Category Archives: Contracts

Wait just a second . . . isn’t online gambling illegal?

Wong v. Partygaming Ltd., — F.3d —, 2009 WL 4893955 (6th Cir. December 21, 2009)

The Sixth Circuit’s recent opinion in the case of Wong v. Partygaming is interesting if you’re a civil procedure wonk and care about things like which law applies to determine the enforceability of forum selection clauses in website terms and conditions and what factors a court should consider when dismissing a case on the basis of forum non conveniens.

bling

The most intriguing part of the case, however, comes from Judge Merritt’s concurrence, in which he addresses the significance of the fact that the terms of service for an online gambling website are probably illegal.

The majority opinion painstakingly analyzed whether the district court abused its discretion in dismissing, of its own will (or “sua sponte” as stodgy lawyers like to say), the plaintiffs’ suit against an online gambling website. The plaintiffs had alleged that the site fraudulently misrepresented that there was no collusion among other online gamblers, and that the site did not target people with gambling problems. The website terms of service contained a forum selection clause naming Gibraltar as the jurisdiction in which disputes were to be heard.

The appellate court affirmed the lower court’s decision that the case should be dismissed and that Gibraltar (which follows English law) would be a suitable and not-too-inconvenient forum. But the majority opinion said nothing about the legality of online gaming.

That’s where Judge Merritt picked up in the concurrence. He agreed that the matter should have been dismissed in favor of it being heard in Gibraltar — that’s why he concurred and did not dissent. His reasoning differed from that of the majority.


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Judge Merritt observed that the plaintiffs’ logic was inconsistent. They had argued that Ohio law should apply to the terms of service. But under Ohio law (and federal statutes like RICO), the subject matter of the contract would probably have been illegal and therefore void. Not to mention the fact that the conduct could send the parties to jail.

The judge wrote that something analogous to the principle of lenity — and not necessarily a rigorous analysis of the forum selection clause and the doctrine of forum non conveniens — should underlie the dismissal of the lawsuit. Lenity requires that when the question of criminal liability is ambiguous, interpretation should be made in favor of the defendant (see McNally v. United States). Since online gambling presumably was not illegal under the law of Gibraltar, the more lenient stance would be to see the matter litigated there.

Bling photo courtesy Flickr user PhotoDu.de under this Creative Commons license.

Browsewrap website terms and conditions enforceable

Major v. McAllister, — S.W.3d —, 2009 WL 4959941 (Mo. App. December 23, 2009)

The Missouri Court of Appeals has issued an opinion that reflects a realistic grasp of how people use the web, and also serves as a definitive nod to self-responsibility. The court refused to accept a website end user’s argument that she should not be bound by the website terms and conditions that were presented to her in the familiar “browsewrap” format.

Click

Ms. Major used a website called ServiceMagic to find some contractors to remodel her home in Springfield, Missouri. Each page she saw during the process had a link to the website terms and conditions. At the point where she submitted her contact information to facilitate the signup process, she was presented with a link to the website’s terms and conditions. We’ve all seen this countless times — the link read, “By submitting you agree to the Terms of Use.”

Major admitted she never clicked on the link and therefore never read the terms and conditions. But had she clicked through she would have read a forum selection clause providing that all suits against ServiceMagic would have to be brought in Denver, Colorado.

When Major sued ServiceMagic in Missouri state court, ServiceMagic moved to dismiss, citing the forum selection clause. The trial court granted the motion and Major sought review. On appeal, the court affirmed the dismissal.

Major relied heavily on Specht v. Netscape, 306 F.3d 17 (2d Cir. 2002). The court in Specht held that end users of Netscape’s website who downloaded a certain application were not bound by the terms and conditions accompanying that download because the terms were not visible on the screen without scrolling down to see them.

But in this case the court found the terms and conditions (including the forum selection clause) to be enforceable. In contrast to Specht, the ServiceMagic site did give immediately visible notice of the existence of the terms of the agreement. Even though one would have to click through to read the terms, the presence of the link was sufficient to place the website user on reasonable notice of the terms, and subsequent use by the end user manifested assent to those terms.

Click image courtesy Flickr user smemon87 under this Creative Commons license.

Court upholds eBay forum selection clause

Tricome v. Ebay, Inc., 2009 WL 3365873 (E.D. Pa. October 19, 2009)

Everyone who signs up to use eBay has to assent to the terms of eBay’s User Agreement. Among other things, the User Agreement contains a forum selection clause that states all disputes between the user and eBay must be brought to court in Santa Clara County, California.

After eBay terminated plaintiff Tricome’s account, Tricome sued eBay in federal court in Pennsylvania. eBay moved to dismiss or to at least transfer the case, arguing that the forum selection clause required it. The court agreed and transferred the case to the U.S. District Court for the Northern District of California.

Plaintiff had argued that the court should not enforce the forum selection clause because it was procedurally and perhaps substantively unconscionable. The court found the agreement not to be procedurally unconscionable because Plaintiff did not have to enter into the agreement in the first place — he only did it to increase his online business. Furthermore, eBay did not employ any high pressure tactics to get Plaintiff to accept the User Agreement. Moreover, eBay had a legitimate interest in not being forced to litigate disputes all around the country.

The court likewise found the User Agreement was not substantively unconscionable either. It would not “shock the conscience” for a person to hear that eBay — an international company — would undertake efforts to focus litigation it is involved with into a single jurisdiction. Furthermore, having the forum selection clause would conserve judicial and litigant resources, in that parties and the courts would know in advance where the appropriate place for disputes concerning eBay would be heard. Finally (and rehashing an earlier point regarding procedural unconscionability), Plaintiff had a meaningful choice — he could have decided not to do business on eBay in the first place.

Map photo courtesy Flickr user sidewalk flying under this Creative Commons license.

Web host did not breach contract by terminating rude customer

Mehmet v. Add2net, Inc., — N.Y.S.2d —-, 2009 WL 3199876 (N.Y.A.D. 1 Dept. October 8, 2009)

Plaintiff website operator didn’t pay his monthly hosting fees on time. He called the hosting company and said he’d be sending a check, but in the meantime the web host exercised its right under the hosting agreement to suspend Plaintiff’s account for nonpayment. Plaintiff called and left a nasty voicemail, using an obscene word to threaten to sue the hosting company if his website was not reactivated.

In response to this angry voice mail, the web host terminated Plaintiff’s account. He sued for breach of contract. The web host moved to dismiss at the trial court level and the court granted the motion. Plaintiff sought review. On appeal, the court affirmed the dismissal.

Of particular importance was a provision in the hosting agreement that incorporated by reference an Acceptable Use Policy (AUP), and provided that any breach of that policy would be grounds for suspension or termination of plaintiff’s account. Under the AUP, plaintiff agreed “not to abuse whether verbally or physically or whether in person, via email or telephone or otherwise … any employee or contractor of [defendant].”

The nonpayment coupled with this violation of the web hosting acceptable use policy undercut Plaintiff’s breach of contract claim.

Do Twitter’s new terms of service forsake third party developers?

Twitter announced its new Terms of Service yesterday. One big issue deals with copyright ownership. This is one of the perennial questions in the law of social media: “who owns the user-created content?” Twitter nods to this issue when it states that “Twitter is allowed to ‘use, copy, reproduce, process, adapt, modify, publish, transmit, display and distribute’ your tweets because that’s what we do. However, they are your tweets and they belong to you.”

That’s all well and good. And by not being too grabby, Twitter avoids stirring up a brouhaha like Facebook did earlier this year for a little while when it claimed a very broad license in users’ content. In that situation, some pointed out that Facebook could use your content forever, even after you deleted your account. No doubt Twitter was motivated by an aversion to controversy of this sort when it decided to not claim a perpetual license.

But is Twitter being too cautious? The license it claims in the new terms of service does not specify a duration. That’s user-friendly, because such a license is probably terminable at will by the user. Under cases like Walthal v. Rusk, 172 F.3d 481 (7th Cir. 1999), Twitter would no longer have the authority to use, copy, reproduce, etc. the tweets of a user that no longer permitted such use be made. Deleting one’s account would be a good indication that such a license was being revoked. And the user could follow up with an express statement to Twitter that the license no longer exists.

Still all well and good. But let’s look at the “ecosystem” that has been nourished by the Twitter API, and which Twitter bolsters in its new terms of service. (“We encourage and permit broad re-use of Content. The Twitter API exists to enable this.”)

Third party developers can build apps that, among other things, cache users’ Tweets and make them available for mashup, organization, etc. and redisplay. These acts by the third party developer are an exercise of rights of the copyright holder, i.e., the individual Twitter user. The terms of service allow Twitter to sublicense these rights to the third party developer, so there is no problem so long as the individual Twitter user is under the terms of service.

What happens, though, in the situation we were just discussing where the individual user revokes the license to Twitter? These cached copies out there in the possession of third party developers all of a sudden become unauthorized, because Twitter no longer has the sublicensable right to allow the tweets’ copying and redistribution by others.

In such a situation, are third party developers who continue to display the content left blowing in the wind, as infringers of erstwhile Twitter users’ copyright rights?

Notice sign photo courtesy Flickr user szlea under this Creative Commons license.

Website terms of service provide basis for exercise of personal jurisdiction

CoStar Realty Information, Inc. v. Field, — F.Supp.2d —-, 2009 WL 841132 (D.Md. March 31, 2009)

Personal jurisdiction cases — even ones that involve the internet — are generally not all that interesting. But the case of CoStar Realty Information, Inc. v. Field is worth noting because of the way the personal jurisdiction analysis was tied to a provision found in online terms of service.

CoStar provides its paying customers with access to a proprietary database via the web. It claimed that certain defendants, who were residents of Texas and Florida, accessed the database using another customer’s password. So CoStar sued these defendants in federal court in Maryland.

These defendants moved to dismiss arguing, among other things, lack of personal jurisdiction. The court denied the motion.

It found that in the four or so years that the defendants accessed the database without authorization, they would have been presented with the online terms of service from time to time. Those terms of service contained a clause which provided that any litigation over use of the database would be conducted in Maryland. The court found that the defendants assented to these terms, and that the forum selection clause was valid and enforceable.

Map photo courtesy Flickr user Marxchivist under this Creative Commons license

Clickwrap binding despite claim of no opportunity to read terms

Via Viente Taiwan, L.P. v. United Parcel Service, Inc., 2009 WL 398729 (E.D. Tex. February 17, 2009)

A federal court in Texas held the clickwrap agreement between United Parcel Service and one of its customers was binding. After plaintiff Via Viente sued UPS in Texas, UPS moved to transfer venue to the Northern District of Georgia, citing to a forum selection clause in a license agreement governing Via Viente’s use of a UPS-provided software program that allowed Via Viente to print labels and manage product shipments.

Via Viente argued that the clickwrap agreement (and by extension the forum selection clause) was not binding because a UPS technician installed the application on a Via Viente computer, and therefore Via Viente never had a chance to agree to the terms. The court rejected that argument for the following three reasons:

  • Via Viente was a sophisticated company and “should have been aware that terms of service were forthcoming” after having signed the general Carrier Agreement with UPS that required the use of the software;
  • It was “difficult to believe” that Via Viente would have left the UPS technician installing the software unsupervised. Moreover, it was not UPS’s practice to install the software unsupervised;
  • Via Viente had kept the benefit of the bargain (convenience and “palatable” shipping costs) so it would have been inequitable to allow it to disavow provisions it did not like.

After finding the clickwrap agreement to be binding, the court went on to find the forum selection clause enforceable, and transferred the matter to the Northern District of Georgia.

EULA photo courtesy Flickr user johntrainor under this Creative Commons license.

I was a guest on On Digital Media last night

Had a great time as a guest in Episode 82 of On Digital Media last night with John Federico, Steve Hatch, Chia-Lin Simmons and Ken Gellman.

We talked in depth about the recent Facebook terms of service bruhaha and the announcement of the Kindle2.

Please listen below (or click through if you’re seeing this in a feed reader).

Open source software and the covenant-condition dichotomy

[Note: This is a short essay I have written in conjunction with an upcoming presentation I will give at John Marshall Law School here in Chicago next week. I invite your feedback in the comments to this post. For formatting purposes, footnotes (which are mainly to case citations) have been omitted.]

Some of the peculiarities of open source software, like the requirement of author attribution, create intriguing questions about how an open source license should be enforced in the event of its violation. Though software distributed under a “free” or open source model has existed in some form for more than a quarter century, only in the past couple of years have some of the basic questions concerning the import of terms in an open source license been litigated. The Federal Circuit’s recent decision in Jacobsen v. Katzer addressed the question of whether the owner of the copyright in software distributed under an open source license may successfully pursue a claim of infringement against a party using the software in violation of the license. Answering that question in the affirmative, the court relied upon the distinction between conditions and covenants in an open source license. This essay examines that distinction’s effect on how an open source license may be enforced.

The Framework for the Analysis: Breach or Infringement?

Because software licenses (both open source and proprietary) are in the nature of a contract, one must look to principles of contract law when examining how the licenses apply. Which cause of action will be appropriate for a violation of the terms of a license depends on the legal relations between the parties. Has the licensee committed copyright infringement by its violation of the license? Or is there merely an action for breach of contract? Since the remedies available for breach of contract versus copyright infringement can differ greatly (i.e., expectation damages versus potential statutory damages, costs and attorney’s fees plus injunctive relief), an evaluation of the right way to proceed is important.

The licensor of software generally waives its right to sue the licensee for copyright infringement. Stated another way, “a licensee cannot be liable for infringing the copyright rights conveyed to it.” For a licensee to have infringed the copyright in the licensor’s software, the licensee must exercise a copyright right not granted to the licensee. We characterize this kind of use as being outside the scope of a license.

Covenants and Conditions in Software Licenses

The authority to exercise the copyright rights in software (like the right to distribute the source code and make derivate works), is established in the licensee through the operation of the license. The grant of authority is an “operative fact,” one that changes the legal relations of the parties. Drawing a familiar term from the lexicon of contract law, the authority for another to use software is a condition precedent – the operative fact that must exist prior to the existence of the legal relation of licensor and valid licensee. If this condition is not satisfied, the licensee’s authority to use the software is not there. Use of the software by another party in the absence of this authority will be an exercise of a right not granted, and, as already noted, a use of the software outside the scope of a license.

Covenants (also known as promises) in a license agreement can also affect the legal relations of the parties. Covenants are quite different from conditions precedent, however, because they refer to an intention related to a future event, not to an operative fact that must be present for authorization to exist. In the software licensing context, a covenant does not affect the authorization of the licensee to exercise the copyright rights in the software. In other words, a covenant in a software license does not define or alter the scope of the authorization.

So if a licensee merely violates a covenant of the software license agreement, the use is still within the scope of the license, and the licensor merely has a cause of action for breach of contract. But if the violation is a failure to satisfy a condition of the license, the use of the software is outside the scope (i.e., is the exercise of a right not granted). Under copyright law, exercise of rights without authorization is called infringement.

Appropriate Causes of Action in the Open Source Context

In a certain sense, the entire legitimacy of the open source model depends on the ability to successfully pursue an action for infringement of copyright. Since most open source software is distributed without the requirement for payment of a fee, a licensor would, for all practical purposes, be left remediless against unauthorized use of the software if the only avenue for recovery were for breach of contract. The appropriate measure of damages would be the amount of licensing fees that would have been collected. In the case of software distributed free of charge, that amount would be zero – not a strong deterrent to unauthorized use.

So for there to be any practical effect on how the source code is actually used, modified and distributed, the violator of an open source license must suffer liability for copyright infringement. This cause of action provides a much more robust (and therefore meaningful) set of remedies, including injunctive relief.

The Jacobsen v. Katzer Decision

Plaintiff Jacobsen wrote some software and made it available under an open source license known as the Artistic License. This open source license granted broad rights to members of the general public to do certain things with the software, including the right to distribute and create derivative works from the software and to use the software in a commercial product, provided that the licensee attribute the original creators.

Jacobsen sued defendant Katzer for copyright infringement, claiming that without permission or consent, Katzer copied the software into a commercial application without attributing the original creators. The district court denied Jacobsen’s motion for injunctive relief, finding that the terms allegedly violated were merely covenants and not conditions. The district court found the scope of the Artistic License to be “intentionally broad,” and that the requirement to insert a prominent notice of attribution did not affect the scope of the license. Therefore, the only viable cause of action was for breach of contract (for which injunctive relief was not appropriate).

Jacobsen sought review with the Federal Circuit. On appeal, the court vacated and remanded, holding that the Artistic License’s terms created conditions which Katzer failed to satisfy. The appellate court found that the license established conditions through the use of the term “provided that.” Further, the appellate court found that the district court’s interpretation did not credit the explicit restrictions found in the license that governed the right to modify and distribute the software. These restrictions successfully defined the scope of the license, and modification and distribution inconsistent with the requirements was unauthorized and therefore outside the scope. Such out-of-scope usage supported a claim for copyright infringement.

Reconciling Jacobsen

The Federal Circuit opinion in Jacobsen contains extensive praise of the open source model, noting that it “serves to advance the arts and sciences in a manner and at a pace that few could have imagined just a few decades ago.” The court went on to observe that through the collaboration inherent in open source software development, “software programs can often be written and debugged faster and at lower cost than if the copyright holder were required to do all the work independently.” One is tempted to speculate whether such a positive attitude to the concept of open source influenced the court’s decision, because there is other authority to support the proposition that an obligation to attribute does not define the scope of a license.

In Graham v. James, the Second Circuit held that the removal of a copyright notice (essentially a failure to attribute) was merely a breach of covenant and therefore did not support a claim for copyright infringement. It is difficult to ascertain how the licensor in Graham would have, in reality, viewed the use of his software without a copyright notice as being authorized (and therefore within the scope of the license). Perhaps the most plausible explanation for the contrary holding in Graham was the absence of a written agreement, and a presumption arising under New York law that the parties intend a covenant and not a condition.

Conclusion

The distinction between conditions and covenants is difficult to perceive. So much can depend on draftsmanship, as one can easily articulate the same set of circumstances to be rendered as a covenant, then a condition. The Artistic License in Jacobsen contained the magic “provided that” language. And it is a good thing it did, for the continued hope in the open source philosophy depended on the court deciding the way it did.

Shame on you, Facebook, for overreaching

Facebook, I hereby grant to you an irrevocable, perpetual, non-exclusive, transferable, fully paid, worldwide license (with the right to sublicense) to use the following content: “Go jump in a lake.”

The past few days people have been talking about how scandalous it is that Facebook changed its terms of service to grab up a very broad license in content its users upload. I’m sure that Facebook is counting on this controversy to go wherever it is that memes go to die, to be forgotten just like most controversies-du-semaine. It probably will, but as the sentiment finds itself already on the decline, I’ll comment.

Here’s what the offending section of the Facebook terms of service now says, in relevant part:

You hereby grant Facebook an irrevocable, perpetual, non-exclusive, transferable, fully paid, worldwide license (with the right to sublicense) to (a) use, copy, publish, stream, store, retain, publicly perform or display, transmit, scan, reformat, modify, edit, frame, translate, excerpt, adapt, create derivative works and distribute (through multiple tiers), any User Content you (i) Post on or in connection with the Facebook Service or the promotion thereof subject only to your privacy settings or (ii) enable a user to Post, including by offering a Share Link on your website and (b) to use your name, likeness and image for any purpose, including commercial or advertising, each of (a) and (b) on or in connection with the Facebook Service or the promotion thereof. You represent and warrant that you have all rights and permissions to grant the foregoing licenses.

I was pretty peeved when I learned that Facebook had modified its terms to get a broader license. But I was even more peeved when I read founder Mark Zuckerburg’s blog post from yesterday which tried to justify the changes. Of course Facebook must make sure it has the rights it needs in order to “show [users' content and information] to the other people they’ve asked [it] to share it with.” But isn’t the right to share that content inherent in the very “asking”? Why be grabby?

Facebook is being content greedy. It’s commandeering more than it needs to run the service. An example Zuckerburg uses in the post concerns the text of a messages sent between friends. If one user deactivates his or her account, a copy of each message will still exist in the other friend’s inbox. Fine. I see the point. So get a license to store and display a copy of private messages. There’s no problem with that.

The bigger rub comes with photos and video users upload. Why does Facebook need a perpetual license for that? I don’t see any reason, whether from a technological or other practical standpoint, why photos and video could not or should not be deleted — and the license to Facebook terminated — when a user deactivates his or her account. YouTube doesn’t demand a license for content after it has been taken down by a user.

Zuckerburg’s post contains the following interesting statement: “In reality, we wouldn’t share your information in a way you wouldn’t want.” Okay Mark, let’s talk about reality. I don’t want you using information about me, like my name, for commercial purposes. That’s reality. Why then do you demand to have the right to use my name and other information for commercial purposes? Are you suggesting that the terms of service as now written don’t reflect reality? I know they were written by lawyers, but surely your legal counsel can’t be that removed from the real world.

I like Facebook, and through it I have reconnected with old friends and made some new ones. But those connections are what’s important, not the intermediary. I may delete my photos off of there but I’ll probably keep using it, at least for now. But I’ll likely post less content. Shame on you, Facebook, and shame on you Mark Zuckerburg, for putting up a post just filled with platitudes, all while ignoring the fact there’s no reason for your new overreaching. That kind of stunt will invigorate those who want an alternative to Facebook, and will accellerate the process of making Facebook tomorrow’s Friendster.

Greedy photo courtesy Flickr user Gribiche under this Creative Commons license.