Long Arms of the Law

The law -- local, state, federal and international -- reached into every corner of Internet technology in 1998, occasionally coming to curious or conflicting conclusions.

by , / December 31, 1998 0
Our 1998 Internet Law Year in Review covers developments from November 1997 through October. This is our second annual review and, barring any serious year-2000 problems, more will follow.

The statistics confirm 1998's rapid growth in Internet use. The number of Internet service providers has nearly tripled to about 4,000, and America Online passed the 13 million-subscriber mark. Although it is hard to measure how many people are online, nearly 10 million of them have made online purchases, according to a survey by Nielsen Media Research and CommerceNet. In fact, Apple Computer reportedly sold $12 million worth of products in its first 30 days of online sales. Much to the chagrin of traditional brokers, Cyber Dialogue reported that one in 10 adult online service users are actively trading stocks online.

Bandwidth demands also increased recently. UUNet, an Internet backbone provider, reported that the volume of Internet traffic, which previously doubled every year, now doubles every three to six months.

Use of the Internet by government agencies is clearly on the rise. For example, the Patent and Trademark Office is now making its database of federally registered trademarks available over the Internet. It also permits electronic trademark filings over its Web site, literally allowing filings as late as 11:59 p.m. on a given day. What a boon to procrastinators!

States are now permitting corporate activities to be accomplished over the Internet as well. Legislation in New York allows electronic notice of shareholder meetings. Such uses of the Internet will only continue to grow in the future.

Many agencies now only make documents available online, or if paper versions are available, they can only be obtained at a much higher cost than generally free online copies. In many fields, the assumption now is that an agency will have a Web site that will have accurate information available about the agency's functions.

In addition to making available information of value to the legal profession, expanded Internet use gives rise to an array of legal issues on civil and criminal fronts, as diverse as the civil antitrust action by the federal government against Microsoft to several federal criminal cases brought against alleged Internet gambling operations in New York State.

This review categorizes the major developments in some orderly fashion -- without warranties, of course.

Jurisdiction and Commerce

The absence of territorial boundaries on Internet activities continues to raise jurisdictional issues.

That the active use of online communications constitutes "interstate commerce" was confirmed in United States v. Kammersell, 7 F.Supp.2d 1196 (D.Utah 1998), where a threatening message sent between Utah residents via America Online (which routes all such traffic through Virginia) satisfied the interstate-commerce requirement for purposes of a federal criminal law.

However, the federal court for California's Northern District held that the mere offering of merchandise on a Web site without specifically targeting California residents did not give rise to personal jurisdiction in that state. See No Mayo-San Francisco v. Memminger, 1998 WL 544974 (N.D.Cal. 1998).

The Minnesota Supreme Court reached a 3-3 stalemate in the continuing saga of State by Humphrey v. Granite Gate Resorts. The standoff's effect affirms the appellate decision, which held that Minnesota did have jurisdiction over online gambling activities directed to Minnesota residents from a Web site in Nevada. See 576 N.W.2d 747 (Minn. 1998).

Similarly, GTE New Media Services Inc. v. Ameritech Corp., et al, 1998 WL 682984 (D.D.C. 1998), was an antitrust action in which regional Bell Operating Companies were accused of conspiring to exclude GTE's Web-based yellow-page services from the market through the control of Internet access points. The court found that it had jurisdiction over the defendants as a result of the injury caused within the court's jurisdiction and the fact that plaintiffs derived economic benefit in the forum jurisdiction from their own yellow page Web sites outside the jurisdiction.

Jurisdiction based on the use of a Web site alone was found inadequate in Conseco Inc. v. Hickerson, a trademark infringement action by Conseco in Indiana against Hickerson, a nonresident of Indiana, who was using his Web site to complain about Conseco and solicit information about others' experiences of unfair treatment. See 698 N.E.2d 816 (Ind.App. 1998). The court relied on Cybersell Inc. v. Cybersell Inc., 130 F.3d 414 (9th Cir. 1997), which held that the mere reference to a trademark at a Web site in one jurisdiction did not support personal jurisdiction elsewhere, absent some other contact with the other jurisdiction. The Indiana court interpreted Cybersell as requiring an analysis of the Web site's level of interactivity and the commercial nature of the exchange.

This measure of interactivity is becoming the standard in looking to see if Web-site activity is adequate to allow a court to exert jurisdiction when lawsuits result from that activity. It appears that the use of a Web site alone, even though it can be accessed from remote locations, may not support personal jurisdiction, but if there is some additional activity intended to reach, affect or injure the party seeking to assert jurisdiction in a distant forum, jurisdiction may be appropriate.

Copyright

An interesting case was State v. Perry, 697 N.E.2d 624 (Ohio 1998), where a state criminal prosecution against an individual who distributed stolen Microsoft products through a bulletin board system was pre-empted by the federal copyright law since
his conduct involved unauthorized uploading and downloading of computer software -- traditional acts of copyright infringement. In cases where the Federal Copyright Act covers conduct, state laws that address the same conduct become secondary to federal legislation. Of course, had suit been brought under the reasonably new federal No Electronic Theft Act, Perry might still have been sent to jail, even though the state prosecution was pre-empted.

ASCAP and other music-licensing entities are trying to crack down on the distribution of unlicensed music on the Internet. ASCAP has a program which surfs the Web looking for music transmissions. There is some question, however, as to whether and to what extent the law requires such licensing -- special rules apply to music performance. The music industry has also been trying to crack down on Web sites that distribute MPEG-3 music files -- usually CD-quality sound files copied from albums and transmitted via the Internet. The recording industry even filed a suit to block the sale of a portable MPEG-3 player, claiming that the manufacturer's device is inherently unlawful. The suit has been proceeding with only mixed success for the recording industry. See Recording Industry Association of America v. Diamond Multimedia, CV 98-8247 ABC (RZx) (C.D.Cal,. filed Oct. 1998).

On the legislative front, new pieces of legislation have passed. Congress lengthened the term of protection afforded by the copyright law. Public Law 105-298, the Sonny Bono Copyright Term Extension Act, adds 20 years to a copyright's duration, but it also adds some new rights for library copying of out-of-print and unavailable works in limited circumstances.

The Digital Millennium Copyright Act (Public Law 105-304) incorporates separate pieces of legislation. It includes prohibitions on the bypassing of copyright management systems, and a ban on the importation, design and sale of devices intended to bypass technological copyright protection schemes. It also prohibits the falsification of copyright management information.

It is now possible to encode a work with copyright management information that will, for example, allow digital systems to recognize an original work and limit the number of reproductions that can be made from that work. Such schemes are only effective when it is illegal to bypass them, however, which this legislation attempts to establish.

The legislation allows the providers to remove or block access to what they believe to be infringing material without fear of a suit for damages brought by an aggrieved user. It also provides that for a copyright holder to hold a service provider liable as a contributory infringer, the provider must be given detailed notice of the infringements and a chance to remedy the situation. This extra immunity, however, is only given to providers that designate an agent for receiving notices of infringement, publicize the contact information for the designated agent, and register the agent with the U.S. Copyright Office.

Speech Issues

Constitutional issues frequented the courts in 1998, and in many of the cases there was strong public support on both sides of the issues, demonstrating fundamentally different philosophies of how the Net should be governed.

A good example of these opposite forces can be found in the "filtering" controversy. Various entities, including the federal government, have sponsored legislation requiring public schools and libraries to install filtering software to restrict access to objectionable material. Schools and libraries have been caught in the middle, however, because the ACLU and others have waged an ongoing and somewhat successful campaign opposing such laws -- as in Urofsky v. Allen, 995 F.Supp. 634 (E.D.Va. 1998), where the ACLU successfully challenged a Virginia law that prohibited state employees from accessing sexually explicit material using state computers.

The city of Livermore, Calif., was sued for not having installed filters in the public libraries (Case No. V-015266-4, filed May 28, 1998, Superior Court of California, County of Alameda). The suit was brought claiming that unfiltered access to the Internet constituted a nuisance, a waste of public funds, and makes the library an unsafe premises. However, on Oct. 20, the judge held that the safe harbor provision of the Communications Decency Act prevented the plaintiffs from holding the library liable. An appeal has been promised.

No discussion of constitutional issues would be complete without mention of the issues raised by student Web sites -- places where all sorts of online activities occur, including the criticism of teachers. In August, the ACLU filed suit on behalf of a Missouri high-school student whose Web site reportedly criticized teachers and administrators at his high school. The student was suspended from school and, as a result, did not graduate. The First Amendment complaint can be found in Beussink v. Woodland R-IV School District (E.D. Mo. filed 8/27/98). In Ohio, a federal court issued a restraining order directing an Ohio School District to reinstate a student suspended for complaining about his band teacher via a personal Web site. Along these lines, a group of teachers in California were (and probably still are) outraged over a Web site that let students submit anonymous evaluations of teachers. The teachers are attempting to recover damages from City College of San Francisco for linking to the site. The claim is "libel by linking." See .

Finally, a federal court in Seattle upheld the speech right of an individual to post "offensive" words on his Web site as part of his ongoing battle with several credit-reporting agencies. The speech was held to be constitutionally protected, even if offensive [Sheehan v. King County, No. C97-1360WD (W.D. Wa. July 17, 1998)].

On the international scene, one of the most important events was the conviction of the director of Compuserve's German office, resulting from the presence on the Compuserve system of material that violates German law. The judge gave the director a suspended sentence of two years even in light of the prosecutor asking for more lenient treatment. Needless to say, you may be hearing more about this case in the future.

Crimes and Scams

Internet crimes and scams were joined by new variations of wrongdoing. The ability to rapidly disseminate information to all corners of the Internet, coupled with the explosive growth in online investing, led to many claims of
false rumors being spread about publicly traded companies to adversely affect the price of the stock. In fact, several public companies filed suits against "John Doe" defendants to serve subpoenas on ISPs to obtain the names of those spreading the falsehoods. Such suits reportedly have been brought in California by Sunbeam, E*Trade and National Semiconductor.

The Securities and Exchange Commission has also taken action against companies that have used the Internet to engage in misrepresentations and other misconduct in the sale of securities. It now has an office of Internet enforcement and specially trained investigators who surf the Net looking for such scams and schemes. The SEC conducted a nationwide Internet securities-fraud sweep against "purveyors of fraudulent spam, online newsletters, message board postings and Web sites." The sweep resulted in 23 enforcement proceedings against 44 "stock promoters."

Attempts to pump up a company's price are also occurring. In September, the SEC filed a civil action against Green Oasis Environmental Inc. and others, alleging a scheme to defraud investors by publishing positive information to news groups to pump up the stock price, and for allegedly conducting an unregistered offering.

Virtual gaming has drawn attention from enforcement agencies. In April, the U.S. Attorney for the Southern District of New York charged the owners and operators of 14 Internet sports-betting sites with conspiracy to violate the Federal Wire Communications Act. The defendant companies allegedly operated their Web sites from outside the United States, but had substantial U.S. and New York activities, such as advertising and taking in substantial volumes of bets from around
the country.

In a turnabout-is-fair-play situation, a woman who reportedly lost $70,000 at virtual casinos, when sued by a bank for failure to pay her credit card debt, sued Visa and Mastercard, alleging that they knew or should have known that the credit cards were being used in connection with illegal gambling on the Internet (see ).

The SEC has also challenged Internet gaming activities. In August, it obtained a restraining order that froze the assets of two California businesses it claimed were using the Internet to solicit investments in a virtual casino. The suit was the aftermath of a regulatory sweep of entertainment-related activities code named "Risky Business."

The Federal Trade Commission has continued its "surf days," during which it searches the Net for illegal activities. 1998 activities included "Kid's Privacy Surf Day," during which it looked at Web sites catering to children. It has also published a list of its top dozen scams carried out by unsolicited e-mail. For a look at the FTC's "Dirty Dozen Spam Scams," see .

The luring of minors by e-mail for sexual activities was a hazardous activity, especially for those who discovered that their rendezvous were with law enforcement officials rather than young victims. Such surprises occurred in California, New York, Maine and other places. Internationally, raids have been carried out in many countries, shutting down some major child-pornography trafficking operations.

A decision of serious consequences to Net porn offenders is from the United States v. Matthews, 11 F.Supp.2d 656 (D.Md. 1998), where it was held that each e-mail transmission of child pornography constituted a separate offense under federal law, despite the argument that the messages were part of only a single online conversation. A somewhat analogous result was reached in a civil infringement action wherein Playboy Enterprises won a damage award of $3.74 million with damages calculated on a per-photo basis rather than per-magazine, in Playboy Enterprises, Inc. v. Sanfillipo, 1998 U.S. Dist. LEXIS 5125 (S.D.Cal., Mar. 24, 1998).

Finally, the "Scam of the Year" award goes to two men in Everett, Wash. They were charged with creating fake company letterheads by downloading logos and the like from the Internet and then using the letterheads to
create letters of agreement with a fictitious company. The men then used those letters to borrow funds from leasing companies, alleging that the money was needed to purchase equipment and lease that equipment to the company whose fake letterhead had been created.

A close contender was a 48-year-old man from Los Angeles who was picked up by police in Rome, where he was charged with criminal conduct for allegedly arranging sales of human organs, including kidneys, hearts and pancreases, via the Internet. The man reportedly is believed to be a member of a U.S.-based ring involved in the Internet organ sales. For all those who claim that the Internet is a soulless means for conducting commerce, this just goes to show that it really does have heart.

E-Mail: Privacy and Spam

Several interesting decisions were handed down in this area last year. In Andersen Consulting LLP v. UOP, a federal court in Illinois held that the Electronic Communications Privacy Act did not apply to an internal company e-mail system because the system was private and not available to the public [991 F.Supp. 1041 (N.D.Ill. 1998)].

A similar rationale led a court to conclude that the e-mail messages exchanged among public employees did not constitute "public records" and therefore were not covered by a Freedom of Information Act request [Wilson-Simmons v. Lake County Sheriff's Dept., 982 F.Supp. 496 (N.D.Ohio 1997)].

Spam was rampant this year, and many firms took action to prevent or moderate its use. America Online maintains a Web page listing many of the antispam suits it has filed. Other ISPs have also sued spammers under such theories as trespass, fraud, nuisance, breach of contract (terms of service); theft (of services) and violations of a variety of state and federal computer laws, such as the federal Computer Fraud and Abuse Act. Indeed, California recently joined the antispam campaign and passed a law (as have Nevada and Washington state) which permits ISPs to sue spammers who violate ISP policies. California also passed another law which requires spammers to provide a valid e-mail return address or toll-free number so that recipients can request removal.

ISP Liability

The U.S. Supreme Court declined to hear an appeal in Zeran v. America Online Inc., where it had been held that a suit against AOL for defamatory content provided by a user was pre-empted by the "Safe Harbor" provision of the Communications Decency Act [118 S.Ct. 2341 (1998)].

AOL was also a prominent but protected party under the Decency Act in Blumenthal v. Drudge, 992 F.Supp.44 (D.D.C. 1998), where the court dismissed accusations against AOL for "publication" of an issue of the Drudge Report that had accused Blumenthal of beating his wife. AOL was relieved of responsibility, even though it had reserved the right to edit the alleged defamatory publication.

Etc.

An interesting employment-restrictive covenant case is Doubleclick Inc. v. Henderson, 1997 WL 731413 (N.Y.Co.Ct. 1997), in which a New York court refused to impose a requested one-year injunction prohibiting former executives from opening a competing business. The court noted that in the rapidly changing world of Internet advertising, the current knowledge of the former employees would not be of much value in one year. A six-month injunction was held appropriate.

New York Attorney General Dennis Vacco is leading the pack in his attempt to define what is good for the rest of us (or at least those who live in New York). He has solicited the help of other state attorneys general to crack down on the online sale of alcoholic beverages (watch out, wine-of-the-month clubbers). But in Wine and Spirits Wholesalers of Massachusetts Inc. v. Net Contents Inc., 10 F.Supp.2d 84 (D.Mass., 1998), the court rejected an interesting argument by a liquor-wholesaler association that because
the defendant violated a Massachusetts criminal law when it sold wine online and without a license, the plaintiff association could bring a civil action for tortious interference with business relations. The court held simply that the criminal law in question did not provide for a private right of action, and therefore the wholesaler's association could not sue. Man does not live by bread alone!

Tune in Next Year ...

While 1998 brought an interesting array of legal developments involving the Internet, there is no doubt that 1999 and 2000 will bring even more.




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Champ W. Davis is a partner at Davis, Mannix & McGrath, a past chairman of the Chicago Bar Association's Computer Law Committee, and serves as an adjunct professor of law at Chicago-Kent College of Law.

David J. Loundy is an associate at Davis, Mannix & McGrath, the immediate past chairman of the CBA Computer Law Committee, and an adjunct professor of law at the John Marshall Law School.

Research materials were also provided by Blake Bell, Senior Litigation Counsel with Simpson, Thatcher & Bartlett in New York City, where he specializes in Internet law with a focus on securities regulation and the Internet.

Linda Klama, a law student at John Marshall Law School, assisted in the preparation of this article.