Talking about shades of gray seems sophisticated and business-savvy, but one must also recognize that black and white still exist. Businesses will do things incredibly boneheaded and leave a paper trail. Take, for example, Gucci America, Inc. v. Frontline Processing Corp., Civ. No. 09-6925 (S.D.N.Y. June 23, 2010), in which a New York federal district court denied a motion to dismiss contributory trademark infringement claims against companies involved in procuring and providing credit card processing services for a website on which counterfeit Gucci handbags were sold. This is an important decision, since e-commerce could not survive without payment processing services, and new Internet and mobile payment services are a huge growth field.

The Gucci case is really the flip side of Tiffany (NJ) Inc. v. eBay, Inc., 600 F.3d 93 (2d Cir. 2010), which I blogged about back in April. There, the U.S. Court of Appeals for the Second Circuit held that eBay was not contributorily liable for trademark infringement associated with the sale of counterfeit Tiffany jewelry on the site, because eBay was not aware of the specific instances of infringement that it was accused of enabling (only the existence of counterfeiting in a generalized sense) and also because eBay used diligent measures to protect against infringement and respond to complaints from trademark owners.

Put simply, eBay did not have the right type of knowledge, and it did everything right to avoid enabling trademark infringement. The defendants in the Gucci case did everything wrong. In fact, if you make a strategic business decision to adopt an illegal business model, actively promoting trademark infringement, and you are consumed by worries that your outside counsel lacks sufficient funds to buy that yacht he always wanted, these guys provide some useful tips. [NOTE: This post summarizes the court's discussion and analysis of the facts alleged by Gucci, which the court had to assume as true to determine whether Gucci could state a legal claim. However, at the request of one of the defendants who apparently reads my blog, let me reiterate that the factual allegations are not necessarily true and must be proven at trial.]

Without further ado, let’s turn to the question at hand: How can you contribute to trademark infringement with your online services?

The Legal Standard

When setting out to violate a law, it’s good to know the controlling legal standard so that you don’t inadvertently end up in compliance. In the Tiffany v. eBay decision, the Second Circuit stated the test for contributory trademark infringement as follows: a service provider can be liable for contributory trademark infringement if it (1) intentionally induces someone else to commit trademark infringement, or (2) continues to supply services to someone it knows or has reason to know is engaging in trademark infringement. The supply of services, as opposed to goods, that aid in the infringement creates additional subtleties. Accordingly, to weed out ancillary service providers, the federal district court in the Gucci case tweaked the test to impose contributory liability for the supply of online services where the provider knowingly supplied services to websites and had sufficient control over infringing activity to merit liability. In other words, some control over the instrumentality of the infringement is key.

What are some examples of things you can do to induce trademark infringement?

Inducing Trademark Infringement: Hold Yourself Out as a Friend to Infringers

Durango was the procurement company that put the counterfeiters into touch with Frontline and Woodforest, the two defendants that provided the credit card processing capability. Durango also facilitated the application process. Nathan Counley, Durango’s sales representative, actually helped the counterfeiters complete their applications and identified himself as a sales agent for Frontline and Woodforest on the applications.

I’ll let Judge Harold Baer (no relation to me) describe in his own words how Durango advertised its procurement services:

“Durango’s website reaches out to ‘high risk merchant accounts,’ including those who sell ‘replica products.’ The website further boasts that 95% of merchant accounts are approved and that Durango ’specialize[s] in hard to acquire accounts.’ …. Similar to the companies that promise the extension of credit or loans to those who are rejected by traditional lending institutions for having bad credit, Gucci’s complaint suggests that Durango bills itself as a company that sets up a certain quality of business with credit card processing services that accept these ‘high risk’ clients.”

(Gucci alleged that “replica” products are commonly understood to mean counterfeit products, but c’mon … is the explanation really necessary?)

The court found that Durango was “communicating an inducing message” to its users, which was enough for liability. On the other hand, while Woodforest and Frontline both charged higher fees for processing high-risk merchants, and Frontline specifically reviewed and approved the counterfeiters’ webpage acknowledgment that the handbags being sold under the Gucci trademark were replicas, such activities did not rise to the level of inducement. That doesn’t mean they were smart, however, which brings us to the second prong of the contributory trademark infringement standard.

Controlling Third-Party Infringement (to Make Sure It Happens)

What are some examples of things you can do to exercise control over acts of trademark infringement? (The court held that the payment services companies, Frontline and Woodforest, were liable under this theory; although Durango was on the hook for inducement, as a mere procurer of payment processing services it exercised little or no control over the actual website sales process.)

(1) You can let a guy who is on notice that potential customers for essential services may be infringers call himself your sales agent — even though he doesn’t work for you! His knowledge, however, will be imputed to you under the law of agency. In the Gucci case, Gucci alleged that Counley (Durango’s sales rep) was the counterfeiters’ connection, matching replica merchants with processors. Not a good state of affairs if you’re relying on a “wow, I’m shocked and appalled” type of defense.

(2) You can review the counterfeiters’ website disclaimer requiring users to acknowledge that they are receiving replica products and advise where it should be placed on the site. Some in-house lawyer or other compliance professional at Frontline actually did this! Free legal advice may be good for stroking a business partner, but in this down economy, if corporate counsel wants to do pro bono work, I’d recommend homeless advocacy instead.

(3) When investigating purchase items that generate chargebacks, you can take note that the price is weirdly cheap for a Gucci handbag, talk to customers who complain that they received fake Gucci bags — and then sit on your keister!

(4) You can review a potential customer’s website that claims to sell “replica” products, print out pages for your file — and then sit on the above-referenced keister! (As a former bank counsel, I can tell you that regulators love to see a well-ordered due diligence file. Maybe not in this case, though.)

I could go on, but you get the picture. The counterfeiters in the Gucci case did everything possible to proclaim the nature of their business except sign their credit card processing applications “N. Fringers.” In the offices of Frontline and Woodforest, there were apparently a lot of crickets chirping and keisters being sat upon. Of course, this is to snidely accord them the benefit of the doubt; the court saw their blindness as willful, and, therefore, the same as positive knowledge. In fact, Frontline and Woodforest charged higher processing fees for high-chargeback merchants and allowed themselves to be held out as processors of last resort for this online subspecies.

Once you take the steps listed above and establish your knowledge of specific cases of trademark infringement, the only remaining question is whether your service contribution is significant enough to give you the ability to control it. If the service you’re providing is the ability to accept credit and debit cards, then you’re in luck — your goose is cooked. As anyone who has ever used Amazon knows, you cannot have an e-commerce site without credit card processing.

Alternate payment systems like PayPal are growing in popularity, and by some accounts, are likely to explode in the next couple of years, but credit (and debit) cards are still king. The counterfeiters in the Gucci case sold over $500,000 of counterfeit bags using Frontline and Woodforest’s credit card processing services. Pull the plug on these services, and you pull the plug on the trademark infringement, or most of it. Credit card processing was an “essential factor” (in the court’s words) to the acts of trademark infringement alleged by Gucci, i.e., the sale of counterfeit handbags.

The defendants in the Gucci case did just about everything they could to contribute to massive trademark infringement. However, in the age of cloud computing and outsourced web and IT applications, the case has broader significance for online service providers and payment services. If you’re providing the lifeblood of a website, be careful about what you may be enabling.

Still, if a major part of your business is a website or software application (including iPhone and Facebook apps), it’s well worth the time and (minimal) expense to put in place at least a simple contract with your developers. This contract should get signed BEFORE the developer begins any substantial work on the project

What you get with a solid developer contract

Why do you need a properly written contract with your developer?

1. Confidentiality. Ideas have legs — muscular marathon runner’s legs — and you don’t want your developer to walk the idea for your new website or app across the street. It’s difficult to protect still-inchoate ideas and requirements (as opposed to completed designs, specifications or prototypes) under intellectual property law, since bare ideas in the process of formulation are not copyrightable or patentable. Moreover, the allowance rate for business method patents is extremely low (presently under 10%), and the cost of prosecuting patents is typically tens of thousands of dollars, so you should not count on being able to patent your website, program or app even at a more advanced stage of development. What this means is that, besides avoiding disclosures except where strictly necessary, contract protection (i.e., a non-disclosure or “NDA” clause) is your best bet to protect your idea as it is being developed.

2. Intellectual Property Ownership. Even if a bare idea is probably unprotectable, at some point the development of your idea is going to lead to the creation of protectable intellectual property. In the context of web or software development, this could be some or all of the following: (1) code, web design, graphics, images, text and other creative content (all of which can be copyrighted), (2) logos, slogans, catchy domain names and similar branding features (which can be trademarked), (3) look and feel (which is potentially protectable as trade dress), and (4) in rare cases, patentable inventions (if your site, program or app does something new, useful and non-obvious in light of the current state of the art).

It is a widely held but mistaken belief that if you pay a contractor to do something for you, you automatically own all IP rights in the work product because it is a “work made for hire.” (In fact, even attorneys often make this mistake, as I was reminded when I was a reviewing an IP asset purchase agreement drafted by opposing counsel the other day.) “Work made for hire” is a copyright concept only; furthermore, with outside contractors, it applies only to select types of specially commissioned works like atlases, parts of motion pictures or other audiovisual works, tests and instructional texts, which are generally irrelevant to the context we are discussing — and even then, a written agreement stating that the works are “made for hire” is still required!

In plain English, what all this boils down to is: you don’t own it (even if you paid for it) unless there is a contract that says you do. To be legally effective, the contract must also assign all relevant copyrights, patent rights and other IP to your startup. Without such a contract, you only get a license (i.e., a narrow right to use), the developer still owns any copyrights and patents, and it is free to use or commercialize this IP elsewhere. Potential investors and acquirors looking at your startup will want to see that you have IP ownership buttoned down. If you don’t own your product, watch out.

3. Getting What You’re Paying For. In development parlance, this refers to scope and specifications: you are paying X for the developer to build you Y, with Y being fleshed out in as much detail as possible in the contract. The importance of getting this nailed down is best illustrated by a common horror story: Client goes to Developer and asks Developer to build a site with A, B and C features and functionality. Developer says sure, no sweat; it’ll cost you $5,000, half up front and half on completion.

Developer labors for a month before realizing that he seriously underbid the project, which is far more complicated than he had considered. So he stops work and informs Client: sorry, I can’t possibly make a profit on this deal, but because I’m a warm-hearted stand-up guy, I’ll agree to just keep the $2,500 you’ve already paid, even though I’ve done $6,000 of work. For this largesse I welcome any comparisons to Gandhi you care to make. Client, who is out $2,500 and doesn’t have a website, is not inclined to award any Nobel Peace Prizes.

Developers may cry foul at this narrative. The common argument I hear from developers is that clients think developing a website is like rehabbing a bathroom, i.e., the client knows what it wants and parameters of the project are fixed at the outset, so there is no scope creep. In contrast, the argument continues, development clients actually DON’T know what they want. Their requirements are constantly in flux, and they require endless rounds of revisions.

Fair enough. But this doesn’t undermine the case for a contract. Quite the opposite, it means a contract is urgently needed by both parties to manage expectations. The contracting process is an opportunity for both sides to crystallize and refine those expectations before money is spent — what will the basic functionality/features be? what platform will the site run on? how many rounds of revisions are included? what will additional revisions cost? And so on.

The idea is that scope is reduced to writing as much as possible at the discussion stage instead of during the thick of development (and ideally a process is defined to handle any requested changes in scope). If it is impossible or impractical to draft detailed functional specifications at this stage, they can be a deliverable to be approved by the client later. (For complex or expensive sites or programs, the parties may end up splitting the risk by handling functional specification development and actual coding as two separate projects, each covered by its own scope definition and cost parameters, with the client having the option whether or not to proceed to stage 2.)

4. Getting It When You Need It. Launch is everything to startups. If a site or program isn’t ready or isn’t debugged by the time desired, this creates all sorts of risks — risk of the competition getting a jump on you, risk of seed capital running out, cash flow risk if an expected stream of revenue is postponed, reputational risk if you’ve heavily promoted the launch and then have nothing (or nothing respectable) to launch. A well-drafted development contract, therefore, should include key deliverable milestones along with delivery dates, and payments should be tied to successful achievement of these milestones in order to incentivize developer performance. A meaningful portion of the development fee (a third or more) should be payable only after final delivery and successful completion of user acceptance testing.

5. Legal Stuff. This is the part that startups really hate, but it can be critical if a dispute arises (as it frequently does). Say a Philly client hires a developer in California to build a site for $10,000. The parties sign a contract, and the developer takes the client’s up-front payment of $5,000. The developer then absolutely does nothing and greets the client’s increasingly anguished entreaties with an upraised middle finger.

It doesn’t take a tech lawyer like me to tell you the developer breached the contract. But how does the client left in the lurch get a remedy? The contract says nothing about where disputes will be litigated (venue) or which state’s law will apply to the interpretation and enforcement of the contract (choice of law). The answer is that the client hires a California litigator at $500/hr to fight over these issues, as well as over the underlying breach-of-contract issue, and after spending $100,000+ in legal fees (and traveling to California to testify), after three to five years the client may get its $5,000 back or perhaps a court order forcing the developer to finish the site.

Obviously this is a losing economic proposition for any client, and it would be insane to sue, despite the legal merits of the case. On the other hand, let’s say the contract had provided that the law of enforcement would be Pennsylvania’s, that any litigation must take place in Philadelphia, and that the party prevailing in any litigation would be entitled to be reimbursed for its legal fees, in addition to any recoverable damages. The costs and risks of enforcement are now working in the client’s favor; it can now bring the suit in Philly, representing itself pro se if necessary, and force the wrongful party (the developer) to pay both sides’ litigation costs, which is a big stick indeed. Of course, there may still be reasons why litigation is not advisable (for example, the client would still need to get a California court to enforce the Philly court’s judgment, and the developer may not have sufficient assets to pay the client’s legal fees and damages, which defeats the whole purpose). However, the client’s ability to raise at least a credible threat of litigation, together with the possibility of much higher costs for the developer, thoroughly changes the dynamics of the dispute and gives the client greater leverage.

Avoiding the 15-Page Monstrosity

If you think that adequately addressing these considerations requires a 15-page contract which would take months to negotiate and consume thousands of dollars in legal fees, you’d be wrong. All of this can be easily hammered out in relatively simple language taking up a couple of pages. Legal fees should be minimal if you’re dealing with an attorney who knows technology and is used to working with startups (otherwise, you may very well get the 15-page monstrosity).

Your startup doesn’t need a perfect agreement with every conceivable bell and whistle; the perfect should never become the enemy of the good. But the basic issues I have described need to be covered. It’s no exaggeration to say that the costs of not obtaining basic protection, in terms of both money paid out to developers and lost future opportunities for your startup, are likely to vastly exceed the legal fees.

And, developers — this is for your own good too. Think about helping your clients by creating a simple contract template with some moderated version of these basic protections for the client built in, along with protections against scope creep and whatever payment terms you need for your business. Contrary to popular belief, contracts aren’t just (or even primarily) for hypothetical future litigation — if drafted well, they are litigation-preventers and value-enhancers, allowing projects to glide to completion along a pathway of smoothly aligned expectations.

I consider this a significant, if qualified, victory for online marketplaces and forums as well as consumers. Significant, because a contrary result would have imposed potentially crippling liability on these venues and forced them to adopt ever more draconian measures to filter user content and terminate users based on educated guesses and unproven allegations. Qualified, because the irony of this case is that eBay actually used a broad range of costly preventive and remedial measures to protect Tiffany’s trademarks and prevent sales of counterfeit Tiffany products. These measures included: canceling sales and reimbursing buyers of counterfeit products, deploying a “fraud engine” to filter out illegal Tiffany listings, responding within 12-24 hours to Tiffany’s take-down requests submitted through eBay’s highly respected Verified Rights Owner (VeRO) Program, terminating repeat offenders and sellers of multiple counterfeit Tiffany products, and manually reviewing certain Tiffany listings. In fact, during the relevant period covered by Tiffany’s complaint, eBay had over 200 employees dedicated exclusively to combatting trademark infringement.

Both the district court and the appellate court were clearly impressed by the seriousness with which eBay took infringement and counterfeiting. Obviously, this was not a case of a website looking the other way. But eBay sets a very, very high standard for other online marketplaces.

Despite all these protections, a “significant portion” of Tiffany jewelry listed on eBay was counterfeit, a fact of which eBay was aware. After determining that eBay’s use of sponsored-link advertisements on Google and Yahoo! touting the presence of Tiffany products on eBay was not direct trademark infringement (because the use of Tiffany’s mark was necessary to describe Tiffany products and did not falsely imply any affiliation with or endorsement by Tiffany), the court turned to the bigger issuer: to what extent was eBay responsible for the infringement of its sellers? The court applied the Supreme Court’s rule in Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844 (1982) to hold that a service provider can be liable for contributory trademark infringement if it (1) intentionally induces someone else to commit trademark infringement, or (2) continues to supply services to someone it knows or has reason to know is engaging in trademark infringement.

Of course, no one claimed that eBay was intentionally getting its sellers to infringe Tiffany’s marks. However, Tiffany alleged that eBay’s knowledge of the existence of continued widespread counterfeiting and infringement, despite all of its protective measures, was enough to impose liability for contributory infringement. The court disagreed — generalized knowledge of infringement cannot be used to penalize a service provider for continuing to provide service to a particular individual where the provider doesn’t have real information to suggest that that individual may be using the service to infringe someone else’s trademark. In other words, suspecting that a person might conceivably be an infringer doesn’t make you, the service provider, an enabler in a legal sense. At the same time, the court noted that websites can’t choose to remain willfully blind when there is evidence to suggest that particular users are infringers. However, the response doesn’t have to be perfect, and eBay had clearly done at least as much as the law expects to detect and punish infringers.

Tiffany did score a lesser point when the appellate court remanded its false advertising claim under the Lanham Act for reconsideration by the lower court. It held that while eBay’s advertisements indicating that consumers could find Tiffany jewelry on eBay were not literally false, they could be considered misleading in view of eBay’s awareness that many Tiffany-branded products sold on eBay were counterfeit. Still, the elimination of the trademark claims significantly reduced eBay’s potential legal exposure.

So, what does all this mean for you, dear web businesses? As under the Digital Millennium Copyright Act (DMCA), you are partially protected from infringement liability flowing from the misdeeds of your site users. But the protection is porous — if you are aware (or are in possession of information to tip you off) that particular site users are using your site or web service to infringe trademarks, you can’t blithely continue to provide service and keep out of their business. You are NOT expected to have the knowledge of a trademark attorney and be able to judge authoritatively whether every use of a third-party trademark is infringing or not; there is room for error and miscalculation. Mere suspicion won’t make you contributorily liable. But you should investigate and respond expeditiously to any complaints by trademark owners. Even better, if your site invites abundant third-party content, you should include in your website terms of use or as a separate intellectual property policy a notice and take-down procedure (like eBay does with its VeRO policy) for rights holders to follow if they wish to submit complaints of infringement. Finally, if you are aware that certain trademarks are particularly susceptible to infringement on your site, and if economically feasible, you might consider adopting (again, as eBay did) a filtering mechanism to block or segregate for prior review postings that use the problematic trademarks.

For a slightly differently take on a ticked-off Tiffany, please check out a recent blog post on the Electronic Frontier Foundation’s (EFF) site. (The EFF, by the way, filed an amicus brief in the case on behalf of eBay.) The EFF, like me, sees the decision as a qualified victory for web businesses and consumers. Its main concern is that trademark law as yet does not provide a “put-back” procedure, as the DMCA does for content that is taken down by a web service provider in connection with a contested copyright infringement allegation.

Guys — on a related note, if you’re thinking of buying Tiffany jewelry for that special somebody in your life, please don’t buy it on eBay. If you’re in or near Center City, Philadelphia, go to the Tiffany store on Walnut Street between Broad and 15th. Or use their catalog or website. Otherwise, you may need a different type of lawyer.

A Special Trademark Issues (STI) review team was created by ICANN in October 2009 to provide further recommendations on some of the proposed Rights Protection Measures (RPM’s), such as the creation of a global trademark clearinghouse to serve as a repository of data about asserted trademark rights and to validate these rights in domain name disputes. Another proposed RPM is the creation of a Uniform Rapid Service (URS) as a faster, cheaper alternative to the current Uniform Dispute Resolution Policy (UDRP) in shutting down blatant cybersquatters and typosquatters. On December 17, 2009, the STI issued a report adding some more flesh to these proposals. You can find it here.

The STI report gives some tantalizing hints concerning the shape the new URS will likely take. Unlike with the UDRP, the remedy for the successful complainant would not be transfer of the domain name, but rather a hold, so that it doesn’t resolve to the original IP address. The elements of a URS complaint would be the same as for a UDRP complaint: bad-faith registration and use of a domain name that is confusingly similar to a trademark, where the domain name registrant has no legitimate interest in the domain name. However, the standard of proof would be higher: clear and convincing evidence that there is no genuine issue of material fact requiring further consideration.

If upon initial examination a URS complaint appeared to contain the basic requirements, an initial freeze would be placed on the domain name to prevent its transfer or changing of the WHOIS record. A full hold — disconnection with the IP address — would be imposed on final determination. However, the registrant would have the right to appeal to another examining body which would review the complaint and facts anew.

Practically speaking, the URS process would not work to resolve genuinely two-sided trademark disputes, i.e., situations where the claimed trademark is weak or descriptive or where the registrant is conducting a legitimate business under a mark adopted in good faith or where the degree of similarity between the domain name and the claimed trademark is less than overwhelming. The UDRP, the Anti-Cybersquatting Consumer Protection Act, and traditional trademark causes of actions for infringement, dilution and false designation of origin would still be available in these situations. However, when I handled trademark matters in-house for a large publicly traded company (whose unpopular line of business made it the target of much brand abuse), my experience was that even in those cases where we were dealing with a clear cybersquatter who didn’t respond at all to our UDRP complaint, we still ended up paying thousands of dollars in legal and arbitration forum fees to obtain a transfer of the domain name registration.

For those whack-a-mole cases, the URS as envisioned by ICANN’s STI (how’s that for alphabet soup?) would be a genuine boon.

Most website comments annotated with Sidewiki that I saw in a quick, wildly unrepresentative and unscientific survey I conducted are precisely that — commentary, either praising or respectfully responding to the content on the site. However, it is easy to imagine Sidewiki being used for competitive, abusive or deceptive purposes. For example, a competitor could trash a site’s products and services or post links to its own site in an effort to divert traffic. Or (as happened recently with Apple and other high-profile sites), a nattering nabob of negativism could simply post pejorative comments without any type of economic agenda whatsoever. All of this raises a host of intellectual property and brand abuse issues for site owners.

Google posts an inconspicuous content policy which prohibits “unlawful” activities using Sidewiki as well as copyright infringement and “unwanted promotional or commercial content” (whatever that means). The Google Webmaster also allows a site owner to claim the topmost spot in the Sidewiki annotations, and Google provides a generic form for parties to complain about objectionable use of its products and services. Still, there is no clear way for a site owner to compel Google to cede back control of its real estate (if indeed the site as displayed through a browser enabled with the Google toolbar can even be likened to real estate).

Sidewiki is obviously too new a service for there to be any law on its use and abuse. Once again, a leap in new media technology has outpaced judges and legislators. Still, since I can’t resist plunging into uncharted waters, I offer a few preliminary thoughts below on intellectual property (IP) and other legal issues that both site owners and Sidewiki commenters should consider.

1. Copyright Infringement. It’s possible that some level of annotation, if substantial and creative enough, could result in the creation of an unauthorized derivative work (modification) of the website or specific website pages. (Web copy is protectable by copyright.) If so, this would be copyright infringement, since the ability to create derivative works is one of the exclusive rights of a copyright holder. A similar argument has been used, with occasional success, against some types of website framing.

Of course, commentary, particularly for non-commercial purposes, is one of the touchstones of fair use, so an infringement case would probably not succeed (either because of the lack of genuine modification or a fair use defense) against most run-of-the-mill commenters. Still, site owners concerned about voluminous Sidewiki comments may want to consider registering their copyrights in their site content, if they have not already done so, since registration is necessary to file suit under the U.S. Copyright Act and to avail oneself of the full panoply of legal remedies (including statutory damages) provided in the Act.

Another copyright issue that site owners should be aware of is the possibility that content posted via Sidewiki may itself infringe a third party’s copyright, in which case the site owner may find itself receiving Digital Millennium Copyright Act take-down notices. However, as mentioned above, the site owner has no real ability to take down objectionable Sidewiki annotations and can only contact Google. In this situation, all the site owner can do is file a complaint with Google and advise the copyright owner to do the same.

2. Trademark Infringement/Dilution and Unfair Competition. It’s possible to construct a creative argument that annotating a site with Sidewiki involves using the site owner’s trademarks (certainly its URL and arguably also other trademarks appearing on the annotated pages, as well as any trademarks used in the comments themselves). If this use is in commerce, i.e., in connection with an offering of goods or services for sale, and is likely to confuse or deceive consumers as to who is providing what goods or services, or suggests some level of sponsorship, affiliation, endorsement, etc., there may be trademark infringement and unfair competition under the federal Lanham Act as well as under applicable state laws.

Showing a likelihood of confusion (the touchstone of a Lanham Act infringement and unfair competition case) will likely to be difficult with Sidewiki. The site owner would have the strongest case where the Sidewiki commenter is a competitor, does not make its separate identity clear, and tries to capitalize somehow on the site owner’s brand in order to divert traffic to its own site. However, where the content or context of the comment make it clear that the commenter is unassociated with the site owner and the commenter does not use the site owner’s trademarks in its annotations or otherwise try to pass itself off as the site owner, making the case will be next to impossible.

Even in the “strongest case” scenario, the site owner will have to tackle the issues of whether the commenter has made commercial use of its marks (this point will be easier to argue if the marks actually appear in the comments themselves) and whether “initial interest confusion” is sufficient confusion for Lanham Act purposes. To explain the latter issue, once an Internet user goes to a competitor’s site via a link provided by the competitor in its comment, they will know, before making any purchase, that they are not dealing with the trademark owner. Having said that, some persons “initially confused” and diverted in this manner may not return to the original site. The legal question is whether this type of confusion is enough to support an infringement or unfair competition claim.

The “initial interest confusion” issue, as well as what constitutes use of a mark in commerce, were both litigated over the past decade in cases examining the use of trademarks as Google search terms and the embedding of trademarks as metatags. Unfortunately, there are no settled answers, although courts in the federal Ninth Circuit (the West Coast states, plus Alaska and Hawaii) are more sympathetic to arguments based on initial interest confusion. Whether you are a site owner or a commenter, therefore, knowing the law in your federal circuit is important.

Finally, where abusive, competitive or otherwise objectionable Sidewiki comments are posted on a site for an extremely well-known brand (such as Apple, Pepsi or Cadillac), the site ower may be able to claim trademark dilution in violation of the Trademark Act. Trademark dilution requires the use in commerce of a famous trademark or a near-identical mark in a manner that is likely to blur or tarnish the mark, whether or not there is any similarity between the goods or services or any likelihood of confusion. It therefore sidesteps the whole confusion issue discussed in the infringement and unfair competition scenario.

However, dilution does require use of the famous mark together with an offering of goods or services, so although a Sidewiki commenter’s choice of where to place their annotations (on the trademark owner’s site) may count against them somewhat, a dilution claim is an unlikely remedy against authentic commentary, critical or otherwise, that is not connected with the promotion of another product, service or website.

3. FTC Endorsement Guidelines. On October 5, the Federal Trade Commission (FTC) issued its final revised Guides Concerning the Use of Endorsements and Testimonials in Advertising, the first rewrite of the Guides since 1980. Under the revised rules, which went into effect on December 1, 2009, companies that make payments or give free products to bloggers and other online commenters in order to generate positive buzz or favorable reviews for their products will now have to monitor closely the statements and claims made about the products and ensure that these relationships, if material, are clearly and conspicuously disclosed. Otherwise, they will face liability for unfair or deceptive advertising practices under Section 5 of the FTC Act, even if they do not control what the bloggers say (or, indeed, whether they say anything).

The bloggers themselves will face similar liability for false or misleading statements and non-disclosure of material connections. Furthermore, according the Guides, a company employee who posts messages on an online message board promoting the company’s product (a common practice) must clearly and conspicuously disclose his or her relationship to the company. Violations are punishable by civil penalties of up to $11,000 per violation. For a more detailed discussion of the FTC Endorsement Guidelines, please see my prior blog post.

What this means is that whether you are (1) a Sidewiki commenter being incentivized to post favorably on a website or trash a competitor’s site, or (2) a site owner or an employee or agent of a site owner posting favorable comments in response to negative Sidewiki remarks posted by someone else, you MUST disclose these connections. Knowing when to disclose is critical because, in the absence of any clear ability to force Google to remove objectionable comments, claiming the top spot on Sidewiki and posting responses to negative comments are indispensable elements of a Sidewiki brand management strategy. (New York’s attorney-general has also brought administrative proceedings against companies which tried to drum up favorable buzz by having their employees make anonymous posts in Internet chatrooms and public forums.)

If you have reason to believe that objectionable comments posted on your site via Sidewiki are being sponsored somehow by an undisclosed competitor or other third party, you should consider playing the UDAP (unfair or deceptive advertising practices) card by threatening to report the matter to the FTC and/or your state AG.

4. Terms of Use. Another option for site owners is to prohibit Sidewiki annotations, or perhaps certain categories of Sidewiki annotations (such as abusive or disparaging comments or comments that use your trademarks), in your website terms of use. Insofar as the terms of use create a binding, enforceable contract between the site owner and its users (which will generally be the case as long as they’re easily noticeable when accessing the site and don’t hold consumers to any unconscionable obligations), then making Sidewiki posts in violation of the terms of use will give the site owner a claim for breach of contract. You might also have a claim for trespass to computer chattels, since your site has been accessed for the purpose of etching on it in violation of your terms of use, although many courts will reject this claim in the absence of some excessive load on the site’s technical infrastructure that has the potential to exclude or disrupt other users.

There are two drawbacks to the terms of use approach. First, opposing this new social media technology may make you seem intolerant of free discourse and criticism (of course, the logical response here is “Do it on your own site!”). Secondly, for the reasons already mentioned, your ability to enforce the contract (other than through legal action) is limited, and appearing to tolerate numerous violations of your terms of use may hurt you in the cases you do want to prosecute. Since filing a complaint with Google for every single Sidewiki comment seems impractical and a waste of resources, it’s probably better to prohibit only those Sidewiki comments that are definably objectionable or use your intellectual property.

5. Other Legal Issues. A site owner might be able to proceed against particularly wrongful commenters (e.g., those who make false or deceptive claims or blatantly infringe the site owner’s intellectual property rights) for the state-law tort of tortious interference with prospective economic relations. Advertising-related causes of action under a state-law trade libel or unfair competition theory or the federal Lanham Act are also a possibility where the comments are false, deceptive or misleading (not to mention governmental action against UDAP, discussed in item #3 above). Site owners may be given some latitude by the courts in these cases due to the placement of the objectionable commentary; on a gut level, other things being equal, it would seem less wrongful on someone else’s website.

As the discussion above indicates, the legal landscape is hazy and will take time to resolve. Vigilance, therefore, is key. Website owners concerned about protecting their brands should claim the top spot for their sites on Sidewiki, monitor the other comments that are being posted, and make responses (with the disclosures required by the FTC) where appropriate. Site owners should also consider what type of approach to Sidewiki they wish to take in their terms of use. Finally, as with other forms of unwelcome commentary on the web, brand owners must weigh the benefits of cleansing their sites against the legal costs involved as well as the risk of enhancing the cachet of Sidewiki commenters they pursue.

Thank you, Google, for doing what you do so well — giving us intellectual property and new media lawyers tons to think and write about.

Some interesting tidbits from the seminar –

Can you have a copyright in a tweet? In theory, yes. While Twitter requires tweets to be 140 characters or less, there is no reason why a tweet can’t possess the minimal “modicum” of creativity needed to be copyrightable. After all, short poems and haikus are copyrightable. However, “I’m sitting on the couch” probably doesn’t qualify.

Does a copyright owner have an obligation to consider fair use before sending a Digital Millennium Copyright Act take-down notice? Yes, at least according to the federal district court in the famous “dancing baby case” of Lenz v. Universal Music Corp., 572 F.Supp.2d 1150 (N.D.Cal. 2008). A mom had posted a 29-second video on YouTube (you can see it here) showing her toddler bopping up and down with a Prince song playing in the background. The sound quality was awful, to put it charitably. However, Universal issued a DMCA take-down notice, YouTube complied, and then angry mom sued Universal for allegedly misrepresenting in its notice that it had a good-faith belief that the use of the material was unauthorized (a statutory requirement under the DMCA) and for a declaratory judgment that her use of the song was non-infringing. Angry mom won. Everyone at the seminar agreed this was pretty obviously a fair use (it’s non-commercial and the record company is not going to lose any royalties from Prince aficionados duping the song off the video rather than downloading it from iTunes or buying the album). So, all you copyright owners, think before you bring out that big DMCA hammer.

Transform, transform, transform. In the era of digital fair use, everything’s about “transformation,” which can often happen in a mashup or otherwise through the use of digital editing tools. The Copyright Act lists four factors to be taken into consideration when evaluating whether or not a use of copyrighted material is a fair use. One of these is the purpose and character of the use, including whether the use is of a commercial nature (fair use is often, although not exclusively, associated with non-commercial uses like education, criticism, news reporting, etc.) When assessing the purpose and character of a use and in which party’s favor this factor weighs, courts consider whether the use is “transformative” of the original material. This is nowhere in the Copyright Act, but it is all the rage in digital fair use cases.

Bottom line: while there is no simple calculus, if the use you are making of copyrighted material is not a traditional fair use, you can help yourself by making sure it significantly transforms the nature and/or purpose of the content somehow (as opposed to simply reproducing it or reproducing it with modifications). So, for example, when Ben Stein used a 15-second clip of John Lennon’s song “Imagine” in his film Expelled to critique the anti-religious message of the song and comment on the concept of a world without religion, the court in Lennon v. Premise Media Corp., 556 F.Supp.2d 310 (S.D.N.Y. 2008) found Messr. Stein’s use highly transformative.

What should you ask for in your widget development contract? SLA’s and source code escrow (if the developer is going to host the widget), insurance (general liability and E&O to establish that your developer is a real business; however, copyright and trademark infringement insurance may be too expensive), ownership of rights in the widget, acceptance criteria, delivery deadlines.

Embedding third-party content on your site. To reduce the risk of copyright infringement liability, stay away from uses that are clearly infringing, stick to official embed channels for videos from major rights-holders like TV networks, stick to the more popular amateur videos, and where appropriate include commentary, criticism and/or analysis, because that helps you a make a “transformative use” argument (see above).

Enjoy the weekend and stay dry.

A radiant weekend in the Old City

1. Entity Formation. Choice of entity is key. Find some sort of limited liability structure that gives you pass-through federal tax treatment (i.e., the entity’s income passes through to your personal tax return rather than being separately and duplicatively taxed). Either an LLC or an S Corp. would qualify. And don’t think you have to incorporate in Delaware. Pennsylvania has made a conscious effort to compete with Delaware for incorporations, and it’s really cheap and easy to form and maintain an entity here. The Pennsylvania Department of State Corporation Bureau has a website which allows you to check the availability of your desired business name and obtain the forms needed to start the business. It costs $125 to incorporate an LLC or corporation in Pennsylvania. Personally, due to the minimal registration fees, taxes and paperwork involved, I like the Pennsylvania LLC, assuming the business is headquartered here.

If you have or expect to admit partners into the business, you should have an LLC operating agreement addressing such issues as voting rights, management responsibilities, transferability of membership interests, allocation of income and losses, etc., but if it’s just you in the business for the time being, this is not critical. The bottom line is that for a small, relatively simple web startup, entity formation issues shouldn’t cost thousands of dollars in legal fees.

2. Trademarks. You or your attorney should do a quick trademark search in the searchable database on the U.S. Patent and Trademark Office website (go to www.uspto.gov and click on “Trademarks”) for the name of your business or website and any prominent catchphrase or slogan you plan to use on the site. What you are looking for are trademarks or applications for trademarks that are the same or similar to your mark and are used (or applied for) in connection with similar goods or services. This is a rough approximation of the legal standard for infringement of trademark rights (”likelihood of confusion” between two marks based on the two key factors cited above, as well as other factors like similarity of commercial impression, sophistication of target consumers, overlap of channels of trade, etc.). You should also run Google searches to identify similar terms and business names, since it is possible for another business to have “common law” trademark rights in a mark even if it isn’t federally registered.

The point of this exercise is to gain some comfort that you won’t be infringing someone else’s trademark, in which case you could be liable for damages (possibly treble damages and attorney’s fees for willful infringement) and would have to change your mark and/or domain name. The searches and analysis shouldn’t use more than a few hundred dollars of attorney time, unless the searches reveal a number of potentially problematic third-party marks and you want your attorney to investigate all of them in order to refine the risk assessment.

If a lot of money was being invested to develop a brand, you would want to perform a more rigorous (and expensive) search that would cover state trademark, business name and fictitious name registries, as well as additional “common law” sources like databases of publications, but this can cost thousands of dollars in attorney time and third-party search agency fees. A quick and dirty “knock-out” search of the type I have described should suffice for a small web startup without much seed capital.

You should also think about filing a trademark application to protect your rights in your mark against third party users, assuming that the searches of the USPTO trademark database and the Internet searches uncover no other marks that are confusingly similar, and that your mark is “distinctive,” i.e., is not a generic term for or descriptive of your goods or services. As of September 15, it will cost $375 to file a trademark application per class of goods or services ($325 if you file electronically), and each application should cost no more than $200 of attorney or paralegal time (excluding trademark search costs), unless you are applying for a lot of different goods or services. (To limit attorney and filing fees, talk to your attorney about what goods/services you should apply for now and what can wait.).

Of course, if the Trademark Office rejects your application, and you want your attorney to respond to their objections, this means more legal fees. If the Trademark Office is objecting to the mark itself (on descriptiveness or likelihood of confusion grounds, for example), rather than to some technical aspect of your application, the fees could run an extra grand or two, since your attorney will have to perform research and prepare a short brief. Having said that, you can always abandon the trademark application if it becomes too costly to proceed. Also, a good trademark attorney will be able to anticipate these types of objections at the search stage, so you should ask about your chances of actually obtaining a registration before you file the application.

You are not required to file a trademark application to use a trademark. You only need to do this if it’s important to scare off (by obtaining powerful legal remedies) third parties who may want to use the same or a similar mark. Investors will want you to register your key marks (such as your website name), but this is certainly not something that must be done prior to launch. If you decide to wait to file a trademark application, you should still make sure you place a TM (or SM for “service mark,” if you are offering services under the mark) superscript by the first prominent use of the mark on your homepage and in any marketing materials for the site.

3. Copyrights and Copyright Licenses. Website code, content and design are all copyrightable if they reflect a modicum of creativity and are not purely functional. Copyright comes into existence once a creative work is written down or recorded, i.e., you do not need to have a Copyright Office registration to own a copyright. Registration is necessary to exercise legal remedies against infringers, but again, this is something you don’t need to worry about right out of the gate.

What you do need to worry about right away is making sure you have the proper rights in all code and content used for your website. By “proper rights,” I mean owning the copyrights in materials designed or developed specifically for your site (HTML code, creative, look and feel, etc.), and suitably permissive license rights in third-party content (like clip art, stock photos and music) used on the site. With respect to the first category, specially created materials, keep in mind that the author (i.e., the programmer, web designer or web developer) owns the copyright unless he or she transfers it to you by written assignment. Therefore, without a signed development agreement or copyright assignment containing the necessary language, you get only a limited license to use developed materials, and the developer can do basically whatever they want with them or give them to someone else.

Do NOT, therefore, have someone design or develop a website for you without some sort of written contract. Investors will want to see that you own the copyrights in your site and have the documentation to prove it. The last thing you want to have happen, once your site becomes a success, is some third party come out of the woodwork claiming that they are entitled to royalties or demanding a right to consent to a planned sale, modification or exploitation of the site. An attorney can help you with this process. A simple copyright assignment should cost you $200 or less.

With respect to third-party content, make sure you read the license agreement to confirm that your planned use is within the scope of the license and there are no nasty surprises. (Of course, to do this you first need to make sure you HAVE the license agreement.) Don’t assume that because music or an image is lifted from a “stock” or “royalty free” source you can do whatever you want with it. For example, some “royalty free” licenses prohibit use of the licensed image for commercial websites or in promotional materials. You can take the first stab at looking at the agreement or agreements yourself, and bring in your attorney if you have questions. Make sure that any web developer or designer you use understands your concern about third-party licenses, and if you have a contract with them, the designer/developer should warrant that all content is either original or comes with license rights sufficient for you to operate and use the site for its intended purposes.

4. Other Contract Issues. Depending on how much you are willing to negotiate with your web developer or designer, you may also want to include additional safeguards in the contract such as business and functional requirements and specifications, acceptance criteria, milestones and deadlines, caps on fees, etc. If you are on a tight time schedule, think about negotiating a holdback of 1/3 or 1/2 of total fees until the website has been completed and you have verified there are no major outstanding issues. Again, this is not a legal requirement, just a good idea. A simple one or two page contract (which would include an assignment of copyrights) should not cost you more than a few hundred dollars in legal fees.

5. Website Terms of Use and Privacy Policy. If your website is in any way interactive, you should have legal terms of use and a privacy policy (indeed, the latter is required by the Federal Trade Commission and some states’ privacy laws if personally identifiable information such as name, address, e-mail address, Social Security or driver’s license number, and/or credit card or other account numbers are collected on the site). Contrary to popular opinion, not all terms of use and privacy policies are standard boilerplate.

With regard to terms of use, the legal risks and issues involved in a social networking site, a financial services site or an online store for power tools are going to differ from those for a passive site where users can coo adoringly over snapshots of puppies. In addition, a site that invites the submission of user content, such as blog posts, photos or videos, will need to have a Digital Millennium Copyright Act take-down policy to immunize the site operator from copyright infringement liability relating to content posted by third-party users. To be truly protective, the terms of use must be tailored to these risks and issues. Also, keep in mind that some legalese can scare website users (as Facebook learned to its chagrin earlier this year when its terms of use briefly stated that Facebook would own content that its users uploaded onto the site).

As for the privacy policy, you should think beforehand about (1) what types of personally identifiable information you will collect, (2) with what types of third parties (service providers, marketing partners?) this information may be shared, (3) what types of uses you foresee making of personally identifiable information, and (4) how, if at all, cookies, pixels and flash objects will be used on the site to collect information from users and how such information will be used and shared (e.g., will the information be shared with marketers or advertising networks for behavioral advertising?) Obviously, these decisions are partly cultural — how much comfort do you want to give your website users on privacy? If you have thought carefully about the specifics of your privacy regime (how information will be collected, used and shared) before having a conversation with your attorney, this will reduce your legal fees. If you plan to collect personally identifiable information from international users on your site, you should also bring this up with your attorney, since the European Union has much stricter privacy laws than the U.S.

Depending on the nature, features and complexity of your site, drafting the terms of use and privacy policy may mean spending anywhere from a few hundred to a few thousand dollars on legal fees. In my humble opinion — and I may be ducking rotten tomatoes from my fellow bar members for saying this! — it should not cost more than this, unless the site is extremely elaborate (Amazon) or the client extremely picayune. With that said, however, sites that offer highly regulated or controlled products or activities (such as online gambling, liquor, health supplements, contests or sweepstakes) or are targeted at children may also require additional disclosures (e.g., contest rules) or controls (e.g., a process to obtain parental consent for the collection of personal information from children under 13) beyond the terms of use and privacy policy, which, of course, will cost extra.

Painful as the legal fees may be, terms of use and privacy policies fall within the old adage, “An ounce of prevention is worth a pound of cure.” They are necessary shields against legal and regulatory liability. Additionally, with the FTC, in particular, sounding off on how certain behavioral tracking disclosures (among other things) should not be buried in legalese and also getting cranky about ways websites should notify their users about material changes in terms of use and privacy policies, you need to have these documents drafted by a pro.

6. Web Copy Review. Your attorney, who is probably thirsting for billable hours in these grim times, would love nothing better than to take a red pen to your site copy and etch out every conceivable source of risk. For most sites that are launched with little seed capital and do not feature heavily regulated or high-risk products or activities (gambling, liquor, financial services, sweepstakes or contests, material targeted to children, etc.), this is probably overkill. Having said that, it is a good idea to have a business lawyer with some experience in online promotions do a quick, high-level pass through the site to see if there are any major issues. For example, if you use certain terms like “Free” or “Guaranteed,” these carry with them special legal obligations and disclosure requirements. You also want your terms of use and privacy policy to be legally binding on your site users, so it is worthwhile to have an attorney eyeball the process or flow by which these documents are presented to and accepted by users.

To give yourself a reasonable degree of comfort, ask your attorney to spend an hour (but no more) clicking through the test site, and then see what he or she comes back with.

No doubt this quick checklist will provoke howls of outrage from some business lawyers who will note scores of issues that I have either glossed over (business structure and governance issues) or omitted entirely (patents, vesting of equity for partners who make service contributions). They are correct — this is not a comprehensive blueprint for launching a new business. If you have the legal budget for that, please give me a call. Please. My point is that if you’re just a small entrepreneur without angel investors or a powerful VC sugar daddy behind you and and you only have a couple of thousand dollars or less to spend on a lawyer, you need to know where you can get the most legal bang for your buck now, and what you can defer for a few months until the business starts to generate revenue.

Which is why I’ve discussed copyrights and trademarks (which are relatively cheap and are also easy for a web business to infringe unknowingly) but not patents (which, now that the golden age of business method patents is definitely over, are less relevant to ordinary web businesses; if you feel you’ve invented something really novel and useful, definitely raise the patenting issue with your attorney, but know that it can cost tens of thousands of dollars in legal and filing fees to apply for a patent, and, in any case, you have up to a year from your first public disclosure or commercialization of the invention to file your patent application). I could give you other examples, but you get the picture.

One additional disclaimer (of course, we love disclaimers!): the figures and ranges I have given above for attorney fees represent my opinion of what these various services should cost, not necessarily what an actual firm will charge you. They are ballpark estimates to help you decide what services are most important to you and fit within your budget. Hopefully they will also facilitate a fruitful conversation with your attorney about managing costs. If you do not have this conversation at the outset, do not be surprised if you do end up getting charged a lot more.

Consulting a good business and e-commerce lawyer is a necessary part of launching a web business. Like any other professional, we have a suite of services we want to sell you. All are useful, but they need to be prioritized. A good business lawyer will do this for you, but sometimes you have to ask.

Last year ICANN embarked on a major initiative to authorize potentially hundreds of new generic top-level domains (gTLDs) starting in 2010. In addition to the 21 current gTLDs (which include the ubiquitous .com, .net and .org), you could soon see domain names ending in .paris, .food, .google and other terms. ICANN believes that gTLD expansion will add choice and flexibility to the Internet address system; however, wary trademark owners, especially financial institutions and financial services associations (including Bank of America Corp. and the American Bankers Association), have objected to its plans, anticipating an explosion in cybersquatting, typosquatting and phishing incidents and a spike in trademark abuse prevention and defensive domain name registration costs (millions of new domain names mean millions more that could end up in the hands of baddies).

In response to these objections, ICANN convened the Implementation Recommendation Team (IRT), a group of intellectual property experts, in March 2009 to examine the problem. On May 29, 2009 the IRT published its Final Report on Trademark Protection in new gTLDs for public comment. If you enjoy the sensation of being repeatedly slammed in the head with a large brick, I invite you to read the report. If you enjoy the sensation of being slammed in the head once or twice with a brick of more middling size, you can check out an article I wrote www.revenews.com summarizing the high points (such as they are) of the Final Report.

A couple of key issues bear mentioning here. First, the report calls for the creation of both (1) an IP Clearinghouse to serve as a repository of data about asserted trademark rights (both registered and unregistered trademarks) throughout the world and a validator of these rights where trademark claims impact domain name registrations, and (2) a Globally Protected Marks List (GPML) of select trademarks which have a large number of registrations in numerous countries and, accordingly, are targeted for the highest levels of abuse. Third-party applications for top-level domains that match or are confusingly similar to trademarks in the GPML (such as, hypothetically speaking, .apple) would initially be blocked, as would third-party applications for second-level domains that are identical to marks on the list (apple.computer, again hypothetically speaking).

Applicants to be domain name registry operators for the new gTLDs would also be encouraged to offer a Pre-Launch IP Claims Service, whereby, if a third party attempts to register a second-level domain that matches a trademark contained and validated in the IP Clearinghouse (and that is not a Globally Protected Mark subject to blocking), the registry would notify both the trademark owner and the registrant. The registrant receiving the notice would not be blocked from registering the domain name, provided that it makes certain contractual representations and warranties – i.e., it has a right or legitimate interest in the domain name, will not use it in bad faith and (under penalty of cancellation of the domain name) has provided accurate contact information.

Finally, the IRT report also recommends that all gTLD registries be required to participate in a new Uniform Rapid Suspension System (URS), sort of a cheaper, fast-track, limited-purpose version of ICANN’s Uniform Domain Name Dispute Resolution Policy (UDRP) for super-bad cybersquatters. In clear-cut cases where there is no “genuine contestable issue” about the registrant’s bad-faith registration and use of an abusive domain name, the trademark owner could have the registration frozen for its natural life, and Internet users attempting to access that domain name would see a specific error webpage. Complaints would be submitted (by e-mail, if the complainant chooses) to a third party selected by ICANN, which would retain a qualified legal expert to render a decision. Fees would be assessed by the third party on a cost-recovery basis. All in all, the process would be more streamlined and less formal than under the UDRP.

All of these trademark rights protection mechanisms will provide a much needed supplement to the wheezing and expensive UDRP (mandatory arbitration that costs thousands of dollars in legal and filing fees per squatter). Nevertheless, with a huge increase in the number of potentially problematic domain names, brand protection and trademark abuse prevention will remain an administratively complex and costly process.

One idea I had is that trademark owners could effectively deputize their online marketing affiliates by license agreement to snap up domain names on their behalf and point these URLs to approved ad copy. Affiliates could be paid a premium commission for clicks or transactions resulting from Internet traffic visiting the new domain names, to compensate the affiliate for both its initiative in opening up new real estate and the mitigation of trademark risk to the merchant from having the domain name in “friendly” hands. The affiliate contract/license agreement could even contain a buyout clause giving the trademark owner the option to purchase the domain name registration from the affiliate at a designated price (the affiliate’s out-of-pocket costs plus some kind of premium). For the trademark owner, in addition to increased Internet traffic, this arrangement would mean lowering its trademark abuse and brand protection costs – fewer domain name registrations to acquire and maintain, fewer disputes to pursue under either the URS or UDRP.

Well, that’s enough for one afternoon (blogging, not work). At the risk of sounding like a philistine, for today’s happy hour recommendation, try the roof of TGI Friday’s on the Ben Franklin Parkway between 17th and 18th Streets. It’s certainly no gastropub, just fun in the sun. (In these hazy, languid days of August, I’m very low-maintenance!)

The great username rush on Facebook highlights a critical problem for trademark owners: what to do about “name squatters” who register usernames on Facebook, Twitter and other social networking websites containing third parties’ trademarks? This behavior is sometimes innocuous (for example, the registrant may be a fan of the trademark owner), sometimes annoying (e.g., a prankster uses a corporate username to make snarky comments critical of the company) and sometimes downright dangerous (e.g., a fraudster impersonates a bank in a phishing scheme intended to obtain sensitive customer information). In their terms of use Facebook and Twitter reserve the right to reclaim usernames, and thus filing a complaint and working with the social networking sites to effectuate a transfer or cancellation of the username is probably a trademark owner’s first and best line of attack against a name squatter (obviously, if the trademark owner gets there first and registers the username itself, that is the most preferable outcome).

With regard to trademark law remedies, the landscape is eerily similar to that which existed in the late 1990’s, when cybersquatting (the bad-faith registration of domain names containing or confusingly similar to others’ trademarks) was rampant, but shoehorning a case into the existing trademark causes of action for infringement and false designation of origin was difficult. As we intellectual property lawyers know, Congress solved that problem in 1999 by passing the Anti-Cybersquatting Consumer Protection Act (15 U.S.C. Sec. 1125(d)). The problem here is that cybersquatting as prohibited in that statute is defined as the registration or use of, or trafficking in, a “domain name” with a bad-faith intent to profit. One could argue, of course. that inclusion of a third party’s trademark in a Facebook vanity URL constitutes registration of a domain name, but this seems dubious: an argument at least equally powerful can be made that the trademark is contained outside of the domain name.

Under the circumstances, the classic causes of action for trademark infringement (15 U.S.C. Sec. 1114) and false designation of origin (15 U.S.C. Sec. 1125(a): in a nutshell, this is using a word or term or making a false or misleading statement which is likely to cause confusion, deception or mistake about the sponsorship, affiliation, origin or approval of a person or its goods or services) are probably the trademark owner’s best bets. If the name squatter can be identified (increasingly a difficult task in the online world), the plaintiff can request the court to award treble damages and, in exceptional cases, attorneys’ fees. These remedies are mandatory if the court finds that the defendant intentionally used a counterfeit mark. However, the defendant’s activities must constitute use of the plaintiff’s mark in commerce and must be in a manner that is likely to confuse or deceive, or to cause mistake by, the public. Therefore, the fans and pranksters mentioned above are less likely to be liable, since they are not using the mark in connection with goods or services (other than referring to the trademark owner’s) and, in any event, are not likely to be confused with the trademark owner. On the other hand, a fraudster who impersonates the trademark owner to obtain money or information and a competitor who uses the owner’s mark in a username to attract traffic to a profile or page promoting its own goods or services is more likely to satisfy the statutory requirements. The first lawsuits have barely been filed, so it will take a year or two to see how all this shakes out — assuming Congress doesn’t act first by passing some sort of anti-social media squatting legislation.

As always, stay tuned ….