Business and Technology Law

Businesses involved in Texas litigation should review a recent decision by the Texas Supreme Court where the court refused to enforce an oral settlement agreement. In Knapp Medical Center v. De La Garza, 2007 WL 3230144 (Tex. 2007), the court made it clear that an oral agreement settling a case cannot be enforced in a Texas court. The court concluded that Texas Rule of Civil Procedure 11, which requires that agreements related to pending litigation must be in writing, bars the enforcement of an oral agreement.

Dr. Javier De La Garza, M.D. filed suit against Knapp Medical Center, a hospital in Weslaco, Texas for defamation, business disparagement, interference with business relations, and civil conspiracy. During the trial, De La Garza’s attorney offered to settle the case based on the hospital’s insurance policy limits of $1,000,000. When he made the settlement offer, De La Garza’s attorney understood that the hospital would also contribute an additional $200,000 to the settlement. After he made the policy-limits demand, the attorney learned that in fact, the hospital did not plan to contribute the additional $200,000 to the settlement. Instead, the insurer had agreed to settle for the $1,000,000 policy limits. In open court prior to the closing arguments, De La Garza’s attorney explained to the judge that he had made the offer with the understanding that the hospital would contribute the additional $200,000. The hospital’s attorney, while acknowledging that an additional contribution had been discussed, stated that the insurer had agreed to settle the case for policy limits. Despite the disagreement, De La Garza agreed on the record to settle the underlying claims for $1,000,000, while purporting to reserve his right to collect an additional $200,000 from the hospital in another lawsuit. The judge accepted the agreement and discharged the jury. De La Garza then signed a Release that acknowledged the settlement funds as complete satisfaction of the claims asserted in the litigation.

De La Garza later filed suit against the hospital for the disputed $200,000, alleging claims for fraud and breach of an oral agreement that pre-dated the agreement that was read into the record and accepted by the court. The trial court entered judgment in favor of De La Garza and awarded attorney’s fees. The hospital appealed, contending that Rule 11 barred De La Garza’s claims. The court of appeals ignored the Rule 11 argument, concluding instead that parol testimony of one of the attorneys was sufficient to support the existence and breach of the settlement agreement.

Without hearing oral argument, the Supreme Court granted review and reversed the court of appeals’ decision, holding that the purported oral settlement agreement was unenforceable under Rule 11. Rule 11 states that “unless otherwise provided in these rules, no agreement between attorneys or parties touching any suit pending will be enforced unless it be in writing, signed and filed with the papers as part of the record, or unless it be made in open court and entered of record.” The court noted that Rule 11 “has long been a part of Texas jurisprudence” and represented “the wisdom of eschewing the verbal agreements of counsel in favor of written ones . . ..” The rule is intended to promote finalizing settlements “by objective manifestation so that the agreements do not themselves become sources of controversy.” In sum, for a settlement to be enforceable in Texas, it must comply with Rule 11.

In this case, the only agreement that complied with Rule 11 was the agreement read into the record to settle the case for $1,000,000. There was no written agreement to settle for any other amount. The hospital’s alleged agreement to contribute an additional $200,000 was neither in writing nor made in open court and entered into the record. Accordingly, it was not enforceable. The decision in Knapp serves as a reminder to Texas practitioners and litigants that compliance with Rule 11 is a necessary prerequisite to seeking enforcement of any agreement related to a pending lawsuit.

Full Opinion Text: http://www.supreme.courts.state.tx.us/historical/2007/nov/060575.pdf

Without a contractual provision to the contrary, ambiguous terms in a software license will be construed against the software publisher. Provided that there are no other business factors that would make litigation unwise, an ambiguous license agreement is the situation most likely to lead to litigation.

Construction against the Drafter
When dealing with ambiguities, it is important to determine whether the license in question contains a provision indicating that ambiguities will not be construed against the drafter. If there is no such provision, the general rule in most jurisdictions is that ambiguities in software license agreements will be construed against the drafter. If the contract is silent on construction against the drafter, it is important review any choice of law provision and determine if the specific jurisdiction follows the general rule.

Parol Evidence
The Parol Evidence Rule, which is applicable in most states, provides that when a court determines that a contractual provision is ambiguous, the parties may introduce extrinsic evidence to prove that their interpretations of the contract are consistent with the parties’ intent when entering into the contract.

In a software dispute, parol evidence will include testimony from both the software company and the end user regarding pre-contract discussions and negotiations as well as pre-contract writings including e-mails, faxes, purchase orders and draft license agreements. All of this evidence would be precluded in a contract dispute where there was no ambiguity in the contract. In such instances the court would be confined to what is called the “four corners” of the software license agreement when conducting its interpretation.

Software licenses often discuss technical matters, and are therefore frequently ambiguous. These ambiguities require the parties to develop and present extrinsic evidence in court. Typically, the evidence is developed through pre-trial discovery mechanisms such as requests for production of documents and depositions, which can be very expensive.

Triable Issues of Fact
Contract disputes, including those involving software licenses, are frequently resolved before the trial begins through motions for summary judgment. The interpretation of a non-ambiguous contract is decided as a matter of law by the court. In addition, because the parol evidence rule precludes the introduction of evidence in contravention of the plain meaning of an unambiguous contract, litigation costs are reduced because the extrinsic evidence regarding the parties’ pre-contract intent is not considered by the court.

On October 5, Paul Holman and Lucy Rivello, both recent purchasers of Apple iPhones, filed suit against Apple and AT&T in the Northern District Court of California, alleging unfair and fraudulent business practices and anti-trust violations under California law, anti-trust violations under U.S. federal law, and trespass against personal property. The plaintiffs also are seeking to represent a nationwide class of similarly situated iPhone owners, dating from June 29, 2007, to the future date of judgment.

The plaintiffs’ allegations arise from their experience with the mobile network “locking” practices employed by Apple and AT&T with respect to the iPhone. Ordinarily, mobile network carriers can provide electronic codes to “unlock” a particular phone from their own network, thereby allowing the phone to access another carrier’s network that uses a compatible technical standard. While a carrier may charge an early termination fee before it allows a current customer to switch to another network, if that customer is under no pending contractual obligations with the carrier, the carrier usually will comply with the customer’s request and unlock the phone.

In the case of the iPhone, however, even though customers in most cases paid full retail price for their iPhones and may be under no contractual obligation to remain with AT&T, AT&T has refused to allow iPhone owners to unlock their phones and migrate to another compatible network. Moreover, according to the complaint, customers who have attempted to unlock their phones without assistance from AT&T have had their phones re-locked or even permanently disabled following a “mandatory” update to their devices’ operating systems from Apple. The complaint further alleges that when the affected customers have requested that Apple reactivate their disabled iPhones, Apple has refused, has told them that they are in violation of applicable iPhone user agreements, and has stated that the only recourse is to purchase a new iPhone.

As this case develops, it will be interesting to see how well the iPhone user agreement fares under scrutiny, as it is the document around which all of the claims and defenses in the case apparently will revolve. A negative result for Apple and AT&T could have important consequences for user agreements in other contexts.

You can download a copy of the complaint here

Nevada recently passed a law requiring businesses to encrypt customers’ personal information during transmission of an electronic transaction. While other data protection laws require the shredding of records or the implementation of reasonable security measures to protect sensitive information, Nevada’s mandates use of encryption technology.

What is prohibited activity?

The Nevada law is brief: “A business in this State shall not transfer any personal information of a customer through an electronic transmission other than a facsimile to a person outside of the secure system of the business unless the business uses encryption to ensure the security of electronic transmission.” Under NRS 205.4742, encryption means the use of any protective or disruptive measure including, but not limited to cryptography, enciphering, encoding or a computer contaminant, in order to:

1. Prevent, impede, delay or disrupt access to any data, information, image, program, signal or sound;
2. Cause or make any data, information, image, program, signal or sound unintelligible or unusable; or
3. Prevent, impede, delay or disrupt the normal operation or use of any component, device, equipment, system or network.

To what information does the statute apply?

Personal information, defined in NRS 603A.040, means a person’s first name or first initial and last name combined with any one or more of the following, when the name and data elements are not encrypted:



1. Social security number.


2. Driver’s license number or identification card number.


3. Account number, credit card number or debit card number, in combination with any required security code, access code or password that would permit access to the person’s financial account.



The statute specifically excludes from the definition of personal information “the last four digits of a social security number or publicly available information that is lawfully made available to the general public.”

Statutory Ambiguity

Though it defines “encryption” and “personal information,” the statute does not define the terms “secure system,” “business,” or “customer.” It is also unclear whether the statute only applies to Nevada residents?

If your business does or plans to do business in Nevada, you should carefully review the provisions of Nevada’s new data encryption law to determine whether you are transmitting personal information in a sufficiently encrypted form.

Owners of successful commercial websites increasingly find themselves faced with the challenge of protecting their Internet content against the misappropriation and copying of that content by others, including, most importantly, by competitors. Compounding this problem is the fact that those who would misappropriate and copy that website content may be able to avoid liability for copyright infringement by copying only the “look and feel” of another site, rather than the original words or images.

A recent case from the Southern District of California highlights the difficulty of proceeding with a copyright-based claim of website content infringement. In Allen v. Ghoulish Gallery, the plaintiff sued the defendant for infringing his asserted copyright in the website he had created for his business, which produced and sold antique photographs that were altered using “lenticular technology” to create a “spooky” alternative image, depending on the angle at which the photograph is viewed. These “changing portraits” are popular in the haunt industry and as novelties. The plaintiff’s and defendant’s businesses were in direct and, apparently, heated competition with one another.

In reviewing the plaintiff’s copyright infringement claims, the court noted that the individual elements displayed on the plaintiff’s site – fonts, navigation buttons, image frames, etc. – generally were not original or copyrightable. However, the court also noted that where “specific components of a compilation are not original or would not be protected by themselves, a party nonetheless may have protection in the selection, arrangement, and presentation of such components.” To obtain copyright protection under such a theory, a claimant must show: “(1) the collection and assembly of pre-existing material, facts or data; (2) the selection, coordination, or arrangement of those materials; and (3) the creation, by virtue of the particular selection, coordination, or arrangement, of an original work of authorship.” In this case, the court found that these elements were present in plaintiff’s web site and that the site was entitled to protection.

However, regardless of whether the content was entitled to protection, the court found that no infringement occurred. Where the work in question does not consist of original constituent elements, the inquiry involves a determination of whether there is a “substantial similarity” between the original work and the allegedly infringing work. That inquiry consists of an intrinsic analysis, based on “an ordinary person’s subjective impressions of the similarities between two works,” or an extrinsic analysis, which “focuses on specific criteria that can be listed and analyzed.” Here, the court used an extrinsic analysis and found that no substantial similarity existed between the two sites. The court noted that the two sites used the same fonts for the same purposes, the same configuration of tabbed links to different site sections, and “framed” examples of portraits, with either black oval “matting” or no “matting,” and substantially similar configurations of sample portraits. However, because the two sites used different colors within a predominantly black theme (which both also shared), different “framing” for the portraits, and different textual elements, the court ruled against the plaintiff’s copyright claim, and proceeded to take up the other claims of unfair competition and false claims that also had been raised.

Thus, if Allen is any indication, while copyright may be an option for businesses facing infringement of their website content by competitors, it could prove to be unavailing in many cases.

The Allen opinion is reported at 2007 WL 4207923.

In May of 2007 Scott & Scott, LLP commissioned the Ponemon Institute to conduct a national survey titled the Business Impact of Data Breach. Out of the 720 companies that responded, 85% reported that they had experienced a data breach and 81% indicated that they suffered a privacy notice triggering event. I was surprised by the high percentage of companies that reported a data breach and alarmed by the number of companies that had notice triggering events. Implementing programs that minimize notice triggering events is easier to accomplish than many companies may realize.

Contrary to popular believe, the single largest cause of data breaches is missing portable devices such as laptops representing 42% in our survey, while criminal acts such as hacking represented only 6%. Accordingly, I have been advising my clients to implement encryption technologies on laptops and PDA’s for several years.



Most of the 38 states that currently have data privacy breach notification statutes specifically define the personal information that is subject to the statute by using the term “unencrypted” in the statute. The statutes that do not specifically exempt encrypted data in the definition of personal information have an exception for incidence where there is no reasonable probability of harm. Accordingly, if you have a laptop or PDA that is goes missing and that laptop is equipped with encryption technology you will likely have no data privacy notice obligation under state laws. Amazingly, even after suffering a data breach 46% of the companies in our survey failed to implement encryption technology.

While implementing encryption in our firm, I discovered that encryption can be expensive and disruptive to business operations. In our firm, we have experienced costs exceeding $100.00 for licensing, labor costs related to installation, and performance and reliability impacts on laptops post installation. For these reasons, I was intrigued to learn that that the major hardware manufacturers Dell, Lenovo, and HP were working with the hard-drive manufacturers such as Seagate to develop hard-drives equipped with encryption technology “out of the box.” I am now advising my clients to change their standard laptop build to include these hard-drives. The quote for my new laptop from Dell includes the following description:

In May of 2007, Sports Imaging Photography of Utah sent a cease-and-desist letter to Utah School & Sports Imaging requesting it to stop using the “sports imaging” name. Both businesses offer photography services for schools and sports leagues. Utah School refused Sports Imaging's request, claiming that the terms “imaging,” “sports imaging” and “sports imaging photography” are generic and cannot be trademarked. Sports Imaging filed a trademark infringement suit in the United States District Court, District of Utah, against Utah School seeking a preliminary injunction prohibiting further use of its trademark.

The court denied Sports Imaging's request for an injunction because: 1) it did not register its trademark and was therefore not entitled to the presumption of validity that accompanies a registered mark; and 2) terms like sports, photography, and imaging, which describe a relevant class of goods are not entitled to trademark protection.

The court also reasoned that even if the marks were descriptive, rather than generic, Sports Imaging would not be able to demonstrate that the marks had acquired a secondary meaning, which is a necessary element for protection. Although, Sports Imaging had been using its marks for 27 years, it never sought to register the words in its logo, and its request to register its logo was unsuccessful.

The court could not conclude that Sports Imaging, at this preliminary stage in the matter, had a likelihood of success on the merits. If you are seeking to protect a trademark and are considering filing a request for an injunction, it is important to evaluate the likelihood of success on the merits.

Business and attorneys with litigation in California should review a strongly worded decision by the California Court of Appeal, Fourth Appellate District, regarding the use of the “notice of unavailability” by attorneys. The practice arose in the wake of the decision in Tenderloin Housing Clinic, Inc. v. Sparks (1992) 8 Cal.App.4th 299 [10 Cal.Rptr.2d 371]. Attorneys often make use of the notice procedure in situations, such as a planned vacation, to preemptively ward off surprise attacks from opposing counsel. In Carl v. Superior Court (2007), the Court of Appeal expressed its frustration with what it views as the abuse of this practice. According to the court, “to the extent this practice attempts to put control of the court’s calendar in the hands of counsel – as opposed to the judiciary – it is an impermissible infringement of the court’s inherent powers.

The issue arose after Carl filed a statement of disqualification against the assigned trial judge on April 4, 2007. Carl then filed a notice of unavailability under Tenderloin, indicating that he would be unavailable to respond to anything until May 11, 2007. Under Code of Civil Procedure section 170.3, a judge must act on a statement of disqualification within ten days or be deemed to have consented to the disqualification. On April 13, 2007, during the time period Carl claimed he would be “unavailable,” the trial judge struck the statement of disqualification because it disclosed no legal grounds for disqualification and was untimely. Carl did not file his petition for writ of mandate with respect to the disqualification order until June 11, 2007, outside the ten-day window provided in Code of Civil Procedure section 170.3

The Court of Appeal rejected Carl’s contention that his petition was timely because the trial judge acted improperly by issuing a ruling during the time period specified in his notice of unavailability. The court rejected the idea that under Tenderloin, a notice of unavailability has the effect of prohibiting opposing counsel or the court from taking any action during that period which adversely affects the unavailable party. As the court described it, “simply put, petitioner essentially argues that by filing a ‘notice of unavailability’ he unilaterally called a litigation time-out.” The court strongly disagreed, noting that the petitioner had no power to stop a superior court from issuing orders and could not use a notice of unavailability to extend statutorily imposed deadlines or time periods.

The court went on to harshly attack the practice of filing notices of unavailability, explaining that the practice of filing notices in the superior court “now permeates the appellate system. We receive them on a regular basis and at all times during the appeal process: they come before the record is filed, they come while the matter is being briefed, and they have even come after a matter has been submitted for decision.”

But no more. The court questioned the very premise for filing notices of unavailability, stating that Tenderloin merely holds that that a trial court may impose sanctions against an attorney who conducts litigation in bad faith and solely for the purpose of harassment.” According to the court, “nothing in Tenderloin, however, expressly condones the practice that has grown up around its name. It has simply been made up.”

The Carl court made it very clear that there was no authority for filing notices of unavailability in the appellate courts, and Carl also calls into question the use of the practice in the trial courts. In the wake of Carl, the “notice of availability” may itself become unavailable.

Full Opinion Text: http://www.courtinfo.ca.gov/opinions/documents/G038766.PDF

When a business applies for a trademark, registration is usually denied when a competing trademark has previously been registered. A company applying for a trademark, when faced with that situation, may then file a petition to cancel the conflicting registration. The application will then be suspending pending a resolution of the petition to cancel. But if the conflicting mark is still in the registration process, the applicable procedures will change and petition to cancel is not an option.

Once an application for registration of a trademark has been submitted to the US Patent and Trademark Office, it is sent to an examining attorney with the USPTO. The examining attorney, in reviewing the application, will initially search the USPTO’s automated records to determining whether there are any conflicting applications or registrations. “Conflicting” applications or registrations are marks filed by a different applicant that may ultimately require a refusal of registration under §2(d) of the Trademark Act, 15 U.S.C. §1052(d), due to a likelihood of confusion. Registration will generally be refused when the conflicting mark has previously been registered.

An examining attorney, however, cannot refuse registration under §2(d) of the Trademark Act based on an earlier-filed application for a conflicting mark until the mark registers. Therefore, when the examining attorney has examined the later-filed application and determined that it is in condition to be approved for publication or issue or in condition for a final refusal, but for the conflict between the marks, the examining attorney will suspend action on the later-filed application until the earlier-filed application matures into a registration or is abandoned. 37 C.F.R. §2.83(c); In re Direct Access Communications (M.C.G.) Inc., 30 USPQ2d 1393 (Comm’r Pats. 1993). Because the conflicting mark has not been “registered” yet, a petition to cancel the registration cannot be filed.

This situation may often occur in situations when the conflicting application is made under 15 U.S.C. § 1051(b) based on an intention to use a trademark in commerce (as opposed to applications based on prior use of the mark in commerce). If such an application is not opposed and meets the requirements, it will not be immediately registered. Instead, a Notice of Allowance will be issued with the proviso that the mark will not be registered until it has been used in commerce and the applicant files a Statement of Use. The Statement of Use must be filed within six months or the application will be deemed abandoned. The applicant can request up to five six-month extensions of this time period, and the later-filed application may remain suspended during that time period.

The potential delay serves as a reminder that a party seeking trademark protection should not delay in filing an application even when it appears that no one else has been using the mark in commerce. An “intent to use” application by another party can delay the process of securing trademark protection even when your business can clearly demonstrate prior use.

Owners of successful commercial websites increasingly find themselves faced with the challenge of protecting their Internet content against the misappropriation and copying of that content by others, including, most importantly, by competitors. Compounding this problem is the fact that those who would misappropriate and copy that website content may be able to avoid liability for copyright infringement by copying only the “look and feel” of another site, rather than the original words or images.

A recent case from the Southern District of California highlights the difficulty of proceeding with a copyright-based claim of website content infringement. In Allen v. Ghoulish Gallery, the plaintiff sued the defendant for infringing his asserted copyright in the website he had created for his business, which produced and sold antique photographs that were altered using “lenticular technology” to create a “spooky” alternative image, depending on the angle at which the photograph is viewed. These “changing portraits” are popular in the haunt industry and as novelties. The plaintiff’s and defendant’s businesses were in direct and, apparently, heated competition with one another.

In reviewing the plaintiff’s copyright infringement claims, the court noted that the individual elements displayed on the plaintiff’s site – fonts, navigation buttons, image frames, etc. – generally were not original or copyrightable. However, the court also noted that where “specific components of a compilation are not original or would not be protected by themselves, a party nonetheless may have protection in the selection, arrangement, and presentation of such components.” To obtain copyright protection under such a theory, a claimant must show: “(1) the collection and assembly of pre-existing material, facts or data; (2) the selection, coordination, or arrangement of those materials; and (3) the creation, by virtue of the particular selection, coordination, or arrangement, of an original work of authorship.” In this case, the court found that these elements were present in plaintiff’s web site and that the site was entitled to protection.

However, regardless of whether the content was entitled to protection, the court found that no infringement occurred. Where the work in question does not consist of original constituent elements, the inquiry involves a determination of whether there is a “substantial similarity” between the original work and the allegedly infringing work. That inquiry consists of an intrinsic analysis, based on “an ordinary person’s subjective impressions of the similarities between two works,” or an extrinsic analysis, which “focuses on specific criteria that can be listed and analyzed.” Here, the court used an extrinsic analysis and found that no substantial similarity existed between the two sites. The court noted that the two sites used the same fonts for the same purposes, the same configuration of tabbed links to different site sections, and “framed” examples of portraits, with either black oval “matting” or no “matting,” and substantially similar configurations of sample portraits. However, because the two sites used different colors within a predominantly black theme (which both also shared), different “framing” for the portraits, and different textual elements, the court ruled against the plaintiff’s copyright claim, and proceeded to take up the other claims of unfair competition and false claims that also had been raised.

Thus, if Allen is any indication, while copyright may be an option for businesses facing infringement of their website content by competitors, it could prove to be unavailing in many cases.

The Allen opinion is reported at 2007 WL 4207923.