April 23, 2004

Public Allegation of Copyright Infringement
Leads to $300K Defamation Verdict

If you think a competitor is doing something illegal, like infringing your copyright, it's usually best not to complain to customers about it. If it turns out you're wrong about the alleged illegality, you could be liable for defamation. A Web site operator named Boats.com recently learned a $300,000 lesson on that subject in a Florida federal district court.

The "student," now $300K poorer -- plus legal expenses, of course -- is a company called Boats.com. It has a Web site, Yachtworld.com, where subscribing yacht brokers can post listings of yachts for sale. The "teacher" is another company, Nautical Solutions Marketing (NSM), which started a competing Web site, Yachtbroker.com.

NSM's competing Web site apparently was an "aggregator"; it used a "spider" program called Boat Rover to harvest factual data from other yacht-brokerage Web sites, including the Yachtworld Web site of Boats.com. NSM employees also copied and pasted other data from the Yachtworld Web site.

Boats.com didn't especially like having data copied from its Web site to a competing site. According to a report published by the Bureau of National Affairs in one of its printed weeklies (not available on-line), Boats.com sent out letters to yacht brokers and others, claiming that NSM's data-harvesting was illegal.

In response, NSM filed a lawsuit accusing Boats.com of defamation and asking the court to declare that its data-harvesting activities were legal. In November 2003, the jury awarded NSM $250,000 in damages for defamation, plus $50,000 in punitive damages. And then earlier this month, the judge issued findings of fact and conclusions of law that pretty much gave NSM the declaration it had asked for.

References: The Associated Press story was carried in USAToday. The district court's findings of fact and conclusions of law on the copyright issue are here.

April 23, 2004 in Intellectual Property, Litigation, Marketing, Sales | Permalink | Comments (1) | TrackBack

March 31, 2004

Amazon, Borders Face Market-Division Claims

According to this story at CNet News, last week a federal district judge in San Francisco said that a private antitrust claim against Amazon and Borders, for allegedly divvying up portions of the on-line book market between them, could proceed to trial. (The judge dismissed a companion price-fixing claim as "ludicrous on its face.") The claim related to a teaming agreement that Amazon and Borders signed in 2001. The CNet story reports that:

[Judge] Patel said one section of the contract, which is similar to one Amazon inked for the online store of Toys "R" Us, is "troubling." A restriction prohibiting Borders from competing with Amazon means that "Borders could not even provide overstock books to another online marketer, even if there were no mention online that these books came from Borders," Patel said.

This story illustrates a basic principle of contract drafting: Any clause that even resembles a division of the market among competitors should be closely scrutinized. For even if Amazon and Borders emerge victorious, they still have to go through the hassle and expense of a full-blown antitrust trial. Presumably they have already gone through the hassle and expense of document production and depositions. And they must contend not only with the antitrust laws, but also with California's notorious unfair competition law. All this for a contract clause that undoubtedly seemed like a good idea at the time.

March 31, 2004 in Contracts, Marketing | Permalink | Comments (0) | TrackBack

March 05, 2004

Bowling for Dollars: Junk FAXer Settles for $1M+

According to an article at law.com:

A bowling business that sent out as many as 352,000 unsolicited faxes will settle a class action for up to $1 million cash and $1.5 million in coupons. However, it's not clear how much of the money will be paid out.

The settlement came under criticism from a lawyer with his own fax case against the bowling company, AMF Bowling Centers, who said the company was getting off too easily.

Excellent - maybe the word will spread and these pests will quit wasting our FAX paper.

For more information about junk faxes, see www.junkfaxes.org (apparently hosted by a consumer) or www.tcpa.com (apparently a law firm site).

March 5, 2004 in Marketing | Permalink | Comments (0) | TrackBack

February 11, 2004

Compuware: Hit By Its Own Torpedoes

In my Navy days I was a carrier sailor, not a submariner. But I still heard the story about the valor of the submarine USS TANG, sunk in the middle of a furious battle in 1944 by one of its own faulty torpedos with the loss of all but nine of its crew. TANG's skipper, Richard O'Kane, was one of the most successful U.S. sub skippers of WW II; he was awarded the Medal of Honor after he and his surviving crew were released from Japanese captivity at the end of the war.

(In re-reading this essay before posting it, I wonder whether I'll be guilty of poor taste in using TANG's epic saga as a motif for a far less-heroic tale. But many of you will have never heard of either TANG or O'Kane, and you should, so here goes.)

Compuware, a mainframe computer software vendor, seems to have been hit by several of its own torpedoes. In 2002, it launched a copyright- and trade-secret lawsuit against IBM, its former alliance partner. Not long afterwards, CompuWare's own assertions were re-directed at them, as part of a class-action securities lawsuit. Last week, Compuware's motion to dismiss the class-action lawsuit was denied in part, leaving the unfortunate Compuware to the tender mercies of the securities plaintiffs' bar. See In re Compuware Securities Litigation, _ F. Supp.2d _, 2004 WL 231464 (E.D. Mich. Feb. 3, 2004) (link via Securities Litigation Watch.)



A Rocky Alliance

IBM was and is a major player in the market for mainframe computers. Compuware is a software vendor in the mainframe market. It was (formerly) a "tier one" alliance partner of IBM; as such, it enjoyed access to IBM source code and other proprietary information. One might think of them as sailing in IBM's wake.

IBM, however, allegedly became dissatisfied with the pricing of Compuware's software. So, beginning in 1999 and 2000, it developed its own competing software, much to Compuware's displeasure. In 2002, Compuware filed a copyright- and trade-secret lawsuit against IBM.

Unhappily, just a few weeks later, Compuware pre-announced what the class-action complaint delicately describes as "disappointing financial results." Its stock price dropped 25% in one day on heavy volume.

A securities class-action plaintiff seized on Compuware's allegations against IBM. The plaintiff claimed that Compuware had admitted that it knew for a long time that its relationship with IBM was deteriorating -- and that it had wrongfully failed to disclose that deterioration.

Torpedo 1 Away: A 1999 Press Release

The class-action plaintiff focused on several of Compuware's press releases, but one of them stands out. In a press release from 1999, Compuware's CEO was quoted as saying "I see no significant trends or impediments that would negatively affect our prospects." (Emphasis added.) No doubt that sentence was actually written by some marketing type, seized by the enthusiasm of the late 90s tech bubble. (Incidentally, Compuware's executive VP for corporate communications and investor relations was named as one of the individual defendants in the class-action suit.)

But according to the class-action plaintiff, the CEO either knew, or recklessly failed to know, that IBM was a'coming, and therefore his statement was deceptive. Judge Taylor concluded that the plaintiff had made out a plausible case in that regard, commenting that:

Plaintiffs have alleged and provided the most plausible inference that Defendant [and CEO] Karmanos knowingly stated that he saw "no significant trends or impediments" to Compuware's growth while being fully aware that a company [i.e., IBM] accounting for one-third of the company's business was becoming increasingly dissatisfied with Compuware's price structure and that an all-important relationship may well disintegrate at any time, absent correction.

Torpedo 2 Away: The IBM Litigation

Compuware's 2002 copyright- and trade-secret suit alleged that IBM had started its competing activities back in 1999 and 2000. When Compuware filed its complaint, it also issued a press release that said, among other things, that "We have been considering this distressing issue for quite some time . . . ."

The class-action plaintiff regarded these statements as admissions that Compuware knew about its problems with IBM and had failed to disclose them.

(Shameless Plug Department: For more information about copyrights and trade secrets in computer software -- as well as software patents, software licensing, export controls, and related topics -- see my one-volume treatise, The Law and Business of Computer Software, published by West Group. Last year I turned over the editing and updating responsibilities to the publisher, but I'm still sentimentally attached to the book.)

The Cautionary Language in
Compuware's SEC Filings Wasn't Enough

In its motion to dismiss, Compuware pointed out that it wasn't as if they hadn't included cautionary language about IBM in their SEC filings. Some of those filings had listed a number of significant competitors (not including IBM), then mentioned that IBM also made competitive products and there could be no assurance IBM would not offer significant competing products in the future.

Judge Taylor didn't buy it, at least for purposes of determining whether the plaintiff was entitled to keep working toward an eventual jury trial:

With regard to future events, uncertain figures, and other so-called soft information, a company may choose silence or speech elaborated by the factual basis as then known -- but it may not choose half-truths. [Citations and internal quotation marks omitted.] IBM's introduction of the Fault Analyzer and File Manager programs not only signaled the release of directly competing products, but were accompanied by a staunch refusal to share indispensable source code information. Clearly, a good relationship had ended.

In light of this, Defendants' choice to disclose anything about that relationship in its press releases and SEC filings mandated full disclosure concerning the benefits, as well as the impediments, to realizing the full potential of that relationship.

* * *

Defendants' statement that "there can be no assurance that IBM will not choose to offer significant competing products in the future," implied that IBM's development of competing software was a possibility as opposed to an actuality, and therefore, this statement does not qualify as meaningful cautionary language. The court finds that the 10-K filings did not satisfy Defendants' obligation to warn investors of risks and negatives as significant as those which were actually realized.

(Emphasis and paragraphing edited.)

Motion to Dismiss Denied

The judge denied Compuware's motion to dismiss the class-action lawsuit in most respects. The denial order said:

Contrary to the assumptions underlying Defendants' arguments, the relevant issue here is not what Plaintiffs can prove, but rather whether what they have alleged creates a plausible inference that Defendants acted or spoke with the requisite state of mind. . . . [I]n this instance, it is hard to imagine a complaint that could better withstand a motion to dismiss. The court finds that Plaintiffs have submitted a well-crafted, well-pled complaint, stating sufficient facts to create a plausible inference that Defendants knowingly misstated or omitted material information. Therefore, Defendants' Motion to dismiss must fail.

(Citations omitted.)

Possible Lessons

In the classic book The Right Stuff, Tom Wolfe recounts that whenever a test pilot crashed and burned, his surviving colleagues -- bathed as they were in the certainty of their own infallibility and immortality -- often reacted along the lines of: How could he have been so stupid?

We might be tempted to say the same about Compuware. But can we? What could Compuware have done differently? That's hard to say. Here are some thoughts:

Press releases: Obviously it would have been better if Compuware's press release hadn't had the CEO saying he saw no significant negative trends. That's an example of a categorical statement, which you're usually better off avoiding when possible. (All categorical statements are bad, including this one.) But at the time, Compuware's CEO may well have genuinely believed that he saw no negative trends.

SEC filings: Obviously, you have to do your best to make a full and fair disclosure of known material information in your SEC filings. But for all we know, at the time, Compuware's executives might have been genuinely optimistic that they could patch up their relationship with IBM. Moreover, they had to face the choice of just how much to disclose about their relationship with IBM. Conceivably, if they had disclosed more than they did, the mere act of disclosure might have damaged the relationship even further, possibly causing more harm than good to the company and its shareholders.

Plaintiffs' lawyers always have the benefit of hindsight. Executives, in contrast, have to make actual business-judgment calls, usually on the basis of limited information.

But even so, companies -- especially their marketing people -- would do well to keep Compuware's troubles in mind when they're drafting press releases and SEC filings.

February 11, 2004 in Intellectual Property, Litigation, Marketing, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

January 07, 2004

Junk FAXing brings $5.4M Fine

On Monday the Federal Communications Commission (FCC) announced that it was fining Fax.com, Inc. nearly $5.4 million "for faxing unsolicited advertisements to consumers in violation of the Telephone Consumer Protection Act (TCPA) and the Commission’s rules. . . . This is the largest single fine ever imposed by the Commission for violation of the TCPA."

The FCC said that it imposed the maximum permissible forfeiture of $11,000 for each of 489 separate violations on grounds that “Fax.com’s primary business activity itself constitutes a massive on-going violation” of the TCPA.

See the FCC's press release for more details.

January 7, 2004 in Litigation, Marketing | Permalink | Comments (0) | TrackBack

December 09, 2003

Marketers, Be Careful About Your GET Statements

Recently, several pharmaceutical companies narrowly dodged a privacy class-action bullet concerning their collection of data about Web-site visitors. See In re Pharmatrak, Inc. Privacy Litigation, No. 00-11672-JLT (D. Mass. Nov. 6, 2003) (granting summary judgment for defendants), copy available at the BNA Web site, on remand from 329 F.3d 9 (1st Cir. 2003) (reversing and remanding summary judgment dismissing action).

The lesson for marketing managers is to check whether your Web-site programmers are using GET statements in a way that results in saving personaly-identifying information about your site's visitors.

Background

Each of the pharma companies wanted to compare usage of different parts of its Web site with the same information from competitors' sites. To do this, they signed up with Pharmatrak, which provided a service that utilized browser "cookies" to collect information about which users had visited which Web sites.

Privacy apparently was a concern from the start. Pharmatrak emphasized in its marketing that it did not collect personally identifiable information. In signing up with Pharmatrak, most of the pharmaceutical companies sought and received assurances from Pharmatrak that the tracking service would not collect personal or identifying data about their Web site visitors.

Alas, it didn't work out exactly that way. It turned out that, through inappropriate programming practice at various companies, Pharmatrak did indeed unintentionally collect some such personal data for a few Web site visitors. That led to a class-action privacy lawsuit under the Electronic Communications Privacy Act of 1986 (ECPA), 18 U.S.C. §§ 2511, 2520.

The Technology Problem

Apparently the main culprit was a Pharmatrak customer's use of a GET statement, instead of a POST statement, for collection of user information. As explained by the appellate court:

The personal information in 197 of the 232 user profiles [for which personally-identifiable information was improperly collected] was recorded due to an interaction between NETcompare and computer code written by one pharmaceutical client, Pharmacia, for one of its webpages.

Starting on or before August 18, 2000 and ending sometime between December 2, 2000 and February 6, 2001, the client Pharmacia used the "get" method to transmit information from a rebate form on its Detrol website; the webpage was subsequently modified to use the "post" method of transmission. This was the source of the personal information collected by Pharmatrak from users of the Detrol website.

Web servers use two methods to transmit information entered into online forms: the get method and the post method. The get method is generally used for short forms such as the "Search" box at Yahoo! and other online search engines. The post method is normally used for longer forms and forms soliciting private information.

When a server uses the get method, the information entered into the online form becomes appended to the next URL. For example, if a user enters "respiratory problems" into the query box at a search engine, and the search engine transmits this information using the get method, then the words "respiratory" and "problems" will be appended to the query string at the end of the URL of the webpage showing the search results.

By contrast, if a website transmits information via the post method, then that information does not appear in the URL. Since NETcompare was designed to record the full URLs of the webpages a user viewed immediately before and during a visit to a client's site, Pharmatrak recorded personal information transmitted using the get method.

* * *

In addition to the problem at the Detrol website, there was also another instance in which a pharmaceutical client used the get method to transmit personal information entered into an online form. The other personal information on Pharmatrak's servers was recorded as a result of software errors. These errors were a bug in a popular email program (reported in May 2001 and subsequently fixed) and an aberrant web browser.

(Footnotes omitted, paragraphing edited.)

A Happy Ending -- So Far

The pharmaceutical companies eventually won, because the trial court found they did not have the requisite "intent" to commit the privacy-violating acts, as defined in the ECPA. We'll see if the judgment survives the inevitable appeal.

Possible Lesson

The lesson learned here is a technical one, but it applies to both Web-site programmers and to marketing people: Be careful about the use of GET statements -- make sure you're not inadvertently collecting private information about your Web-site users.

December 9, 2003 in Marketing | Permalink | Comments (0) | TrackBack

October 28, 2003

Victoria's Secret Exposes Too Much
(It's Not What You Think)

No, it's not what you think. Victoria's Secret had computer security problems that allowed customers to browse through other customers' on-line orders. (Insert your choice of joke here.) That attracted the attention of NY attorney general Elliot Spitzer. When the dust settled, the Victoria's Secret parent company agreed to give refunds or credits to customers in New York and to pay the state of New York a $50,000 fine. See the AP story.

POSSIBLE LESSON: This is yet another example of how companies doing business on the Internet may have to contend with multiple legal authorities. Some other examples:

  • Earlier this month, Google was ordered to pay a French company 75,000 euros in damages for allowing paid advertisements to be linked to the French company's trademark in search terms; see the Reuters story.
  • Last December, an Australian court ruled that a local business executive could bring suit -- in Australia -- against Dow Jones for allegedly libelous statements posted on a U.S. Web site. See this BBC analysis.
  • In November 2000, another French judge ordered Yahoo! to block French access to Nazi-memorabilia sites; see this BBC story.

October 28, 2003 in Litigation, Marketing | Permalink | Comments (0) | TrackBack

October 15, 2003

Advertising Heartburn

Sometimes it seems there’s no shortage of object lessons about the troubles that over-enthusiastic advertising can cause. Procter & Gamble (P&G;) ran ads for a new heartburn product, Prilosec OTC. The ad copy read, "One pill. 24 Hours. Zero Heartburn" The ad copy apparently gave Johnson & Johnson heartburn of a different sort – it filed suit against P&G.;

In response to J&J;’s motion for a preliminary injunction, a federal judge in New York found that P&G; had engaged in false advertising. The judge prohibited P&G; from continuing its ad campaign pending a full trial. (Johnson & Johnson-Merck Consumer Pharmaceuticals Co. v. The Procter & Gamble Company, No. 03 Civ.7042(JES) (S.D.N.Y. Sept. 25, 2003).)

If the parties don't settle before trial, P&G; may find itself staring down the barrel of a big damages award for corrective advertising, under precedent such as one of my favorite case stories, that of U-Haul v. Jartran.

Literally False Claims

First let's take a quick look at the law of false advertising from 10,000 feet. It's actually pretty straightforward -- as Judge Sprizzo noted in the J&J; v. P&G; case, “To prevail on a false advertising claim, a plaintiff must establish that defendant's advertisements are either (1) literally false or (2) although literally true, likely to deceive or confuse consumers.”

Judge Sprizzo zeroed in on the first prong of this test, i.e., whether the P & G ads were literally false. That seemed to be a no-brainer, at least to the judge:

[T][he claim advanced by P & G's advertising--essentially, that 24 hours heartburn relief can be achieved with one pill of Prilosec OTC--is literally false. "One pill. 24 Hours. Zero Heartburn" simply does not equal "One pill. Wait 5 hours. Only then Zero Heartburn for the next 24 hours."
(Emphasis added.)

Coming Soon: J&J;’s Quest for a Damage Award?

P&G;’s legal troubles almost surely aren’t over. It likely will have to face J&J;’s claim for sizeable monetary damages. On that subject, I used to like to tell clients the story of the U-Haul v. Jartran case from the 1980s. Jartran was found liable for false advertising that compared its rental trucks and trailers to those of U-Haul. In the wake of the ad campaign, Jartran's sales had boomed, and U-Haul's sales had slumped. The court awarded damages to U-Haul in the amount of $40 million, representing:

  • the $6 million cost of Jartran’s ad campaign, on the theory that Jartran must have derived at least that much benefit from its ad campaign; plus
  • the $13.5 million cost of U-Haul’s corrective-advertising campaign; plus
  • another $20 million (in effect doubling the award) as a kind of punitive damages permitted by the Lanham Act in exceptional circumstances. The increase in damages presumably was motivated by what the trial court described as Jartran's “deliberately false comparative [advertising] claims.”
The $40 million damage award was upheld by the appellate court. U-Haul Intern., Inc. v. Jartran, Inc., 793 F.2d 1034 (9th Cir. 1986).

Possible Lessons

It doesn't take a rocket scientist to figure out the lessons here:

  • Be careful about the factual statements and implications that you put in your advertisements and other marketing materials.
  • Be even more careful if you're going to run ads comparing your products or services -- even implicitly -- with those of a competitor.

October 15, 2003 in Communications, Embarrassments / Bad Career Moves, Marketing | Permalink | Comments (0) | TrackBack

October 14, 2003

Mother Always Said, Don't Brag

The exuberance and assertiveness of marketing people can make enormous contributions to a company. They can also put the company in a deep hole. Here's an example of the latter: Some not-atypical, faintly boastful language in a company's press releases language, of a kind your marketing people might well have used themselves, kept the company mired in a securities class-action lawsuit, when the lawsuit might otherwise have been dismissed.

A Sad but Familiar Tale

Log On America (LOA) was a Rhode Island-based Internet access provider for residential and commercial customers. From 1992 to early 1999, LOA grew into a company with nine full-time employees and revenues of just under $760,000, but it never once turned a profit.

Despite this decidedly less-than-stellar track record, LOA decided to go public. In April 1999 it went out at $10, the price spiked to $37 on the first day of trading, and closed at $35 per share. LOA went on a buying spree, using its capital and its publicly-traded "currency" (shares) to acquire various New England internet service providers, growing its customer base from 1,000 to over 30,000.

The Fateful Press Releases

During those exhilerating days, LOA issued press releases and interviews that would come back to haunt them in the subsequent securities class-action lawsuit. The company said, for example, that:

  • LOA was the "premier provider of high-speed DSL services in the Northeast corridor";
  • LOA was "a Northeast Regional [CLEC] and Information Internet Service Provider (IISP) providing local dial-tone, in- state toll, long distance, high speed Internet access and cable programming solutions . . . to residential and commercial customers through the Northeast";
  • LOA was "one of New England's leading providers of bundled communications services";
  • LOA was "in a dominant position in the market for integrated data and voice services" and "a dominant super regional communications player."
(Emphasis added.)

The Lawsuit

In an all-too-familiar story, LOA's rapid post-IPO expansion resulted in exploding net losses, which in turn caused the stock price to drop. And then, in early 2000, the tech bubble burst. LOA's stock dropped even more, down to a low of $0.10 per share. NASDAQ eventually delisted the stock.

As night follows day, the securities class-action lawyers found their way to LOA. They filed the usual lawsuit accusing LOA's CEO and CFO of securities fraud, alleging that those two officers had engaged in "a massive fraudulent scheme to deceive investors into thinking [LOA] was a successful 'dominant' telecommunications company, when in actuality it was not."

The LOA officers did they usual thing: they filed a motion to dismiss the lawsuit. The judge granted some portions of their motion, but also kept other, significant portions of the lawsuit alive. Why? Because, the judge concluded, some of the statements in LOA's press releases and interviews might well have been material misstatements:

The representation that LOA was the "premier provider of high-speed DSL services in the Northeast corridor," as it was described in a May 17, 1999 press release, is much more than mere puffery: it is a statement of LOA's present status and capabilities, and connotes that LOA is comparatively superior to all other high-speed DSL service providers in the Northeast corridor.

Likewise, the statements that LOA's transaction with Nortel would "help further solidify [LOA's] dominant position in the market for integrated data and voice services," and that LOA's "proven early market entry strategy is positioning it as a dominant super regional communications player," are both actionable: they clearly imply a comparison to competitors and suggest that activities undertaken by LOA as of December 17, 1999 or February 10, 2000 had made or were making it "dominant" over all other competitors in its field.

The same is true for the statement that, by October 28, 1999, LOA had become "one of New England's leading providers of bundled communications services." Assuming that the substance of the statement is untrue (as Plaintiffs have alleged, and as Defendants have conceded for purposes of this motion), this statement is material, as it connotes superiority over the vast majority of other bundled communications services providers.

(Paragraphing supplied.)

Moreover, LOA apparently was never able to offer cable services, even though they had described themselves as a cable-programming provider.

(Scritchfield v. Paolo, 274 F. Supp. 2d 163 (D.R.I. 2003).)

Some Possible Lessons

  • Think carefully before using superlatives like "premier provider" and "dominant player" to describe your business. The judge and jury might view such statements as non-actionable puffery, or they might regard them as false statements. (Indeed, the Scritchfield judge said that the mere fact that the defendants made a puffery argument was a concession that the statements were not true.)

    I'm not a marketing guy. But my personal belief is that superlative language of this kind seldom does you much good in the marketplace. I think customers and investors tend to discount such language. It therefore provides you with little or no benefit, while still increasing your potential vulnerability to a securities class-action lawsuit. Talk about the worst of both worlds.

  • There's another reason that using pharases like "dominant player" is a bad idea. Someday you may want to acquire, or be acquired by, another company. You might have to do a Hart-Scott-Rodino antitrust filing to get government approval for the acquisition. That filing may have to contain your press releases. You really don't want the government's antitrust reviewer to see your own press releases describing you as the "dominant player" in any particular market or submarket -- at the very least, it likely would complicate the approval process.

Thanks to Securities Litigation Watch for the pointer to this story.

October 14, 2003 in Communications, Litigation, Marketing, Securities law, SEC regs / actions | Permalink | Comments (2) | TrackBack

October 01, 2003

Will Your PPT Slides' Footer Help Lose a Lawsuit Too?

Last week a court poured out * Storage Technology's corporate-raiding lawsuit against Cisco. One of the nails in the coffin was the way that Storage Tech had protected -- or more accurately, failed to protect -- the alleged trade secrets that Cisco had supposedly misappropriated. While that alone didn't lose the case for Storage Tech, it didn't help, and it likely has triggered some internal recriminations at Storage Tech.

* When a lawsuit is "poured out," it generally means the lawsuit was dismissed, in this case, by the granting of summary judgment.

Here's the story:

The Lawsuit

The parties to the lawsuit are well-known players in the tech sector. Storage Technology makes various disk- and tape storage devices, as well as equipment for storage networking and management. Cisco is "the worldwide leader in networking for the Internet," according to its Web site. In late 1999 and into 2000, several of Storage Tech's employees left to join NuSpeed, Inc., a start-up company that opened in January 2000. In September 2000, Cisco bought out NuSpeed for some $450 million in Cisco stock.

(Wait a minute -- in September 2000, long after the tech bubble had burst, the NuSpeed guys got $450 million in stock for their nine-month old company? Wow. Don't be too envious, though. As this chart shows, Cisco's stock price joined the plunge in the months following the acquisition. Depending on how long the lock-up was for -- I couldn't seem to find the acquisition agreement in Cisco's SEC filings -- the NuSpeed people probably didn't net nearly as much as they had hoped.)

Anyway, Storage Tech sued Cisco shortly after the acquisition closed. The gravamen of the lawsuit was that Cisco allegedly had interfered with the noncompete, nonsolicitation, and nondisclosure provisions in the employment contracts of the former Storage employees who had gone to NuSpeed. Three years later (viz., last week), the judge granted summary judgment for Cisco on all counts, largely because Storage Tech had failed to come forward with evidence of actual damages.

Storage Tech's Secrecy Problems

At one point, the judge zeroed in on Storage Tech's supposedly-cavalier treatment of what it was claiming to be trade-secret information:

As to the requirement of reasonable efforts to maintain the secrecy of the information, the [Minnesota Uniform Trade Secrets Act] requires neither the maintenance of absolute confidentiality nor the implementation of specific measures to maintain the secrecy of a trade secret. A plaintiff asserting a misappropriation claim must demonstrate that it undertook some effort to keep the information secret.

Here, Storage used general employee-confidentiality agreements, but such agreements are insufficient to satisfy the statutory requirement. [Editorial comment: That doesn't seem like a correct statement of the law, but maybe the judge was making a specific statement about these particular circumstances.]

Given its rejection early in the product development process, very little information about the SAN Appliance exists. What little information does exist was not the subject of reasonable efforts to maintain its secrecy. For example,

  • the author of the slide presentation did not mark it as confidential because he did not believe the design of the SAN Appliance was confidential, proprietary, or a trade secret. None of the limited documentation of the SAN Appliance was marked confidential.
  • Nor did Storage secure the documentation related to the SAN Appliance. Storage admits that it found the documentation on back-up disks left behind by departing employees. [Editorial comment: It's hard to see how this one example weighs against secrecy.]
  • Moreover, upon the resignation of the slide presentation's author, Storage did not inform him of the secrecy of the SAN Appliance. [Editorial comment: This doesn't sound right at all. It doesn't seem reasonable to expect that an employer, in every exit interview, must go through and list every trade secret that the departing employee is expected to keep secret. But again, maybe the judge was referring to the specific facts and circumstances of this case.]

In short, viewed in the light most favorable to Storage, the record reveals that Storage did not subject information about the SAN Appliance to reasonable efforts to maintain its secrecy.

(Emphasis, paragraphing, and bullets added, citations omitted.)

As you can tell from the editorial comments above, I think the judge probably goofed here. It could be that the judge didn't have sufficient evidence presented about Storage Tech's security system. From the discussion in the judge's opinion, it seems to me that if Storage Tech had the usual corporate security systems in place -- locks on the doors, passwords to access the network, etc. -- the judge should have let the secrecy claim go to the jury. But then I have yet to be appointed and confirmed as a federal judge, so my opinion counts for exactly zero.

The overall tone of the opinion suggests that the judge didn't think much of Storage Tech's trade-secret claim concerning a product proposal that it apparently had never even tried to develop. In all likelihood, he was going to pour out Storage Tech in any case.

Possible Lessons

There are several lessons to be had in this case, but here's a big one: Make an effort to label your confidential documents as "Confidential" or "Proprietary." If you don't, a judge might later use that as an excuse to deny your claim that the documents contain trade secrets -- if you didn't treat the documents like trade secrets, why should the court?

(On the other hand, don't go overboard with your confidentiality stamp -- the credibility of your secrecy assertions may well be diluted if you unthinkingly label the menu in the company cafeteria as confidential.)

October 1, 2003 in Embarrassments / Bad Career Moves, Intellectual Property, Marketing, R&D;, Record-keeping | Permalink | Comments (1) | TrackBack

September 23, 2003

California Anti-Spam Law - Welcome, Plaintiffs' Bar

California has just enacted a tough new anti-spam law. See these NY Times and CNET stories. The text of the new law is here. Effective January 1, 2004, the new law:

  • bans essentially all unsolicited commercial email advertisements sent to or from California, except to people who (i) have provided "direct consent" to receiving ads from the advertiser, or (ii) have a pre-existing or current business relationship with the advertiser;
  • requires commercial email ads sent to pre-existing or current relationships to include an "opt-out" capability, either by email or by toll-free number;
  • imposes liquidated damages of $1,000 per email, up to $1 million per email campaign; and
  • perhaps most significantly, allows recipients, ISPs, and the state attorney general to file lawsuits against spammers.

Boy, the plaintiffs' lawyers must be salivating over this one.

If your company sends out email blasts from a California location, the new law will cramp your style severely. If your company isn't in California, you may end up with a tough choice: Either figure out which addresses on your email lists are in California, or comply with the California rules for all your emailings.

Here's an excerpt from the introduction to the bill:

The bill would . . . prohibit a person or entity located in California from initiating or advertising in unsolicited commercial e-mail advertisements. The bill would prohibit a person or entity not located in California from initiating or advertising in unsolicited commercial e-mail advertisements sent to a California e-mail address. The bill would also prohibit a person or entity from collecting e-mail addresses or registering multiple e-mail addresses for the purpose of initiating or advertising in an unsolicited vommercial e-mail advertisement from California or to a California e-mail address. The bill would prohibit a person or entity from using a commercial e-mail advertisement containing certain falsified, misrepresented, obscured, or misleading information.

This bill would authorize the recipient of a commercial e-mail advertisement transmitted in violation of these prohibitions, the electronic mail service provider, or the Attorney General to bring an action to recover actual damages and would authorize these parties to recover liquidated damages of $1,000 per transmitted message up to $1,000,000 per incident, as defined, subject to reduction by a court for specified reasons. The bill would provide for an award of reasonable attorney's fees and costs to a prevailing plaintiff.

The introduction to the bill states that prohibited spamming is a crime, but that wasn't clear to me from the bill's text.

The Times article notes that some fear a wave of largely-frivolous litigation; that the law may be subject to constitutional challenge under the Commerce Clause; and that pending federal legislation, which isn't as tough, may end up preempting harsher state laws like the new California statute.

September 23, 2003 in Criminal Penalties, Marketing | Permalink | Comments (1) | TrackBack

September 15, 2003

Taco Bell Learns $42MM Lesson That Idea Sources Can Haunt You

The New York Lawyer reports that Taco Bell was hit with a $41.9 million jury verdict for allegedly stealing the idea for the talking-Chihuahua advertising campaign. Thanks to Martin Schwimmer's Trademark Blog for the pointer to this story.

The Taco Bell case illustrates a harsh fact of life for established companies: If you enter into discussions to use a smaller company's ideas or concepts, you'd better be really, really careful if you subsequently decide to go it alone -- you may find it very difficult to convince a jury that you (re-)developed the ideas or concepts on your own.

For another example of how juries can react in situations like this, see Celeritas Technologies vs. Rockwell International. In that case, Rockwell had engaged in preliminary discussions with Celeritas about some ideas for improving wireless modems that Celeritas's technology guy had developed. Rockwell decided to go it alone, and Celeritas sued. At trial, the jury simply did not believe that Rockwell had independently created the technology after its discussions with Celeritas. Nor did the jury believe that Celeritas's technology could not be a trade secret because it was already in the public domain (although the appeals court later held that Celeritas's patent was invalid because of a prior published article that described similar technology). In all, Rockwell was hit with a damages verdict totalling over $58 million. (Disclosure: I was one of the members of Rockwell's trial team.)

September 15, 2003 in Marketing, R&D; | Permalink | Comments (0) | TrackBack

August 24, 2003

Someone's Parodying Your Slogan?
You May Just Have to Get Used to It

A Fox News Network business strategy backfired last week when Fox was literally laughed out of court. Fox News tried to stop Al Franken, the alleged comedian and satirist, from using its trademarked phrase "fair and balanced" in the subtitle of his new book. Fox News got something of a black eye in the press coverage of the case. And, in a classic illustration of the law of unintended -- but surely not unforeseeable -- consequences, Fox News did Franken a huge favor by generating priceless publicity for his book. All in all, Fox News doubtless would have been much better off gritting its collective teeth and keeping its mouth shut about Franken's book.

The Situation: Al Franken is the author of such sober, thoughtful works as Rush Limbaugh is a Big Fat Idiot. (How the man won four Emmy awards for his work on Saturday Night Live, I'll never understand.)

Franken was about to release a book entitled Lies, and the Lying Liars Who Tell Them: A Fair and Balanced Look at the Right. The book cover included a picture of, among others, Bill O'Reilly, a Fox News Network headliner.

Some folks at Fox News evidently took offense at Franken's book and its subtitle. They must have cackled with glee (so to speak) when they learned that Fox News had previously obtained a federal trademark registration for the term "Fair and Balanced."

The Business Decision: Fox News filed a lawsuit seeking an injunction to block publication of Franken's book.

The Outcome: Things didn't work out quite the way the Fox executives hoped.

  • Fox News didn't look too good in the press reports. (I can hear the likely response from certain quarters: "What else did you expect from the liberal media?")
  • In court, Fox News claimed that Franken's use of the phrase "fair and balanced" would "blur and tarnish" Fox's registered trademark. The New York Times reported that spectators in the courtroom laughed at Fox's legal arguments.
  • The judge was no kinder in his ruling; he held that Fox's lawsuit was "wholly without merit, both factually and legally" and reportedly he was scathing in his criticism of Fox News. See the Reuters story for more quotes from the court hearing.
  • Mr. Franken got the kind of national publicity for which most authors would cheerfully sacrifice a body part. His publisher, no doubt delighted by Fox's unwitting gift, rushed the book into print ahead of schedule. The book quickly rose to No. 1 in the Amazon sales ranking.

Quotable Quotes: From a prior Reuters story: "'You pay money to position your advertising so it becomes an American idiom,' said Robert Thompson, media professor at Syracuse University. 'Parodies in most cases do more good for a company than harm. It gets that brand out there.'"

Critique: What Could Fox News Have Done Differently?

  • Fox News presumably knew that if you're a trademark owner, you can't baldly assert that someone else's use of your mark is an infringement. The law requires that you demonstrate at least a likelihood of confusion -- not a certainty, but more than just a possibility, of confusion -- as to whether the other party's products or services originated with you, or at least are sponsored or endorsed by you. The idea that anyone might would think Fox News had sponsored or endorsed Franken's book is ludicrous on its face. (If your trademark is famous, you might also be able to assert "dilution" instead of infringement, but that's another story.)
  • Fox News should have remembered that, any time you start a high-profile squabble with someone who is at least semi-popular with the public, you risk taking a hit to your reputation if you lose.
  • Fox News, of all people, should have realized that if you're going to pick a fight where the other side will make a First Amendment argument, you can expect much of the press to line up against you, if not openly then implicitly. Moreover, Fox News is conservative in its general outlook, so it should have anticipated that the so-called liberal media might not be especially sympathetic.

Similar Stories: Reuters reports that other companies have tried similar tactics, with little success. For example, Verizon Communications unsuccessfully sued one of its union for using the catch-phrase "can you hear me now?" to protest layoffs.

References:

August 24, 2003 in Marketing | Permalink | Comments (0)

August 21, 2003

Watch Out for State Spam Laws

There's been a lot of debate lately about whether Congress should enact anti-spam legislation. No matter what side of the debate you're on, if your company does email blasts, it's important to remember that numerous states have anti-spam laws that conceivably might apply to your company.

See http://www.spamlaws.com/state/summary.html for what appears to be a useful summary of state laws and links to the text of the legislation; I don't know how accurate or up-to-date it is. Other countries and the EU might also have anti-spam laws that could come into play.

August 21, 2003 in Marketing | Permalink | Comments (0)

August 14, 2003

Allegedly Out-of-Date Comparative
Advertising Triggers Lawsuit

Comparative advertising sometimes begets litigation. An advertiser can take some simple steps to discourage its targeted competitor from running to the courthouse.

You've seen comparative ads -- "Gleam-So-Bright toothpaste contains 43% more whitening ingredients than Brand X." Brand X's people will tear apart the Gleam-So-Bright ads in search of anything that might be factually false or arguably misleading to consumers. If Brand X's lawyers think that they have a shot at a false-advertising claim, then Gleam-So-Bright can expect a cease-and-desist letter, or even a lawsuit (possibly without warning).

UpShot found this out last month. UpShot is the provider of an on-line customer-relationship-management (CRM) system. It claimed in some of its ads that customers preferred UpShot's CRM solution by 2 to 1 over that of competitor Salesforce.com. It also claimed that the Salesforce offering lacked support for Microsoft Outlook. In July 2003, Salesforce filed a lawsuit for false advertising, unfair competition, and unfair business practices. See story.

Technically, Salesforce has the burden of proof. As a practical matter, however, UpShot will have to defend the truth of its advertising claims. Even if UpShot's advertising claims are bulletproof, the company still will have to spend a good bit of money, and a great deal of management bandwidth, in document production, depositions, interrogatory responses, motion practice, and trial preparation.

The UpShot case also illustrates why it's often preferable to be very specific about the version of the competitor's product that you're targeting in your comparative ad. The instant that your claims arguably become outdated, you may be in danger of being sued.

Possible lessons: If you're going to do comparative-advertising:

1) Try to make sure that your claims are as factually bullet-proof as possible.

2) Try to collect hard evidence in advance to support your factual assertions (your lawyer will thank you).

3) Consider the risk-reward ratio -- how much incremental benefit will you get from doing the specific comparison, versus how much additional risk are you courting by doing so.

4) Consider including a footnote with additional factual data, perhaps including (i) the applicable version numbers of the products in question and (ii) the date as of which your data is current.

(Of course, don't rely on this as a substitute for legal advice; click on the "Disclaimers & cautions" link at the top right of this page.)

August 14, 2003 in Marketing | Permalink | Comments (0)

August 13, 2003

Rigging a Promotion Costs Coca-Cola Big Bucks
and Triggers Grand-Jury Investigation

From the Career-Limiting Moves Department: Coke agrees to pay up to $21MM to Burger King for rigging results of market testing of Frozen Coke at BK restaurants. Wouldn't you hate to be in the shoes of the marketing managers who did that . . . .

In 2000, Coca-Cola and Burger King ran a promotional campaign to test the appeal of Frozen Coke, a slushy drink, at Burger King restaurants in Virginia. (Burger King is a huge customer for Coke fountain drinks.) If the test was successful, then Burger King would make Frozen Coke a regular offering.

Apparently the initial results of the campaign weren't pleasing to some people at Coke. They took steps to increase the Frozen Coke traffic at the test restaurants. Supposedly, this included paying a man -- without Burger King's knowledge -- to get hundreds of kids to go to Burger King restaurants and ask for the Frozen Coke meal deal. That made sales look pretty good. Burger King started to ramp up its Frozen Coke program.

Then, however, a finance executive in Coke's fountain-drink division was let go. He filed a lawsuit, claiming that he had been fired for whistleblowing. In his lawsuit, he accused Coke of rigging the Frozen Coke promotional campaign.

His accusations touched off investigations by the SEC and by the Justice Department. Coke was subpoenaed by a federal grand jury. Coke's corporate headquarters admitted that some of their employees had rigged the promotional campaign and said that it was cooperating with the investigations.

Needless to say, Coke's customer Burger King was not thrilled. Earlier this week, Coke announced that it had reached a settlement with BK. According to the New York Times, Coke agreed to pay up to $21 million to Burger King and its franchisees. Of course, Coke still has the SEC and the federal grand jury to worry about.

It's not clear what happened to the individual Coke employees who supposedly rigged the promotional campaign. Coke reportedly said it had "disciplined" them. It's safe to say they probably don't have stellar careers at Coke ahead of them. And who knows what punishment the federal prosecutors will demand.

Some possible lessons for corporate managers:

1) Remember the old saying that you shouldn't do anything you wouldn't want to see published on the front page of the New York Times.

2) Your corporate sins can come back to haunt you years later, especially if one of your colleagues leaves the company under less-than-happy circumstances.

3) What you think of as a simple error in business judgment, the Justice Department -- those friendly folks who can send you to federal prison -- might regard as criminal behavior. (And let's not forget the SEC and the private shareholder plaintiffs' bar. )

4) Angering one of your company's biggest customers is seldom a career-enhancing move.

5) Coke's marketing budget for Frozen Coke probably didn't include a $21 million payment to settle the dispute with Burger King. Busting that budget was unlikely to have been a career-enhancing move either.

Sources: New York Times story (free subscription required) and National Post (Canada) story (with more details on the former executive's accusations about the rigged promotional campaign); Google News search.

August 13, 2003 in Criminal Penalties, Embarrassments / Bad Career Moves, Marketing, Securities law, SEC regs / actions | Permalink | Comments (0)