Category Archives: Contracts

Court enforces forum selection clause in web hosting agreement

Bennett v. Hosting.com, Inc., 2008 WL 4951020 (N.D. Cal. November 18, 2008)

Bennett filed an astounding 30-count complaint against defendant Hosting.com. Though the Managed Hosting Agreement designated Jefferson County, Kentucky to be the sole and exclusive venue for actions brought in connection with the agreement, Bennet brought the action in federal court in Northern California. Hosting.com moved to dismiss for improper venue. The court granted the motion.

Kentucky on a map

The court held that Bennett failed to prove that the forum selection clause in the hosting agreement was unreasonable. The fact that Hosting.com may have had superior bargaining power and the agreement appeared to be non-negotiable was not enough to render the agreement unconscionable. Moreover, Bennett failed to demonstrate how the forum selection clause was against any public policy of California. And the court rejected her argument that the case belonged in California because Kentucky does not recognize certain of the causes of actions in the complaint. After all, a Kentucky court could apply California law.

The court also rejected Bennett’s argument that the forum selection clause shouldn’t apply because a number of the claims arose from tort law and did not involve the agreement. This argument was rejected because many of the tort claims would require the same findings of fact as the contract-related claims. Moreover, and perhaps more importantly, the forum selection clause was broad. All the claims appeared to be “in connection with” the agreement. That was enough in this case to bring them in.

(Missing Kentucky image courtesy Flickr user dog_manor under this Creative Commons license.)

Software distributor agreement violated New York’s Rule Against Perpetuities

McAllister Software Systems, Inc. v. Henry Schein, Inc., No. 06-0093, 2008 WL 922328 (E.D. Mo. April 2, 2008)

This case came out about three months ago, and I should have blogged about it then but it slipped by. It’s a quirky holding, what with the Rule Against Perpetuities, so it’s worth going back to pick it up. As it turns out, the Rule comes into play in real life, not just on the bar exam or in first year of law school Property class.

In 1990, McAllister and Schein entered into an Exclusive Distributor Agreement (EDA) whereby Schein would have the exclusive right to promote and sell veterinary management software. In 2006, McAllister sued, asking the court to declare the EDA void ab initio (from its creation), claiming that terms of the EDA violated New York’s Rule Against Perpetuities. (The EDA provided that New York law would apply).

McAllister moved for summary judgment on its claim, and the court granted the motion. And now for the legalese, because I know that’s the real reason you’re here.

The New York Estate Powers and Trust Law at Article 9, Section 1.1 prohibits the suspension of the absolute power of alienation of any present or future estate for a period beyond lives in being at the creation of the estate plus twenty-one years. Although usually thought of as a real property question, under New York law, the Rule applies to personal property as well. Yawn.

The court found that two provisions of the EDA violated the Rule because they permanently restrained McAllister from freely selling the software and developing and marketing new software in the same market space.

One provision provided that

Schein shall have the right to be the exclusive distributor of any other software designed for the Market that [McAllister Software] produces, develops, or acquires the rights to, hereafter.

Another provision stated that

McAllister Software will keep and maintain a current version of the Software’s source code and supporting documentation (“Escrow Materials”) in escrow with its attorney or a professional computer software escrow agent (“Escrowee”) …If [McAllister Software] fails to support the Software to the reasonable satisfaction of Schein and Schein’s customers or if [McAllister Software] ceases to do business, Schein shall have the right to immediately obtain the source code from the Escrowee, and [McAllister Software], by its execution hereof, hereby authorizes Escrowee to release the source code to Schein only under said circumstances.

Both the parties were corporations so there were no “measuring lives” to use for purposes of the Rule Against Perpetuities calculation. So the court simply considered whether the power of alienation was suspended for at least 21 years. This situation fit the bill, so the EDA was void.

No standing to sue Microsoft under XP EULA

Johnson v. Microsoft Corp., No. 06-900, 2008 WL 803124 (W.D. Wash. March 21, 2008).

A number of plaintiffs filed suit against Microsoft in federal court in Washington state, alleging, among other things, that the installation of Windows Genuine Advantage (“WGA”) (which enforces the validity of a user’s version of XP) violated the XP end user license agreement (“EULA”).

Microsoft moved for summary judgment against two of the plaintiffs, arguing that they did not own the computers at the time WGA was installed, and thus these plaintiffs lacked standing. The court agreed and entered summary judgment against these plaintiffs.

The court rejected these plaintiffs’ arguments that they had standing as computer users and business owners to raise the breach of contract claims. The plaintiffs had transferred their ownership to a company before WGA was installed. The parties were therefore not parties to the EULA and lacked privity with any party. Moreover, they could not be treated as third party beneficiaries of the EULA, so they lacked standing.

Resale on eBay o.k. under First Sale Doctrine?

Last week the U.S. District Court in Seattle denied Defendant Autodesk’s motion to dismiss Plaintiff Vernor’s case, and held that under the circumstances, the sale of AutoCAD on eBay was protected by the First Sale Doctrine.

Vernor makes a living reselling goods on eBay. He found himself in hot water after trying to sell four copies of Autodesk’s AutoCAD on eBay, and sought a declaratory judgment from the Court that he was entitled to sell these copies of AutoCAD.

In 2005, Vernor bought a copy of AutoCAD at a garage sale. He then listed it on an eBay auction. When Autodesk found out about Vernor’s eBay auction, it sent eBay a notice and takedown request alleging that copyright infringement would occur if Vernor were allowed to sell its product. Vernor filed a counter-notice claiming his proposed sale was lawful. eBay reinstated the auction, and the sale was completed. Fast forward to 2007 when Vernor bought four copies of AutoCAD for sale on eBay. He was able to sell three copies after going through similar notice and takedown / reply correspondence as in 2005. When he tried to sell the fourth copy, eBay suspended his account for one month for alleged “repeat infringement.” He sued for a declaration that his proposed sale was lawful, and that Autodesk’s actions were unfair competition.

Vernor acquired his copies of AutoCAD from CTA who had acquired them from Autodesk as part of a settlement. Each copy contained a Software License Agreement which contained a “nonexclusive, nontransferable license to use the enclosed program … [including prohibiting] transfer … to any other person without Autodesk’s prior written consent.”

Contrary to Autodesk’s assertion, the Court held that Vernor did make out a valid cause of action, and that there is an actual case / controversy between the parties per the Declaratory Judgment Act. Moreover, the Court also held that “If It Applies, the First Sale Doctrine Immunizes Mr. Vernor” since “[t]he first sale doctrine permits a person who owns a lawfully-made copy of a copyrighted work to sell or otherwise dispose of the copy.” The Court also cited with approval Quality King Distribs., Inc. v. L’Anza Research Int’l, Inc., 523 U.S. 135, 152 (1998) which noted that “[w]hen a copyright holder chooses to sell a copy of his work, however, he ‘exhaust[s] his exclusive statutory right to control its distribution’.” The Court noted by way of example that “the first sale doctrine permits a consumer who buys a lawfully made DVD …to resell the copy, but not to duplicate the copy.”

Autodesk claims (as would arguably all software companies) that since it licensed AutoCAD, there was no sale, and thus Vernor is not an “owner” and the First Sale Doctrine does not apply. The Court points out the key question: “whether Autodesk’s transfer of AutoCAD packages to CTA was a sale or a mere transfer of possession pursuant to a license.” If it was a sale, Autodesk would be limited to a breach of contract claim against CTA. The Court notes that there is no bright-line rule as to what constitutes a sale versus a transfer, but that “[i]n comparing the transactions found to be sales in Wise with those that were not, the critical factor is whether the transferee kept the copy acquired from the copyright holder.” (emphasis added). Thus in this case, since CTA, and subsequently Vernor kept the copies of AutoCAD, there was a sale. The Court noted in a footnote that: “[e]ven if Autodesk could revive its “exhausted” distribution rights by reclaiming title to software copies it sold, Autodesk did not reclaim title. It merely required CTA to destroy its copies.” This might mean that software vendors will amend license language to avoid this issue in the future, along with more aggressively policing possession of their software requiring licensees to return copies of software so as to avoid First Sale issues (or that they could provide limited-term renewable licenses which contain a DRM-type “auto-destroy” feature – similar to the way iTunes limits via license the number of machines its customers can upload a song to).

The Court does note a series of decisions which run counter to the reasoning in United States v. Wise, 550 F.2d 1180, 1187 (9th Cir. 1977), but ultimately follows Wise in finding that “the transfer of AutoCAD packages from Autodesk to CTA was a sale with contractual restrictions on use and transfer of the software. Mr. Vernor may thus invoke the first sale doctrine, and his resale of the AutoCAD packages is not a copyright violation.” The Court also notes that other jurisdictions may have reached a different conclusion. This case has important implications for consumers and the software industry, and given the noted Circuit split, might not ride off into the sunset just yet.

William Patry provides an informative commentary here.

Case is: CASE NO. C07-1189RAJ (U.S. Dist Court of Washington at Seattle)

Court upholds forum selection clause in YouTube’s terms of use

Bowen v. YouTube, Inc., No. 08-5050, 2008 WL 1757578 (W.D.Wash. April 15, 2008)

Plaintiff Bowen, a registered YouTube user, sued YouTube over some harassing comments others had posted about her on the site, as well as for some sort of dissatisfaction about misappropriation of her intellectual property rights. (The opinion is not clear about exactly what Bowen’s claims were.)

YouTube moved to dismiss the complaint for, among other things, improper venue, invoking a provision of the site’s Terms of Use which read:

You agree that: (i) the YouTube Website shall be deemed solely based in California; and (ii) the YouTube Website shall be deemed a passive website that does not give rise to personal jurisdiction over YouTube, either specific or general, in jurisdictions other than California. These Terms of Service shall be governed by the internal substantive laws of the State of California, without respect to its conflict of laws principles. Any claim or dispute between you and YouTube that arises in whole or in part from the YouTube Website shall be decided exclusively by a court of competent jurisdiction located in San Mateo County, California.

Looking to the cases of Pebble Beach Co. v. Caddy, 453 F.3d 1151 (9th Cir.2006), Rio Properties, Inc. v. Rio Int’l Interlink, 284 F.3d 1007, 1020 (9th Cir.2000) and Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414, 418-20 (9th Cir.1997), the court observed that “for the proposition that when a ‘website advertiser [does] nothing other than register a domain name and post an essentially passive website’ and nothing else is done ‘to encourage residents of the forum state,’ there is no personal jurisdiction.”

The court found that Bowen’s allegations arose from her use of YouTube, and no conduct was alleged to provide the “something more” necessary for rendering YouTube subject to jurisdiction in the Western District of Washington.

Network Solutions’s forum selection clause enforced


Doe v. Network Solutions, LLC, No. 07-5115, 2008 WL 191419 (N.D. Cal. January 22, 2008)

Plaintiff Doe alleged violations of the Electronic Communications Privacy Act and similar California statutes when he discovered that personal and financial information about him had allegedly been obtained from a webmail account he established with Network Solutions. Citing to the forum selection clause in the click-wrap agreement Doe had entered into several times, Network Solutions moved to dismiss the action under Fed. R. Civ. P. 12(b)(3) for improper venue.

The court granted the motion to dismiss, finding that the claims brought by plaintiff were within the scope of the clause, and that enforcement would not be unreasonable. The matter was dismissed without prejudice to refile in the Eastern District of Virginia.

The forum selection clause provided, in relevant part, that it governed “any disputes between [customer] and Network Solutions under, arising out of, or related in any way to this Agreement. . . .” In holding that the claims fell within the scope of the clause, the court observed that although there were no claims for breach of contract, the claims arose out of plaintiff’s status as a customer and related to the services, thus implicating the contractual relationship. Moreover, the language “under, arising out of, or related in any way to [the] agreement” led the court to conclude that the clause was to be construed broadly.

In determining that enforcement of the clause would not be unreasonable, the court rejected plaintiff’s argument that it would contravene public policy, as the choice of law provision (naming Virginia) would preclude recovery under various California statutes. The court noted that California law had not expressed any policy against enforcement of a forum selection clause in the context of the claims asserted, and that a clause providing a forum which permits different or less favorable remedies is not, alone, a basis for invalidating the clause.

Ownership of domain name grounds for civil contempt and award of attorney’s fees

But mere ownership of domain name, without “use,” was not enough to give rise to infringement.

Careylicensing, Inc. v. Erlich, No. 05-1194, 2007 WL 3146559 (E.D. Mo. October 25, 2007)

Plaintiff Carey International and defendant International Chauffeured Services are competitors in the limousine industry. Carey sued International back in 2005 for trademark infringement, and the parties settled the case. They entered into a consent judgment, which is, essentially, like a contract between the parties that was made an order of the court. The consent judgment prohibited, among other things, the defendant from owning any domain name containing the word “Carey.”

In February 2007, the plaintiff noticed that the defendant owned a domain name careylimousine.net. The plaintiff eventually went back into court, asking that the defendant be held in contempt for violating the consent judgment and, pursuant to the terms of the consent judgment, be awarded attorneys fees and “liquidated damages,” for breaching the agreement.

The court found that ownership of the domain name by the defendant warranted a contempt citation. It also found that that ownership was a breach that made an award of attorney’s fees proper. But the court declined to award liquidated damages.

The consent judgment provided that liquidated damages be awarded for any “infringement” of the plaintiff’s mark. But in this case, there was no infringement. The court found that merely owning the domain name, without having an active site there, was not a “use” in commerce as required by the Lanham Act. Without the requisite element of use, there could be no infringement.

Purported John Kerry ex-flame’s suit against Yahoo tossed

I’m going back in time a little bit to pick up on an unreported September 5, 2007 decision by a New York state trial court in the case of Whitnum v. Yahoo! [2007 WL 2609825].

Plaintiff Whitnum is the author of the book Hedge Fund Mistress, and also the owner of the website of the same name. Yahoo, who hosted the site, is alleged to have shut down the site for 8 hours on August 19, 2004, which was the same day that the book was mentioned on the front page of the Boston Herald.

Whitnum claimed that this caused her to lose out on $125,000 in revenue, so she sued Yahoo for that amount. Yahoo moved to dismiss, however, citing to its hosting terms of service which provided that it had the right “at any time and from time to time to modify or discontinue, temporarily or permanently, the [hosting] Service.” The terms of service also provided, among other things, that Yahoo would not be liable for any indirect or consequential damages resulting from a customer’s inability to use the service.

The court granted the motion to dismiss. It rejected Whitnum’s arguments that she should be allowed to file an amended complaint alleging intentional conduct or gross negligence, instead finding that her basis for saying that Yahoo may have shut down her account to silence her story about having dated John Kerry was mere speculation.

Internet marketer not fraudulent in predicting success of future advertising campaign

Hallmark Institute of Photography, Inc. v. CollegeBound Network, LLC, — F.Supp.2d —-, 2007 WL 3145433 (D. Mass. October 29, 2007).

CollegeBound LLC is an Internet marketing company that gathers “leads” for its customers. These “leads” are people who visit CollegeBound’s websites, express interest in the services provided by CollegeBound’s customers, and provide their contact information. CollegeBound then sells this lead information to its customers on a “cost per lead” basis. The customers then follow up with their own marketing efforts.

One of CollegeBound’s customers was Hallmark Institute of Photography. It signed written agreements with CollegeBound whereby it agreed to pay more than $30 for each lead that CollegeBound provided. When the parties were negotiating the deal, CollegeBound allegedly orally represented that between three and seven percent of the leads would enroll for Hallmark’s photography courses.

Although CollegeBound gathered leads and sent them on to Hallmark, less than one percent of them applied. Hallmark was disappointed in this result, and sued CollegeBound for breach of contract and for fraud and misrepresentation. CollegeBound moved to dismiss, and the court granted the motion.

On the breach of contract claim, the court held that the parol evidence rule precluded it from considering any extrinsic evidence. The alleged representations were made orally, and not included in the written agreement. Although the contract did not contain an “integration clause,” the court found that the agreement was fully integrated, where essentially all the important terms were included, and there was no indication the parties intended there be any additional terms. Since the agreement was not ambiguous, the court could not consider any evidence outside the document’s four corners.

As for the fraud and misrepresentation claims, the court held that CollegeBound’s statements were of a “fundamentally predictive nature,” and “concerned a matter of opinion, estimate or judgment which was not susceptible of actual knowledge at the time of [their] utterance.” For these reasons, the court found that Hallmark could not have reasonably relied on the statements. So the claims failed as a matter of law.

Court shuts down BoardFirst.com for violation of Web site terms of service

Southwest Airlines Co. v. BoardFirst, LLC, No. 06-0891 (N.D. Tex. September 12, 2007)

Southwest Airlines does not have differentiated seating — one cannot get a better seat by paying more. Passengers are allowed to board based on a group classification they are assigned on a first come, first served basis. Passengers in the “A” group get to board first, while passengers in the “C” group go last. One can check in to be assigned to a group up to 24 hours before a flight by visiting Southwest’s Web site.

Boardfirst.com was a web-based company that Southwest passengers could pay to log in for them in hopes of obtaining “A” group passes. Southwest objected to this practice, however, and filed suit in a Texas federal court against Boardfirst alleging violation of the Southwest Web site’s terms of service. Southwest then moved for summary judgment on its breach of contract claim, and the court granted the motion.

The first issue before the court was whether the “browsewrap” terms of service on the Southwest Web site, visible upon clicking a hyperlink at the bottom of the home page, constituted a valid contract between Southwest and BoardFirst. Those terms of service, among other things, prohibited using the Southwest site for anything other than personal, non-commercial purposes.

The court held that a valid contract existed. Finding that the situation resembled the one in the case of Register.com v. Verio, Inc., 356 F.3d 393 (2d Cir. 2004), the court held that the evidence showed BoardFirst had actual knowledge of the terms, which expressly prohibited use of the site for commercial purposes.

Next the court determined that BoardFirst had breached the terms of service by using the site for commercial purposes. It rejected BoardFirst’s argument that BoardFirst was an agent of the ticket purchasers and therefore not a prohibited third party accessing the site. The court also rejected BoardFirst’s argument that prohibiting “commercial” use of the website would mean that every access of the site — ostensibly resulting in Southwest’s commercial advantage — would constitute a breach of the terms of service.