Tuesday, February 22, 2011

In Which We Learn Whether a Sour Relationship Constitutes a Breach of Contract or a Violation of the AntiCybersquatting Consumer Protect Act

Let's pretend the unimaginable: an individual who has hired a contractor and the contractor come to a dispute. Anyone who has had their house remodeled knows the pain of this predicament. In order to resolve the conflict, usually (a) the individual withholds final payment until satisfactory delivery or (b) the contractor withholds delivery until satisfactory payment. Regardless of the good or service to be procured, this is how contract disputes typically devolve and get resolved.

Now let's say the contractor is a wed designer. We'll name him Dan. And the individual is Paul, who owns that incredibly valuable mark ACME. Paul asks Dan to design a website. Dan does so, registered the domain name www.acme.foo. Not wanting to be inconsistent with cultural norms, Paul and Dan have a dispute, a falling out if you will.

Question: If Dan seeks resolution of the dispute by offering to turn over the design and the domain name to Paul in return for Paul paying off his bill, has Dan violated the AntiCybersquatting Consumer Protect Act? No, really; that's a serious question.

For purposes of our hypothetical, let's make no judgment on the contract dispute but assume the following: Dan is not warehousing domains, Dan's registration of the domain included accurate information, Dan does not use the domain for his own site and does not attempt to divert traffic to some other site. In this hypothetical, Dan's use of Paul's trademark is pursuant to a contract (a licensing agreement) and that contract is in dispute. Is that cybersquatting?

Interestingly enough, two courts considered this very case recently and came out with opposing conclusions. The 9th Circuit concluded that Dan had a "bad faith intent to profit" from the domain name, while Northern District Court in Illinois concluded that this is a contract dispute case and dismissed the ACPA claim. Let's review.

In Airoom, LLC v. Demi & Cooper, Inc., ND Ill Jan. 5, 2011, the District Court concluded that what we have here is a failure to communicate – and not a trademark dispute. Paul asked Dan to design a website, along with acquiring a domain name. Dan did so. "The parties' relationship soured." Dan asked to be paid; the bill went unpaid; Dan turned off the website. Eventually Dan turned control over the website over to Paul. Paul sued claiming a violation of the AntiCybersquatting Consumer Protection Act.

"Not so fast," said the court. Recloaking a contractual dispute as a trademark dispute doesn’t cut it. The principle of law here is known as the Artful Pleading Doctrine.

First, you have to understand: this case was brought before a federal court. The federal court can have jurisdiction if (a) the parties are from different states (diversity jurisdiction) or (b) a federal statute is involved. In this case, both Paul and Dan were from Illinois. Thus, the only way a federal court could have jurisdiction is if it involved a federal law, in this case a trademark dispute; a mundane contract dispute would belong in the state court.

Analyzing the dispute between the parties, the Court noted that the only reason Dan was using the trademark in the first place was pursuant to the contract between the parties. Paul had hired Dan to create a website, thereby licensing the mark to Dan in order to complete the work. In this case, there is no dispute over whether the trademark is valid, nor is this a case where Defendant

out of nowhere, decided to misappropriate Plaintiffs' trademarks. Rather, there was an ongoing relationship between the parties . . . based on a contract. The court found that the trademark claim was entirely derivative of the contract claim given that but for the dispute relating to the contract between the parties, there would not be allegations of trademark violations.

What we have here, concluded the court, is a contract dispute. The court refused to recast it as a trademark dispute, dismissed the ACPA claim, and dismissed the case for lack of federal jurisdiction.

On almost the same fact pattern, the 9th Circuit went the other way. In DSPT International, Inc. v. Lucky Nahum (9th Cir. Oct. 27, 2010), Paul asked Dan to set up an online presence for his clothing store. Unfortunately, the friendship between Paul and Dan "soured." The contract between the parties expired on August 31, 2005 and was not renewed. About a month later, Dan took down Paul's website, and uploaded a page that referred questions to himself. Dan stated that he had done so "in order to get Paul to pay him funds that were due to him.” Paul asked for the website to be delivered to him, and Dan refused. The record shows that Paul spent $31K rebuilding the website and that it returned online after several months.

So far, so good; this sounds pretty much like the Airoom case, down to the exact same word to describe the relationship status: "soured." There are probably a few more things you should know. According to the record, the reason Dan did not renew his contract with Paul is that Dan went to work for Paul's competitor. In August of 2005, Paul paid for Dan to come to an industry conference in Las Vegas; at that conference "Dan spent time in a competitor’s booth, and arranged employment with that competitor." After that conference and the expiration of the contract, Dan took down Paul's website. Paul's website had been very profitable and Paul, according to the Court, and lost a great deal of revenue while the site was down. In the end of the day, the 9th Circuit affirmed a jury award of $152,000 damages for Dan's violation of the ACPA. Finally, the court noted that Dan's claim that he was owed money was "meritless."

The 9th Circuit did not consider the Artful Pleading Doctrine. Instead, the 9th Circuit applied the factors of bad faith from the AntiCybersquatting Consumer Protection Act and focused in on factor 6, bad faith intent to profit, and concluded that Dan was unjustly using Paul's mark with an intent to profit. Even though Dan's use of the mark originates through a contractual relationship and Dan never used the mark to sell goods or services, the use of the mark with the attempt to force Paul to pay a disputed debt constituted "bad faith intent to profit."

Factor VI may fairly be read to mean that it is bad faith to hold a domain name for ransom, where the holder uses it to get money from the owner of the trademark rather than to sell goods. The jury had evidence that Dan was using the “acme.foo” domain name as leverage to get Paul to pay him the disputed commissions, not for the bona fide sale of clothes. Though there was no direct evidence of an explicit offer to sell the domain to Paul for a specified amount, the jury could infer the intent to give back the site to Paul only if Paul paid Dan the disputed commissions.

The “intent to profit,” as factor VI shows, means simply the intent to get money or other valuable consideration. “Profit” does not require that Dan receive more than he is owed on his disputed claim. Rather, “[p]rofit includes an attempt to procure an advantageous gain or return.” Thus, it does not matter that, as the jury concluded, Dan’s claim for unpaid commissions was meritless, because he could not hold the domain name for ransom even if he had been owed commissions.

Read that last sentence again. The 9th Circuit says, even where a web designer has a rightful claim against a trademark owner to get paid, offering to transfer the domain name in exchange for payment of that debt (having both parties fulfill their obligations under the contract) constitutes a violation of the ACPA!

That's amazing. I could go on about the other things I find wrong with this decision (Congress directs the courts to balance 9 elements; the 9th Circuit here finds a violation of the ACPA based solely on one element – and so on). But to suggest that a profession cannot, in good faith, negotiate a resolution of a contractual dispute through the delivery of the goods and services in exchange for compensation – makes me think I might want to move my web design business to Illinois.

The ACPA is a tricky thing. From the outset, we have observed that the ACPA can be a booby trap for parties who, in good faith, attempt to negotiate disputes. Domain name disputes can arise even where there is no bad faith and no cybersquatting. Parties can negotiate resolutions, and recognizing that the party that gives up a domain name must incur expenses (such as redoing letter head, business cards, business relations – you know, all the things the 9th Circuit noted that Paul had to pay for when Paul had to rebuild its website), can agree on some fair compensation. But they second Dan the domain name holder does that, a court could conclude, "aha, a bad faith intent to profit!" And, poof, no one can negotiate any disputes for fear of being found in violations of the ACPA!

Many courts have declared "hogwash," recognizing that settling disputes is preferable to litigation, and negotiations don’t constitute cybersquatting. The 9th Circuit's places web designers in the precarious position when they enter contractual disputes; according to the 9th Circuit, the ACPA doesn’t require the designer to get paid for the designers work, but it does require that the designer to deliver the work to the trademark owner regardless of payment. That's stupid.

In the 9th Circuit case, Dan reportedly breached his contract and thus could apparently be liable for damages under a breach of contract cause of action. But recloaking a contract dispute into a trademark dispute just so Paul can more easily get the damages Paul desires distorts the law and puts a profession in unnecessary jeopardy. This is not why the ACPA was passed; this is not what the ACPA covers; there was no registration and warehousing of domain names for the purpose of extracting extortion from trademark owners. This is a case that seeks to slap a litigant that court does not like and thus puts at risk a profession.

Let's see what today's lesson is: "Wheel of Morality, turn, turn, turn - Tell us what lesson we should learn." [Whirl, Click, Click, Clock]: The Bard Saith: "Let me embrace thee, sour adversity, for wise men say it is the wisest course."

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