a domain name. Merely using a name in commerce or even applying for registration of the mark and obtaining a trademark does not prevent someone from reserving the name and starting to use it. Again, don't delay -- NSI assigns domain names on a first come, first served basis.

• If a conflicting domain name is already reserved or in use and your company is the registered owner of the trademark in the United States or in a foreign country, you can file an objection with NSI. If the prior user of the domain name fails produce evidence of registration of the mark and to post a bond sufficient to cover damages claimed, the name will be "suspended" until the dispute is resolved by court order, arbitration or settlement; if the domain-name user complies with these requirements, your company will have to try to its rights in court or reach a settlement with the prior user.

• A trademark owner can bring an action under Section 32 and 43(a) of the Lanham Act where the other party is the mark in commerce and that use is likely to cause confusion or deception.

• A likelihood of confusion can be shown where the other party is using the domain name in connection with the same type of goods or services; owners of famous marks that are highly distinctive or unique -- as in the mcdonalds.com example, may argue that the unauthorized use of the mark as a domain name is inherently a use in commerce that is likely to cause confusion; the trade mark owner is likely to have a particularly strong case if it can show that the domain name user is using the name in bad faith -- for example, to derive a benefit from the trademark owner's reputation or solely to harass or a disparage competitor -- as in the kaplan.com example.

• The Federal Trademark Dilution Act that became law earlier this year provides an additional weapon in the arsenal of owners of "famous" trademarks against unauthorized acts that tend to diminish the distinctivenes of a famous mark or damage its reputation by using it in a disparaging way.

• State antidilution laws may also provide a remedy.

A Footnote: NSI's Dispute Resolution Policy Under Attack.

At least four domain name owners have sued NSI over its domain dispute resolution policy:

• A complaint filed against NSI by Roadrunner Computer Systems was dismissed as moot on June 21 because the trademark holder, Time Warner, declined to assert that Roadrunner's use of roadrunner.com was causing it harm; domain name holder claimed that it was a third party beneficiary of NSI's contract with the National Science Foundation and that NSI breached its contractual obligations to domain holders not to arbitrarily interfere with the use of their domain names, and not to amend retroactively its domain name dispute policy (Roadrunner Computer Systems, Inc. v. Network Solutions, Inc., No. 96-413-A (E.D. Va., filed April 16, 1996)).

• A complaint was filed against NSI by Data Concepts; no wrongdoing was alleged against NSI; domain name holder seeks cancellation of federally-registered trademark alleging that it infringes on the domain name holder's common law rights to the mark; NSI stipulated to an order allowing continued use of the domain name unless otherwise ordered by a court (Data Concepts, Inc. v. Digital Consulting, Inc., No. 96-CV-429 (M.D. Tenn., filed May 8, 1996)).

• A complaint was filed against NSI by Giacolone; no wrongdoing was alleged against NSI; issues to be litigated: trademark misuse and intentional interference with advantageous buisness relations; NSI stipulated to an order allowing continued use of the domain name unless otherwise ordered by a court (Giacalone v. Network Solutions, Inc., No. C-96-20434 (N.D. Cal., filed May 30, 1996)).

• Most recently, a company called Clue Computing has sued to prevent suspension of its domain name, clue.com, in response to a challenge by Hasbro based on its registered trademark for the board game "Clue"; Clue Computing claimed NSI breached its contract with Clue Computing that resulted from the registration of its domain name and interfered with its contractual relations with third parties; the trademark owner has alleged trademark infringement; NSI filed an interpleader complaint against Clue Computing and Hasbro to enjoin further proceedings alleging the dispute is between the domain name holder and the trademark owner and that NSI is an impartial stakeholder; a court-ordered injunction was entered allowing continued use of the domain name (Clue Computing Inc. v. Network Solutions Inc., No. 96 CV 694 (Colo Dist. Ct.)).

• To date, NSI's domain name policy has not been successfully challenged on the merits

A Postscript: The States Begin to Regulate Trademark Use on the Internet

• In Georgia, it is now a misdemeanor to "knowingly ... transmit any data through a computer network ... if such data uses any individual name, trade name, [or] registered trademark ... to falsely identify the person [or] organization ... transmitting such data."

• A bill pending in the California legislature, if enacted, will prohibit the unauthorized use of another's registered trade name or trademark as a domain name, user identification or electronic mail address on any computer bulletin board, information network or information system such as the Internet or the World Wide Web which accepts and relays electronic mail to computers" in California "if the user fails to release [the] domain name upon notice of unauthorized use and demand from the owner of the registered trade name" or trademark, subjecting the offending domain-name users to an injunction and damages of at least $1000 plus attorneys fees.

Defamation: Is a Service Provider a "Publisher"?

Courts have reached what may seem to be conflicting answers to the question of whether service providers can be held liable as a "publisher" and held to the same standard in republishing the defamatory statement of another as if they uttered the statement originally or are more like bookstores and libraries which are held a different standard.

• In Cubby v. Compuserve, Inc., 776 F. Supp. 135 (S.D.N.Y. 1991), a federal court in New York held that in providing its subscribers with access to news articles assembled by a third party provider, Compuserve was a mere "distributor" of information and was only liable for defamatory statements in the news publications if it "knew or had reason to know" of the defamatory statements.

• Five years later, in Stratton Oakmont v. Prodigy Servs. Co., 1991 WL 323710 (N.Y. Sup.), a state court also in New York found that Prodigy could be liable for postings by subscribers on an on-line financial bulletin board because it had exercised a degree of control over its bulletin boards by issuing content guidelines that board leaders were expected to enforce and by using an automatic software screening program to screen out certain offensive material.

• A provision in section of the Communications Decency Act that -- thus far -- has not been challenged in court, may have addressed the Stratton Oakmont issue as far subjecting service providers to liability as "publishers" but, like a content provider, a company that implements its own home page enjoys no such immunity.

False Advertising: The Long Arm of the Law? Late last month, the FTC obtained a court order permitting it -- quite literally -- to "take over" the home pages on the World Wide Web of two companies that it charged with using misrepresentations to sell display rack distributorships for computer software and violating the franchise disclosure rule. Now, not content with merely freezing the companies' assets and appointing a receiver to managing the firms, pending a hearing on the FTC's challenge, the FTC has arranged that consumers who access the companies' home page address are automatically linked to information about the FTC's case -- which could really put a crimp on their business (FTC v. Chappie, No. 96-6671-Civ (S.D. Fla.)).

Is Big Brother Surfing the Web? In the past year, the FTC prosecuted a dozen cases involving false advertising in Cyberspace. Three involved false claims regarding the earnings potential of home business programs, several more concerned phony claims on the Internet for "guaranteed credit repair." Eleven resulted in consent judgments; the remaining case is pending. The FTC has obtained broad cease and decist provisions in these and, in at least one recent case involving false claims regarding self-improvement products like the "Super Nutrient program" and "Fat Burner Pills," the defendant paid a penalty of $195,000.

Other agencies, both state and federal, are also getting into the act. Last year, the SEC sued to enjoin an illegal offer and sale of securities over America Online and the Internet without a prospectus, and the Department of Transportation fined Virgin Atlantic Airways for failing to disclose teh full price of flights on its home page on the World Wide Web. The FDA is also looking into online advertsiements for pharmaceuticals. The National Association of Attorneys General (NAAG) has formed a 38-state task force to develop enforcement guidelines for combatting illegal activity on-line.

In short, businesses should expect to see increasing regulation of advertising content on the Internet and be guided accordingly.