California Court of Appeal, B.D. v. Blizzard Entertainment, Docket No. D078506

Online Contract

 

Contract Formation

 

Online Contract Formation

 

License Agreement

 

Conspicuous Notice of an Arbitration Provision?

 

Presentation to Users in an Online Pop-Up Window that Contained the Entire Agreement within a Scrollable Text Box

 

Shrink-Wrap Licenses

 

Browsewraps, Clickwraps, Scrollwraps, and Sign-in Wraps Agreements

 

Terms of an Extrinsic Document May Be Incorporated by Reference in a  Contract

 

Contract Drafting

 

California Law

 

 

 

 

Blizzard moved to compel arbitration based on the dispute resolution policy incorporated into various iterations of the online license agreement that Blizzard presented to users when they signed up for, downloaded, and used Blizzard’s service.  The trial court denied the motion, finding a “reasonably prudent user would not have inquiry notice of the agreement” to arbitrate because “there was no conspicuous notice of an arbitration” provision in any of the license agreements. We disagree.  As we will explain, the operative version of Blizzard’s license agreement—the most recent version presented in 2018 before Plaintiffs filed suit—was presented to users in an online pop-up window that contained the entire agreement within a scrollable text box.

 

 

As the screenshot shows, the portion of the license agreement immediately visible in the text box displayed two significant notices.  First, that users may not use Blizzard’s service if they do not agree to all of the terms in the license agreement.  And second, that users should read the section of the license agreement “below” titled “dispute resolution” because it contains an arbitration agreement and class action waiver that affect users’ legal rights.  That section stated that disputes under the license agreement would be resolved in accordance with Blizzard’s dispute resolution policy, to which the section connected via hyperlink.  The dispute resolution policy contained a comprehensive arbitration agreement. The pop-up window admonished users that by clicking the “Continue” button (immediately below the admonishment) the user “acknowledged that he or she has read and understood the license agreement.”  B.D. could not have continued to use Blizzard’s service if he did not click the “Continue” button, and Blizzard’s records indicate B.D. did, in fact, continue to use the service.  In the context of the transaction at issue, we conclude Blizzard’s pop-up notice provided sufficiently conspicuous notice of the arbitration agreement such that Plaintiffs are bound by it.

 

 

(…) Accordingly, we reverse the trial court’s order denying Blizzard’s motion to compel arbitration and direct the court to enter a new order granting the motion.

 

 

1.Online Formation of Arbitration Agreements

 

“‘Under “both federal and state law, the threshold question presented by a petition to compel arbitration is whether there is an agreement to arbitrate.”’”  (Long v. Provide Commerce, Inc. (2016) 245 Cal.App.4th 855, 861 (Long); see Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236 (Pinnacle); Sellers v.Just Answer LLC (2021) 73 Cal.App.5th 444, 461 (Sellers).)  “This threshold inquiry stems from the ‘“basic premise that arbitration is consensual in nature.”’”  (Long, at p. 861.)  Thus, “while California public policy favors arbitration, ‘“‘there is no policy compelling persons to accept arbitration of controversies which they have not agreed to arbitrate.’”’” (Sellers, at p. 461.) “‘General principles of contract law determine whether the parties have entered a binding agreement to arbitrate.’”  (Pinnacle, supra, 55 Cal.4th at p. 236.)  “Mutual assent, or consent, of the parties ‘is essential to the existence of a contract’ [citations], and ‘consent is not mutual, unless the parties all agree upon the same thing in the same sense’ [citation].  ‘Mutual assent is determined under an objective standard applied to the outward manifestations or expressions of the parties, i.e., the reasonable meaning of their words and acts, and not their unexpressed intentions or understandings.’”  (Sellers, supra, 73 Cal.App.5th at p. 460; see Donovan v. RRL Corp. (2001) 26 Cal.4th 261, 270 (Donovan) [“An essential element of any contract is the consent of the parties.”].) If an offeree objectively manifests assent to an agreement, the offeree cannot avoid a specific provision of that agreement on the ground the offeree did not actually read it.  (See Pinnacle, at p. 236 (“An arbitration clause within a contract may be binding on a party even if the party never actually read the clause.”].) These consent principles apply “with equal force to arbitration provisions contained in contracts purportedly formed over the Internet.”  (Long, supra, 245 Cal.App.4th at p. 862; see Sellers, supra, 73 Cal.App.5th at p. 460.)  “While Internet commerce has exposed courts to many new situations, it has not fundamentally changed the requirement that ‘“mutual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract.”’”  (Long, at p. 862.)

 

 

(…) California and Delaware both adhere to the objective theory of contract formation.  (See Sellers, supra, 73 Cal.App.5th at p. 460; Salamone v. Gorman (Del. 2014) 106 A.3d 354, 367-368 [“Delaware law adheres to the objective theory of contracts”].)

 

 

“In the world of paper contracting, the outward manifestation of assent to the same thing by both parties is often readily established by the offeree’s receipt of the physical contract.” (Sellers, supra, 73 Cal.App.5th at p. 461.)  “By contrast, when transactions occur over the internet, there is no face-to-face contact and the consumer is not typically provided a physical copy of the contractual terms.  In that context, and in the absence of actual notice, a manifestation of assent may be inferred from the consumer’s actions on the website—including, for example, checking boxes and clicking buttons—but any such action must indicate the parties’ assent to the same thing, which occurs only when the website puts the consumer on constructive notice of the contractual terms.”  (Ibid.; see Stover v. Experian Holdings, Inc. (9th Cir. 2020) 978 F.3d 1082, 1086 [“notice—actual, inquiry, or constructive—is the touchstone for assent to a contract”].)  “Thus, in order to establish mutual assent for the valid formation of an internet contract, a provider must first establish the contractual terms were presented to the consumer in a manner that made it apparent the consumer was assenting to those very terms when checking a box or clicking on a button.”  (Sellers, at p. 461.) Recently, in Sellers, supra, 73 Cal.App.5th 444, our court thoroughly discussed the legal landscape regarding the various methods by which contracts are commonly formed online.  We borrow extensively from Sellers here.

 

 

“Even before the rise of internet transactions, software providers included contractual terms of use in their packaging.”  (Sellers, supra, 73 Cal.App.5th at p. 462.)  “These agreements, which restricted how the software could be used and provided protection from widespread illegal copying, came to be ‘called shrink-wrap licenses [fn. omitted] because although the packaging contains notice of the agreement inside, the entire agreement can only be viewed after buying the product and breaking through the plastic shrink-wrap packaging.’”  (Id. at p. 463, italics added.) “As consumers began downloading software from websites, agreements similar to shrink-wrap licenses began to appear online.  [Citation.]  But since there is no packaging on the internet, there was no way for providers to include a physical copy of the contractual terms.  Instead, providers would ask customers to agree to the terms, displayed somewhere on their website, by clicking on an ‘“I accept”’ or ‘“I agree”’ button.  [Citation.]  This type of agreement became known as a ‘“clickwrap”’ agreement, ‘by analogy to “shrinkwrap,” used in the licensing of tangible forms of software sold in packages, because it “presents the user with a message on his or her computer screen, requiring that the user manifest his or her assent to the terms of the license agreement by clicking on an icon.”’ [Citation.]  In most instances, the contractual terms were not actually displayed on the same screen as the ‘I accept’ button, but were instead provided via a hyperlink that, when clicked, took the user to a separate page displaying the full set of terms.”  (Sellers, supra, 73 Cal.App.5th at p. 463, italics added.) “As the internet evolved, so did the various manners in which providers sought to impose contractual terms on consumers.  Most courts now have identified at least four types of internet contract formation, most easily defined by the way in which the user purportedly gives their assent to be bound by the associated terms:  browsewraps, clickwraps, scrollwraps, and sign-in wraps.”  (Sellers, supra, 73 Cal.App.5th at p. 463.) “‘A “browsewrap” agreement is one in which an internet user accepts a website’s terms of use merely by browsing the site.’”  (Sellers, supra, 73 Cal.App.5th at p. 463.) “‘“Unlike a clickwrap agreement, a browsewrap agreement does not require the user to manifest assent to the terms and conditions expressly....  A party instead gives his assent simply by using the website,”’” which typically contains a hyperlink somewhere on the page leading to a separate page containing the terms of use to which the owner intends to bind the user.  (Long, supra, 245 Cal.App.4th at p. 862, quoting Nguyen v. Barnes & Noble Inc. (9th Cir. 2014) 763 F.3d 1171, 1176 (Nguyen).)  “‘Thus, “by visiting the website—something that the user has already done—the user agrees to the Terms of Use not listed on the site itself but available only by clicking a hyperlink.”’”(Long, at p. 862, quoting Nguyen, at p.1176.) As noted, “‘a“clickwrap” agreement is one in which an internet user accepts a website’s terms of use by clicking an “I agree” or “I accept” button, with a link to the agreement readily available.’”  (Sellers, supra, 73 Cal.App.5th at p.463.) “‘A “scrollwrap” agreement is like a “clickwrap,” but the user is presented with the entire agreement and must physically scroll to the bottom of it to find the “I agree” or “I accept” button....’”  (Sellers, supra, 73 Cal.App.5th at pp. 463-464.) Finally, a “sign-in wrap” agreement is a “blend” or “‘hybrid’” of browsewrap and clickwrap agreements.  (Colgate v. JUUL Labs, Inc. (N.D.Cal. 2019) 402 F.Supp.3d 728, 763.)  “‘“Sign-in-wrap” agreements are those in which a user signs up to use an internet product or service, and the sign-up screen states that acceptance of a separate agreement is required before the user can access the service. While a link to the separate agreement is provided, users are not required to indicate that they have read the agreement’s terms before signing up.’  [Citations.]  Instead, ‘the website is designed so that a user is notified of the existence and applicability of the site’s “terms of use” [usually by a textual notice] when proceeding through the website’s sign-in or login process.’”  (Sellers, supra, 73 Cal.App.5th at p.464.) As we will explain below, we conclude Blizzard’s License Agreements constitute sign-in wrap agreements. The “wrap” methods of online contract-formation provide varying degrees of notice to users, with browsewrap providing the least and scrollwrap providing the most.  (Sellers, supra, 73 Cal.App.5th at p. 471.)  Our court recognized in Sellers that California “and federal courts have reached consistent conclusions when evaluating the enforceability of agreements at either end of the spectrum, generally finding scrollwrap and clickwrap agreements to be enforceable and browsewrap agreements to be unenforceable.”  (Sellers, at p. 466; see, e.g., Nguyen, supra, 763 F.3d at p.1177.) The Sellers court was the first California court “to determine where sign-in wrap agreements fall on the spectrum.”  (Sellers, supra, 73 Cal.App.5th at p. 466.)  The court concluded “sign-in wrap agreements fall somewhere in the middle of the two extremes of browsewrap and scrollwrap agreements.  Sign-in wrap agreements do include a textual notice indicating the user will be bound by the terms, but they do not require the consumer to review those terms or to expressly manifest their assent to those terms by checking a box or clicking an ‘I agree’ button.  Instead, the consumer is purportedly bound by clicking some other button that they would otherwise need to click to continue with their transaction or their use of the website—most frequently, a button that allows the consumer to ‘sign in’ or ‘sign up’ for an account.  Thus, it is not apparent that the consumer is aware that they are agreeing to contractual terms simply by clicking some other button.  Instead, ‘the consumer’s assent is “largely passive,”’ and the existence of a contract turns ‘“on whether a reasonably prudent offeree would be on inquiry notice of the terms at issue.”’”  (Id. at p. 471, second italics added.) The Sellers court observed that federal courts have generally upheld sign-in wrap agreements, “perhaps in part because the transactions at issue in those cases...mostly involve a consumer signing up for an ongoing account and, thus, it is reasonable to expect that the typical consumer in that type of transaction contemplates entering into a continuing, forward-looking relationship.”  (Sellers, supra 73 Cal.App.5th at p. 471.)  But, beyond this commonality, the Sellers court noted “some important limitations of the current state of the law in these federal cases.”  (Id. at p. 472.) First, “because the threshold issue of the existence of a contract is for the courts to decide, the issue of conspicuousness is typically characterized as a question of law.”  (Sellers, supra, 73 Cal.App.5th at p. 473.)  But in deciding this issue, courts are actually undertaking “a fact-intensive inquiry” of “largely subjective” criteria, such as the size, color, contrast, and location of any text notices; the obviousness of any hyperlinks; and overall screen “clutter.”  (Ibid.)  Not surprisingly, then, the Sellers court observed that different federal courts have reached “seemingly inconsistent results” (ibid.) about the conspicuousness of “essentially the same... sign-up webpages” (id. at p. 474, citing Metter v. Uber Technologies, Inc. (N.D.Cal., Apr. 17, 2017, No. 16-CV-06652-RS) 2017 WL 1374579, at p.*3 [finding Uber’s sign-in wrap sufficiently conspicuous] and Cullinane v. Uber Technologies, Inc. (1st Cir. 2018) 893 F.3d 53, 63 [finding Uber’s sign-in wrap not sufficiently conspicuous]). Second, the Sellers court noted that, because the “courts have relied on similarly, subjective views about the experience, knowledge, and skill level of the ‘typical’ online consumer” (Sellers, supra, 73 Cal.App.5th at p. 474), “it is more appropriate to focus on the providers, which have complete control over the design of their websites and can choose from myriad ways of presenting contractual terms to consumers online” to “eliminate any uncertainty as to the consumer’s notice of contractual terms and assent to those very terms” (id. at pp. 475-476). In this respect, “the transactional context is an important factor to consider and is key to determining the expectations of a typical consumer.”  (Sellers, supra, 73 Cal.App.5th at p. 481.)  Thus, “when the transaction is one in which the typical consumer would not expect to enter into an ongoing contractual relationship,” such as buying a single flower arrangement or pair of socks, downloading free software, or signing up for a free trial, the consumer “is less likely to be looking for” contractual terms.  (Id. at p.476; see Long, supra, 245 Cal.App.4th at p. 866 [online purchase of flower arrangement]; Specht v. Netscape Communications Corp. (2d Cir. 2002) 306 F.3d 17, 32 (Specht) [free software download].)  “By contrast, the majority of the federal cases finding an enforceable sign-in wrap agreement involve continuing, forward-looking relationships.”  (Sellers, at p. 476; see, e.g., Meyer v. Uber Technologies, Inc. (2d Cir. 2017) 868 F.3d 66, 80 (Meyer) [“The registration process clearly contemplated some sort of continuing relationship between the putative user and Uber, one that would require some terms and conditions, and the Payment Screen provided clear notice that there were terms that governed that relationship.”].)

 

 

Applying these principles, the Sellers court found a sign-in wrap agreement was not sufficiently conspicuous to put consumers on notice of the service provider’s arbitration provision and class action waiver, where the plaintiffs alleged they believed they were paying a one-time fee of $5 to submit a question to an online “‘expert.’”  (Sellers, supra, 73 Cal.App.5th at p.452.)  The plaintiffs alleged the defendant then enrolled them in a costlier, automatically renewing membership, in violation of California’s Automatic Renewal Law (ARL), which requires “‘clear and conspicuous’ disclosures” and “‘affirmative consent’” to enrollment.  (Sellers, at p. 452.)  First and foremost, the Sellers court found that in the context of a transaction governed by the ARL, the sign-in wrap notices “were not sufficiently conspicuous to bind” the plaintiffs (Sellers, supra, 73 Cal.App.5th at p. 478) because the notices were “significantly less conspicuous than the statutory notice requirements governing the plaintiffs’ underlying ARL claims” (id. at p. 479; see id. at p. 480 [“a textual notice of the existence of contractual terms that limit the consumer’s ability to address ARL violations should... be at least as conspicuous as the notice required by the statute in the first instance”]). Second, apart from the ARL, the Sellers court found the sign-in wrap notices were “not sufficiently conspicuous even when considering the more subjective criteria applied in the more recent federal cases” (Sellers, supra, 73 Cal.App.5th at p. 478) because the “context of the transaction”—clicking a “‘Start my trial’” button to “get the answer to a single question for a one-time fee of $5” (id. at p. 480, italics added)—“is not a situation in which ‘the registration process clearly contemplated some sort of continuing relationship... that would require some terms and conditions’” (ibid., quoting Meyer, supra, 868 F.3d at p. 80).Rather, in this context, consumers “would not likely be scrutinizing the page” for notices regarding terms of use, which were disclosed (1) “in extremely small print” that contrasted less against the background than other print on the same page; (2) outside the “box containing the payment fields where the consumer’s attention would necessarily be focused”; and (3) via a hyperlink that, although underlined, was “not set apart in any other way..., such as with blue text or capital letters.”  (Sellers, at pp. 480-481).

 

 

Finally, the court found that additional disclosures contained on the “View response” page that appears “only after the user has already signed up for a ‘trial’” were not sufficiently conspicuous.  (Sellers, supra, 73 Cal.App.5th at p. 482.)  Below the “View response” prompt was a checkbox next to text stating, “‘I agree to the Disclaimer and re-agree to the Terms of Service.’”  (Id. at p. 456.)  Although the court found this disclosure “somewhat more like a clickwrap agreement that is generally enforceable” (id. at p. 482), the court nonetheless found it insufficiently conspicuous because the underlined hyperlink “goes to a set of disclaimers regarding the accuracy of the answer the user is about to receive, and not to the terms of service” (id. at p. 483).  The bottom of the accuracy-disclaimer page contained links to the terms of service, with a notice stating, “‘You can read more about these policies in our Terms of Service.’”  (Ibid.)  The court found this language insufficiently conspicuous because it “does not suggest the consumer will be bound by those terms and instead, the entire scenario requires the user ‘to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.’”  (Ibid., quoting Nguyen, supra, 763 F.3d at p.1179.)  “Considering the context of the transaction,” the court found the checkbox disclosure insufficiently conspicuous because “the hyperlink does not take the consumer to terms advising them they would be bound by an agreement to arbitrate. Instead, the terms are available only if the consumer scrolls through the disclaimers and clicks on a secondary link to the terms of service.”  (Sellers, at pp. 483-484, italics added.)

 

 

(…) And he accessed Blizzard’s online platform to interact with other players in a videogame he alleges he “spent approximately 50 hours playing... over the course of approximately two years.”  These circumstances “involve a consumer signing up for an ongoing account and, thus, it is reasonable to expect that the typical consumer in that type of transaction contemplates entering into a continuing, forward-looking relationship” governed by terms and conditions.  (Sellers, supra, 73 Cal.App.5th at p. 471, italics added; see id. at p. 477 [users who “submitted a single question for a ‘trial’ and a one-time fee” “did not anticipate that they would enter into an ongoing relationship governed by extensive contractual terms”].)  This is the type of transaction in which federal courts have generally found sign-in wrap agreements enforceable.  (See id. at p. 476.)

 

 

In this context, we have no trouble concluding the 2018 pop-up notice provided sufficiently conspicuous notice that a user who clicked the “Continue” button at the bottom of the pop-up would be bound by the 2018 License Agreement and the Dispute Resolution Policy incorporated into it. As for notice of the 2018 License Agreement generally, the pop-up provided sufficiently conspicuous notice.  It consisted primarily of a scrollable text box that contained the entire 2018 License Agreement.  Thus, unlike in Sellers, users did not need “‘to ferret out hyperlinks to terms and conditions.’” (Sellers, supra, 73 Cal.App.5th at p. 483; see Specht, supra, 306 F.3d at p. 32 [“a reference to the existence of license terms on a submerged screen is not sufficient to place consumers on inquiry or constructive notice of those terms”].)  Blizzard directly provided those terms and conditions. Blizzard also made clear the significance of clicking the “Continue” button in the pop-up. Immediately above the button, in white text contrasting against a dark background, the pop-up notice stated: “By clicking ‘Continue’, I acknowledge that I have read and understand the Blizzard License Agreement applicable to my country of residence.”  The portion of the 2018 License Agreement immediately visible in the text box advised users to “CAREFULLY READ THE AGREEMENT,” and admonished that they “MAY NOT INSTALL OR OTHERWISE ACCESS THE PLATFORM” if they “DO NOT AGREE WITH ALL OF THE TERMS OF THE AGREEMENT.”  This provided sufficiently conspicuous notice to users that by clicking the “Continue” button on the pop-up, they were agreeing to be bound by the 2018 License Agreement.

 

As for notice of the arbitration agreement specifically, we further conclude the pop-up provided sufficiently conspicuous notice.  The portion of the 2018 License Agreement immediately visible in the scrollable text box also advised that the agreement contains a dispute resolution section that, in turn, contains an arbitration agreement and class action waiver: “PLEASE NOTE THAT THE SECTION BELOW TITLED DISPUTE RESOLUTION CONTAINS A BINDING ARBITRATION AGREEMENT AND CLASS ACTION WAIVER.  THEY AFFECT YOUR LEGAL RIGHTS.  PLEASE READ THEM.” Because this notice appeared in a scrollable text box that contained the entire 2018 License Agreement, a user could scroll through the agreement to find a section clearly titled “Dispute Resolution. ”Thus, the trial court mistakenly stated in its minute order that “there is no ‘Dispute Resolution’ section ‘below.’”  (See Sellers, supra, 73 Cal.App.5th at p. 462 [Court of Appeal reviews undisputed screenshots de novo].)

 

 

The Dispute Resolution section of the 2018 License Agreement, in turn, provided sufficiently conspicuous notice that it incorporated by reference the Dispute Resolution Policy, which contains an arbitration provision. “The general rule is that the terms of an extrinsic document may be incorporated by reference in a contract so long as (1) the reference is clear and unequivocal, (2) the reference is called to the attention of the other party and he consents thereto, and (3) the terms of the incorporated document are known or easily available to the contracting parties.”  (DVD Copy Control Assn., Inc. v. Kaleidescape, Inc. (2009) 176 Cal.App.4th 697, 713 (Kaleidescape); see Shaw v. Regents of University of California (1997) 58 Cal.App.4th 44, 54 (Shaw) [“The contract need not recite that it ‘incorporates’ another document, so long as it ‘guides the reader to the incorporated document.’”].) These criteria are satisfied here.

 

 

(…) It is of no import that the document being incorporated contains an arbitration agreement.  (See Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 914 [the defendant “was under no obligation to highlight the arbitration clause of its contract, nor was it required to specifically call that clause to the plaintiff’s attention.  Any state law imposing such an obligation would be preempted by the FAA.”]; Wolschlager v. Fidelity National Title Ins. Co. (2003) 111 Cal.App.4th 784, 791 [“There is no authority requiring the defendant to specify that the incorporated document contains an arbitration clause in order to make the incorporation valid. All that is required is that the incorporation be clear and unequivocal and that the plaintiff can easily locate the incorporated document.”]; Ajzenman, supra, 492 F.Supp.3d at p. 1077 [“there is no special rule that an offeror of an adhesive consumer contract specifically highlight or otherwise bring an arbitration clause to the attention of the consumer to render the clause enforceable”].)

 

Plaintiffs imply that Blizzard’s incorporation by reference was ineffective because the Dispute Resolution Policy was more than “one click” away from Blizzard’s textual notice; that is, the user would have to click a hyperlink to a first webpage that contains the License Agreement, and from there click a hyperlink to a second webpage that contains the Dispute Resolution Policy.  (See, e.g., Sellers, supra, 73 Cal.App.5th at pp.483-484 [finding notice insufficient where “the terms are available only if the consumer scrolls through the disclaimers and clicks on a secondary link to the terms of service” (italics added)].)  However, this ignores that the 2018 pop-up notice presented the entire 2018 License Agreement, which contained a hyperlink directly to the Dispute Resolution Policy. Thus, the incorporated document was only one click away, not two.

 

 

To conclude, the 2018 pop-up notice provided sufficiently conspicuous notice that by clicking on the “Continue” button at the bottom of the pop-up, the user would be agreeing to all of the terms of the 2018 License Agreement, which validly incorporated by reference the Dispute Resolution Policy, together with its arbitration agreement and class action waiver (both of which the pop-up notice specifically brought to the user’s attention).

 

 

(…) 

 

DISPOSITION

 

We reverse the trial court’s December 18, 2020 order and direct the court to enter a new order granting Blizzard’s motion to compel arbitration.  Blizzard is entitled to its costs on appeal.

 

 

 

 

(California Court of Appeal, March 29, 2022, B.D. v. Blizzard Entertainment, Docket No. D078506, Certified for Publication)

U.S. Court of Appeals for the Ninth Circuit, Weston Family Partnership LLP v. Twitter, Inc., Docket No. 20-17465

SEC

 

Disclosure (Scope of)

 

Duty to Disclose

 

Misleading Statements

Exchange Act’s Safe Harbor Provision for Forward-Looking Statements

Securities Law

 

Securities Fraud Lawsuit

 

Twitter

 

 

 

The panel affirmed the district court’s dismissal of a securities fraud lawsuit under §§ 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5, alleging that Twitter, Inc., misled investors by hiding the scope of software bugs customization. Twitter shares users’ cell phone location data with companies that pay more for ads tailored to certain users, but it permits users to opt out of such data-sharing. In May 2019, Twitter announced that it had discovered software bugs that caused sharing of cell phone location data of its users, but it told its users that it had fixed the problems. In August 2019, Twitter announced that it had again accidentally shared user data with advertisers, even for those who had opted out, but it had “fixed these issues.” Twitter had not resolved the software bugs, but instead had stopped sharing user data altogether for its Mobile App Promotion advertising program, resulting in a drop in revenue. In October 2019, Twitter disclosed the software bugs and reported a revenue shortfall, and its share price dropped.

 

The panel held that plaintiffs’ complaint failed to state a claim under § 10(b) because Twitter’s statements were not false or materially misleading. The panel held that the securities laws do not require real-time business updates or complete disclosure of all material information whenever a company speaks on a particular topic. To the contrary, a company can speak selectively about its business so long as its statements do not paint a misleading picture. The panel held that Twitter’s statements about its advertising program were not false or misleading because they were qualified and factually true, and the company had no duty to disclose more than it did under federal securities law. Specifically, securities laws did not require Twitter to provide real-time updates about the progress of its Mobile App Promotion program. Further, plaintiffs did not plausibly or with particularity allege that the software bugs disclosed in August had materialized and affected revenue in July. In addition, Twitter’s July 2019 statements fell within the Exchange Act’s safe harbor provision for forward-looking statements.

 

When Twitter said that it had “fixed these issues,” it did not mean resolving the software bugs, which proved to be difficult. Rather, Twitter had stopped sharing user data for its MAP advertising program altogether. This meant no data- sharing for all users and thus also less revenue from MAP. Twitter did not disclose these facts at that time.

 

(…) Finally, about 11 weeks later on October 24, Twitter in its quarterly earnings report disclosed the software bugs hampering MAP and reported a $25 million revenue shortfall. In response to this news, some analysts downgraded the stock and the share price dropped over 20%.

 

Plaintiffs allege that these statements were false or materially misleading:

(1) Twitter’s July 26, 2019 shareholder letter and July 31, 2019 Form 10-Q stated the company is “continuing its work to increase the stability, performance, and flexibility of its ads platform and MAP,” but that it is “not there yet” and that this work will “take place over multiple quarters, with a gradual impact on revenue.” Segal added that the company is “still in the middle of that work” relating to MAP improvements, and that it is “still at the state where he believes that you would see its impact be gradual in nature.” Plaintiffs allege that these statements are false because the defendants did not disclose the software bugs allegedly plaguing MAP then and suggested that MAP was on track.

 

(2) The Form 10-Q also contained warnings that the company’s products and services “may contain undetected software errors, which could harm its business and operating results.” Plaintiffs claim that this statement is misleading because Twitter supposedly knew by this time that “software errors” would—not just “may”—harm the bottom line.

(3) Because of the allegedly false or misleading statements in the 10-Q filing, Twitter’s Sarbanes- Oxley (SOX) certifications signed by Dorsey and Segal were also false or misleading.

(4) On August 6, 2019, the company issued a tweet that stated: “We recently discovered and fixed issues related to your settings choices for the way we deliver personalized ads, and when we share certain data with trusted management and advertising partners,” and Twitter’s Help Center claimed that it “fixed these issues on August 5, 2019.” Plaintiffs assert that this statement misleadingly suggested Twitter had solved the software bugs, not just the privacy leak.

(5) On September 4, 2019 at an investor conference, Segal stated that the company’s “MAP work is ongoing” and that Twitter “continued to sell the existing MAP product.” Plaintiffs again claim that Twitter failed to disclose the scope of the software bugs hindering MAP.

(6) At the same conference, Segal stated that “Asia . . . has tended to be more MAP-focused historically.” This statement, according to Plaintiffs, glossed over MAP’s software bugs.

 

II. The Complaint Fails to State a Claim Under Section 10(b) Because Twitter’s Statements Are Not False or Materially Misleading.

Section 10(b) of the Exchange Act makes it unlawful:

To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the SEC may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. § 78j(b). The SEC, in turn, issued Rule 10b-5, which declares it unlawful:

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5.

To state a claim under Section 10(b) of the Exchange Act and Rule 10b-5, the complaint must plausibly allege: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 267 (2014) (citations omitted).

For a statement to be false or misleading, it must “directly contradict what the defendant knew at that time” or “omit material information.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1008–09 (9th Cir. 2018); see also 15 U.S.C. § 78u-4(b)(1)(A)–(B).

Plaintiffs must also overcome several hurdles to successfully plead a claim under Section 10(b). First, under the PSLRA’s particularity requirements and Federal Rule of Civil Procedure 9(b), allegations of “fraud must be accompanied by the who, what, when, where, and how of the misconduct charged.” Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (cleaned up); see also 15 U.S.C. § 78u-4(b)(1). Second, an allegedly misleading statement must be “capable of objective verification.” Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 606 (9th Cir. 2014). For example, “puffing”—expressing an opinion rather than a knowingly false statement of fact—is not misleading. Id.; see also Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1206–07 (9th Cir. 2016). Third, a statement is not actionable just because it is incomplete. In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1085 (9th Cir. 2002). Section 10(b) and Rule 10b-5(b) “do not create an affirmative duty to disclose any and all material information. Disclosure is required . . . only when necessary ‘to make . . . statements made, in the light of the circumstances under which they were made, not misleading.’” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011) (quoting 17 C.F.R. § 240.10b-5(b)). 

Finally, even if a statement is objectively false or misleading, the PSLRA provides a “safe harbor” for forward-looking statements if such statements are either identified as forward-looking and accompanied by a meaningful cautionary statement, or if the plaintiff fails to show that the statement was made with actual knowledge that it was false or misleading. See 15 U.S.C. § 78u-5(c)(1); see also In re Cutera Sec. Litig., 610 F.3d 1103, 1108 (9th Cir. 2010).

 

A. Securities laws do not require Twitter to provide real-time updates about the progress of its MAP program.

Plaintiffs suggest that Twitter—when faced with a setback in dealing with software bugs plaguing its MAP program—had a legal duty to disclose it to the investing public. Not so. While society may have become accustomed to being instantly in the loop about the latest news (thanks in part to Twitter), our securities laws do not impose a similar requirement. Section 10(b) and Rule 10b-5 “do not create an affirmative duty to disclose any and all material information.” Matrixx, 563 U.S. at 44.

Put another way, companies do not have an obligation to offer an instantaneous update of every internal development, especially when it involves the oft-tortuous path of product development. See Vantive, 283 F.3d at 1085 (“If the challenged statement is not false or misleading, it does not become actionable merely because it is incomplete.”). Indeed, to do so would inject instability into the securities market, as stocks may wildly gyrate based on even fleeting developments. A company must disclose a negative internal development only if its omission would make other statements materially misleading. Matrixx, 563 U.S. at 45 (“Even with respect to information that a reasonable investor might consider material, companies can control what they have to disclose under these provisions by controlling what they say to the market.”).

Plaintiffs argue that Twitter’s failure to disclose the software bugs’ impact on MAP in July 2019 was materially misleading because its prior statements had allegedly left a “misimpression” that the work to improve MAP was “on track.” But a closer examination of the statements reveals a much more qualified and less definitive characterization of the MAP program. For example, the July 2019 shareholder letter and 10-Q stated that Twitter is “continuing its work to increase the stability, performance, and flexibility of its ads platform and MAP. . . but we’re not there yet.” Similarly, the CFO explained that the company is “still in the middle of that work” relating to MAP. And later in September of that same year, the CFO again reiterated that the “MAP work is ongoing.”

None of these statements suggests that Twitter’s MAP program was “on track.” Rather, they suggest a vaguely optimistic assessment that MAP, like almost all product developments, has had its ups and downs, even as the company continues to make progress. Perhaps if Twitter had set a specific deadline or revenue impact for MAP, its somewhat optimistic statements could seem like an implied affirmation of that target. But Twitter never made such specific or unqualified guidance. And with no such guidance, Twitter’s statements are so imprecise and noncommittal that they are incapable of objective verification. See Apollo, 774 F.3d at 606 (distinguishing non-actionable vague puffery from statements capable of objective verification); In re Cutera Sec. Litig., 610 F.3d at 1111 (“Mildly optimistic, subjective assessment hardly amounts to a securities violation.”). Nor can it be said that the company “touted positive information to the market” such that it “became bound to do so in a manner that wouldn’t mislead investors, including disclosing adverse information that cuts against the positive information.” Khoja, 899 F.3d at 1009.

In short, Twitter had no legal duty to disclose immediately the software bugs in its MAP program, especially given that its earlier statements about MAP’s progress were qualified and vague.

(…) Even then, an express statement of the company being “on track” to meet a target would likely be protected as a forward-looking statement under the safe harbor provision of the PSLRA. Wochos v. Tesla, Inc., 985 F.3d 1180, 1192 (9th Cir. 2021). (Fn. 4).

(…) But Twitter’s August 6 Help Center blog post said no such thing. The context makes clear that Twitter had “fixed” the inadvertent data-sharing; there is no mention of software bugs, let alone ridding of them. See Retail Wholesale & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1278 (9th Cir. 2017) (“A duty to provide information exists only where statements were made which were misleading in light of the context surrounding the statements.” (emphasis added)). The blog post starts off by noting that Twitter wants “to give you control over your data” but that it had “recently found issues” of inadvertent data-sharing. The post then states: “We fixed these issues on August 5, 2019. We know you will want to know if you were personally affected . . . . What is there to do? Aside from checking your settings, we don’t believe there is anything for you to do.” These statements address Twitter users’ concerns about their privacy, and thus the “fix” related to privacy leaks, not software bugs that are not even mentioned in the blog post. In short, an ordinary investor would not read Twitter’s Help Center blog post as saying that Twitter had remediated the software issues.

 

C. Twitter’s July 2019 statements fall within the safe harbor provision.

Plaintiffs’ challenge of Twitter’s July 2019 statements in its shareholder letter and 10-Q fails for another reason: They were identified as forward-looking statements and fall within the safe harbor of the Exchange Act. 15 U.S.C. § 78u- 5(c)(1); see also Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1058 (9th Cir. 2014) (“Classic growth and revenue projections... are forward-looking on their face.”). These forward-looking statements in the shareholder letter and 10-Q were accompanied by very detailed meaningful cautionary language that “identified important factors that could cause actual results to differ materially from those in the forward- looking statements.” 15 U.S.C. § 78u-5(c)(1)(A)(i).

 

III. The District Court Properly Dismissed the Section 20(a) Claims.

Under Section 20(a) of the Exchange Act, “certain ‘controlling’ individuals are also liable for violations of section 10(b) and its underlying regulations.” Zucco Partners, 552 F.3d at 990 (citing 15 U.S.C. §78t(a)). Because a Section 20(a) claim is derivative, “a defendant employee of a corporation who has violated the securities laws will be jointly and severally liable to the plaintiff, as long as the plaintiff demonstrates ‘a primary violation of federal securities law’ and that ‘the defendant exercised actual power or control over the primary violator.’” Id. (citation omitted). But, as shown above, Plaintiffs did not adequately plead a primary violation of Section 10(b) or Rule 10b-5 by any defendant. Thus, control person liability under Section 20(a) cannot survive.

 

CONCLUSION

The district court’s order granting the defendants’ motion to dismiss is AFFIRMED.

 

(Because we hold that the complaint did not adequately allege falsity, we need not address scienter or loss causation.) (Fn. 7).

 

 

(U.S. Court of Appeals for the Ninth Circuit, March 23, 2022, Weston Family Partnership LLP v. Twitter, Inc., Docket No. 20-17465, for Publication)

About Blocking Negative Reviews of Products from Being Posted to Website

Customer Reviews

 

Negative Reviews

 

Advertising

 

Competition Law

 

Consumer Law

 

Websites

 

Internet Law

 

 

 

FTC Finalizes Order with Fashion Nova Over Allegations It Blocked Negative Reviews

 

Republication

https://www.ftc.gov/news-events/news/press-releases/2022/03/ftc-finalizes-order-fashion-nova-over-allegations-it-blocked-negative-reviews?utm_source=govdelivery

 

https://www.ftc.gov/legal-library/browse/cases-proceedings/192-3138-fashion-nova-llc-matter?utm_source=govdelivery

 

Last Updated

March 21, 2022

 

Case Status

Pending

 

In the Matter of Fashion Nova, LLC, a limited liability company

 

FTC Matter/File Number

192 3138

 

Enforcement Type

Part 2 Consents

 

 

 

The Federal Trade Commission has finalized an order settling allegations that online fashion retailer Fashion Nova, LLC blocked negative reviews of its products from being posted to its website. Under the final order, Fashion Nova will pay $4.2 million and is prohibited from suppressing customer reviews of its products.

 

 

In a complaint first announced in January 2022, the FTC alleged Fashion Nova misrepresented that the product reviews on its website reflected the views of all purchasers who submitted reviews, when in fact it suppressed reviews with ratings lower than four stars out of five.

 

 

In addition to the $4.2 million for harm consumers incurred, Fashion Nova is prohibited from making misrepresentations about any customer reviews or other endorsements. It also must post on its website all customer reviews of products currently being sold—with the exception of reviews that contain obscene, sexually explicit, racist, or unlawful content and reviews that are unrelated to the product or customer services like shipping or returns.

U.S. Court of Appeals for the Federal Circuit, Broadcom Corp. v. International Trade Commission, Docket No. 20-2008

Import

 

Customs

 

Patent Infringement

 

19 U.S.C.  § 1337  

Existence of a Domestic Industry Requirement (Consists of an “Economic Prong” and a “Technical Prong.”)

 

 

 

Appeal  from  the  United  States  International  Trade  Commission in Investigation No. 337-TA-1119.

 

 

 

Broadcom Corporation (“Broadcom”) filed a complaint at the International Trade Commission (“the Commission”) alleging a violation of 19 U.S.C. § 1337  (“Section  337”) based on the importation of products by Renesas Electronics Corporation (“Renesas”) and other companies that are asserted to infringe U.S.  Patents 7,437,583  (the “’583  patent”) and 7,512,752 (the “’752 patent”). In a final initial determination, the administrative law judge (“the ALJ”) held that  Broadcom failed to demonstrate a violation of Section 337 with respect to the ’583 patent because it failed to satisfy the technical prong of the domestic industry requirement and because there was no infringement of claim 25. (For the ’752 patent, the ALJ held that claim 5 would have been unpatentable as obvious over certain prior art). The parties then filed petitions seeking Commission review, and the Commission affirmed the relevant portions of the    final initial determination. Certain Infotainment  Sys., Components Thereof, and  Auto.  Containing the Same, Inv. No. 337-TA-1119 (May 28, 2020) (Final) (“Decision I”).

 

 

(…) Holding that there was no Section 337 violation because Broadcom failed to show the existence of a domestic industry (…).

 

At the Commission, Broadcom alleged a violation of Section 337 based on the importation of products by Renesas and other companies that it asserts infringe claims 17 and 18 and 25 and 26. Each of the accused infringers was a respondent in the Commission investigation and most have intervened in support of the Commission in this appeal.

 

In the final initial determination, the ALJ held that Broadcom failed to demonstrate that its system-on-a-chip (“SoC”) satisfied the technical prong of the domestic industry requirement in Section 337 because the SoC did not include a “clock tree driver,” which is a limitation of the asserted claims. J.A. 46. The ALJ also held that Broadcom failed to demonstrate infringement of claims 25 and 26 because it “could not identify any specific source code in the accused product where the claimed sequence of events ‘actually happened.’” J.A. 96. The Commission affirmed both holdings.

 

The Commission determined that there was no Section 337 violation because Broadcom failed to satisfy the technical prong of the domestic industry requirement. On appeal, Broadcom asserts error in the Commission’s findings of fact. Reviewing these findings for substantial evidence, we affirm the Commission’s decision.

 

To establish a violation of Section 337 a complainant must show both infringement and that an industry “relating to the articles protected by the patent . . . exists or is in the process of being established” in the United States. 19 U.S.C. § 1337(a)(2), (3). Under Commission precedent, the domestic industry requirement consists of an “economic prong” and a “technical prong.” See, e.g., Alloc, Inc. v. ITC, 342 F.3d 1361, 1375 (Fed. Cir. 2003). To meet the technical prong, the complainant must establish that it practices at least one claim of the asserted patent. This requires a complainant to identify “actual ‘articles protected by the patent.’” Microsoft Corp. v. ITC, 731 F.3d 1354, 1361–62 (Fed. Cir. 2013) (citing 19 U.S.C. § 1337(a)(2)–(a)(3)). To meet the economic prong, the complainant must demonstrate that its investment in the protected article is “significant” or “substantial.” 19 U.S.C. §1337(a)(3). The economic prong is not at issue in this appeal.

 

The ALJ determined that Broadcom identified only its SoC as a domestic industry article. However, the ALJ found, and Broadcom did not dispute, that the SoC did not contain the “clock tree driver” that is required by claim 25; it found that the driver must be stored on an external memory, separate from the SoC. But Broadcom instead argued that it satisfies the technical prong of the domestic industry requirement because it collaborates with its customers to integrate its SoC with external memory to enable retrieval and execution of the “clock tree driver” firmware. However, the ALJ faulted Broadcom for failing to identify any specific external memory that contained the “clock tree driver,” and noted that an actual article protected by the patent is needed to meet the industry requirement.

 

The Commission similarly found that Broadcom failed to identify any specific integration of the purported domestic industry SoC and the “clock tree driver” firmware, or a specific location where the firmware was stored. The Commission reasoned that without identifying an actual integration of the SoC and “clock tree driver,” Broadcom posited only a hypothetical device that did not meet claim 25’s limitations and therefore did not satisfy the technical prong of the domestic industry requirement. The Commission added that Broadcom’s new argument, i.e., that it manufactured and tested a “system” that included an SoC and firmware that contained the clock tree driver, was waived because Broadcom did not raise this theory in the ALJ proceedings.

 

We agree with the Commission that Broadcom failed to satisfy the technical requirement. We have previously found that, in order to meet the technical requirement of Section 337, a complainant must “show that there is a domestic industry product that actually practices” at least one claim of the asserted patent. Microsoft, 731 F.3d at 1361. In Microsoft, the patentee Microsoft supplied a mobile operating system to its customers. Id. at 1358, 1361. Microsoft’s asserted patent dealt with server-client communications, in which the client application was run on a mobile phone manufactured by Microsoft’s customers. Id. at 1360–61. Microsoft failed to show, however, that any such client applications were actually implemented on any third-party mobile device. Id. We therefore found that Microsoft did not satisfy the domestic industry requirement.

 

Broadcom suffers from substantially the same failure of proof here. As in Microsoft, Broadcom failed to identify any specific integration of the domestic industry SoC and the “clock tree driver” firmware, or a specific location where the firmware was stored. Broadcom does not challenge this finding, and instead introduces new theories that the Commission properly deemed waived. Because Broadcom failed to identify an actual article that practices claim 25, the Commission’s finding that Broadcom failed to satisfy the domestic industry requirement of Section 337 was supported by substantial evidence.

 

In light of our affirmance of the Commission’s finding of no domestic industry, the portion of the Commission’s decision addressing infringement of claim 25 is moot. We thus do not address Broadcom’s appeal from that portion of the Commission’s decision.

 

 

 

 

(U.S. Court of Appeals for the Federal Circuit, March 8, 2022, Broadcom Corp. v. International Trade Commission, Docket No. 20-2008)

 

U.S. Court of Appeals for the Fifth Circuit, Bell v. Eagle Mountain Saginaw Independent School District, Docket No. 21-10504

Copyright Infringement

Tweets

Fair Use

Effect on Licensing

Tweets: A Fair Use of Copyright That Bars This Suit?

Attorney’s Fees in a Copyright Action

« Win One for the Gipper »

 

 

Appeal from the United States District Court for the Northern District of Texas USDC No. 4:20-CV-1157

 

Just as famous as some great upsets in sports history are the motivational speeches that inspired them. Knute Rockne, in a speech immortalized in film by a future President, asked his Notre Dame players at halftime to “win one for the Gipper.” They did just that, rallying to beat an undefeated Army. See Knute Rockne: All American (Warner Bros. 1940). Herb Brooks convinced a group of American college players that for one night they could be “the greatest hockey team in the world.” They were, defeating the mighty Soviets in the Miracle on Ice. See Miracle (Walt Disney Pictures 2004).

 

Technology now allows inspirational messages to be conveyed not only in the locker room but also on social media. The softball team and flag corps at a public high school outside Fort Worth used their Twitter accounts to post a motivational passage from sports psychologist Keith Bell’s book, Winning Isn’t Normal.

 

We do not know if the tweets motivated the students to perform at a higher level. We do know that the tweets resulted in Bell’s suing the school district for copyright infringement. We must decide if the tweets were a fair use of the copyright that bars this suit.

 

In 1982, Bell published Winning Isn’t Normal, a 72-page book that provides strategies for success in athletics. Bell continues to market and sell Winning Isn’t Normal through online retailers and his personal website, where he also offers merchandise, including t-shirts and posters that display the passage that was quoted in the tweets.

 

That passage, which Bell calls the WIN Passage, is separately copyrighted. Bell offers licenses for its use. The passage reads:

(…)

 

(…) The leading treatise on fair use observes that “increasingly, courts have considered fair use on a Rule 12(b)(6) motion to dismiss for failure to state a claim.” William F. Patry, PATRY ON FAIR USE § 7:5 & n.10 (2017) (citing more than 25 cases that have evaluated fair use at the Rule 12 stage).

 

(…) Our question, then, is whether a successful fair-use defense appears on the face of Bell’s complaint.

 

(…)

Congress codified the fair-use doctrine in the Copyright Act of 1976 and listed four factors that courts should consider when applying it:

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;

(2) the nature of the copyrighted work;

(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for or value of the copyrighted work.

17 U.S.C. § 107.

 

The four factors are not exclusive. Harper & Row, 471 U.S. at 560. “All are to be explored, and the results weighed together, in light of the purposes of copyright.” Campbell, 510 U.S. at 578. A fair-use defense can succeed even if one or more factors favor the claimant. See id.; Compaq Comput. Corp. v. Ergonome Inc., 387 F.3d 403, 409–10 (5th Cir. 2004). Courts typically give particular attention to factors one and four (the purpose and market effect of the use). See Monge v. Maya Mags., Inc., 688 F.3d 1164, 1171 (9th Cir. 2012); Barton Beebe, An Empirical Study of U.S. Copyright Fair Use Opinions, 1978–2005, 156 U. Pa. L. Rev. 549, 584 (2008) (finding that “the outcomes of factors one and four very strongly correlated with the test outcome” in a survey of caselaw). But, ultimately, courts have “almost complete discretion in determining whether any given factor is present in any particular case” and whether the totality favors fair use. See Melville B. Nimmer & David Nimmer, 4 Nimmer on Copyright § 13.05(A)(4) (Matthew Bender rev. ed. 2021).

 

The first factor considers “the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes.” 17 U.S.C. §107(1). This involves a few considerations. The first and most obvious is commerciality—“whether the user stands to profit from exploitation of the copyrighted material without paying the customary price.” See Harper & Row, 471 U.S. at 562. The second is whether the user acted in good faith. Google LLC v. Oracle Am., Inc., 141 S. Ct. 1183, 1204 (2021); NXIVM Corp. v. Ross Inst., 364 F.3d 471, 478 (2d Cir. 2004). The third is whether the use is “transformative,” meaning it “adds something new” to the copyrighted work. Google, 141 S. Ct. at 1203. The school district does not assert that its use was transformative but argues the other inquiries tip the first factor in its favor. We agree.

First, the school’s use was noncommercial. (…)

(The school district did not, for example, charge others to access the WIN Passage, cf. Elvis Presley Enters. v. Passport Video, 349 F.3d 622, 628 (9th Cir. 2003), or pawn the work off as its own, Triangle Publ’ns, Inc. v. Knight-Ridder Newspapers, Inc., 626 F.2d 1171, 1176 (5th Cir. 1980). Nor did it reproduce a substantial portion of Winning Isn’t Normal to save its students the cost of purchasing the book. Cf. Worldwide Church of God v. Phila. Church of God, Inc., 227 F.3d 1110, 1118 (9th Cir. 2010). (Fn. 1)).

 

The school’s good faith adds another point to the scorecard. See Nunez v. Caribbean Int’l News Corp., 235 F.3d 18, 23 (1st Cir. 2000). Good faith does not excuse infringement. See id. Nevertheless, because “fair use presupposes good faith and fair dealing,” the propriety of the defendant’s conduct does factor into “the equitable balance of a fair use determination.” Fisher, 794 F.2d at 432 (quoting Harper & Row, 105 S. Ct. at 2232). The school posted the WIN Passage in quotes and credited Bell as the author. See Nunez, 235 F.3d at 23. Bell discovered the posts soon after but waited nearly a year before telling the school he disapproved of them. Once he did, the school immediately removed the posts and responded that the incident was “a teachable moment” it would be sure not to repeat. We do not see anything in the school’s conduct “sufficiently blameworthy” to weigh against fair use. See id.

 

(…) The pleadings, however, also indicate that the WIN Passage was freely accessible before the softball team and flag corps posted it. The WIN Passage appears in images that Bell posts online. Indeed, the complaint suggests that Bell merely took issue with the post because it “was not the generally circulated version.” If an infringing use “enables a viewer to see such a work which he had been invited to witness in its entirety free of charge, the fact that the entire work is reproduced . . . does not have its ordinary effect of militating against a finding of fair use.” Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 449–50 (1984). The school quoted a small excerpt from Winning Isn’t Normal, which was already freely available to the public. As a result, the third factor is neutral.

 

The fourth factor examines “the effect of the use” on the market for and value of the copyrighted work. 17 U.S.C. § 107(4). We consider actual market harm but, more broadly, whether widespread use of the work in the same infringing fashion “would result in a substantially adverse impact on the potential market” for the original work and any derivatives. Campbell, 510 U.S. at 590; see also Compaq, 387 F.3d at 410. “This last factor is undoubtedly the single most important element of fair use.” Harper & Row, 471 U.S. at 566.

 

Bell does not allege that he actually lost any revenue due to the school’s use of the passage. Instead, his complaint contends that widespread use of the WIN Passage on social media could reduce “the incentive to purchase Winning Isn’t Normal or related merchandise.”

 

We do not see a plausible economic rationale to support Bell’s assertion that widespread tweeting of the WIN passage would undermine the value of his copyright. See Twombly, 550 U.S. at 566–68 (considering market realities in evaluating whether a claim is plausible). The tweets do not reproduce such a substantial portion of Winning Isn’t Normal “as to make available a significantly competing substitute” for the original work. See Author’s Guild, 804 F.3d at 223. If anything, the properly attributed quotation of a short passage from Winning Isn’t Normal might bolster interest in the book; it is free advertising. See Narell v. Freeman, 872 F.2d 907, 914 (9th Cir. 1989). The same is true for merchandise. An online post is not a market substitute for a coffee mug. Viral sharing of the WIN Passage on Twitter might enhance the notoriety and appeal of Bell’s work, thereby increasing the incentive to purchase products displaying it. The opposite inference does not make sense: How would online references to the WIN Passage reduce the market for merchandise displaying it?

 

(The school district asserts that Bell carries the burden on this factor because its use was not commercial. Although some courts once interpreted Sony as creating a presumption of de minimis harm for nonprofit uses, see e.g., Princeton Univ. Press v. Mich. Document Servs., Inc., 99 F.3d 1381, 1385–86 (6th Cir. 1996), the Supreme Court has since clarified that no such presumption exists, see Patry § 6:4 (“The burden of proving the defense always remains on the party asserting it.”); Campbell, 510 U.S. at 584–85; Harper & Row, 471 U.S. at 566–69. (Fn. 4).

 

Bell also alleges that the tweets might impact his ability to license similar uses of the WIN Passage. But we cannot recognize a “theoretical market for licensing the very use at bar.” Swatch Group Mgmt. Servs., Ltd. v. Bloomberg L.P., 756 F.3d 73, 91 (2d Cir. 2014) (quoting 4 NIMMER ON COPYRIGHT § 13.05(A)(4)). To weigh any possible effect on licensing, we must first find it plausible that there is a “traditional, reasonable, or likely to be developed market” for licensing the kind of use at issue. See Am. Geophysical Union v. Texaco Inc., 60 F.3d 913, 930 (2d Cir. 1994); see also Cambridge Univ. Press v. Patton, 769 F.3d 1232, 1276 (11th Cir. 2014) (finding that the availability of licenses for the plaintiff’s copyrighted work “is not determinative” of a potential market for licensing the defendant’s use). Bell says he offers licenses for the WIN Passage. Yet despite being embroiled in litigation for years, Bell is unable to allege that anyone has ever purchased a license before posting the WIN Passage on social media—much less a public school district, which has no commercial interest in its online presence. Even in his brief, Bell’s only authority that “such a market exists” is his own “filing of at least 26 copyright infringement lawsuits” and obtaining settlements “from at least 90 different alleged infringers.” Bell’s aggressive efforts to litigate, no matter how successful, are not indicative of a “traditional” or “reasonable” market for his work. See Hofheinz v. AMC Prods., Inc., 147 F. Supp. 2d 127, 141 (E.D.N.Y. 2001) (explaining alleged infringers “are likely to seek a license to avoid entering the murky realm of fair use law during the course of litigation”). Absent any plausible allegation that public schools would willingly pay to tweet the WIN Passage, Bell’s licensing concerns “are purely speculative.” See Narell, 872 F.2d at 914.

 

Bell has failed to plausibly allege a “substantially adverse impact” on a legitimate market for his copyrighted work. The fourth factor thus weighs in favor of fair use.

 

Time to tally up the scorecard. The first and fourth fair-use factors favor the school district, the second narrowly favors Bell, and the third is neutral. In both their number and importance, the statutory factors show that the school’s tweets were fair use. This conclusion comports with the “ultimate test of fair use”: whether copyright law’s goal of promoting creativity would be better served by allowing the use than preventing it. Castle Rock Ent., Inc. v. Carol Publ’g Grp., Inc., 150 F.3d 132, 141 (2d Cir. 1998).

 

Bell also challenges the district court’s award of attorney’s fees. We review this ruling only for abuse of discretion. See Hunn v. Dan Wilson Homes, Inc., 789 F.3d 573, 588 (5th Cir. 2015).

 

“Attorney’s fees to the prevailing party in a copyright action is the rule rather than the exception and should be awarded routinely.” Virgin Records Am., Inc. v. Thompson, 512 F.3d 724, 726 (5th Cir. 2008) (quotation omitted). Still, “recovery of attorney’s fees is not automatic.” Id. It is a matter of the district court’s discretion. Fogerty v. Fantasy, Inc., 510 U.S. 517, 533 (1994). Relevant factors include: “frivolousness, motivation, objective unreasonableness (both in the factual and in the legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence.” Id. at 539 n.19 (quotation omitted).

 

The district court did not abuse its discretion by following the normal rule. Bell is not the typical copyright plaintiff seeking “a fair return for his creative labor.” See Twentieth Cent. Music Corp. v. Aiken, 422 U.S. 151, 156 (1975). He has a long history of suing public institutions and nonprofit organizations over de minimis uses of his work. Taking these cases into account, the district court reasonably concluded that Bell is a serial litigant, who makes exorbitant demands for damages in hopes of extracting disproportionate settlements. This case is another in the line. The school shared a single page of Bell’s work with fewer than 1,000 online followers and immediately removed the posts upon request. Bell was unable to identify any actual financial injury associated with that use but brought suit anyway. Attorney’s fees were thus an appropriate deterrent, both with respect to Bell and other copyright holders who might consider a similar business model of litigation. See id. at 618.

 

 

 

Secondary sources: William F. Patry, PATRY ON FAIR USE § 7:5 & n.10 (2017); Barton Beebe, An Empirical Study of U.S. Copyright Fair Use Opinions, 1978–2005, 156 U. Pa. L. Rev. 549, 584 (2008); Melville B. Nimmer & David Nimmer, 4 Nimmer on Copyright § 13.05(A)(4) (Matthew Bender rev. ed. 2021).

 

 

 

(U.S. Court of Appeals for the Fifth Circuit, Feb. 25, 2022, Bell v. Eagle Mountain Saginaw Independent School District, Docket No. 21-10504)

U.S. Supreme Court, Unicolors, Inc. v. H&M Hennes & Mauritz, L.P., Docket No. 20-915

Copyright

 

Registration Application

 

Inaccurate Information in a Registration

 

Copyright Infringement

 

Safe Harbor, Validity of Certificate of Registration

 

“Ignorance of the Law Is No Excuse.”?

 

 

 

 

To obtain registration, the author of a work must submit to the Register of Copyrights a copy of the work and an application. §§408, 409. The application must provide information about the work. §409. Some of this information is purely factual, but some of it incorporates legal conclusions. Ibid. If the Register determines that the work is copyrightable and meets other statutory requirements, she will issue a certificate of registration. §410(a). The information on this certificate reflects the information that the copyright holder provided on the application.Ibid.

 

Naturally, the information provided on the application for registration should be accurate. Nevertheless, the Copyright Act provides a safe harbor. It says that a certificate of registration is valid 

“regardless of whether the certificate contains any inaccurate information, unless— 

“(A) the inaccurate information was included on the application for copyright registration with knowledge that it was inaccurate; and 

“(B) the inaccuracy of the information, if known, would have caused the Register of Copyrights to refuse registration.” §411(b)(1) (emphasis added).

 

The important point for our purposes is that a certificate of registration is valid even though it contains inaccurate information, as long as the copyright holder lacked “knowledge that it was inaccurate.” §411(b)(1)(A).

 

The question before us concerns the scope of the phrase “with knowledge that it was inaccurate.” The Court of Appeals for the Ninth Circuit believed that a copyright holder cannot benefit from the safe harbor and save its copyright registration from invalidation if its lack of knowledge stems from a failure to understand the law rather than a failure to understand the facts. In our view, however, §411(b) does not distinguish between a mistake of law and a mistake of fact. Lack of knowledge of either fact or law can excuse an inaccuracy in a copyright registration. We therefore vacate the Court of Appeals’ contrary holding.

 

Our reasons are straightforward. For one thing, we follow the text of the statute. See Hardt v. Reliance Standard Life Ins. Co., 560 U. S. 242, 251 (2010). Section 411(b)(1) says that Unicolors’ registration is valid “regardless of whether the registration certificate contains any inaccurate information, unless . . . the inaccurate information was included on the application for copyright registration with knowledge that it was inaccurate.” Both case law and the dictionary tell us that “knowledge” has historically “meant and still means ‘the fact or condition of being aware of something.’” Intel Corp. Investment Policy Comm. v. Sulyma, 589 U. S. ___, ___ (2020) (slip op., at 6) (quoting Webster’s Seventh New Collegiate Dictionary 469 (1967)); see also Black’s Law Dictionary 888 (8th ed. 2004); New Oxford American Dictionary 938 (def. 2) (2d ed. 2005); Webster’s New College Dictionary 625 (3d ed. 2008).

 

Unicolors says that, when it submitted its registration application, it was not aware (as the Ninth Circuit would later hold) that the 31 designs it was registering together did not satisfy the “single unit of publication” requirement. If Unicolors was not aware of the legal requirement that rendered the information in its application inaccurate, it did not include that information in its application “with knowledge that it was inaccurate.” §411(b)(1)(A) (emphasis added). Nothing in the statutory language suggests that this straightforward conclusion should be any different simply because there was a mistake of law as opposed to a mistake of fact.

 

To the contrary, nearby statutory provisions help confirm that here “knowledge” refers to knowledge of the law as well as the facts. Registration applications call for information that requires both legal and factual knowledge. See, e.g., §409(4) (whether a work was made “for hire”); §409(8) (when and where the work was “published”); §409(9) (whether the work is “a compilation or derivative work”). Inaccurate information in a registration is therefore equally (or more) likely to arise from a mistake of law as a mistake of fact. That is especially true because applicants include novelists, poets, painters, designers, and others without legal training. Nothing in the statutory language suggests that Congress wanted to forgive those applicants’ factual but not their (often esoteric) legal mistakes.

 

Further, those who consider legislative history will find that history persuasive here. It indicates that Congress enacted §411(b) to make it easier, not more difficult, for nonlawyers to obtain valid copyright registrations. The House Report states that its purpose was to “improve intellectual property enforcement in the United States and abroad.” H. R. Rep. No. 110–617, p. 20 (2008). It did so in part by “eliminating loopholes that might prevent enforcement of otherwise validly registered copyrights.” Ibid. The Report specifically notes that some defendants in copyright infringement cases had “argued . . . that a mistake in the registration documents, such as checking the wrong box on the registration form, renders a registration invalid and thus forecloses the availability of statutory damages.” Id., at 24. Congress intended to deny infringers the ability to “exploit this potential loophole.” Ibid. Of course, an applicant for a copyright registration—especially one who is not a lawyer—might check the wrong box on the registration documents as a result of a legal, as well as a factual, error. Given this history, it would make no sense if §411(b) left copyright registrations exposed to invalidation based on applicants’ good-faith misunderstandings of the details of copyright law.

 

H&M also argues that our interpretation is foreclosed by the legal maxim that “ignorance of the law is no excuse.” See Brief for Respondent 41–43. This maxim “normally applies where a defendant has the requisite mental state in respect to the elements of a crime but claims to be unaware of the existence of a statute proscribing his conduct.” Rehaif v. United States, 588 U. S. ___, ___ (2019) (slip op., at 8) (internal quotation marks omitted). It does not apply in this civil case concerning the scope of a safe harbor that arises from ignorance of collateral legal requirements. See ibid.

 

 

 

(U.S. Supreme Court, Feb. 24, 2022, Unicolors, Inc. v. H&M Hennes & Mauritz, L.P., Docket No. 20-915, J. Breyer)