Business and Technology Law

A recent federal court decision highlights the need for businesses to maintain the confidentiality of their valuable trade secrets. While many companies rely on non-compete agreements with nondisclosure clauses, that may not be enough. Without internal protocols for maintaining the secrecy of devices, products, or methods, a company may find that there is no legal protection for that information should it end up in the hands of a competitor. A business concerned about protecting its secrets should be proactive in establishing and enforcing safeguards before the secrecy of such information becomes an issue in court.

In Tank Tech, Inc. v. Neal, 2007 WL 2137187 (E.D. Mo. 2007), Tank Tech found out that its efforts to protect its trade secrets were insufficient. Tank Tech is in the business of retrofitting/lining, inspection, and repair of above ground and underground storage tanks used in the petroleum industry. Neal was a Tank Tech foreman who had signed a non-compete agreement that included a requirement that he not share trade secrets without written consent. Neal quit his job and went to work for a competitor. When he left, Neal took numerous photographs of Tank Tech worksites, a jobsite checklist, and a list of items needed and used for all Tank Tech jobsites. Tank Tech sued Neal alleging that Neal had misappropriated its trade secrets, including information about various processes and devices used by Tank Tech at its worksites. Tank Tech sought to enforce its non-compete agreement and enjoin Neal from working for the competitor for a period of five years.

The federal district court refused to issue the requested injunction. The court noted that the employer bears the burden of proving that its purported trade secrets are, in fact, secret. In this case, Tank Tech’s claims were “fatally and inescapably doomed by its own lack of secrecy with respect to all of the designs and developments it has presented.” While Tank Tech had its employees sign non-compete agreements and barricaded its job sites, this was insufficient to meet its burden of demonstrating that its information was actually secret.

The court was very clear that a non-compete agreement does not grant protection when the information itself is not secret. The evidence indicated that all of Tank Tech’s employees were aware of the information, and Tank Tech never told its employees that the information was to be considered a trade secret. Tank Tech had actually sold one of the devices it claimed was secret to another competitor. Tank Tech also demonstrated many of the procedures it claimed were secret at trade shows. Other aspects of Tank Tech’s processes were in plain view at job sites and were not so complicated that the designs and elements could not be readily reproduced by a competitor. The court also noted that there was no evidence indicating that Tank Tech had expended a significant amount of effort or money in developing the information it claimed was secret.

The decision in Tank Tech serves as a reminder to businesses that if you want to keep important information away from your competitors, it is vital to develop plans and protocols that will keep your trade secrets secret.

Businesses providing services to consumers should be aware that if they intend to change the terms of a contract, they cannot do so merely by posting new terms on a website. The Ninth Circuit has recently ruled that posting modified contract terms on a website does not create an enforceable contract. Instead, it is necessary to give proper notice, such as mailing the new terms to the customer. Otherwise, the customer will not be bound by the modified terms. The court did not address whether the posted contract modifications could become enforceable if some means of electronic assent, such as a click-wrap agreement, were used.

Joe Douglas was a customer of America Online and received long distance telephone service from AOL. AOL sold its long distance business to Talk America, which continued to provide long distance service to AOL’s former customers. Talk America added four new provisions to the service contract, including additional service charges, a class action waiver, an arbitration clause, and a choice-of-law provision requiring application of New York law. Talk America posted the revised service contract on its website but did not otherwise notify its customers that the contract had changed. Douglas, who was unaware of the new terms, continued to use Talk America’s services for four years. When he learned of additional charges that Talk America had imposed under the new terms, Douglas filed a class action lawsuit against Talk America alleging causes of action for violations of the Federal Communications Act, breach of contract, and violations of California’s consumer protection laws. Talk America moved to compel arbitration based on the modified contract, and the district court granted the motion. Douglas petitioned the Ninth Circuit for a writ of mandamus.

The Ninth Circuit granted the petition and vacated the district court’s order compelling arbitration. The district court apparently assumed that because the new contract terms were available on Talk America’s website, Douglas was aware of them. The Ninth Circuit, however, found that even if Douglas had visited the website, “he would have had no reason to look at the contract posted there.” The court noted that parties to a contract have no obligation to check the terms on a periodic basis to determine if those terms have been changed by the other party. It is well settled that one party cannot unilaterally change the terms of a contract. To change the terms of a contract, the other party’s consent must be obtained. A revised contract is nothing more than an offer, which does not bind the parties until it is accepted. When an offeree is not aware of the new terms, it certainly cannot assent to them.

The court rejected the argument that by continuing to use Talk America’s services, Douglas had agreed to the new terms. The court made it clear that assent could only be inferred if Douglas had received proper notice of the proposed changes. While notification by mail of contract modifications might be enough, posting the new terms on a website was not sufficient to establish proper notice. The court did not address whether giving notice of the new terms themselves by e-mail or advising the customer by e-mail or regular mail to visit the website to see the new terms would constitute proper notice, though this seems sensible. It is also possible that a company could post a click-wrap form on its website, requiring the customer to indicate agreement with the modified terms before using additional services. The key appears to be making certain that each customer receives some sort of individualized notification of the new terms and some activity that is indicative of assent.

Full Opinion text: http://www.ca9.uscourts.gov/ca9/newopinions.nsf/1665312C85BA50868825731C00781F5D/$file/0675424.pdf?openelement

The United States Court of Appeals for the Second Circuit has recently clarified the standards for false advertising under the Lanham Act. The court has now indicated that an advertisement can still be false even when it does not explicitly include any false assertions if the entire advertisement, taken as a whole, conveys a false message. But the court also expanded the concept of “puffery” to include advertisements featuring inaccurate images that are so grossly exaggerated that no reasonable consumer would believe them to be true. These dueling concepts may make it more difficult for businesses to discern where the line is drawn with respect to advertising that attacks the competition.

Time Warner Cable, Inc. v. DirecTV, Inc., 2007 WL 2263932 (2d Cir. 2007), arose out of a dispute between Time Warner and DirecTV over a marketing campaign DirecTV conducted touting its HDTV picture quality in comparison to cable TV. Time Warner alleged that two television ads run by DirecTV, as well as internet advertisements, constituted false advertising under section 43(a) of the Lanham Act.

One TV advertisement featured Jessica Simpson as her Daisy Duke character from the “The Dukes of Hazzard” movie, with Simpson telling viewers “Hey, 253 straight days at the gym to get this body and you're not going to watch me on DirecTV HD? You’re just not going to get the best picture out of some fancy big screen TV without DirecTV. It’s broadcast in 1080i. I totally don't know what that means, but I want it.” Another ad featured William Shatner, as Captain Kirk from “Star Trek,” in a conversation taking place on the bridge of the Starship Enterprise:

Mr. Chekov: Should we raise our shields, Captain?

Captain Kirk: At ease, Mr. Chekov. [addressing viewers] Again with the shields. I wish he’d just relax and enjoy the amazing picture clarity of the DirecTV HD we just hooked up. With what Starfleet just ponied up for this big screen TV, settling for cable would be illogical.

Mr. Spock: [Clearing throat.]

Captain Kirk: What, I can’t use that line?

The court noted that under section 43(a), liability may be established when an ad is literally false or it is likely to mislead or confuse consumers. With respect to the Jessica Simpson ad, the ad indicates that the best quality picture, in 1080i resolution, could only be obtained from DirecTV. The court agreed with Time Warner that this was literally untrue, given that the same picture resolution could be obtained by ordering HDTV programming from a cable company.

In considering the Shatner ad, the court broke new ground. The court’s analysis focused on Shatner’s statement that for HDTV, “settling for cable would be illogical.” The court adopted what it called the “false by necessary implication” doctrine, which requires a court to evaluate whether an advertisement is literally false by considering the message conveyed by the entire advertisement and not limiting its analysis to the specific statements contained in the ad. While none of the statements in the ad, in isolation, were literally false, the court concluded that the entire Shatner ad conveyed a false message – that DirecTV’s HDTV picture was superior to cable’s HDTV picture.

The court, however, rejected Time Warner’s contention that DirecTV’s internet ads were false. The advertisements featured a split screen, with one side highly distorted that purportedly depicted a cable TV picture. The court noted that the ads, which included images of sports figures, were “not just inaccurate; they are not even remotely realistic.”
The court concluded that the internet ads were acceptable because they so distorted what a cable image would look like that no viewer could think it was an accurate depiction. In doing so, the court accepted DirecTV’s contention that the ads constituted puffery, which cannot form the basis of a claim under section 43(a).

Puffery is generally defined as subjective claims that cannot be proven true or false and includes exaggeration or overstatement expressed in broad, vague, and commendatory language. The court expanded this concept to apply to the grossly distorted images featured in the DirecTV ads. The ads depicted the cable TV picture as a series of large, colored square blocks laid out in a grid that nearly entirely obscured any image. The court concluded that this was obvious hyperbole, stating that “it is difficult to imagine that any consumer, whatever the level of sophistication, would actually be fooled by the Internet advertisements into thinking that cable’s picture quality is so poor that the image is nearly entirely obscured.”

While the court’s expansion of the concept of puffery may allow more freedom to advertisers, the court’s treatment of DirecTV’s television ads indicates that taking care not to make false statements in an ad may not be enough to avoid a charge of false advertising.

The latest twist in the patent dispute between Microsoft and Alcatel-Lucent demonstrates how difficult it can be for a business to enforce patent rights it thinks it holds. Even when a company gets a favorable verdict, true victory may be a long way off.

In February of 2007, a jury sat through 3 weeks of trial and 4 days of deliberation resulting in a unanimous verdict that Microsoft must pay $1.52 billion for infringing Alcatel’s patent rights. On August 6, however, Judge Brewster of the United States District Court for the Southern District of California ruled that the jury’s damage award could not stand because one of the two patents was not infringed. In the 43 page opinion, the court determined that they jury’s verdict was “against the clear weight of the evidence,” and that Microsoft had a valid license to the patent co-owned by the Fraunhofer Institute, a German research institute.

Alcatel-Lucent is the world’s largest maker of telecommunications equipment. This particular dispute arose over Alcatel-Lucent’s MP3 digital music format developed years go. In 1989, AT&T Corp and the Fraunhofer Institute agreed to develop the MP3 format. MP3 has since become widely used by individuals and companies worldwide. Microsoft contended that it paid $16 million for the rights to the technology by licensing it from a co-owner of the patent. The district judge disregarded the jury’s verdict and agreed with Microsoft that its license of the technology was valid. The decision will affect many other companies that have also licensed MP3 technology. For instance, companies like Apple Inc. and RealNetwork feared legal potential liability should Alcatel prevail in its claims with respect to the MP3 patent.

Although this would have been the largest patent verdict in US history, Alcatel still hoped for a higher damage award, and to obtain a precedent setting verdict. Specific to this case, Alcatel complained that the jury award only covered sales through November 2005. That motion was denied however, because Alcatel was “no longer the prevailing party.” Alcatel hopes this decision won’t stick around long and plans on appealing it. The appeal of this verdict is one to follow closely.

Alcatel is also pursuing at least six other cases concerning the use of technology developed at Bell Labs, which is now owned by Alcatel-Lucent. Stay tuned for the other disputes, including those concerning video coding on Microsoft’s Xbox game console and Window’s interface.

The Federal Circuit has held that federal patent law preempts state and local legislation intended to regulate the sale price of patented drugs. The court made it clear that the patent system is intended to create a market-based set of rewards for patent holders to promote innovation. State or local price regulation alters this system and therefore conflicts with federal law. While the decision dealt directly with drug patents, the principles established may give companies holding other patents additional protection from efforts by state or local governments to legislate how their products can be sold.

The District of Columbia City Council adopted legislation prohibiting any patented drug from being sold in the District for an excessive price. The operative section of the District’s Excessive Pricing Act states that “It shall be unlawful for any drug manufacturer or licensee thereof, excluding a point of sale retail seller, to sell or supply for sale or impose minimum resale requirements for a patented prescription drug that results in the prescription drug being sold in the District for an excessive price.” While not defining what constituted an “excessive price,” the legislation included a statement that a prima facie case of excessive pricing could be established by proving that the wholesale price of the drug was 30% higher than the comparable price in any high income country [defined as the United Kingdom, Germany, Canada, or Australia] where the product is protected by patents or other exclusive marketing rights. The law was challenged by the Pharmaceutical Research and Manufacturers of America and the Biotechnology Industry Organization, which contended that it was preempted by federal patent laws.

In Biotechnology Industry Organization v. Dist. of Columbia, 2007 WL 2189156 (Fed. Cir. 2007), the court held that the District’s law was preempted by federal patent law. The court first noted that while the District of Columbia is a federal territory, the general principles of preemption govern any conflict between District statutes and Congressional enactments. The court also indicated that there is no express provision in the federal patent statute that prohibits states from regulating the price of patented goods. In fact, the Federal Circuit has previously held that “the federal patent laws do not create any affirmative right to make, use, or sell anything.” Leatherman Tool Group, Inc. v. Cooper Indus., Inc., 131 F.3d 1011, 1015 (Fed.Cir.1997).

Nevertheless, the court concluded that a state or local law must yield to congressional enactments if it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” The patent laws are intended to create an incentive for innovation, and the court concluded that the District’s legislation effectively changes federal patent policy within its borders. “By penalizing high prices – and thus limiting the full exercise of the exclusionary power that derives from a patent – the District has chosen to re-balance the statutory framework of rewards and incentives insofar as it relates to inventive new drugs.” The court held that because Congress intended a market-based framework to reward innovation, the District’s price regulation scheme would distort this framework and therefore conflicted with federal patent law.

The holding only applied to patented drugs. Nevertheless, the decision may provide a mechanism for other businesses holding patents to challenge state and local regulation that alters the market-based reward system that, according to the Federal Circuit, underlies federal patent law.

Full Opinion
Text: http://www.fedcir.gov/opinions/06-1593.pdf

“Texans expect their personal information to remain confidential. The Office of the Attorney General will take all necessary steps to protect consumers from identity thieves.”
– Texas Attorney General Greg Abbott

Last week the Texas Attorney General filed suit against yet another company that disposed of its customers’ confidential personally identifiable information in a publicly accessible trash dumpster. Minnesota-based Lifetime Fitness has been accused of “systematically exposing its customers to identity theft.”

The documents were discovered by a Dallas resident who was looking for empty boxes in trash dumpsters behind local businesses. Instead, the Dallasite found a plastic bag full of credit card receipts with corresponding driver’s license numbers, as well as complete credit card numbers. The concerned citizen reported the incident to the Dallas Police Department, who in turn visited the store manager to investigate the problem. The Lifetime Fitness store manager assured the Dallas Police Department and the concerned citizen that he would shred its customers’ confidential information and dispose of the material properly. The next day, the concerned citizen visited the same dumpster and found that the documents were not completely shredded properly and that he still could read confidential personally identifiable information. Upset that the Lifetime Fitness store manager had not kept his word, the concerned citizen then contacted a Dallas television station where the story aired that night.

According to the lawsuit filed by the Office of the Texas Attorney General, “Lifetime Fitness violated the law by repeatedly failing to protect customer records that contain sensitive personal information, including Social Security and credit card account numbers.” Even worse, the documents included the names and birth dates of children. Lifetime Fitness operates a short term child care as a service to its members. Lifetime Fitness is accused of violating the Texas Deceptive Trade Practices Act and the 2005 Identity Theft Enforcement and Protection Act. The Attorney General alleged that Lifetime Fitness violated the Texas Deceptive Trade Practices Act because it violated its own web-based Privacy Statement. According to the lawsuit, Lifetime Fitness misrepresented to its customers that “all of their employees who have access to personal data are obliged to respect the confidentiality of consumers’ personal information.” The Texas ITEP Act mandates that businesses have a legal duty to protect and safeguard sensitive personal information. Finally, the Texas Attorney General accused Lifetime Fitness of violating Chapter 35 of the Texas Business Commerce & Commercial Code which requires business to develop document retention and disposal procedures for their clients’ personal information.

If Lifetime Fitness is liable under Chapter 35 of the Texas Business Commerce & Commercial Code, a court could impose a civil penalty of up to $500 for each record. Section 48.201 mandates a civil penalty of at least $2,000 and up to $50,000 against each Defendant. Under the DTPA, civil penalties against each Defendant could reach up to $20,000 for each violation. If the customers whose nonpublic personal information was unlawfully dumped can be identified, those customers could be awarded damages of not less than the amount the consumer originally paid Lifetime Fitness. Finally, Lifetime Fitness could be liable for the State’s reasonable attorney’s fees, investigatory costs and court costs.

Many companies who comply with a demand by a software publisher or industry association (such as the BSA or the SIIA) for an internal software audit end up facing significant settlement demands after forwarding their audit materials to the other side. One of the reasons the settlement demands often are so high is the fact that the auditing entities frequently base their demands, in part, on the “unbundled” price of software suites. Thus, where a company may expect to pay a fine based on the MSRP of, for example, one undocumented installation Microsoft Office Professional 2007 ($679), it likely will end up receiving a settlement demand based on the combined MSRPs of each of the components of that undocumented suite: Word ($229), Excel ($229), PowerPoint ($229), Outlook ($110), Publisher ($169), and Access ($229), all totaling $1195. In a typical case these difference add tens of thousands of dollars to the amount in controversy.

Another way in which publishers or auditing entities raise the amount in controversy in software audits is the attempt to assess separate “fines” for each allegedly infringing installation of a software product. Thus, a company reporting just ten undocumented installations of Office Professional 2007, with no other licensing shortfalls, may receive a settlement offer based on the combined, “unbundled” MSRPs of the component products totaling just shy of $12,000. Moreover, that is before the auditing entity applies any multipliers to that figure (yet another common tactic) or makes any assessments for their claimed legal fees, both of which factors may drive the opening settlement offer in the above example to $40,000 or more.

It is not difficult to see how owners of small to medium businesses who think that they have a handle on their financial exposure in a software audit matter often end up with truly unpleasant surprises after submitting audit materials to the BSA or SIIA that they may have believed would be negotiating on a more equitable basis.

If your business has been accused of software “piracy” and is responding to a software audit demand either from a software publisher like Autodesk or from the BSA or the SIIA, an experienced attorney can give you visibility into the process and help you avoid unpleasant surprises.

The Canadian Personal Information Protection and Electronic Documents Act (“PIPEDA”) was designed to protect personal information. The provisions of PIPEDA allow organizations to collect, use, or disclose personal information “only for purposes that a reasonable person would consider are appropriate in the circumstances.” Organizations are prohibited from collecting personal information without the data owner’s consent unless:

• the collection is clearly in the interests of the individual and consent cannot be obtained in a timely way;


• it is reasonable to expect that the collection with the knowledge or consent of the individual would compromise the availability or the accuracy of the information and the collection is reasonable for purposes related to investigating a breach of an agreement or a contravention of the laws of Canada or a province;


• the collection is solely for journalistic, artistic or literary purposes;


• the information is publicly available and is specified by the regulations; or


• the collection is made for the purpose of making a disclosure required by law.

“It is the policy of Congress that each financial institution has an affirmative and continuing obligation to respect the privacy of its customers and to protect the security and confidentiality of those customers’ nonpublic personal information.” - 15 U.S.C.A. § 6801.

The Gramm-Leach-Bliley Act (the “GLBA”), also known as the Financial Services Modernization Act of 1999, effectively repealed the Banking Act of 1933 and amended the Bank Holding Company Act of 1956. The GLBA requires financial institutions to protect themselves against unauthorized access, anticipate security risks, and safeguard a consumer’s nonpublic personally identifiable information. The GLBA also prohibits individuals and companies from obtaining consumer information using false representations.

The GLBA separates individual privacy protection into three principal categories: (1) the Financial Privacy Rule; (2) the Safeguards Rule; and (3) Pretexting Provisions. The Financial Privacy Rule and the Safeguards Rule apply to “financial institutions,” which include banks, securities firms, insurance companies and other companies providing financial products and services to consumers. The Pretexting Provisions apply to individuals and companies, who obtain or attempt to obtain personal financial information under false pretenses.

The GLBA charged the Federal Trade Commission and other government agencies that regulate financial institutions, with the duty to enforce, carry out, and implement the GLBA. However, the GLBA does not provide for a private cause of action against those financial institutions that violate the GLBA.

In January, 2007 TJX Companies, Inc. (“TJX”) announced that its computer network for T.J. Maxx, Marshalls, HomeGoods, Bob’s Stores and A.J Wright was breached and that customer information such as drivers’ license numbers, checking accounts and credit and debit card information was compromised. Shortly thereafter, a civil class action lawsuit was filed by AmeriFirst Bank in the United States District Court for the District of Massachusetts against TJX Companies, Inc. for Negligence, Breach of Contract and Negligence Per Se. Interestingly, the Plaintiffs based their claim of negligence per se upon TJX’s violation of the GLBA. Specifically, the lawsuit alleges that TJX failed to comply with 15 U.S.C.A. §§ 6801(a) - (b) and 6809. The lawsuit continued to allege under the negligence per se cause of action that Fifth Third Bank, a co-Defendant in the lawsuit, failed to comply with the GLBA requirements by “not providing for adequate safeguards in its handling of nonpublic personal information.”

As noted above, the GLBA does not afford a private cause of action. However, AmeriFirst Bank’s lawsuit will likely test the extent that GLBA can be used as the basis of a negligence per se cause of action. If AmeriFirst Bank’s negligence per se theory survives judicial scrutiny, other similar cases based on data breach may follow.

Since Google acquired YouTube for $1.65 billion in November 2006, it has been forced to defend itself and its new acquisition against claims of copyright infringement made by swarms of angry copyright owners. Such cases include Viacom, which has claimed over $1 billion in damages, and the class action matter The Football Association Premier League Limited, et al. v. YouTube, Inc., et al.. Both cases are currently pending in the U.S. District Court for the Southern District of New York. (The current class action complaint is available at the web site set up by the plaintiffs’ attorneys here.)

Central to YouTube’s and Google’s defense in these cases is their claim that, though the YouTube.com site may be hosting audio and video works copyrighted by third parties, that action does not constitute actionable copyright infringement, thanks to Section 512(c) of the Digital Millennium Copyright Act (DMCA), which provides:

A service provider shall not be liable for monetary relief, or, [with some exceptions], for injunctive or other equitable relief, for infringement of copyright by reason of the storage at the direction of a user of material that resides on a system or network controlled or operated by or for the service provider, if the service provider:

(A) (i) does not have actual knowledge that the material or an activity using the material on the system or network is infringing;

(ii) in the absence of such actual knowledge, is not aware of facts or circumstances from which infringing activity is apparent; OR

(iii) upon obtaining such knowledge or awareness, acts expeditiously to remove, or disable access to, the material;

(B) does not receive a financial benefit directly attributable to the infringing activity, in a case in which the service provider has the right and ability to control such activity; AND

(C) upon notification [as specified elsewhere in the statute] of claimed infringement…responds expeditiously to remove, or disable access to, the material that is claimed to be infringing or to be the subject of infringing activity.

Thus, YouTube and Google claim that, though they are working on technological countermeasures to filter copyrighted material, the YouTube.com site has such a large volume of users that they cannot effectively monitor all of the site’s content for infringing copies. Therefore, until given notice by copyright owners of the presence of infringing works on the site, they cannot be held liable for copyright infringement.

In response, the class action plaintiffs offer a number of arguments attempting to distinguish YouTube and Google’s actions from those of the average, theoretical, safe-harbor-eligible service provider: the defendants do not just “store” information at the direction of users, but rather provide functions to actively assist users disseminate copyrighted materials; the defendants have no policy in place to terminate the accounts of “repeat” copyright infringers; the defendants have failed in the past to timely respond to Section 512 takedown notices; the defendants “have failed to police” the site for the presence of infringing materials; and defendants have failed to employ existing, readily-available techniques to monitor the site and remove copyrighted works. (You can read the complaint here.)

It remains to be seen what success any of the parties will have with any of the above arguments. Perhaps the Supreme Court will consider the issues, at which point we hopefully will receive some much-needed clarification regarding the scope and implementation of the DMCA’s safe harbor provisions. However any of those cases may conclude, expect the pressure on Congress to modify the DMCA – pressure coming from copyright holders, on the one hand, and Internet service providers and content hosts, on the other – to only increase in coming months and years. And rightfully so. Whichever side you may fall on regarding the intent of the DMCA, in light of the fracas surrounding YouTube.com, few would dispute that it is a statute in need of extensive revision or elaboration.

Many companies are struggling with the issue of vendor management and outsourcing. While outsourcing technology and account services can be valuable in industries like banking and healthcare, the original service provider has the responsibility to ensure that the data is protected. As the Federal Financial Institutions Examination Council (“FFIEC”) indicated, “responsibility for managing the risks associated with those products or activities cannot be outsourced.”
The FFIEC suggested that organizations conduct periodic risk assessments that consider:

• Strategic goals, objectives, and business needs of the financial institution.


• Ability to evaluate and oversee outsourcing relationships.


• Importance and criticality of the services to the financial institution.


• Defined requirements for the outsourced activity.


• Necessary controls and reporting processes.


• Contractual obligations and requirements for the service provider.


• Contingency plans, including availability of alternative service providers, costs and resources required to switch service providers.


• Ongoing assessment of outsourcing arrangements to evaluate consistency with strategic objectives and service provider performance.


• Regulatory requirements and guidance for the business lines affected and technologies used.

A federal judge’s decision castigating both attorneys and their client in the Qualcomm patent litigation highlights the potential for conflict between attorneys and their clients created by the new federal e-discovery rules. The e-discovery rules place great burdens on both counsel and clients to produce information stored in electronic form. Counsel has a duty to protect the client’s interest and to make sure that discovery complies with the rules. But what if the discovery doesn’t comply? When responsive electronic information is not produced, the interests of the client and counsel may come into conflict, with counsel attempting to shield herself from the wrath of the court by claiming that she was not made aware by her client of the existence of the responsive information.

These issues arose in the ongoing Qualcomm litigation, where, according to the court, counsel tried to fend off allegations of noncompliance by claiming that the client kept counsel “in the dark” about the existence of more than 200,000 pages of critical e-mails and electronic documents that were not produced in discovery.

Qualcomm unsuccessfully sued rival chip maker Broadcom for infringing several of its patents dealing with the transmission of video data under the H.264 standard. Broadcom counterclaimed, alleging that the patents were unenforceable due to waiver and inequitable conduct. At trial, the jury returned a unanimous noninfringement verdict in favor of Broadcom. In an advisory verdict, the jury also found that one of the patents was unenforceable due to inequitable conduct and both patents were unenforceable due to waiver. In its August 6, 2007 decision, the United States District Court for the Southern District of California (Brewster, J.), rejected the inequitable conduct finding but held that both patents were unenforceable due to waiver based on Qualcomm’s conduct before the Joint Video Team (“JVT”), the standards-setting body that created the H.264 video standard.

According to the court, the waiver issue turned on information about Qualcomm’s participation with the JVT that Qualcomm had originally not disclosed. The court found that Qualcomm had concealed “over two hundred thousand pages of emails and electronic documents that were finally produced four months after trial containing direct evidence that multiple representatives of Qualcomm participated in the JVT from the beginning, and that multiple Qualcomm witnesses knew of this participation even as they testified to the contrary at deposition and trial.” The court’s decision indicates that the possibility that this information existed only came to light during Broadcom’s cross-examination of a Qualcomm witness on one of the last days of trial.

According to the judge, “after over three more months of denials, refusals, and opposition, Qualcomm reversed its position, allegedly to avoid further dispute over the matter, and produced on April 13, 2007, over 110,000 pages of emails, company correspondence, and memoranda, and on May 15, 2007, over 120,000 more pages, some of which have now been filed with the Court, none of which have been disputed by Qualcomm.” The court found that Qualcomm had actively engaged in misconduct by concealing information from the court and opposing counsel. In support of this finding, the court pointed to, inter alia, e-mails that the court claimed evidenced Qualcomm’s actions before the JVT and contradicted testimony given under oath by Qualcomm personnel.

The court specifically concluded that Qualcomm’s counsel “participated in an organized program of litigation misconduct and concealment throughout discovery, trial, and post-trial before new counsel took over lead role in the case on April 27, 2007.” The court rejected counsel’s claim that Qualcomm had kept counsel in the dark about the existence of the e-mails and other documents. The court pointed to a letter in which, according to the court, Qualcomm counsel claimed that while perhaps “there was some fleeting mention of emails in my presence,” he was “not cognizant that the emails from Ms. Raveendran’s archive had been identified.” The court noted that counsel had previously told the Court during a sidebar that no such emails existed.

The court’s decision makes it clear that the court didn’t believe counsel’s protestations of innocence. The court stated that Qualcomm counsel’s discovery responses “demonstrate that they were able to locate with alacrity company records from December 2003 forward and find four or more Qualcomm employees participating in proceedings of the JVT. Yet inexplicably, they were unable to find over 200,000 pages of relevant emails, memoranda, and other company documents, hundreds of pages of which explicitly document massive participation in JVT proceedings since at least January 2002.” The court found that “these examples of Qualcomm counsel’s indefensible discovery conduct belie counsel’s later implied protestation of having been ‘kept in the dark’ by their client.” The court also referenced its finding that Qualcomm’s counsel, while preparing a witness for her testimony, “had stripped over fifty pages of emails regarding the JVT from her email archives.”

Given the difficulties inherent in locating and producing electronic information, the issues raised in the Qualcomm litigation may be a preview of things to come. The discovery dispute and the resulting court order certainly raise questions regarding the extent of counsel’s duty to investigate the existence of responsive electronic information, the potential conflict between counsel’s duties to the court and the client’s interests, as well as the circumstances under which counsel will be held responsible for a client’s failure to make electronic information available in discovery.

Citation: Qualcomm, Inc. v. Broadcom Corporation, No. 05-CV-1958-B(BLM), 2007 WL 2296441 (S.D. Cal. August 6, 2007).

In a trademark action involving lightweight car toys, the Ninth Circuit has clarified the weight to be given to the eight Sleekcraft factors when determining the likelihood of confusion. Business concerned about trademark infringement issues should consider the ruling in Jada Toys, Inc. v. Mattel, Inc., 2007 WL 2199286 (9th Cir. 2007), where the court refused to completely rule out a claim of infringement even where the two marks were dissimilar. The court wanted to make it clear that even though some factors are “more important than others,” a determination of dissimilarity alone is insufficient to support a finding that there was no evidence of infringement.

Jada Toys filed suit against Mattel asserting claims for trademark infringement, false designation of origin, and unfair competition related to Mattel’s advertising and sale of it’s OLD SCHOOL and NEW SCHOOL line of car toys, where Jada Toys had registered the trademark of OLD SKOOL. In turn, Mattel filed counterclaims asserting that Jada’s use and sale of its HOT RIGZ mark infringed on Mattel’s HOT WHEELS mark. Both parties moved for summary judgment.

Trademark infringement claims often turn on whether the alleged infringer’s use of a mark creates a likelihood of confusion. The eight factors employed to determine the likelihood of confusion (the “Sleekcraft factors”) are (1) strength of the mark; (2) proximity of the goods; (3) similarity of the marks; (4) evidence of actual confusion; (5) marketing channels used; (6) type of goods and degree of care likely to be exercised by the purchaser; (7) defendant’s intent in selecting the mark; and (8) likelihood of expansion of the product lines. AMF Inc. v. Sleekcraft Boats, 599 F.2d 341, 348-49 (9th Cir. 1979).

The district court granted summary judgment against Mattel on its infringement counter-claim, relying on the principle that the dissimilarity of the marks alone determined that no likelihood of confusion existed. None of the other Sleekcraft factors were considered. On appeal, the Ninth Circuit reversed because dissimilarity alone does not obviate the need to inquire into evidence of other important factors. While it is true that the test for likelihood of confusion is “pliant” and that some factors are more important than others, that does not mean that dissimilarity alone is determinative of the likelihood of confusion. Evidence of “relatively important factors” must be considered as well. The decision indicates that even a dissimilar mark may be infringing if some of the other Sleekcraft factors are present.

Full Opinion Text: http://www.ca9.uscourts.gov/ca9/newopinions.nsf/F552D4DFDE50F88B8825732A007F4367/$file/0555627.pdf?openelement

The United States Court of Appeals for the Fifth Circuit has recently dealt with the intersection of the antitrust laws and cybersquatting. The dispute arose between a number of casinos operating in Tunica County, Mississippi and the owner of various domain names that could be used to advertise Tunica area businesses. The owners of the domain names claimed that the casinos refused to deal with her company in the hopes of driving down the value of the domain names so that the casinos could later acquire the names themselves. The Fifth Circuit made it clear that such a course of conduct could indeed violate the antitrust laws. The decision in Tunica Web Advertising, Inc. v. Tunica Casino Operators Association, 2007 WL 2297464 (5th Cir. 2007), is a reminder that companies acting to protect their domain names from competitors must consider the antitrust implications of their actions.

In November of 1999, Cherry Graziosi purchased the domain names “tunicamiss.com” and “tunicamississippi.com” from Network Solutions, Inc. for $140.00. Graziosi then leased the domain names to Circus Circus Mississippi, Inc. d/b/a Gold Strike Casino Resort. A user who entered either domain name was redirected to the Gold Strike Casino’s website. Graziosi later established Tunica Web Advertising, Inc. (“TWA”), which then acquired the domain name “tunica.com” from another company for approximately $20,000.00. TWA leased “tunica.com” to the Gold Strike Casino for $3000.00 per month. The Tunica County Tourism Commission (“TCTC”) sued Graziosi, alleging that she was a cybersquatter. The suit was settled, with Graziosi transferring the rights to “tunicamiss.com” and “tunicamississippi.com” to TCTC and TCTC relinquishing any claims to the domain name “tunica.com.”

In May of 2001, TWA made a proposal to the TCTC to lease “tunica.com” to all the Tunica County casinos collectively to advertise their businesses. Under the terms of the proposal, visitors to the domain would be redirected to the TCTC’s website, which already featured information about all the casinos. The proposal was referred to the Tunica Casino Operators Association (“TCOA”), a trade association formed by the Tunica casinos. At a meeting of the TCOA, none of the casinos agreed to TWA’s proposal. TWA later learned from a person present at the meeting that the casinos had entered into a “gentlemen’s agreement” not to do business with TWA. The apparent motivation for this agreement was to cause the value of the “tunica.com” domain name to decline so that it could later be acquired by the casinos themselves. Shortly thereafter, the Gold Strike terminated its existing relationship with TWA, and the casinos all turned down later proposals by TWA to advertise on a website TWA created using the “tunica.com” domain name.

TWA sued all the Tunica County casinos, the TCTC, and the TCOA in federal court alleging state and federal antitrust claims. The claims against the TCTC and TCOA were dismissed, and the district court granted summary judgment in favor of the defendants. The Fifth Circuit reversed the summary judgment order. The court concluded that there were triable issues of fact with respect to whether there was a conspiracy among the casinos. The casinos’ rejection of TWA’s initial proposal was not actionable because the proposal was made to them jointly. But the evidence of a “gentlemen’s agreement” not to do business with TWA and “tunica.com” was sufficient to survive summary judgment. In particular, the court pointed to evidence indicating that the casinos collectively hoped that if they did not do business with TWA, the value of the “tunica.com” domain name would decline and the casinos could buy it later. The court concluded that if TWA could substantiate these allegations, they would be enough to show either direct or circumstantial evidence of a concerted refusal to deal in violation of the antitrust laws.

The court also concluded that the casinos’ actions could constitute an illegal horizontal boycott that would be per se unlawful under the Sherman Act. Because the casinos are direct competitors of each other, an alleged agreement not to do business with TWA would clearly be a horizontal agreement. The court rejected the casinos’ contention that for a group boycott to be per se unlawful, at least one of the conspirators had to be a direct competitor. While direct competition with a victim is often part of a per se unlawful boycott, it is not an absolute prerequisite to a finding of per se illegality. The court concluded that to determine the applicability of the per se rule, the district court should analyze “(1) whether the casinos hold a dominant position in the relevant market; (2) whether the casinos control access to an element necessary to enable TWA to compete; and (3) whether there exist plausible arguments concerning pro-competitive effects.” The decision in Tunica Web Advertising certainly indicates that unrestrained battles over domain names can have significant antitrust consequences.

Full
Opinion Text: http://www.ca5.uscourts.gov/opinions/pub/06/06-60305-CV0.wpd.pdf

In AT&T Mobility, LLC v. National Ass’n for Stock Car Auto Racing, Inc., 2007 WL 2297832 (11th Cir. 2007), decided on August 13, the Eleventh Circuit rebuffed a claim filed by AT&T seeking an injunction compelling NASCAR to permit it to display its logo on a race car originally sponsored by Cingular. The decision cleared the way for NASCAR to prevent AT&T from substituting the AT&T logo for the current Cingular logo on Jeff Burton’s racing car. The court’s resolution of the ongoing dispute highlights the importance of careful drafting in sponsorship agreements as well as the need to consider the legal ramifications of any potential rebranding of a business.

AT&T bought Cingular and has since been in the process of rebranding the wireless provider under the AT&T name. Naturally, AT&T wanted to place the AT&T logo on Jeff Burton’s No. 31 Richard Childress Racing Chevrolet. After all, NASCAR races are broadcast in over 150 countries to approximately 75 million viewers. But NASCAR was not so sure this was a good idea.

NASCAR declined to permit AT&T to display its logo on Jeff Burton’s race car because NASCAR asserted that this action would violate its contract with Sprint Nextel. In June of 2003, Sprint Nextel Corp. reportedly paid $700 million for its exclusive sponsorship rights for the NASCAR Cup Series races over a 10 year period. The Nextel Sponsorship Agreement contained language defining competitors and specifically naming AT&T and several other telecommunications companies. Competitors of Sprint Nextel are prohibited from advertising and sponsorships in connection with NASCAR Nextel Cup Series Events. However, at the time this agreement was executed, Nextel became aware that the #31 car owned by RCR and driven by Jeff Burton, had been sponsored by Cingular Wireless since 2001. According to the court’s opinion, the Nextel Sponsorship Agreement carved out narrow exceptions to Sprint Nextel’s exclusivity as an accommodation to those pre-existing telecommunications sponsors. The agreement permitted RCR’s #31 car to continue under their pre-existing sponsorship agreement with Cingular, under certain terms and conditions. NASCAR also agreed to take all legally permissible steps to protect Sprint Nextel’s exclusivity.

In 2007, NASCAR, RCR, and Jeff Burton were parties to a 2007 Driver and Car Owner Agreement. The court noted that an addendum to the RCR Agreement, designed to effectuate the narrow exceptions for Nextel’s exclusivity, contained a grandfather clause permitting RCR to “renew it’s non complying sponsorship so long as the sponsor’s brand position is not increased on the #31 car.” This clause also provides that “in the event the sponsorship relationship with Sprint Nextel Competitor is not renewed, RCR will not be permitted to enter into a subsequent sponsorship agreement with a different Sprint Nextel Competitor.” On January 4, 2007, RCR submitted approval for a paint scheme of car #31 that maintained the Cingular logo on the hood of the car, but also introduced the AT&T logon on the rear panel. The court stated that NASCAR rejected this paint scheme as it violated the Sprint Nextel Sponsorship Agreement, prohibiting the display of the AT&T logo. On March 26, 2007, AT&T Mobility filed an amended complaint against NASCAR asserting claims for breach of the RCR Agreement, breach of implied covenant of good faith and fair dealing, and seeking a declaratory judgment from the district court that AT&T could place the name, brand, logos, and marks of its choosing on car #31, driver uniforms, helmets, and in all merchandising and licensing rights, including a change of its name, brand, logos and marks to AT&T. AT&T also requested a preliminary injunction preventing NASCAR from interfering with its right to place its name, logo, and marks on car #31. The district court found that AT&T had standing as a third party beneficiary of the RCR and NASCAR agreement, and granted AT&T’s requested injunction. The appellate court decided otherwise.

The Eleventh Circuit found that AT&T did not have standing to challenge NASCAR’s decision under the RCR Agreement to prohibit the display of AT&T Logo on the #31 car. Georgia law permits a “beneficiary of a contract made between other parties for his benefit [to] maintain an action against the promisor on the contract.” Ga. Code Ann § 9-2-20(b). Further applying Georgia law, the court stated that in order for a third party to have standing to enforce a contract, it must clearly appear from the contract that it was intended for his benefit. The court said that this simply wasn’t the case in the RCR-NASCAR agreement. The court reasoned that any benefit to Cingular was merely incidental to NASCAR’S intended purpose of preserving RCR’s choice of sponsorship, and that the fact that Cingular (now AT&T) would benefit was not enough. The court was also unable to conclude that NASCAR promised to render any performance to Cingular under the RCR Agreement, stating that “RCR was the intended beneficiary of that promise, not Cingular.” RCR retained the rights to either continue or discontinue their sponsorship with Cingular, and so the court believed that NASCAR assumed no duty to preserve or protect Cingular or its successors rights. This injunction was vacated and remanded for dismissal. The remainder of the case, including a countersuit by NASCAR has yet to be resolved.

Full Opinion Text: http://www.ca11.uscourts.gov/opinions/ops/200712299.pdf

A recent federal district court decision indicates that a business may be held liable when it chooses a trademark with the intent of causing confusion with an existing mark. The decision in Kerr Corp. v. Freeman Mfg. & Supply Co., 2007 WL 2344752 (N.D. Ohio 2007), indicates that choosing a mark with the intent to cause confusion may, by itself, be sufficient to establish an inference of confusing similarity. The decision gives companies yet another reason to be wary of potential legal consequences when selecting a trademark.

Beginning in the late 1970’s, Freeman Manufacturing & Supply Company (“Freeman”), developed original formulas for colored injection wax, optical soluble wax, and flake-form wax products. Kerr Corporation (“Kerr”), sold color-coded, flake-form injection waxes for jewelry and optics, which were manufactured by Freeman. In the mid 1980’s, the two companies entered into a development agreement under which Freeman would research and develop wax technology for projects proposed by Kerr in exchange for a monthly consulting fee. Freeman later began to compete with Kerr in the sale of colored wax products, flake-form wax products, and other items. Kerr marketed the colors at issue as “Tuffy Green,” “NYC Pink,” and “Flex-Plast,” while Freeman began marketing those colors as “Tuf Guy Green,” “Filigree Pink,” and “Flexible Blue.”

Kerr sued Freeman for trademark infringement under the Lanham Act, and Freeman moved for summary judgment on the claims. Kerr also asserted claims under state deceptive trade practices law and other common law causes of action. The court ruled that “Kerr’s attempt to protect basic color choices in the manufacture of products is without merit.” The court also rejected other attempts by Kerr to invoke the Lanham Act to protect its product designs, noting that “where the design feature is related to the utilitarian function of the product, such design cannot be protected.”

The court, however, did agree with Kerr that Freeman’s use of the “Tuf Guy Green” name could be a violation of Kerr’s trademark “Tuffy Green.” Kerr’s use of the fanciful modifier “Tuffy” rendered the name partially arbitrary. An arbitrary mark does not require a showing of secondary meaning, even when it involves colors.

In analyzing this issue, the court indicated that “if a party chooses a mark with the intent of causing confusion, that fact alone may be sufficient to justify an inference of confusing similarity.” The court noted that “to the ordinary consumer or reasonable juror, ‘Tuffy’ and ‘Tuf Guy’ are similar enough in appearance, spelling, and suggested meaning to result in some confusion as to origin, and the question is begged: Why else would Freeman have chosen such a similar color name, if not to confuse consumers into mistaking its product for Kerr’s?” Because a jury could conclude that the name was selected to cause confusion, it was inappropriate to grant summary judgment on that claim.

The court went on to reject the rest of Kerr’s claims regarding some of the names chosen by Freeman for its products. While color alone may sometimes meet the basic legal requirement for use as a trademark, color is generally merely descriptive. To invoke the Lanham Act, it is necessary to demonstrate that a color name has achieved a secondary meaning that distinguishes the company’s goods and identifies their source, without serving any other significant function. The court concluded that the product names “Super Pink,” “Aqua Green,” “Ruby Red,” and “Turquoise,” which were merely descriptive of wax color and quality, did not carry any secondary meaning that would support invocation of the Lanham Act.

The decision in Kerr serves as a reminder that intent in choosing a trademark can be significant. If it appears that a similar name was chosen with the intention of confusing consumers, that, by itself, may be sufficient to establish liability for trademark infringement.

The Securities and Exchange Commission has adopted a new rule intended to clarify its authority to bring enforcement actions against hedge fund advisers. The SEC’s action comes in the wake of a federal appeals court decision questioning attempts by the SEC to invoke its statutory authority to control hedge funds and other pooled investment vehicles. The new rule clarifies the SEC’s intent to expand its regulation of hedge funds and similar investment types and authorizes enforcement actions against investment advisers without a showing of fraudulent intent. The new rule, while not creating any private right of action, will also apply to both registered and unregistered investment advisers.

The new rule appears to be inspired by the DC Circuit’s decision in Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006). The SEC has previously brought enforcement actions under section 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80-b(1), et seq., against investment advisers that the SEC alleges have defrauded investors in hedge funds or other pooled investment vehicles. The statutory provision invoked by the SEC, 15 U.S.C. § 80-b(3), by its terms does not apply to investment advisers with 15 or fewer clients.

After the near collapse of the Long Term Capital Management fund in 1998, the SEC began exploring ways to increase the regulation of hedge funds. With the fund itself considered to be the “client,” section 80-b(3) did not apply. In 1994, the SEC issued a regulation redefining the term “client” as used in section 80-b(3). Under the rule, advisers to hedge funds must register with the Commission if the funds they advise have fifteen or more “shareholders, limited partners, members, or beneficiaries.” 17 C.F.R. § 275.203(b)(3)-2. In Goldstein, an investment advisory firm and a hedge fund petitioned the court for review of an SEC order regulating hedge funds under the Investment Advisers Act of 1940. The court held that this rule, which essentially required that investors in a hedge fund be counted as clients, was invalid as conflicting with the purposes underlying the statute.

In answer to this decision, the SEC has now adopted Rule 206(4)-8, which becomes effective on September 10, 2007. In doing so, the SEC has invoked section 206(4) of the Investment Advisers Act of 1940, which specifically makes it unlawful for investment advisers to engage in any act or practice that is fraudulent or deceptive and authorizes the SEC to adopt rules that are reasonably designed to prevent fraud by advisers. This new rule allows the SEC to avoid the client limitation on which the Goldstein decision was premised.

Under new rule 206(4)-8, it is a violation for the investment advisor of any pooled investment vehicle to:

1. make any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading to any investor or prospective investor in the pooled investment vehicle; or


2. otherwise engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.

By adopting rule 206(4)-8, the SEC has signaled its intent to increase its enforcement of the laws against hedge fund advisers and advisers to other pooled asset vehicles. The rule allows the SEC to proceed against advisers that disseminate materially false or misleading information or omit material information, with or without intent to defraud, or otherwise engage in fraudulent conduct.

Recently, a Danish pop band from the 1980s gave Sony BMG an uncomfortable reminder that business officers who neglect to review their contracts in light of changes in technology and commercial objectives may find themselves having to play a costly game of catch-up when the terms of those contracts no longer reflect the current state-of-the-art technology.

Dodo and the Dodos apparently are one of Denmark’s all-time best-selling pop bands, famous (in certain regions along the eastern shore of the Atlantic Ocean, anyway) for several hits, including their biggest, “Vågner i natten’ (‘Waking in the Night’).” More than five years ago, Sony BMG sent out notices to approximately 400 composers of songs for which the company held distribution rights, including the Dodos, informing them that their compositions were slated to begin distribution via Internet download. The Dodos were the only recipients to object to and challenge their notice, based both on their belief that their current royalty deal was inadequate to fully compensate them for Internet distribution as well as, more importantly, on the fact that their existing contract with Sony did not explicitly allow for that method of distribution. Apparently, when the Sony-Dodos deal was inked, there was no reason to mention music downloads, as they were not then a technologically viable option for distribution.

After losing the case against it at the trial level, Sony appealed the decision to the Eastern High Court of Denmark, which upheld the trial court’s decision in a ruling issued on August 9. The case is believed to be the first of its kind involving electronic distribution of copyrighted content under dated distribution agreements. While the final decision is not necessarily controlling on courts in other jurisdictions, it is likely that it will be important ammunition for other similarly situated copyright owners who want to challenge Internet distribution of their works under terms of aging contracts that they may believe fail to provide adequate compensation.

As important as the case may prove to be for the music industry and other businesses handling electronic distribution of copyrighted materials, it serves as an important lesson for any company that enters into contracts affected by technological issues. Contract drafters sometimes make the mistake of failing to write agreements that are flexible enough to adapt to changes in technology over the life of those agreements. In other situations, contract managers fail to regularly review the terms of existing contracts to determine whether technological changes and advances have occurred since execution that will impact the interpretation of those contracts. Being behind the ball with respect to either consideration can prove to be an expensive mistake.

You can read a brief, English-language description of the case at The Copenhagen Post here.

The Minnesota Plastic Card Security Act (“PCSA”) became effective August 1st, 2007. Designed to offer greater protection to consumers’ personal data, the PCSA is a controversial state law that applies broadly to businesses accepting credit cards in Minnesota.

The PCSA applies to “any person or entity conducting business in Minnesota that accepts an access device [e.g., credit or debit card] in connection with a transaction.” Size of the transacting entity is immaterial. Additionally, the law applies equally to persons and formal business entities accepting credit or debit cards.

What is prohibited activity under PSCA?

The transacting entity must not retain the consumer’s PIN, card security code, or the full contents of any track of magnetic stripe data subsequent to the authorization of the transaction. In the case of a PIN debit transaction, the information may not be kept for more than 48 hours after the transaction has been authorized.

What is the liability?

The breaching person or entity must reimburse the financial institution that issued an access devices (payment cards) affected by the breach for the costs of any reasonable actions undertaken by the financial institution resulting from the breach in order to protect its cardholder’s information or to continue to provide services to cardholders. Examples of such costs include, but are not limited to:

• cancellation or reissuance of any affected access device
• closure of any affected deposit, transaction, share draft, or other accounts, or action to stop payment or block transactions
• any refund or credit made to a cardholder to cover the cost of any unauthorized transaction relating to the breach
• notification of cardholders affected by the breach
• damages paid by the financial institution to cardholders injured by a breach

If your business accepts credit or debit cards and conducts business in Minnesota, you should carefully review the requirements of the PCSA to determine whether you are compliant.

Businesses take note: Customers are becoming aware of their data privacy rights and are willing to sue to protect their rights. Recently, a Pennsylvania woman brought a class action lawsuit against Lifetime Brands, Inc. better known to you and me as the Cadillac of sewing machines called Pfaltzgraff. Ehrheart v. Lifetimebrands, Inc. 2007 WL 2141979 (E.D.Pa. July 20, 2007). The complaint, filed in the Federal Eastern District of Pennsylvania, alleges that Pfaltzgraff violated the Fair and Accurate Transaction Act of 2003, which requires retailers to conceal or at least not disclose credit card information on purchase receipts given to customers. Specifically, Section 605(c)(g) expressly requires that “no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.” 15 U.S.C. § 1681(c)(g)(1). The Plaintiff in this case alleges that Pfaltzgraff gave her a receipt that included the consumer’s full credit card number and even printed the expiration date of the credit card.

Defendant Pfaltzgraff filed a traditional motion for summary judgment stating that Plaintiff lacked standing because the complaint failed to assert that Defendant acted willfully and that Plaintiff was not the victim of identity theft as a result of Defendant’s wrongful conduct. Defendant also argued that it was entitled to summary judgment because Plaintiff failed to allege that she suffered injury in fact. The Federal District Court correctly noted, however, that FACTA does not require that a plaintiff to suffer actual monetary damages in order to bring suit under the Act. The mere fact that a business violated the Act, such as printing more than the last five digits of her credit card or debit card number and/or printed the expiration date of her card, is sufficient to allege an injury under FACTA. Consequently, the Court held that the Plaintiff may be entitled to monetary damages.

So what is the Fair and Accurate Credit Transactions Act? FACTA is an amendment to the Fair Credit Reporting Act enacted in 2003 primarily to help the American public prevent identity theft. FACTA was also meant to protect businesses from having to comply with individual state laws. In truth, FACTA bars states from enacting stronger privacy laws than the Act allows. Most consumers are not aware of FACTA, but they are aware of the immediate benefits FACTA requires. For example, FACTA is best known by consumers for giving them the right to obtain one free credit report from each of the three major credit bureaus every 12 months. However, businesses need to be aware of FACTA because as noted in the Ehrheart decision, mere violation of the Act may give a consumer the right to file suit and seek monetary damages. Section 616, et. seq. outlines the civil liability for willful noncompliance and Section 617, et. seq., summarizes a business’ civil liability for negligent noncompliance.

Finally, business should take note that FACTA requires businesses and individuals to take suitable measures to dispose of an individual’s personal sensitive information derived from consumer reports. Therefore, businesses that use consumer reports for business purposes are subject to the FACTA Disposal Rule. Please note that the Disposal Rule applies to consumer reports and the information derived from consumer reports. The Federal Trade Commission considers consumer reports to include “information obtained from a consumer reporting company that is used, or expected to be used, in establishing a consumer’s eligibility for credit, employment, or insurance, among other purposes.” The Disposal Rule not only applies to credit reports, but also includes credit scores, reports businesses obtain regarding employment background, check writing history, insurance claims, residential or tenant history or medical history. Therefore, the Disposal Rule is broad in nature and businesses should be aware whether FACTA applies to the internal operations as well as the external business itself.

Hot on the heels of uncharacteristic agreement in Congress concerning pending legislation to enact a number of tech manufacturer- and publisher-friendly reforms to the nation’s patent laws (more on that here), Seagate Technology has secured a victory in the Federal Circuit Court of Appeals that likely will give those same industry groups even more reason to celebrate. In re Seagate Technology, LLC, --- F.3d ----, 2007 WL 2358677 (C.A. Fed. (N.Y.), August 20, 2007), originated with Seagate’s petition for writ of mandamus to reverse the N.Y. Southern District trial court’s order compelling Seagate to submit to discovery of that part of its trial counsel’s work product, as well as communications with its trial counsel, related to the work of Seagate’s opinion counsel. Seagate had independently retained and designated opinion counsel both to refute the claims of willful patent infringement by plaintiffs Convolve, Inc. and the Massachusetts Institute of Technology as well as to support Seagate’s asserted advise of counsel defense. Following oral argument and the Federal Circuit’s review of the nearly two dozen party and amicus briefs that were submitted for and against the petition, the court, sitting en banc of its own accord, not only reversed the discovery order, but also fundamentally changed the controlling standard for a finding of willful patent infringement.

The trial court relied on the Federal Circuit’s prior precedent, which held: (1) that a potential patent infringer with actual notice of another’s patent rights had an affirmative duty to exercise due care to determine whether he is infringing those rights, and that failure to exercise such due care would give rise to a claim of willful infringement (and, thus, enhanced monetary damages), and (2) that assertion of an advice of counsel defense (under which the accused infringer raises advice received from his attorneys that he was not infringing as evidence of due care taken), in most cases functioned as a waiver of both the attorney-client privilege and the work product privilege, so that the validity of the defense could be tested. In interpreting the latter holding, trial courts had adopted differing approaches regarding the scope of that waiver, with some courts holding that it extended to all communications and work product of trial counsel, other courts holding that it extended to no such communications or work product, and still others holding that it extended only to such communications or work product that contradicted or cast doubt on the opinions used to support the advice of counsel defense.

In Seagate, the Federal Circuit attempted to eliminate that confusion. Before it did so, however, it first did away with the “affirmative duty” standard, which the court stated set a threshold for willful infringement that amounted to mere negligence, thereby placing an improper burden on the numerous attorney-client relationships affected by assertion of the advice of counsel defense. In its place, the court held that for claims of willful infringement, a recklessness standard would now control, under which patentees “must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” Thus, the court shifted the burden from defendants to claimants to prove the existence, rather than the absence, of willful infringement, thereby eliminating much of the need for the advice of counsel defense in the first place. In addition, though, the court explicitly limited the scope of the privilege waiver, absent extraordinary circumstances, to communications with or work product of trial counsel.

It will be interesting in coming weeks and months to see the extent to which this very important opinion informs the congressional debate over proposed patent reforms.

You can read the Federal Circuit’s Seagate opinion here.

“Only a moron would buy YouTube.” - Mark Cuban

Internet and media darling, YouTube, Inc. (“YouTube”), has received a copyright wakeup call of sorts when United States Federal District Judge Florence-Marie Cooper of the Central District of California denied its Partial Motion for Summary Judgment against Plaintiff Robert Tur. Robert Tur is a helicopter pilot and photojournalist who does business under the name Los Angeles news Service. Tur owns the copyrights to and sells a variety of news video to television stations, cable channels, motion pictures and other media outlets. Tur is best known for his award winning coverage of the 1992 Los Angeles riots and the beating of truck driver Reginald Denny. Tur sued YouTube for copyright infringement under 17 U.S.C. § 501 and unfair competition claiming that the streaming video website posted and distributed his video coverage without his consent.

YouTube, which is owned by Google, Inc., raised the affirmative defense of Safe Harbor Protection under the Digital Millennium Copyright Act (the “DMCA”), 17 U.S.C. § 512(c), and sought a determination by the Court regarding the same. Specifically the DMCA provides four distinct safe harbors, but in order pass judicial muster, the Defendant must first meet the Conditions for Eligibility as set out in Section 512(i). Section 512(i) states:

The limitations of liability established by this section shall apply to the service provider only if the service provider:
(A) has adopted and reasonably implemented, and informs subscribers and account holders of the service provider’s system or network of, a policy that provides for the termination in appropriate circumstances of subscribers and account holders of the service provider’s system or network who are repeat infringers; and
(B) accommodates and does not interfere with standard technical issues.

A service provider shall not be liable for monetary relief, or, except as provided in subsection (j), for injunctive or other equitable relief, for infringement of copyright by reason of the storage and direction of a user of material that resides on a system or network controlled or operated by or for the service provider, if the service provider -
(A) (i) does not have actual knowledge that the material or an activity using the material on the system or network is infringing;
(ii) in the absence of such actual knowledge, is not aware of facts or circumstances from which infringing activity is apparent; or
(iii) upon obtaining such knowledge or awareness, acts expeditiously to remove, or disable access to, the material;
(B) does not receive a financial benefit directly attributable to the infringing activity, in a case in which the service provider has the right and ability to control such activity; and
(C) upon notification of claimed infringement as described in paragraph (3), responds expeditiously to remove, or disable access to, the material that is claimed to be infringing or to be the subject of infringing activity.

The Central District of California has long held that the “right and ability to control” infringing activity must be something more than just the ability of a service provider to remove or block access to materials posted on its website or stored in its system, it requires an an ability to limit or filter copyrighted material. Therefore, YouTube’s own admission that it did not have the ability to control the alleged infringing activity persuaded the Court that YouTube did not satisfy the Safe Harbor requirements under Section 512(1)(B) and therefore denied its Partial Motion for Summary Judgment as a matter of law.