contract – Attorney Evan Brown

April 9, 2024 Contracts

So-called “Mutual Non-Disclosure Agreement” only protected one party’s information

mutual NDA

Eastern sued Herbalife for breach of the “Mutual Non-Disclosure Agreement” into which the parties had entered. Eastern claimed Herbalife breached the agreement by disclosing Eastern’s confidential information to a competitor. Herbalife moved for summary judgment on Eastern’s claim for breach of the NDA. The court granted the summary judgment motion.

Was there trickery in drafting?

The NDA in many respects read like an NDA that would bind both parties to protect the other party’s confidential information. Its title contained the word “mutual”. It referred to a “Disclosing Party” and a “Receiving Party”. And it defined “Confidential Information” not by referring to the parties by name, but by saying that Confidential Information was comprised of certain information that the Disclosing Party makes available to the Receiving Party. So on quick glance, one might think it bound both parties to protect the other’s information.

But one critical feature of the agreement was fatal to Eastern’s claim. The word “Disclosing Party” was defined to include only Herbalife.

But what about other parts of the agreement?

Eastern argued that the parties intended the NDA to be mutually binding by pointing to the title of the agreement, references to the obligations of the “Parties”, and discussion of the remedies section which discussed remedies to which a “non-breaching party” would be entitled. Eastern argued that these instances of language showed that a remedy for breach should not be considered as available only for Herbalife.

Plain definitions prevailed

The court rejected Eastern’s argument, looking at the plain language of the agreement and noting that the general references that Eastern emphasized did not “vitiate” the NDA’s express definitions of “Disclosing Party” and “Confidential Information”.

Herbalife Int’l of America, Inc. v. Eastern Computer Exchange Inc., 2024 WL 1158344 (C.D. Cal., March 18, 2024)

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March 21, 2024 Blockchain, Contracts, Cryptocurrency

Bitcoin miner denied injunction against colocation service provider accused of removing rigs

Plaintiff Bitcoin miner sued defendant colocation hosting provider for breach of contract, conversion, and trespass to chattels under Washington law. After filing suit, plaintiff filed a motion for temporary restraining order against defendant, seeking to require defendant to restore plaintiff’s access to the more than 1,000 mining rigs that defendant allegedly removed from its hosting facility. The court denied the motion, finding that plaintiff had established only possible economic injury, not the kind of irreparable harm required for the issuance of a temporary restraining order.

The underlying agreement

In July 2021, the parties entered into an agreement whereby plaintiff would collocate 1,610 cryptocurrency mining rigs at defendant’s facility. Plaintiff had obtained a loan to purchase the rigs for over $6 million. Defendant was to operate the rigs at a high hash rate to efficiently mine Bitcoin, with defendant earning a portion of the mined BTC.

After plaintiff defaulted on its loan, however, in early 2023, defendant allegedly reduced the available power to the rigs, despite plaintiff having cured the delinquency. Plaintiff claimed this reduced power likewise reduced the amount of Bitcoin that imined, and claims that defendant reallocated resources to other miners in its facility from whom it could earn more money.

The discord between the parties continued through late 2023 and early 2024, with 402 rigs being removed, and then defendant’s eventual termination of the agreement. The parties then began disputing over the removal of the remaining rigs and alleged unpaid fees by plaintiff. In early March 2024, plaintiff attempted to retake possession of its rigs, only to allegedly find defendant’s facility empty and abandoned. This lawsuit followed.

No irreparable harm

The court observed that under applicable law, a party seeking injunctive relief must proffer evidence sufficient to establish a likelihood of irreparable harm and mere speculation of irreparable harm does not suffice. Moreover, the court noted, irreparable harm is traditionally defined as harm for which there is no adequate legal remedy, such as an award of damages. Further, the court stated that it is well established that economic injury alone does not support a finding of irreparable harm, because such injury can be remedied by a damage award.

In this situation, the court found there to be no problem of irreparable harm to plaintiff. The court distinguished this case from the case of EZ Blockchain LLC v. Blaise Energy Power, Inc., 589 F. Supp. 3d 1102 (D.N.D. 2022), in which a court granted a temporary restraining order against a datacenter provider who had threatened to sell its customer’s rigs. In that case, the court found irreparable harm based on the fact that the miners were sophisticated technology and could not be easily replaced.

The court in this case found there was no evidence defendant was going to sell off plaintiff’s equipment. It was similarly unpersuaded that the upcoming Bitcoin halving (anticipated in April 2024) created extra urgency for plaintiffs to have access to their rigs prior to such time, after which mining Bitcoin will be less profitable. Instead, the court found that any losses could be compensated via money damages. And since plaintiff had not provided any evidence to support the idea it would be forced out of business in these circumstances, the court found it appropriate to deny plaintiff’s motion for a temporary restraining order.

Block Mining, Inc. v. Hosting Source, LLC, 2024 WL 1156479 (W.D. Washington, March 18, 2024)

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February 5, 2024 Contracts

Online retailer’s browsewrap agreement was not enforceable

browsewrap

Plaintiff sued defendant Urban Outfitters under California law over the way that the retailer routed messages sent using the company’s website. Defendant moved to compel arbitration, arguing that the terms and conditions on defendant’s website required plaintiff to submit to arbitration instead of going to court. The court denied the motion.

The key issue in the case was whether plaintiff, by completing her purchases on defendant’s website, was sufficiently notified of and thus agreed to the arbitration agreement embedded via hyperlinks on the checkout page. Defendant maintained that the language and placement of the hyperlinks on the order page were adequate to inform plaintiff of the arbitration terms, which she implicitly agreed to by finalizing her purchases. Plaintiff argued that the hyperlinks were not conspicuous enough to alert her to the arbitration terms, thus negating her consent to them.

The court looked at the nature of the online agreement and whether plaintiff had adequate notice of the arbitration agreement, thereby consenting to its terms. The court’s discussion touched upon the differences between “clickwrap” and “browsewrap” agreements, emphasizing that the latter, which defendant’s website purportedly used, often fails to meet the threshold for constructive notice due to the lack of explicit acknowledgment required from the user.

The court examined the specifics of what constitutes sufficient notice, pointing out that for a user to be on inquiry notice, the terms must be presented in a way that a reasonable person would notice and understand that their actions (such as clicking a button) indicate agreement to those terms. The court found that defendant’s method of presenting the arbitration terms – through hyperlinks in small, grey font that were not sufficiently set apart from surrounding text – did not meet this standard.

Rocha v. Urban Outfitters, 2024 WL 393486 (N.D. Cal., February 1, 2024)

Shake Shack shakes off typeface breach of contract claim

In an ongoing federal case in New York, the well-loved restaurant Shake Shack finds itself embroiled in a copyright and contract dispute with House Industries, a typeface foundry known for developing the Neutraface font. House Industries accused Shake Shack of using the Neutraface font in Shake Shack’s logos and signage without the necessary licensing, claiming that Shake Shack breached Hose Industries’ End User License Agreement (EULA).

The Core of the Dispute

House Industries’ argument centered around its claim that Shake Shack used the proprietary Neutraface font software for commercial purposes, specifically in logos and signage, without obtaining the appropriate permissions. House Industries asserted – in a counterclaim brought against Shake Shack, who had filed a declaratory judgment action against House Industries – that this breached the EULA, which explicitly prohibits use of the Neutraface font software in logos or for the sale of products (unless the user pays an additional license fee).

Shake Shack moved to dismiss the counterclaim. It argued that House Industries failed to provide plausible, non-speculative allegations sufficient to substantiate a breach of contract claim. Moreover, Shake Shack contended that the contract claim was preempted by the Copyright Act. The court agreed with Shake Shack and dismissed House Industries’ claims.

The Court’s Analysis and Ruling

In assessing the breach of contract claim, the court found significant deficiencies in House Industries’ allegations. To establish a breach of contract, House Industries had to demonstrate the existence of an agreement, performance by House Industries, breach by Shake Shack, and resultant damages. House Industries, however, could not substantiate the existence of a contract between itself and Shake Shack. The details of Shake Shack’s assent to the EULA, including who agreed to it and when, were notably absent in House Industries’ claim. The court noted that mere speculation and the inability to identify a specific agreement or its terms were insufficient to sustain a breach of contract claim.

The court also delved into the issue of preemption under the Copyright Act. The central question was whether House Industries’ claim attempted to enforce rights equivalent to those protected under copyright law. The court determined that the Neutraface glyphs, being graphic or pictorial works, fell within the subject matter of copyright. (It is interesting to note that House Industries did not assert that Shake Shack violated the EULA by using the font software without authorization. “House Industries has pleaded no details whatsoever concerning Shake Shack’s alleged use of the proprietary software.”)

Despite House Industries’ assertions to the contrary, the court concluded that the claims were qualitatively similar to a copyright infringement claim. This portion of the analysis was particularly interesting. Copyright law covers pictorial or graphic works – the category in which the glyphs would fall. But type faces are specifically excluded from copyright protection (37 C.F.R. § 202.1(e)). That exclusion did not matter. Even though the glyphs were not subject to copyright protection, they were the type of works copyright protects. Since House Industries’ claim was equivalent to a claim under the Copyright Act concerning these types of works, the court found the breach of contract claim preempted by the Copyright Act.

Implications and Conclusion

This ruling highlights the complexities of intellectual property rights concerning the use of digital assets like fonts in commercial endeavors. It underscores the importance for companies to clearly understand and comply with licensing agreements when using digital creations. This case serves as a reminder of the nuanced legal landscape governing the intersection of technology, art, and commerce.

Shake Shack Enterprises v. Brand Design Company, Inc., 2023 WL 9003713 (S.D.N.Y. December 28, 2023)

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January 3, 2024 Contracts

Customer was not “under duress” to agree to clickwrap agreement for continued services

Plaintiff filed a lawsuit in federal court against car maker Hyundai alleging issues airsing from Hyundai’s Blue Link and connected services. Defendant Hyundai moved to compel arbitration and to stay the proceedings. The court granted the motion, finding that plaintiff and defendant had entered into a valid agreement to arbitrate such claims via a clickwrap agreement.

The court found there was unrebutted evidence that plaintiff assented to the terms of the “Connected Services Agreement” which contained an arbitration provision. He did so when he reactivated the services in 2021 and when he logged onto the mobile app. The court likewise found the clickwrap process to be proper because they “adequately communicate[d] all the terms and conditions of the agreement,” and “the circumstances support[ed] the assumption that the purchaser receive[d] reasonable notices of those terms”.

Plaintiff had argued that it was unfair and amounted to duress for him to be required to accept new terms for Hyundai’s Blue Link service years after the initial agreement, risking cancellation if not agreed to. However, the court rejected this argument because plaintiff failed to meet the “high standard” required for showing duress. Such a defense requires a showing that one is compelled to make a contract under a wrongful threat, removing free will. That was not the case here. Plaintiff had the option to reject Hyundai’s updated terms and conditions but chose to accept them, indicating the presence of free will in his decision-making process.

Tamburo v. Hyundai Motor America Corporation, 2024 WL 22230 (N.D. Ill. January 2, 2024)

January 16, 2023 Contracts

What are audit provisions in a technology contract?

audit provision

An audit provision in a technology contract is a clause that allows for one party to inspect and perhaps copy certain business records and other information of the other party. Often an audit provision authorizes a party that owns licensed technology or software (the provider or licensor) to periodically inspect and audit the customer’s use of the technology or software. These types of provisions help ensure that the customer is using the technology or software in accordance with the terms of the agreement and that it is not infringing or otherwise misusing the technology or software. They can also be used to ensure that the customer is paying the appropriate license fees or royalties.

One often sees audit provisions in reseller agreements and revenue sharing agreements, to give the right of one party to inspect records that confirm it is being paid in accordance with the terms of the agreement. Since commissions are often calculated as a percentage of revenue, a referral partner may want to see the underlying records supporting the amounts the referral partner is being paid.

The audit provision typically outlines the procedures for the audit, such as the frequency of the audits (often expressed as “no more often than x times per calendar year”), who may conduct the audits (e.g., designees of the auditing party), and what information must be made available for review during the audit. It may also outline the rights and responsibilities of both parties during the audit process, including any limitations on the scope of the audit and the handling of any confidential information that is revealed during the audit.

An audit provision in a technology contract may provide that if the audit uncovers underpayment by the audited party (perhaps by at least a certain percentage) then the audited party will be responsible not only for the amount of the underpayment, but also for the costs incurred by the auditing party in conducting the audit.

Overall, audit provisions are an important aspect of technology agreements and play a vital role in protecting the interests of both parties involved. It is important for both parties to understand the audit provisions in the agreement and to comply with them fully in order to avoid any potential legal disputes.

Evan Brown is a Chicago attorney helping businesses negotiate and draft technology services and development contracts. He also handles many other issues involving the internet, copyright and trademarks, domain names and new media. Call him at (630) 362-7237 or email ebrown@internetcases.com. Follow him on Twitter: @internetcases

November 21, 2018 Contracts

Facebook and iOS game developer’s browsewrap terms of service were not enforceable

Plaintiffs sued defendant game developer in court alleging defendant’s game (Available on Facebook and via an iOS app) constituted illegal gambling in violation of Washington state law, and that they should get back the money they spent on virtual chips bought in-game.

Defendant moved to compel arbitration. The court denied the motion. It held that the game did not present its terms of service in a manner that would place users on notice of the provisions. Since the plaintiffs never effectively agreed to resolve their claims through arbitration, it was proper to allow the case to stay in court.

The court noted a number of problems with the game’s “browsewrap” agreement.

When a user would first access the Facebook app, the “App Terms” link on the initial pop-up window was located far below the “Continue” button in small grey text. The court found that the pop-up window’s main purpose was to gain permission for data sharing between Facebook and defendant, and was not a point traditionally associated with binding terms unrelated to the data sharing itself.

When a user would first download the iPhone app, the app page contained a link to the “License Agreement” that could only be viewed after significant scrolling. Compounding the problem was the fact that a user could download the app directly from the search results list within the App Store without ever accessing the particular app page. So neither the initial link on Facebook or on the mobile app was coupled with a notification informing a user that downloading or playing defendant’s game created a binding agreement.

The hyperlinks within the game itself also did not put a user on inquiry notice.

On Facebook, the “Terms of Use” hyperlink was located at the very bottom of the gameplay screen in small font next to several other links, and was not visible unless a user would scroll down.

On the mobile app, the link to the Terms of Use was located within a settings menu that a player might never have even needed to access. Furthermore, links that were available only via the settings menu were not “temporally coupled” with a discrete act of manifesting assent, such as downloading an app or making a purchase, and were thus less likely to put a reasonable user on inquiry notice.

Benson v. Double Down Interactive, LLC, 2018 WL 5921062 (W.D.Wa. Nov. 13, 2018)

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October 30, 2017 Contracts

Live by the browsewrap, die by the browsewrap

Company could not argue it was not bound by competitor’s browsewrap agreement, because it used a browsewrap agreement for its own website.

server_wrap

Oilpro filed a counterclaim for breach of contract against its competitor, DHI, arguing that DHI breached the agreement it had with Oilpro – such agreement being in a browsewrap agreement found on Oilpro’s website – to not scrape, crawl, or use other automated means to download data from Oilpro’s website. DHI moved to dismiss the breach of contract claim, arguing that Oilpro had insufficiently pled that DHI assented to the terms of the browsewrap agreement. The court denied the motion to dismiss.

In browsewrap cases, because there is no affirmative step to acknowledge assent to the agreement, the party claiming breach has to show that a valid contract exists by demonstrating that the breaching party had actual or constructive knowledge of the terms and conditions. Just having a link to the terms at the bottom of the page, or having them available for review (without having to affirmatively click on something) may not be enough (though there are exceptions to this).

Here, the court found that Oilpro was not relying only on the fact that the agreement was on the pages of the website and available. Instead, Oilpro pointed to DHI’s own web design practices to support its knowledge of the terms of the browsewrap agreement. In the court’s words:

Oilpro alleges constructive notice because DHI has a similar site with a similar browsewrap agreement. Thus, even if there are no allegations that DHI took affirmative action to acknowledge assent, the court finds that the allegations relating to DHI’s constructive knowledge provide more than that the agreement was available and raise the claim to plausible.

So the case stands for the proposition that a company that uses a browsewrap agreement on its own website is less likely to be able to argue it is unaware of other companies’ browsewrap agreements. Said another way, browsewrap-using companies may have a higher standard of diligence in their own online dealings.

It should be noted, however, that the conclusion in this case is likely to apply only in the B2B context, and will likely not affect the enforceability (or non-enforceability) of browsewrap agreements in consumer context. The court said “[t]his conclusion is confined, of course, to instances where both parties are sophisticated businesses that use browsewrap agreements on their websites.”

DHI Group, Inc. v. Kent et al., 2017 WL 4837730 (S.D. Texas, October 26, 2017).

Photo courtesy Flickr user Patrick Finnegan under this Creative Commons license.

About the Author: Evan Brown is a Chicago technology and intellectual property attorney. Call Evan at (630) 362-7237, send email to ebrown [at] internetcases.com, or follow him on Twitter @internetcases. Read Evan’s other blog, UDRP Tracker, for information about domain name disputes.

Unjust enrichment claim over unauthorized use of software was not preempted by the Copyright Act

The Copyright Act is a federal law, and is drafted to “preempt” state laws that purport to give individuals rights that are “equivalent” to rights granted under the Copyright Act. The purpose of this preemption is to displace the effect of any equivalent state law, so that the federal framework gets to deal exclusively with copyright.

So when a plaintiff goes to court suing for copyright infringement and also adds a state law claim against the defendant based on the same underlying facts, defendants routinely move to dismiss that state law claim as preempted by the Copyright Act.

That is what happened in a recent case involving a plaintiff software developer who filed a copyright infringement case against a company for whom he had done some work. He added an “unjust enrichment” claim based on state law, which defendants moved to dismiss. But the court denied the motion, holding that in this situation, the unjust enrichment claim was not dealing with rights that were equivalent under the Copyright Act.

Plaintiff’s unjust enrichment claim was based on the fact that he had not been paid any money for the development work he provided to defendants. In other words, he delivered the copyrighted software, which defendants used without paying him. Sounds a lot like copyright infringement, doesn’t it? Or, more precisely, it sounds like the rights he was claiming were equivalent to those provided under the Copyright Act.

But the court held otherwise, namely, that plaintiff had pled an “extra element” that rendered his unjust enrichment claim to not be equivalent to rights under the Copyright Act.

The court drew an important distinction within the doctrine of unjust enrichment, between “implied-in-law” (quasi-) contracts, and “implied in fact” contracts. An implied-in-fact contract claim passes the threshold of having an “extra element” that defeats a preemption challenge, while an implied-in-law contract does not.

An implied-in-law contract is a “fictional” contract created by a court for equitable, not contractual, purposes. It is not an actual contract, but is a legal substitute formed to impose equity between two parties. An implied-in-fact contract, on the other hand, is indeed a contract that is agreed to by non-verbal conduct, rather than explicit words.

Infringement is the unauthorized use of a work, and a court applying an implied-in-law contract would simply be stepping in to remedy an injustice of that infringement. That is why an unjust enrichment claim based on an implied-in-law contract would be preempted. But the implied-in-fact contract has more to it – actual conduct (a factual reality) that is more than just the conduct of the infringement that took place. That is why an implied-in-fact contract claim of unjust enrichment passes the no-preemption test.

(Compare this to the 2010 case of Christen v. Iparadigms that dealt with Turnitin.com.)

Mahavisno v. Compendia Bioscience, Inc., 2014 WL 340369 (E.D.Mich. January 30, 2014)

December 18, 2011 Contracts

Court enforces online terms and conditions incorporated by reference in invoices

Clickwrap and browsewrap agreements are not the only enforceable online contracts.

Fadal Machining Centers, LLC v. Compumachine, Inc., 2011 WL 6254979 (9th Cir. December 15, 2011)

Plaintiff manufacturer sued one of its distributors over unpaid invoices. Defendant moved to dismiss, citing to an arbitration provision in the terms and conditions on plaintiff’s website. The district court dismissed the complaint and plaintiff sought review with the Ninth Circuit. On appeal, the court affirmed.

It held that the district court did not err in concluding an arbitration agreement existed between the parties. Though the language of the hard copy distribution agreement did not address arbitration, it provided that plaintiff could unilaterally establish terms of sale from time to time. Each invoice referred to plaintiff’s website’s terms and conditions. The court found that these referred-to terms and conditions “clearly and unmistakably delegated the question of arbitrability to an arbitrator.”

The decision supports the notion that contracting parties (particularly merchants selling goods) may rely on provisions not spelled out in any documents exchanged between them, but appearing online and incorporated by reference. In other words, certain online contracts other than clickwrap and browsewrap agreements may be enforceable.