Business and Technology Law

The master service agreement for MSP's defines the terms and conditions of the relationship between the MSP and its client related to all managed services and project based work. There are several critical provisions that are necessary to protect the MSP's legal rights in a master service agreement. The indemnification provision of the master service agreement is one of the most frequenty negotiated by MSP's and their clients.

The indemnification provision of a master service agreement sets forth the risks that each party will be undertaking in the event of a claim or loss arising out of or relating to the services being provided. The indeminication section of a master service agreement frequently will say "MSP agrees to defend, indemnify, and hold customer harmless for any and all claims . . . ." End-users frequenly seek broad indemnification language from the MSP defining the scope of claims covered as broadly as possible. The MSP should be careful not to assume legal risks that can be adverse to its business in the event of a claim by it customer or a third-party. We recommend that all MSP's carry professional liability insurance and that the indemnity provisions in the master service agreement are carefully tailored to the coverages provided under the insurance contract.

For example, if the MSP has Managed Service Professional Liability insurance, the indemnity provision in the MSP Master Service Agreement should be drafted so the MSP agrees to contractually provide the same indemnities that the insurance company covers. By tailoring the indemnification to the language in the professional liability insurance, the MSP is able to offer broad indemnification to its clients without undertaking risks for which insurance has not been obtained.

Many managed service providers incorporate their pricing and payment terms into their Master Services Agreements or their Service Level Agreements. While it is important to ensure that the financial arrangements are clearly delineated in writing to ensure that everyone’s expectations are clear, it is equally important to allow Managed Service Providers (“MSPs”) to adjust their prices when circumstances justify an increase.

One way to allow for flexibility is to extract the pricing information from the Master Services Agreement or Service Level Agreement and include a pricing addendum to the agreements. With a separate pricing document, an MSP can adjust the price without revising an entire MSA or SLA. Because many agreements span several years, MSPs should protect themselves by reducing the possibility that a price increase will result in a renegotiation of all the MSP agreements. For example, a managed services client who is presented with a revised agreement containing new pricing and a description of services identical to the original agreement may insist on renegotiating the scope of services provided. However, if the original agreement contains a provision allowing for periodic increases in pricing, and if the pricing document is separate from the core agreements, the MSP may be able to increase its prices, send an updated pricing addendum, and avoid renegotiating the terms of the rest of the agreement.

It is important to consider whether to allow your clients to terminate the agreement in the event of a price increase. Many MSPs want to use price increases as a way to jettison underperforming clients. To achieve that objective, these MSPs allow their customers to terminate the agreement if the MSP increases the price. Others want to have the right to increase the price by a certain percentage without the possibility of cancellation. Like other components of an agreement, the pricing provisions should be specifically tailored to meet the business objectives of each MSP. Experienced counsel can assist MSPs with using documents to reduce risks and increase client satisfaction.

An Arizona district judge recently reconsidered its decision to grant summary judgment in favor of a group of recording companies in Atlantic Recording Corporation et al. v. Howell. The record companies accused Mr. and Mrs. Howell of using music-sharing software KaZaA to share music files in violation of the Copyright Act. The Howells, proceeding pro se, argued that KaZaA shared Mr. Howell’s private music folder without his authorization or knowledge. Mr. Howell denied placing music files in KaZaA’s shared folder, which allows public access to computer files. The district court originally granted summary judgment based on the record companies’ evidence that Mr. Howell admitted he shared copyrighted materials through KaZaA. However, upon reconsideration, the court determined that Mr. Howell never admitted he disseminated the materials.

The Copyright Act provides in section 106(3) that the owner of a copyright possesses, among other rights, the exclusive right to distribute copies of the copyrighted work. Although the Copyright Act does not define “distribute,” the court followed precedent from other jurisdictions and determined that actual dissemination of either copies or phonorecords is required to demonstrate a violation of Section 106.

The court concluded that unless a copy of the work is transferred “by sale or other transfer of ownership, or by rental, lease, or lending,” there is no distribution. Judge Wake added that merely making available an unauthorized copy for public access is does not violate the copyright owner's exclusive right to distribution. Combined with other circumstantial evidence, such conduct may create liability, but it is insufficient on its own to result in a copyright violation.

Although the record companies may ultimately prevail on their copyright claims, the court’s ruling makes it difficult for plaintiffs in Arizona to prevail merely by showing that copyrighted material was available on a file-sharing network without an additional showing that the defendant affirmatively disseminated the material.

To view the court’s opinion, click here.

The U.S. District Court in New Hampshire recently issued a written opinion that undoubtedly will give some Internet service providers reason to re-think their policies with regard to some anonymous user accounts. In Doe v. Friendfinder Network, Inc., the plaintiff discovered prior to filing suit that an unnamed individual had created a number of profiles using information about the plaintiff’s identity on various social networking websites operated by the defendants and oriented toward people seeking sexual relationships with others. The plaintiff sued defendants on various state-law claims arising out of the allegedly false and unauthorized personal advertisements. In its opinion, the court addressed the defendants’ motion to dismiss, which asserted that the plaintiffs’ claims were barred by the Communications Decency Act of 1996. That Act provides, in part, that “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider,” which the Act further defines as “any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service.”

The court held that the Act did work to bar all of the plaintiff’s state-law claims, except for one: invasion of privacy, to the extent that the plaintiff’s claim was based on the right of publicity. The court specifically looked to an exception in the Act, which provides: “[n]othing in this section shall be construed to limit or expand any law pertaining to intellectual property.” The court stated that a state-law right of publicity claim arises from a “law pertaining to intellectual property,” and it further held that state-law intellectual property claims are within the scope of the Act’s exception. In so holding, the court expressly disapproved the 9th Circuit’s opinion in Perfect 10, Inc. v. CCBill, LLC, where it held last year that the exception only extended to claims based on violations of federal laws pertaining to intellectual property.

The Friendfinder case may be one to watch for at least two reasons. First, it has the potential to set up a conflict between two federal circuits, which may help lead to or hasten review by the Supreme Court. (A petition for certiorari was denied following the 9th Circuit’s ruling in the CCBill case.) Second, if the trial court’s opinion in Friendfinder prevails, then Internet service providers – especially those operating social networking sites (which now include heavy-hitters such as Facebook and Second Life) – may face the daunting prospect of having to verify the validity of information entered in users’ personal profiles in order to avoid exposure from state-law claims based on violation of a third party’s right of publicity. Such a precedent could mean significant changes to the way such sites operate today.

In a case of first impression, the California Court of Appeal has rejected an attempt to disqualify an arbitrator after the arbitrator volunteered information that was not required to be disclosed under the rules and statutes governing arbitration. In Luce, Forward, Hamilton & Scripps, LLP v. Koch, 2008 WL 1886606 (Cal. App. 2008), the Court of Appeal, Fourth Appellate District, held that the arbitrator could not be disqualified based on information he voluntarily disclosed orally during the proceedings.

Luce Forward filed a breach of contract suit against four former clients who had retained the firm to represent them in a complex securities litigation. Other than their initial retainer, the former clients did not pay Luce Forward any fees, and after filing suit, Luce Forward successfully compelled arbitration under the fee agreements, which contained an arbitration clause. Judge J. Richard Haden, a retired Superior Court judge with the Judicial Arbitration and Medication Services (“JAMS”) was selected as the arbitrator. As required by the rules, the Judge Haden sent the parties a written disclosure indicating that he had served as mediator in three cases in which Luce Forward was a party and attorneys at the firm participated as counsel in those mediations. The judge indicated that the mediations did not concern issues arising in this case and stated that he did not believe that his prior work would impact his ability to be fair. None of the parties challenged the disclosure.

After the arbitration commenced, the judge stated that after reviewing the witness list and the pleadings the weekend before the arbitration, he discovered that he had served on the board of a local trial lawyers’ association with one of the witnesses and one of the firm’s lawyers. Koch then requested that the judge disqualify himself, but the judge denied that challenge. Ultimately, the judge issued an award in favor of the law firm, and the award was confirmed by the superior court.

The Court of Appeal rejected Koch’s contention that Judge Haden was required to disqualify himself based on the disclosures made during the arbitration. According to the court, “Judge Haden was not legally required to make any disclosures pertaining to” the witness of the attorney where “there was no indication Judge Haden had a personal relationship, or close friendship” with either of them. There was no evidence of a business relationship, and serving on a volunteer board or participating in the same professional organizations did not create one. Generally, no disclosure is required when there has been slight or attenuated contact because “arbitrators cannot sever all their ties with the business world” or the legal community. The court noted that “under the defendants’ theory, an arbitrator could be disqualified during arbitration for orally revealing even the most attenuated contact with a party’s counsel or witness, such as occasionally shopping at the same grocery store.”

Because Judge Haden was not required to make the disclosures, he also was not obligated to disqualify himself after voluntarily disclosing the relationships. The judge complied with the disclosure obligations under the statutes, and an arbitrator may only be disqualified “when the disclosure is legally required.”

Full Opinion Text: http://www.courtinfo.ca.gov/opinions/documents/D049788.PDF

Companies concerned about trademark issues should take note of a recent federal court verdict in an infringement case. On May 7, 2008, a jury in Oregon awarded Adidas $305 million in damages for trademark infringement by Payless Shoes, which is owned by Kansas-based Collective Brands. The jury’s award is believed to be the largest trademark verdict ever.

Adidas alleged that Payless purchased multiple versions of Adidas’s three-stripe sneakers, sent them to China where copies were manufactured with either two or four stripes, then sold approximately 30 million pairs of the copies in its stores. Sales for the shoes totaled approximately $400 million. The verdict form in the case included pictures of more than 200 shoe styles that Adidas alleged infringed its trademarks. The jury awarded $30 million in actual damages for trademark and trade dress infringement, trademark and trade dress dilution, and unfair and deceptive trade practices. The jury also found that Payless acted willfully and ordered it to disgorge its profits from the infringing shoes, approximately $137 million. The jury also awarded approximately $137 million in punitive damages. Based on the willfulness finding, the court may also award attorney’s fees and has the option of trebling the actual damages award. Payless has indicated that it will ask the court to set the verdict aside and pursue an appeal if necessary.

The verdict form itself may be accessed here: http://s.wsj.net/public/resources/documents/WSJ_JuryVerdict_No861.pdf

It’s never a good idea for a business or individual accused of copyright infringement to simply ignore the allegations, hoping they’ll go away. This is particularly true when the copyright holder files a lawsuit seeking damages, as the defendant in Broadcast Music, Inc. v. Spring Mount Area Bavarian Resort, LTD., 2008 WL 2152060 (E.D. Pa. 2008), recently learned. Indeed, a failure to respond to allegations of copyright infringement may result in a finding that the infringement was willful, leading to a larger damages award.

BMI is a collection of music recording companies, licensing companies, and affiliated artists that own the copyrights to various popular songs. Spring Mount operates Crazy Carol’s Sports Bar located in Schwenksville, Pennsylvania. BMI alleged that Crazy Carol’s performs, or causes to be performed, songs whose copyrights are owned by BMI. Between August 2005 and May 2007, BMI sent numerous “cease and desist” letters to Spring Mount demanding that Spring Mount honor BMI’s copyrights and also placed nearly fifty telephone calls to Crazy Carol’s in an attempt to address the issue. BMI finally sent a representative to Crazy Carol’s to determine whether it was continuing to violate the copyrights. During a four-hour period, the representative documented extensive violations of the copyrights. Had Crazy Carol’s entered into a typical licensing agreement with BMI, licensing fees owed from August 2005 would have totaled approximately $10,000.00.

Crazy Carol’s neither responded nor ceased the activity, and BMI filed suit against Spring Mount and an individual officer of Spring Mount for copyright infringement. BMI sought statutory damages, injunctive relief, costs, and attorney’s fees. Defendants did not answer the complaint or otherwise appear, and the clerk entered a default against Defendants. BMI then moved for default judgment, seeking statutory damages in the amount of $2,000.00 for each of eight violations, an injunction prohibiting further copyright infringement by Defendants, and more than $5,000.00 in attorney’s fees and costs.

Because Defendants had not responded, the court accepted BMI’s allegations as true and found that Defendants were liable for eight instances of copyright infringement. The court also found that “Defendants’ default and their decision not to defend against these allegations are grounds for concluding that their actions were willful.” The court noted that this finding was also supported by evidence indicating that Defendants continued to infringe on the copyrights months after being notified. According to the court, “Plaintiffs provided Defendants with clear and unambiguous notice that they were infringing Plaintiff’s copyrights, and Defendants nonetheless persisted in their unlicensed use.” Defendants’ “intransigence prior to the initiation of this litigation,” coupled with their refusal to appear, “indicate a conscious decision to ignore this problem in the hope that it will simply go away.”

That decision proved costly to Defendants. Under the Copyright Act, a court may increase the award of statutory damages up to $150,000.00 when it finds the infringement was committed willfully. The court concluded that the requested award of $2000.00 per infringement, although higher than the minimum statutory damages amount of $750.00, was just and appropriate under the circumstances. Similarly, the court found that it was appropriate to award attorney’s fees and costs and also allow interest on the damages, costs, and fees “as a further incentive to Defendants to promptly and finally resolve this matter.”

The result in Broadcast Music is a clear reminder that it is rarely a good idea to ignore a copyright infringement allegation because the refusal to respond to an allegation may be used as evidence that infringement was willful, resulting in a higher damages award.

The Texas Supreme Court has indicated that a party’s conduct in removing a case from state to federal court and later attempting to transfer the case to a multidistrict litigation panel did not constitute a waiver of its right to arbitration. With its decision in In re Citigroup Global Markets, Inc., 2008 WL 2069835 (Tex. 2008), the court continues to explore the question of what constitutes a waiver of arbitration rights. The decision in Citigroup appears to allow a party additional leeway to pursue some litigation options before endangering its arbitration rights.

Robert and Natalie Nickell had investment accounts with Citigroup and signed agreements to arbitrate any disputes concerning or arising from the accounts. The Nickells claim they lost more than $4 million invested in WorldCom, Inc. based on research reports prepared by a Citigroup analyst. The Nickells filed suit against Citigroup in Texas state court. Citigroup immediately removed the case to federal court on the ground that it related to WorldCom’s bankruptcy proceedings. While the Nickells moved to remand, Citigroup asked to have the case transferred to a federal multidistrict litigation court in New York that was managing similar WorldCom-related suits against Citigroup. Citigroup also asked to stay proceedings in the federal court pending a resolution of the issue by the multidistrict panel. In seeking a stay, Citigroup specifically reserved its defense that the Nickells were obligated to arbitrate their claims. In the multidistrict panel, the Nickells again moved to remand and Citigroup did not oppose the motion.

After this seven-month process, the case returned to Texas state court. Citigroup filed an answer and moved to compel arbitration. The trial court denied the motion, and the court of appeals denied Citigroup’s petition for writ of mandamus on the ground that Citigroup had expressly waived arbitration by making statements in its motions to transfer suggesting that it was doing so for the purpose of litigating, not arbitrating.

The Supreme Court disagreed. According to the court, “Citigroup never opposed arbitration, nor did it expressly waive its arbitration rights.” The statements in its moving papers “were required by statute to justify transfer to the MDL court.” The court disagreed that Citigroup’s attempts to transfer the case to the multidistrict panel were necessarily inconsistent with seeking arbitration, noting that “arbitration is possible for consolidated actions as well as individual ones.” Therefore, Citigroup’s actions in seeking to transfer the case did not indicate that it had abandoned arbitration. The court also concluded that Citigroup had not impliedly waived arbitration. While Citigroup’s actions in requesting transfer to the multidistrict panel were factors to be considered in a totality-of-the-circumstances analysis the court had announced in Perry Homes v. Cull, 2008 WL 1922978 (Tex. 2008), those actions were not determinative. Citigroup’s litigation conduct “was limited to jurisdictional transfers, not the merits.” Citigroup had not engaged in any discovery or filed any motions related to the merits before it sought arbitration. Because Citigroup had not waived its right to arbitration, the court granted its petition for writ of mandamus and directed the trial court to compel arbitration.

Full opinion text: http://www.supreme.courts.state.tx.us/historical/2008/may/060886.pdf

By an overwhelming majority of 410-11, the U.S. House recently passed the Prioritizing Resources and Organization for Intellectual Property Act of 2007 (PRO-IP Act). The legislation has been controversial among many legal experts and consumer groups for proposing significant and, according to many, unnecessary changes to existing copyright law. The PRO-IP Act proposes new governmental powers and bureaucracies – including a “copyright czar” – with the stated goal of combating copyright infringement. The PRO-IP Act also provides for criminal and civil forfeiture of property used to commit copyright infringement, and it would allow courts in copyright litigation to order the seizure of property containing records documenting acts of infringement.

However, perhaps the most controversial aspect of the legislation was removed prior to passage. As introduced in the House, the PRO-IP Act would have provided as follows:

A copyright owner is entitled to recover statutory damages for each copyrighted work sued upon that is found to be infringed. The court may make either one or multiple awards of statutory damages with respect to infringement of a compilation, or of works that were lawfully included in a compilation, or a derivative work and any preexisting works upon which it is based. In making a decision on the awarding of such damages, the court may consider any facts it finds relevant relating to the infringed works and the infringing conduct, including whether the infringed works are distinct works having independent economic value.

That change would have comprised a substantial departure from the analysis used to calculate statutory damages for copyright infringement. Currently (and, ostensibly, for the foreseeable future), the Copyright Act expressly provides that compilations are to be considered “one work” for the purpose of calculating statutory damages for their infringement.

Industry groups had been strongly in favor of the legislation as it was originally drafted, because its passage would have increased the amount of copyright damages awards. The fact that the statutory damages language was stripped from the bill prior to passage is compelling evidence (to the extent that any was needed) that it was never the intent of Congress to allow for heightened damages awards for unauthorized copying of compilations, even when the constituent parts of those compilations are independently copyrighted and capable of “leading their own copyright life” apart from any suite in which they are included.

The judge in MySpace Inc. v. Wallace, et al, CV-07-1929-ABC-AGR (C.D. Cal. May 12, 2008) entered a default judgment against Sanford Wallace and Walter Rines for violations of the CAN-SPAM Act and ordered the defendants to pay MySpace over $230 million in statutory damages. The CAN-SPAM Act regulates the transmission of commercial email and various activities related to commercial email, such as prohibiting the use of false, misleading, or deceptive information, prohibiting the use of automated “bots” to create multiple email accounts, and requiring certain contact information in commercial electronic mail messages.

MySpace, a social networking site, allows individuals to create unique user profiles containing personal and private information and to share their profile information with others. The networking site allows users to send each other messages within the MySpace network and to post comments on each other’s profile pages.

MySpace alleged that Wallace and Rines created over 11,000 false profiles by circumventing MySpace’s security measures designed to prevent such actions. MySpace further asserted that Wallace and Rines sent nearly 400,000 commercial messages and posted 890,000 comments from 320,000 profiles defendants “hijacked” by luring users to a website designed to look like a MySpace page. The phony MySpace page then solicited MySpace users’ account credentials which defendants Wallace and Rines used to hijack user profiles and send messages.

The court found that Wallace and Rines violated the CAN-SPAM Act and assessed damages as follows:

- $157,390,200 against Wallace and $233,777,500 against Rines, for violations of the CAN-SPAM Act ($157,390,200 in joint and several liability and an additional $63,387,300 against Rines).

- Statutory damages in the amount of $1,500,000 against both defendants for violations of California’s anti-phishing statute, Cal. Bus. & Prof. Code § 22948.2.

- Attorneys’ fees in the amount of $4,709,140.00, as calculated pursuant to the formula prescribed by Local Rule 55-3 ($5,600 plus 2% of the amount over $100,000); plus costs of suit.

The Supreme Court of New Jersey recently became one of the first courts in the nation to determine that Internet users have a Constitutional right to privacy under Article I of the New Jersey Constitution. Because of the ruling, a grand jury warrant will be required before law enforcement officials can access personal information about the Internet users.

The Court considered the issue after Shirley Reid was charged with second-degree theft for allegedly hacking into her employer’s computer system from her home computer. When her employer asked Comcast for the identity of the person who accessed the employer’s computer network, Comcast refused to do so without a subpoena. Investigators then obtained a municipal court subpoena and served it on Comcast. Comcast complied with the subpoena and identified Reid as the person who accessed the employer’s network.

A New Jersey superior court suppressed the evidence based on the fact that investigators did not obtain a grand jury subpoena. A state appellate court agreed, and the Cape May County Prosecutor’s Office appealed to the New Jersey Supreme Court, which unanimously upheld the decision. The Prosecutor’s Office has indicated that it intends to continue pursuing the case by requesting the appropriate grand jury subpoena.

Although the United States Supreme Court concluded that there is no federal Constitutional right to privacy on the Internet, the New Jersey law will take precedent in New Jersey cases involving Internet privacy.