• Credit Card Companies Not Liable For Copyright Infringers' Acts
• Info Tech Law: Computer Contracts — The Four Corners
• Ninth Circuit Requires That Companies Give Customers Notice Beyond A Website Posting Before Changing A Service Contract

Credit Card Companies Not Liable for Copyright Infringers' Acts
By Mitchell Zimmerman

In the 1940s, Jehovah’s Witnesses, tenaciously litigious in defense of free expression, generated a half-dozen Supreme Court decisions that came to define First Amendment rights in the Twentieth Century.  With comparable persistence, erotic photo publisher Perfect 10 has fought a series of battles that may delineate the scope of secondary liability in the online kingdom.  In July 2007, Perfect 10 lost the third Ninth Circuit case this year in which it sought to make others responsible for direct copyright infringement and other wrongs committed by pornographic internet services.  Perfect 10 v. Visa Int’l, 2007 U.S. App. Lexis 15824 (July 3, 2007).

In the Visa case, a divided panel held that processing payments for infringing website services was too remote from direct copyright infringement for Visa and the other credit card companies (collectively “Visa”) to be held contributorily or vicariously liable.

The first of the Perfect 10 trilogy, Perfect 10 v. CCBill, 481 F.3d 751 (9th Cir. 2007), was brought against companies that provide web hosting and online credit card processing services to internet enterprises that directly infringed Perfect 10’s copyrights.  The Ninth Circuit held that Perfect 10’s state law claims were preempted by Section 230 of the Communications Decency Act ("CDA"), determined that Perfect 10’s Digital Millennium Copyright Act ("DMCA") infringement notices were insufficient to require the defendants to take down allegedly infringing matter, and remanded for further consideration the defendants’ eligibility to qualify for the DMCA’s safe harbors.  In May, another Ninth Circuit panel rejected most of the theories whereby Perfect 10 sought to hold Google liable for providing visual search engine services that facilitated locating and accessing infringing sites.  Perfect 10 v. Amazon, 487 F.3d 701 (9th Cir. 2007).

In Perfect 10 v. Visa, the district court dismissed for failure to state a claim, holding inter alia that Visa was not contributorily or vicariously liable under copyright law.  The same panel of the Ninth Circuit that heard the CCBill case affirmed the dismissal.  For contributory infringement, the defendant must: (1) have knowledge of an underlying direct infringement, and (2) materially contribute to it.  Reviewing de novo, Circuit Judges Smith and Reinhardt held that Visa’s activities did not materially contribute to infringement because facilitating payment bears “no direct connection to [the] infringement.”  The majority emphasized that the underlying infringements — reproduction, alteration, display and distribution of Perfect 10’s images — could occur regardless of whether Visa provided payment services.

In Perfect 10 v. Amazon, the Ninth Circuit held that Google’s search engine materially contributed to infringement because it assisted in locating and accessing infringing images by providing links to them.  Similarly, the music file-sharing services in the Napster and Grokster were held contributorily liable because they allowed users to locate and obtain infringing material.  Distinguishing these cases, the Visa majority argued that Visa’s services do not cause the infringing activities, and that making it easier to profit from infringement is not essential to the conduct of infringement.

Amazon instructed that “Google could be held contributorily liable if it had knowledge that infringing Perfect 10 images were available using its search engine, could take simple measures to prevent further damage to Perfect 10’s copyrighted works, and failed to take such steps.”  Dissenting Judge Kozinski argued that Visa’s acts were equivalent to those in Amazon.  The majority, however, held that payment systems and search engines are not equivalent because creating a financial incentive for infringement involves “an additional step in the causal chain” beyond facilitating connection with an infringing site.

The dissent responded that the credit card payment system is, as a practical matter, essential, and that in any event the test for “materially contributing” is merely whether the activity “substantially assists” infringement.  Kozinksi also maintained that there was no additional step between Visa’s activity and the direct infringement because payment is integral to one of the exclusive rights of copyright holders, “plaintiff’s right of distribution ‘by sale.’ 17 U.S.C. section 106(3).”  “It’s not possible to distribute by sale without receiving compensation,” Kozinski argued, “so payment is in fact part of the infringement process.”

The majority noted that under the dissent’s reasoning, a utility company that provides electricity to the direct infringer would be held to have materially contributed to the infringement.  After all, if a power company is given notice of an alleged infringement, it can take “simple measures to prevent further damage to . . . copyrighted works,” namely, turning off the electricity.

A labyrinth of troubling issues concerning the “knowledge” element of contributory infringement would have to be threaded through if a broader class of enterprises is deemed to be materially contributing to infringing activity.  For example, what if the alleged direct infringer has not created a counterfeit of the original work, but a work alleged to be “substantially similar?”  What if fair use or protectability under copyright law poses significant issues?

By Perfect 10’s logic, when a copyright holder puts a supporting player on notice for a claim of infringement, that entity must terminate services to the alleged direct infringer or investigate and make a judgment about whether the claim appears meritorious.  But what kind of investigation is required? And by what standard should a credit card company or utility be deemed to “know” that the accused is an infringer? Is it enough to defeat such knowledge that the alleged direct infringer makes a nonfrivolous argument of fair use?

Existing case law does not offer clear answers to these questions.  But Congress, by providing safe harbors under the DMCA and immunity against various state law claims under the Communications Decency Act, powerfully signaled its policy determination that copyright holders must focus their policing efforts on the infringers themselves.

For vicarious liability, the defendant must have (1) the right and ability to supervise and control an underlying direct infringement from which it (2) obtains a direct financial benefit.  Perfect 10 maintained that Visa had the right and ability to control infringement because the payment system allows the infringements to operate on a larger scale than they otherwise would.  But, the majority held, that was insufficient.  The dissent responded that Visa did have the right and ability to control infringement because its agreement with the charged websites reserved the right to require them to behave lawfully as a condition for obtaining Visa’s payment services.

The last judicial word has not been uttered on Perfect 10 v. Visa.  Leaning heavily on Judge Kozinski’s vigorous dissent, Perfect 10 (supported by the usual suspects, the Motion Picture Association of America and the Recording Industry Association of America) has petitioned for rehearing and rehearing en banc.  On October 9, 2007, the Ninth Circuit denied both petitions.  The Supreme Court denied cert to Perfect 10’s appeal.

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The opinions in the articles contained in this publication are those of the authors only, and not necessarily those of the editors, the Intellectual Property Subcommittee, the Cyberspace Law Committee, or the American Bar Association.

Computer contracts are different from most other types of contracts.  Often they include a mix of tangible and intangible property, technologies, concepts, and terms not found in many other contracts.  A recent U.S. district court case points out some of the difficulties that can arise in a computer contract.

In Rockland Trust Co. v. Computer Assoc.  Int’l, Inc. U.S. Dist. LEXIS 69380 (August 31, 2007 D. Mass) the court had to interpret a software licensing agreement and addenda executed in late 1990 and early 1991 between a large bank (Rockland Trust Company, the plaintiff) and a large computer vendor (Computer Associates International, Inc., the defendant).

To put this in perspective, this computer contract dispute involved a business-critical software acquisition.  The contracts were executed in 1991, with an addendum in 1993, and a complaint filed in July 1995, initiating a lawsuit that was finally resolved by the court in August 2007 - some 12 years later.  A review of the court’s docket indicates a number of reasons for the delay, including numerous requests for extensions filed by both parties in the dispute, discovery issues, and multiple motions filed.  In the Rockland case, the defendant, CAI, asserted $1,160,586.81 in attorney fees and costs an amount slightly in excess of the unpaid invoices in CAI’s counterclaim!

The original computer contract provided, among other things, a limited warranty and an integration clause.  One key focus of the dispute was the interpretation of this integration clause.  The contract “integration clause” says in essence that what the parties intend is set forth within the “four corners” of the contract document and if not stated therein, it’s not part of the deal.

Several disputes arose, including one over the adequacy of the functional integration (not to be confused with the legal integration clause) of the various modules in the banking software delivered by CAI to Rockland.  In reviewing the facts, the court noted that the agreement did not define the term “integration” (in the functional sense).  The plaintiff, Rockland, argued that the brochures presented by CAI described the system’s functional integration, and were part of the contract.  The court disagreed, pointing instead to the integration clause of the contract and noting that the brochures were not made a part of the contract.  The court stated:

In short, Rockland Trust received the Integrated Commercial Loans software it evaluated and purchased, and there is no evidence that Computer Associates failed to use its best efforts to correct problems, after having been informed that the product failed to meet the published specification. There is also no persuasive evidence that Computer Associates' upgrade efforts were inadequate or below industry standards, even though they were ultimately unsuccessful.

According to an SEC filing, Rockland paid CAI $1,089,113.73 plus prejudgment ­interest of $272,278.43, for a total of $1,361,392.16.

To date, the computer system acquisition contracts that I have personally negotiated and drafted have all gone to “system works” and none of them have resulted in any liti­gation.  Thus, my involvement in computer system contract disputes has been when some­one else has drafted the computer contracts and a problem has arisen, or I am reviewing the computer contract in my role as an arbitrator or mediator.

In that role, I have encountered numerous other examples of issues relating to the integration clause, including performance failures due to data conversion problems (the contract failed to define the conversion process); inadequate response time (the contract failed to define response time); or scope of use problems (the contract failed to define how or where the software was to be used).

Given that the integration clause states that the terms of the agreement are completely contained within the four corners of the document, whenever the contract fails to properly address a particular issue, conflicting interpretations can arise that can lead to legal disputes.

Acquisition of any reasonably sophisticated computer system embodies unique aspects, and each should be examined through the lens of the contract’s integration clause.  The Rockland court highlights this perspective when it states: “[Functional] Integration is not defined in the License Agreement, and is mentioned only in the title of the three software components. … I find [Rockland] has failed to meet its burden of demonstrating that the [CAI] software package lacked contractually mandated ‘integration,’ even if the term is construed broadly.”

The bottom line is that the contract’s integration clause is a very important provision in the agreement.  When speaking with a client about the computer contract provided by the other party, focus the client’s attention to the integration clause first, and then discuss the remainder of the contract.  In discussions about a computer system acquisition particularly a business-critical acquisition when something is identified as important, then it should be properly included within the four corners of the agreement.

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A recent Ninth Circuit decision holds that a service provider may not change the terms of its service contract merely by posting the revised contract on its website.  See Douglas v. U.S. Dist. Court for Cent. Dist. of Cal., 495 F.3d 1062, 1066 (9th Cir. 2007).  Although the decision leaves open the question of precisely what type of notice is required and whose burden it is to prove receipt of proper notice, the Ninth Circuit’s decision nevertheless raises issues, particularly in the context of mergers and acquisitions, as to the process for revising contract terms, who will bear the responsibility of notification, and how notification will be given.

In Douglas, the plaintiff, Joe Douglas, contracted for long-distance telephone service with America Online (“AOL”), which was subsequently acquired by Talk America.  Id. at 1065.  Following the acquisition, Talk America continued to provide telephone service to former AOL customers, including Douglas, but added four provisions to the service contract:  (1) additional service charges, (2) a class action waiver, (3) an arbitration clause, and (4) a choice-of-law provision.  Talk America posted the revised contract on its web site but never notified Douglas that the contract had changed.  Id.  Douglas could only have become aware of the new contract terms if he had visited Talk America’s web site and examined the modified contract against his existing contract for possible changes.  Id. at 1066.

After becoming aware of the additional service charges, Douglas filed a class action lawsuit in federal district court in California, alleging a violation of the Federal Communications Act, breach of contract, and violations of various state consumer protection statutes.  Talk America moved to compel arbitration pursuant to the revised contract, and the district court granted Talk America’s motion.  Douglas then petitioned the Ninth Circuit for a writ of mandamus.  Id. at 1065.

Recognizing the significance of its decision and noting that it could “potentially affect . . . the relationship of numerous service providers with millions of customers,” the Ninth Circuit held that Douglas did not receive proper notice of Talk America’s modified contract since the only notice of the changed terms consisted of posting the revised contract on Talk America’s web site.  Id. at 1069.  The court noted that even though Douglas may have had occasion to visit Talk America’s web site, he would not have had any reason to review the contract posted there.  Id. at 1066.  The court based its decision on fundamental contract theory:

Parties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side.  Indeed, a party can’t unilaterally change the terms of a contract; it must obtain the other party’s consent before doing so.  This is because a revised contract is merely an offer and does not bind the parties until it is accepted.  And generally “an offeree cannot actually assent to an offer unless he knows of its existence.”

Id. at 1066 (citation omitted).  The court determined that Douglas’s continued use of Talk America’s service for four years could be considered assent had he received proper notice but in this instance Douglas did not receive proper notice.  Id.

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The opinions in the articles contained in this publication are those of the authors only, and not necessarily those of the editors, the Intellectual Property Subcommittee, the Cyberspace Law Committee, or the American Bar Association.