contract – Page 2 – Attorney Evan Brown

February 13, 2014 Copyright

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.

September 6, 2011 Contracts

Website terms and conditions were unenforceable because of fraud

Duick v. Toyota Motor Sales, U.S.A., Inc., 2011 WL 3834740 (Cal.App. 2 Dist. August 31, 2011)

Someone signed plaintiff up through a Toyota website to take part in a “Personality Evaluation.” She got an email with a link to a website, and on the second page that she had to click through, she was presented with the well-known check box next to the words “I have read and agree to the terms and conditions.”

Later plaintiff started getting creepy emails from an unknown male calling himself “Sebastian Bowler” who indicated that he was on a cross-country road trip to come and visit plaintiff. He even listed plaintiff’s physical address. One of the emails had a link to Bowler’s MySpace page, which revealed he “enjoyed drinking alcohol to excess.” A few days later plaintiff got another email from someone purporting to be the manager of the hotel in which Bowler had trashed a room, and attempted to bill plaintiff for the damage.

As one would expect, plaintiff was disturbed by these messages. She finally got an email with a link to a video that said Bowler was a fictional character and that the emails were part of an elaborate prank, all to advertise the Toyota Matrix.

Plaintiff sued Toyota for, among other things, infliction of emotional distress. Toyota moved to dismiss the lawsuit, arguing that the online terms and conditions contained an arbitration provision, so the case did not belong in court but before an arbitrator. The court rejected this argument, finding that the terms and conditions were void, because plaintiff’s agreement to them was procured by “fraud in the inception or execution.”

The court found that the terms and conditions led plaintiff to believe that she was going to participate in a personality evaluation and nothing more. A reasonable reader in plaintiff’s position would not have known that she was signing up to be the target of a prank. For example, the terms and conditions were under the heading “Personality Evaluation Terms and Conditions” and made vague and opaque references to terms such as “interactive experience” and a “digital experience.” Simply stated, plaintiff, through no fault of her own, did not know what she was getting herself into.

For these reasons, the court held that the terms and conditions were void, and all the provisions contained in those terms and conditions, including the purported agreement to arbitrate any disputes, did not bind the parties.

October 13, 2010 Contracts, Unfair Competition

Blog post violated nonsolicitation clause in Amway agreement

Amway Global v. Woodward, 2010 WL 3927661 (E.D.Mich. September 30, 2010)

Amway Global went after some of its former distributors in arbitration for, among other things, violating the “Rules of Conduct” which serve as an agreement as to how the distributors (formally known as Independent Business Owners or “IBOs”) operate. Amway claimed that the IBOs violated the Rules of Conduct by soliciting others to leave Amway and join competing enterprises.

The arbitrator found in Amway’s favor, and Amway filed a motion with the court to confirm the award. The court granted the motion.

One of the factual questions was whether one of the IBOs violated the rules against solicitation by blogging about his decision to leave Amway and join another company. One of his posts said “[i]f you knew what I knew, you would do what I do.”

The IBOs argued that this statement did not constitute actionable solicitation because the communication was passive and untargeted, and because there was no evidence that anyone responded to the solicitation by leaving Amway.

The court rejected these arguments. As to the “passive and untargeted” argument, the court observed that:

[C]ommon sense dictates that it is the substance of the message conveyed, and not the medium through which it is transmitted, that determines whether a communication qualifies as a solicitation. The [statement] is readily characterized as an invitation for the reader to follow his lead and join [Amway’s competitor], and this is true despite the diffuse and uncertain readership of the site.

As to the argument based on the fact that no one responded, the court found that the express language of the nonsolicitation clause which prohibited “encourag[ing], solicit[ing], or otherwise attempt[ing] to recruit or persuade any other IBO to compete with” Amway did not turn on the success of those prohibited efforts.

October 11, 2009 Contracts

Web host did not breach contract by terminating rude customer

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

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

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

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

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