Internet Access Service Provider Lacks Standing To Assert Can-Spam / California State Claims Against Affiliate Network Azoogleads.Com

ASIS Internet Servs. v. Optin Global, Inc., 2008 WL 1902217 (N.D. Cal. April. 29, 2008).

FACTS

ASIS Internet Services (“ASIS”), an Internet Access Service provider ("IAS"), alleged that defendants, including Internet affiliate network AzoogleAds.Com, various lead generators, advertisers of mortgage products, and affiliate marketers, conspired to send 12,756 unsolicited commercial email messages to ASIS' customers between October 25, 2005 and November 14, 2005.
ASIS sought to establish its CAN-SPAM claims by extrapolating a single lead -- purchased from a third party vendor - into a claim that defendants were responsible for thousands of emails received through ASIS’ network.

HOLDING

All claims against defendant AzoogleAds.com were dismissed.

RATIONALE

Plaintiff Suffered No Adverse Effects

CAN-SPAM permits an IAS provider to bring an action only when it is "adversely affected" by a violation of §7704(a)(1), (b) or (d) of the Act.
The Court followed Gordon v. Virtumundo, Inc., 2007 WL 1459395 (W.D. Wash. May 15, 2007), holding the adverse effect requirement is satisfied only if an IAS demonstrates that it suffered harm, from the specific emails at issue, that is "significant" in nature.
The ASIS Court concluded that no reasonable jury could find that the emails at issue caused any significant adverse effect to plaintiff, explaining that: "[w]hile there is some evidence that spam generally has imposed costs on ASIS over the years, there is no evidence that any of the [e]mails at issue in this action resulted in adverse effects to ASIS…."
In particular, there is no evidence that demonstrates that:

the emails at issue reached any active ASIS users;
the emails were the subject of any complaints;
ASIS had to increase its server capacity or experienced crashes as a result of receiving the emails; or
ASIS experienced higher costs from its filtering service as a result of receiving the emails.

EMAILS WERE NOT “PROCURED" BY AZOOGLE

As a second, distinct, basis for dismissal, the Court found no evidence that AzoogleAds.com "procured" the emails, as defined in CAN-SPAM.
CAN-SPAM prohibits the "initiation" of certain types of deceptive or misleading commercial email messages, and defines "initiate" in this instance to mean "to procure the origination or transmission of such messages…."
"Procure" is defined generally to mean "intentionally to pay or provide other consideration to, or induce, another person to initiate such a message on one's behalf."
When an action is brought by an IAS, liability attaches only when defendant procures, "with actual knowledge, or by consciously avoiding knowing, whether such person is engaging, or will engage, in a pattern or practice that violates this chapter."
While ASIS claimed that AzoogleAds.com did not do enough to investigate the email marketing practices of the third-party vendors from which it acquired marketing leads, the Court held that AzoogleAds.com did not “consciously avoid knowing” any facts about the lead vendor's practices, nor was there any evidence that the subject third-party lead vendors were likely to engage in CAN-SPAM violations. In fact, all evidence demonstrated that the lead vendors enjoyed a favorable reputation.

PLAINTIFF'S CALIFORNIA BUSINESS PRACTICE CLAIMS DISMISSED

Finally, the Court held that ASIS' state law claims must also fail because there was no proof that AzoogleAds.com sent or procured the alleged email, or that Azoogle "advertised" as defined in the statute.

AzoogleAds.com was represented by General Counsel David Graff, Esq.; Sean Moynihan of Klein Zelman Rothermel LLP, New York; Hank Burgoine of Kronenberger Burgoine, San Francisco; and Steven Fox of Morris & Fox, New York.

New York State Internet Sales Tax Law Enacted

NEW LAW

On April 9, 2008, the New York State Legislature approved a budget bill that requires State residents to pay sales tax on Internet purchases.
Shortly thereafter, Governor David Paterson signed the bill into law on April 23 as part of the 2008/2009 Budget.

EFFECT OF THE NEW LAW

The law creates a presumption that certain out-of-state sellers of goods or services via the Internet (“e-retailers”) qualify as “sales tax vendors” and are, thereby, required to: (1) register with the State of New York for sales tax purposes; and (2) collect state and local sales taxes on all purchases from New York State.
Under the new law, e-retailers are presumed to be sales tax-based vendors if they enter into agreements with New York affiliates to compensate them for referring customers to the e-retailers.
An affiliate is a website operator that provides a link to an e-retailer in return for a commission on any sale resulting from customers using its link.
For purposes of the new law, New York-based affiliates include: (1) individuals who maintain a "permanent place of abode" within New York State; (2) corporations incorporated in New York State; (3) business entities that do business in New York State; and (4) business entities that maintain their place of business in New York State.
In the past, New York law required out-of-state retailers to collect taxes from in-state customers if the retailers “solicit” business within the State.
The new law has expanded the definition of “solicit” to include any company that pays a New York-based affiliate for “directly or indirectly referring customers” to its retail business.
On May 8, 2008, the New York State Department of Taxation and Finance, Office of Tax Policy Analysis, issued a Technical Service Bulletin (“TSB”) in which the Department outlined the ways that an e-retailer could rebut the presumption created by the new law.
Specifically, the Department stated that an e-retailer can rebut the presumption that its use of a New York-based affiliate makes it a sales tax vendor if the e-retailer can prove that the affiliate is not engaged in any additional solicitation activity within New York State.
Based on the May 8 TSB, additional solicitation activity includes targeting New York State customers on behalf of the e-retailer through the distribution of flyers, newsletters or e-mails. Telemarketing also qualifies as additional solicitation activity.
It has been reported that the new law will raise an estimated $50 million each year.
Proponents of the law say this is lost revenue from unreported use taxes from New Yorkers who shop at out-of-state online retailers.

AMAZON BRINGS SUIT

Amazon.com filed a complaint on April 25 asking the New York State Supreme Court to declare the law “invalid, illegal and unconstitutional.”
Specifically, Amazon contends that the statute violates the equal protection clause of the United States and New York State Constitutions because it “intentionally targets” the company.
Amazon says it has hundreds of thousands of independent website affiliates to whom it pays a commission for linking to products for sale on its website.

THE FORMER POLICY

Based on a 1967 United States Supreme Court decision set for mail-order vendors: The seller needs only to collect tax on purchases in states where the vendor has a physical presence.

WHY TRY TO CHANGE THINGS?

Because of the way many e-retailers direct traffic to their websites.
Many e-retailers use affiliate programs to market their products and services.
The new law would equate having a New York State-based affiliate with having an in-state salesperson.

SUMMARY

As a result of this law, some e-retailers may drop their affiliate programs.
We will be following the outcome of the Amazon case, as many believe that New York’s law will not be upheld.

Text Message Fees not Recoverable Under State Gambling Law

Hardin, et al., v. NBC Universal, Inc., __S.E.2d__, 2008 WL 1774036 (GA) April 21, 2008.

FACTS

Plaintiffs are Georgia State residents who unsuccessfully played the “Lucky Case Game” as part of the televised NBC program Deal or No Deal.
During each Deal or No Deal broadcast, home viewers were invited to participate in the “Lucky Case Game” by choosing one of the six (6) gold briefcases as the lucky case.
Viewers are given the option of submitting their choice free via the Internet or by text messaging for a fee of $0.99.
At the end of the program, the winning case is revealed and entrants that chose the “lucky case” are entered into a random drawing and the winner of that drawing receives a prize.
Plaintiffs (a class of Georgia State residents) brought an action against NBC Universal, Endemol USA, Inc., and VeriSign, Inc., under State Law OCGA § 13-8-3(b), which allows the loser of a gambling game to maintain a private, civil action to recover damages from the winner.
The statute provides: “money paid or property delivered upon a gambling consideration may be recovered from the winner by the loser by institution of an action for the same . . . . ”
Plaintiffs sought to recover the $0.99 text messaging charge.

COURT DECISION

The Court held that OCGA § 13-8-3(b) does not authorize plaintiffs to recover from defendants the text messaging charges they paid to participate in the Lucky Case Game as there was an absence of gambling consideration.
According to the Court, to state a claim against defendants under the statute, plaintiffs must allege that a “gambling contract” supported by a “gambling consideration” existed between the parties.
The Court looked to Martin v. Citizens Bank of Marshallville, 177 GA 871, 874 (171 S.E. 711 (1933)) which defined a “gambling contract” as “'one in which the parties in effect stipulate that they shall gain or lose upon the happening of an . . . event in which they have no interest except that arising from the possibility of such gain or loss.' . . . By the terms of such a contract the consideration must fall to the one or the other upon the determination of the specified event.”
Applying the rule in Martin, the Court found that the contract between the parties “does not involve a bet or wager, neither defendants nor any participant is certain to lose, and the contract’s consideration [the $0.99 text messaging entry fee] never hangs in the balance.”

SUMMARY

This is a very important, positive decision for mobile marketers: the Georgia State Supreme Court generally approved the right to charge a text fee to enter a sweepstakes -- under the facts at issue in the case.
However, mobile marketers must exercise caution in this area as there are other actions concerning this very issue still pending in California state courts.
It is important to carefully consider the nationwide text-fee-sweepstakes climate before embarking on a venture in the mobile marketing space.

NextClick Media Agrees to Halt Alleged Deceptive Practices to Avoid Trial

Fed. Trade Comm'n v. NextClick Media, LLC, et al. (N.D. CA) Civil Action No. C08-1718 VRW FTC File No. 072-3117.

FACTS

According to the FTC:

NextClick Media operates several websites that offer “free” 10-day trials of their products, including herbal smoking-cessation patches.
The Company’s advertisements contain in large type: “FREE 10-Day Supply plus shipping and handling” and “TRY IT FREE.”
Consumers used a credit or debit card to pay for the shipping charge and received a 30-day supply (not 10 days) and were obligated to pay for all 30 days of the product if they decided to keep it.
Those who returned the unused item paid postage and were assessed a $7.95 restocking fee, neither of which, according to the FTC, was adequately disclosed.
NextClick allegedly failed to adequately disclose that consumers who signed up were agreeing to be enrolled in a continuity program and would automatically be billed monthly charges of up to $99.95 until cancelled.
Consumers complained that canceling was difficult or impossible – most calls to customer service resulted in receiving a voice message that the mailbox that they had reached was full. Those who were able to leave a message failed to receive a reply.
The FTC also alleged that the operation did not have sufficient clinical proof to support claims that the smoking-cessation patches had a 97% success rate.
The FTC sued NextClick Media alleging that the trials were not free, the patches did not work as claimed, and that the Company was illegally debiting consumers’ bank accounts without their authorization.

THE COURT ORDERED SETTLEMENT

NextClick is barred from making allegedly-deceptive claims, may not dissipate its assets, and must account for its profits and preserve its records.

SUMMARY

The FTC is continuing its tireless efforts to protect consumers from what it believes are deceptive practices.
Consider this decision and others when promoting items for sale via the Internet.
Clinical studies, language choice, as well as adequate disclosure of material terms, are crucial to promoting products or services for sale via online media.

Internet Marketing Companies Agree to Cease Advertising Allegedly Deceptive Promotions to Washington State Residents

Washington v. SubscriberBASE Holdings, Inc., et al. No. 08-2-14566-2SEA.

FACTS

Defendants market their services over the Internet in various ways -- both directly through their own websites and through third-party marketing companies.
The Washington State Attorney General’s Office, led by AG Rob McKenna, brought a complaint against SubscriberBASE Holdings, et al., under the State’s Unfair Business Practices – Consumer Protection Act.

ATTORNEY GENERAL ALLEGATIONS

According to the complaint, one of the ways that defendants market their services is through offers of “free” products, such as expensive cameras, TVs and laptops.
The AG alleged that ultimately, through completion of paid multi-level sponsored offers, consumers were forced to pay more for the "free" items than they were worth in order to receive them.
It was further alleged that consumers were presented with a series of offers requiring increasingly more expensive purchases in order to qualify for the "free" items.
Consumers were required to provide personal information which defendants then leased to other online marketers.

THE SETTLEMENT

While the defendants admitted to no wrongdoing, they agreed to pay $55,000 in civil penalties, plus $65,365 in attorneys’ fees and costs.
Defendants may no longer offer such promotions as described above to Washington State residents, and have agreed to refund more than 35,000 Washington State customers who paid for products and services in order to qualify for the free items.

SUMMARY

Representatives from the Washington AG's Office voiced concern over advertising products as “free” where the consumer is ultimately required to spend significant sums in order to obtain the featured item.
Internet marketers beware. This is a significant settlement indicating the Washington AG Office's heightened scrutiny of the above-described advertising practices.

Clickwrap Agreement Informing Customers of Installation of Pop-up Advertising Software Enforceable

State v. Direct Revenue LLC, 19 Misc. 3d 1124 (A), 2008 WL 1849855 (Sup. Ct. N.Y. County), 2008 N.Y. Slip Op. 50845 (U) March 12, 2008.

FACTS

Direct Revenue, an advertising company, produces software that delivers advertisements to consumers’ computer screens via the Internet.
The software generates pop-up ads tailored to consumers based on their specific historic Internet interests and usage patterns.
Direct Revenue is compensated by companies whose products and services it advertises.
The Direct Revenue model works as follows: Direct Revenue offers consumers popular software applications (e.g., screensavers or games) for free. When the free application is downloaded, that application installs additional software on the consumers' computers, known as an “advertising client,” that generates pop-up ads.
After receiving consumer complaints, the New York Attorney General began an investigation by testing websites that distributed Direct Revenue’s advertising client.
Seven (7) transactions were conducted directly with Direct Revenue, either through one of its websites or a Direct Revenue advertisement appearing on a website operated by a third party.
In each of these instances, investigators were presented with a computer hyperlink which specifically referred to Direct Revenue’s End-User License Agreement (the “EULA”).
In connection with the hyperlink, a dialog box labeled “Security Warning” appeared affording the user the option of accepting the terms of the EULA by clicking “Yes” or declining by clicking “No.”
There was an accompanying message that explained the ramifications of clicking “Yes”: the user acknowledged that he or she had read the EULA and agreed to be bound by its terms.

PROCEEDINGS

The AG brought a special proceeding against respondents, Direct Revenue, et al., seeking injunctive and monetary relief for allegedly deceptive and illegal practices relating to the installation of pop-up advertising software on consumers’ computers.

COURT DECISION

The Court granted respondents’ motion to dismiss in its entirety.
The Court found that clicking on the “Yes” button to assent to the terms of the EULA established a binding “click-wrap” agreement which bars any claim for deceptive or unlawful conduct.
According to the Court, such agreements are enforceable under New York State law insofar as the consumer is given a sufficient opportunity to read the EULA and agrees to be bound by it after being provided with an unambiguous method of accepting or declining the EULA terms.
The Court also pointed out that the EULA contained material disclosures relating to the fact that pop-up ads would be triggered as a result of the software download and respondents’ relevant policies.

SUMMARY

The company provided a hyperlink to its EULA which explained in sufficient detail that the “free” software would simultaneously install pop-up advertising software. Consumers were on notice and bound by the “click-wrap” agreement when they clicked “Yes” to agree to the installation.
This decision is a favorable one for Internet marketers. The Court found the facts under which Direct Revenue conducted its business to be appropriate.
Advertisers should carefully consider the specific facts of this case and be reminded that the language and location of a software EULA is of paramount importance when considering its enforceability.

Marketer of Adult Websites Settles CAN-SPAM Case Involving Affiliates’ Act Violations

U.S. (on behalf of Fed. Trade Comm'n) v. Cyberheat, Inc., D. Ariz., No. 4:05-cv-00457-DCB, March 4, 2008.

BACKGROUND

In our Newsletter of May, 2007, we reported on the decision U.S. (on behalf of the Fed. Trade Comm'n) v. Cyberheat, Inc., in which the Court found that the CAN-SPAM Act and the Adult Labeling Rule apply to the relationship between Cyberheat and its affiliates and that Cyberheat may be held vicariously liable for the actions of its affiliates.

THE FACTS AS REPORTED

Defendant, Cyberheat, Inc., offers by subscription sexually-explicit content for consenting adults to view on the Internet.
Cyberheat hires affiliates (marketing partners) to promote its adult websites and compensates them for each successful visit that they generate to one of its sites.
Cyberheat’s affiliates sent 642 sexually-explicit unsolicited commercial emails in violation of the CAN-SPAM Act and were paid $209,120 in commissions during a one-year period.
Cyberheat received approximately 400 complaints of computer users who received unwanted sexually-explicit emails, 300 of which were sent by a single affiliate.
The Department of Justice (on behalf of the FTC) brought an action against Cyberheat alleging that its actions violated the FTC’s Adult Labeling rule and the CAN-SPAM Act.

CAN-SPAM ACT AND ADULT LABELING RULE

Both require commercial e-mailers of sexually-explicit material to use the phrase “SEXUALLY EXPLICIT” in the subject line of adult-oriented email messages and to ensure that the initially viewable area of the messages does not contain graphic sexual content.
Both also require that unsolicited commercial email contain a mechanism to opt out from receiving future email and a valid physical postal address, among other things.

ACCORDING TO THE FTC
The Cyberheat affiliates sent sexually-explicit email messages that:

violated the Adult Labeling Rule requirements;
violated the requirement to provide a clear and conspicuous opt-out mechanism; and
violated the requirement to provide a postal address.

THE SETTLEMENT

Cyberheat agreed to pay a $413,000 civil penalty.
The settlement also bars such illegal marketing practices in the future and requires Cyberheat to monitor its affiliates to ensure that they are complying with the law.
The settlement further contains standard bookkeeping and recordkeeping provisions to allow the FTC to monitor the Company for future compliance.

SUMMARY

Facing the prospect of a judgment that it was responsible for the unsolicited commercial email sent by its affiliates (based on the notion that Cyberheat encouraged them to send it by offering payment to those who brought subscribers to its websites), Cyberheat chose to settle on the above terms.
Given this precedent, Internet companies need to have comprehensive affiliate agreements in place with strict marketing guidelines, the violation of which should result in immediate termination.