United States District Court,



E-Commerce

Cases and Materials

Stewart Brand, The Media Lab: Inventing the Future at MIT

(New York: Viking Penguin, 1987), p.202

Information wants to be free. Information also wants to be expensive. Information wants to be free because it has become so cheap to distribute, copy, and recombine—too cheap to meter. It wants to be expensive because it can be immeasurably valuable to the recipient. That tension will not go away. It leads to endless wrenching debate about price, copyright, ‘intellectual property,’ the moral rightness of casual distribution, because each round of new devices makes the

tension worse, not better.

Beales and Muris, Choice or Consequences: Protecting Privacy in Commercial Information [excerpt]

75 U. Chi. L. Rev. 109 – 112 (2008)

Introduction

      We are frequently asked how, during our recent tenure at the Federal Trade Commission, we came to create the National Do Not Call Registry, one of the most popular government actions ever undertaken. The answer lies in our search for an approach to regulate the exchange of consumer information in commercial transactions. Information exchange is the currency of the modern economy. The growth of the internet, and the resulting new possibilities for collecting, storing, and exchanging information, have sparked a renewed interest in privacy and the ability of consumers to control the use of information about them.

      We argue that information exchange is valuable and that regulators should be cautious about restricting it. The traditional approach to privacy regulation, based on the so-called fair information practices (FIPs), is inadequate. Instead, we argue, government should base commercial privacy regulations and policies on the potential consequences for consumers of information use and misuse. This approach focuses attention on the relevant questions of benefits and costs, and offers a superior foundation for regulation. It was this approach that suggested there would be large consumer benefits from Do Not Call. Finally, we apply this approach to privacy to the growing problem of breaches of information security. Companies with sensitive information about consumers that, in the wrong hands, could harm consumers should be expected to protect that information in ways that are reasonable and appropriate given the sensitivity of the information.

I. The Value of Information Exchange

      A multi-billion dollar industry with dozens of firms compiles and resells information. [FN1] These companies collect and collate different items of information about an individual from various sources and resell it. The revenues of the risk management sector of the business are about $5 billion, [FN2] and the market for pre-employment background screening services is approximately $2 billion. [FN3]

      The heart of building a database is a matching algorithm. [FN4] Systems must distinguish consumers with very similar identifying information, and recognize an individual whose identifying information changes significantly, such as those who have moved or changed their names after marriage or divorce. The systems must accommodate records that may be missing parts of the identifying information, and they must recognize that any individual piece of incoming information may be a mistake. [FN5] Consequently, no one piece of identifying information is used to perform the match. Rather, matching is done based on multiple data points using an algorithm that tests the extent to which the various elements contain data that are consistent for that individual.

      Matching systems confront an inherent tradeoff between inclusion (associating probable matches) and exclusion (keeping records separate when an exact match does not exist). Insisting on a more exact match reduces the chances that an incoming record will be associated mistakenly with the wrong individual. But it increases the chances that the information about an individual will be incomplete because some valid information cannot be matched to the individual with absolute certainty. [FN6] Either potential error can create costs for both users of the data and the consumers who are the subject of the information. Absent a unique, error-free, and universally available identifier, however, the tradeoff is unavoidable. An important element of competition among information providers is their systems' ability to provide the most complete, precise, and accurate data possible to their customers.

      Information is compiled from both public and private sources. Public records include those for property ownership, marriage, divorce, birth, death, change of address, occupational licenses, and UCC and SEC filings. Other information, such as from telephone books, professional registries, and the like is also available. There is also an active commerce in nonpublic information, especially contact information such as names and addresses revealed in business transactions. Companies also compile information concerning products purchased, magazine subscriptions, travel records, types of accounts, fraudulent transactions, and payment history. [FN7]

      Once compiled, information is used for many purposes. [FN8] Information intermediaries help locate individuals, providing information about their last known address, prior addresses, places of employment, and the like. For background checks, the intermediaries also facilitate searches of public records, revealing liens, bankruptcies, personal assets, and even criminal records.

      Information products also reduce the risk of fraud in account applications or in remote transactions such as online or telephone purchases. Approaches to fraud control can be as simple as checking an identity against a list of prior cases of fraud or determining whether an address is a campground rather than a personal residence. More sophisticated approaches check for consistency in the ways identifying information is used in various transactions, or use available information to estimate the probability that a proposed transaction is fraudulent. Other fraud control tools rely on pooled data to search for anomalous patterns across applications or over time, such as numerous applications with different names but a common home telephone number. Although the evidence is anecdotal, these tools appear highly effective in reducing the incidence of fraud. [FN9]

       Of course, the accumulated information about consumers is used for marketing, perhaps the most controversial use of commercial data. Like the other uses of commercial data, marketing has real social value, enabling companies to offer consumers choices that better satisfy their preferences. Unlike the other uses, however, it directly involves the consumer, who must process a torrent of junk mail, both electronic and physical, and deal with unwanted calls from telemarketers.

      It is not obvious, however, that better information about consumer behavior increases the amount of marketing. It clearly leads to more targeted marketing—there is a higher probability that the consumer will find the message relevant if information about past behavior helps to predict preferences. If targeting were perfect, consumers would receive only offers that were actually of interest. Imperfect, but better, targeting would increase the fraction of offers that the consumer finds interesting. By eliminating offers of no interest, it would tend to reduce the amount of marketing received. [FN10] Indeed, much of the annoyance of spam stems from that fact that, because it is so cheap to send, there is very little targeting. [FN11] Regardless of past behavior, virtually every consumer with an email account has likely received offers to enlarge or contract various body parts, as well as offers to assist in smuggling large sums of money out of a foreign country.

Footnotes

[FN1]. A wide variety of information products exist, offering substantial benefits. These products include tools to reduce the risk of fraud, facilitate credit-granting decisions, and locate individuals. Information tools also offer easier access to public records, thus helping to monitor official conduct, protect our most vulnerable citizens from criminals and sexual predators, monitor land use and development, and determine whether licensed professionals are who they claim to be.

[FN2]. According to LexisNexis, the risk management sector includes identity authentication, fraud prevention, and credit and security risk products. Reed Elsevier, Reed Elsevier Announces the Acquisition of Seisint, Inc. for $775 Million (July 14, 2004), online at ? Articleid=965 (visited Jan 12, 2008).

[FN3]. KPMG Corporate Finance, Background Screening *1 (Fall 2003), online at us/pdf/bkgd_screen.pdf (visited Jan 12, 2008).

[FN4]. The data-matching process used in credit reporting is discussed in detail in FTC, Report to Congress under Sections 318 and 319 of the Fair and Accurate Credit Transactions Act of 2003 36-46 (2004), online at http:// reports/facta/041209factarpt.pdf (visited Jan 12, 2008).

[FN5]. Studies of unemployment insurance records, for example, suggest that the error rates in entering social security numbers range from 0.5 to 4 percent. Id at 39. Unlike credit card numbers, social security numbers do not include a “checksum” digit, which can be derived mathematically from the other digits in the number. Thus, a computer can check to ensure the credit card number is internally consistent, which substantially reduces the chances of undetected typographical errors.

[FN6]. The consequences of either incompleteness or inaccuracy depend on the particular item of information involved. Either type of error about a recent bankruptcy filing, for example, is more serious than if the information is about a recent account that was paid on time.

[FN7]. Identity Theft: Recent Developments Involving the Security of Sensitive Consumer Information, hearing before the Senate Committee on Banking, Housing, and Urban Affairs, 4 (Mar 10, 2005) (statement of the FTC), online at (visited Jan 12, 2008).

[FN8]. Many uses of information are restricted under various federal statutes. Under § 604 of the Fair Credit Reporting Act (FCRA), Pub L No 91-508, 84 Stat 1128, codified in relevant part at 15 USCA § 1681b (2007), for example, information that constitutes a “consumer report” can be used only for a narrowly drawn list of permissible purposes.

[FN9]. A major national credit card issuer with approximately forty-five million accounts, growing by about ten thousand accounts a day, realized a 13 percent decrease in application fraud losses and annual savings of $18 million by implementing a basic identity authentication tool. Similarly, a national wireless telecommunications provider reduced its fraud losses per handset by 55 percent and decreased the time it took to confirm fraud records by 66 percent. FTC, Panel on the Costs and Benefits of the Collection and Use of Consumer Information for Credit Transactions 11-12 (June 18, 2003) (testimony of Laura DeSoto, Senior Vice President, Credit Services, Experian).

[FN10]. Better targeting would reduce the marginal cost of acquiring a new customer, which would mean that sellers would seek to acquire more customers. This expansion in the amount of marketing would tend to increase the number of solicitations received. On the other hand, the increased productivity of marketing means that it takes fewer solicitations to generate a customer, which would reduce the number of solicitations received. Which factor would predominate is not obvious a priori.

[FN11]. See FTC, Email Address Harvesting: How Spammers Reap What You Sow 1 (Nov 2002), online at (visited Jan 12, 2008).

Carnival Cruise Lines, Inc. v. Shute

499 U.S. 585 (1991)

Justice BLACKMUN delivered the opinion of the Court.

In this admiralty case we primarily consider whether the United States Court of Appeals for the Ninth Circuit correctly refused to enforce a forum-selection clause contained in tickets issued by petitioner Carnival Cruise Lines, Inc., to respondents Eulala and Russel Shute.

I

The Shutes, through an Arlington, Wash., travel agent, purchased passage for a 7-day cruise on petitioner's ship, the Tropicale. Respondents paid the fare to the agent who forwarded the payment to petitioner's headquarters in Miami, Fla. Petitioner then prepared the tickets and sent them to respondents in the State of Washington. The face of each ticket, at its left-hand lower corner, contained this admonition:

“SUBJECT TO CONDITIONS OF CONTRACT ON LAST PAGES IMPORTANT! PLEASE READ CONTRACT-ON LAST PAGES 1, 2, 3” App. 15.

The following appeared on “contract page 1” of each ticket:

“TERMS AND CONDITIONS OF PASSAGE CONTRACT TICKET

. . . . .

“3. (a) The acceptance of this ticket by the person or persons named hereon as passengers shall be deemed to be an acceptance and agreement by each of them of all of the terms and conditions of this Passage Contract Ticket.

. . . . .

“8. It is agreed by and between the passenger and the Carrier that all disputes and matters whatsoever arising under, in connection with or incident to this Contract shall be litigated, if at all, in and before a Court located in the State of Florida, U.S.A., to the exclusion of the Courts of any other state or country.” Id., at 16.

The last quoted paragraph is the forum-selection clause at issue.

II

Respondents boarded the Tropicale in Los Angeles, Cal. The ship sailed to Puerto Vallarta, Mexico, and then returned to Los Angeles. While the ship was in international waters off the Mexican coast, respondent Eulala Shute was injured when she slipped on a deck mat during a guided tour of the ship's galley. Respondents filed suit against petitioner in the United States District Court for the Western District of Washington, claiming that Mrs. Shute's injuries had been caused by the negligence of Carnival Cruise Lines and its employees. Id., at 4.

Petitioner moved for summary judgment, contending that the forum clause in respondents' tickets required the Shutes to bring their suit against petitioner in a court in the State of Florida. Petitioner contended, alternatively, that the District Court lacked personal jurisdiction over petitioner because petitioner's contacts with the State of Washington were insubstantial. The District Court granted the motion, holding that petitioner's contacts with Washington were constitutionally insufficient to support the exercise of personal jurisdiction. See App. to Pet. for Cert. 60a.

The Court of Appeals reversed. Reasoning that “but for” petitioner's solicitation of business in Washington, respondents would not have taken the cruise and Mrs. Shute would not have been injured, the court concluded that petitioner had sufficient contacts with Washington to justify the District Court's exercise of personal jurisdiction. 897 F.2d 377, 385-386 (CA9 1990).

Turning to the forum-selection clause, the Court of Appeals acknowledged that a court concerned with the enforceability of such a clause must begin its analysis with The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972), where this Court held that forum-selection clauses, although not “historically ... favored,” are “prima facie valid.” Id., at 9-10, 92 S.Ct., at 1913. See 897 F.2d, at 388. The appellate court concluded that the forum clause should not be enforced because it “was not freely bargained for.” Id., at 389. As an “independent justification” for refusing to enforce the clause, the Court of Appeals noted that there was evidence in the record to indicate that “the Shutes are physically and financially incapable of pursuing this litigation in Florida” and that the enforcement of the clause would operate to deprive them of their day in court and thereby contravene this Court's holding in The Bremen. 897 F.2d, at 389.

We granted certiorari to address the question whether the Court of Appeals was correct in holding that the District Court should hear respondents' tort claim against petitioner. 498 U.S. 807-808, 111 S.Ct. 39, 112 L.Ed.2d 16 (1990). Because we find the forum-selection clause to be dispositive of this question, we need not consider petitioner's constitutional argument as to personal jurisdiction. See Ashwander v. TVA, 297 U.S. 288, 347, 56 S.Ct. 466, 483, 80 L.Ed. 688 (1936) (Brandeis, J., concurring) (“ ‘It is not the habit of the Court to decide questions of a constitutional nature unless absolutely necessary to a decision of the case,’ ” quoting Burton v. United States, 196 U.S. 283, 295, 25 S.Ct. 243, 245, 49 L.Ed. 482 (1905)).

III

We begin by noting the boundaries of our inquiry.

First, this is a case in admiralty, and federal law governs the enforceability of the forum-selection clause we scrutinize. See Archawski v. Hanioti, 350 U.S. 532, 533, 76 S.Ct. 617, 619, 100 L.Ed. 676 (1956); The Moses Taylor, 4 Wall. 411, 427, 18 L.Ed. 397 (1867); Tr. of Oral Arg. 36-37, 12, 47-48. Cf. Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 28-29, 108 S.Ct. 2239, 2243-2244, 101 L.Ed.2d 22 (1988).

Second, we do not address the question whether respondents had sufficient notice of the forum clause before entering the contract for passage. Respondents essentially have conceded that they had notice of the forum-selection provision. Brief for Respondents 26 (“The respondents do not contest the incorporation of the provisions nor [sic ] that the forum selection clause was reasonably communicated to the respondents, as much as three pages of fine print can be communicated” ). Additionally, the Court of Appeals evaluated the enforceability of the forum clause under the assumption, although “doubtful,” that respondents could be deemed to have had knowledge of the clause. See 897 F.2d, at 389, and n. 11.

Within this context, respondents urge that the forum clause should not be enforced because, contrary to this Court's teachings in The Bremen, the clause was not the product of negotiation, and enforcement effectively would deprive respondents of their day in court. Additionally, respondents contend that the clause violates the Limitation of Vessel Owner's Liability Act, 46 U.S.C.App. § 183c. We consider these arguments in turn.

IV

A

Both petitioner and respondents argue vigorously that the Court's opinion in The Bremen governs this case, and each side purports to find ample support for its position in that opinion's broad-ranging language. This seeming paradox derives in large part from key factual differences between this case and The Bremen, differences that preclude an automatic and simple application of The Bremen's general principles to the facts here.

In The Bremen, this Court addressed the enforceability of a forum-selection clause in a contract between two business corporations. An American corporation, Zapata, made a contract with Unterweser, a German corporation, for the towage of Zapata's oceangoing drilling rig from Louisiana to a point in the Adriatic Sea off the coast of Italy. The agreement provided that any dispute arising under the contract was to be resolved in the London Court of Justice. After a storm in the Gulf of Mexico seriously damaged the rig, Zapata ordered Unterweser's ship to tow the rig to Tampa, Fla., the nearest point of refuge. Thereafter, Zapata sued Unterweser in admiralty in federal court at Tampa. Citing the forum clause, Unterweser moved to dismiss. The District Court denied Unterweser's motion, and the Court of Appeals for the Fifth Circuit, sitting en banc on rehearing, and by a sharply divided vote, affirmed. In re Complaint of Unterweser Reederei GmbH, 446 F.2d 907 (1971).

This Court vacated and remanded, stating that, in general, “a freely negotiated private international agreement, unaffected by fraud, undue influence, or overweening bargaining power, such as that involved here, should be given full effect.” 407 U.S., at 12-13, 92 S.Ct. at 1914-1915 (footnote omitted). The Court further generalized that “in the light of present-day commercial realities and expanding international trade we conclude that the forum clause should control absent a strong showing that it should be set aside.” Id., at 15, 92 S.Ct., at 1916. The Court did not define precisely the circumstances that would make it unreasonable for a court to enforce a forum clause. Instead, the Court discussed a number of factors that made it reasonable to enforce the clause at issue in The Bremen and that, presumably, would be pertinent in any determination whether to enforce a similar clause.

In this respect, the Court noted that there was “strong evidence that the forum clause was a vital part of the agreement, and [that] it would be unrealistic to think that the parties did not conduct their negotiations, including fixing the monetary terms, with the consequences of the forum clause figuring prominently in their calculations.” Id., at 14, 92 S.Ct., 1915 (footnote omitted). Further, the Court observed that it was not “dealing with an agreement between two Americans to resolve their essentially local disputes in a remote alien forum,” and that in such a case, “the serious inconvenience of the contractual forum to one or both of the parties might carry greater weight in determining the reasonableness of the forum clause.” Id., at 17, 92 S.Ct., at 1917. The Court stated that even where the forum clause establishes a remote forum for resolution of conflicts, “the party claiming [unfairness] should bear a heavy burden of proof.” Ibid.

In applying The Bremen, the Court of Appeals in the present litigation took note of the foregoing “reasonableness” factors and rather automatically decided that the forum-selection clause was unenforceable because, unlike the parties in The Bremen, respondents are not business persons and did not negotiate the terms of the clause with petitioner. Alternatively, the Court of Appeals ruled that the clause should not be enforced because enforcement effectively would deprive respondents of an opportunity to litigate their claim against petitioner.

The Bremen concerned a “far from routine transaction between companies of two different nations contemplating the tow of an extremely costly piece of equipment from Louisiana across the Gulf of Mexico and the Atlantic Ocean, through the Mediterranean Sea to its final destination in the Adriatic Sea.” Id., at 13, 92 S.Ct., at 1915. These facts suggest that, even apart from the evidence of negotiation regarding the forum clause, it was entirely reasonable for the Court in The Bremen to have expected Unterweser and Zapata to have negotiated with care in selecting a forum for the resolution of disputes arising from their special towing contract.

In contrast, respondents' passage contract was purely routine and doubtless nearly identical to every commercial passage contract issued by petitioner and most other cruise lines. In this context, it would be entirely unreasonable for us to assume that respondents-or any other cruise passenger-would negotiate with petitioner the terms of a forum-selection clause in an ordinary commercial cruise ticket. Common sense dictates that a ticket of this kind will be a form contract the terms of which are not subject to negotiation, and that an individual purchasing the ticket will not have bargaining parity with the cruise line. But by ignoring the crucial differences in the business contexts in which the respective contracts were executed, the Court of Appeals' analysis seems to us to have distorted somewhat this Court's holding in The Bremen.

In evaluating the reasonableness of the forum clause at issue in this case, we must refine the analysis of The Bremen to account for the realities of form passage contracts. As an initial matter, we do not adopt the Court of Appeals' determination that a non-negotiated forum-selection clause in a form ticket contract is never enforceable simply because it is not the subject of bargaining. Including a reasonable forum clause in a form contract of this kind well may be permissible for several reasons: First, a cruise line has a special interest in limiting the fora in which it potentially could be subject to suit. Because a cruise ship typically carries passengers from many locales, it is not unlikely that a mishap on a cruise could subject the cruise line to litigation in several different fora. See The Bremen, 407 U.S., at 13, and n. 15, 92 S.Ct., at 1915, and n. 15; Hodes, 858 F.2d, at 913. Additionally, a clause establishing ex ante the forum for dispute resolution has the salutary effect of dispelling any confusion about where suits arising from the contract must be brought and defended, sparing litigants the time and expense of pretrial motions to determine the correct forum and conserving judicial resources that otherwise would be devoted to deciding those motions. Finally, it stands to reason that passengers who purchase tickets containing a forum clause like that at issue in this case benefit in the form of reduced fares reflecting the savings that the cruise line enjoys by limiting the fora in which it may be sued.

We also do not accept the Court of Appeals' “independent justification” for its conclusion that The Bremen dictates that the clause should not be enforced because “[t]here is evidence in the record to indicate that the Shutes are physically and financially incapable of pursuing this litigation in Florida.” 897 F.2d, at 389. We do not defer to the Court of Appeals' findings of fact. In dismissing the case for lack of personal jurisdiction over petitioner, the District Court made no finding regarding the physical and financial impediments to the Shutes' pursuing their case in Florida. The Court of Appeals' conclusory reference to the record provides no basis for this Court to validate the finding of inconvenience. Furthermore, the Court of Appeals did not place in proper context this Court's statement in The Bremen that “the serious inconvenience of the contractual forum to one or both of the parties might carry greater weight in determining the reasonableness of the forum clause.” 407 U.S., at 17, 92 S.Ct., at 1917. The Court made this statement in evaluating a hypothetical “agreement between two Americans to resolve their essentially local disputes in a remote alien forum.” Ibid. In the present case, Florida is not a “remote alien forum,” nor-given the fact that Mrs. Shute's accident occurred off the coast of Mexico-is this dispute an essentially local one inherently more suited to resolution in the State of Washington than in Florida. In light of these distinctions, and because respondents do not claim lack of notice of the forum clause, we conclude that they have not satisfied the “heavy burden of proof,” ibid., required to set aside the clause on grounds of inconvenience.

It bears emphasis that forum-selection clauses contained in form passage contracts are subject to judicial scrutiny for fundamental fairness. In this case, there is no indication that petitioner set Florida as the forum in which disputes were to be resolved as a means of discouraging cruise passengers from pursuing legitimate claims. Any suggestion of such a bad-faith motive is belied by two facts: Petitioner has its principal place of business in Florida, and many of its cruises depart from and return to Florida ports. Similarly, there is no evidence that petitioner obtained respondents' accession to the forum clause by fraud or overreaching. Finally, respondents have conceded that they were given notice of the forum provision and, therefore, presumably retained the option of rejecting the contract with impunity. In the case before us, therefore, we conclude that the Court of Appeals erred in refusing to enforce the forum-selection clause.

. . .

V

The judgment of the Court of Appeals is reversed.

It is so ordered.

Justice STEVENS, with whom Justice MARSHALL joins, dissenting.

The Court prefaces its legal analysis with a factual statement that implies that a purchaser of a Carnival Cruise Lines passenger ticket is fully and fairly notified about the existence of the choice of forum clause in the fine print on the back of the ticket. Even if this implication were accurate, I would disagree with the Court's analysis. But, given the Court's preface, I begin my dissent by noting that only the most meticulous passenger is likely to become aware of the forum-selection provision. I have therefore appended to this opinion a facsimile of the relevant text, using the type size that actually appears in the ticket itself. A careful reader will find the forum-selection clause in the 8th of the 25 numbered paragraphs.

Of course, many passengers, like the respondents in this case will not have an opportunity to read paragraph 8 until they have actually purchased their tickets. By this point, the passengers will already have accepted the condition set forth in paragraph 16(a), which provides that “[t]he Carrier shall not be liable to make any refund to passengers in respect of ... tickets wholly or partly not used by a passenger.” Not knowing whether or not that provision is legally enforceable, I assume that the average passenger would accept the risk of having to file suit in Florida in the event of an injury, rather than canceling-without a refund-a planned vacation at the last minute. The fact that the cruise line can reduce its litigation costs, and therefore its liability insurance premiums, by forcing this choice on its passengers does not, in my opinion, suffice to render the provision reasonable. Cf. Steven v. Fidelity & Casualty Co. of New York, 58 Cal.2d 862, 883, 27 Cal.Rptr. 172, 186, 377 P.2d 284, 298 (1962) (refusing to enforce limitation on liability in insurance policy because insured “must purchase the policy before he even knows its provisions”).

. . .

The common law, recognizing that standardized form contracts account for a significant portion of all commercial agreements . . . subjects terms in contracts of adhesion to scrutiny for reasonableness. Judge J. Skelly Wright set out the state of the law succinctly in Williams v. Walker-Thomas Furniture Co., 121 U.S.App.D.C. 315, 319-320, 350 F.2d 445, 449-450 (1965) (footnotes omitted):

“Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain. But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all of the terms. In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld.”

See also Steven, 58 Cal.2d, at 879-883, 27 Cal.Rptr. at 183-185, 377 P.2d, at 295-297; Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69 (1960).

The second doctrinal principle implicated by forum-selection clauses is the traditional rule that “contractual provisions, which seek to limit the place or court in which an action may ... be brought, are invalid as contrary to public policy.” See Dougherty, Validity of Contractual Provision Limiting Place or Court in Which Action May Be Brought, 31 A.L.R.4th 404, 409, § 3 (1984). See also Home Insurance Co. v. Morse, 20 Wall. 445, 451, 22 L.Ed. 365 (1874). Although adherence to this general rule has declined in recent years, particularly following our decision in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972), the prevailing rule is still that forum-selection clauses are not enforceable if they were not freely bargained for, create additional expense for one party, or deny one party a remedy. See 31 A.L.R.4th, at 409-438 (citing cases). A forum-selection clause in a standardized passenger ticket would clearly have been unenforceable under the common law before our decision in The Bremen, see 407 U.S., at 9, and n. 10, 92 S.Ct., at 1912-13, and n. 10, and, in my opinion, remains unenforceable under the prevailing rule today.

The Bremen, which the Court effectively treats as controlling this case, had nothing to say about stipulations printed on the back of passenger tickets. That case involved the enforceability of a forum-selection clause in a freely negotiated international agreement between two large corporations providing for the towage of a vessel from the Gulf of Mexico to the Adriatic Sea. The Court recognized that such towage agreements had generally been held unenforceable in American courts, but held that the doctrine of those cases did not extend to commercial arrangements between parties with equal bargaining power.

. . .

I respectfully dissent.

Beales and Muris, Choice or Consequences: Protecting Privacy in Commercial Information [excerpt]

75 U. Chi. L. Rev. 112 – 117 (2008)

Introduction

      II. Approaches to Privacy Regulation

      Since their origination in 1973, [FN12] the FIPs have been highly influential in privacy debates. The heart of FIPs is to require notice and choice. That is, consumers should receive notice of the information that is collected about them, and they should have a choice about how that information is used, particularly with respect to secondary uses. [FN13] In the context in which they were originally developed—assessing the privacy implications of government agencies matching data about a consumer derived from various sources—these principles are potentially quite useful. If consumers knew that data given to one agency would be matched to data from another agency and they had a choice about whether to provide the data or allow the match, then it is very difficult to see how a privacy problem could exist.

      The converse, however, does not follow. That is, the absence of a privacy problem when consumers understand and have a choice about the information collection or use does not imply that a privacy problem exists whenever consumers are ignorant of the information use or lack a choice about it. No reasonable person would think that a privacy problem exists when information is shared with numerous parties to clear a check in settlement of a transaction or to conclude a transaction at an ATM. Yet, most consumers are unaware that such information sharing even exists, let alone have knowledge of which specific parties might receive the information, and consumers have given no consent beyond the fact that they initiated the transaction. [FN14] Indeed, attempting to apply FIPs to real-world privacy issues creates significant quandaries, as we discuss next.

A. The Irrelevance of FIPs

      Both of the foundational principles of FIPs—notice and choice—are highly appealing in theory. In the abstract, who can oppose them? FIPs pose insuperable difficulties in practice, however. Most fundamentally, FIPs neglect the very real costs of processing information and making a decision. Everyone who has received a financial privacy notice (and has actually perused it) is aware that the notices are often long, complex, and filled with legal jargon. Few consumers actually take the time to read them, understand them, and make a conscious choice about whether to opt out of information sharing that is not a matter of statutory right for the financial institution. [FN15]

       Judging by behavior in the marketplace, most consumers have better things to do with their time than read privacy notices. The point is not that transaction costs are particularly high, because it does not take long to process a privacy notice. Rather, processing privacy notices is a cost that most consumers apparently do not believe is worth incurring. The perceived benefits are simply too low. Simpler notices are always possible, but any notice that provides meaningful information about the actual uses of information in the modern economy will necessarily impose costs on consumers who must read and process the information. [FN16]

      The reality that decisions about information sharing are not worth thinking about for the vast majority of consumers contradicts the fundamental premise of the notice approach to privacy. To be an effective approach, some significant number of consumers must not only read privacy notices for the businesses with whom they currently deal, they must also consider the privacy practices of alternative service providers and choose the provider whose practices best match their privacy preferences. There is no reason to think this is currently happening, or will ever happen.

      The FIPs principle of choice fares no better. For consumers, the costs of exercising choice regarding information sharing involve more than the small investment of time to read the notice and implement the choice. To exercise choice, a consumer first must decide to do so. Because consumers literally have (at least) hundreds of ways that they can use their time, to care about choices regarding their information they must overcome both the costs of decisionmaking and the opportunity cost of not using their time elsewhere. [FN17] The costs involved in deciding to choose may pose a more fundamental barrier to FIPs than the mere time costs involved.

      The tendency of consumers to avoid decisionmaking costs by avoiding a choice has been observed in a number of different contexts and given rise to debate about the proper choice of default rules. For example, Austria, Belgium, France, Hungary, Poland, Portugal, and Sweden have presumed consent (opt out) as the default rule for organ donation, whereas Denmark, the Netherlands, the UK, and Germany have explicit consent (opt in) as the default. [FN18] Across European countries, the opt-out countries have drastically higher proportions of the population in the potential organ donor pool: a difference of at least 60 percentage points. Richard Posner has attributed the stickiness of default rules in the organ donation context to the cost of decisionmaking:

       One possible reason the weak default rule appears to have a significant effect is public ignorance. The probability that one's organs will be harvested for use in transplantation must be very slight—so slight that it doesn't pay to think much about whether one wants to participate in such a program. When the consequences of making a “correct” decision are slight, ignorance is rational, and therefore one expects default rules to have their greatest effect on behavior when people are ignorant of the rule and therefore do not try to take advantage of the opportunity to opt out of it. [FN19]

      Thus, consumers rationally avoid investing in information necessary to make certain decisions, such as donating organs, when their decision is very unlikely to have a significant impact on them. The same is true with respect to privacy. Consumers also maintain rational ignorance about how much and what kind of information sharing occurs. It simply does not pay for most consumers to think and make decisions about policies on the use of their information, given that the issue is of such little consequence practically to them. [FN20]

      In our economy, there are vital uses of information sharing that depend on the fact that consumers cannot choose whether to participate. One such example is credit reporting. Unlike many other countries, credit reporting in the US is “full file” or “comprehensive” reporting, including both positive and negative information about consumers. [FN21] The expansion of credit reporting, along with improvements in credit scoring, has facilitated substantial expansion in the availability of credit to American consumers, [FN22] as well as the democratization of credit. [FN23] Credit grantors can make more expeditious decisions, often without a personal visit to a loan officer, enabling the phenomenon of “instant credit” and offering significant benefits to consumers as a group.

      Comprehensive credit reporting, however, depends on the absence of consumer choice. Creditors report, on a voluntary basis, consumers' payment histories. If consumers could choose not to have some of their information reported, [FN24] the credit reporting system likely would experience significant adverse selection—consumers with poor payment histories would choose not to have that information reported. [FN25] Such information loss, however, would significantly compromise the value of the system, leading to some combination of increased defaults and reduced credit availability. [FN26]

      Property recordation is another example in which giving consumers choice regarding use of their information in the system would seriously undermine an important institution. Although the recording acts governing property recordation vary from state to state, they share two separate, but interdependent, purposes. The first is to protect purchasers who acquire interests in real property. The second purpose, critical to achievement of the first, is enabling prospective purchasers—and lenders—to determine the existence of prior claims that might affect their interests. Thus, claims against property are a matter of public record, accessible to all. [FN27] If consumers could exclude liens against their property, or if they could limit access to the records, these important purposes would be thwarted.

      We could, of course, narrow the range of places in which consumers are allowed choice to avoid the difficulties discussed above. But, if we accept FIPs as the basis for privacy regulation, there is no principled basis for limiting choice consistent with FIPs. A privacy regime that gives consumers a choice—except when it doesn't—is not a basis for a sound legal approach at all.

      The core difficulty with the FIPs approach to privacy is its attempt to approach privacy as a question of property. Information about a consumer is seen as “belonging” to the consumer, who therefore is entitled to control how and where that information is disseminated. In fact, however, the consumer and the other party to a transaction generally jointly produce commercial information. There is no obvious way to assign property rights, particularly exclusive property rights, to either party. In a real estate transaction, for example, or an auction on eBay, both the buyer and seller know all of the pertinent details of the transaction and may benefit from using that information for a variety of other purposes. Which party should be given control? US law does not treat commercial information in the possession of sellers as something over which consumers can exercise exclusive control—it is not the consumer's property. [FN28]

       Of course, under the Coase theorem, allocation of a property right to information would not matter in a world of zero transaction costs. As our discussion of notice makes clear, however, the transaction costs of even considering uses of personal information appear to loom large relative to the benefits, let alone the costs of negotiating to rearrange rights. Because transaction costs will essentially preclude transactions, we need to know the efficient use of the information before we can assign property rights. Yet, the attraction of the FIPs approach to privacy is that, at first blush, it seems to avoid precisely that question. Unfortunately, it does not.

Footnotes

[FN12]. Report of the Secretary's Advisory Committee on Automated Personal Data Systems, US Department of Health, Education, and Welfare, Records, Computers, and the Rights of Citizens (1973), online at http:// privacy/hew1973report (visited Jan 12, 2008).

[FN13]. Other FIPs include access and correction (the notion that consumers should be able to examine and correct information about them). In some contexts (like credit reporting), these approaches are helpful, but in others they can create problems. Consider, for example, a database of identities that have been used to commit frauds. The only person with a real interest in examining and correcting such a database is the thief who used that identity once and would like to use it again. Similarly, the fact that one person's name has at some point been used with another person's social security number looks like an error to each of them, but knowing that fact helps creditors reduce the risk of fraudulent applications, thereby protecting both. FIPs also require that information holders protect the information, a notion that we explore at some length below.

[FN14]. The most that even diligent readers of financial privacy disclosures might learn is that information “may” be shared to process a transaction. Plainly, such an incantation does not cure any privacy problem that would otherwise exist.

[FN15]. See Susan E. Henrichsen, What Privacy Notice?, Presentation at Interagency Public Workshop on Financial Privacy Notices, slide 3 (Office of the Attorney General, California, Dec 4, 2001) (reporting that according to a May 2001 American Bankers Association survey, 41 percent of consumers did not recall receiving the notice, 22 percent had received but not read the notice, and 36 percent had read the notice).

[FN16]. The situation is no different with respect to internet privacy notices. Although the vast majority of websites have privacy policies, there is little evidence that consumers actually click on them, let alone read them. In a survey by the Privacy Leadership Initiative, a group of corporate and trade association executives, only 3 percent of consumers read websites' privacy policies carefully, and 64 percent only glanced at—or never read—websites' privacy policies. Privacy Leadership Initiative (PLI), Privacy Notices Research: Final Results (Dec 2001), online at https:// UnderstandingPrivacy/library/datasum.pdf (visited Jan 12, 2008).

[FN17]. In many contexts, consumers can use the market to substitute money for time, hiring an agent to perform a task that would otherwise require their own time. It is difficult to imagine a practical market substitute for reading privacy notices and exercising choice, however.

[FN18]. See Eric Johnson and Daniel Goldstein, Do Defaults Save Lives?, Science 1338, 1339 (Nov 21, 2003). Under the European Union's Privacy Directive, all EU members have an opt-in default rule for information sharing. Consumers are presumed willing to share their organs, but not their information.

[FN19]. Richard Posner, Organ Sales—Posner's Comment, The Becker-Posner Blog (Jan 1, 2006), online at (visited Jan 12, 2008).

[FN20]. Of course, some consumers care intensely about privacy issues and are willing to bear the decisionmaking costs of processing and deciding about privacy notices. Default rules should be designed to impose those costs on consumers who think they are worth paying. An opt-out default rule means that consumers who do not think that decisionmaking costs are worthwhile do not need to bear those costs. Consumers who care intensely, however, will face the costs of making a decision. In contrast, an opt-in default rule frees those who care the most about the issue to avoid the decision costs, because the default will accord with their preferences.

[FN21]. See generally John M. Barron and Michael Staten, The Value of Comprehensive Credit Reports: Lessons from the U.S. Experience (2000), online at (visited Jan 12, 2008) (discussing the benefits of the US system of comprehensive credit reporting, and offering the US system as a model for credit reporting systems in other countries that currently do not fully realize the benefits of comprehensive credit reporting due to varying limitations from country to country on lenders' access to personal credit history for the purpose of assessing risk).

[FN22]. In 1970, when the Fair Credit Reporting Act was enacted, outstanding consumer credit in constant dollars was $556 billion. Fair Credit Reporting Act, hearing before the House Committee on Financial Services (July 9, 2003) (statement of the FTC), online at (visited Jan 12, 2008). In 2002, it was $7 trillion. Fred H. Cate, et al, Financial Privacy, Consumer Prosperity, and the Public Good: Maintaining the Balance ii (AEI-Brookings Joint Center for Regulatory Studies, Mar 2003).

[FN23]. The percentage of families in the lowest income quintile with a credit card has increased from 2 percent in 1970 to 38 percent in 2001. The Information Policy Institute, The Fair Credit Reporting Act: Access, Efficiency & Opportunity—The Economic Importance of Fair Credit Reauthorization (“IPI Report”) 5 (June 2003).

[FN24]. Recently, some states have enacted so-called “freeze” laws, allowing consumers to block access to their credit reports. Generally, these statutes include exceptions that effectively limit their applicability to when the consumer is applying for a new account. Freezes, for example, do not block access to credit reports for purposes of risk management or pricing a note or obligation in a transaction. Moreover, various hurdles have made requesting a freeze difficult, and only about 50,000 consumers have so requested. See Brian Krebs, States Offer Consumers New Tool to Thwart Identity Theft: Consumers Largely Unaware of Credit Freeze, (May 9, 2007), online at (visited Jan 12, 2008). More importantly for our argument, they do not allow consumers choice about what information is included in their credit file.

[FN25]. Although creditors could demand access to a credit report as a condition of granting credit, they could no longer distinguish between the consumer who has no report because he has no prior experience with credit and the very different consumer who has a bad credit history but has blocked reporting of any information. Both consumers would have no file. Or, a deadbeat with choice might maintain one account in good standing and repeatedly open and default on other accounts without allowing reporting. The result would have elements of a “lemons” market. See George A. Akerloff, The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, 84 Q J Econ 488, 490-92 (1970) (demonstrating that asymmetrical information can lead to market conditions wherein poor-quality products drive out high-quality products). Choice would undermine the mechanism that allows lenders to differentiate consumers based on risk. A likely response of lenders would be to rely more heavily on their own experience with a consumer, thus tying consumers more tightly to a particular lender and reducing willingness to lend to strangers.

[FN26]. See generally IPI Report (cited in note 23) (analyzing the many benefits of comprehensive credit reporting).

[FN27]. Richard R. Powell and Michael Allan Wolf, ed, 14 Powell on Real Property § 82.01[3] at 82-12 (Matthew Bender 2007).

[FN28]. See Dwyer v American Express Co, 652 NE2d 1351, 1354 (Ill App 1995) (dismissing the plaintiff consumer's challenge to American Express's practice of renting lists compiled from information contained in its own records, because by using the American Express card, the consumer voluntarily gave the information to American Express, which simply compiled and analyzed that information); Shibley v Time, Inc, 341 NE2d 337, 339-40 (Ohio App 1975) (upholding the defendant's practice of selling subscription lists to direct mail advertisers when subscribers' profiles were used only to determine what type of advertisement was to be sent). Moreover, consumers' preferences regarding a seller's use of transaction information for other purposes may differ. See Shibley v Time, Inc, 321 NE2d 791, 797 (Ohio Ct Com Pl 1974) (noting that large portions of the class may have preferred receiving the unsolicited mail and supported the sale of mailing lists).

Dougherty v. Salt

125 N.E. 94 (1919)

 

Cardozo, J.

 

The plaintiff, a boy of eight years, received from his aunt, the defendant's testatrix, a promissory note for $3,000, payable at her death or before. Use was made of a printed form, which contains the words ‘value received.’ How the note came to be given was explained by the boy's guardian, who was a witness for his ward. The aunt was visiting her nephew.

 

‘When she saw Charley coming in, she said, ‘Isn't he a nice boy?’ I answered her, Yes; that he is getting along very nice, and getting along nice in school; and I showed where he had progressed in school, having good reports, and so forth, and she told me that she was going to take care of that child; that she loved him very much. I said, ‘I know you do, Tillie, but your taking care of the child will be done probably like your brother and sister done, take it out in talk. ’She said, ‘I don't intend to take it out in talk; I would like to take care of him now. ’I said, ‘Well, that is up to you.’ She said, ‘Why can't I make out a note to him? ’I said, ‘You can, if you wish to.’ She said, ‘Would that be right?’ And I said, ‘I do not know, but I guess it would; I do not know why it would not.’ And she said, ‘Well, will you make out a note for me?’ I said, ‘Yes, if you wish me to,’ and she said, ‘Well, I wish you would.”

 

A blank was then produced, filled out, and signed. The aunt handed the note to her nephew, with these words:

         

‘You have always done for me, and I have signed this note for you. Now, do not lose it. Some day it will be valuable.’

 

The trial judge submitted to the jury the question whether there was any consideration for the promised payment. Afterwards, he set aside the verdict in favor of the plaintiff, and dismissed the complaint. The Appellate Division, by a divided court, reversed the judgment of dismissal, and reinstated the verdict on the ground that the note was sufficient evidence of consideration.

 

We reach a different conclusion. The inference of consideration to be drawn from the form of the note has been so overcome and rebutted as to leave no question for a jury. This is not a case where witnesses, summoned by the defendant and friendly to the defendant's cause, supply the testimony in disproof of value.  Strickland v. Henry, 175 N. Y. 372, 67 N. E. 611. This is a case where the testimony in disproof of value comes from the plaintiff's own witness, speaking at the plaintiff's instance. The transaction thus revealed admits of one interpretation, and one only. The note was the voluntary and unenforceable promise of an executory gift . . .

The promise was neither offered nor accepted with any other purpose. . . . A note so given is not made for ‘value received,’ however its maker may have labeled it. The formula of the printed blank becomes, in the light of the conceded facts, a mere erroneous conclusion, which cannot overcome the inconsistent conclusion of the law.  . . .  The plaintiff through his own witness, has explained the genesis of the promise, and consideration has been disproved.

 

We hold, therefore, that the verdict of the jury was contrary to law, and that the trial judge was right in setting it aside. . . .

In Re , Inc., Customer Data Security Breach Litigation

893 F.Supp.2d 1058 (D.Nev.,2012)

Order

R. JONES, District Judge

This Multidistrict Litigation ("MDL") proceeding arises out of a security breach of servers belong to Defendants , Inc. (“Amazon"), doing business as , and Zappos.co, Inc. ("Zappos") in January 2012. Now pending is Defendant Zappos' Motion to Compel Arbitration and Stay action (#3).

I. Relevant Factual Background

Zappos is an online retailer of apparel, shoes, handbags, home furnishing, beauty products, and accessories. Plaintiffs are Zappos customers who gave personal information to Zappos in order to purchase goods via and/or . In mid-January 2012, a computer hacker attacked and attempted to download files containing customer information such as names and addresses from a Zappos server (the "Security Breach"). Plaintiffs allege that on January 16, 2012, Zappos notified Plaintiffs via email that their personal customer account information had been compromised by hackers. Plaintiffs have filed complaints in federal district courts across the country seeking relief pursuant to state and federal statutory and common law for damages resulting from the Security Breach.

II. Procedural Background

. . . The Court held a hearing on the motion and heard the parties' oral arguments on September 19, 2012.

III. Legal Standard

The Federal Arbitration Act ("FAA") provides that contractual arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2 . . .

IV. Discussion

The arbitration agreement at issue, founds in the Disputes section of the Terms of Use of the website, provides as follows:

Any dispute relating in any way to your visit to the Site or to the products you purchase through the Site shall be submitted to confidential arbitration in Las Vegas, Nevada, except that to the extent you have in any manner violated or threatened to violate our intellectual property rights, we may seek injunctive or other appropriate relief in any state or federal court in the State of Nevada. You hereby consent to, and waive all defense of lack of personal jurisdiction and forum non conveniens with respect to venue and jurisdiction in the state and federal courts of Nevada. Arbitration under these Terms of Use shall be conducted pursuant to the Commercial Arbitration Rules then prevailing at the American Arbitration Association. The arbitrator's award shall be final and binding and may be entered as a judgment in any court of competent jurisdiction. To the fullest extent permitted by applicable law, no arbitration under this Agreement shall be joined to an arbitration involving any other party subject to this Agreement, whether through class action proceedings or otherwise. You agree that regardless of any statute or law to the contrary, any claim or cause of action arising out of, related to or connected with the use of the Site or this Agreement must be filed within one (1) year after such claim or cause of action arose or be forever banned.

Additionally, the first paragraph of the Terms of Use provides in relevant part: "We reserve the right to change this Site and these terms and conditions at any time. ACCESSING, BROWSING OR OTHERWISE USING THE SITE INDICATES YOUR AGREEMENT TOALL THE TERMS AND CONDITIONS IN THIS AGREEMENT, SO PLEASE READ THISAGREEMENT CAREFULLY BEFORE PROCEEDING."

. . .

B. The Terms of Use Constitutes an Illusory Contract

The Priera Plaintiffs argue that because the Terms of Use grants Zappos the unilateral right to revise the Arbitration Clause, the contract is illusory and therefore unenforceable. In other words, Plaintiffs argue that the Arbitration Clause is illusory because Zappos can avoid the promise to arbitrate simply by amending the provision, while users are simultaneously bound to arbitration.

Most federal courts that have considered this issue have held that if a party retains the unilateral, unrestricted right to terminate the arbitration agreement, it is illusory and unenforceable, especially where there is no obligation to receive consent from, or even notify, the other parties to the contract . . .

Here, the Terms of Use gives Zappos the right to change the Terms of Use, including the Arbitration Clause, at any time without notice to the consumer. On one side, the Terms of Use purportedly binds any user of the website to mandatory arbitration. However, if a consumer sought to invoke arbitration pursuant to the Terms of Use, nothing would prevent Zappos from unilaterally changing the Terms and making those changes applicable to that pending dispute if it determined that arbitration was no longer in its interest. In effect, the agreement allows Zappos to hold its customers and users to the promise to arbitrate while reserving its own escape hatch. By the terms of the Terms of Use, Zappos is free at any time to require a consumer to arbitrate and/or litigate anywhere it sees fit, while consumers are required to submit to arbitration in Las Vegas, Nevada. Because the Terms of Use binds consumers to arbitration while leaving Zappos free to litigate or arbitrate wherever it sees fit, there exists no mutuality of obligation. We join those other federal courts that find such arbitration agreements illusory and therefore unenforceable.

. . .

V. Conclusion

A court cannot compel a party to arbitrate where that party has not previously agreed to arbitrate. The arbitration provision found in the Terms of Use purportedly binds all users of the website by virtue of their browsing. However, the advent of the Internet has not changed the basic requirements of a contract, . . . even if Plaintiffs could be said to have consented to the terms, the Terms of Use constitutes an illusory contract because it allows Zappos to avoid arbitration by unilaterally changing the Terms at any time, while binding any consumer to mandatory arbitration in Las Vegas, Nevada . . .

Linder v Mid-Continent Petroleum Corp.

252 S.W.2d 631 (1952)

 

George Rose Smith, Justice.

 

This is an action by Mid-Continent Petroleum Corporation to recover possession of a filling station owned by Cora Lee Lindner and leased by her to Mid-Continent.  The theory of the complaint is that Mrs. Lindner wrongfully attempted to cancel the lease and thereafter unjustifiably withheld possession from the plaintiff. There was also involved certain equipment appurtenant to the filling station, but the arguments advanced on appeal present no issue with respect to this equipment. The defenses below were that Mrs. Lindner's lease to Mid-Continent was void for lack of mutuality and that the lessee was in default in the payment of rent. Trial before a jury resulted in a verdict awarding possession to the plaintiff.

 

The jury may have concluded from the proof that on March 19, 1949, Mid-Continent wished to rent the station as an outlet for the sale of its petroleum products, Mrs. Lindner desired to lease the property to Mid-Continent, and Mrs. Lindner's husband, the other appellant, wanted to undertake the operation of the station. In furtherance of these ends the parties executed four instruments on the date mentioned. First, Mrs. Lindner, for a rental of one cent for each gallon of motor fuel sold on the premises, leased the filling station to Mid-Continent for a term of three years with an option by which the lessee might extend the lease for two more years. In this lease the lessee reserved the privilege of termination at any time upon ten days' notice to the lessor. Second, Mid-Continent in turn rented the property to Paul Lindner upon a month-to-month basis at the same rental, both parties retaining the privilege of termination upon ten days' notice. Third, the Lindners authorized Mid-Continent to offset the rents against each other, so that Mid-Continent would not be required to collect the rent monthly from Lindner and pay over an identical amount to Mrs. Lindner. Fourth Mid-Continent and Lindner agreed upon the price schedule at which the company would sell petroleum products to Lindner, this Contract also being cancelable upon ten days' notice by either party.

 

These arrangements appear to have been satisfactory until the year 1951, when Lindner removed Mid-Continent's advertising from the service station and began buying gas and oil from a competing company. On July 23, 1951, Mid-Continent gave notice that it elected to terminate its lease to Paul Lindner and its agreement to sell petroleum products to him. Three days later the Lindners retaliated by attempting to cancel Mrs. Lindner's lease to Mid-Continent. When the latter demanded possession at the expiration of the ten-day notice by which its sublease to Paul Lindner had been canceled the defendants refused to give up the property. This suit was then filed.

 

It is argued by the appellants that the lease from Mrs. Lindner to Mid-Continent is lacking in mutuality in that the lessee can terminate the contract upon ten days' notice, while no similar privilege is granted to the lessor. This contention is without merit. Williston has pointed out that the use of the term ‘mutuality’ in this connection ‘is likely to cause confusion and however limited is at best an unnecessary way of stating that there must be a valid consideration.’  Williston on Contracts, § 141. As we held in Johnson v. Johnson, 188 Ark. 992, 68 S.W.2d 465, the requirement of mutuality does not mean that the promisor's obligation must be exactly coextensive with that of the promisee.  It is enough that the duty unconditionally undertaken by each party be regarded by the law as a sufficient consideration for the other's promise.  Of course a promise which is merely illusory, such as an agreement to buy only what the promisor may choose to buy, falls short of being a consideration for the promisee's undertaking, and neither is bound.  If, however, each party's binding duty of performance amounts to a valuable consideration, the courts do no insist that the bargain be precisely as favorable to one side as to the other.

 

In this view it will be seen that Mid-Continent's option to cancel the lease upon ten days' notice to Mrs. Lindner is not fatal to the validity of the contract. This is not an option by which the lessee may terminate the lease at pleasure and without notice; at the very least the lessee bound itself to pay rent for ten days. Even lesser duties than this are held to be a sufficient consideration to support a contract . . .

 

Affirmed.

Lefkowitz v. Great Minneapolis Surplus Store 

86 N.W.2d 689 (Minn. 1957)

This is an appeal from an order of the Municipal Court of Minneapolis denying the motion of the defendant for amended findings of fact, or, in the alternative, for a new trial. The order for judgment awarded the plaintiff the sum of $ 138.50 as damages for breach of contract.

This case grows out of the alleged refusal of the defendant to sell to the plaintiff a certain fur piece which it had offered for sale in a newspaper advertisement. It appears from the record that on April 6, 1956, the defendant published the following advertisement in a Minneapolis newspaper:

"Saturday 9 a.m. sharp 

3 Brand New Fur Coats 

Worth to $ 100.00 

First Come, First Served 

$ 1 Each"

On April 13, the defendant again published an advertisement in the same newspaper as follows:

"Saturday 9 a.m. 

2 Brand New Pastel Mink 3-Skin Scarfs 

Selling for $ 89.50 

Out they go Saturday. 

Each . . . . $ 1.00 

1 Black Lapin Stole 

Beautiful, worth $ 139.50 . . . $ 1.00 

First Come, First Served"

The record supports the findings of the court that on each of the Saturdays following the publication of the above-described ads the plaintiff was the first to present himself at the appropriate counter in the defendant's store and on each occasion demanded the coat and the stole so advertised and indicated his readiness to pay the sale price of $ 1. On both occasions, the defendant refused to sell the merchandise to the plaintiff, stating on the first occasion that by a "house rule" the offer was intended for women only and sales would not be made to men, and on the second visit that plaintiff knew defendant's house rules.

. . .

The test of whether a binding obligation may originate in advertisements addressed to the general public is "whether the facts show that some performance was promised in positive terms in return for something requested." 1 Williston, Contracts (Rev. ed.) § 27.

The authorities above cited emphasize that, where the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract . . .

Whether in any individual instance a newspaper advertisement is an offer rather than an invitation to make an offer depends on the legal intention of the parties and the surrounding circumstances. We are of the view on the facts before us that the offer by the defendant of the sale of the Lapin fur was clear, definite, and explicit, and left nothing open for negotiation. The plaintiff having successfully managed to be the first one to appear at the seller's place of business to be served, as requested by the advertisement, and having offered the stated purchase price of the article, he was entitled to performance on the part of the defendant. We think the trial court was correct in holding that there was in the conduct of the parties a sufficient mutuality of obligation to constitute a contract of sale.

2.  The defendant contends that the offer was modified by a "house rule" to the effect that only women were qualified to receive the bargains advertised. The advertisement contained no such restriction. This objection may be disposed of briefly by stating that, while an advertiser has the right at any time before acceptance to modify his offer, he does not have the right, after acceptance, to impose new or arbitrary conditions not contained in the published offer. . . .

Affirmed. 

 

ProCD v. Zeidenberg

86 F.3d 1447 (1996)

EASTERBROOK, Circuit Judge. Must buyers of computer software obey the terms of shrinkwrap licenses? The district court held not, for two reasons: first, they are not contracts because the licenses are inside the box rather than printed on the outside; second, federal law forbids enforcement even if the licenses are contracts. 908 F. Supp. 640 (W.D. Wis. 1996). The parties and numerous amici curiae have briefed many other issues, but these are the only two that matter--and we disagree with the district judge's conclusion on each. Shrinkwrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, or if they are unconscionable). Because no one argues that the terms of the license at issue here are troublesome, we remand with instructions to enter judgment for the plaintiff.

I

ProCD, the plaintiff, has compiled information from more than 3,000 telephone directories into a computer database. We may assume that this database cannot be copyrighted, although it is more complex, contains more information (nine-digit zip codes and census industrial codes), is organized differently, and therefore is more original than the single alphabetical directory at issue in Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 113 L. Ed. 2d 358, 111 S. Ct. 1282 (1991). . . ProCD sells a version of the database, called SelectPhone (trademark), on CD-ROM discs. (CD-ROM means "compact disc—read only memory." The "shrinkwrap license" gets its name from the fact that retail software packages are covered in plastic or cellophane "shrinkwrap," and some vendors, though not ProCD, have written licenses that become effective as soon as the customer tears the wrapping from the package. Vendors prefer "end user license," but we use the more common term.) A proprietary method of compressing the data serves as effective encryption too. Customers decrypt and use the data with the aid of an application program that ProCD has written. This program, which is copyrighted, searches the database in response to users' criteria (such as "find all people named Tatum in Tennessee, plus all firms with 'Door Systems' in the corporate name"). The resulting lists (or, as ProCD prefers, "listings") can be read and manipulated by other software, such as word processing programs.

The database in SelectPhone (trademark) cost more than $ 10 million to compile and is expensive to keep current. It is much more valuable to some users than to others. The combination of names, addresses, and zip codes enables manufacturers to compile lists of potential customers. Manufacturers and retailers pay high prices to specialized information intermediaries for such mailing lists; ProCD offers a potentially cheaper alternative. People with nothing to sell could use the database as a substitute for calling long distance information, or as a way to look up old friends who have moved to unknown towns, or just as a electronic substitute for the local phone book. ProCD decided to engage in price discrimination, selling its database to the general public for personal use at a low price (approximately $ 150 for the set of five discs) while selling information to the trade for a higher price . . .

If ProCD had to recover all of its costs and make a profit by charging a single price--that is, if it could not charge more to commercial users than to the general public--it would have to raise the price substantially over $ 150. The ensuing reduction in sales would harm consumers who value the information at, say, $ 200. They get a consumer surplus of $ 50 under the current arrangement but would cease to buy if the price rose substantially. If because of high elasticity of demand in the consumer segment of the market the only way to make a profit turned out to be a price attractive to commercial users alone, then all consumers would lose out--and so would the commercial clients, who would have to pay more for the listings because ProCD could not obtain any contribution toward costs from the consumer market.

To make price discrimination work, however, the seller must be able to control arbitrage. An air carrier sells tickets for less to vacationers than to business travelers, using advance purchase and Saturday-night-stay requirements to distinguish the categories. A producer of movies segments the market by time, releasing first to theaters, then to pay-per-view services, next to the videotape and laserdisc market, and finally to cable and commercial tv. Vendors of computer software have a harder task. Anyone can walk into a retail store and buy a box. Customers do not wear tags saying "commercial user" or "consumer user." Anyway, even a commercial-user-detector at the door would not work, because a consumer could buy the software and resell to a commercial user. That arbitrage would break down the price discrimination and drive up the minimum price at which ProCD would sell to anyone.

Instead of tinkering with the product and letting users sort themselves--for example, furnishing current data at a high price that would be attractive only to commercial customers, and two-year-old data at a low price--ProCD turned to the institution of contract. Every box containing its consumer product declares that the software comes with restrictions stated in an enclosed license. This license, which is encoded on the CD-ROM disks as well as printed in the manual, and which appears on a user's screen every time the software runs, limits use of the application program and listings to non-commercial purposes.

Matthew Zeidenberg bought a consumer package of SelectPhone (trademark) in 1994 from a retail outlet in Madison, Wisconsin, but decided to ignore the license. He formed Silken Mountain Web Services, Inc., to resell the information in the SelectPhone (trademark) database. The corporation makes the database available on the Internet to anyone willing to pay its price--which, needless to say, is less than ProCD charges its commercial customers. Zeidenberg has purchased two additional SelectPhone (trademark) packages, each with an updated version of the database, and made the latest information available over the World Wide Web, for a price, through his corporation. ProCD filed this suit seeking an injunction against further dissemination that exceeds the rights specified in the licenses (identical in each of the three packages Zeidenberg purchased). The district court held the licenses ineffectual because their terms do not appear on the outside of the packages. The court added that the second and third licenses stand no different from the first, even though they are identical, because they might have been different, and a purchaser does not agree to--and cannot be bound by--terms that were secret at the time of purchase. 908 F. Supp. at 654.

II

Following the district court, we treat the licenses as ordinary contracts accompanying the sale of products, and therefore as governed by the common law of contracts and the Uniform Commercial Code. Whether there are legal differences between "contracts" and "licenses" (which may matter under the copyright doctrine of first sale) is a subject for another day. See Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (E.D. N.Y. 1994). Zeidenberg does not argue that Silken Mountain Web Services is free of any restrictions that apply to Zeidenberg himself, because any effort to treat the two parties as distinct would put Silken Mountain behind the eight ball on ProCD's argument that copying the application program onto its hard disk violates the copyright laws. Zeidenberg does argue, and the district court held, that placing the package of software on the shelf is an "offer," which the customer "accepts" by paying the asking price and leaving the store with the goods. Peeters v. State, 154 Wis. 111, 142 N.W. 181 (1913). In Wisconsin, as elsewhere, a contract includes only the terms on which the parties have agreed. One cannot agree to hidden terms, the judge concluded. So far, so good--but one of the terms to which Zeidenberg agreed by purchasing the software is that the transaction was subject to a license. Zeidenberg's position therefore must be that the printed terms on the outside of a box are the parties' contract--except for printed terms that refer to or incorporate other terms. But why would Wisconsin fetter the parties' choice in this way? Vendors can put the entire terms of a contract on the outside of a box only by using microscopic type, removing other information that buyers might find more useful (such as what the software does, and on which computers it works), or both. The "Read Me" file included with most software, describing system requirements and potential incompatibilities, may be equivalent to ten pages of type; warranties and license restrictions take still more space. Notice on the outside, terms on the inside, and a right to return the software for a refund if the terms are unacceptable (a right that the license expressly extends), may be a means of doing business valuable to buyers and sellers alike. See E. Allan Farnsworth, 1 Farnsworth on Contracts § 4.26 (1990); Restatement (2d) of Contracts § 211 comment a (1981) ("Standardization of agreements serves many of the same functions as standardization of goods and services; both are essential to a system of mass production and distribution. Scarce and costly time and skill can be devoted to a class of transactions rather than the details of individual transactions."). Doubtless a state could forbid the use of standard contracts in the software business, but we do not think that Wisconsin has done so.

Transactions in which the exchange of money precedes the communication of detailed terms are common. Consider the purchase of insurance. The buyer goes to an agent, who explains the essentials (amount of coverage, number of years) and remits the premium to the home office, which sends back a policy. On the district judge's understanding, the terms of the policy are irrelevant because the insured paid before receiving them. Yet the device of payment, often with a "binder" (so that the insurance takes effect immediately even though the home office reserves the right to withdraw coverage later), in advance of the policy, serves buyers' interests by accelerating effectiveness and reducing transactions costs. Or consider the purchase of an airline ticket. The traveler calls the carrier or an agent, is quoted a price, reserves a seat, pays, and gets a ticket, in that order. The ticket contains elaborate terms, which the traveler can reject by canceling the reservation. To use the ticket is to accept the terms, even terms that in retrospect are disadvantageous. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 113 L. Ed. 2d 622 . . . Just so with a ticket to a concert. The back of the ticket states that the patron promises not to record the concert; to attend is to agree. A theater that detects a violation will confiscate the tape and escort the violator to the exit. One could arrange things so that every concertgoer signs this promise before forking over the money, but that cumbersome way of doing things not only would lengthen queues and raise prices but also would scotch the sale of tickets by phone or electronic data service.

Consumer goods work the same way. Someone who wants to buy a radio set visits a store, pays, and walks out with a box. Inside the box is a leaflet containing some terms, the most important of which usually is the warranty, read for the first time in the comfort of home. By Zeidenberg's lights, the warranty in the box is irrelevant; every consumer gets the standard warranty implied by the UCC in the event the contract is silent; yet so far as we are aware no state disregards warranties furnished with consumer products. Drugs come with a list of ingredients on the outside and an elaborate package insert on the inside. The package insert describes drug interactions, contraindications, and other vital information--but, if Zeidenberg is right, the purchaser need not read the package insert, because it is not part of the contract.

Next consider the software industry itself. Only a minority of sales take place over the counter, where there are boxes to peruse. A customer pay place an order by phone in response to a line item in a catalog or a review in a magazine. Much software is ordered over the Internet by purchasers who have never seen a box. Increasingly software arrives by wire. There is no box; there is only a stream of electrons, a collection of information that includes data, an application program, instructions, many limitations ("MegaPixel 3.14159 cannot be used with Byte-Pusher 2.718"), and the terms of sale. The user purchases a serial number, which activates the software's features. On Zeidenberg's arguments, these unboxed sales are unfettered by terms--so the seller has made a broad warranty and must pay consequential damages for any shortfalls in performance, two "promises" that if taken seriously would drive prices through the ceiling or return transactions to the horse-and-buggy age.

According to the district court, the UCC does not countenance the sequence of money now, terms later. (Wisconsin's version of the UCC does not differ from the Official Version in any material respect, so we use the regular numbering system. Wis. Stat. § 402.201 corresponds to UCC § 2-201, and other citations are easy to derive.) One of the court's reasons--that by proposing as part of the draft Article 2B a new UCC § 2-2203 that would explicitly validate standard-form user licenses, the American Law Institute and the National Conference of Commissioners on Uniform Laws have conceded the invalidity of shrinkwrap licenses under current law, see 908 F. Supp. at 655-66--depends on a faulty inference. To propose a change in a law's text is not necessarily to propose a change in the law's effect. New words may be designed to fortify the current rule with a more precise text that curtails uncertainty. To judge by the flux of law review articles discussing shrinkwrap licenses, uncertainty is much in need of reduction--although businesses seem to feel less uncertainty than do scholars, for only three cases (other than ours) touch on the subject, and none directly addresses it. See Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991); Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 268-70 (5th Cir. 1988); Arizona Retail Systems, Inc. v. Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993). As their titles suggest, these are not consumer transactions. Step-Saver is a battle-of-the-forms case, in which the parties exchange incompatible forms and a court must decide which prevails. Our case has only one form; UCC § 2-207 is irrelevant. Vault holds that Louisiana's special shrinkwrap-license statute is preempted by federal law, a question to which we return. And Arizona Retail Systems did not reach the question, because the court found that the buyer knew the terms of the license before purchasing the software.

What then does the current version of the UCC have to say? We think that the place to start is § 2-204(1): "A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract." A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance. And that is what happened. ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure. This Zeidenberg did. He had no choice, because the software splashed the license on the screen and would not let him proceed without indicating acceptance. So although the district judge was right to say that a contract can be, and often is, formed simply by paying the price and walking out of the store, the UCC permits contracts to be formed in other ways. ProCD proposed such a different way, and without protest Zeidenberg agreed. Ours is not a case in which a consumer opens a package to find an insert saying "you owe us an extra $10,000" and the seller files suit to collect. Any buyer finding such a demand can prevent formation of the contract by returning the package, as can any consumer who concludes that the terms of the license make the software worth less than the purchase price. Nothing in the UCC requires a seller to maximize the buyer's net gains.

Section 2-606, which defines "acceptance of goods", reinforces this understanding. A buyer accepts goods under § 2-606(1)(b) when, after an opportunity to inspect, he fails to make an effective rejection under § 2-602(1). ProCD extended an opportunity to reject if a buyer should find the license terms unsatisfactory; Zeidenberg inspected the package, tried out the software, learned of the license, and did not reject the goods. We refer to § 2-606 only to show that the opportunity to return goods can be important; acceptance of an offer differs from acceptance of goods after delivery, see Gillen v. Atalanta Systems, Inc., 997 F.2d 280, 284 n.1 (7th Cir. 1993); but the UCC consistently permits the parties to structure their relations so that the buyer has a chance to make a final decision after a detailed review.

Some portions of the UCC impose additional requirements on the way parties agree on terms. A disclaimer of the implied warranty of merchantability must be "conspicuous." UCC § 2-316(2), incorporating UCC § 1-201(10). Promises to make firm offers, or to negate oral modifications, must be "separately signed." UCC § § 2-205, 2-209(2). These special provisos reinforce the impression that, so far as the UCC is concerned, other terms may be as inconspicuous as the forum-selection clause on the back of the cruise ship ticket in Carnival Lines. Zeidenberg has not located any Wisconsin case--for that matter, any case in any state--holding that under the UCC the ordinary terms found in shrinkwrap licenses require any special prominence, or otherwise are to be undercut rather than enforced. In the end, the terms of the license are conceptually identical to the contents of the package. Just as no court would dream of saying that SelectPhone (trademark) must contain 3,100 phone books rather than 3,000, or must have data no more than 30 days old, or must sell for $ 100 rather than $ 150--although any of these changes would be welcomed by the customer, if all other things were held constant--so, we believe, Wisconsin would not let the buyer pick and choose among terms. Terms of use are no less a part of "the product" than are the size of the database and the speed with which the software compiles listings. Competition among vendors, not judicial revision of a package's contents, is how consumers are protected in a market economy. Digital Equipment Corp. v. Uniq Digital Technologies, Inc., 73 F.3d 756 (7th Cir. 1996). ProCD has rivals, which may elect to compete by offering superior software, monthly updates, improved terms of use, lower price, or a better compromise among these elements. As we stressed above, adjusting terms in buyers' favor might help Matthew Zeidenberg today (he already has the software) but would lead to a response, such as a higher price, that might make consumers as a whole worse off. . .

REVERSED AND REMANDED

Specht v. Netscape

306 F.3d 17 (2nd Circuit N.Y., 2001)

SOTOMAYOR, Circuit Judge.

This is an appeal from a judgment of the Southern District of New York denying a motion by defendants-appellants Netscape Communications Corporation and its corporate parent, America Online, Inc. (collectively, “defendants” or “Netscape”), to compel arbitration and to stay court proceedings. In order to resolve the central question of arbitrability presented here, we must address issues of contract formation in cyberspace. Principally, we are asked to determine whether plaintiffs-appellees (“plaintiffs”), by acting upon defendants' invitation to download free software made available on defendants' webpage, agreed to be bound by the software's license terms (which included the arbitration clause at issue), even though plaintiffs could not have learned of the existence of those terms unless, prior to executing the download, they had scrolled down the webpage to a screen located below the download button. We agree with the district court that a reasonably prudent Internet user in circumstances such as these would not have known or learned of the existence of the license terms before responding to defendants' invitation to download the free software, and that defendants therefore did not provide reasonable notice of the license terms. In consequence, plaintiffs' bare act of downloading the software did not unambiguously manifest assent to the arbitration provision contained in the license terms.

We also agree with the district court that plaintiffs' claims relating to the software at issue—a “plug-in” program entitled SmartDownload (“SmartDownload” or “the plug-in program”), offered by Netscape to enhance the functioning of the separate browser program called Netscape Communicator (“Communicator” or “the browser program”)—are not subject to an arbitration agreement contained in the license terms governing the use of Communicator. Finally, we conclude that the district court properly rejected defendants' argument that plaintiff website owner Christopher Specht, though not a party to any Netscape license agreement, is nevertheless required to arbitrate his claims concerning SmartDownload because he allegedly benefited directly under SmartDownload's license agreement. Defendants' theory that Specht benefited whenever visitors employing SmartDownload downloaded certain files made available on his website is simply too tenuous and speculative to justify application of the legal doctrine that requires a nonparty to an arbitration agreement to arbitrate if he or she has received a direct benefit under a contract containing the arbitration agreement.

We therefore affirm the district court's denial of defendants' motion to compel arbitration and to stay court proceedings.

BACKGROUND

I. Facts

In three related putative class actions, plaintiffs alleged that, unknown to them, their use of SmartDownload transmitted to defendants private information about plaintiffs' downloading of files from the Internet, thereby effecting an electronic surveillance of their online activities in violation of two federal statutes, the Electronic Communications Privacy Act, 18 U.S.C. §§ 2510 et seq., and the Computer Fraud and Abuse Act, 18 U.S.C. § 1030.

Specifically, plaintiffs alleged that when they first used Netscape's Communicator--a software program that permits Internet browsing--the program created and stored on each of their computer hard drives a small text file known as a “cookie” that functioned “as a kind of electronic identification tag for future communications” between their computers and Netscape. Plaintiffs further alleged that when they installed SmartDownload--a separate software “plug-in” that served to enhance Communicator's browsing capabilities--SmartDownload created and stored on their computer hard drives another string of characters, known as a “Key,” which similarly functioned as an identification tag in future communications with Netscape. According to the complaints in this case, each time a computer user employed Communicator to download a file from the Internet, SmartDownload “assume[d] from Communicator the task of downloading” the file and transmitted to Netscape the address of the file being downloaded together with the cookie created by Communicator and the Key created by SmartDownload. These processes, plaintiffs claim, constituted unlawful “eavesdropping” on users of Netscape's software products as well as on Internet websites from which users employing SmartDownload downloaded files.

In the time period relevant to this litigation, Netscape offered on its website various software programs, including Communicator and SmartDownload, which visitors to the site were invited to obtain free of charge. It is undisputed that five of the six named plaintiffs--Michael Fagan, John Gibson, Mark Gruber, Sean Kelly, and Sherry Weindorf--downloaded Communicator from the Netscape website. These plaintiffs acknowledge that when they proceeded to initiate installation of Communicator, they were automatically shown a scrollable text of that program's license agreement and were not permitted to complete the installation until they had clicked on a “Yes” button to indicate that they accepted all the license terms.FN4 If a user attempted to install Communicator without clicking “Yes,” the installation would be aborted. All five named user plaintiffs expressly agreed to Communicator's license terms by clicking “Yes.” The Communicator license agreement that these plaintiffs saw made no mention of SmartDownload or other plug-in programs, and stated that “[t]hese terms apply to Netscape Communicator and Netscape Navigator” and that “all disputes relating to this Agreement (excepting any dispute relating to intellectual property rights)” are subject to “binding arbitration in Santa Clara County, California.”

FN4. This kind of online software license agreement has come to be known as “clickwrap” (by analogy to “shrinkwrap,” used in the licensing of tangible forms of software sold in packages) because it “presents the user with a message on his or her computer screen, requiring that the user manifest his or her assent to the terms of the license agreement by clicking on an icon. The product cannot be obtained or used unless and until the icon is clicked.” Specht, 150 F.Supp.2d at 593-94 (footnote omitted). Just as breaking the shrinkwrap seal and using the enclosed computer program after encountering notice of the existence of governing license terms has been deemed by some courts to constitute assent to those terms in the context of tangible software, see, e.g., ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1451 (7th Cir.1996), so clicking on a webpage's clickwrap button after receiving notice of the existence of license terms has been held by some courts to manifest an Internet user's assent to terms governing the use of downloadable intangible software, see, e.g., Hotmail Corp. v. Van$ Money Pie Inc., 47 U.S.P.Q.2d 1020, 1025 (N.D.Cal.1998).

Although Communicator could be obtained independently of SmartDownload, all the named user plaintiffs, except Fagan, downloaded and installed Communicator in connection with downloading SmartDownload. Each of these plaintiffs allegedly arrived at a Netscape webpage captioned “SmartDownload Communicator” that urged them to “Download With Confidence Using SmartDownload!” At or near the bottom of the screen facing plaintiffs was the prompt “Start Download” and a tinted button labeled “Download.” By clicking on the button, plaintiffs initiated the download of SmartDownload. Once that process was complete, SmartDownload, as its first plug-in task, permitted plaintiffs to proceed with downloading and installing Communicator, an operation that was accompanied by the clickwrap display of Communicator's license terms described above.

The signal difference between downloading Communicator and downloading SmartDownload was that no clickwrap presentation accompanied the latter operation. Instead, once plaintiffs Gibson, Gruber, Kelly, and Weindorf had clicked on the “Download” button located at or near the bottom of their screen, and the downloading of SmartDownload was complete, these plaintiffs encountered no further information about the plug-in program or the existence of license terms governing its use. The sole reference to SmartDownload's license terms on the “SmartDownload Communicator” webpage was located in text that would have become visible to plaintiffs only if they had scrolled down to the next screen.

Had plaintiffs scrolled down instead of acting on defendants' invitation to click on the “Download” button, they would have encountered the following invitation: “Please review and agree to the terms of the Netscape SmartDownload software license agreement before downloading and using the software.” Plaintiffs Gibson, Gruber, Kelly, and Weindorf averred in their affidavits that they never saw this reference to the SmartDownload license agreement when they clicked on the “Download” button. They also testified during depositions that they saw no reference to license terms when they clicked to download SmartDownload, although under questioning by defendants' counsel, some plaintiffs added that they could not “remember” or be “sure” whether the screen shots of the SmartDownload page attached to their affidavits reflected precisely what they had seen on their computer screens when they downloaded SmartDownload.FN10

FN10. In the screen shot of the SmartDownload webpage attached to Weindorf's affidavit, the reference to license terms is partially visible, though almost illegible, at the bottom of the screen. In the screen shots attached to the affidavits of Gibson, Gruber, and Kelly, the reference to license terms is not visible.

In sum, plaintiffs Gibson, Gruber, Kelly, and Weindorf allege that the process of obtaining SmartDownload contrasted sharply with that of obtaining Communicator. Having selected SmartDownload, they were required neither to express unambiguous assent to that program's license agreement nor even to view the license terms or become aware of their existence before proceeding with the invited download of the free plug-in program. Moreover, once these plaintiffs had initiated the download, the existence of SmartDownload's license terms was not mentioned while the software was running or at any later point in plaintiffs' experience of the product.

Even for a user who, unlike plaintiffs, did happen to scroll down past the download button, SmartDownload's license terms would not have been immediately displayed in the manner of Communicator's clickwrapped terms. Instead, if such a user had seen the notice of SmartDownload's terms and then clicked on the underlined invitation to review and agree to the terms, a hypertext link would have taken the user to a separate webpage entitled “License & Support Agreements.” The first paragraph on this page read, in pertinent part:

The use of each Netscape software product is governed by a license agreement. You must read and agree to the license agreement terms BEFORE acquiring a product. Please click on the appropriate link below to review the current license agreement for the product of interest to you before acquisition. For products available for download, you must read and agree to the license agreement terms BEFORE you install the software. If you do not agree to the license terms, do not download, install or use the software.

Below this paragraph appeared a list of license agreements, the first of which was “License Agreement for Netscape Navigator and Netscape Communicator Product Family (Netscape Navigator, Netscape Communicator and Netscape SmartDownload).” If the user clicked on that link, he or she would be taken to yet another webpage that contained the full text of a license agreement that was identical in every respect to the Communicator license agreement except that it stated that its “terms apply to Netscape Communicator, Netscape Navigator, and Netscape SmartDownload.” The license agreement granted the user a nonexclusive license to use and reproduce the software, subject to certain terms:

BY CLICKING THE ACCEPTANCE BUTTON OR INSTALLING OR USING NETSCAPE COMMUNICATOR, NETSCAPE NAVIGATOR, OR NETSCAPE SMARTDOWNLOAD SOFTWARE (THE “PRODUCT”), THE INDIVIDUAL OR ENTITY LICENSING THE PRODUCT (“LICENSEE”) IS CONSENTING TO BE BOUND BY AND IS BECOMING A PARTY TO THIS AGREEMENT. IF LICENSEE DOES NOT AGREE TO ALL OF THE TERMS OF THIS AGREEMENT, THE BUTTON INDICATING NON-ACCEPTANCE MUST BE SELECTED, AND LICENSEE MUST NOT INSTALL OR USE THE SOFTWARE.

Among the license terms was a provision requiring virtually all disputes relating to the agreement to be submitted to arbitration:

Unless otherwise agreed in writing, all disputes relating to this Agreement (excepting any dispute relating to intellectual property rights) shall be subject to final and binding arbitration in Santa Clara County, California, under the auspices of JAMS/EndDispute, with the losing party paying all costs of arbitration.

Unlike the four named user plaintiffs who downloaded SmartDownload from the Netscape website, the fifth named plaintiff, Michael Fagan, claims to have downloaded the plug-in program from a “shareware” website operated by ZDNet, an entity unrelated to Netscape. Shareware sites are websites, maintained by companies or individuals, that contain libraries of free, publicly available software. The pages that a user would have seen while downloading SmartDownload from ZDNet differed from those that he or she would have encountered while downloading SmartDownload from the Netscape website. Notably, instead of any kind of notice of the SmartDownload license agreement, the ZDNet pages offered only a hypertext link to “more information” about SmartDownload, which, if clicked on, took the user to a Netscape webpage that, in turn, contained a link to the license agreement. Thus, a visitor to the ZDNet website could have obtained SmartDownload, as Fagan avers he did, without ever seeing a reference to that program's license terms, even if he or she had scrolled through all of ZDNet's webpages.

The sixth named plaintiff, Christopher Specht, never obtained or used SmartDownload, but instead operated a website from which visitors could download certain electronic files that permitted them to create an account with an internet service provider called WhyWeb. Specht alleges that every time a user who had previously installed SmartDownload visited his website and downloaded WhyWeb-related files, defendants intercepted this information. Defendants allege that Specht would receive a representative's commission from WhyWeb every time a user who obtained a WhyWeb file from his website subsequently subscribed to the WhyWeb service. Thus, argue defendants, because the “Netscape license agreement ... conferred on each user the right to download and use both Communicator and SmartDownload software,” Specht received a benefit under that license agreement in that SmartDownload “assisted in obtaining the WhyWeb file and increased the likelihood of success in the download process.” This benefit, defendants claim, was direct enough to require Specht to arbitrate his claims pursuant to Netscape's license terms. Specht, however, maintains that he never received any commissions based on the WhyWeb files available on his website.

II. Proceedings Below

In the district court, defendants moved to compel arbitration and to stay court proceedings pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 4, arguing that the disputes reflected in the complaints, like any other dispute relating to the SmartDownload license agreement, are subject to the arbitration clause contained in that agreement. Finding that Netscape's webpage, unlike typical examples of clickwrap, neither adequately alerted users to the existence of SmartDownload's license terms nor required users unambiguously to manifest assent to those terms as a condition of downloading the product, the court held that the user plaintiffs had not entered into the SmartDownload license agreement. Specht, 150 F.Supp.2d at 595-96.

The district court also ruled that the separate license agreement governing use of Communicator, even though the user plaintiffs had assented to its terms, involved an independent transaction that made no mention of SmartDownload and so did not bind plaintiffs to arbitrate their claims relating to SmartDownload. Id. at 596. The court further concluded that Fagan could not be bound by the SmartDownload license agreement, because the shareware site from which he allegedly obtained the plug-in program provided even less notice of SmartDownload's license terms than did Netscape's page. Id. at 596-97. Finally, the court ruled that Specht was not bound by the SmartDownload arbitration agreement as a noncontracting beneficiary, because he (1) had no preexisting relationship with any of the parties, (2) was not an agent of any party, and (3) received no direct benefit from users' downloading of files from his site, even if those users did employ SmartDownload to enhance their downloading. Id. at 597-98.

Defendants took this timely appeal pursuant to 9 U.S.C. § 16, and the district court stayed all proceedings in the underlying cases pending resolution of the appeal. This Court has jurisdiction pursuant to § 16(a)(1)(B), as this is an appeal from an order denying defendants' motion to compel arbitration under the FAA. Mediterranean Shipping Co. S.A. Geneva v. POL-Atlantic, 229 F.3d 397, 402 (2d Cir.2000).

DISCUSSION

. . .

II. Whether This Court Should Remand for a Trial on Contract Formation

Defendants argue on appeal that the district court erred in deciding the question of contract formation as a matter of law. A central issue in dispute, according to defendants, is whether the user plaintiffs actually saw the notice of SmartDownload's license terms when they downloaded the plug-in program. Although plaintiffs in their affidavits and depositions generally swore that they never saw the notice of terms on Netscape's webpage, defendants point to deposition testimony in which some plaintiffs, under repeated questioning by defendants' counsel, responded that they could not “remember” or be entirely “sure” whether the link to SmartDownload's license terms was visible on their computer screens. Defendants argue that on some computers, depending on the configuration of the monitor and browser, SmartDownload's license link “appears on the first screen, without any need for the user to scroll at all.” Thus, according to defendants, “a trial on the factual issues that Defendants raised about each and every Plaintiffs' [sic ] downloading experience” is required on remand to remedy the district court's “error” in denying defendants' motion as a matter of law.

Section 4 of the FAA provides, in relevant part, that “[i]f the making of the arbitration agreement ... be in issue, the court shall proceed summarily to the trial thereof.” 9 U.S.C. § 4. We conclude for two reasons, however, that defendants are not entitled to a remand for a full trial. First, during oral argument in the district court on the arbitrability of the five user plaintiffs' claims, defendants' counsel repeatedly insisted that the district court could decide “as a matter of law based on the uncontroverted facts in this case” whether “a reasonably prudent person could or should have known of the [license] terms by which acceptance would be signified.” “I don't want you to try the facts,” defendants' counsel told the court. “I think that the evidence in this case upon which this court can make a determination [of whether a contract existed] as a matter of law is uncontroverted.” Accordingly, the district court decided the issue of reasonable notice and objective manifestation of assent as a matter of law. “[I]t is a well-established general rule that an appellate court will not consider an issue raised for the first time on appeal.” Greene v. United States, 13 F.3d 577, 586 (2d Cir.1994); see also Gurary v. Winehouse, 190 F.3d 37, 44 (2d Cir.1999) (“Having failed to make the present argument to the district court, plaintiff will not be heard to advance it here.”). Nor would it cause injustice in this case for us to decline to accept defendants' invitation to consider an issue that defendants did not advance below.

Second, after conducting weeks of discovery on defendants' motion to compel arbitration, the parties placed before the district court an ample record consisting of affidavits and extensive deposition testimony by each named plaintiff; numerous declarations by counsel and witnesses for the parties; dozens of exhibits, including computer screen shots and other visual evidence concerning the user plaintiffs' experience of the Netscape webpage; oral argument supplemented by a computer demonstration; and additional briefs following oral argument. This well-developed record contrasts sharply with the meager records that on occasion have caused this Court to remand for trial on the issue of contract formation pursuant to 9 U.S.C. § 4. See, e.g., Interbras Cayman Co. v. Orient Victory Shipping Co., S.A., 663 F.2d 4, 5 (2d Cir.1981) (record consisted of affidavits and other papers); Interocean Shipping, 462 F.2d at 676 (record consisted of pleadings, affidavits, and documentary attachments). We are satisfied that the unusually full record before the district court in this case constituted “a hearing where evidence is received.” Interocean Shipping, 462 F.2d at 677. Moreover, upon the record assembled, a fact-finder could not reasonably find that defendants prevailed in showing that any of the user plaintiffs had entered into an agreement on defendants' license terms.

In sum, we conclude that the district court properly decided the question of reasonable notice and objective manifestation of assent as a matter of law on the record before it, and we decline defendants' request to remand for a full trial on that question.

III. Whether the User Plaintiffs Had Reasonable Notice of and Manifested Assent to the SmartDownload License Agreement

Whether governed by the common law or by Article 2 of the Uniform Commercial Code (“UCC”), a transaction, in order to be a contract, requires a manifestation of agreement between the parties. See Windsor Mills, Inc. v. Collins & Aikman Corp., 25 Cal.App.3d 987, 991, 101 Cal.Rptr. 347, 350 (1972) (“[C]onsent to, or acceptance of, the arbitration provision [is] necessary to create an agreement to arbitrate.”); see also Cal. Com.Code § 2204(1) (“A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.”). Mutual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract. Binder v. Aetna Life Ins. Co., 75 Cal.App.4th 832, 848, 89 Cal.Rptr.2d 540, 551 (1999); cf. Restatement (Second) of Contracts § 19(2) (1981) (“The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents.”). Although an onlooker observing the disputed transactions in this case would have seen each of the user plaintiffs click on the SmartDownload “Download” button, see Cedars Sinai Med. Ctr. v. Mid-West Nat'l Life Ins. Co., 118 F.Supp.2d 1002, 1008 (C.D.Cal.2000) (“In California, a party's intent to contract is judged objectively, by the party's outward manifestation of consent.”), a consumer's clicking on a download button does not communicate assent to contractual terms if the offer did not make clear to the consumer that clicking on the download button would signify assent to those terms, see Windsor Mills, 25 Cal.App.3d at 992, 101 Cal.Rptr. at 351 (“[W]hen the offeree does not know that a proposal has been made to him this objective standard does not apply.”). California's common law is clear that “an offeree, regardless of apparent manifestation of his consent, is not bound by inconspicuous contractual provisions of which he is unaware, contained in a document whose contractual nature is not obvious.” Id.; see also Marin Storage & Trucking, Inc. v. Benco Contracting & Eng'g, Inc., 89 Cal.App.4th 1042, 1049, 107 Cal.Rptr.2d 645, 651 (2001) (same).

Arbitration agreements are no exception to the requirement of manifestation of assent. “This principle of knowing consent applies with particular force to provisions for arbitration.” Windsor Mills, 101 Cal.Rptr. at 351. Clarity and conspicuousness of arbitration terms are important in securing informed assent. “If a party wishes to bind in writing another to an agreement to arbitrate future disputes, such purpose should be accomplished in a way that each party to the arrangement will fully and clearly comprehend that the agreement to arbitrate exists and binds the parties thereto.” Commercial Factors Corp. v. Kurtzman Bros., 131 Cal.App.2d 133, 134-35, 280 P.2d 146, 147-48 (1955) (internal quotation marks omitted). Thus, California contract law measures assent by an objective standard that takes into account both what the offeree said, wrote, or did and the transactional context in which the offeree verbalized or acted.

A. The Reasonably Prudent Offeree of Downloadable Software

Defendants argue that plaintiffs must be held to a standard of reasonable prudence and that, because notice of the existence of SmartDownload license terms was on the next scrollable screen, plaintiffs were on “inquiry notice” of those terms.FN14 We disagree with the proposition that a reasonably prudent offeree in plaintiffs' position would necessarily have known or learned of the existence of the SmartDownload license agreement prior to acting, so that plaintiffs may be held to have assented to that agreement with constructive notice of its terms. See Cal. Civ.Code § 1589 (“A voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting.”). It is true that “[a] party cannot avoid the terms of a contract on the ground that he or she failed to read it before signing.” Marin Storage & Trucking, 89 Cal.App.4th at 1049, 107 Cal.Rptr.2d at 651. But courts are quick to add: “An exception to this general rule exists when the writing does not appear to be a contract and the terms are not called to the attention of the recipient. In such a case, no contract is formed with respect to the undisclosed term.” Id.; cf. Cory v. Golden State Bank, 95 Cal.App.3d 360, 364, 157 Cal.Rptr. 538, 541 (1979) (“[T]he provision in question is effectively hidden from the view of money order purchasers until after the transactions are completed.... Under these circumstances, it must be concluded that the Bank's money order purchasers are not chargeable with either actual or constructive notice of the service charge provision, and therefore cannot be deemed to have consented to the provision as part of their transaction with the Bank.”).

FN14. “Inquiry notice” is “actual notice of circumstances sufficient to put a prudent man upon inquiry.” Cal. State Auto. Ass'n Inter-Ins. Bureau v. Barrett Garages, Inc., 257 Cal.App.2d 71, 64 Cal.Rptr. 699, 703 (Cal.Ct.App.1967) (internal quotation marks omitted).

Most of the cases cited by defendants in support of their inquiry-notice argument are drawn from the world of paper contracting. See, e.g., Taussig v. Bode & Haslett, 134 Cal. 260, 66 P. 259 (1901) (where party had opportunity to read leakage disclaimer printed on warehouse receipt, he had duty to do so); In re First Capital Life Ins. Co., 34 Cal.App.4th 1283, 1288, 40 Cal.Rptr.2d 816, 820 (1995) (purchase of insurance policy after opportunity to read and understand policy terms creates binding agreement); King v. Larsen Realty, Inc., 121 Cal.App.3d 349, 356, 175 Cal.Rptr. 226, 231 (1981) (where realtors' board manual specifying that party was required to arbitrate was “readily available,” party was “on notice” that he was agreeing to mandatory arbitration); Cal. State Auto. Ass'n Inter-Ins. Bureau v. Barrett Garages, Inc., 257 Cal.App.2d 71, 76, 64 Cal.Rptr. 699, 703 (1967) (recipient of airport parking claim check was bound by terms printed on claim check, because a “ordinarily prudent” person would have been alerted to the terms); Larrus v. First Nat'l Bank, 122 Cal.App.2d 884, 888, 266 P.2d 143, 147 (1954) (“clearly printed” statement on bank card stating that depositor agreed to bank's regulations provided sufficient notice to create agreement, where party had opportunity to view statement and to ask for full text of regulations, but did not do so); see also Hux v. Butler, 339 F.2d 696, 700 (6th Cir.1964) (constructive notice found where “slightest inquiry” would have disclosed relevant facts to offeree); Walker v. Carnival Cruise Lines, 63 F.Supp.2d 1083, 1089 (N.D.Cal.1999) (under California and federal law, “conspicuous notice” directing the attention of parties to existence of contract terms renders terms binding) (quotation marks omitted); Shacket v. Roger Smith Aircraft Sales, Inc., 651 F.Supp. 675, 691 (N.D.Ill.1986) (constructive notice found where “minimal investigation” would have revealed facts to offeree).

As the foregoing cases suggest, receipt of a physical document containing contract terms or notice thereof is frequently deemed, in the world of paper transactions, a sufficient circumstance to place the offeree on inquiry notice of those terms. “Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact.” Cal. Civ.Code § 19. These principles apply equally to the emergent world of online product delivery, pop-up screens, hyperlinked pages, clickwrap licensing, scrollable documents, and urgent admonitions to “Download Now!”. What plaintiffs saw when they were being invited by defendants to download this fast, free plug-in called SmartDownload was a screen containing praise for the product and, at the very bottom of the screen, a “Download” button. Defendants argue that under the principles set forth in the cases cited above, a “fair and prudent person using ordinary care” would have been on inquiry notice of SmartDownload's license terms. Shacket, 651 F.Supp. at 690.

We are not persuaded that a reasonably prudent offeree in these circumstances would have known of the existence of license terms. Plaintiffs were responding to an offer that did not carry an immediately visible notice of the existence of license terms or require unambiguous manifestation of assent to those terms. Thus, plaintiffs' “apparent manifestation of ... consent” was to terms “contained in a document whose contractual nature [was] not obvious.” Windsor Mills, 25 Cal.App.3d at 992, 101 Cal.Rptr. at 351. Moreover, the fact that, given the position of the scroll bar on their computer screens, plaintiffs may have been aware that an unexplored portion of the Netscape webpage remained below the download button does not mean that they reasonably should have concluded that this portion contained a notice of license terms. In their deposition testimony, plaintiffs variously stated that they used the scroll bar “[o]nly if there is something that I feel I need to see that is on-that is off the page,” or that the elevated position of the scroll bar suggested the presence of “mere[ ] formalities, standard lower banner links” or “that the page is bigger than what I can see.” Plaintiffs testified, and defendants did not refute, that plaintiffs were in fact unaware that defendants intended to attach license terms to the use of SmartDownload.

We conclude that in circumstances such as these, where consumers are urged to download free software at the immediate click of a button, a reference to the existence of license terms on a submerged screen is not sufficient to place consumers on inquiry or constructive notice of those terms. The SmartDownload webpage screen was “printed in such a manner that it tended to conceal the fact that it was an express acceptance of [Netscape's] rules and regulations.” Larrus, 266 P.2d at 147. Internet users may have, as defendants put it, “as much time as they need[ ]” to scroll through multiple screens on a webpage, but there is no reason to assume that viewers will scroll down to subsequent screens simply because screens are there. When products are “free” and users are invited to download them in the absence of reasonably conspicuous notice that they are about to bind themselves to contract terms, the transactional circumstances cannot be fully analogized to those in the paper world of arm's-length bargaining. In the next two sections, we discuss case law and other legal authorities that have addressed the circumstances of computer sales, software licensing, and online transacting. Those authorities tend strongly to support our conclusion that plaintiffs did not manifest assent to SmartDownload's license terms.

B. Shrinkwrap Licensing and Related Practices

Defendants cite certain well-known cases involving shrinkwrap licensing and related commercial practices in support of their contention that plaintiffs became bound by the SmartDownload license terms by virtue of inquiry notice. For example, in Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.1997), the Seventh Circuit held that where a purchaser had ordered a computer over the telephone, received the order in a shipped box containing the computer along with printed contract terms, and did not return the computer within the thirty days required by the terms, the purchaser was bound by the contract. Id. at 1148-49. In ProCD, Inc. v. Zeidenberg, the same court held that where an individual purchased software in a box containing license terms which were displayed on the computer screen every time the user executed the software program, the user had sufficient opportunity to review the terms and to return the software, and so was contractually bound after retaining the product. ProCD, 86 F.3d at 1452; cf. Moore v. Microsoft Corp., 293 A.D.2d 587, 587, 741 N.Y.S.2d 91, 92 (2d Dep't 2002) (software user was bound by license agreement where terms were prominently displayed on computer screen before software could be installed and where user was required to indicate assent by clicking “I agree”); Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 251, 676 N.Y.S.2d 569, 572 (1st Dep't 1998) (buyer assented to arbitration clause shipped inside box with computer and software by retaining items beyond date specified by license terms); M.A. Mortenson Co. v. Timberline Software Corp., 93 Wash.App. 819, 970 P.2d 803, 809 (1999) (buyer manifested assent to software license terms by installing and using software), aff'd, 140 Wash.2d 568, 998 P.2d 305 (2000); see also I.Lan Sys., 183 F.Supp.2d at 338 (business entity “explicitly accepted the clickwrap license agreement [contained in purchased software] when it clicked on the box stating ‘I agree’ ”).

These cases do not help defendants. To the extent that they hold that the purchaser of a computer or tangible software is contractually bound after failing to object to printed license terms provided with the product, Hill and Brower do not differ markedly from the cases involving traditional paper contracting discussed in the previous section. Insofar as the purchaser in ProCD was confronted with conspicuous, mandatory license terms every time he ran the software on his computer, that case actually undermines defendants' contention that downloading in the absence of conspicuous terms is an act that binds plaintiffs to those terms. In Mortenson, the full text of license terms was printed on each sealed diskette envelope inside the software box, printed again on the inside cover of the user manual, and notice of the terms appeared on the computer screen every time the purchaser executed the program. Mortenson, 970 P.2d at 806. In sum, the foregoing cases are clearly distinguishable from the facts of the present action.

C. Online Transactions

Cases in which courts have found contracts arising from Internet use do not assist defendants, because in those circumstances there was much clearer notice than in the present case that a user's act would manifest assent to contract terms.FN16 See, e.g., Hotmail Corp. v. Van$ Money Pie Inc., 47 U.S.P.Q.2d 1020, 1025 (N.D.Cal.1998) (granting preliminary injunction based in part on breach of “Terms of Service” agreement, to which defendants had assented); America Online, Inc. v. Booker, 781 So.2d 423, 425 (Fla.Dist.Ct.App.2001) (upholding forum selection clause in “freely negotiated agreement” contained in online terms of service); Caspi v. Microsoft Network, L.L.C., 323 N.J.Super. 118, 732 A.2d 528, 530, 532-33 (N.J.Super.Ct.App.Div.1999) (upholding forum selection clause where subscribers to online software were required to review license terms in scrollable window and to click “I Agree” or “I Don't Agree”); Barnett v. Network Solutions, Inc., 38 S.W.3d 200, 203-04 (Tex.App.2001) (upholding forum selection clause in online contract for registering Internet domain names that required users to scroll through terms before accepting or rejecting them); cf. Pollstar v. Gigmania, Ltd., 170 F.Supp.2d 974, 981-82 (E.D.Cal.2000) (expressing concern that notice of license terms had appeared in small, gray text on a gray background on a linked webpage, but concluding that it was too early in the case to order dismissal).FN17

FN16. Defendants place great importance on , Inc. v. Verio, Inc., 126 F.Supp.2d 238 (S.D.N.Y.2000), which held that a user of the Internet domain-name database, , had “manifested its assent to be bound” by the database's terms of use when it electronically submitted queries to the database. Id. at 248. But Verio is not helpful to defendants. There, the plaintiff's terms of use of its information were well known to the defendant, which took the information daily with full awareness that it was using the information in a manner prohibited by the terms of the plaintiff's offer. The case is not closely analogous to ours.

After reviewing the California common law and other relevant legal authority, we conclude that under the circumstances here, plaintiffs' downloading of SmartDownload did not constitute acceptance of defendants' license terms. Reasonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assent to those terms by consumers are essential if electronic bargaining is to have integrity and credibility. We hold that a reasonably prudent offeree in plaintiffs' position would not have known or learned, prior to acting on the invitation to download, of the reference to SmartDownload's license terms hidden below the “Download” button on the next screen. We affirm the district court's conclusion that the user plaintiffs, including Fagan, are not bound by the arbitration clause contained in those terms.FN18

FN18. Because we conclude that the Netscape webpage did not provide reasonable notice of the existence of SmartDownload's license terms, it is irrelevant to our decision whether plaintiff Fagan obtained SmartDownload from that webpage, as defendants contend, or from a shareware website that provided less or no notice of that program's license terms, as Fagan maintains. In either case, Fagan could not be bound by the SmartDownload license agreement. Further, because we find that the California common law disposes of the issue of notice and assent, we do not address plaintiffs' arguments based on California's Commercial Code § 2207, the UCC Article 2 provision governing the “battle of the forms.” Moreover, having determined that the parties did not enter into the SmartDownload license agreement, we do not reach plaintiffs' alternative arguments concerning unconscionability.

. . .

CONCLUSION

For the foregoing reasons, we affirm the district court's denial of defendants' motion to compel arbitration and to stay court proceedings.

UETA, UCITA, and E-Sign

Richard Warner

1. UETA

The NCCUSL drafted the Uniform Electronic Transactions Act (UETA) to promote uniformity in the regulation of electronic contracting and to resolve legal uncertainties about the statue of such contracts. The NCCUSL emphasizes that “the purpose of UETA is to remove barriers to electronic commerce by validating and effectuating electronic records and signatures. It is NOT a general contracting statute—the substantive rules of contracts remain unaffected by UETA.” Uniform Electronic Transactions Act, Prefatory Note, National Conference of Commissioners on Uniform State Laws (1999). As of 2006, forty-eighty states had adopted UETA according to the NCCUSL.

Uniform Electronic Transactions Act

SECTION 3. SCOPE.

(a) Except as otherwise provided in subsection (b), this [Act] applies to electronic records and electronic signatures relating to a transaction.

(b) This [Act] does not apply to a transaction to the extent it is governed by:

(1) a law governing the creation and execution of wills, codicils, or testamentary trusts;

(2) [The Uniform Commercial Code other than Sections 1-107 and 1-206, Article 2, and Article 2A];

(3) [the Uniform Computer Information Transactions Act]; and

(4) [other laws, if any, identified by State].

(c) This [Act] applies to an electronic record or electronic signature otherwise excluded from the application of this [Act] under subsection (b) to the extent it is governed by a law other than those specified in subsection (b).

(d) A transaction subject to this [Act] is also subject to other applicable substantive law.

Comment

. . .

7. This Act does apply, in toto, to transactions under unrevised Articles 2 and 2A. There is every reason to validate electronic contracting in these situations. Sale and lease transactions do not implicate broad systems beyond the parties to the underlying transaction, such as are present in check collection and electronic funds transfers. Further sales and leases generally do not have as far reaching effect on the rights of third parties beyond contracting parties, such as exists in the secured transactions system. Finally, it is in the area of sales, licenses, and leases that electronic contracting is occurring to its greatest extent today. To exclude these transactions would largely gut this Act.

Notes and Questions

1. As Comment 7 makes clear, one of the fundamental goals of UETA is to “validate contracting” in the sale of goods and in lease transactions. UETA does not however, resolve the offer and acceptance issues that make some question the enforceability of shrinkwrap and clickwrap contracts, nor does it address the claims, discussed infra in Section D, that certain crucial provisions in software licenses are unenforceable because Federal copyright law preempts the applicable state contract law. But does anything else need validating? As Caspi v. Microsoft illustrates, electronic contracts formed by affirmative indicating assent prior to purchase are clearly enforceable under pre-UETA contract law. Consider UETA Section 7 in this regard.

SECTION 7. LEGAL RECOGNITION OF ELECTRONIC RECORDS, ELECTRONIC SIGNATURES, AND ELECTRONIC CONTRACTS.

(a) A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.

(b) A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.

(c) If a law requires a record to be in writing, an electronic record satisfies the law.

(d) If a law requires a signature, an electronic signature satisfies the law.

Notes and Questions

1. The law often requires writings and signatures. Illinois, for example, has over 3000 statutory sections requiring a signed writing. UETA does resolve uncertainty about whether an electronic signature on an electronic record satisfies these requirements.

2. UETA

UETA also resolves uncertainties about what counts as an electronic signature. UETA’s provisions in this regard are virtually identical to The Electronic Signatures in Global and National Commerce Act (ESIGN), 17 U.S.C. § 7006.

3. ESIGN

Conducting business via the exchange of electronic documents typically saves considerable time and money; consequently, it is important to know when an electronic signature on a document is legally binding. The states responded by passing laws that recognized the legal validity of an electronic signature; the laws vary considerably and thus pose a problem for businesses with national scope. To resolve this lack of uniformity, Congress passed The Electronic Signatures in Global and National Commerce Act (ESIGN), 17 U.S.C. § 7006.

ESIGN resolved a difference among the states in their treatment of an “electronic signature.” §106 of ESIGN defines an electronic signature and related terms.

a. Electronic versus digital signatures

§106. Definitions.

. . .

(2) ELECTRONIC- The term ‘electronic’ means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.

(3) ELECTRONIC AGENT- The term ‘electronic agent’ means a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part without review or action by an individual at the time of the action or response.

(4) ELECTRONIC RECORD- The term ‘electronic record’ means a contract or other record created, generated, sent, communicated, received, or stored by electronic means.

(5) ELECTRONIC SIGNATURE- The term ‘electronic signature’ means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.

b. Digital signature technology

Under §106(5), a typed name at the end of an e-mail, a graphic of a signature, or any other electronic item is a signature as long as it is “attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” Some states had adopted statutes that require the use a specific technology for electronic signatures. This technology is commonly referred to as a digital signature. A digital signature is an electronic signature in the ESIGN sense, but not every electronic signature is a digital signature. Walking through the steps of digitally signing an e-mail illustrates the relevant technology. Suppose Alice wishes to digitally sign the e-mail she is about to send to Bob. Provided Alice has the necessary software on her computer, all she has to do to sign the e-mail digitally is click on the “digitally sign” icon. You need to understand three things the computer does to understand some of the motives behind ESIGN.

First: the computer applies a “hash function” to the message. This is a program that turns the message into a shorter alphanumeric sequence (a sequence of letters and numbers). Suppose Alice’s message is, “Hi, Bob. Hope all is well. Alice,” and suppose that the hash function turns this into the alphanumeric sequence “a29zz878.” Different messages produce different sequences. Second: the computer combines the alphanumeric sequence with a special series of numbers known as “Alice’s private key.” Do not worry yet about where Alice gets her private key. Third: the computer encodes the combination using an “encryption algorithm,” and attaches the result to the e-mail. Here is a very simple encryption algorithm: replace every letter, with the letter that follows it in the alphabet; replace every number with next larger number. Actual encryption programs are vastly more complicated.

The attached encrypted file is Alice’s signature. To see why this is a signature, you need to understand what Bob does when he receives the e-mail. Now, what Bob really does is just click on “decrypt,” but, as with Alice, we need to understand what Bob’s computer does. First: it combines the encrypted file with a special sequence of numbers called “Alice’s public key.” Do not worry yet about where Bob gets Alice’s public key. Second: the computer applies the encryption program (the same one Alice used) to the combination of the public key and the encrypted files. The result is the alphanumeric sequence “a29zz878” the same sequence Alice’s computer produced by running the hash function on “Hi, Bob. Hope all is well. Alice.” Third: Bob’s computer also runs the hash function on that message and it also gets the sequence “a29zz878.” As a result, Bob knows two things: (a) the message is from Alice; (b) it has not been altered in transmission. He knows the message is from Alice because the only items Bob can decrypt using Alice’s public key are items encrypted with her private key. So when the encryption program succeeds in decrypting the attached file, Bob knows that Alice is the one who encrypted that file. This is why the file is a signature. Just as she does when she signs a paper document, Alice attaches an identifying mark to her e-mail when she attaches the encrypted file. Bob gets more than just an identifying mark, however. When the hash function results match, he knows the message was not altered during transmission (because no two messages have the same hash function result).

Now, where does Alice get her private key? And Bob, the corresponding public key? Public/private key pairs are issued by certification authorities (VeriSign is a major one; see ). When Alice wants a key pair, she requests it from a certification authority; the authority verifies that Alice is indeed who she claims to be, and issues her an (electronically stored) key pair. Alice carefully guards her private key so that only she has access to it, but she allows the entire world to have access to her public key, which they may obtain from the certification authority (or from Alice herself). The public key is accompanied by a certificate (in the form of an electronic record) that attests that the public key was issued to Alice.

Terminology: The use of key pairs issued by certification authorities is often referred to as “public key encryption.” The certificate authorities, and the use of key pairs they support, are typically referred to as “public key infrastructure” (PKI).

c. ESIGN and public key encryption

Some state statutes mandated or favored the use of public key encryption; some states did not. In the interest of uniformity, ESIGN preempts statutes that are not technology neutral. 15 USC §7002(a)(2)(A)(ii), 15 USC §7002(a)(2)(B). States may still require public key encryption for state procurement (15 USC §7002(b)) and for filing documents with the state (15 USC §7004(a)).

d. Problems with public key encryption

Failure to verify identity. Certification authorities do not always carefully verify the identity of those requesting key pairs. Some will issue a key pair on the basis of an online application in which the person applying merely supplies a name. The story has circulated for years that one well-known certificate authority issued two fraudulently requested certificates in the name of “Microsoft.”

Failure to safeguard private keys. When describing Alice and Bob, we assumed that Alice carefully safeguarded her private key. Holders of private keys often do not. They often store them on their hard drives. This is convenient because the computer needs to access the private key in the process of encryption, but it is also unsafe as hackers may steal the key. Anyone who steals Alice’s key can masquerade as Alice. The reason: what Bob really knows when he succeeds in decrypting the file Alice attached to her e-mail is that the file was attached by someone in possession of Alice’s private key; he only knows that that person is Alice is he is sure that she is the only one using her private key.

Failure to maintain revocation lists. If Alice’s private key is stolen, or if she wishes to cease using it for any reason, Alice can revoke the associated public key. Certification authorities maintain revocation lists that users may consult to determine whether a public key is still valid. Unfortunately, these lists up to date are often not up to date.

Failure to check revocation lists. Users of public keys often do not check revocation lists to determine if the public key they are using is still valid.

4. The Mailbox Rule

International Convention of Sale of Goods

Acceptance is effective on receipt.

Article 18

(1) A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance.

(2) An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. An acceptance is not effective if the indication of assent does not reach the offeror within the time he has fixed or, if no time is fixed, within a reasonable time, due account being taken of the circumstances of the transaction, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise.

(3) However, if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act, such as one relating to the dispatch of the goods or payment of the price, without notice to the offeror, the acceptance is effective at the moment the act is performed, provided that the act is performed within the period of time laid down in the preceding paragraph.

The offeror’s power to revoke ends upon dispatch of the acceptance.

Article 16

Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance.

Uniform Electronic Transactions Act

UETA is typically interpreted as altering the mailbox rule so that acceptance is effective on receipt, where receipt is defined as below.

UETA 114 (b): "Unless otherwise agreed between the sender and the recipient, an electronic record is received when it enters an information processing system (1) that the recipient has designated or uses for the purpose of receiving electronic records or information of the type sent; (2) in a form capable of being processed by that system; and (3) from which the recipient is able to retrieve the electronic record." 

SECTION 203. OFFER AND ACCEPTANCE IN GENERAL.

Unless otherwise unambiguously indicated by the language or the circumstances, the following rules apply:

(1) [Manner of acceptance.] An ofer to make a contract invites acceptance in any manner and by any medium reasonable under the circumstances.

. . .

(4) [Electronic acceptance.] If an ofer in an electronic message evokes an electronic message acceptng the ofer, a contract is formed:

(A) when an electronic acceptance is received; or

(B) if the response consists of beginning performance, full performance, or giving access to informaton, when the performance is received or the access is

enabled and necessary access materials are received.

Douglas v. Talk America

495 F.3d 1062 (9th Cir. 2007)

PER CURIAM:

We consider whether a service provider may change the terms of its service contract by merely posting a revised contract on its website.

Facts

Joe Douglas contracted for long distance telephone service with America Online. Talk America subsequently acquired this business from AOL and continued to provide telephone service to AOL's former customers. Talk America then added four provisions to the service contract: (1) additional service charges; (2) a class action waiver; (3) an arbitration clause; and (4) a choice-of-law provision pointing to New York law. Talk America posted the revised contract on its website but, according to Douglas, it never notified him that the contract had changed. Unaware of the new terms, Douglas continued using Talk America's services for four years.

After becoming aware of the additional charges, Douglas filed a class action lawsuit in district court, charging Talk America with violations of the Federal Communications Act, breach of contract and violations of various California consumer protection statutes. Talk America moved to compel arbitration based on the modified contract and the district court granted the motion. Because the Federal Arbitration Act, 9 U.S.C. § 16, does not authorize interlocutory appeals of a district court order compelling arbitration, Douglas petitioned for a writ of mandamus.

Analysis

Because a writ of mandamus is an extraordinary remedy, we have developed five factors that cabin our power to grant the writ:

1. “The party seeking the writ has no other adequate means, such as a direct appeal, to attain the relief he or she desires.”

2. “The petitioner will be damaged or prejudiced in a way not correctable on appeal.”

3. “The district court's order is clearly erroneous as a matter of law.”

4. “The district court's order is an oft-repeated error, or manifests a persistent disregard of the federal rules.”

5. “The district court's order raises new and important problems, or issues of law of first impression.”

Bauman v. U.S. Dist. Court, 557 F.2d 650, 654-55 (9th Cir.1977).

The third factor is a necessary condition for granting a writ of mandamus. Executive Software N. Am., Inc. v. U.S. Dist. Court, 24 F.3d 1545, 1551 (9th Cir.1994). But “all five factors need not be satisfied at once.” Valenzuela-Gonzalez v. U.S. Dist. Court, 915 F.2d 1276, 1279 (9th Cir.1990). If the district court clearly erred, we determine whether the four additional factors “in the mandamus calculus point in favor of granting the writ.” Executive Software, 24 F.3d at 1551.

1. Douglas alleges that Talk America changed his service contract without notifying him. He could only have become aware of the new terms if he had visited Talk America's website and examined the contract for possible changes. The district court seems to have assumed Douglas had visited the website when it noted that the contract was available on “the web site on which Plaintiff paid his bills.” However, Douglas claims that he authorized AOL to charge his credit card automatically and Talk America continued this practice, so he had no occasion to visit Talk America's website to pay his bills. Even if Douglas had visited the website, he would have had no reason to look at the contract posted there. Parties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side.FN1 Indeed, a party can't unilaterally change the terms of a contract; it must obtain the other party's consent before doing so. Union Pac. R.R. v. Chi., Milwaukee, St. Paul & Pac. R.R., 549 F.2d 114, 118 (9th Cir.1976). This is because a revised contract is merely an offer and does not bind the parties until it is accepted. Matanuska Val Farmers Cooperating Ass'n v. Monaghan, 188 F.2d 906, 909 (9th Cir.1951). And generally “an offeree cannot actually assent to an offer unless he knows of its existence.” 1 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 4:13, at 365 (4th ed.1990); see also Trimble v. N.Y. Life Ins. Co., 234 A.D. 427, 255 N.Y.S. 292, 297 (1932) (“An offer may not be accepted until it is made and brought to the attention of the one accepting.”). Even if Douglas's continued use of Talk America's service could be considered assent, such assent can only be inferred after he received proper notice of the proposed changes. Douglas claims that no such notice was given.

FN1. Nor would a party know when to check the website for possible changes to the contract terms without being notified that the contract has been changed and how. Douglas would have had to check the contract every day for possible changes. Without notice, an examination would be fairly cumbersome, as Douglas would have had to compare every word of the posted contract with his existing contract in order to detect whether it had changed.

. . .

The district court thus erred in holding that Douglas was bound by the terms of the revised contract when he was not notified of the changes. The error reflects fundamental misapplications of contract law and goes to the heart of petitioner's claim. It would alone be sufficient to satisfy the third Bauman factor, but the district court also committed two additional errors. Even if Douglas were bound by the new terms of the contract (which he is not for the reasons already explained), the new terms probably would not be enforceable in California because they conflict with California's fundamental policy as to unconscionable contracts. In New York, as in California, a contract is unconscionable only if it is both procedurally and substantively unconscionable. That's where the similarities end. The district court erred in analyzing California law as to both procedural and substantive unconscionability.

The district court held that the arbitration clause in the modified contract is not procedurally unconscionable (and therefore enforceable) because Douglas had meaningful alternative choices for telephone service. Under New York law this choice forecloses any procedural unconscionability claim. See Ranieri v. Bell Atl. Mobile, 304 A.D.2d 353, 759 N.Y.S.2d 448, 449 (2003). However, after the district court made its ruling, we noted that California “has rejected the notion that the availability ... of substitute ... services alone can defeat a claim of procedural unconscionability.” Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1283 (9th Cir.2006) (en banc). In California, a contract can be procedurally unconscionable if a service provider has overwhelming bargaining power and presents a “take-it-or-leave-it” contract to a customer-even if the customer has a meaningful choice as to service providers. Id. at 1284.

Likewise, the district court held that the class action waiver provision is not substantively unconscionable. Such waivers aren't substantively unconscionable under New York law. . . . but the California Court of Appeal in Cohen v. DirecTV, Inc., 142 Cal.App.4th 1442, 1455 n. 13, 48 Cal.Rptr.3d 813 (Ct.App.2006), expressly disavowed Provencher. A class action waiver provision thus may be unconscionable in California. Whether it is depends on the facts and circumstances developed during the course of litigation. The district court clearly erred in holding that the clauses (assuming that they are part of the contract at all) are consistent with California policy and therefore enforceable as a matter of law.

Henningsen v. Bloomfield Motors, Inc.

161 A.2d 69 (N.J. 1960)

Plaintiff Claus H. Henningsen purchased a Plymouth automobile, manufactured by defendant Chrysler Corporation, from defendant Bloomfield Motors, Inc. His wife, plaintiff Helen Henningsen, was injured while driving it and instituted suit against both defendants to recover damages on account of her injuries. Her husband joined in the action seeking compensation for his consequential losses. The complaint was predicated upon breach of express and implied warranties and upon negligence. At the trial the negligence counts were dismissed by the court and the cause was submitted to the jury for determination solely on the issues of implied warranty of merchantability. Verdicts were returned against both defendants and in favor of the plaintiffs. Defendants appealed and plaintiffs cross-appealed from the dismissal of their negligence claim. . . .

The facts are not complicated, but a general outline of them is necessary to an understanding of the case.

On May 7, 1955 Mr. and Mrs. Henningsen visited the place of business of Bloomfield Motors, Inc., an authorized De Soto and Plymouth dealer, to look at a Plymouth. They wanted to buy a car and were considering a Ford or a Chevrolet as well as a Plymouth. They were shown a Plymouth which appealed to them and the purchase followed. The record indicates that Mr. Henningsen intended the car as a Mother's Day gift to his wife. He said the intention was communicated to the dealer. When the purchase order or contract was prepared and presented, the husband executed it alone. His wife did not join as a party.

The purchase order was a printed form of one page. On the front it contained blanks to be filled in with a description of the automobile to be sold, the various accessories to be included, and the details of the financing. The particular car selected was described as a 1955 Plymouth, Plaza "6," Club Sedan. The type used in the printed parts of the form became smaller in size, different in style, and less readable toward the bottom where the line for the purchaser's signature was placed. The smallest type on the page appears in the two paragraphs, one of two and one-quarter lines and the second of one and one-half lines, on which great stress is laid by the defense in the case. These two paragraphs are the least legible and the most difficult to read in the instrument, but they are most important in the evaluation of the rights of the contesting parties. They do not attract attention and there is nothing about the format which would draw the reader's eye to them. In fact, a studied and concentrated effort would have to be made to read them. De-emphasis seems the motif rather than emphasis. More particularly, most of the printing in the body of the order appears to be 12 point block type, and easy to read. In the short paragraphs under discussion, however, the type appears to be six point script and the print is solid, that is, the lines are very close together.

The two paragraphs are:

The front and back of this Order comprise the entire agreement affecting this purchase and no other agreement or understanding of any nature concerning same has been made or entered into, or will be recognized. . . .

I have read the matter printed on the back hereof and agree to it as a part of this order the same as if it were printed above my signature. . . .

. . .The testimony of Claus Henningsen justifies the conclusion that he did not read the two fine print paragraphs referring to the back of the purchase contract. And it is uncontradicted that no one made any reference to them, or called them to his attention. With respect to the matter appearing on the back, it is likewise uncontradicted that he did not read it and that no one called it to his attention.

The reverse side of the contract contains 8 1/2 inches of fine print. It is not as small, however, as the two critical paragraphs described above. The page is headed "Conditions" and contains ten separate paragraphs consisting of 65 lines in all. The paragraphs do not have headnotes or margin notes denoting their particular subject, as in the case of the "Owner Service Certificate" to be referred to later. In the seventh paragraph, about two-thirds of the way down the page, the warranty, which is the focal point of the case, is set forth. It is as follows:

7. It is expressly agreed that there are no warranties, express or implied, made by either the dealer or the manufacturer on the motor vehicle, chassis, or parts furnished hereunder except as follows:

The manufacturer warrants each new motor vehicle (including original equipment placed thereon by the manufacturer except tires), chassis or parts manufactured by it to be free from defects in material or workmanship under normal use and service. Its obligation under this warranty being limited to making good at its factory any part or parts thereof which shall, within ninety (90) days after delivery of such vehicle to the original purchaser or before such vehicle has been driven 4,000 miles, whichever event shall first occur, be returned to it with transportation charges prepaid and which its examination shall disclose to its satisfaction to have been thus defective; this warranty being expressly in lieu of all other warranties expressed or implied, and all other obligations or liabilities on its part, and it neither assumes nor authorizes any other person to assume for it any other liability in connection with the sale of its vehicles.

After the contract had been executed, plaintiffs were told the car had to be serviced and that it would be ready in two days . . .

The new Plymouth was turned over to the Henningsens on May 9, 1955. . . . It had no servicing and no mishaps of any kind before the event of May 19. That day, Mrs. Henningsen drove to Asbury Park. On the way down and in returning the car performed in normal fashion until the accident occurred. She was proceeding north on Route 36 in Highlands, New Jersey, at 20-22 miles per hour. The highway was paved and smooth, and contained two lanes for northbound travel. She was riding in the right-hand lane. Suddenly she heard a loud noise "from the bottom, by the hood." It "felt as if something cracked." The steering wheel spun in her hands; the car veered sharply to the right and crashed into a highway sign and a brick wall. No other vehicle was in any way involved. A bus operator driving in the left-hand lane testified that he observed plaintiffs' car approaching in normal fashion in the opposite direction; "all of a sudden [it] veered at 90 degrees * * * and right into this wall." As a result of the impact, the front of the car was so badly damaged that it was impossible to determine if any of the parts of the steering wheel mechanism or workmanship or assembly were defective or improper prior to the accident. The condition was such that the collision insurance carrier, after inspection, declared the vehicle a total loss. It had 468 miles on the speedometer at the time.

The insurance carrier's inspector and appraiser of damaged cars, with 11 years of experience, advanced the opinion, based on the history and his examination, that something definitely went "wrong from the steering wheel down to the front wheels" and that the untoward happening must have been due to mechanical defect or failure; "something down there had to drop off or break loose to cause the car" to act in the manner described.

As has been indicated, the trial court felt that the proof was not sufficient to make out a prima facie case as to the negligence of either the manufacturer or the dealer. The case was given to the jury, therefore, solely on the warranty theory, with results favorable to the plaintiffs against both defendants.

I.

THE CLAIM OF IMPLIED WARRANTY AGAINST THE MANUFACTURER.

. . . The terms of the warranty are a sad commentary upon the automobile manufacturers' marketing practices. Warranties developed in the law in the interest of and to protect the ordinary consumer who cannot be expected to have the knowledge or capacity or even the opportunity to make adequate inspection of mechanical instrumentalities, like automobiles, and to decide for himself whether they are reasonably fit for the designed purpose. . . . But the ingenuity of the Automobile Manufacturers Association, by means of its standardized form, has metamorphosed the warranty into a device to limit the maker's liability. . . .

The manufacturer agrees to replace defective parts for 90 days after the sale or until the car has been driven 4,000 miles, whichever is first to occur, if the part is sent to the factory, transportation charges prepaid, and if examination discloses to its satisfaction that the part is defective. It is difficult to imagine a greater burden on the consumer, or less satisfactory remedy. Aside from imposing on the buyer the trouble of removing and shipping the part, the maker has sought to retain the uncontrolled discretion to decide the issue of defectiveness. . . .

. . . We hold that under modern marketing conditions, when a manufacturer puts a new automobile in the stream of trade and promotes its purchase by the public, an implied warranty that it is reasonably suitable for use as such accompanies it into the hands of the ultimate purchaser. Absence of agency between the manufacturer and the dealer who makes the ultimate sale is immaterial.

II.

THE EFFECT OF THE DISCLAIMER AND LIMITATION OF LIABILITY CLAUSES ON THE IMPLIED WARRANTY OF MERCHANTABILITY.

. . .

The warranty before us is a standardized form designed for mass use. It is imposed upon the automobile consumer. He takes it or leaves it, and he must take it to buy an automobile. No bargaining is engaged in with respect to it. In fact, the dealer through whom it comes to the buyer is without authority to alter it; his function is ministerial -- simply to deliver it. The form warranty is not only standard with Chrysler but, as mentioned above, it is the uniform warranty of the Automobile Manufacturers Association. Members of the Association are: General Motors, Inc., Ford, Chrysler, Studebaker-Packard, American Motors (Rambler), Willys Motors, Checker Motors Corp., and International Harvester Company. . . . Of these companies, the "Big Three" (General Motors, Ford, and Chrysler) represented 93.5% of the passenger-car production for 1958 and the independents 6.5% . . .

The gross inequality of bargaining position occupied by the consumer in the automobile industry is thus apparent. There is no competition among the car makers in the area of the express warranty. Where can the buyer go to negotiate for better protection? Such control and limitation of his remedies are inimical to the public welfare and, at the very least, call for great care by the courts to avoid injustice through application of strict common-law principles of freedom of contract. Because there is no competition among the motor vehicle manufacturers with respect to the scope of protection guaranteed to the buyer, there is no incentive on their part to stimulate good will in that field of public relations. Thus, there is lacking a factor existing in more competitive fields, one which tends to guarantee the safe construction of the article sold. Since all competitors operate in the same way, the urge to be careful is not so pressing. . . .

Although the courts, with few exceptions, have been most sensitive to problems presented by contracts resulting from gross disparity in buyer-seller bargaining positions, they have not articulated a general principle condemning, as opposed to public policy, the imposition on the buyer of a skeleton warranty as a means of limiting the responsibility of the manufacturer. They have endeavored thus far to avoid a drastic departure from age-old tenets of freedom of contract by adopting doctrines of strict construction, and notice and knowledgeable assent by the buyer to the attempted exculpation of the seller. . . . Accordingly to be found in the cases are statements that disclaimers and the consequent limitation of liability will not be given effect if "unfairly procured". . . ; if not brought to the buyer's attention and he was not made understandingly aware of it . . .

The task of the judiciary is to administer the spirit as well as the letter of the law. On issues such as the present one, part of that burden is to protect the ordinary man against the loss of important rights through what, in effect, is the unilateral act of the manufacturer. The status of the automobile industry is unique. Manufacturers are few in number and strong in bargaining position. In the matter of warranties on the sale of their products, the Automotive Manufacturers Association has enabled them to present a united front. From the standpoint of the purchaser, there can be no arms’ length negotiating on the subject. Because his capacity for bargaining is so grossly unequal, the inexorable conclusion which follows is that he is not permitted to bargain at all. He must take or leave the automobile on the warranty terms dictated by the maker. He cannot turn to a competitor for better security.

Public policy is a term not easily defined. Its significance varies as the habits and needs of a people may vary. It is not static and the field of application is an ever increasing one. A contract, or a particular provision therein, valid in one era may be wholly opposed to the public policy of another . . . Courts keep in mind the principle that the best interests of society demand that persons should not be unnecessarily restricted in their freedom to contract. But they do not hesitate to declare void as against public policy contractual provisions which clearly tend to the injury of the public in some way. . . .

Public policy at a given time finds expression in the Constitution, the statutory law and in judicial decisions. In the area of sale of goods, the legislative will has imposed an implied warranty of merchantability as a general incident of sale of an automobile by description. The warranty does not depend upon the affirmative intention of the parties. It is a child of the law; it annexes itself to the contract because of the very nature of the transaction. . . . The judicial process has recognized a right to recover damages for personal injuries arising from a breach of that warranty. The disclaimer of the implied warranty and exclusion of all obligations except those specifically assumed by the express warranty signify a studied effort to frustrate that protection. True, the Sales Act authorizes agreements between buyer and seller qualifying the warranty obligations. But quite obviously the Legislature contemplated lawful stipulations (which are determined by the circumstances of a particular case) arrived at freely by parties of relatively equal bargaining strength. The lawmakers did not authorize the automobile manufacturer to use its grossly disproportionate bargaining power to relieve itself from liability and to impose on the ordinary buyer, who in effect has no real freedom of choice, the grave danger of injury to himself and others that attends the sale of such a dangerous instrumentality as a defectively made automobile. In the framework of this case, illuminated as it is by the facts and the many decisions noted, we are of the opinion that Chrysler's attempted disclaimer of an implied warranty of merchantability and of the obligations arising therefrom is so inimical to the public good as to compel an adjudication of its invalidity. . . .

III.

THE DEALER'S IMPLIED WARRANTY.

The principles that have been expounded as to the obligation of the manufacturer apply with equal force to the separate express warranty of the dealer. This is so, irrespective of the absence of the relationship of principal and agent between these defendants, because the manufacturer and the Association establish the warranty policy for the industry. The bargaining position of the dealer is inextricably bound by practice to that of the maker and the purchaser must take or leave the automobile, accompanied and encumbered as it is by the uniform warranty.

. . .

VII.

. . . [T]he judgments in favor of the plaintiffs and against defendants are affirmed.

Mark Lemley, Terms of Use

91 Minn.. L. Rev. 459, 459 (2006)

Assent by both parties to the terms of a contract has long been the fundamental principle animating contract law. Indeed, it is the concept of assent that gives contracts legitimacy and distinguishes them from private legislation.

Margaret Jane Radin, Humans, Computers, and Binding Commitment

75 Ind. L.J. 1125, 1126 (1999)

Free consent “requires a knowing understanding of what one is doing in a context in which it is actually possible for one to do otherwise, and an affirmative action in doing something, rather than a merely passive acquiescence in accepting something.

Paul M. Schwartz & Daniel Solove, Notice and Choice: Implications for Digital Marketing to Youth, (2009)

.

[In the online contracting situation], the “choice” presented is more of a Hobson’s choice than a real one. Many companies present consumers with a take-it-or-leave-it choice that provides hardly any ability for consumers to bargain about their privacy preferences. If a consumer wants to buy a product, read a website, subscribe to a magazine, use a service, and so on, the consumer can be forced either to surrender privacy or to go elsewhere. But when nearly all companies offer the same take-it-or-leave-it approach, consumers desiring to protect their privacy have nowhere to turn.

Todd Rakoff, Contracts of Adhesion: An Essay In Reconstruction

96 Harv. L. Rev. 1173, 1229 - 1230 (1983)

There is little that the individual adherent [= consumer entering a standard form, no-negotiation contract] can do to improve his position.  From the standpoint of ordinary contract law, the obvious failure of adherents to read and understand form documents appears to be the core problem involved in the use of contracts of adhesion.  On fuller examination, this failure proves to be merely the most visible symbol of a pervasive and complex institutional practice.  Once the practice comes to exist generally, the fact that a particular adherent reads and understands the particular form that he signs is irrelevant. The internal rigidity of the firm will itself be likely to prevent a knowledgeable adherent's objection to any form term from generating bargaining behavior, even if the objection is coupled with a threat to take his trade elsewhere.  Yet the effect is magnified when both the adherent and the drafter know, or at least sense, that other adherents are not attempting to bargain, for then the request that the firm change its standard practice becomes mere eccentricity.  Similarly, that the adherent reads one form does not establish that he has read or shopped many others, or that it would be rational for him to do so. But even if a particular adherent undertakes that task, the widespread ethos of not shopping form terms submerges his effort and contributes to the likelihood that, regarding most matters, the terms on all the various forms will be protective of the drafting parties. Shopping can protect shoppers only when it is a widespread activity. When contracts of adhesion become commonplace, even the individual who reads and understands is, and may well perceive himself to be, essentially helpless. The consumer's experience of modern commercial life is one not of freedom in the full sense posited by traditional contract law, but rather one of submission to organizational domination, leavened by the ability to choose the organization by which he will be dominated.

Gatton v. T-Mobile USA, Inc.

152 Cal. App. 4th 571 (Cal. App. 1 Dist. 2007)

Gemello, J.

In this consolidated appeal, T-Mobile USA, Inc. appeals from an order denying its motion to compel arbitration of actions challenging the early termination fee charged to cellular telephone service subscribers and challenging the practice of selling locked handsets that a subscriber cannot use when switching carriers. T-Mobile contends the court erred in concluding that the arbitration clause in its service agreement is unconscionable.

. . . [W]e hold that the adhesive nature of the service agreement established a minimal degree of procedural unconscionability notwithstanding the availability of market alternatives and that the high degree of substantive unconscionability arising from the class action waiver rendered the arbitration provision unenforceable.

We affirm the trial court order.

FACTUAL AND PROCEDURAL BACKGROUND

The Parties and the Service Agreements

T-Mobile USA, Inc. (T-Mobile) is a cellular telephone provider in California. Plaintiffs are or were subscribers to T-Mobile. All plaintiffs executed service agreements drafted by T-Mobile. Each agreement incorporated terms and conditions drafted by T-Mobile. Directly above the signature line in the service agreement executed by plaintiffs is a short paragraph stating, “By signing below, you acknowledge you .... have received a copy of this Agreement.... You also acknowledge you have received and reviewed the T-Mobile Terms and Conditions, and agree to be bound by them.... All disputes are subject to mandatory arbitration in accordance with paragraph 3 of the Terms and Conditions.”

The introductory paragraph to the terms and conditions incorporated into the agreement states: “Welcome to T-Mobile. BY ACTIVATING OR USING OUR SERVICE YOU AGREE TO BE BOUND BY THE AGREEMENT. Please carefully read these Terms and Conditions (“T & C's” ) as they describe your Service and affect your legal rights. IF YOU DON'T AGREE WITH THESE T & C'S, DO NOT USE THIS SERVICE OR YOUR UNIT.” Similarly, the handset shipping box was sealed across the closing seam with a sticker that stated: “IMPORTANT[¶] Read the enclosed T-Mobile Terms & Conditions. By using T-Mobile service, you agree to be bound by the Terms & Conditions, including the mandatory arbitration and early termination fee provisions.” The terms and conditions were also included in a “Welcome Guide” enclosed in the boxes containing the handsets.

Section 3 of the terms and conditions incorporated into the agreement is entitled “Mandatory Arbitration; Dispute Resolution.” It includes language waiving any right to seek classwide relief.( The terms and conditions incorporated into each of the plaintiff's agreements included a mandatory arbitration clause including a class action waiver.

Early Termination Fees Case (A112082)

The action of plaintiffs Gatton, Hull, Nguyen, and Vaughan, brought on behalf of themselves individually and on behalf of all similarly situated California residents, challenges the fee imposed by T-Mobile for termination of the service agreement before its expiration date.

The complaint includes the following allegations. The service agreement between T-Mobile and its subscribers is typically one or two years in duration. Under the terms of the agreement, subscribers who terminate the service before the expiration of the agreement are subject to an early termination penalty of approximately $200 per telephone. The early termination penalties are also imposed if T-Mobile terminates the agreement for, among other reasons, nonpayment by the subscriber. The amount of the fee does not vary according to how long the contract has been in effect at the time of termination; it is the same whether the contract has been in effect for several weeks or several months. The flat-fee early termination penalty constitutes an unlawful penalty under Civil Code section 1671, subdivision (d),( is unlawful under the unfair competition law (Bus. & Prof.Code, § 17200 et seq.), and is unconscionable under the Consumers Legal Remedies Act (CLRA) (Civ.Code, § 1750 et seq.).

Plaintiffs seek a permanent injunction prohibiting T-Mobile from collecting or enforcing the early termination penalty; a constructive trust on all monies collected as early termination penalties; and all other relief to which they are statutorily entitled, including restitution.

Handset Locking Case (A112084)

The action of plaintiffs Nguyen and Grant, brought on behalf of themselves individually and on behalf of all similarly situated California residents, challenges the practice of installing a locking device in T-Mobile handsets that prevents its subscribers from switching cell phone providers without purchasing a new handset.

The complaint includes the following allegations. The handsets T-Mobile sells its subscribers are manufactured by equipment vendors such as Nokia, Motorola, or Samsung. Each handset has a receptacle into which a machine readable SIM (subscriber information module) card can be inserted. The card is approximately the size of a postage stamp and contains the subscriber and the provider identifying information. The SIM card can be inserted and removed by hand; no special tools or equipment are required. T-Mobile employs a SIM lock to prevent its handsets from operating with a SIM card programmed for any other network. The SIM lock can be unlocked by entering an eight digit code number; once unlocked, the handset will operate with any compatible SIM card for any network. T-Mobile requires equipment vendors to alter the handsets they sell to T-Mobile by locking them with SIM locks and setting the SIM unlock code based on a secret algorithm provided by T-Mobile. The agreement between T-Mobile and its subscribers falsely states that T-Mobile handsets are not compatible with and will not work with other wireless networks. That misrepresentation constitutes unfair competition and violates the CLRA. The secret locking makes it impossible or impracticable for subscribers to switch cell phone service providers without purchasing a new handset.

Plaintiffs seek an order directing T-Mobile to disclose the existence and effect of the handset locks and to offer to unlock the handsets free of charge; an injunction prohibiting T-Mobile from secretly programming and selling handsets with SIM locks and from representing that the handsets are not compatible with services provided by other wireless carriers; and for restitution and/or disgorgement of all amounts wrongfully charged to plaintiffs and members of the class.

Motion to Compel Arbitration

T-Mobile moved to compel arbitration of the two actions in accord with the service agreement. Plaintiffs opposed the motion on the grounds that (1) their claims for injunctive relief under the Unfair Competition Law and the CLRA were not arbitrable, and (2) their remaining claims were not arbitrable because the arbitration clause was unconscionable.

The trial court denied the motion to compel. It concluded that the claims for injunctive relief were primarily for the benefit of the public and, consequently, were not subject to arbitration. As to the other claims, it concluded that the arbitration provision was unconscionable and therefore unenforceable. The trial court held that although the indications of procedural unconscionability were “not particularly strong,” under Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100(Discover Bank ), the arbitration clause was substantively unconscionable because its prohibition on class arbitrations or participation in a class action was against public policy.

DISCUSSION

Appellant T-Mobile contends the trial court erred in denying its motion to compel because the class action waiver did not render the arbitration provision unconscionable and because principles of federal preemption require enforcement of the provision.

I. Unconscionability

An agreement to arbitrate is valid except when grounds exist for revocation of a contract. (Code Civ. Proc., §§ 1281, 1281.2, subd. (b).) Unconscionability is one ground on which a court may refuse to enforce a contract. (Civ.Code, § 1670.5.) The petitioner, T-Mobile here, bears the burden of proving the existence of a valid arbitration agreement and the opposing party, plaintiffs here, bears the burden of proving any fact necessary to its defense. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972, 64 Cal.Rptr.2d 843, 938 P.2d 903.)

Whether a provision is unconscionable is a question of law. (Civ.Code, § 1670.5, subd. (a); Flores v. Transamerica HomeFirst, Inc. (2001) 93 Cal.App.4th 846, 851, 113 Cal.Rptr.2d 376(Flores ).) On appeal, when the extrinsic evidence is undisputed, as it is here, we review the contract de novo to determine unconscionability. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1527, 60 Cal.Rptr.2d 138(Stirlen ); Flores, at p. 851, 113 Cal.Rptr.2d 376.)

The analytic framework employed by the California Supreme Court in determining whether a contract provision is unconscionable has its origins in A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 186 Cal.Rptr. 114(A & M Produce ). (See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114, 99 Cal.Rptr.2d 745, 6 P.3d 669(Armendariz ).) Unconscionability has a procedural and a substantive element; the procedural element focuses on the existence of oppression or surprise and the substantive element focuses on overly harsh or one-sided results. (Armendariz, at p. 114, 99 Cal.Rptr.2d 745, 6 P.3d 669, quoting A & M Produce, at pp. 486-487, 186 Cal.Rptr. 114; see also Discover Bank, supra, 36 Cal.4th at p. 160, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) To be unenforceable, a contract must be both procedurally and substantively unconscionable, but the elements need not be present in the same degree. (Armendariz, at p. 114, 99 Cal.Rptr.2d 745, 6 P.3d 669.) The analysis employs a sliding scale: “ the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Ibid.; see also Donovan v. RRL Corp. (2001) 26 Cal.4th 261, 291, 109 Cal.Rptr.2d 807, 27 P.3d 702.)

A. The Discover Bank Decision

Our analysis of the challenged arbitration provision is governed by the California Supreme Court decision Discover Bank. There, the court considered an unconscionability challenge to an arbitration provision prohibiting classwide arbitration in an agreement between a credit card company and its cardholders. (Discover Bank, supra, 36 Cal.4th at p. 152, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) The provision was added to the agreement by a notice sent to cardholders. (Id. at p. 153, 30 Cal.Rptr.3d 76, 113 P.3d 1100.)

The court emphasized the “important role of class action remedies in California law.” (Discover Bank, supra, 36 Cal.4th at p. 157, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) “ ‘Frequently numerous consumers are exposed to the same dubious practice by the same seller so that proof of the prevalence of the practice as to one consumer would provide proof for all. Individual actions by each of the defrauded consumers is often impracticable because the amount of individual recovery would be insufficient to justify bringing a separate action; thus an unscrupulous seller retains the benefits of its wrongful conduct. A class action by consumers produces several salutary by-products, including a therapeutic effect upon those sellers who indulge in fraudulent practices, aid to legitimate business enterprises by curtailing illegitimate competition, and avoidance to the judicial process of the burden of multiple litigation involving identical claims. The benefit to the parties and the courts would, in many circumstances, be substantial.’ ” (Id. at p. 156, 30 Cal.Rptr.3d 76, 113 P.3d 1100, quoting Vasquez v. Superior Court (1971) 4 Cal.3d 800, 808, 94 Cal.Rptr. 796, 484 P.2d 964.)

In analyzing the unconscionability issue, Discover Bank first concluded that “when a consumer is given an amendment to its cardholder agreement in the form of a ‘bill stuffer’ that he would be deemed to accept if he did not close his account, an element of procedural unconscionability is present.” (Discover Bank, supra, 36 Cal.4th at p. 160, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) Turning to the substantive element, the court stated “although adhesive contracts are generally enforced [citation], class action waivers found in such contracts may also be substantively unconscionable inasmuch as they may operate effectively as exculpatory contract clauses that are contrary to public policy. [Citation.] As stated in Civil Code section 1668: ‘All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.’ (Italics added.)” (Discover Bank, at p. 161, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) The court acknowledged that class action and class arbitration waivers are not, in the abstract, exculpatory clauses, but because damages in consumer cases are often small and “because ‘ “ [a] company which wrongfully exacts a dollar from each of millions of customers will reap a handsome profit” ’ [citation], ‘ “ the class action is often the only effective way to halt and redress such exploitation.” ’ ” (Ibid.) Moreover, the court recognized that such class action and class arbitration waivers are “indisputably one-sided.” (Ibid.) “ ‘Although styled as a mutual prohibition on representative or class actions, it is difficult to envision the circumstances under which the provision might negatively impact Discover [Bank], because credit card companies typically do not sue their customers in class action lawsuits.’ ” (Ibid.)

In light of those considerations, Discover Bank held that when a waiver of classwide relief “is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ (Civ.Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced.” (Discover Bank, supra, 36 Cal.4th at pp. 162-163, 30 Cal.Rptr.3d 76, 113 P.3d 1100.)

Against this legal backdrop, we consider the specific provision challenged here.

B. Procedural Unconscionability

The procedural element of the unconscionability analysis concerns the manner in which the contract was negotiated and the circumstances of the parties at that time. (Kinney v. United HealthCare Services, Inc. (1999) 70 Cal.App.4th 1322, 1329, 83 Cal.Rptr.2d 348, citing A & M Produce, supra, 135 Cal.App.3d at p. 486, 186 Cal.Rptr. 114.) The element focuses on oppression or surprise. (Armendariz, supra, 24 Cal.4th at p. 114, 99 Cal.Rptr.2d 745, 6 P.3d 669.) “ Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice.” (Flores, supra, 93 Cal.App.4th at p. 853, 113 Cal.Rptr.2d 376, citing A & M Produce, at p. 486, 186 Cal.Rptr. 114.) Surprise is defined as “ ‘the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms.’ ” (Stirlen, supra, 51 Cal.App.4th at p. 1532, 60 Cal.Rptr.2d 138, quoting A & M Produce, at p. 486, 186 Cal.Rptr. 114.)

In their reply brief, plaintiffs did not dispute T-Mobile's assertion that the surprise aspect of procedural unconscionability is absent because the arbitration provision was fully disclosed to T-Mobile's customers. In response to our request for supplemental briefing, plaintiffs first urged that surprise is not necessary to find procedural unconscionability. Plaintiffs then asserted that we could find surprise because T-Mobile did not specifically bring to the attention of its customers that the arbitration provision included a class action waiver and because the print used in the agreement was small. We conclude that plaintiffs have not shown surprise. The arbitration provision was not disguised or hidden, and T-Mobile made affirmative efforts to bring the provision to the attention of its customers, including by referencing the provision on a sticker placed across the closing seam of the handset shipping box. (Stirlen, supra, 51 Cal.App.4th at p. 1532, 60 Cal.Rptr.2d 138.) A finding of procedural unconscionability in this case cannot be based on the existence of surprise.

The California Supreme Court has consistently reiterated that “ ‘ [t]he procedural element of an unconscionable contract generally takes the form of a contract of adhesion.’ ” (Discover Bank, supra, 36 Cal.4th at p. 160, 30 Cal.Rptr.3d 76, 113 P.3d 1100; see also Armendariz, supra, 24 Cal.4th at p. 113, 99 Cal.Rptr.2d 745, 6 P.3d 669 [“Unconscionability analysis begins with an inquiry into whether the contract is one of adhesion” ]; Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071, 130 Cal.Rptr.2d 892, 63 P.3d 979.) Appellate courts considering unconscionability challenges in consumer cases have routinely found the procedural element satisfied where the agreement containing the challenged provision was a contract of adhesion. For example, in Flores we stated that “[a] finding of a contract of adhesion is essentially a finding of procedural unconscionability” (Flores, supra, 93 Cal.App.4th at p. 853, 113 Cal.Rptr.2d 376), and in Aral v. EarthLink, Inc. (2005) 134 Cal.App.4th 544, 557, 36 Cal.Rptr.3d 229, the court described an adhesive contract as “quintessential procedural unconscionability.” (See also Marin Storage & Trucking, Inc. v. Benco Contracting & Engineering, Inc. (2001) 89 Cal.App.4th 1042, 1054, 107 Cal.Rptr.2d 645(Marin Storage ); Cohen v. DirecTV, Inc. (2006) 142 Cal.App.4th 1442, 1451, 48 Cal.Rptr.3d 813.)

Whether the challenged provision is within a contract of adhesion pertains to the oppression aspect of procedural unconscionability. A contract of adhesion is “ ‘ “imposed and drafted by the party of superior bargaining strength” ’ ” and “ ‘ “relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” ’ ” (Discover Bank, supra, 36 Cal. 4th at p. 160, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) This definition closely parallels the description of the oppression aspect of procedural unconscionability, which “arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice.” (Flores, supra, 93 Cal.App.4th at p. 853, 113 Cal.Rptr.2d 376, citing A & M Produce, supra, 135 Cal.App.3d at p. 486, 186 Cal.Rptr. 114; see also Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925, fn. 9, 216 Cal.Rptr. 345, 702 P.2d 503 [noting that oppression arises from “unequal bargaining power”].) It is clear that the T-Mobile service agreement was a contract of adhesion: T-Mobile drafted the form agreement, its bargaining strength was far greater than that of individual customers, and customers were required to accept all terms and conditions of the agreement as presented or forgo T-Mobile's telephone service.

Nevertheless, T-Mobile argues that there was no oppression in the formation of the agreements because plaintiffs had the option of obtaining mobile phone service from one of two other providers whose agreements did not contain class action waivers. Preliminarily, we note that the evidence of the availability of market alternatives is exceedingly slim. More fundamentally, we reject the contention that the existence of market choice altogether negates the oppression aspect of procedural unconscionability. “Procedural unconscionability focuses on the manner in which the disputed clause is presented to the party in the weaker bargaining position. When the weaker party is presented the clause and told to ‘ take it or leave it’ without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability, are present.” (Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094, 1100, 118 Cal.Rptr.2d 862(Szetela).) The existence of consumer choice decreases the extent of procedural unconscionability but does not negate the oppression and obligate courts to enforce the challenged provision regardless of the extent of substantive unfairness. The existence of consumer choice is relevant, but it is not determinative of the entire issue. (Ibid.)(

We considered market alternatives as a relevant factor in our decision in Marin Storage, supra, 89 Cal.App.4th 1042, 107 Cal.Rptr.2d 645. There, a general contractor challenged the enforceability of an indemnification provision in a form subcontract created by a crane rental company. (Id. at pp. 1046-1048, 107 Cal.Rptr.2d 645.) The procedural element was satisfied because the agreement at issue was “ a contract of adhesion and, hence, procedurally unconscionable.” (Id. at p. 1054, 107 Cal.Rptr.2d 645.) But the degree of procedural unconscionability was limited because the contractor was sophisticated and had choice in selecting crane providers; in fact the plaintiff had done business with ten other firms. (Id. at p. 1056, 107 Cal.Rptr.2d 645.) We also considered substantive unconscionability and concluded that, viewed in its commercial context, the indemnification provision was not overly one-sided or unreasonable. (Id. at pp. 1055-1056, 107 Cal.Rptr.2d 645.) Balancing the procedural and substantive elements, we concluded that “ [i]n light of the low level of procedural unfairness ... a greater degree of substantive unfairness than has been shown here was required before the contract could be found substantively unconscionable.” (Id. at p. 1056, 107 Cal.Rptr.2d 645; see also Woodside Homes of Cal., Inc. v. Superior Court (2003) 107 Cal.App.4th 723, 730, 132 Cal.Rptr.2d 35 [because plaintiff home buyers were not unsophisticated or lacking in choice, they established only a “ low level” of procedural unconscionability and were obligated to establish “ a high level of substantive unconscionability” ].)

The Marin Storage approach is consistent with the instruction in Armendariz, supra, 24 Cal.4th at p. 114, 99 Cal.Rptr.2d 745, 6 P.3d 669, that the elements of procedural and substantive unconscionability “ need not be present in the same degree.” The court explained: “ ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.’ [Citations.] In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Ibid.)

In the three appellate decisions relied on by T-Mobile to support its approach to procedural unconscionability, the results would be the same under the Marin Storage reasoning. In two, the courts, like Marin Storage, actually rejected the unconscionability claims only after finding no clear substantive unfairness. (Morris v. Redwood Empire Bancorp, supra, 128 Cal.App.4th at p. 1322, 27 Cal.Rptr.3d 797 [“In sum, we are able to discern little or no procedural unconscionability from the allegations of the second amended complaint.... [¶] We now turn our analysis to substantive unconscionability”]; Wayne v. Staples, Inc., supra, 135 Cal.App.4th at p. 483, 37 Cal.Rptr.3d 544.) Critically, any substantive unconscionability was relatively minor: Morris involved only a $150 fee charged upon termination of a credit card merchant account; Staples involved allegedly excessive charges for “declared value coverage” but the charges were “comparable to the amount charged by other retailers of shipping services.” (Morris, at pp. 1323-1324, 27 Cal.Rptr.3d 797; Staples, at p. 483, 37 Cal.Rptr.3d 544.) In the third, Dean Witter Reynolds, Inc. v. Superior Court (1989) 211 Cal.App.3d 758, 772, 259 Cal.Rptr. 789(Dean Witter), while the court did not reach the issue of substantive unconscionability, the challenged provision was a relatively insignificant $50 fee for terminating an individual retirement account.

The cases are distinguishable because in each there was not a high degree of substantive unconscionability that could justify a court “ ‘ disregard [ing] the regularity of the procedural process of the contract formation.’ ” (Armendariz, supra, 24 Cal.4th at p. 114, 99 Cal.Rptr.2d 745, 6 P.3d 669.) In other words, because any substantive unconscionability was low, the sliding scale analysis did not provide a basis to refuse to enforce the provisions in light of the minimal procedural unconscionability.

The rule T-Mobile asks us to adopt disregards the sliding scale balancing required by Armendariz; in the absence of evidence of surprise, the proposed rule would allow any evidence of consumer choice to trump all other considerations, mandating courts to enforce the challenged provisions without considering the degree of substantive unfairness and the potential harm to important public policies. Although contracts of adhesion are well accepted in the law and routinely enforced, the inherent inequality of bargaining power supports an approach to unconscionability that preserves the role of the courts in reviewing the substantive fairness of challenged provisions. (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at pp. 817-818, 171 Cal.Rptr. 604, 623 P.2d 165; Marin Storage, supra, 89 Cal.App.4th at p. 1052, 107 Cal.Rptr.2d 645.) Otherwise, the imbalance of power creates an opportunity for overreaching in drafting form agreements. (See Graham v. Scissor-Tail, at pp. 817-818, 171 Cal.Rptr. 604, 623 P.2d 165.) The possibility of overreaching is even greater in ordinary consumer transactions involving relatively inexpensive goods or services because consumers have little incentive to carefully scrutinize the contract terms or to research whether there are adequate alternatives with different terms, and companies have every business incentive to craft the terms carefully and to their advantage. The unconscionability doctrine ensures that companies are not permitted to exploit this dynamic by imposing overly one-sided and onerous terms. (Ibid.) In sum, there are provisions so unfair or contrary to public policy that the law will not allow them to be imposed in a contract of adhesion, even if theoretically the consumer had an opportunity to discover and use an alternate provider for the good or service involved.

We reject the rule proposed by T-Mobile. Instead we hold that absent unusual circumstances, use of a contract of adhesion establishes a minimal degree of procedural unconscionability notwithstanding the availability of market alternatives. If the challenged provision does not have a high degree of substantive unconscionability, it should be enforced. But, under Armendariz, supra, 24 Cal.4th at p. 114, 99 Cal.Rptr.2d 745, 6 P.3d 669, we conclude that courts are not obligated to enforce highly unfair provisions that undermine important public policies simply because there is some degree of consumer choice in the market.

The Ninth Circuit, sitting en banc in Nagrampa v. MailCoups, Inc. (9th Cir.2006) 469 F.3d 1257, reached the same conclusion. There, a franchisee contended that an arbitration provision in a contract of adhesion was unconscionable. (Id. at p. 1281.) The court rejected the franchisor's argument that the availability of other franchising opportunities could alone defeat the plaintiff's claim of procedural unconscionability. (Id. at p. 1283.) Because the franchisor had overwhelming bargaining power, drafted the contract, and presented it on a take-it-or-leave-it basis, there was “minimal” evidence of procedural unconscionability. (Id. at p. 1284.) The court reasoned that the minimal showing was “sufficient to require us, under California law, to reach the second prong of the unconscionability analysis. We therefore next examine the extent of substantive unconscionability to determine, whether based on the California courts' sliding scale approach, the arbitration provision is unconscionable.” (Ibid.)

We conclude that plaintiffs showed a minimal degree of procedural unconscionability arising from the adhesive nature of the agreement. But this is “ ‘the beginning and not the end of the analysis insofar as enforceability of its terms is concerned.’ ” (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at p. 819, 171 Cal.Rptr. 604, 623 P.2d 165.) Under the sliding scale approach, plaintiffs were obligated to make a strong showing of substantive unconscionability to render the arbitration provision unenforceable.

C. Substantive Unconscionability

The substantive element of the unconscionability analysis focuses on overly harsh or one-sided results. (Armendariz, supra, 24 Cal.4th at p. 114, 99 Cal.Rptr.2d 745, 6 P.3d 669; Flores, supra, 93 Cal.App.4th at p. 853, 113 Cal.Rptr.2d 376.) In light of Discover Bank, we conclude that the challenged provision has a high degree of substantive unconscionability.

In considering whether class action waivers may be unconscionable, Discover Bank emphasized that class actions are often the only effective way to halt corporate wrongdoing and that class action waivers are “indisputably one-sided” because companies typically do not sue their customers in class action lawsuits. (Discover Bank, supra, 36 Cal.4th at p. 161, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) The court did not conclude that all class action waivers are necessarily unconscionable, but the court did hold that “when the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money,” then the waiver is exculpatory in effect and unconscionable under California law. (Discover Bank, supra, 36 Cal.4th at pp. 162-163, 30 Cal.Rptr.3d 76, 113 P.3d 1100; see also Cohen v. DirecTV, Inc., supra, 142 Cal.App.4th at pp. 1451-1454, 48 Cal.Rptr.3d 813; Klussman v. Cross Country Bank (2005) 134 Cal.App.4th 1283, 1297-1298, 36 Cal.Rptr.3d 728; Aral v. EarthLink, Inc., supra, 134 Cal.App.4th at pp. 555-557, 36 Cal.Rptr.3d 229; Szetela, supra, 97 Cal.App.4th at pp. 1100-1102, 118 Cal.Rptr.2d 862 [cited with approval in Discover Bank ].)

T-Mobile contends that this case is distinguishable from Discover Bank on two grounds. First, the amount in controversy exceeds the $29 late payment fee involved in Discover Bank. The largest monetary damage claim is the $200 early termination fee. We agree with Cohen v. DirecTV, Inc., supra, 142 Cal.App.4th at p. 1452, 48 Cal.Rptr.3d 813, which rejected the same argument T-Mobile makes. The court reasoned: “ While $1,000 is not an insignificant sum, many consumers of services such as those offered by DIRECTV may not view that amount as sufficient ‘ “ ‘ “to warrant individual litigation,” ’ ” and certainly it is not sufficient to obtain legal assistance in prosecuting the claim. [ Discover Bank, supra, 36 Cal.4th at p. 157, 30 Cal.Rptr.3d 76, 113 P.3d 1100.] In short, the class action device remains, in our view, the only practicable way for consumers of services such as DIRECTV's to deter and redress wrongdoing of the type Cohen alleges. Damages that may or may not exceed $1,000 do not take DIRECTV's class action waiver outside ‘ a setting in which disputes between the contracting parties predictably involve small amounts of damages....'” (Cohen, at p. 1452, 48 Cal.Rptr.3d 813.) The same is true in this case.

Second, T-Mobile contends that the class action waiver would not exculpate the company from any wrongdoing because, unlike in Discover Bank, plaintiffs assert inarbitrable claims for public injunctive relief. However, under Discover Bank's reasoning, the class action waiver would at the very least effectively exculpate T-Mobile from the alleged fraud perpetrated on the class members, which is enough to bring this case within the scope of the Discover Bank holding. Moreover, Discover Bank rejected the argument that private lawsuits seeking injunctive relief and attorney fees awards are an adequate substitute for class actions. The court specifically stated that it was not persuaded that the problems posed by class action waivers are ameliorated by the availability of attorney fees awards in private litigation or the availability of public actions (brought by the Attorney General or other designated law enforcement officials) for injunctive relief and civil penalties. (Discover Bank, supra, 36 Cal.4th at p. 162, 30 Cal.Rptr.3d 76, 113 P.3d 1100; see also id. at p. 180, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (dis. opn. of Baxter, J.).)

In the consumer context, class actions and arbitrations are “ often inextricably linked to the vindication of substantive rights.” (Discover Bank, supra, 36 al.4th at p. 161, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) There is nothing extraordinary about the circumstances of this case that distinguishes it from the typical consumer class actions described in Discover Bank. Because it is directly within the scope of the holding in that case, we conclude that the class action waiver has a high degree of substantive unconscionability. Applying the sliding scale test for unconscionability, even though the evidence of procedural unconscionability is limited, the evidence of substantive unconscionability is strong enough to tip the scale and render the arbitration provision unconscionable. The trial court properly denied the motion to compel arbitration.

. . .

DISPOSITION

The order denying the motion to compel arbitration is affirmed. Costs are awarded to plaintiffs.

Patco Construction Company v. People's United Bank

684 F.3d 197 (2012)

LYNCH, Chief Judge.

Over seven days in May 2009, Ocean Bank, a southern Maine community bank, authorized six apparently fraudulent withdrawals, totaling $588,851.26, from an account held by Patco Construction Company, after the perpetrators correctly supplied Patco's customized answers to security questions. Although the bank's security system flagged each of these transactions as unusually “high-risk” because they were inconsistent with the timing, value, and geographic location of Patco's regular payment orders, the bank's security system did not notify its commercial customers of this information and allowed the payments to go through. Ocean Bank was able to block or recover $243,406.83, leaving a residual loss to Patco of $345,444.43.

Patco brought suit, setting forth six counts against People's United Bank, a regional bank which had acquired Ocean Bank. The suit alleged, inter alia, that the bank should bear the loss because its security system was not commercially reasonable under Article 4A of the Uniform Commercial Code (“UCC”), as codified under Maine Law at Me.Rev.Stat. Ann. tit. 11, § 4–1101 et seq., and that Patco had not consented to the procedures.

On cross-motions for summary judgment, the district court held that the bank's security system was commercially reasonable and on that basis entered judgment in favor of the bank on the first count. Patco Constr. Co. v. People's United Bank, No. 09–cv–503, 2011 WL 3420588 (D.Me. Aug. 4, 2011). The district court also granted summary judgment in favor of the bank on the remaining counts, holding that they were either dependent on or displaced by the analysis and law underlying the first count. Id.

We reverse the district court's grant of summary judgment in favor of the bank and affirm its denial of Patco's motion for summary judgment on the first count. In particular, we leave open the question of what, if any, obligations or responsibilities Article 4A imposes on Patco. We also reinstate certain other claims dismissed by the district court, and remand for proceedings consistent with this opinion.

I.

The facts, which are largely undisputed, are as follows. Where the facts remain in dispute, we relate them in the light most favorable to Patco, the non-moving party.

A. The Parties

Patco is a small property development and contractor business located in Sanford, Maine. Patco began banking with Ocean Bank in 1985. Ocean Bank was acquired by the Chittenden family of banks, which was later acquired by People's United Bank, a regional bank based in Bridgeport, Connecticut. People's United Bank operates other local Maine banks such as Maine Bank & Trust, where Patco also had an account in May 2009. Ocean Bank was a division of People's United at the time of the fraudulent withdrawals at issue in this case.

In September 2003, Patco added internet banking-also known as “eBanking”—to its commercial checking account at Ocean Bank. Ocean Bank allows its eBanking commercial customers to make electronic funds transfers through Ocean Bank via the Automated Clearing House (“ACH”) network, a system used by banks to transfer funds electronically between accounts. Patco used eBanking primarily to make regular weekly payroll payments. These regular payroll payments had certain repeated characteristics: they were always made on Fridays; they were always initiated from one of the computers housed at Patco's offices in Sanford, Maine; they originated from a single static Internet Protocol (“IP”) address; and they were accompanied by weekly withdrawals for federal and state tax withholding as well as 401(k) contributions. The highest payroll payment Patco ever made using eBanking was $36,634.74. Until October of 2008, Patco also used eBanking to transfer money from the accounts of Patco and related entities at Maine Bank & Trust, which maintains a branch in Sanford, Maine, into its Ocean Bank checking account.

In September 2003, when it added eBanking services, Patco entered into several agreements with Ocean Bank.Most significantly, Patco entered into the eBanking for Business Agreement. The eBanking agreement stated that “use of the Ocean National Bank's eBanking for Business password constitutes authentication of all transactions performed by you or on your behalf.” The eBanking agreement stated that Ocean Bank did not “assume[ ] any responsibilities” with respect to Patco's use of eBanking, that “electronic transmission of confidential business and sensitive personal information” was at Patco's risk, and that Ocean Bank was liable only for its gross negligence, limited to six months of fees. The eBanking agreement also provided that:

[U]se of Ocean National Bank's eBanking for Business by any one owner of a joint account or by an authorized signor on an account, shall be deemed an authorized transaction on an account unless you provide us with written notice that the use of Ocean National Bank's eBanking for Business is terminated or that the joint account owner or authorized signor has been validly removed form [sic] the account.

The agreement provided that Patco had to contact the bank immediately upon discovery of an unauthorized transaction.

The bank also reserved the right to modify the terms and conditions of the eBanking agreement at any time, effective upon publication. The bank claims that at some point before May 2009, it modified the eBanking agreement to state:

If you choose to receive ACH debit transactions on your commercial accounts, you assume all liability and responsibility to monitor those commercial accounts on a daily basis. In the event that you object to any ACH debit, you agree to notify us of your objection on the same day the debit occurs.

The bank claims that it published this modified eBanking agreement on its website before May 2009. Patco disputes that this agreement was modified and/or published on the bank's website before May 2009, and argues that the modified agreement was therefore not effective as between the parties.

B. Ocean Bank's Security Measures

In 2004, Ocean Bank began using Jack Henry & Associates to provide its core online banking platform, known as “NetTeller.” Jack Henry provides the NetTeller product to approximately 1,300 of its 1,500 bank customers.

In October 2005, the agencies of the Federal Financial Institutions Examination Council (“FFIEC”), responding to increased online banking fraud, issued guidance titled “Authentication in an Internet Banking Environment.” See Fed. Fin. Insts. Examination Council, Authentication in an Internet Banking Environment (Aug. 8, 2001), available at http:// ffiec. gov/ pdf/ authentication_ guidance. pdf [hereinafter “FFIEC Guidance”]. The Guidance was intended to aid financial institutions in “evaluating and implementing authentication systems and practices whether they are provided internally or by a service provider.” Id. at 1. The Guidance provides that “financial institutions should periodically ... [a]djust, as appropriate, their information security program in light of any relevant changes in technology, the sensitivity of its customer information, and internal or external threats to information.” Id. at 2.

The Guidance explains that existing authentication methodologies involve three basic “factors”: (1) something the user knows (e.g., password, personal identification number); (2) something the user has (e.g., ATM card, smart card); and (3) something the user is (e.g., biometric characteristic, such as a fingerprint). Id. at 3. It states:

Authentication methods that depend on more than one factor are more difficult to compromise than single-factor methods. Accordingly, properly designed and implemented multifactor authentication methods are more reliable and stronger fraud deterrents. For example, the use of a logon ID/password is single-factor authentication (i.e., something the user knows); whereas, an ATM transaction requires multifactor authentication: something the user possesses (i.e., the card) combined with something the user knows (i.e., PIN). A multifactor authentication methodology may also include “out-of-band” controls for risk mitigation.

Id. The Guidance also states:

The agencies consider single-factor authentication, as the only control mechanism, to be inadequate for high-risk transactions involving access to customer information or the movement of funds to other parties.... Account fraud and identity theft are frequently the result of single-factor (e.g., ID/password) authentication exploitation. Where risk assessments indicate that the use of single-factor authentication is inadequate, financial institutions should implement multifactor authentication, layered security, or other controls reasonably calculated to mitigate those risks.

Id. at 1–2.

Following publication of the FFIEC Guidance, Ocean Bank worked with Jack Henry to conduct a risk assessment and institute appropriate authentication protocols to comply with the Guidance. The bank determined that its eBanking product was a “high risk” system that required enhanced security, and in particular, multifactor authentication.

Jack Henry entered into a re-seller agreement with Cyota, Inc., an RSA Security Company (“RSA/Cyota”), for a multifactor authentication system to integrate into its NetTeller product so that it could offer security solutions compliant with the FFIEC Guidance. Through collaboration with RSA/Cyota, Jack Henry made two multifactor authentication products available to its customers to meet the FFIEC Guidance: the “Basic” package and the “Premium” package.

Ocean Bank selected the Jack Henry “Premium” package, which it implemented by January 2007. The system, as implemented by Ocean Bank, had six key features:

1. User IDs and Passwords: The system required each authorized Patco employee to use both a company ID and password and a user-specific ID and password to access online banking.

2. Invisible Device Authentication: The system placed a “device cookie” onto customers' computers to identify particular computers used to access online banking. The device cookie would be used to help establish a secure communication session with the NetTeller environment and to contribute to the component risk score. Whenever the cookie was changed or was new, that impacted the risk score and potentially triggered challenge questions.

3. Risk Profiling: The system entailed the building of a risk profile for each customer by RSA/Cyota based on a number of different factors, including the location from which a user logged in, when/how often a user logged in, what a user did while on the system, and the size, type, and frequency of payment orders normally issued by the customer to the bank. The Premium Product noted the IP address that the customer typically used to log into online banking and added it to the customer profile.

RSA/Cyota's adaptive monitoring provided a risk score to the bank for every log-in attempt and transaction based on a multitude of data, including but not limited to IP address, device cookie ID, Geo location, and transaction activity. If a user's transaction differed from its normal profile, RSA/Cyota reported to the bank an elevated risk score for that transaction. RSA/Cyota considered transactions generating risk scores in excess of 750, on a scale from 0 to 1,000, to be high-risk transactions. “Challenge questions,” described below, were prompted any time the risk score for a transaction exceeded 750.

4. Challenge Questions: The system required users, during initial log-in, to select three challenge questions and responses. The challenge questions might be prompted for various reasons. For example, if the risk score associated with a particular transaction exceeded 750, the challenge questions would be triggered. If the challenge question responses entered by the user did not match the ones originally provided, the customer would receive an error message. If the customer was unable to answer the challenge questions in three attempts, the customer was blocked from online banking and would be required to contact the bank.

5. Dollar Amount Rule: The system permitted financial institutions to set a dollar threshold amount above which a transaction would automatically trigger the challenge questions even if the user ID, password, and device cookie were all valid. In August 2007, Ocean Bank set the dollar amount rule to $100,000. On June 6, 2008, Ocean Bank lowered the dollar amount rule from $100,000 to $1. After the Bank lowered the threshold to $1, Patco was prompted to answer challenge questions every time it initiated a transaction. In May 2009, when the fraud at issue in this case occurred, the dollar amount rule threshold remained at $1.

6. Subscription to the eFraud Network: The Jack Henry Premium Product provided Ocean Bank with a subscription to the eFraud Network, which compared characteristics of the transaction (such as the IP address of the user seeking access to the Bank's system) with those of known instances of fraud. The eFraud Network allowed financial institutions to report IP addresses or other discrete identifying characteristics identified with instances of fraud. An attempt to access a customer's NetTeller account initiated by someone with that characteristic would then be automatically blocked. The individual would not even be prompted for challenge questions.

Ocean Bank asserts that on December 1, 2006, as it began to implement the Jack Henry system, it also began to offer the option of e-mail alerts to its eBanking customers. If the customer chose to receive such alerts, the bank would send the customer e-mails regarding incoming/outgoing transactions, changes to the customer's balance, the clearing of checks, and/or alerts on certain customer-specified dates. Patco claims it did not receive notice that e-mail alerts were available and this is a disputed issue of fact. It appears that notice of the availability of e-mail alerts was not readily visible. To set up alerts through the eBanking system, a user would have to first click the “Preferences” tab on the eBanking webpage, then click on a second tab labeled “Alerts,” and then follow several additional steps to activate individual alerts. Patco claims it never saw anything on the website indicating that e-mail alerts were available, and it therefore never set up e-mail alerts.

C. Security Measures Available Which Ocean Bank Chose Not to Implement

There were several additional security measures that were available to Ocean Bank but that the bank chose not to implement:

1. Out–of–Band Authentication: Jack Henry offered Ocean Bank a version of the NetTeller system that included an out-of-band authentication option. Out-of-band authentication “generally refers to additional steps or actions taken beyond the technology boundaries of a typical transaction.” Id. at 3 n.5. Examples of out-of-band authentication include notification to the customer, callback (voice) verification, e-mail approval from the customer, and cell phone based challenge/response processes. The FFIEC Guidance identifies out-of-band authentication as a useful method of risk mitigation. See id. at 11–12.

2. User–Selected Picture: Ocean Bank's security procedures did not include the user-selected picture function that was available through Jack Henry's Premium option. Ocean Bank states that it did not utilize the user-selected picture function because it already utilized other anti-phishing controls.

3. Tokens: Tokens are physical devices (something the person has), such as a USB token device, a smart card, or a password-generating token. The FFIEC Guidance identifies tokens as a useful part of a multifactor authentication scheme. See id. at 8. Tokens were not available from Jack Henry when Ocean Bank implemented its system in 2007, but were readily available to financial institutions at that time through other sources. Although People's United Bank has used tokens since at least January of 2008, Ocean Bank did not do so until after the fraud in this case occurred.

4. Monitoring of Risk–Scoring Reports: In May 2009, bank personnel did not monitor the risk-scoring reports received as part of the Premium Product package, nor did the bank conduct any other regular review of transactions that generated high risk scores. In May 2009, the bank had the capability to conduct manual review of high-risk transactions through its transaction-profiling and risk-scoring system, but did not do so. The bank also had the ability to call a customer if it detected fraudulent activity, but did not do so. The bank began conducting manual reviews of high-risk transactions in late 2009, after the fraud in this case occurred. Since then, the bank has instituted a policy of calling the customer in the case of uncharacteristic transactions to inquire if the customer did indeed initiate the transaction.

D. The Fraudulent Transfers

Beginning on May 7, 2009, a series of withdrawals were made on Patco's account over the course of several days.

On May 7, unknown third parties initiated a $56,594 ACH withdrawal from Patco's account. The perpetrators supplied the proper credentials of one of Patco's employees, including her ID, password, and answers to her challenge questions. The payment on this withdrawal was directed to go to the accounts of numerous individuals, none of whom had previously been sent money by Patco. The perpetrators logged in from a device unrecognized by Ocean Bank's system, and from an IP address that Patco had never before used. The risk-scoring engine generated a risk score of 790 for the transaction, a significant departure from Patco's usual risk scores, which generally ranged from 10 to 214. There is no evidence that Patco's risk scores prior to the fraudulent transfers in this case ever exceeded 214. The risk-scoring engine reported the following contributors to the risk score for that transaction: (1) “Very high risk non-authenticated device”; (2) “High risk transaction amount”; (3) “IP anomaly”; and (4) “Risk score distributor per cookie age.” An RSA manual describing risk score contributors states that any transaction triggering the contributor “Very high risk non-authenticated device” is “a very high-risk transaction.” Despite this high risk score, Patco was not notified. Moreover, it appears no one at the bank monitored these high-risk transactions. Bank personnel did not manually review the May 7, 2009 transaction. The bank batched and processed the transaction as usual, and it was paid the next day.

The activities of May 7 having successfully resulted in payment, on Friday, May 8, 2009, unknown third parties again successfully initiated an ACH payment order from Patco's account, this time for $115,620.26. As before, the perpetrators wired money to multiple individual accounts to which Patco had never before sent funds. The perpetrators again used a device that was not recognized by Ocean Bank's system. The payment order originated from the same IP address as the day before. The transaction was larger by several magnitudes than any ACH transfer Patco had ever made to third parties. Despite these unusual characteristics, the bank again took no steps to notify Patco and batched and processed the transaction as usual, which was paid by the bank on Monday, May 11, 2009.

On May 11, 12, and 13, unknown third parties initiated further withdrawals from Patco's account in the amounts of $99,068, $91,959, and $113,647, respectively. Like the prior fraudulent transactions, these transactions were uncharacteristic in that they sent money to numerous individuals to whom Patco had never before sent funds, were for greater amounts than Patco's ordinary third-party transactions, were sent from computers that were not recognized by Ocean Bank's system, and originated from IP addresses that were not recognized as valid IP addresses of Patco. As a result of these unusual characteristics, the transactions continued to generate higher than normal risk scores. The May 11 transaction generated a risk score of 720, the May 12 transaction triggered a risk score of 563, and the transaction on May 13 generated a risk score of 785. The Bank did not manually review any of these transactions to determine their legitimacy or notify Patco.

Portions of the transfers, beginning with the first transfer initiated on May 7, 2009, were automatically returned to the bank because certain of the account numbers to which the money was slated to be transferred were invalid. As a result, the bank sent limited “return” notices to the home of Mark Patterson, one of Patco's principals, via U.S. mail. Patterson received the first such notice after work on the evening of May 13, six days after the allegedly fraudulent withdrawals began.

The next morning, on May 14, 2009, Patco called the bank to inform it that Patco had not authorized the transactions. Also on the morning of May 14, another alleged fraudulent transaction was initiated from Patco's account in the amount of $111,963. Despite the information from Patco, the bank initially processed this payment order on May 15, 2009. However, because of the alert from Patco of the ongoing fraud, the bank then took steps to block completion of a portion of this transaction and recovered a portion of the transferred funds shortly thereafter.

At the end of the string of thefts, the amount of money fraudulently withdrawn from Patco's account totaled $588,851.26, of which $243,406.83 was automatically returned or blocked and recovered.

According to Ocean Bank, on May 14, 2009, immediately after the allegedly fraudulent withdrawals occurred, the bank gave instructions to Patco. It instructed Patco to disconnect the computers it used for electronic banking from its network; to stop using these computers for work purposes; to leave the computers turned on; and to bring in a third-party forensic professional or law enforcement to create a forensic image of the computers to determine whether a security breach had occurred. Ocean Bank claims, and Patco disputes, that Patco did not isolate its computers or forensically preserve the hard drives; and that Patco employees continued to use their computers during the week following the alleged fraud. In another dispute of fact, Patco states that Ocean Bank recommended only that Patco check its system for a security breach using a third-party forensic professional, which Patco did.

Shortly after the fraudulent transfers, Patco hired an IT consultant, who ran anti-malware scans on the computers. A remnant of a Zeus/Zbot malware was found. However, the Zeus/Zbot malware, which contained the encryption key for the Zeus/Zbot configuration file, was quarantined and then deleted by the anti-malware scan. Without the encryption key, it is impossible to decrypt the configuration file and identify what information, if any, the Zeus/Zbot malware would have captured, if in fact it was of a type that would have intercepted authentication credentials.

II.

On September 18, 2009, Patco filed suit against People's United in Maine Superior Court, York County. The complaint included six counts: (I) liability under Article 4A of the Uniform Commercial Code (“UCC”); (II) negligence; (III) breach of contract; (IV) breach of fiduciary duty; (V) unjust enrichment; and (VI) conversion. On October 9, 2009, People's United removed the case to the United States District Court for the District of Maine.

On August 27, 2010, Patco moved for summary judgment on Count I, its claim under Article 4A of the UCC. That same day, the bank moved for summary judgment on all six counts. On May 27, 2011, the magistrate judge issued a recommended decision on the cross-motions for summary judgment. Patco Constr. Co. v. People's United Bank, No. 09–cv–503, 2011 WL 2174507 (D.Me. May 27, 2011). The magistrate judge determined both that the bank's security procedures were commercially reasonable, id. at *32–34, and that Patco had agreed to those procedures, id. at *24–25. Therefore, the magistrate concluded, Patco—not the bank—bore the loss of the fraudulent transfers. Id. at *34. The magistrate also determined that Counts II–IV of Patco's complaint were displaced by the provisions of Article 4A, and that Counts V and VI failed along with Count I because the bank could not have been unjustly enriched, or have wrongly converted Patco's funds, if it employed commercially reasonable security procedures. Id. at *34–35. Accordingly, the magistrate recommended that the district court grant the bank's motion for summary judgment and deny that of Patco. Id. at *35.

Patco objected to the recommended decision on June 13, 2011, and People's United responded to Patco's objection on June 27, 2011. On August 4, 2011, the district court adopted the magistrate's recommendation in full. It granted People's United's motion for summary judgment, denied Patco's motion for summary judgment, and found the parties' outstanding motions to be moot. On September 6, 2011, Patco appealed.

III.

We review orders granting or denying summary judgment de novo. Certain Interested Underwriters at Lloyd's, London v. Stolberg, 680 F.3d 61, 65 (1st Cir.2012). In doing so, we consider the record and all reasonable inferences in the light most favorable to the non-moving party. Id.

We affirm only if there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Id. “A dispute is genuine if the evidence about the fact is such that a reasonable jury could resolve the point in the favor of the non-moving party.” Rodríguez–Rivera v. Federico Trilla Reg'l Hosp. of Carolina, 532 F.3d 28, 30 (1st Cir.2008) (quoting Thompson v. Coca–Cola Co., 522 F.3d 168, 175 (1st Cir.2008)). “A fact is material if it has the potential of determining the outcome of the litigation.” Id. (quoting Maymí v. P.R. Ports Auth., 515 F.3d 20, 25 (1st Cir.2008)).

A. Article 4A of the UCC

The claim under Count I is governed by Article 4A of the UCC, which was meant to govern the rights, duties, and liabilities of banks and their commercial customers with respect to electronic funds transfers. See Me.Rev.Stat. Ann. tit. 11, § 4–1102 cmt. Article 4A was enacted in toto by Maine in 1991, well before the transfers at issue in this case.FN6 Id. § 4–1101.

FN6. In its enactment of Article 4A, the Maine legislature provided that while “the text of that uniform act has been changed to conform to Maine statutory conventions[, ... u]nless otherwise noted in a Maine comment, the changes are technical in nature and it is the intent of the Legislature that this Act be interpreted as substantively the same as the uniform act.” 1992 Me. Legis. Serv. ch. 812, § 3.

Article 4A was developed to address wholesale wire transfers and commercial ACH transfers, generally between businesses and their financial institutions. FN7 Id. § 4–1102 cmt. Before Article 4A was drafted, “there was no comprehensive body of law—statutory or judicial—that defined the juridical nature of a [commercial] funds transfer or the rights and obligations flowing from payment orders.” Id. Instead, judges relied on general principles of common law, sought guidance from other provisions of the UCC, or analogized to laws applicable to other payment methods. Id. The drafters of Article 4A sought to deliver clarity to this area of law by “us[ing] precise and detailed rules to assign responsibility, define behavioral norms, allocate risks and establish limits on liability” in order to allow parties to predict and insure against risk with greater certainty, given the very large amounts of money involved in commercial funds transfers. Id.

FN7. By contrast, consumer payments that are made electronically, such as through direct wiring or the use of a debit card, are covered by a separate federal statute, the Electronic Fund Transfer Act (EFTA), 15 U.S.C. § 1693 et seq. Article 4A does not apply to any funds transfer that is covered by the EFTA; the two are mutually exclusive. Me.Rev.Stat. Ann. tit. 11, § 4–1108 & cmt. The drafters of Article 4A felt that a separate framework, apart from the more consumer-focused EFTA, was needed to cover electronic transfers between commercial institutions because of the sheer volume and magnitude of such transfers. Id. Art. 4–A, Refs. & Annots. cmt. At the time of Article 4A's drafting, the volume of payments by non-consumer wire transfer exceeded well over one trillion dollars per day and the dollar volume of payments made by wire transfer far exceeded the dollar volume of payments made by other means. Id.

Importantly, the drafters also sought to clarify the interaction between the new provisions of Article 4A and existing remedies under the common law:

Funds transfers involve competing interests—those of the banks that provide funds transfer services and the commercial and financial organizations that use the services, as well as the public interest. These competing interests were represented in the drafting process and they were thoroughly considered. The rules that emerged represent a careful and delicate balancing of those interests and are intended to be the exclusive means of determining the rights, duties and liabilities of the affected parties in any situation covered by particular provisions of the Article. Consequently, resort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties and liabilities inconsistent with those stated in this Article.

Id. The drafters “intended that Article 4A would be supplemented, enhanced, and in some places, superceded by other bodies of law ... [T]he Article is intended to synergize with other legal doctrines,” so long as those doctrines are not inconsistent with the rights, duties, and liabilities established in Article 4A. Regions Bank v. Provident Bank, Inc., 345 F.3d 1267, 1275 (11th Cir.2003) (omission in original) (quoting Baxter & Bhala, The Interrelationship of Article 4A with Other Law, 45 Bus. Law. 1485, 1485 (1990)) (internal quotation mark omitted). Article 4A further provides that, in general, the parties may not vary by agreement any rights and obligations arising under Article 4A. See Me.Rev.Stat. Ann. tit. 11, § 4–1202(6).

Under Article 4A, a bank receiving a payment order ordinarily bears the risk of loss of any unauthorized funds transfer. Id. § 4–1204. The bank may shift the risk of loss to the customer in one of two ways, one of which involves the commercial reasonableness of security procedures and one of which does not. First, the bank may show that the “payment order received ... is the authorized order of the person identified as sender if that person authorized the order or is otherwise bound by it under the law of agency.” Id. § 4–1202(1). But, as the Article 4A commentary explains, “[i]n a very large percentage of cases covered by Article 4A, ... [c]ommon law concepts of authority of agent to bind principal are not helpful” because the payment order is transmitted electronically and the bank “may be required to act on the basis of a message that appears on a computer screen.” Id. § 4–1203 cmt. 1.

If the sender of the payment order had no authority to act for the customer, and there are no additional facts on which estoppel might be found, the “Customer is not liable to pay the order and [the] Bank takes the loss.” Id. cmt. 2. In such cases, “these legal principles [of agency] give the receiving bank very little protection.... The only remedy of [the] Bank is to seek recovery from the person who received payment as beneficiary of the fraudulent order.” Id. cmts. 1, 2.

Accordingly, the drafters provided a second way by which a bank may shift the risk of loss and protect itself whether or not the payment order is authorized. This, in turn, has several components:

If a bank and its customer have agreed that the authenticity of payment orders issued to the bank in the name of the customer as sender will be verified pursuant to a security procedure, a payment order received by the receiving bank is effective as the order of the customer, whether or not authorized, if:

(a) The security procedure is a commercially reasonable method of providing security against unauthorized payment orders; and

(b) The bank proves that it accepted the payment order in good faith and in compliance with the security procedure and any written agreement or instruction of the customer restricting acceptance of payment orders issued in the name of the customer. The bank is not required to follow an instruction that violates a written agreement with the customer or notice of which is not received at a time and in a manner affording the bank a reasonable opportunity to act on it before the payment order is accepted.

Id. § 4–1202(2).

In turn, Article 4A defines a security procedure as:

[A] procedure established by agreement of a customer and a receiving bank for the purpose of: (1) Verifying that a payment order or communication amending or cancelling a payment order is that of the customer; or (2) Detecting error in the transmission or the content of the payment order or communication.

Id. § 4–1201. One question raised in this appeal is the scope of any agreement reached.

The UCC explains that the “[c]ommercial reasonableness of a security procedure is a question of law” to be determined by the court. Id. § 4–1202(3). There are two ways by which a security procedure may be shown to be commercially reasonable. First is by reference to:

[T]he wishes of the customer expressed to the bank, the circumstances of the customer known to the bank, including the size, type and frequency of payment orders normally issued by the customer to the bank, alternative security procedures offered to the customer and security procedures in general use by customers and receiving banks similarly situated.

Id. § 4–1202(3). The Article is explicit that “[t]he standard is not whether the security procedure is the best available. Rather it is whether the procedure is reasonable for the particular customer and the particular bank....” Id. § 4–1203 cmt. 4. The UCC explains that “[t]he burden of making available commercially reasonable security procedures is imposed on receiving banks because they generally determine what security procedures can be used and are in the best position to evaluate the efficacy of procedures offered to customers to combat fraud.” Id. cmt. 3.

Secondly, the Article creates a presumption of reasonableness under certain circumstances, not applicable here. A security procedure is deemed to be commercially reasonable if:

(a) The security procedure was chosen by the customer after the bank offered and the customer refused, a security procedure that was commercially reasonable for that customer; and

(b) The customer expressly agreed in writing to be bound by any payment order, whether or not authorized, issued in its name and accepted by the bank in compliance with the security procedure chosen by the customer.

Id. § 4–1202(3). Of course, if the security procedure offered by the bank was not commercially reasonable, then the provision does not apply. Id. § 4–1203 cmt. 4.

If the bank shows both that its security procedure was commercially reasonable and that it accepted the payment order “in good faith and in compliance with the security procedure,” the payment order is effective as an authorized order of the customer. Id. §§ 4–1202(2)(b), 4–1203(1). In such a case, the bank may, “[b]y express written agreement, ... limit the extent to which it is entitled to enforce or retain payment of the payment order.” Id. § 4–1203(1)(a).

Once the bank has shown commercial reasonableness, the customer may shift the risk of loss back to the bank if the customer proves that the order was not “caused, either directly or indirectly, by a person”:

(i) Entrusted at any time with duties to act for the customer with respect to payment orders or the security procedure or who obtained access to transmitting facilities of the customer; or

(ii) Who obtained from a source controlled by the customer and without authority of the receiving bank information facilitating breach of the security procedure, regardless of how the information was obtained or whether the customer was at fault. Information includes any access device, computer software or the like.

Id. § 4–1203(1)(b). As the commentary explains, this section of the UCC places a burden on the customer, when the security procedure is commercially reasonable, “to supervise its employees to assure compliance with the security procedure and to safeguard confidential security information and access to transmitting facilities so that the security procedure cannot be breached.” Id. § 4–1203 cmt. 3.

If the bank does not make its showing of commercial reasonableness, then the analysis goes back to the question of agency under § 4–1202(a), described above. If the court determines, under any of these provisions, that the bank bears the risk of loss, “the bank shall refund any payment of the payment order received from the customer to the extent the bank is not entitled to enforce payment and shall pay interest on the refundable amount calculated from the date the bank received payment to the date of the refund.” Id. § 4–1204(1).

B. Ocean Bank's Motion for Summary Judgment

Ocean Bank argues that because Patco agreed to the security system in use, and because the security system was commercially reasonable, it is entitled to summary judgment.

Patco counters that the bank's security system was not commercially reasonable, that it did not agree to all of the procedures, and that the bank did not comply with its own procedures.

As to commercial reasonableness, Patco argues the bank's decision to lower the dollar amount rule to $1 increased the risk of compromised security, and that the bank's failure in light of this increased risk to monitor and immediately notify customers of abnormal transactions which met high risk criteria was not commercially reasonable. Patco also argues that it was not offered and it did not decline an e-mail notice system for transactions.

Essentially, Patco argues that when Ocean Bank decided in June of 2008 to trigger challenge questions for any transaction over $1, the bank increased the frequency with which a user was required to enter the answers to his or her challenge questions. Indeed, at a $1 threshold, the frequency as to Patco became 100%, covering every transaction. For customers like Patco who made regular ACH transfers, the risks were even greater than for customers who rarely made such transfers. This, in turn, also increased the risk that such answers would be compromised by keyloggers or other malware that would capture that information for unauthorized uses. By thus increasing the risk of fraud through unauthorized use of compromised security answers, Patco argues, Ocean Bank's security system failed to be commercially reasonable because it did not incorporate additional security measures, at the very least monitoring of high risk score transactions, use of e-mail alerts and inquiries, or other immediate notice to customers of high-risk transactions.

In our view, Ocean Bank did substantially increase the risk of fraud by asking for security answers for every $1 transaction, particularly for customers like Patco which had frequent, regular, and high dollar transfers. Then, when it had warning that such fraud was likely occurring in a given transaction, Ocean Bank neither monitored that transaction nor provided notice to customers before allowing the transaction to be completed. Because it had the capacity to do all of those things, yet failed to do so, we cannot conclude that its security system was commercially reasonable. We emphasize that it was these collective failures taken as a whole, rather than any single failure, which rendered Ocean Bank's security system commercially unreasonable.

The Jack Henry Premium Product was designed to harness the power of the risk-scoring system and included a device identification system to trigger an additional layer of authentication—challenge questions—whenever the bank's system detected unusual or suspicious transactions. In May of 2009, bank personnel did not monitor the risk-scoring reports, nor did the bank conduct any other regular review of transactions that generated high risk scores. Thus, the only result of a high risk score or an unidentified device was that a customer would be prompted to answer his or her challenge questions.

When Ocean Bank lowered the dollar amount rule from $100,000 to $1, it essentially deprived the complex Jack Henry risk-scoring system of its core functionality. The $1 dollar amount rule guaranteed that challenge questions would be triggered on every transaction unless caught by a separate eFraud network which depended on the use of known fraudulent IP addresses. The eFraud network was of no use if the address and like information were not already known to law enforcement. Accordingly, cyber criminals equipped with keyloggers had the much more frequent opportunity to capture all information necessary to compromise an account every time the customer initiated an ACH transaction. In Patco's case, ACH transactions were initiated at least weekly, and often several times per week. In the event a customer's computer became infected with a keylogger, it was likely that the customer would be prompted to answer its challenge questions before the malware was discovered and removed from the customer's computer.

Patco's argument is supported both by evidence and by common sense. Patco's expert testified that at the times in question, keylogging malware was a persistent problem throughout the financial industry. It was foreseeable, against this background, that triggering the use of the same challenge questions for high-risk transactions as were used for ordinary transactions, was ineffective as a stand-alone backstop to password/ID entry. Indeed, it was well known that setting challenge questions to be asked on every transaction greatly increases the risk that a fraudster equipped with a keylogger would be able to access the answers to a customer's challenge questions because it increases the frequency with which such information is entered through a user's keyboard.

As early as 2005, RSA/Cyota cautioned against the regular and frequent use of challenge questions as a stand-alone backstop to the exclusion of further controls, stating that challenge questions were “quicker and simpler to adopt” but were “less secure,” and should be used only “in the short term, as the first phase of a full project.” According to RSA/Cyota, challenge questions should be triggered only selectively, when unusual or suspicious activity is detected, so that they are less likely to be asked after a keylogger is installed on a customer's computer and before it can be removed. When asked frequently, they should not be used as the only line of defense beyond a password/ID, since a password/ID and answers to challenge questions could all be simultaneously captured by a keylogger.

Ocean Bank's decision to set the dollar amount rule at $1 for all of its customers also ignored Article 4A's mandate that security procedures take into account “the circumstances of the customer” known to the bank. Id. § 4–1202(3). Article 4A directs banks to consider such circumstances as “the size, type and frequency of payment orders normally issued by the customer to the bank.” Id. In Patco's case, these characteristics were regular and predictable. Patco used eBanking primarily to make payroll payments to employees. These payments were made weekly, generally on Fridays; they originated from a single static IP address; and they were always made from the same set of computers at Patco's offices in Sanford, Maine. The highest such payment Patco ever made was $36,634.74, well below the former $100,000 threshold. The bank does not assert that it ever offered to adjust the threshold amount for particular customers. Instead, the bank adopted a “one-size-fits-all” dollar amount rule of $1 for its customers.

Ocean Bank argues that it did take Patco's circumstances into account by building a risk profile based on Patco's eBanking habits, such that the security system could compare the characteristics of each transaction against those in Patco's profile.FN9 This argument misses the mark because, in fact, the risk profile information played no role. It triggered no additional authentication requirements, and the bank did nothing with the information generated by comparing the fraudulent transactions against Patco's profile.

FN9. The bank also argues that it took Patco's circumstances into account by setting Patco's ACH withdrawal limit based on its specific needs. As the district court correctly noted, however, ACH limits do not constitute a “security procedure” under Article 4A and thus have no bearing on the commercial reasonableness analysis. Patco Constr. Co. v. People's United Bank, No. 09–cv–503, 2011 WL 2174507, at *28 n. 131 (D.Me. May 27, 2011).

Ocean Bank also argues that it was commercially reasonable for it to universally lower the dollar amount rule to $1 in order to target low-dollar fraud. Whether or not that is true for certain customers, it is beside the point. Here, the increase in risk to the consumer who engaged in regular high dollar transfers, such as Patco, was sufficiently serious to require a corollary increase in security measures for a security system to remain commercially reasonable. The bank's generic “one-size-fits-all” approach to customers violates Article 4A's instruction to take the customer's circumstances into account. Further, the reduction of the dollar amount rule to $1 was for commercial customers, who are quite unlikely to have transfers of less than $1.

Ocean Bank introduced no additional security measures in tandem with its decision to lower the dollar amount rule, despite the fact that several such security measures were not uncommon in the industry and were relatively easy to implement. Patco's expert testified that all of her other banking clients using the same Jack Henry Premium Product employed manual reviews or some other additional security measure to protect against the type of fraud that occurred in this case.

For example, by May 2009, internet banking security had largely moved to hardware-based tokens and other means of generating “one-time” passwords. FN10 As of then, People's United Bank (which had acquired Ocean Bank), several national banks, and many New England community banks were using tokens for commercial accounts. Of those banks that did not use tokens in May 2009, New England community banks commonly used some form of manual review or customer verification to authenticate uncharacteristic or suspicious transactions. Such security procedures self-evidently would not have been difficult to implement.FN11

FN10. Although tokens can be compromised, bypassing them requires greater sophistication than is needed to obtain challenge questions. The perpetrator must use the information within seconds of acquiring it, before the system generates a new password to replace the old. The answers to challenge questions, by contrast, may be used at the perpetrator's leisure, particularly when, as was the case at Ocean Bank, the answers are static. Even if a token had been used and compromised in this case, the magnitude of the resulting fraud would have been greatly reduced because the captured password could not have been used after the initial transaction.

FN11. Indeed, shortly after the fraud in this case occurred, Ocean Bank began conducting manual reviews of suspect transactions. Now, transactions that generate high risk scores are personally reviewed by Ocean Bank personnel to determine their legitimacy.

This failure to implement additional procedures was especially unreasonable in light of the bank's knowledge of ongoing fraud. As early as 2008, Ocean Bank had received notification of substantial increases in internet fraud involving keylogging malware. By May 2009, Ocean Bank had itself experienced at least two incidents of fraud on the bank's system which it attributed to either keylogging malware or internal fraud. In both instances, the perpetrators had acquired and successfully applied the customer's passwords, IDs, and answers to challenge questions.

Thus, by May 2009, when the fraud in this case occurred, it was commercially unreasonable for Ocean Bank's security system to trigger nothing more than what was triggered in the event of a perfectly ordinary transaction in response to the high risk scores that were generated by the withdrawals from Patco's account. The payment orders at issue were entirely uncharacteristic of Patco's ordinary transactions: they were directed to accounts to which Patco had never before transferred money; they originated from computers Patco had never before used; they originated from an IP address that Patco had never before used; and they specified payment amounts significantly higher than the payments Patco ordinarily made to third parties. As a result, the security system flagged these transactions as uncharacteristic, highly suspicious, and potentially fraudulent from a “very high risk non-authenticated device.” The transactions generated unprecedentedly high risk scores ranging from 563 to 790, well above Patco's regular risk scores which ranged from 10 to 214.

These collective failures, taken as a whole, rendered Ocean Bank's security procedures commercially unreasonable. We reverse the district court's grant of summary judgment as to Count I.

That does not, however, end the matter, even as to Count I. The issues briefed to us on appeal have largely involved commercial reasonableness. Our conclusion that the security procedures were not commercially reasonable does not end the analysis of the Article 4A issues. Our conclusion as to Count I and commercial reasonableness does, though, also lead us to vacate the district court's grant of summary judgment on the two claims—Count V (unjust enrichment) and Count VI (conversion)—which the district court considered to be dependent on the success of Count I.

C. Patco's Motion for Summary Judgment

We affirm the district court's decision to deny Patco's motion for summary judgment. There remain several genuine and disputed issues of fact which may be material to the question of whether Patco has satisfied its obligations and responsibilities under Article 4A, or at least to the question of damages. The district court did not reach, and the parties have not briefed, the question of what, if any, obligations or responsibilities Article 4A imposes on a commercial customer even where a bank's security system is commercially unreasonable. We leave these questions open on remand so that the district court may, after briefing, assess whether such obligations exist, either for liability purposes or for mitigation of damages.

As to the genuine and disputed issues of fact, the parties dispute the facts surrounding Patco's lack of e-mail alerts. Patco alleges that it requested e-mail alerts from the bank, but that the bank ignored these requests and never notified Patco when e-mail alerts became available to bank customers. The bank counters with its own allegation that it sent out a general e-mail to customers that it would make e-mail alerts available. Patco states that it received no such e-mail, and that instead, a customer would have had to follow a complicated series of steps to find an “Alerts” tab on the bank's website in order to learn that such e-mail alerts had become available. Moreover, Patco alleges that its account was not even set up with an “Alerts” tab; that the account only features a “Preferences” tab. While one of Patco's employees did successfully navigate to the “Preferences” tab, she alleges she never saw an “Alerts” tab. Additionally, neither party has submitted into the record an example of such an e-mail alert or specified when such an e-mail alert would have been sent, such that it is unclear what Patco would have learned from such an e-mail alert and whether and when such an e-mail would have placed Patco on notice of the fraudulent transfer.

The parties also disagree as to whether the fraud in this case was caused by malware and keylogging in the first place, or whether Patco shares some responsibility. Ocean Bank argues that because Patco irreparably altered the evidence on its hard drives by using and scanning its computers before making forensic copies, it is unclear whether keylogging malware existed on Patco's computers and enabled the alleged fraud. These disputed issues of fact may be material.

Article 4A does not appear to be a one-way street. Commercial customers have obligations and responsibilities as well, under at least § 4–1204. See Me.Rev.Stat. Ann. tit. 11, § 4–1204; but see id. § 4–1102 cmt. (“Resort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties and liabilities inconsistent with those stated in this Article.”). Section 4–1204, entitled “Refund of payment and duty of customer to report with respect to unauthorized payment order,” provides:

The customer is not entitled to interest from the bank on the amount to be refunded if the customer fails to exercise ordinary care to determine that the order was not authorized by the customer and to notify the bank of the relevant facts within a reasonable time not exceeding 90 days after the date the customer received notification from the bank that the order was accepted or that the customer's account was debited with respect to the order.

Id. § 4–1204(1).FN12 It is unclear, however, what, if any, obligations a commercial customer has when a bank's security system is found to be commercially unreasonable.

FN12. The commentary describes this burden on the customer as a duty of ordinary care which is designed to encourage the customer to promptly notify the bank about any instances of fraud so that the bank can minimize its losses. Me.Rev.Stat. Ann. tit 11, § 4–1204 cmt. 2. The commentary clarifies that a breach of this duty results only in a loss of the interest on the refund payable by the bank, but not a loss of the refund itself. Id.

In short, we leave open for the parties to brief on remand the question of what, if any, obligations or responsibilities are imposed on a commercial customer under Article 4A even where a bank's security system is commercially unreasonable. The record requires further development on these issues, precluding summary judgment at this stage.

D. Dismissal of Counts II–IV

The district court concluded that Article 4A “preempts” FN13 Patco's remaining common law claims: Count II (negligence), Count III (breach of contract), and Count IV (breach of fiduciary duty). The district court based its analysis on the commentary to § 4–1102, which provides:

FN13. This use of the term has nothing to do with the standard legal use of “preemption,” which involves the question of whether federal law precludes a state from regulating on the same topic. See, e.g., Kurns v. R.R. Friction Prods. Corp., ––– U.S. ––––, 132 S.Ct. 1261, 1265–66, –––L.Ed.2d –––– (2012). We prefer different terminology.

Funds transfers involve competing interests—those of the banks that provide funds transfer services and the commercial and financial organizations that use the services, as well as the public interest. These competing interests were represented in the drafting process and they were thoroughly considered. The rules that emerged represent a careful and delicate balancing of those interests and are intended to be the exclusive means of determining the rights, duties and liabilities of the affected parties in any situation covered by particular provisions of the Article. Consequently, resort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties and liabilities inconsistent with those stated in this Article.

Id. § 4–1102 cmt.

This language does not, on its face, displace Patco's Count III for breach of contract or Count IV for breach of fiduciary duty. We adopt the test, as set forth in the commentary, that Article 4A embodies an intent to restrain common law claims only to the extent that they create rights, duties, and liabilities inconsistent with Article 4A. See Ma v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 597 F.3d 84, 89 (2d Cir.2010); Regions Bank, 345 F.3d at 1275.

The common law claims of breach of contract and breach of fiduciary duty are not inherently inconsistent with Patco's Article 4A claim. At least in theory, there could be, either by contract or through assumption of fiduciary duties, higher standards which are imposed on the bank. Indeed, courts have held that plaintiffs may turn to common law remedies to seek redress for an alleged harm arising from a funds transfer where Article 4A does not protect against the underlying injury or misconduct alleged. See, e.g., Ma, 597 F.3d at 89–90; Regions Bank, 345 F.3d at 1275; see also White & Summers, Uniform Commercial Code §§ 1–2, at 132 (1993 pocket part) (“With the adoption of Article 4A, electronic funds transactions are governed not only by Article 4A, but also common law....”). We vacate the dismissal and leave the issue of these two causes of action open on remand to be considered anew.

The closer question is whether Article 4A, on the facts of this case, displaces the claim for negligence. That is, are the negligence claims inconsistent with the duties and liability limits set forth in Article 4A. We think they are, inasmuch as the standard for the duty of care as to both sides is set forth in Article 4A and its limitation of liability. See Ma, 597 F.3d at 89–90 (interpreting Article 4A to displace common law claims, such as negligence, where Article 4A has already specified the relevant duties and “protect[ions] against the type of underlying injury or misconduct alleged in a claim”); Donmar Enters., Inc. v. S. Nat'l Bank of N.C., 64 F.3d 944, 949–50 (4th Cir.1995) (holding that negligence claims are in conflict with, and therefore displaced by, Article 4A); cf. Anderson v. Hannaford Bros. Co., 659 F.3d 151, 161 (1st Cir.2011) (where Maine law is clear that certain damages on given facts are not available regardless of theory pled, Maine law will not under new cause of action allow such damages). So we affirm the dismissal of the negligence claims.

IV.

We reverse the district court's grant of summary judgment in favor of the bank, and affirm the district court's denial of Patco's motion for summary judgment. We remand for further proceedings in accordance with this opinion. On remand the parties may wish to consider whether it would be wiser to invest their resources in resolving this matter by agreement.

No fees are awarded; each side shall bear its own costs.

Reilly v. Ceridian

664 F. 3d 38 (2011)

ALDISERT, Circuit Judge.

Kathy Reilly and Patricia Pluemacher, individually and on behalf of all others similarly situated, appeal from an order of the United States District Court for the District of New Jersey, which granted Ceridian Corporation's motion to dismiss for lack of standing, and alternatively, failure to state a claim. Appellants contend that (1) they have standing to bring their claims in federal court, and (2) they stated a claim that adequately alleged cognizable damage, injury, and ascertainable loss. We hold that Appellants lack standing and do not reach the merits of the substantive issue. We will therefore affirm.

I.

A.

Ceridian is a payroll processing firm with its principal place of business in Bloomington, Minnesota. To process its commercial business customers' payrolls, Ceridian collects information about its customers' employees. This information may include employees' names, addresses, social security numbers, dates of birth, and bank account information.

Reilly and Pluemacher were employees of the Brach Eichler law firm, a Ceridian customer, until September 2003. Ceridian entered into contracts with Appellants' employer and the employers of the proposed class members to provide payroll processing services.

On or about December 22, 2009, Ceridian suffered a security breach. An unknown hacker infiltrated Ceridian's Powerpay system and potentially gained access to personal and financial information belonging to Appellants and approximately 27,000 employees at 1,900 companies.

It is not known whether the hacker read, copied, or understood the data.

Working with law enforcement and professional investigators, Ceridian determined what information the hacker may have accessed. On about January 29, 2010, Ceridian sent letters to the potential identity theft victims, informing them of the breach: "[S]ome of your personal information . . . may have been illegally accessed by an unauthorized hacker. . . . [T]he information accessed included your first name, last name, social security number and, in several cases, birth date and/or the bank account that is used for direct deposit." App. 00039. Ceridian arranged to provide the potentially affected individuals with one year of free credit monitoring and identity theft protection. Individuals had until April 30, 2010, to enroll in the free program, and Ceridian included instructions on how to do so within its letter.

B.

On October 7, 2010, Appellants filed a complaint against Ceridian, on behalf of themselves and all others similarly situated, in the United States District Court for the District of New Jersey.[fn1] Appellants alleged that they: (1) have an increased risk of identity theft, (2) incurred costs to monitor their credit activity, and (3) suffered from emotional distress.

On December 15, 2010, Ceridian filed a motion to dismiss pursuant to Rules 12 (b)(1) and 12 (b)(6), Federal Rules of Civil Procedure, for lack of standing and failure to state a claim. On February 22, 2011, the District Court granted Ceridian's motion, holding that Appellants lacked Article III standing. The Court further held that, assuming Appellants had standing, they nonetheless failed to adequately allege the damage, injury, and ascertainable loss elements of their claims. Appellants timely filed their Notice of Appeal on March 18, 2011.

II.

We have jurisdiction to review the District Court's final judgment pursuant to 28 U.S.C. § 1291 . But "[a]bsent Article III standing, a federal court does not have subject matter jurisdiction to address a plaintiffs claims, and they must be dismissed." Taliaferro v. Darby Twp. ZoningBd., 458 F.3d 181 , 188 (3d Cir. 2006). Hence, we exercise plenary review over the District Court's jurisdictional determinations, see Graden v. Conexant Sys. Inc., 496 F.3d 291 , 294 n. 2 (3d Cir. 2007), "review[ing] only whether the allegations on the face of the complaint, taken as true, allege facts sufficient to invoke the jurisdiction of the district court," Common Cause of Penn. v. Pennsylvania, 558 F.3d 249 , 257 (3d Cir. 2009). We also review de novo a district court's grant of a motion to dismiss for failure to state a claim under Rule 12(b)(6) . See Values v. Sky Bank, 432 F.3d 493 , 494 (3d Cir. 2006).

Because the District Court dismissed Appellants' claims pursuant to Rules 12(b)(1) and 12(b)(6) , we accept as true all well-pleaded allegations and construe the complaint in the light most favorable to the non-moving party. See Lends v.Atlas Van Lines, Inc., 542 F.3d 403 , 405 (3d Cir. 2008).

III.

Appellants' allegations of hypothetical, future injury do not establish standing under Article III. For the following reasons we will therefore affirm the District Court's dismissal.

A.

Article III limits our jurisdiction to actual "cases or controversies." U.S. Const. art. Ill, § 2. One element of this "bedrock requirement" is that plaintiffs "must establish that they have standing to sue." Raines v. Byrd, 521 U.S. 811 , 818 , 117 S.Ct. 2312 , 138 L.Ed.2d 849 (1997). It is the plaintiffs' burden, at the pleading stage, to establish standing. See Lujan v. Defenders of Wildlife, 504 U.S. 555 , 561 , 112 S.Ct. 2130 , 119 L.Ed.2d 351 (1992); Storinov. Borough of Point Pleasant Beach, 322 F.3d 293 , 296 (3d Cir. 2003). Although "general factual allegations of injury resulting from the defendant's conduct may suffice," Lujan, 504 U.S. at 561 , 112 S.Ct. 2130 , the complaint must still "clearly and specifically set forth facts sufficient to satisfy" Article III. Whitmore v. Arkansas, 495 U.S. 149 , 155 , 110 S.Ct. 1717 , 109 L.Ed.2d 135 (1990).

"[T]he question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues." Elk Grove Unified Sch. Dist. v.Newdow, 542 U.S. 1 , 11 , 124 S.Ct. 2301 , 159 L.Ed.2d 98 (2004). Standing implicates both constitutional and prudential limitations on the jurisdiction of federal courts. SeeStorino, 322 F.3d at 296 . Constitutional standing requires an "injury-in-fact, which is an invasion of a legally protected interest that is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical." Danvers Motor Co. v. Ford Motor Co., 432 F.3d 286 , 290-291 (3d Cir. 2005) (citing Lujan, 504 U.S. at 560-561 , 112 S.Ct. 2130 ). An injury-in-fact "must be concrete in both a qualitative and temporal sense. The complainant must allege an injury to himself that is `distinct and palpable,' as distinguished from merely `abstract,' and the alleged harm must be actual or imminent, not `conjectural' or `hypothetical.`" Whit-more, 495 U.S. at 155 , 110 S.Ct. 1717 (internal citations omitted).

Allegations of "possible future injury" are not sufficient to satisfy Article III. Whitmore, 495 U.S. at 158 , 110 S.Ct. 1717 ; see also Lujan, 504 U.S. at 564 n. 2, 112 S.Ct. 2130 (stating that allegations of a future harm at some indefinite time cannot be an "actual or imminent injury"). Instead, "[a] threatened injury must be `certainly impending,' "Whitmore, 495 U.S. at 158 , 110 S.Ct. 1717 (internal citation omitted), and "proceed with a high degree of immediacy, so as to reduce the possibility of deciding a case in which no injury would have occurred at all," Lujan, 504 U.S. at 564 n. 2, 112 S.Ct. 2130 ; Whitmore, 495 U.S. at 155 , 110 S.Ct. 1717 (explaining that the imminence requirement "ensures that courts do not entertain suits based on speculative or hypothetical harms"). A plaintiff therefore lacks standing if his "injury" stems from an indefinite risk of future harms inflicted by unknown third parties. SeeLujan, 504 U.S. at 564 , 112 S.Ct. 2130.

B.

We conclude that Appellants' allegations of hypothetical, future injury are insufficient to establish standing. Appellants' contentions rely on speculation that the hacker: (1) read, copied, and understood their personal information; (2) intends to commit future criminal acts by misusing the information; and (3) is able to use such information to the detriment of Appellants by making unauthorized transactions in Appellants' names. Unless and until these conjectures come true, Appellants have not suffered any injury; there has been no misuse of the information, and thus, no harm.

The Supreme Court has consistently dismissed cases for lack of standing when the alleged future harm is neither imminent nor certainly impending. For example, the Lujan Court addressed whether plaintiffs had standing when seeking to enjoin the funding of activities that threatened certain species' habitats. The Court held that plaintiffs' claim that they would visit the project sites "some day" did not meet the requirement that their injury be "imminent." 504 U.S. at 564 n. 2, 112 S.Ct. 2130 ("[W]e are at a loss to see how, as a factual matter, the standard can be met by respondents' mere profession of an intent, some day, to return."). Appellants' allegations here are even more speculative than those at issue in Lujan. There, the acts necessary to make the injury "imminent" were within plaintiffs' own control, because all plaintiffs needed to do was travel to the site to see the alleged destruction of wild-life take place. Yet, notwithstanding their stated intent to travel to the site at some point in the future — which the Court had no reason to doubt — their harm was not imminent enough to confer standing. See id . Here, Appellants' alleged increased risk of future injury is even more attenuated, because it is dependent on entirely speculative, future actions of an unknown third-party.

The requirement that an injury be "certainly impending" is best illustrated by City of Los Angeles v. Lyons, 461 U.S. 95 , 103 S.Ct. 1660 , 75 L.Ed.2d 675 (1983). There, the Court held that a plaintiff lacked standing to enjoin the Los Angeles Police Department from using a controversial chokehold technique on arrestees. See Lyons, 461 U.S. at 105-106 , 103 S.Ct. 1660 . Although the plaintiff had already once been subjected to this maneuver, the future harm he sought to enjoin depended on the police again arresting and choking him. See id. at 105 , 103 S.Ct. 1660 . Unlike the plaintiff in Lyons, Appellants in this case have yet to suffer any harm, and their alleged increased risk of future injury is nothing more than speculation. As such, the alleged injury is not "certainly impending." Lujan, 504 U.S. at 564 n. 2, 112 S.Ct. 2130 .

Our Court, too, has refused to confer standing when plaintiffs fail to allege an imminent injury-in-fact. For example, although the plaintiffs in Storino contended that a municipal ordinance would eventually result in a commercially undesirable zoning change, we held that the allegation of future economic damage was too conjectural and insufficient to meet the "injury in fact" requirement. See322 F.3d at 298 . As we stated in that case, "one cannot describe how the [plaintiffs] will be injured without beginning the explanation with the word `if.' The prospective damages, described by the [plaintiffs] as certain, are, in reality, conjectural." Id. at 297-298 . Similarly, we cannot now describe how Appellants will be injured in this case without beginning our explanation with the word "if': if the hacker read, copied, and understood the hacked information, and ifthe hacker attempts to use the information, and if he does so successfully, only then will Appellants have suffered an injury.

C.

In this increasingly digitized world, a number of courts have had occasion to decide whether the "risk of future harm" posed by data security breaches confers standing on persons whose information may have been accessed. Most courts have held that such plaintiffs lack standing because the harm is too speculative. See Amburgy v. Express Scripts, Inc., 671 F.Supp.2d 1046 , 1051-1053 (E.D.Mo. 2009); see also Key v.DSW Inc., 454 F.Supp.2d 684 , 690 (S.D.Ohio 2006). We agree with the holdings in those cases. Here, no evidence suggests that the data has been — or will ever be — misused. The present test is actuality, not hypothetical speculations concerning the possibility of future injury. Appellants' allegations of an increased risk of identity theft resulting from a security breach are therefore insufficient to secure standing. See Whitmore, 495 U.S. at 158 , 110 S.Ct. 1717 ("[A]llegations of possible future injury do not satisfy the requirements of Art. III.").

Principally relying on Pisciotta v. Old NationalBancorp, 499 F.3d 629 (7th Cir. 2007), Appellants contend that an increased risk of identity theft is itself a harm sufficient to confer standing. In Pisciotta, plaintiffs brought a class action against a bank after its website had been hacked, alleging that the bank failed to adequately secure the personal information it solicited (such as names, addresses, birthdates, and social security numbers) when consumers applied for banking services on its website. The named plaintiffs did not allege "any completed directfinancial loss to their accounts" nor that they "alreadyhad been the victim of identity theft as a result of the breach." Id. at 632 . The court, nonetheless, held that plaintiffs had standing, concluding, without explanation, that the "injury-in-fact requirement can be satisfied by a threat of future harm or by an act which harms the plaintiff only by increasing the risk of future harm that the plaintiff would have otherwise faced, absent the defendant's actions." Id. at 634 .

Appellants rely as well on Krottner v. StarbucksCorp., 628 F.3d 1139 (9th Cir. 2010), in which the Court of Appeals for the Ninth Circuit conferred standing under circumstances much different from those present here. There, plaintiffs "names, addresses, and social security numbers were stored on a laptop that was stolen from Starbucks." Id. at 1140 . The court concluded that plaintiffs met the standing requirement through their allegations of "a credible threat of real and immediate harm stemming from the theft of a laptop containing their unencrypted personal data." Id. at 1143 . Appellants here contend that we should follow Pisciotta and Krottner and hold that the "credible threat of real and immediate harm" stemming from the security breach of Ceridian's Powerpay system satisfies the standing requirement. Id .

But these cases have little persuasive value here; in Pisciotta and Krottner, the threatened harms were significantly more "imminent" and "certainly impending" than the alleged harm here. In Pisciotta, there was evidence that "the [hacker's] intrusion was sophisticated, intentional and malicious." 499 F.3d at 632 . In Krottner, someone attempted to open a bank account with a plaintiffs information following the physical theft of the laptop.[fn2] See 628 F.3d at 1142 . Here, there is no evidence that the intrusion was intentional or malicious. Appellants have alleged no misuse, and therefore, no injury. Indeed, no identifiable taking occurred; all that is known is that a firewall was penetrated. Appellants' string of hypothetical injuries do not meet the requirement of an "actual or imminent" injury.

D.

Neither Pisciotta nor Krottner, moreover, discussed the constitutional standing requirements and how they apply to generalized data theft situations. Indeed, the Pisciotta court did not mention — let alone discuss — the requirement that a threatened injury must be "imminent" and "certainly impending" to confer standing. See 499 F.3d at 634 . Instead of making a determination as to whether the alleged injury was "certainly impending," both courts simply analogized data-security-breach situations to defective-medical-device, toxic-substance-exposure, or environmental-injury cases. See id .; see alsoKrottner, 628 F.3d at 1142-1143 .

Still, Appellants urge us to adopt those courts' skimpy rationale for three reasons. First, Appellants here expended monies on credit monitoring and insurance to protect their safety, just as plaintiffs in defective-medical-device and toxic-substance-exposure cases expend monies on medical monitoring. See Sutton v. St. Jude Med. S.C., Inc., 419 F.3d 568 , 570-575 (6th Cir. 2005). Second, members of this putative class may very well have suffered emotional distress from the incident, which also represents a bodily injury, just as plaintiffs in the medical-device and toxic-tort cases have suffered physical injuries. See In re Paoli R.R. Yard PCBLitig., 916 F.2d 829 , 850 (3d Cir. 1990) (explaining that "courts have begun to recognize claims like medical monitoring, which can allow plaintiffs some relief even absent present manifestations of physical injury" and that "in the toxic tort context, courts have allowed plaintiffs to recover for emotional distress suffered because of the fear of contracting a toxic exposure disease"). Third, injury to one's identity is extraordinarily unique and money may not even compensate one for the injuries sustained, just as environmental injury is unique and monetary compensation may not adequately return plaintiffs to their original position. See Cent. DeltaWater Agency v. United States, 306 F.3d 938 , 950 (9th Cir. 2002) (holding that "monetary compensation may well not adequately return plaintiffs to their original position" because harms to the environment "are frequently difficult or impossible to remedy"). Based on these analogies, Appellants contend they have established standing here. These analogies do not persuade us, because defective-medical-device and toxic-substance-exposure cases confer standing based on two important factors not present in data breach cases.

First, in those cases, an injury has undoubtedly occurred. In medical-device cases, a defective device has been implanted into the human body with a quantifiable risk of failure. See Sutton, 419 F.3d at 574 . Similarly, exposure to a toxic substance causes injury; cells are damaged and a disease mechanism has been introduced. See In re Paoli R.R. YardPCB Litig., 916 F.2d at 851 , 851-852 (explaining that "persons exposed to toxic chemicals emanating from the landfill have an increased risk of invisible genetic damage and a present cause of action for their injury" because "in a toxic age, significant harm can be done to an individual by a tortfeasor, notwithstanding latent manifestation of that harm"). Hence, the damage has been done; we just cannot yet quantify how it will manifest itself.

In data breach cases where no misuse is alleged, however, there has been no injury — indeed, no change in the status quo. Here, Appellants' credit card statements are exactly the same today as they would have been had Ceridian's database never been hacked. Moreover, there is no quantifiable risk of damage in the future. See id. at 852 ("As a proximate result of exposure [to the toxic substance], plaintiff suffers a significantly increased risk of contracting a serious latent disease."). Any damages that may occur here are entirely speculative and dependent on the skill and intent of the hacker.

Second, standing in medical-device and toxic-tort cases hinges on human health concerns. See Sutton, 419 F.3d at 575 . Courts resist strictly applying the "actual injury" test when the future harm involves human suffering or premature death. See id . As the Sutton court explained, "there is something to be said for disease prevention, as opposed to disease treatment. Waiting for a plaintiff to suffer physical injury before allowing any redress whatsoever is both overly harsh and economically inefficient." Id . The deceased, after all, have little use for compensation. This case implicates none of these concerns. The hacker did not change or injure Appellants' bodies; any harm that may occur — if all of Appellants' stated fears are actually realized — may be redressed in due time through money damages after the harm occurs with no fear that litigants will be dead or disabled from the onset of the injury. SeeKey, 454 F.Supp.2d at 690 ("[T]hose [medical monitoring] cases not only act as a narrow exception to the general rule of courts rejecting standing based on increased risk of future harm, but are also factually distinguishable from the present case [of a data security breach].").

An analogy to environmental injury cases fails as well. As the Court of Appeals for the Ninth Circuit explained in CentralDelta Water Agency, standing is unique in the environmental context because monetary compensation may not adequately return plaintiffs to their original position. See id. at 950 ("The extinction of a species, the destruction of a wilderness habitat, or the fouling of air and water are harms that are frequently difficult or impossible to remedy [by monetary compensation]."). In a data breach case, however, there is no reason to believe that monetary compensation will not return plaintiffs to their original position completely — if the hacked information is actually read, copied, understood, and misused to a plaintiffs detriment. To the contrary, unlike priceless "mountains majesty," the thing feared lost here is simple cash, which is easily and precisely compensable with a monetary award. We therefore decline to analogize this case to those cases in the medical device, toxic tort or environmental injury contexts.

E.

Finally, we conclude that Appellants' alleged time and money expenditures to monitor their financial information do not establish standing, because costs incurred to watch for a speculative chain of future events based on hypothetical future criminal acts are no more "actual" injuries than the alleged "increased risk of injury" which forms the basis for Appellants' claims. See Randolph v. ING Life Ins.& Annuity Co., 486 F.Supp.2d 1 , 8 (D.D.C. 2007) ("[T]he `lost data' cases . . . clearly reject the theory that a plaintiff is entitled to reimbursement for credit monitoring services or for time and money spent monitoring his or her credit."). That a plaintiff has willingly incurred costs to protect against an alleged increased risk of identity theft is not enough to demonstrate a "concrete and particularized" or "actual or imminent" injury. Id .; see also Amburgy, 671 F.Supp.2d at 1053 (holding plaintiff lacked standing even though he allegedly spent time and money to protect himself from risk of future injury); Hammond v. Bank of N.Y. MellonCorp., No. 08-6060, 2010 WL 2643307, at *4, *7 (S.D.N.Y. June 25, 2010) (noting that plaintiffs "out-of-pocket expenses incurred to proactively safeguard and/or repair their credit" and the "expense of comprehensive credit monitoring" did not confer standing); Allison v. Aetna, Inc., No. 09-2560, 2010 WL 3719243, at *5 n. 7 (E.D.Pa. Mar. 9, 2010) (rejecting claims for time and money spent on credit monitoring due to a perceived risk of harm as the basis for an injury in fact).

Although Appellants have incurred expenses to monitor their accounts and "to protect their personal and financial information from imminent misuse and/or identity theft," App. 00021, they have not done so as a result of any actual injury (e.g. because their private information was misused or their identities stolen). Rather, they prophylactically spent money to ease fears of future third-party criminality. Such misuse is only speculative — not imminent. The claim that they incurred expenses in anticipation of future harm, therefore, is not sufficient to confer standing.

IV.

The District Court correctly held that Appellants failed to plead specific facts demonstrating they have standing to bring this suit under Article III, because Appellants' allegations of an increased risk of identity theft as a result of the security breach are hypothetical, future injuries, and are therefore insufficient to establish standing. For the reasons set forth, we will AFFIRM the District Court's order granting Ceridian's motion to dismiss.

[fn1] Appellants' proposed class consists of all persons whose personal and financial information was contained in the Ceridian Powerpay System and was stolen or otherwise misplaced as a result of the breach.

[fn2] The bank closed the account before any financial loss occurred.

Pinero v. Jackson Hewitt Tax Service

594 F.Supp.2d 710.

ORDER AND REASONS

SARAH S. VANCE, District Judge.

Before the Court is defendants' Motion to Dismiss and plaintiff's Motion for Class Certification. For the following reasons, the Court GRANTS in part and DENIES in part defendants' motion. The Court also DENIES plaintiff's motion as premature.

I. Background

This case arises out of defendants' alleged mishandling of plaintiff's confidential personal information. In 2006, plaintiff visited defendant Crescent City Tax Service, Inc., d/b/a Jackson Hewitt Tax Service (“Crescent City”), in Metairie, Louisiana to have her 2005 federal and state tax returns prepared and e-filed. Crescent City Tax Service is a franchisee of defendant Jackson Hewitt Tax Service (“Jackson Hewitt”). During her visit plaintiff provided highly confidential information, including her social security number, date of birth, and driver's license number, to Crescent City. Plaintiff signed Jackson Hewitt's privacy policy, which stated that defendants had policies and procedures in place, including physical, electronic, and procedural safeguards, to protect customers' private information. Plaintiff alleges that she relied on this statement in her decision to turn over her information.

Plaintiff contends that sometime in early 2008, defendants disposed of her 2005 federal and state tax returns in a public dumpster in Gretna, Louisiana. Wilhelmina Walker found plaintiff's tax returns, as well as those of over 100 other individuals. The returns were in readable form and were not burned, shredded, or pulverized as required by federal and state law. Walker then contacted a local television news station and the sheriff's office to alert them of the documents she had found in the dumpster. The news station contacted plaintiff and returned the tax returns to her. Crescent City later issued a public statement asserting that the documents were stolen and maintaining that it takes customer privacy seriously.

On May 22, 2008, plaintiff sued Jackson Hewitt and Crescent City in federal court. Plaintiff, on behalf of herself and others similarly situated, asserts seven causes of action against defendants. Plaintiff brings state law claims of fraud, breach of contract, negligence, invasion of privacy, violation of the Louisiana Database Security Breach Notification Law (LDSBNA), and violation of the Louisiana Unfair Trade Practices Act (LUTPA). (R. Doc. 9, Amended Complaint at ¶¶ 54–77, 82–86). Plaintiff also alleges that defendants' unauthorized disclosure of tax returns violates 26 U.S.C. § 6103. (Amended Complaint at ¶ 47).

Plaintiff seeks general damages for fear, panic, anxiety, sleeplessness, nightmares, embarrassment, hassle, anger, lost time, loss of consortium, and other emotional and physical distress. (Amended Complaint at ¶ 33). Plaintiff seeks special damages for credit monitoring, credit insurance, reimbursement for all out-of-pocket expenses related to notifying creditors of the improper disclosure, and reimbursement for all out-of-pocket expenses related to identity theft. (Amended Complaint at ¶ 33). Plaintiff also seeks declaratory and injunctive relief. (Amended Complaint at ¶¶ 78–81). Plaintiff has moved for class certification of her claims for unauthorized disclosure of tax returns, fraud, breach of contract, negligence, and invasion of privacy. Plaintiff now moves for class certification of her claims for unauthorized disclosure of tax returns, fraud, breach of contract, negligence, and invasion of privacy. Defendants move to dismiss all of plaintiff's claims.

II. Motion to Dismiss

A. Legal Standard

In considering a motion to dismiss, a court must accept all well-pleaded facts as true and must draw all reasonable inferences in favor of the plaintiff. Baker v. Putnal, 75 F.3d 190, 196 (5th Cir.1996). To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007); In re Katrina Canal Breaches Litigation, 495 F.3d 191, 205 (5th Cir.2007) (recognizing a change in the standard of review). “Factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all allegations in the complaint are true (even if doubtful in fact).” Twombly, 127 S.Ct. at 1965 (quotation marks, citations, and footnote omitted).

B. Discussion

. . .

6. Invasion of privacy

Defendant contends that plaintiff's invasion of privacy claim fails because plaintiff has failed to allege an unreasonable public disclosure of facts. Under Louisiana law, the right of privacy encompasses four different interests: (1) the appropriation of an individual's name or likeness for the use or benefit of the defendant; (2) an unreasonable intrusion upon the plaintiff's physical solitude or seclusion; (3) publicity which unreasonably places the plaintiff in a false light before the public; and (4) unreasonable public disclosure of private facts. Spellman v. Discount Zone Gas Station, 975 So.2d 44, 47 (La.Ct.App.2007); Jaubert v. Crowley Post–Signal, Inc., 375 So.2d 1386, 1388–89 (La.1979). In Louisiana, the right to privacy has been defined as “the right to be let alone” and “the right to an inviolate personality.” Jaubert, 375 So.2d at 1388 (internal citations omitted). When an individual has such a right, other members of society have a corresponding duty not to violate the right. Id. Invasion of privacy is an intentional tort. See Leger v. Spurlock, 589 So.2d 40, 43 (La.Ct.App.1991); 12 William E. Crawford La. Civ. L. Treatise, Tort Law § 12.23. An actionable invasion of privacy occurs when the defendant's conduct is “unreasonable and seriously interferes with the plaintiff's privacy interest.” Id. at 1389.

Plaintiff alleges that her claim involves an unreasonable public disclosure of private facts. Plaintiff alleges that her personal information was intentionally dumped in a “public dumpster, with free access to any citizen.” (Complaint at ¶ 72). Defendants assert that plaintiff's claim fails because plaintiff fails to allege that her personal information was made public. Defendants do not dispute that plaintiff's personal information was found in a dumpster and disclosed to a local news outlet.

The Court has not found any caselaw, controlling or otherwise, with facts similar to those alleged here that states that similar allegations do not amount to an invasion of privacy. Whether additional factual development will support defendants' contention that under the circumstances the information was not made public remains to be seen. The Court finds that at this juncture plaintiff has made sufficient allegations to state a claim for public disclosure of private facts. Accordingly, the Court DENIES defendants' motion to dismiss this claim.

Sorrel v. IMS Health

131 S.Ct. 2653 (2011)

Justice KENNEDY delivered the opinion of the Court.

Vermont law restricts the sale, disclosure, and use of pharmacy records that reveal the prescribing practices of individual doctors. Vt. Stat. Ann., Tit. 18, § 4631 (Supp.2010). Subject to certain exceptions, the information may not be sold, disclosed by pharmacies for marketing purposes, or used for marketing by pharmaceutical manufacturers. Vermont argues that its prohibitions safeguard medical privacy and diminish the likelihood that marketing will lead to prescription decisions not in the best interests of patients or the State. It can be assumed that these interests are significant. Speech in aid of pharmaceutical marketing, however, is a form of expression protected by the Free Speech Clause of the First Amendment. As a consequence, Vermont's statute must be subjected to heightened judicial scrutiny. The law cannot satisfy that standard.

I

A

Pharmaceutical manufacturers promote their drugs to doctors through a process called “detailing.” This often involves a scheduled visit to a doctor's office to persuade the doctor to prescribe a particular pharmaceutical. Detailers bring drug samples as well as medical studies that explain the “details” and potential advantages of various prescription drugs. Interested physicians listen, ask questions, and receive followup data. Salespersons can be more effective when they know the background and purchasing preferences of their clientele, and pharmaceutical salespersons are no exception. Knowledge of a physician's prescription practices—called “prescriber-identifying information”—enables a detailer better to ascertain which doctors are likely to be interested in a particular drug and how best to present a particular sales message. Detailing is an expensive undertaking, so pharmaceutical companies most often use it to promote high-profit brand-name drugs protected by patent. Once a brand-name drug's patent expires, less expensive bioequivalent generic alternatives are manufactured and sold.

Pharmacies, as a matter of business routine and federal law, receive prescriber-identifying information when processing prescriptions. See 21 U.S.C. § 353(b); see also Vt. Bd. of Pharmacy Admin. Rule 9.1 (2009); Rule 9.2. Many pharmacies sell this information to “data miners,” firms that analyze prescriber-identifying information and produce reports on prescriber behavior. Data miners lease these reports to pharmaceutical manufacturers subject to nondisclosure agreements. Detailers, who represent the manufacturers, then use the reports to refine their marketing tactics and increase sales.

In 2007, Vermont enacted the Prescription Confidentiality Law. The measure is also referred to as Act 80. It has several components. The central provision of the present case is § 4631(d).

“A health insurer, a self-insured employer, an electronic transmission intermediary, a pharmacy, or other similar entity shall not sell, license, or exchange for value regulated records containing prescriber-identifiable information, nor permit the use of regulated records containing prescriber-identifiable information for marketing or promoting a prescription drug, unless the prescriber consents .... Pharmaceutical manufacturers and pharmaceutical marketers shall not use prescriber-identifiable information for marketing or promoting a prescription drug unless the prescriber consents ....”

The quoted provision has three component parts. The provision begins by prohibiting pharmacies, health insurers, and similar entities from selling prescriber-identifying information, absent the prescriber's consent. The parties here dispute whether this clause applies to all sales or only to sales for marketing. The provision then goes on to prohibit pharmacies, health insurers, and similar entities from allowing prescriber-identifying information to be used for marketing, unless the prescriber consents. This prohibition in effect bars pharmacies from disclosing the information for marketing purposes. Finally, the provision's second sentence bars pharmaceutical manufacturers and pharmaceutical marketers from using prescriber-identifying information for marketing, again absent the prescriber's consent. The Vermont attorney general may pursue civil remedies against violators. § 4631(f).

Separate statutory provisions elaborate the scope of the prohibitions set out in § 4631(d). “Marketing” is defined to include “advertising, promotion, or any activity” that is “used to influence sales or the market share of a prescription drug.” § 4631(b)(5). Section 4631(c)(1) further provides that Vermont's Department of Health must allow “a prescriber to give consent for his or her identifying information to be used for the purposes” identified in § 4631(d). Finally, the Act's prohibitions on sale, disclosure, and use are subject to a list of exceptions. For example, prescriber-identifying information may be disseminated or used for “health care research”; to enforce “compliance” with health insurance formularies, or preferred drug lists; for “care management educational communications provided to” patients on such matters as “treatment options”; for law enforcement operations; and for purposes “otherwise provided by law.” § 4631(e).

Act 80 also authorized funds for an “evidence-based prescription drug education program” designed to provide doctors and others with “information and education on the therapeutic and cost-effective utilization of prescription drugs.” § 4622(a)(1). An express aim of the program is to advise prescribers “about commonly used brand-name drugs for which the patent has expired” or will soon expire. § 4622(a)(2). Similar efforts to promote the use of generic pharmaceuticals are sometimes referred to as “counter-detailing.” App. 211; see also IMS Health Inc. v. Ayotte, 550 F.3d 42, 91 (C.A.1 2008) (Lipez, J., concurring and dissenting). The counterdetailer's recommended substitute may be an older, less expensive drug and not a bioequivalent of the brand-name drug the physician might otherwise prescribe. Like the pharmaceutical manufacturers whose efforts they hope to resist, counterdetailers in some States use prescriber-identifying information to increase their effectiveness. States themselves may supply the prescriber-identifying information used in these programs. See App. 313; id., at 375 (“[W]e use the data given to us by the State of Pennsylvania ... to figure out which physicians to talk to”); see also id., at 427–429 (Director of the Office of Vermont Health Access explaining that the office collects prescriber-identifying information but “does not at this point in time have a counterdetailing or detailing effort”). As first enacted, Act 80 also required detailers to provide information about alternative treatment options. The Vermont Legislature, however, later repealed that provision. 2008 Vt. Laws No. 89, § 3.

Act 80 was accompanied by legislative findings. Vt. Acts No. 80, § 1. Vermont found, for example, that the “goals of marketing programs are often in conflict with the goals of the state” and that the “marketplace for ideas on medicine safety and effectiveness is frequently one-sided in that brand-name companies invest in expensive pharmaceutical marketing campaigns to doctors.” §§ 1(3), (4). Detailing, in the legislature's view, caused doctors to make decisions based on “incomplete and biased information.” § 1(4). Because they “are unable to take the time to research the quickly changing pharmaceutical market,” Vermont doctors “rely on information provided by pharmaceutical representatives.” § 1(13). The legislature further found that detailing increases the cost of health care and health insurance, § 1(15); encourages hasty and excessive reliance on brand-name drugs, before the profession has observed their effectiveness as compared with older and less expensive generic alternatives, § 1(7); and fosters disruptive and repeated marketing visits tantamount to harassment, §§ 1(27)-(28). The legislative findings further noted that use of prescriber-identifying information “increase[s] the effect of detailing programs” by allowing detailers to target their visits to particular doctors. §§ 1(23)-(26). Use of prescriber-identifying data also helps detailers shape their messages by “tailoring” their “presentations to individual prescriber styles, preferences, and attitudes.” § 1(25).

B

The present case involves two consolidated suits. One was brought by three Vermont data miners, the other by an association of pharmaceutical manufacturers that produce brand-name drugs. These entities are the respondents here. Contending that § 4631(d) violates their First Amendment rights as incorporated by the Fourteenth Amendment, the respondents sought declaratory and injunctive relief against the petitioners, the Attorney General and other officials of the State of Vermont.

After a bench trial, the United States District Court for the District of Vermont denied relief. 631 F.Supp.2d 434 (2009). The District Court found that “[p]harmaceutical manufacturers are essentially the only paying customers of the data vendor industry” and that, because detailing unpatented generic drugs is not “cost-effective,” pharmaceutical sales representatives “detail only branded drugs.” Id., at 451, 442. As the District Court further concluded, “the Legislature's determination that [prescriber-identifying] data is an effective marketing tool that enables detailers to increase sales of new drugs is supported in the record.” Id., at 451. The United States Court of Appeals for the Second Circuit reversed and remanded. It held that § 4631(d) violates the First Amendment by burdening the speech of pharmaceutical marketers and data miners without an adequate justification. 630 F.3d 263. Judge Livingston dissented.

The decision of the Second Circuit is in conflict with decisions of the United States Court of Appeals for the First Circuit concerning similar legislation enacted by Maine and New Hampshire. See IMS Health Inc. v. Mills, 616 F.3d 7 (C.A.1 2010) (Maine); Ayotte, supra (New Hampshire). Recognizing a division of authority regarding the constitutionality of state statutes, this Court granted certiorari. 562 U.S. ––––, 131 S.Ct. 857, 178 L.Ed.2d 623 (2011).

II

The beginning point is the text of § 4631(d). In the proceedings below, Vermont stated that the first sentence of § 4631(d) prohibits pharmacies and other regulated entities from selling or disseminating prescriber-identifying information for marketing. The information, in other words, could be sold or given away for purposes other than marketing. The District Court and the Court of Appeals accepted the State's reading. See 630 F.3d, at 276. At oral argument in this Court, however, the State for the first time advanced an alternative reading of § 4631(d)—namely, that pharmacies, health insurers, and similar entities may not sell prescriber-identifying information for any purpose, subject to the statutory exceptions set out at § 4631(e). See Tr. of Oral Arg. 19–20. It might be argued that the State's newfound interpretation comes too late in the day. See Sprietsma v. Mercury Marine, 537 U.S. 51, 56, n. 4, 123 S.Ct. 518, 154 L.Ed.2d 466 (2002) (waiver); New Hampshire v. Maine, 532 U.S. 742, 749, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (judicial estoppel). The respondents, the District Court, and the Court of Appeals were entitled to rely on the State's plausible interpretation of the law it is charged with enforcing. For the State to change its position is particularly troubling in a First Amendment case, where plaintiffs have a special interest in obtaining a prompt adjudication of their rights, despite potential ambiguities of state law. See Houston v. Hill, 482 U.S. 451, 467–468, and n. 17, 107 S.Ct. 2502, 96 L.Ed.2d 398 (1987); Zwickler v. Koota, 389 U.S. 241, 252, 88 S.Ct. 391, 19 L.Ed.2d 444 (1967).

In any event, § 4631(d) cannot be sustained even under the interpretation the State now adopts. As a consequence this Court can assume that the opening clause of § 4631(d) prohibits pharmacies, health insurers, and similar entities from selling prescriber-identifying information, subject to the statutory exceptions set out at § 4631(e). Under that reading, pharmacies may sell the information to private or academic researchers, see § 4631(e)(1), but not, for example, to pharmaceutical marketers. There is no dispute as to the remainder of § 4631(d). It prohibits pharmacies, health insurers, and similar entities from disclosing or otherwise allowing prescriber-identifying information to be used for marketing. And it bars pharmaceutical manufacturers and detailers from using the information for marketing. The questions now are whether § 4631(d) must be tested by heightened judicial scrutiny and, if so, whether the State can justify the law.

A

1

On its face, Vermont's law enacts content-and speaker-based restrictions on the sale, disclosure, and use of prescriber-identifying information. The provision first forbids sale subject to exceptions based in large part on the content of a purchaser's speech. For example, those who wish to engage in certain “educational communications,” § 4631(e)(4), may purchase the information. The measure then bars any disclosure when recipient speakers will use the information for marketing. Finally, the provision's second sentence prohibits pharmaceutical manufacturers from using the information for marketing. The statute thus disfavors marketing, that is, speech with a particular content. More than that, the statute disfavors specific speakers, namely pharmaceutical manufacturers. As a result of these content- and speaker-based rules, detailers cannot obtain prescriber-identifying information, even though the information may be purchased or acquired by other speakers with diverse purposes and viewpoints. Detailers are likewise barred from using the information for marketing, even though the information may be used by a wide range of other speakers. For example, it appears that Vermont could supply academic organizations with prescriber-identifying information to use in countering the messages of brand-name pharmaceutical manufacturers and in promoting the prescription of generic drugs. But § 4631(d) leaves detailers no means of purchasing, acquiring, or using prescriber-identifying information. The law on its face burdens disfavored speech by disfavored speakers.

Any doubt that § 4631(d) imposes an aimed, content-based burden on detailers is dispelled by the record and by formal legislative findings. As the District Court noted, “[p]harmaceutical manufacturers are essentially the only paying customers of the data vendor industry”; and the almost invariable rule is that detailing by pharmaceutical manufacturers is in support of brand-name drugs. 631 F.Supp.2d, at 451. Vermont's law thus has the effect of preventing detailers—and only detailers—from communicating with physicians in an effective and informative manner. Cf. Edenfield v. Fane, 507 U.S. 761, 766, 113 S.Ct. 1792, 123 L.Ed.2d 543 (1993) (explaining the “considerable value” of in-person solicitation). Formal legislative findings accompanying § 4631(d) confirm that the law's express purpose and practical effect are to diminish the effectiveness of marketing by manufacturers of brand-name drugs. Just as the “inevitable effect of a statute on its face may render it unconstitutional,” a statute's stated purposes may also be considered. United States v. O'Brien, 391 U.S. 367, 384, 88 S.Ct. 1673, 20 L.Ed.2d 672 (1968). Here, the Vermont Legislature explained that detailers, in particular those who promote brand-name drugs, convey messages that “are often in conflict with the goals of the state.” 2007 Vt. No. 80, § 1(3). The legislature designed § 4631(d) to target those speakers and their messages for disfavored treatment. “In its practical operation,” Vermont's law “goes even beyond mere content discrimination, to actual viewpoint discrimination.” R.A.V. v. St. Paul, 505 U.S. 377, 391, 112 S.Ct. 2538, 120 L.Ed.2d 305 (1992). Given the legislature's expressed statement of purpose, it is apparent that § 4631(d) imposes burdens that are based on the content of speech and that are aimed at a particular viewpoint.

Act 80 is designed to impose a specific, content-based burden on protected expression. It follows that heightened judicial scrutiny is warranted. See Cincinnati v. Discovery Network, Inc., 507 U.S. 410, 418, 113 S.Ct. 1505, 123 L.Ed.2d 99 (1993) (applying heightened scrutiny to “a categorical prohibition on the use of newsracks to disseminate commercial messages”); id., at 429, 113 S.Ct. 1505 (“[T]he very basis for the regulation is the difference in content between ordinary newspapers and commercial speech” in the form of “commercial handbills .... Thus, by any commonsense understanding of the term, the ban in this case is ‘content based’ ” (some internal quotation marks omitted)); see also Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622, 658, 114 S.Ct. 2445, 129 L.Ed.2d 497 (1994) (explaining that strict scrutiny applies to regulations reflecting “aversion” to what “disfavored speakers” have to say). The Court has recognized that the “distinction between laws burdening and laws banning speech is but a matter of degree” and that the “Government's content-based burdens must satisfy the same rigorous scrutiny as its content-based bans.” United States v. Playboy Entertainment Group, Inc., 529 U.S. 803, 812, 120 S.Ct. 1878, 146 L.Ed.2d 865 (2000). Lawmakers may no more silence unwanted speech by burdening its utterance than by censoring its content. See Simon & Schuster, Inc. v. Members of N.Y. State Crime Victims Bd., 502 U.S. 105, 115, 112 S.Ct. 501, 116 L.Ed.2d 476 (1991) (content-based financial burden); Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 103 S.Ct. 1365, 75 L.Ed.2d 295 (1983) (speaker-based financial burden).

The First Amendment requires heightened scrutiny whenever the government creates “a regulation of speech because of disagreement with the message it conveys.” Ward v. Rock Against Racism, 491 U.S. 781, 791, 109 S.Ct. 2746, 105 L.Ed.2d 661 (1989); see also Renton v. Playtime Theatres, Inc., 475 U.S. 41, 48, 106 S.Ct. 925, 89 L.Ed.2d 29 (1986) (explaining that “ ‘content-neutral’ speech regulations” are “those that are justified without reference to the content of the regulated speech” (internal quotation marks omitted)). A government bent on frustrating an impending demonstration might pass a law demanding two years' notice before the issuance of parade permits. Even if the hypothetical measure on its face appeared neutral as to content and speaker, its purpose to suppress speech and its unjustified burdens on expression would render it unconstitutional. Ibid. Commercial speech is no exception. See Discovery Network, supra, at 429–430, 113 S.Ct. 1505 (commercial speech restriction lacking a “neutral justification” was not content neutral). A “consumer's concern for the free flow of commercial speech often may be far keener than his concern for urgent political dialogue.” Bates v. State Bar of Ariz., 433 U.S. 350, 364, 97 S.Ct. 2691, 53 L.Ed.2d 810 (1977). That reality has great relevance in the fields of medicine and public health, where information can save lives.

2

The State argues that heightened judicial scrutiny is unwarranted because its law is a mere commercial regulation. It is true that restrictions on protected expression are distinct from restrictions on economic activity or, more generally, on nonexpressive conduct. It is also true that the First Amendment does not prevent restrictions directed at commerce or conduct from imposing incidental burdens on speech. That is why a ban on race-based hiring may require employers to remove “‘White Applicants Only’” signs, Rumsfeld v. Forum for Academic and Institutional Rights, Inc., 547 U.S. 47, 62, 126 S.Ct. 1297, 164 L.Ed.2d 156 (2006); why “an ordinance against outdoor fires” might forbid “burning a flag,” R.A. V., supra, at 385, 112 S.Ct. 2538; and why antitrust laws can prohibit “agreements in restraint of trade,” Giboney v. Empire Storage & Ice Co., 336 U.S. 490, 502, 69 S.Ct. 684, 93 L.Ed. 834 (1949).

But § 4631(d) imposes more than an incidental burden on protected expression. Both on its face and in its practical operation, Vermont's law imposes a burden based on the content of speech and the identity of the speaker. See supra, at 2663 – 2665. While the burdened speech results from an economic motive, so too does a great deal of vital expression. See Bigelow v. Virginia, 421 U.S. 809, 818, 95 S.Ct. 2222, 44 L.Ed.2d 600 (1975); New York Times Co. v. Sullivan, 376 U.S. 254, 266, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964); see also United States v. United Foods, Inc., 533 U.S. 405, 410–411, 121 S.Ct. 2334, 150 L.Ed.2d 438 (2001) (applying “First Amendment scrutiny” where speech effects were not incidental and noting that “those whose business and livelihood depend in some way upon the product involved no doubt deem First Amendment protection to be just as important for them as it is for other discrete, little noticed groups”). Vermont's law does not simply have an effect on speech, but is directed at certain content and is aimed at particular speakers. The Constitution “does not enact Mr. Herbert Spencer's Social Statics.” Lochner v. New York, 198 U.S. 45, 75, 25 S.Ct. 539, 49 L.Ed. 937 (1905) (Holmes, J., dissenting). It does enact the First Amendment.

Vermont further argues that § 4631(d) regulates not speech but simply access to information. Prescriber-identifying information was generated in compliance with a legal mandate, the State argues, and so could be considered a kind of governmental information. This argument finds some support in Los Angeles Police Dept. v. United Reporting Publishing Corp., 528 U.S. 32, 120 S.Ct. 483, 145 L.Ed.2d 451 (1999), where the Court held that a plaintiff could not raise a facial challenge to a content-based restriction on access to government held information. Because no private party faced a threat of legal punishment, the Court characterized the law at issue as “nothing more than a governmental denial of access to information in its possession.” Id., at 40, 120 S.Ct. 483. Under those circumstances the special reasons for permitting First Amendment plaintiffs to invoke the rights of others did not apply. Id., at 38–39, 120 S.Ct. 483. Having found that the plaintiff could not raise a facial challenge, the Court remanded for consideration of an as-applied challenge. Id., at 41. United Reporting is thus a case about the availability of facial challenges. The Court did not rule on the merits of any First Amendment claim.

United Reporting is distinguishable in at least two respects. First, Vermont has imposed a restriction on access to information in private hands. This confronts the Court with a point reserved, and a situation not addressed, in United Reporting. Here, unlike in United Reporting, we do have “a case in which the government is prohibiting a speaker from conveying information that the speaker already possesses.” Id., at 40, 120 S.Ct. 483. The difference is significant. An individual's right to speak is implicated when information he or she possesses is subjected to “restraints on the way in which the information might be used” or disseminated. Seattle Times Co. v. Rhinehart, 467 U.S. 20, 32, 104 S.Ct. 2199, 81 L.Ed.2d 17 (1984); see also Bartnicki v. Vopper, 532 U.S. 514, 527, 121 S.Ct. 1753, 149 L.Ed.2d 787 (2001); Florida Star v. B.J. F., 491 U.S. 524, 109 S.Ct. 2603, 105 L.Ed.2d 443 (1989); New York Times Co. v. United States, 403 U.S. 713, 91 S.Ct. 2140, 29 L.Ed.2d 822 (1971) (per curiam). In Seattle Times, this Court applied heightened judicial scrutiny before sustaining a trial court order prohibiting a newspaper's disclosure of information it learned through coercive discovery. It is true that the respondents here, unlike the newspaper in Seattle Times, do not themselves possess information whose disclosure has been curtailed. That information, however, is in the hands of pharmacies and other private entities. There is no question that the “threat of prosecution ... hangs over their heads.” United Reporting, 528 U.S., at 41, 120 S.Ct. 483. For that reason United Reporting does not bar respondents' facial challenge.

United Reporting is distinguishable for a second and even more important reason. The plaintiff in United Reporting had neither “attempt [ed] to qualify” for access to the government's information nor presented an as-applied claim in this Court. Id., at 40, 120 S.Ct. 483. As a result, the Court assumed that the plaintiff had not suffered a personal First Amendment injury and could prevail only by invoking the rights of others through a facial challenge. Here, by contrast, the respondents claim—with good reason—that § 4631(d) burdens their own speech. That argument finds support in the separate writings in United Reporting, which were joined by eight Justices. All of those writings recognized that restrictions on the disclosure of government-held information can facilitate or burden the expression of potential recipients and so transgress the First Amendment. See id., at 42, 120 S.Ct. 483 (SCALIA, J., concurring) (suggesting that “a restriction upon access that allows access to the press ... but at the same time denies access to persons who wish to use the information for certain speech purposes, is in reality a restriction upon speech”); id., at 43, 120 S.Ct. 483 (GINSBURG, J., concurring) (noting that “the provision of [government] information is a kind of subsidy to people who wish to speak” about certain subjects, “and once a State decides to make such a benefit available to the public, there are no doubt limits to its freedom to decide how that benefit will be distributed”); id., at 46, 120 S.Ct. 483 (Stevens, J., dissenting) (concluding that, “because the State's discrimination is based on its desire to prevent the information from being used for constitutionally protected purposes, [i]t must assume the burden of justifying its conduct”). Vermont's law imposes a content- and speaker-based burden on respondents' own speech. That consideration provides a separate basis for distinguishing United Reporting and requires heightened judicial scrutiny.

The State also contends that heightened judicial scrutiny is unwarranted in this case because sales, transfer, and use of prescriber-identifying information are conduct, not speech. Consistent with that submission, the United States Court of Appeals for the First Circuit has characterized prescriber-identifying information as a mere “commodity” with no greater entitlement to First Amendment protection than “beef jerky.” Ayotte, 550 F.3d, at 52–53. In contrast the courts below concluded that a prohibition on the sale of prescriber-identifying information is a content-based rule akin to a ban on the sale of cookbooks, laboratory results, or train schedules. See 630 F.3d, at 271–272 (“The First Amendment protects even dry information, devoid of advocacy, political relevance, or artistic expression” (internal quotation marks and alteration omitted)); 631 F.Supp.2d, at 445 (“A restriction on disclosure is a regulation of speech, and the ‘sale’ of [information] is simply disclosure for profit”).

This Court has held that the creation and dissemination of information are speech within the meaning of the First Amendment. See, e.g., Bartnicki, supra, at 527, 121 S.Ct. 1753 (“[I]f the acts of ‘disclosing’ and ‘publishing’ information do not constitute speech, it is hard to imagine what does fall within that category, as distinct from the category of expressive conduct” (some internal quotation marks omitted)); Rubin v. Coors Brewing Co., 514 U.S. 476, 481, 115 S.Ct. 1585, 131 L.Ed.2d 532 (1995) ( “information on beer labels” is speech); Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749, 759, 105 S.Ct. 2939, 86 L.Ed.2d 593 (1985) (plurality opinion) (credit report is “speech”). Facts, after all, are the beginning point for much of the speech that is most essential to advance human knowledge and to conduct human affairs. There is thus a strong argument that prescriber-identifying information is speech for First Amendment purposes.

The State asks for an exception to the rule that information is speech, but there is no need to consider that request in this case. The State has imposed content- and speaker-based restrictions on the availability and use of prescriber-identifying information. So long as they do not engage in marketing, many speakers can obtain and use the information. But detailers cannot. Vermont's statute could be compared with a law prohibiting trade magazines from purchasing or using ink. Cf. Minneapolis Star, 460 U.S. 575, 103 S.Ct. 1365, 75 L.Ed.2d 295. Like that hypothetical law, § 4631(d) imposes a speaker- and content-based burden on protected expression, and that circumstance is sufficient to justify application of heightened scrutiny. As a consequence, this case can be resolved even assuming, as the State argues, that prescriber-identifying information is a mere commodity.

B

In the ordinary case it is all but dispositive to conclude that a law is content-based and, in practice, viewpoint-discriminatory. See R.A. V., 505 U.S., at 382, 112 S.Ct. 2538 (“Content-based regulations are presumptively invalid”); id., at 391–392, 112 S.Ct. 2538. The State argues that a different analysis applies here because, assuming § 4631(d) burdens speech at all, it at most burdens only commercial speech. As in previous cases, however, the outcome is the same whether a special commercial speech inquiry or a stricter form of judicial scrutiny is applied. See, e.g., Greater New Orleans Broadcasting Assn., Inc. v. United States, 527 U.S. 173, 184, 119 S.Ct. 1923, 144 L.Ed.2d 161 (1999). For the same reason there is no need to determine whether all speech hampered by § 4631(d) is commercial, as our cases have used that term. Cf. Board of Trustees of State Univ. of N.Y. v. Fox, 492 U.S. 469, 474, 109 S.Ct. 3028, 106 L.Ed.2d 388 (1989) (discussing whether “pure speech and commercial speech” were inextricably intertwined, so that “the entirety must ... be classified as noncommercial”).

Under a commercial speech inquiry, it is the State's burden to justify its content-based law as consistent with the First Amendment. Thompson v. Western States Medical Center, 535 U.S. 357, 373, 122 S.Ct. 1497, 152 L.Ed.2d 563 (2002). To sustain the targeted, content-based burden § 4631(d) imposes on protected expression, the State must show at least that the statute directly advances a substantial governmental interest and that the measure is drawn to achieve that interest. See Fox, supra, at 480–481, 109 S.Ct. 3028; Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n of N. Y., 447 U.S. 557, 566, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980). There must be a “fit between the legislature's ends and the means chosen to accomplish those ends.” Fox, supra, at 480, 109 S.Ct. 3028 (internal quotation marks omitted). As in other contexts, these standards ensure not only that the State's interests are proportional to the resulting burdens placed on speech but also that the law does not seek to suppress a disfavored message. See Turner Broadcasting, 512 U.S., at 662–663, 114 S.Ct. 2445.

The State's asserted justifications for § 4631(d) come under two general headings. First, the State contends that its law is necessary to protect medical privacy, including physician confidentiality, avoidance of harassment, and the integrity of the doctor-patient relationship. Second, the State argues that § 4631(d) is integral to the achievement of policy objectives—namely, improved public health and reduced healthcare costs. Neither justification withstands scrutiny.

1

Vermont argues that its physicians have a “reasonable expectation” that their prescriber-identifying information “will not be used for purposes other than ... filling and processing” prescriptions. See 2007 Vt. Laws No. 80, § 1(29). It may be assumed that, for many reasons, physicians have an interest in keeping their prescription decisions confidential. But § 4631(d) is not drawn to serve that interest. Under Vermont's law, pharmacies may share prescriber-identifying information with anyone for any reason save one: They must not allow the information to be used for marketing. Exceptions further allow pharmacies to sell prescriber-identifying information for certain purposes, including “health care research.” § 4631(e). And the measure permits insurers, researchers, journalists, the State itself, and others to use the information. See § 4631(d); cf. App. 370–372; id., at 211. All but conceding that § 4631(d) does not in itself advance confidentiality interests, the State suggests that other laws might impose separate bars on the disclosure of prescriber-identifying information. See Vt. Bd. of Pharmacy Admin. Rule 20.1. But the potential effectiveness of other measures cannot justify the distinctive set of prohibitions and sanctions imposed by § 4631(d).

Perhaps the State could have addressed physician confidentiality through “a more coherent policy.” Greater New Orleans Broadcasting, supra, at 195, 119 S.Ct. 1923; see also Discovery Network, 507 U.S., at 428, 113 S.Ct. 1505. For instance, the State might have advanced its asserted privacy interest by allowing the information's sale or disclosure in only a few narrow and well-justified circumstances. See, e.g., Health Insurance Portability and Accountability Act of 1996, 42 U.S.C. § 1320d–2; 45 CFR pts. 160 and 164 (2010). A statute of that type would present quite a different case than the one presented here. But the State did not enact a statute with that purpose or design. Instead, Vermont made prescriber-identifying information available to an almost limitless audience. The explicit structure of the statute allows the information to be studied and used by all but a narrow class of disfavored speakers. Given the information's widespread availability and many permissible uses, the State's asserted interest in physician confidentiality does not justify the burden that § 4631(d) places on protected expression.

The State points out that it allows doctors to forgo the advantages of § 4631(d) by consenting to the sale, disclosure, and use of their prescriber-identifying information. See § 4631(c)(1). It is true that private decisionmaking can avoid governmental partiality and thus insulate privacy measures from First Amendment challenge. See Rowan v. Post Office Dept., 397 U.S. 728, 90 S.Ct. 1484, 25 L.Ed.2d 736 (1970); cf. Bolger v. Youngs Drug Products Corp., 463 U.S. 60, 72, 103 S.Ct. 2875, 77 L.Ed.2d 469 (1983). But that principle is inapposite here. Vermont has given its doctors a contrived choice: Either consent, which will allow your prescriber-identifying information to be disseminated and used without constraint; or, withhold consent, which will allow your information to be used by those speakers whose message the State supports. Section 4631(d) may offer a limited degree of privacy, but only on terms favorable to the speech the State prefers. Cf. Rowan, supra, at 734, 737, 739, n. 6, 90 S.Ct. 1484 (sustaining a law that allowed private parties to make “unfettered,” “unlimited,” and “unreviewable” choices regarding their own privacy). This is not to say that all privacy measures must avoid content-based rules. Here, however, the State has conditioned privacy on acceptance of a content-based rule that is not drawn to serve the State's asserted interest. To obtain the limited privacy allowed by § 4631(d), Vermont physicians are forced to acquiesce in the State's goal of burdening disfavored speech by disfavored speakers.

Respondents suggest that a further defect of § 4631(d) lies in its presumption of applicability absent a physician's election to the contrary. Vermont's law might burden less speech if it came into operation only after an individual choice, but a revision to that effect would not necessarily save § 4631(d). Even reliance on a prior election would not suffice, for instance, if available categories of coverage by design favored speakers of one political persuasion over another. Rules that burden protected expression may not be sustained when the options provided by the State are too narrow to advance legitimate interests or too broad to protect speech. As already explained, § 4631(d) permits extensive use of prescriber-identifying information and so does not advance the State's asserted interest in physician confidentiality. The limited range of available privacy options instead reflects the State's impermissible purpose to burden disfavored speech. Vermont's argument accordingly fails, even if the availability and scope of private election might be relevant in other contexts, as when the statute's design is unrelated to any purpose to advance a preferred message.

The State also contends that § 4631(d) protects doctors from “harassing sales behaviors.” 2007 Vt. Laws No. 80, § 1(28). “Some doctors in Vermont are experiencing an undesired increase in the aggressiveness of pharmaceutical sales representatives,” the Vermont Legislature found, “and a few have reported that they felt coerced and harassed.” § 1(20). It is doubtful that concern for “a few” physicians who may have “felt coerced and harassed” by pharmaceutical marketers can sustain a broad content-based rule like § 4631(d). Many are those who must endure speech they do not like, but that is a necessary cost of freedom. See Erznoznik v. Jacksonville, 422 U.S. 205, 210–211, 95 S.Ct. 2268, 45 L.Ed.2d 125 (1975); Cohen v. California, 403 U.S. 15, 21, 91 S.Ct. 1780, 29 L.Ed.2d 284 (1971). In any event the State offers no explanation why remedies other than content-based rules would be inadequate. See 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 503, 116 S.Ct. 1495, 134 L.Ed.2d 711 (1996) (opinion of Stevens, J.). Physicians can, and often do, simply decline to meet with detailers, including detailers who use prescriber-identifying information. See, e.g., App. 180, 333–334. Doctors who wish to forgo detailing altogether are free to give “No Solicitation” or “No Detailing” instructions to their office managers or to receptionists at their places of work. Personal privacy even in one's own home receives “ample protection” from the “resident's unquestioned right to refuse to engage in conversation with unwelcome visitors.” Watchtower Bible & Tract Soc. of N. Y., Inc. v. Village of Stratton, 536 U.S. 150, 168, 122 S.Ct. 2080, 153 L.Ed.2d 205 (2002); see also Bolger, supra, at 72, 103 S.Ct. 2875. A physician's office is no more private and is entitled to no greater protection.

Vermont argues that detailers' use of prescriber-identifying information undermines the doctor-patient relationship by allowing detailers to influence treatment decisions. According to the State, “unwanted pressure occurs” when doctors learn that their prescription decisions are being “monitored” by detailers. 2007 Vt. Laws No. 80, § 1(27). Some physicians accuse detailers of “spying” or of engaging in “underhanded” conduct in order to “subvert” prescription decisions. App. 336, 380, 407–408; see also id., at 326–328. And Vermont claims that detailing makes people “anxious” about whether doctors have their patients' best interests at heart. Id., at 327. But the State does not explain why detailers' use of prescriber-identifying information is more likely to prompt these objections than many other uses permitted by § 4631(d). In any event, this asserted interest is contrary to basic First Amendment principles. Speech remains protected even when it may “stir people to action,” “move them to tears,” or “inflict great pain.” Snyder v. Phelps, 562 U.S. ––––, ––––, 131 S.Ct. 1207, 1220, 179 L.Ed.2d 172 (2011). The more benign and, many would say, beneficial speech of pharmaceutical marketing is also entitled to the protection of the First Amendment. If pharmaceutical marketing affects treatment decisions, it does so because doctors find it persuasive. Absent circumstances far from those presented here, the fear that speech might persuade provides no lawful basis for quieting it. Brandenburg v. Ohio, 395 U.S. 444, 447, 89 S.Ct. 1827, 23 L.Ed.2d 430 (1969) (per curiam).

2

The State contends that § 4631(d) advances important public policy goals by lowering the costs of medical services and promoting public health. If prescriber-identifying information were available for use by detailers, the State contends, then detailing would be effective in promoting brand-name drugs that are more expensive and less safe than generic alternatives. This logic is set out at length in the legislative findings accompanying § 4631(d). Yet at oral argument here, the State declined to acknowledge that § 4631(d)'s objective purpose and practical effect were to inhibit detailing and alter doctors' prescription decisions. See Tr. of Oral Arg. 5–6. The State's reluctance to embrace its own legislature's rationale reflects the vulnerability of its position.

While Vermont's stated policy goals may be proper, § 4631(d) does not advance them in a permissible way. As the Court of Appeals noted, the “state's own explanation of how” § 4631(d) “advances its interests cannot be said to be direct.” 630 F.3d, at 277. The State seeks to achieve its policy objectives through the indirect means of restraining certain speech by certain speakers—that is, by diminishing detailers' ability to influence prescription decisions. Those who seek to censor or burden free expression often assert that disfavored speech has adverse effects. But the “fear that people would make bad decisions if given truthful information” cannot justify content-based burdens on speech. Thompson, 535 U.S., at 374, 122 S.Ct. 1497; see also Virginia Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 769–770, 96 S.Ct. 1817, 48 L.Ed.2d 346 (1976). “The First Amendment directs us to be especially skeptical of regulations that seek to keep people in the dark for what the government perceives to be their own good.” 44 Liquormart, supra, at 503, 116 S.Ct. 1495 (opinion of Stevens, J.); see also Linmark Associates, Inc. v. Willingboro, 431 U.S. 85, 97, 97 S.Ct. 1614, 52 L.Ed.2d 155 (1977). These precepts apply with full force when the audience, in this case prescribing physicians, consists of “sophisticated and experienced” consumers. Edenfield, 507 U.S., at 775, 113 S.Ct. 1792.

As Vermont's legislative findings acknowledge, the premise of § 4631(d) is that the force of speech can justify the government's attempts to stifle it. Indeed the State defends the law by insisting that “pharmaceutical marketing has a strong influence on doctors' prescribing practices.” Brief for Petitioners 49–50. This reasoning is incompatible with the First Amendment. In an attempt to reverse a disfavored trend in public opinion, a State could not ban campaigning with slogans, picketing with signs, or marching during the daytime. Likewise the State may not seek to remove a popular but disfavored product from the marketplace by prohibiting truthful, nonmisleading advertisements that contain impressive endorsements or catchy jingles. That the State finds expression too persuasive does not permit it to quiet the speech or to burden its messengers.

The defect in Vermont's law is made clear by the fact that many listeners find detailing instructive. Indeed the record demonstrates that some Vermont doctors view targeted detailing based on prescriber-identifying information as “very helpful” because it allows detailers to shape their messages to each doctor's practice. App. 274; see also id., at 181, 218, 271–272. Even the United States, which appeared here in support of Vermont, took care to dispute the State's “unwarranted view that the dangers of [n]ew drugs outweigh their benefits to patients.” Brief for United States as Amicus Curiae 24, n. 4. There are divergent views regarding detailing and the prescription of brand-name drugs. Under the Constitution, resolution of that debate must result from free and uninhibited speech. As one Vermont physician put it: “We have a saying in medicine, information is power. And the more you know, or anyone knows, the better decisions can be made.” App. 279. There are similar sayings in law, including that “information is not in itself harmful, that people will perceive their own best interests if only they are well enough informed, and that the best means to that end is to open the channels of communication rather than to close them.” Virginia Bd., 425 U.S., at 770, 96 S.Ct. 1817. The choice “between the dangers of suppressing information, and the dangers of its misuse if it is freely available” is one that “the First Amendment makes for us.” Ibid.

Vermont may be displeased that detailers who use prescriber-identifying information are effective in promoting brand-name drugs. The State can express that view through its own speech. See Linmark, 431 U.S., at 97, 97 S.Ct. 1614; cf. § 4622(a)(1) (establishing a prescription drug educational program). But a State's failure to persuade does not allow it to hamstring the opposition. The State may not burden the speech of others in order to tilt public debate in a preferred direction. “The commercial marketplace, like other spheres of our social and cultural life, provides a forum where ideas and information flourish. Some of the ideas and information are vital, some of slight worth. But the general rule is that the speaker and the audience, not the government, assess the value of the information presented.” Edenfield, supra, at 767, 113 S.Ct. 1792.

It is true that content-based restrictions on protected expression are sometimes permissible, and that principle applies to commercial speech. Indeed the government's legitimate interest in protecting consumers from “commercial harms” explains “why commercial speech can be subject to greater governmental regulation than noncommercial speech.” Discovery Network, 507 U.S., at 426, 113 S.Ct. 1505; see also 44 Liquormart, 517 U.S., at 502, 116 S.Ct. 1495 (opinion of Stevens, J.). The Court has noted, for example, that “a State may choose to regulate price advertising in one industry but not in others, because the risk of fraud ... is in its view greater there.” R.A. V., 505 U.S., at 388–389, 112 S.Ct. 2538 (citing Virginia Bd., supra, at 771–772, 96 S.Ct. 1817). Here, however, Vermont has not shown that its law has a neutral justification.

The State nowhere contends that detailing is false or misleading within the meaning of this Court's First Amendment precedents. See Thompson, 535 U.S., at 373, 122 S.Ct. 1497. Nor does the State argue that the provision challenged here will prevent false or misleading speech. Cf. post, at 2677 – 2678 (BREYER, J., dissenting) (collecting regulations that the government might defend on this ground). The State's interest in burdening the speech of detailers instead turns on nothing more than a difference of opinion. See Bolger, 463 U.S., at 69, 103 S.Ct. 2875; Thompson, supra, at 376, 122 S.Ct. 1497.

* * *

The capacity of technology to find and publish personal information, including records required by the government, presents serious and unresolved issues with respect to personal privacy and the dignity it seeks to secure. In considering how to protect those interests, however, the State cannot engage in content-based discrimination to advance its own side of a debate.

If Vermont's statute provided that prescriber-identifying information could not be sold or disclosed except in narrow circumstances then the State might have a stronger position. Here, however, the State gives possessors of the information broad discretion and wide latitude in disclosing the information, while at the same time restricting the information's use by some speakers and for some purposes, even while the State itself can use the information to counter the speech it seeks to suppress. Privacy is a concept too integral to the person and a right too essential to freedom to allow its manipulation to support just those ideas the government prefers.

When it enacted § 4631(d), the Vermont Legislature found that the “marketplace for ideas on medicine safety and effectiveness is frequently one-sided in that brand-name companies invest in expensive pharmaceutical marketing campaigns to doctors.” 2007 Vt. Laws No. 80, § 1(4). “The goals of marketing programs,” the legislature said, “are often in conflict with the goals of the state.” § 1(3). The text of § 4631(d), associated legislative findings, and the record developed in the District Court establish that Vermont enacted its law for this end. The State has burdened a form of protected expression that it found too persuasive. At the same time, the State has left unburdened those speakers whose messages are in accord with its own views. This the State cannot do.

The judgment of the Court of Appeals is affirmed.

It is so ordered.

Justice BREYER, with whom Justice GINSBURG and Justice KAGAN join, dissenting.

The Vermont statute before us adversely affects expression in one, and only one, way. It deprives pharmaceutical and data-mining companies of data, collected pursuant to the government's regulatory mandate, that could help pharmaceutical companies create better sales messages. In my view, this effect on expression is inextricably related to a lawful governmental effort to regulate a commercial enterprise. The First Amendment does not require courts to apply a special “heightened” standard of review when reviewing such an effort. And, in any event, the statute meets the First Amendment standard this Court has previously applied when the government seeks to regulate commercial speech. For any or all of these reasons, the Court should uphold the statute as constitutional.

I

The Vermont statute before us says pharmacies and certain other entities

“shall not [1] sell ... regulated records containing prescriber-identifiable information, nor [2] permit the use of [such] records ... for marketing or promoting a prescription drug, unless the prescriber consents.” Vt. Stat. Ann., Tit. 18, § 4631(d) (Supp.2010).

It also says that

“[3] [p]harmaceutical manufacturers and pharmaceutical marketers shall not use prescriber-identifiable information for marketing or promoting a prescription drug unless the prescriber consents.” Ibid.

For the most part, I shall focus upon the first and second of these prohibitions. In Part IV, I shall explain why the third prohibition makes no difference to the result.

II

In Glickman v. Wileman Brothers & Elliott, Inc., 521 U.S. 457, 117 S.Ct. 2130, 138 L.Ed.2d 585 (1997), this Court considered the First Amendment's application to federal agricultural commodity marketing regulations that required growers of fruit to make compulsory contributions to pay for collective advertising. The Court reviewed the lawfulness of the regulation's negative impact on the growers' freedom voluntarily to choose their own commercial messages “under the standard appropriate for the review of economic regulation.” Id., at 469, 117 S.Ct. 2130.

In this case I would ask whether Vermont's regulatory provisions work harm to First Amendment interests that is disproportionate to their furtherance of legitimate regulatory objectives. And in doing so, I would give significant weight to legitimate commercial regulatory objectives—as this Court did in Glickman. The far stricter, specially “heightened” First Amendment standards that the majority would apply to this instance of commercial regulation are out of place here. Ante, at 2659, 2663, 2664, 2664 – 2665, 2666, 2667.

A

Because many, perhaps most, activities of human beings living together in communities take place through speech, and because speech-related risks and offsetting justifications differ depending upon context, this Court has distinguished for First Amendment purposes among different contexts in which speech takes place. See, e.g., Snyder v. Phelps, 562 U.S. ––––, –––– – ––––, 131 S.Ct. 1207, 1220, 179 L.Ed.2d 172 (2011). Thus, the First Amendment imposes tight constraints upon government efforts to restrict, e.g., “core” political speech, while imposing looser constraints when the government seeks to restrict, e.g., commercial speech, the speech of its own employees, or the regulation-related speech of a firm subject to a traditional regulatory program. Compare Boos v. Barry, 485 U.S. 312, 321, 108 S.Ct. 1157, 99 L.Ed.2d 333 (1988) (political speech), with Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n of N. Y., 447 U.S. 557, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980) (commercial speech), Pickering v. Board of Ed. of Township High School Dist. 205, Will Cty., 391 U.S. 563, 88 S.Ct. 1731, 20 L.Ed.2d 811 (1968) (government employees), and Glickman, supra (economic regulation).

These test-related distinctions reflect the constitutional importance of maintaining a free marketplace of ideas, a marketplace that provides access to “social, political, esthetic, moral, and other ideas and experiences.” Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 390, 89 S.Ct. 1794, 23 L.Ed.2d 371 (1969); see Abrams v. United States, 250 U.S. 616, 630, 40 S.Ct. 17, 63 L.Ed. 1173 (1919) (Holmes, J., dissenting). Without such a marketplace, the public could not freely choose a government pledged to implement policies that reflect the people's informed will.

At the same time, our cases make clear that the First Amendment offers considerably less protection to the maintenance of a free marketplace for goods and services. See Florida Bar v. Went For It, Inc., 515 U.S. 618, 623, 115 S.Ct. 2371, 132 L.Ed.2d 541 (1995) (“We have always been careful to distinguish commercial speech from speech at the First Amendment's core”). And they also reflect the democratic importance of permitting an elected government to implement through effective programs policy choices for which the people's elected representatives have voted.

Thus this Court has recognized that commercial speech including advertising has an “informational function” and is not “valueless in the marketplace of ideas.” Central Hudson, supra, at 563, 100 S.Ct. 2343; Bigelow v. Virginia, 421 U.S. 809, 826, 95 S.Ct. 2222, 44 L.Ed.2d 600 (1975). But at the same time it has applied a less than strict, “intermediate” First Amendment test when the government directly restricts commercial speech. Under that test, government laws and regulations may significantly restrict speech, as long as they also “directly advance” a “substantial” government interest that could not “be served as well by a more limited restriction.” Central Hudson, supra, at 564, 100 S.Ct. 2343. Moreover, the Court has found that “sales practices” that are “misleading, deceptive, or aggressive” lack the protection of even this “intermediate” standard. 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 501, 116 S.Ct. 1495, 134 L.Ed.2d 711 (1996) (opinion of Stevens, J.); see also Central Hudson, supra, at 563, 100 S.Ct. 2343; Virginia Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 772, 96 S.Ct. 1817, 48 L.Ed.2d 346 (1976). And the Court has emphasized the need, in applying an “intermediate” test, to maintain the

“ ‘commonsense’ distinction between speech proposing a commercial transaction, which occurs in an area traditionally subject to government regulation, and other varieties of speech.” Ohralik v. Ohio State Bar Assn., 436 U.S. 447, 455–456, 98 S.Ct. 1912, 56 L.Ed.2d 444 (1978) (quoting Virginia Bd. of Pharmacy, supra, at 771, n. 24, 96 S.Ct. 1817; emphasis added).

The Court has also normally applied a yet more lenient approach to ordinary commercial or regulatory legislation that affects speech in less direct ways. In doing so, the Court has taken account of the need in this area of law to defer significantly to legislative judgment—as the Court has done in cases involving the Commerce Clause or the Due Process Clause. See Glickman, supra, at 475–476, 117 S.Ct. 2130. “Our function” in such cases, Justice Brandeis said, “is only to determine the reasonableness of the legislature's belief in the existence of evils and in the effectiveness of the remedy provided.” New State Ice Co. v. Liebmann, 285 U.S. 262, 286–287, 52 S.Ct. 371, 76 L.Ed. 747 (1932) (dissenting opinion); Williamson v. Lee Optical of Okla., Inc., 348 U.S. 483, 488, 75 S.Ct. 461, 99 L.Ed. 563 (1955) ( “It is enough that there is an evil at hand for correction, and that it might be thought that the particular legislative measure was a rational way to correct it”); United States v. Carolene Products Co., 304 U.S. 144, 152, 58 S.Ct. 778, 82 L.Ed. 1234 (1938) (“[R]egulatory legislation affecting ordinary commercial transactions is not to be pronounced unconstitutional” if it rests “upon some rational basis within the knowledge and experience of the legislators”).

To apply a strict First Amendment standard virtually as a matter of course when a court reviews ordinary economic regulatory programs (even if that program has a modest impact upon a firm's ability to shape a commercial message) would work at cross-purposes with this more basic constitutional approach. Since ordinary regulatory programs can affect speech, particularly commercial speech, in myriad ways, to apply a “heightened” First Amendment standard of review whenever such a program burdens speech would transfer from legislatures to judges the primary power to weigh ends and to choose means, threatening to distort or undermine legitimate legislative objectives. See Glickman, 521 U.S., at 476, 117 S.Ct. 2130 (“Doubts concerning the policy judgments that underlie” a program requiring fruit growers to pay for advertising they disagree with does not “justify reliance on the First Amendment as a basis for reviewing economic regulations”). Cf. Johanns v. Livestock Marketing Assn., 544 U.S. 550, 560–562, 125 S.Ct. 2055, 161 L.Ed.2d 896 (2005) (applying less scrutiny when the compelled speech is made by the Government); United States v. United Foods, Inc., 533 U.S. 405, 411, 121 S.Ct. 2334, 150 L.Ed.2d 438 (2001) (applying greater scrutiny where compelled speech was not “ancillary to a more comprehensive program restricting marketing autonomy”). To apply a “heightened” standard of review in such cases as a matter of course would risk what then-Justice Rehnquist, dissenting in Central Hudson, described as a

“retur[n] to the bygone era of Lochner v. New York, 198 U.S. 45, 25 S.Ct. 539, 49 L.Ed. 937 (1905), in which it was common practice for this Court to strike down economic regulations adopted by a State based on the Court's own notions of the most appropriate means for the State to implement its considered policies.” 447 U.S., at 589, 100 S.Ct. 2343.

B

There are several reasons why the Court should review Vermont's law “under the standard appropriate for the review of economic regulation,” not “under a heightened standard appropriate for the review of First Amendment issues.” Glickman, 521 U.S., at 469, 117 S.Ct. 2130. For one thing, Vermont's statute neither forbids nor requires anyone to say anything, to engage in any form of symbolic speech, or to endorse any particular point of view, whether ideological or related to the sale of a product. Cf. id., at 469–470, 117 S.Ct. 2130. (And I here assume that Central Hudson might otherwise apply. See Part III, infra.)

For another thing, the same First Amendment standards that apply to Vermont here would apply to similar regulatory actions taken by other States or by the Federal Government acting, for example, through Food and Drug Administration (FDA) regulation. (And the Federal Government's ability to preempt state laws that interfere with existing or contemplated federal forms of regulation is here irrelevant.)

Further, the statute's requirements form part of a traditional, comprehensive regulatory regime. Cf. United Foods, supra, at 411, 121 S.Ct. 2334. The pharmaceutical drug industry has been heavily regulated at least since 1906. See Pure Food and Drugs Act, 34 Stat. 768. Longstanding statutes and regulations require pharmaceutical companies to engage in complex drug testing to ensure that their drugs are both “safe” and “effective.” 21 U.S.C. §§ 355(b)(1), 355(d). Only then can the drugs be marketed, at which point drug companies are subject to the FDA's exhaustive regulation of the content of drug labels and the manner in which drugs can be advertised and sold. § 352(f)(2); 21 CFR pts. 201–203 (2010).

Finally, Vermont's statute is directed toward information that exists only by virtue of government regulation. Under federal law, certain drugs can be dispensed only by a pharmacist operating under the orders of a medical practitioner. 21 U.S.C. § 353(b). Vermont regulates the qualifications, the fitness, and the practices of pharmacists themselves, and requires pharmacies to maintain a “patient record system” that, among other things, tracks who prescribed which drugs. Vt. Stat. Ann., Tit. 26, §§ 2041(a), 2022(14) (Supp.2010); Vt. Bd. of Pharmacy Admin. Rules (Pharmacy Rules) 9.1, 9.24(e) (2009). But for these regulations, pharmacies would have no way to know who had told customers to buy which drugs (as is the case when a doctor tells a patient to take a daily dose of aspirin).

Regulators will often find it necessary to create tailored restrictions on the use of information subject to their regulatory jurisdiction. A car dealership that obtains credit scores for customers who want car loans can be prohibited from using credit data to search for new customers. See 15 U.S.C. § 1681b (2006 ed. and Supp. III); cf. Trans Union Corp. v. FTC, 245 F.3d 809, reh'g denied, 267 F.3d 1138 (C.A.D.C.2001). Medical specialists who obtain medical records for their existing patients cannot purchase those records in order to identify new patients. See 45 CFR § 164.508(a)(3) (2010). Or, speaking hypothetically, a public utilities commission that directs local gas distributors to gather usage information for individual customers might permit the distributors to share the data with researchers (trying to lower energy costs) but forbid sales of the data to appliance manufacturers seeking to sell gas stoves.

Such regulatory actions are subject to judicial review, e.g., for compliance with applicable statutes. And they would normally be subject to review under the Administrative Procedure Act to make certain they are not “arbitrary, capricious, [or] an abuse of discretion.” 5 U.S.C. § 706(2)(A) (2006 ed.). In an appropriate case, such review might be informed by First Amendment considerations. But regulatory actions of the kind present here have not previously been thought to raise serious additional constitutional concerns under the First Amendment. But cf. Trans Union LLC v. FTC, 536 U.S. 915, 122 S.Ct. 2386, 153 L.Ed.2d 199 (2002) (KENNEDY, J., dissenting from denial of certiorari) (questioning ban on use of consumer credit reports for target marketing). The ease with which one can point to actual or hypothetical examples with potentially adverse speech-related effects at least roughly comparable to those at issue here indicates the danger of applying a “heightened” or “intermediate” standard of First Amendment review where typical regulatory actions affect commercial speech (say, by withholding information that a commercial speaker might use to shape the content of a message).

Thus, it is not surprising that, until today, this Court has never found that the First Amendment prohibits the government from restricting the use of information gathered pursuant to a regulatory mandate—whether the information rests in government files or has remained in the hands of the private firms that gathered it. But cf. ante, at 2664 – 2667. Nor has this Court ever previously applied any form of “heightened” scrutiny in any even roughly similar case. See Los Angeles Police Dept. v. United Reporting Publishing Corp., 528 U.S. 32, 120 S.Ct. 483, 145 L.Ed.2d 451 (1999) (no heightened scrutiny); compare Cincinnati v. Discovery Network, Inc., 507 U.S. 410, 426, 113 S.Ct. 1505, 123 L.Ed.2d 99 (1993) (“[C]ommercial speech can be subject to greater governmental regulation than noncommercial speech” because of the government's “interest in preventing commercial harms”), with ante, at 2664, 2668, 2672 (suggesting that Discovery Network supports heightened scrutiny when regulations target commercial speech).

C

The Court (suggesting a standard yet stricter than Central Hudson ) says that we must give content-based restrictions that burden speech “heightened” scrutiny. It adds that “[c]ommercial speech is no exception.” Ante, at 2664. And the Court then emphasizes that this is a case involving both “content-based” and “speaker-based” restrictions. See ante, at 2663, 2664, 2665, 2666, 2667, 2669, 2670, 2672.

But neither of these categories—“content-based” nor “speaker-based”—has ever before justified greater scrutiny when regulatory activity affects commercial speech. See, e.g., Capital Broadcasting Co. v. Mitchell, 333 F.Supp. 582 (DC 1971) (three-judge court), summarily aff'd sub nom. Capital Broadcasting Co. v. Acting Attorney General, 405 U.S. 1000, 92 S.Ct. 1289, 31 L.Ed.2d 472 (1972) (upholding ban on radio and television marketing of tobacco). And the absence of any such precedent is understandable.

Regulatory programs necessarily draw distinctions on the basis of content. Virginia Bd. of Pharmacy, 425 U.S., at 761, 762, 96 S.Ct. 1817 (“If there is a kind of commercial speech that lacks all First Amendment protection, ... it must be distinguished by its content”). Electricity regulators, for example, oversee company statements, pronouncements, and proposals, but only about electricity. See, e.g., Vt. Pub. Serv. Bd. Rules 3.100 (1983), 4.200 (1986), 5.200 (2004). The Federal Reserve Board regulates the content of statements, advertising, loan proposals, and interest rate disclosures, but only when made by financial institutions. See 12 CFR pts. 226, 230 (2011). And the FDA oversees the form and content of labeling, advertising, and sales proposals of drugs, but not of furniture. See 21 CFR pts. 201–203. Given the ubiquity of content-based regulatory categories, why should the “content-based” nature of typical regulation require courts (other things being equal) to grant legislators and regulators less deference? Cf. Board of Trustees of State Univ. of N.Y. v. Fox, 492 U.S. 469, 481, 109 S.Ct. 3028, 106 L.Ed.2d 388 (1989) (courts, in First Amendment area, should “provide the Legislative and Executive Branches needed leeway” when regulated industries are at issue).

Nor, in the context of a regulatory program, is it unusual for particular rules to be “speaker-based,” affecting only a class of entities, namely, the regulated firms. An energy regulator, for example, might require the manufacturers of home appliances to publicize ways to reduce energy consumption, while exempting producers of industrial equipment. See, e.g., 16 CFR pt. 305 (2011) (prescribing labeling requirements for certain home appliances); Nev. Admin. Code §§ 704.804, 704.808 (2010) (requiring utilities to provide consumers with information on conservation). Or a trade regulator might forbid a particular firm to make the true claim that its cosmetic product contains “cleansing grains that scrub away dirt and excess oil” unless it substantiates that claim with detailed backup testing, even though opponents of cosmetics use need not substantiate their claims. Morris, F.T.C. Orders Data to Back Ad Claims, N.Y. Times, Nov. 3, 1973, p. 32; Boys' Life, Oct. 1973, p. 64; see 36 Fed.Reg. 12058 (1971). Or the FDA might control in detail just what a pharmaceutical firm can, and cannot, tell potential purchasers about its products. Such a firm, for example, could not suggest to a potential purchaser (say, a doctor) that he or she might put a pharmaceutical drug to an “off label” use, even if the manufacturer, in good faith and with considerable evidence, believes the drug will help. All the while, a third party (say, a researcher) is free to tell the doctor not to use the drug for that purpose. See 21 CFR pt. 99; cf. Buckman Co. v. Plaintiffs' Legal Comm., 531 U.S. 341, 350–351, 121 S.Ct. 1012, 148 L.Ed.2d 854 (2001) (discussing effect of similar regulations in respect to medical devices); see also Proposed Rule, Revised Effectiveness Determination; Sunscreen Drug Products for Over–the–Counter Human Use, 76 Fed.Reg. 35672 (2011) (proposing to prohibit marketing of sunscreens with sun protection factor (SPF) of greater than 50 due to insufficient data “to indicate that there is additional clinical benefit”).

If the Court means to create constitutional barriers to regulatory rules that might affect the content of a commercial message, it has embarked upon an unprecedented task—a task that threatens significant judicial interference with widely accepted regulatory activity. Cf., e.g., 21 CFR pts. 201–203. Nor would it ease the task to limit its “heightened” scrutiny to regulations that only affect certain speakers. As the examples that I have set forth illustrate, many regulations affect only messages sent by a small class of regulated speakers, for example, electricity generators or natural gas pipelines.

The Court also uses the words “aimed” and “targeted” when describing the relation of the statute to drug manufacturers. Ante, at 2663, 2664, 2665, 2667. But, for the reasons just set forth, to require “heightened” scrutiny on this basis is to require its application early and often when the State seeks to regulate industry. Any statutory initiative stems from a legislative agenda. See, e.g., Message to Congress, May 24, 1937, H.R. Doc. No. 255, 75th Cong., 1st Sess., 4 (request from President Franklin Roosevelt for legislation to ease the plight of factory workers). Any administrative initiative stems from a regulatory agenda. See, e.g., Exec. Order No. 12866, 58 Fed.Reg. 51735 (1993) (specifying how to identify regulatory priorities and requiring agencies to prepare agendas). The related statutes, regulations, programs, and initiatives almost always reflect a point of view, for example, of the Congress and the administration that enacted them and ultimately the voters. And they often aim at, and target, particular firms that engage in practices about the merits of which the Government and the firms may disagree. Section 2 of the Sherman Act, 15 U.S.C. § 2, for example, which limits the truthful, nonmisleading speech of firms that, due to their market power, can affect the competitive landscape, is directly aimed at, and targeted at, monopolists.

In short, the case law in this area reflects the need to ensure that the First Amendment protects the “marketplace of ideas,” thereby facilitating the democratic creation of sound government policies without improperly hampering the ability of government to introduce an agenda, to implement its policies, and to favor them to the exclusion of contrary policies. To apply “heightened” scrutiny when the regulation of commercial activities (which often involve speech) is at issue is unnecessarily to undercut the latter constitutional goal. The majority's view of this case presents that risk.

Moreover, given the sheer quantity of regulatory initiatives that touch upon commercial messages, the Court's vision of its reviewing task threatens to return us to a happily bygone era when judges scrutinized legislation for its interference with economic liberty. History shows that the power was much abused and resulted in the constitutionalization of economic theories preferred by individual jurists. See Lochner v. New York, 198 U.S. 45, 75–76, 25 S.Ct. 539, 49 L.Ed. 937 (1905) (Holmes, J., dissenting). By inviting courts to scrutinize whether a State's legitimate regulatory interests can be achieved in less restrictive ways whenever they touch (even indirectly) upon commercial speech, today's majority risks repeating the mistakes of the past in a manner not anticipated by our precedents. See Central Hudson, 447 U.S., at 589, 100 S.Ct. 2343 (Rehnquist, J., dissenting); cf. Railroad Comm'n of Tex. v. Rowan & Nichols Oil Co., 310 U.S. 573, 580–581, 60 S.Ct. 1021, 84 L.Ed. 1368 (1940) (“A controversy like this always calls for fresh reminder that courts must not substitute their notions of expediency and fairness for those which have guided the agencies to whom the formulation and execution of policy have been entrusted”).

Nothing in Vermont's statute undermines the ability of persons opposing the State's policies to speak their mind or to pursue a different set of policy objectives through the democratic process. Whether Vermont's regulatory statute “targets” drug companies (as opposed to affecting them unintentionally) must be beside the First Amendment point.

This does not mean that economic regulation having some effect on speech is always lawful. Courts typically review the lawfulness of statutes for rationality and of regulations (if federal) to make certain they are not “arbitrary, capricious, [or] an abuse of discretion.” 5 U.S.C. § 706(2)(A). And our valuable free-speech tradition may play an important role in such review. But courts do not normally view these matters as requiring “heightened” First Amendment scrutiny—and particularly not the unforgiving brand of “intermediate” scrutiny employed by the majority. Because the imposition of “heightened” scrutiny in such instances would significantly change the legislative/judicial balance, in a way that would significantly weaken the legislature's authority to regulate commerce and industry, I would not apply a “heightened” First Amendment standard of review in this case.

III

Turning to the constitutional merits, I believe Vermont's statute survives application of Central Hudson 's “intermediate” commercial speech standard as well as any more limited “economic regulation” test.

A

The statute threatens only modest harm to commercial speech. I agree that it withholds from pharmaceutical companies information that would help those entities create a more effective selling message. But I cannot agree with the majority that the harm also involves unjustified discrimination in that it permits “pharmacies” to “share prescriber-identifying information with anyone for any reason” (but marketing). Ante, at 2668. Whatever the First Amendment relevance of such discrimination, there is no evidence that it exists in Vermont. The record contains no evidence that prescriber-identifying data is widely disseminated. See App. 248, 255. Cf. Burson v. Freeman, 504 U.S. 191, 207, 112 S.Ct. 1846, 119 L.Ed.2d 5 (1992) (plurality opinion) (“States adopt laws to address the problems that confront them. The First Amendment does not require States to regulate for problems that do not exist”); Bates v. State Bar of Ariz., 433 U.S. 350, 380, 97 S.Ct. 2691, 53 L.Ed.2d 810 (1977) (“[T]he justification for the application of overbreadth analysis applies weakly, if at all, in the ordinary commercial context”).

The absence of any such evidence likely reflects the presence of other legal rules that forbid widespread release of prescriber-identifying information. Vermont's Pharmacy Rules, for example, define “unprofessional conduct” to include “[d]ivulging or revealing to unauthorized persons patient or practitioner information or the nature of professional pharmacy services rendered.” Rule 20.1(i) (emphasis added); see also Reply Brief for Petitioners 21. The statute reinforces this prohibition where pharmaceutical marketing is at issue. And the exceptions that it creates are narrow and concern common and often essential uses of prescription data. See Vt. Stat. Ann., Tit. 18, § 4631(e)(1) (pharmacy reimbursement, patient care management, health care research); § 4631(e)(2) (drug dispensing); § 4631(e)(3) (communications between prescriber and pharmacy); § 4631(e)(4) (information to patients); §§ 4631(e)(5)-(6) (as otherwise provided by state or federal law). Cf. Trans Union Corp., 245 F.3d, at 819 (rejecting an underinclusiveness challenge because an exception to the Fair Credit Reporting Act concerned “ ‘exactly the sort of thing the Act seeks to promote’ ”) (quoting Trans Union Corp. v. FTC, 81 F.3d 228, 234 (C.A.D.C.1996)).

Nor can the majority find record support for its claim that the statute helps “favored” speech and imposes a “burde[n]” upon “disfavored speech by disfavored speakers.” Ante, at 2669. The Court apparently means that the statute (1) prevents pharmaceutical companies from creating individualized messages that would help them sell their drugs more effectively, but (2) permits “counterdetailing” programs, which often promote generic drugs, to create such messages using prescriber-identifying data. I am willing to assume, for argument's sake, that this consequence would significantly increase the statute's negative impact upon commercial speech. But cf. 21 CFR §§ 202.1(e)(1), 202.1(e)(5)(ii) (FDA's “fair balance” requirement); App. 193 (no similar FDA requirement for nondrug manufacturers). The record before us, however, contains no evidentiary basis for the conclusion that any such individualized counterdetailing is widespread, or exists at all, in Vermont.

The majority points out, ante, at 2660 – 2661, that Act 80, of which § 4631 was a part, also created an “evidence-based prescription drug education program,” in which the Vermont Department of Health, the Department of Vermont Health Access, and the University of Vermont, among others, work together “to provide information and education on the therapeutic and cost-effective utilization of prescription drugs” to health professionals responsible for prescribing and dispensing prescription drugs, Vt. Stat. Ann., Tit. 18, § 4622(a)(1). See generally §§ 4621–4622. But that program does not make use of prescriber-identifying data. Reply Brief for Petitioners 11.

The majority cites testimony by two witnesses in support of its statement that “States themselves may supply the prescriber-identifying information used in [counterdetailing] programs.” Ante, at 2661. One witness explained that academic detailers in Pennsylvania work with state health officials to identify physicians serving patients whose health care is likewise state provided. App. 375. The other, an IMS Health officer, observed that Vermont has its own multipayer database containing prescriber-identifying data, which could be used to talk to doctors about their prescription patterns and the lower costs associated with generics. Id., at 313. But nothing in the record indicates that any “counterdetailing” of this kind has ever taken place in fact in Vermont. State-sponsored health care professionals sometimes meet with small groups of doctors to discuss best practices and generic drugs generally. See University of Vermont, College of Medicine, Office of Primary Care, Vermont Academic Detailing Program (July 2010), http:// med. uvm. edu/ ahec/downloads/VTAD_overview_2010.07.08.pdf (all Internet materials as visited June 21, 2011, and available in Clerk of Court's case file). Nothing in Vermont's statute prohibits brand-name manufacturers from undertaking a similar effort.

The upshot is that the only commercial-speech-related harm that the record shows this statute to have brought about is the one I have previously described: The withholding of information collected through a regulatory program, thereby preventing companies from shaping a commercial message they believe maximally effective. The absence of precedent suggesting that this kind of harm is serious reinforces the conclusion that the harm here is modest at most.

B

The legitimate state interests that the statute serves are “substantial.” Central Hudson, 447 U.S., at 564, 100 S.Ct. 2343. Vermont enacted its statute

“to advance the state's interest in protecting the public health of Vermonters, protecting the privacy of prescribers and prescribing information, and to ensure costs are contained in the private health care sector, as well as for state purchasers of prescription drugs, through the promotion of less costly drugs and ensuring prescribers receive unbiased information.” § 4631(a).

These objectives are important. And the interests they embody all are “neutral” in respect to speech. Cf. ante, at 2672.

The protection of public health falls within the traditional scope of a State's police powers. Hillsborough County v. Automated Medical Laboratories, Inc., 471 U.S. 707, 719, 105 S.Ct. 2371, 85 L.Ed.2d 714 (1985). The fact that the Court normally exempts the regulation of “misleading” and “deceptive” information even from the rigors of its “intermediate” commercial speech scrutiny testifies to the importance of securing “unbiased information,” see 44 Liquormart, 517 U.S., at 501, 116 S.Ct. 1495 (opinion of Stevens, J.); Central Hudson, supra, at 563, 100 S.Ct. 2343, as does the fact that the FDA sets forth as a federal regulatory goal the need to ensure a “fair balance” of information about marketed drugs, 21 CFR §§ 202.1(e)(1), 202.1(e)(5)(ii). As major payers in the health care system, health care spending is also of crucial state interest. And this Court has affirmed the importance of maintaining “privacy” as an important public policy goal—even in respect to information already disclosed to the public for particular purposes (but not others). See Department of Justice v. Reporters Comm. for Freedom of Press, 489 U.S. 749, 762–771, 109 S.Ct. 1468, 103 L.Ed.2d 774 (1989); see also Solove, A Taxonomy of Privacy, 154 U. Pa. L.Rev. 477, 520–522 (2006); cf. NASA v. Nelson, 562 U.S. ––––, ––––-––––, 131 S.Ct. 746, 755–56, 178 L.Ed.2d 667 (2011) (discussing privacy interests in nondisclosure).

At the same time, the record evidence is sufficient to permit a legislature to conclude that the statute “directly advances” each of these objectives. The statute helps to focus sales discussions on an individual drug's safety, effectiveness, and cost, perhaps compared to other drugs (including generics). These drug-related facts have everything to do with general information that drug manufacturers likely possess. They have little, if anything, to do with the name or prior prescription practices of the particular doctor to whom a detailer is speaking. Shaping a detailing message based on an individual doctor's prior prescription habits may help sell more of a particular manufacturer's particular drugs. But it does so by diverting attention from scientific research about a drug's safety and effectiveness, as well as its cost. This diversion comes at the expense of public health and the State's fiscal interests.

Vermont compiled a substantial legislative record to corroborate this line of reasoning. See Testimony of Sean Flynn (Apr. 11, 2007), App. in No. 09–1913–cv(L) etc. (CA2), p. A–1156 (hereinafter CA2 App.) (use of data mining helps drug companies “to cover up information that is not in the best of light of their drug and to highlight information that makes them look good”); Volker & Outterson, New Legislative Trends Threaten the Way Health Information Companies Operate, Pharmaceutical Pricing & Reimbursement 2007, id., at A–4235 (one former detailer considered prescriber-identifying data the “ ‘greatest tool in planning our approach to manipulating doctors' ”) (quoting Whitney, Big (Brother) Pharma: How Drug Reps Know Which Doctors to Target, New Republic, Aug. 29, 2006, http:// tnr. com/ article/ 84056/ health- care- eli- lilly- pfizer- ama); Testimony of Paul Harrington (May 3, 2007), id., at A–1437 (describing data mining practices as “secret and manipulative activities by the marketers”); Testimony of Julie Brill (May 3, 2007), id., at A–1445 (restrictions on data mining “ensur[e] that the FDA's requirement of doctors receiving fair and balanced information actually occurs”); Written Statement of Jerry Avorn & Aaron Kesselheim, id., at A–4310 (citing studies that “indicate that more physician-specific detailing will lead to more prescriptions of brand-name agents, often with no additional patient benefit but at much higher cost to patients and to state-based insurance programs, which will continue to drive up the cost of health care”); id., at 4311 (“Making it more difficult for manufacturers to tailor their marketing strategies to the prescribing histories of individual physicians would actually encourage detailers to present physicians with a more neutral description of the product”); see also Record in No. 1:07–cv–00188–jgm (D Vt.), Doc. 414, pp. 53–57, 64 (hereinafter Doc. 414) (summarizing record evidence).

These conclusions required the legislature to make judgments about whether and how to ameliorate these problems. And it is the job of regulatory agencies and legislatures to make just these kinds of judgments. Vermont's attempts to ensure a “fair balance” of information is no different from the FDA's similar requirement, see 21 CFR §§ 202.1(e)(1), 202.1(e)(5)(ii). No one has yet suggested that substantial portions of federal drug regulation are unconstitutional. Why then should we treat Vermont's law differently?

The record also adequately supports the State's privacy objective. Regulatory rules in Vermont make clear that the confidentiality of an individual doctor's prescribing practices remains the norm. See, e.g., Pharmacy Rule 8.7(c) ( “Prescription and other patient health care information shall be secure from access by the public, and the information shall be kept confidential”); Pharmacy Rule 20.1(i) (forbidding disclosure of patient or prescriber information to “unauthorized persons” without consent). Exceptions to this norm are comparatively few. See, e.g., ibid. (identifying “authorized persons”); Vt. Stat. Ann., Tit. 18, § 4631(e); App. 248, 255 (indicating that prescriber-identifying data is not widely disseminated). There is no indication that the State of Vermont, or others in the State, makes use of this information for counterdetailing efforts. See supra, at 2680.

Pharmaceutical manufacturers and the data miners who sell information to those manufacturers would like to create (and did create) an additional exception, which means additional circulation of otherwise largely confidential information. Vermont's statute closes that door. At the same time, the statute permits doctors who wish to permit use of their prescribing practices to do so. §§ 4631(c)-(d). For purposes of Central Hudson, this would seem sufficiently to show that the statute serves a meaningful interest in increasing the protection given to prescriber privacy. See Fox, 492 U.S., at 480, 109 S.Ct. 3028 (in commercial speech area, First Amendment requires “a fit that is not necessarily perfect, but reasonable; that represents not necessarily the single best disposition but one whose scope is in proportion to the interest served” (internal quotation marks omitted)); see also United States v. Edge Broadcasting Co., 509 U.S. 418, 434, 113 S.Ct. 2696, 125 L.Ed.2d 345 (1993) (The First Amendment does not “require that the Government make progress on every front before it can make progress on any front”); Burson, 504 U.S., at 207, 112 S.Ct. 1846 (plurality opinion).

C

The majority cannot point to any adequately supported, similarly effective “more limited restriction.” Central Hudson, 447 U.S., at 564, 100 S.Ct. 2343. It says that doctors “can, and often do, simply decline to meet with detailers.” Ante, at 2669. This fact, while true, is beside the point. Closing the office door entirely has no similar tendency to lower costs (by focusing greater attention upon the comparative advantages and disadvantages of generic drug alternatives). And it would not protect the confidentiality of information already released to, say, data miners. In any event, physicians are unlikely to turn detailers away at the door, for those detailers, whether delivering a balanced or imbalanced message, are nonetheless providers of much useful information. See Manchanda & Honka, The Effects and Role of Direct–to–Physician Marketing in the Pharmaceutical Industry: An Integrative Review, 5 Yale J. Health Pol'y L. & Ethics 785, 793–797, 815–816 (2005); Ziegler, Lew, & Singer, The Accuracy of Drug Information from Pharmaceutical Sales Representatives, 273 JAMA 1296 (1995). Forcing doctors to choose between targeted detailing and no detailing at all could therefore jeopardize the State's interest in promoting public health.

The majority also suggests that if the “statute provided that prescriber-identifying information could not be sold or disclosed except in narrow circumstances then the State might have a stronger position.” Ante, at 2672 – 2673; see also ante, at 2668. But the disclosure-permitting exceptions here are quite narrow, and they serve useful, indeed essential purposes. See supra, at 2680. Compare Vt. Stat. Ann., Tit. 18, § 4631(e) with note following 42 U.S.C. § 1320d–2, p. 1190, and 45 CFR § 164.512 (uses and disclosures not requiring consent under the Health Insurance Portability and Accountability Act of 1996). Regardless, this alternative is not “a more limited restriction,” Central Hudson, supra, at 564, 100 S.Ct. 2343 (emphasis added), for it would impose a greater, not a lesser, burden upon the dissemination of information.

Respondents' alternatives are no more helpful. Respondents suggest that “Vermont can simply inform physicians that pharmaceutical companies ... use prescription history information to communicate with doctors.” Brief for Respondent Pharmaceutical Research and Manufacturers of America 48. But how would that help serve the State's basic purposes? It would not create the “fair balance” of information in pharmaceutical marketing that the State, like the FDA, seeks. Cf. Reno v. American Civil Liberties Union, 521 U.S. 844, 874, 117 S.Ct. 2329, 138 L.Ed.2d 874 (1997) (alternative must be “at least as effective in achieving the legitimate purpose that the statute was enacted to serve”). Respondents also suggest policies requiring use of generic drugs or educating doctors about their benefits. Brief for Respondent Pharmaceutical Research and Manufacturers of America 54–55. Such programs have been in effect for some time in Vermont or other States, without indication that they have prevented the imbalanced sales tactics at which Vermont's statute takes aim. See, e.g., Written Statement of Jerry Avorn & Aaron Kesselheim, CA2 App. 4310; Doc. 414, at 60–61. And in any event, such laws do not help protect prescriber privacy.

Vermont has thus developed a record that sufficiently shows that its statute meaningfully furthers substantial state interests. Neither the majority nor respondents suggests any equally effective “more limited” restriction. And the First Amendment harm that Vermont's statute works is, at most, modest. I consequently conclude that, even if we apply an “intermediate” test such as that in Central Hudson, this statute is constitutional.

IV

What about the statute's third restriction, providing that “[p]harmaceutical manufacturers and pharmaceutical marketers” may not “use prescriber-identifiable information for marketing or promoting a prescription drug unless the prescriber consents”? Vt. Stat. Ann., Tit. 18, § 4631(d) (emphasis added). In principle, I should not reach this question. That is because respondent pharmaceutical manufacturers, marketers, and data miners seek a declaratory judgment and injunction prohibiting the enforcement of this statute. See 28 U.S.C. § 2201; App. 49–128. And they have neither shown nor claimed that they could obtain significant amounts of “prescriber-identifiable information” if the first two prohibitions are valid. If, as I believe, the first two statutory prohibitions (related to selling and disclosing the information) are valid, then the dispute about the validity of the third provision is not “ ‘real and substantial’ ” or “ ‘definite and concrete.’ ” MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127, 127 S.Ct. 764, 166 L.Ed.2d 604 (2007) (quoting Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240–241, 57 S.Ct. 461, 81 L.Ed. 617 (1937)) (Article III does not permit courts to entertain such disputes).

The Court, however, strikes down all three provisions, and so I add that I disagree with the majority as to the constitutionality of the third restriction as well—basically for the reasons I have already set out. The prohibition against pharmaceutical firms using this prescriber-identifying information works no more than modest First Amendment harm; the prohibition is justified by the need to ensure unbiased sales presentations, prevent unnecessarily high drug costs, and protect the privacy of prescribing physicians. There is no obvious equally effective, more limited alternative.

V

In sum, I believe that the statute before us satisfies the “intermediate” standards this Court has applied to restrictions on commercial speech. A fortiori it satisfies less demanding standards that are more appropriately applied in this kind of commercial regulatory case—a case where the government seeks typical regulatory ends (lower drug prices, more balanced sales messages) through the use of ordinary regulatory means (limiting the commercial use of data gathered pursuant to a regulatory mandate). The speech-related consequences here are indirect, incidental, and entirely commercial. See supra, at 2675 – 2677.

The Court reaches its conclusion through the use of important First Amendment categories—“content-based,” “speaker-based,” and “neutral”—but without taking full account of the regulatory context, the nature of the speech effects, the values these First Amendment categories seek to promote, and prior precedent. See supra, at 2673 – 2676, 2677 – 2679, 2681. At best the Court opens a Pandora's Box of First Amendment challenges to many ordinary regulatory practices that may only incidentally affect a commercial message. See, e.g., supra, at 2676 – 2677, 2677 – 2678. At worst, it reawakens Lochner 's pre-New Deal threat of substituting judicial for democratic decisionmaking where ordinary economic regulation is at issue. See Central Hudson, 447 U.S., at 589, 100 S.Ct. 2343 (Rehnquist, J., dissenting).

Regardless, whether we apply an ordinary commercial speech standard or a less demanding standard, I believe Vermont's law is consistent with the First Amendment. And with respect, I dissent.

OPINION OF ADVOCATE GENERAL JÄÄSKINEN

delivered on 25 June 2013 (1)

Case C‑131/12

Google Spain SL

Google Inc.

v

Agencia Española de Protección de Datos (AEPD)

Mario Costeja González

I – Introduction

1. In 1890, in their seminal Harvard Law Review article ‘The Right to Privacy’, Samuel D. Warren and Louis D. Brandeis lamented that ‘[r]ecent inventions and business methods’ such as ‘[i]nstantenous photographs and newspaper enterprise have invaded the sacred precincts of private and domestic life’. In the same article they referred ‘to the next step which must be taken for the protection of the person.’

2. Nowadays, protecting personal data and privacy of individuals has become increasingly important. Any content including personal data, be it in the form of texts or audiovisual materials, can instantly and permanently be made accessible in digital format world wide. The internet has revolutionised our lives by removing technical and institutional barriers to dissemination and reception of information, and has created a platform for various information society services. These benefit consumers, undertakings and society at large. This has given rise to unprecedented circumstances in which a balance has to be struck between various fundamental rights, such as freedom of expression, freedom of information and freedom to conduct a business, on one hand, and protection of personal data and the privacy of individuals, on the other.

3. In the context of the internet, three situations should be distinguished that relate to personal data. The first is the publishing of elements of personal data on any web page on the internet (the ‘source web page’). The second is the case where an internet search engine provides search results that direct the internet user to the source web page. The third, more invisible operation occurs when an internet user performs a search using an internet search engine, and some of his personal data, such as the IP address from which the search is made, are automatically transferred to the internet search engine service provider.

4. As regards the first situation, the Court has already held in Lindqvist that Directive 95/46/EC (hereinafter ‘the Data Protection Directive’ or ‘the Directive’) applies to this situation. The third situation is not at issue in the present proceedings, and there are ongoing administrative procedures initiated by national data protection authorities to clarify the scope of application of the EU data protection rules to the users of internet search engines.

5. The order for reference in this case relates to the second situation. It has been made by the Audiencia Nacional (the National High Court of Spain) in the course of proceedings between Google Spain SL and Google Inc. (individually or jointly ‘Google’) on the one side and the Agencia Española de Protección de Datos (‘the AEPD’) and Mr Mario Costeja González (‘the data subject’) on the other side. The proceedings concern the application of the Data Protection Directive to an internet search engine that Google operates as service provider. In the national proceedings it is undisputed that some personal data regarding the data subject have been published by a Spanish newspaper, in two of its printed issues in 1998, both of which were republished at a later date in its electronic version made available on the internet. The data subject now thinks that this information should no longer be displayed in the search results presented by the internet search engine operated by Google, when a search is made of his name and surnames.

6. The questions referred to the Court fall into three categories. The first group of questions relates to territorial scope of application of EU data protection rules. The second group addresses the issues relating to the legal position of an internet search engine service provider in the light of the Directive, especially in terms of its scope of application ratione materiae. Finally, the third question concerns the so-called right to be forgotten and the issue of whether data subjects can request that some or all search results concerning them are no longer accessible through search engine. All of these questions, which also raise important points of fundamental rights protection, are new to the Court.

7. This appears to be the first case in which the Court is called upon to interpret the Directive in the context internet search engines; an issue that is seemingly topical for national data protection authorities and Member State courts. Indeed, the referring court has indiciated that it has several similar cases pending before it.

8. The most important previous case of this Court in which data protection issues and the internet have been addressed was Lindqvist. However, in that case internet search engines were not involved. The Directive itself has been interpreted in a number of cases. Of these Österreichischer Rundfunk, Satakunnan Markkinapörssi and Satamedia and Volker und Markus Schecke and Eifert are particularily relevant. The role of internet search engines in relation to intellectual property rights and jurisdiction of courts has also been addressed in the case-law of the Court in Google France and Google, Portakabin, L’Oréal and Others, Interflora and Interflora British Unit and Wintersteiger.

9. Since the adoption of the Directive, a provision on protection of personal data has been included in Article 16 TFEU and in Article 8 of the Charter of Fundamental Rights of the European Union (‘the Charter’). Moreover, in 2012, the Commission made a Proposal for a General Data Protection Regulation, with a view to replacing the Directive. However, the dispute to hand has to be decided on the basis of existing law.

10. The present preliminary reference is affected by the fact that when the Commission proposal for the Directive was made in 1990, the internet in the present sense of the World Wide Web, did not exist, and nor were there any search engines. At the time the Directive was adopted in 1995 the internet had barely begun and the first rudimentary search engines started to appear, but nobody could foresee how profoundly it would revolutionise the world. Nowadays almost anyone with a smartphone or a computer could be considered to be engaged in activities on the internet to which the Directive could potentially apply.

II – Legal framework

A – The Data Protection Directive

11. Article 1 of the Directive obliges Member States to protect the fundamental rights and freedoms of natural persons, and in particular their right to privacy with respect to the processing of personal data, in accordance with the provisions of the Directive.

12. Article 2 defines, inter alia, the notions of ‘personal data’ and ‘data subject’, ‘processing of personal data’, ‘controller’ and ‘third party’.

13. According to Article 3, the Directive is to apply to the processing of personal data wholly or partly by automatic means, and in certain situations to the processing otherwise than by automatic means.

14. Pursuant to Article 4(1), a Member State is to apply the national provisions it adopts pursuant to the Directive to the processing of personal data where there is an establishment of the controller on its territory, or in cases where the controller is not established in the Union, if he makes use of equipment situated on the territory of the Member State for the purposes of processing personal data.

15. Article 12 of the Directive provides data subjects ‘a right of access’ to personal data processed by the controller and Article 14 a ‘right to object’ to the processing of personal data in certain situations.

16. Article 29 of the Directive sets up an independent advisory working party consisting, among others, of data protection authorities of the Member States (‘the Article 29 Working Party’).

B – National law

17. Organic Law No 15/1999 on data protection has transposed the Directive in Spanish law.

III – Facts and questions referred for a preliminary ruling

18. In early 1998, a newspaper widely circulated in Spain published in its printed edition two announcements concerning a real-estate auction connected with attachment proceedings prompted by social security debts. The data subject was mentioned as the owner. At a later date an electronic version of the newspaper was made available online by its publisher.

19. In November 2009, the data subject contacted the publisher of the newspaper asserting that, when his name and surnames were entered in the Google search engine, a reference appeared to pages of the newspaper with the announcements concerning the real-estate auction. He argued that the attachment proceedings relating to his social security debts had been concluded and resolved many years earlier and were now of no relevance. The publisher replied to him saying that erasure of his data was not appropriate, given that the publication was effected by order of the Ministry of Labour and Social Affairs.

20. In February 2010, the data subject contacted Google Spain and requested that the search results should not show any links to the newspaper when his name and surnames were entered in the Google search engine. Google Spain forwarded the request to Google Inc., whose registered office is in California, United States, taking the view that the latter was the undertaking providing the internet search service.

21. Thereafter the data subject lodged a complaint with the AEPD asking that the publisher be required to remove or rectify the publication so that his personal data did not appear or else should use the tools made available by search engines to protect his personal data. He also asserted that Google Spain or Google Inc. should be required to remove or conceal his data so that they ceased to be included in the search results and reveal links to the newspaper.

22. By a decision on 30 July 2010, the Director of the AEPD upheld the complaint made by the data subject against Google Spain and Google Inc., calling on them to take the measures necessary to withdraw the data from their index and to render future access to them impossible but rejected the complaint against the publisher. This was so because publication of the data in the press was legally justified. Google Spain and Google Inc. have brought two appeals before the referring court, seeking annulment of the AEPD decision.

23. The national court has stayed the proceedings and referred the following questions to the Court for a preliminary ruling:

‘1. With regard to the territorial application of [the Directive] and, consequently, of the Spanish data protection legislation:

1.1. must it be considered that an “establishment”, within the meaning of Article 4(1)(a) of [the Directive], exists when any one or more of the following circumstances arise:

– when the undertaking providing the search engine sets up in a Member State an office or subsidiary for the purpose of promoting and selling advertising space on the search engine, which orientates its activity towards the inhabitants of that State,

or

– when the parent company designates a subsidiary located in that Member State as its representative and controller for two specific filing systems which relate to the data of customers who have contracted for advertising with that undertaking,

or

– when the office or subsidiary established in a Member State forwards to the parent company, located outside the European Union, requests and requirements addressed to it both by data subjects and by the authorities with responsibility for ensuring observation of the right to data protection, even where such collaboration is engaged in voluntarily?

1.2. Must Article 4(1)(c) of [the Directive] be interpreted as meaning that there is “use of equipment … situated on the territory of that Member State”

when a search engine uses crawlers or robots to locate and index information contained in web pages located on servers in that Member State

or

when it uses a domain name pertaining to a Member State and arranges for searches and the results thereof to be based on the language of that Member State?

1.3. Is it possible to regard as a use of equipment, in the terms of Article 4(1)(c) of [the Directive], the temporary storage of the information indexed by internet search engines? If the answer to that question is affirmative, can it be considered that that connecting factor is present when the undertaking refuses to disclose the place where it stores those indexes, invoking reasons of competition?

1.4. Regardless of the answers to the foregoing questions and particularly in the event that the [Court] considers that the connecting factors referred to in Article 4 of the Directive are not present:

must [the Directive] be applied, in the light of Article 8 of the [Charter], in the Member State where the centre of gravity of the conflict is located and more effective protection of the rights of European Union citizens is possible?

2. As regards the activity of search engines as providers of content in relation to [the Directive]:

2.1. in relation to the activity of the search engine of the ‘Google’ undertaking on the internet, as a provider of content, consisting in locating information published or included on the net by third parties, indexing it automatically, storing it temporarily and finally making it available to internet users according to a particular order of preference, when that information contains personal data of third parties,

must an activity like the one described be interpreted as falling within the concept of “processing of … data” used in Article 2(b) of [the Directive]?

2.2. If the answer to the foregoing question is affirmative, and once again in relation to an activity like the one described: must Article 2(d) of the Directive be interpreted as meaning that the undertaking managing the “Google” search engine is to be regarded as the ‘controller’ of the personal data contained in the web pages that it indexes?

2.3. In the event that the answer to the foregoing question is affirmative, may the national data-control authority (in this case the [AEPD]), protecting the rights embodied in Articles 12(b) and 14(a) of [the Directive], directly impose on the search engine of the “Google” undertaking a requirement that it withdraw from its indexes an item of information published by third parties, without addressing itself in advance or simultaneously to the owner of the web page on which that information is located?

2.4. In the event that the answer to the foregoing question is affirmative, would the obligation of search engines to protect those rights be excluded when the information that contains the personal data has been lawfully published by third parties and is kept on the web page from which it originates?

3. Regarding the scope of the right of erasure and/or the right to object, in relation to the “derecho al olvido” (the “right to be forgotten”), the following question is asked:

3.1. must it be considered that the rights to erasure and blocking of data, provided for in Article 12(b), and the right to object, provided for by Article 14(a), of [the Directive], extend to enabling the data subject to address himself to search engines in order to prevent indexing of the information relating to him personally, published on third parties’ web pages, invoking his wish that such information should not be known to internet users when he considers that it might be prejudicial to him or he wishes it to be consigned to oblivion, even though the information in question has been lawfully published by third parties?’

24. Written observations were submitted by Google, the Governments of Spain, Greece, Italy, Austria and Poland, and European Commission. With the exception of the Polish Government, all of them attended the hearing on 26 February 2013, as did the representative of the data subject, and presented oral argument.

IV – Preliminary observations

A – Introductory remarks

25. The key issue in the present case is how the role of internet search engine service providers should be interpreted in the light of the existing EU legal instruments relating to data protection, and in particular the Directive. Therefore it is instructive to start with some observations relating to the development of data protection, the internet and internet search engines.

26. At the time when the Directive was negotiated and adopted in 1995, it was given a wide scope of application ratione materiae. This was done in order to catch up with technological developments relating to data processing by controllers that was more decentralised than filing systems based on traditional centralised data banks, and which also covered new types of personal data like images and processing techniques such as free text searches.

27. In 1995, generalised access to the internet was a new phenomenon. Today, after almost two decades, the amount of digitalised content available online has exploded. It can be easily accessed, consulted and disseminated through social media, as well as downloaded to various devices, such as tablet computers, smartphones and laptop computers. However, it is clear that the development of the internet into a comprehensive global stock of information which is universally accessible and searchable was not foreseen by the Community legislator.

28. At the heart of the present preliminary reference is the fact that the internet magnifies and facilitates in an unprecended manner the dissemination of information. Similarly, as the invention of printing in the 15th century enabled reproduction of an unlimited number of copies that previously needed to be written by hand, uploading of material on to the internet enables mass access to information which earlier could perhaps only be found after painstaking searches, and at limited physical locations. Universal access to information on the internet is possible everywhere, with the exception of those countries where the authorities have limited, by various technical means (such as electronic firewalls), access to the internet or where the access to telecommunications is controlled or scarce.

29. Due to these developments, the potential scope of application of the Directive in the modern world has become be surprisingly wide. Let us think of a European law professor who has downloaded, from the Court’s website, the essential case-law of the Court to his laptop computer. In terms of the Directive, the professor could be considered to be a ‘controller’ of personal data originating from a third party. The professor has files containing personal data that are processed automatically for search and consultation within the context of activities that are not purely personal or household related. In fact, anyone today reading a newspaper on a tablet computer or following social media on a smartphone appears to be engaged in processing of personal data with automatic means, and could potentially fall within the scope of application of the Directive to the extent this takes place outside his purely private capacity. (20) In addition, the wide interpretation given by the Court to the fundamental right to private life in a data protection context seems to expose any human communication by electronic means to the scrutiny by reference to this right.

30. In the current setting, the broad definitions of personal data, processing of personal data and controller are likely to cover an unprecedently wide range of new factual situations due to technological development. This is so because many, if not most, websites and files that are accessible through them include personal data, such as names of living natural persons. This obliges the Court to apply a rule of reason, in other words, the principle of proportionality, in interpreting the scope of the Directive in order to avoid unreasonable and excessive legal consequences. This moderate approach was applied by the Court already in Lindqvist, where it rejected an interpretation which could have lead to an unreasonably wide scope of application of Article 25 of the Directive on transfer of personal data to third countries in the context of the internet. (21)

31. Hence, in the present case it will be necessary to strike a correct, reasonable and proportionate balance between the protection of personal data, the coherent interpretation of the objectives of the information society and legitimate interests of economic operators and internet users at large. Albeit the Directive has not been amended since its adoption in 1995, its application to novel situations has been unavoidable. It is a complex area where law and new technology meet. The opinions adopted by the Article 29 Working Party provide very helpful analysis in this respect. (22)

B – Internet search engines and data protection

32. When analysing the legal position of an internet search engine in relation to the data protection rules, the following elements should be noted. (23)

33. First, in its basic form, an internet search engine does not in principle create new autonomous content. In its simplest form, it only indicates where already existing content, made available by third parties on the internet, can be found by giving a hyperlink to the website containing the search terms.

34. Second, the search results displayed by an internet search engine are not based on an instant search of the whole World Wide Web, but they are gathered from content that the internet search engine has previously processed. This means that the internet search engine has retrieved contents from existing websites and copied, analysed and indexed that content on its own devices. This retrieved content contains personal data if any of the source web pages do.

35. Third, to make the results more user‑friendly, internet search engines often display additional content alongside the link to the original website. There can be text extracts, audiovisual content or even snapshots of the source web pages. This preview information can be at least in part retrieved from the devices of the internet search engine service provider, and not instantly from the original website. This means that the service provider actually holds the information so displayed.

C – Regulation of internet search engines

36. The European Union has attached great importance to the development of the information society. In this context, the role of information society intermediaries has also been addressed. Such intermediaries act as bridge builders between content providers and internet users. The specific role of intermediaries has been recognised, for example, in the Directive (recital 47 in the preamble thereto), in the ecommerce Directive 2000/31 (24) (Article 21(2) and recital 18 in the preamble thereto) as well as in Opinion 1/2008 of the Article 29 Working Party. The role of internet service providers has been considered as crucial for the information society, and their liability for the third-party content they transfer and/or store has been limited in order to facilitate their legitimate activities.

37. The role and legal position of internet search engine service providers has not been expressly regulated in EU legislation. As such ‘information location tool services’ are ‘provided at a distance, by electronic means and at the individual request of a recipient of services’, and amount thus to an information society service consisting of provision of tools that allow for search, access and retrieval of data. However, internet search engine service providers like Google who do not provide their service in return for remuneration from the internet users, appear to fall in that capacity outside the scope of application of ecommerce Directive 2000/31. (25)

38. Despite this, it is necessary to analyse their position vis-à-vis the legal principles underpinning the limitations on the liability of internet service providers. In other words, to what extent are activities performed by an internet search engine service provider, from the point of view of liability principles, analogous to the services enumerated in the ecommerce Directive 2000/31 (transfer, mere caching, hosting) or transmission service mentioned in recital 47 in the preamble to the Directive, and to what extent does the internet search engine service provider act as content provider in its own right.

D – The role and liability of source web page publishers

39. The Court found in Lindqvist that ‘the operation of loading personal data on an internet page must be considered to be [processing of personal data]’. (26) Moreover, ‘placing information on an internet page entails, under current technical and computer procedures, the operation of loading that page onto a server and the operations necessary to make that page accessible to people who are connected to the internet. Such operations are performed, at least in part, automatically.’ The Court concluded that ‘the act of referring, on an internet page, to various persons and identifying them by name or by other means’ ‘constitutes “the processing of personal data” wholly or partly by automatic means within the meaning of Article 3(1) of [the Directive]’.

40. It follows from the above findings in Lindqvist that the publisher of source web pages containing personal data is a controller of processing of personal data within the meaning of the Directive. As such the publisher is bound by all the obligations the Directive imposes on the controllers.

41. Source web pages are kept on host servers connected to internet. The publisher of source web pages can make use of ‘exclusion codes’ (27) for the operation of the internet search engines. Exclusion codes advise search engines not to index or to store a source web page or to display it within the search results. (28) Their use indicates that the publisher does not want certain information on the source web page to be retrieved for dissemination through search engines.

42. Therefore, technically, the publisher has the possibility to include in his web pages exclusion codes restricting indexing and archiving of the page, and thereby enhancing the protection of personal data. In the extreme, the publisher can withdraw the page from the host server, republish it without the objectionable personal data, and require updating of the page in the cache memories of search engines.

43. Hence, the person who publishes the content on the source web page, is in his capacity of controller liable for the personal data published on the page, and that person has various means for fulfilling his obligations in this respect. This channelling of legal liability is in line with the established principles of publisher liability in the context of traditional media. (29)

44. This liability of publisher does not, however, guarantee that the data protection problems may be dealt with conclusively only by recourse to the controllers of the source web pages. As the referring court has pointed out, it is possible that the same personal data has been published on innumerable pages, which would make tracing and contacting all relevant publishers difficult or even impossible. Moreover, the publisher might reside in a third country, and the web pages concerned could fall outside the scope of application of EU data protection rules. There might also be legal impediments such as in the present case where the retaining of the original publication on the internet has been considered to be lawful.

45. In fact, universal accessibility of information on the internet relies on internet search engines, because finding relevant information without them would be too complicated and difficult, and would produce limited results. As the referring court rightly observes, acquiring information about announcements on the forced sale of the data subject’s property would previously have required a visit to the archives of the newspaper. Now this information can be acquired by typing his name into an internet search engine and this makes the dissemination of such data considerably more efficient, and at the same time, more disturbing for the data subject. Internet search engines may be used for extensive profiling of individuals by searching and collecting their personal data. Yet the fear relating to the profiling of individuals was the inspiration for the development of modern data protection legislation. (30)

46. For these reasons, it is important to examine the liability of internet search engine service providers in respect of personal data published on third-party source web pages which are accessible through their search engines. In other words, the Court is here faced with the issue of ‘secondary liability’ of this category of information society service providers analogous to that it has dealt with in its case-law on trademarks and electronic marketplaces. (31)

E – Activities of an internet search engine service provider

47. An internet search engine service provider may have various types of activities. The nature and assessment of those activities from the data protection point of view may be different.

48. An internet search engine service provider may automatically acquire personal data relating to its users, (32) that is, persons who enter search terms into the search engine. This automatically transmitted data can include their IP address, user preferences (language, etc.), and of course the search terms themselves which in the case of so-called vanity searches (that is, searches made by a user with his own name) easily reveal the identity of users. Moreover, as regards persons who have user accounts and who have thus registered themselves, their personal data such as names, e-mail addresses and telephone numbers, almost invariably end up in the hands of the internet search engine service provider.

49. The revenue of internet search engine service providers does not come from the users who enter the search terms in the search engine, but from the advertisers who buy search terms as keywords so that their advertisement is displayed simultaneously with the search results of using that keyword. (33) It is obvious that personal data relating to advertising customers comes into the possession of the service provider.

50. However, the present preliminary ruling concerns Google acting as a simple internet search engine service provider in relation to data, including personal data, published on the internet in third-party source web pages and processed and indexed by Google’s search engine. Hence, the problems of the users and advertising customers, to whose data the Directive is undoubtedly applicable with respect to their relationship with Google, do not affect the analysis of the second group of preliminary questions. However, concerning the jurisdictional issues under the first group of preliminary questions these customer groups may be relevant.

V – First group of questions relating to territorial scope of application of the Directive

A – Introduction

51. The first group of preliminary questions concerns the interpretation of Article 4 of the Directive, as regards the criteria determining the territorial scope of application of the national implementing legislation.

52. The referring court has divided its preliminary questions with regard to the territorial application of the Spanish data protection legislation into four sub‑questions. The first sub‑question relates to the concept of an ‘establishment’, within the meaning of Article 4(1)(a) of the Directive and the second to the circumstances where there is ‘use of equipment … situated on the territory of that Member State’ within the meaning of Article 4(1)(c) thereof. The third sub-question asks if it is possible to regard, as use of equipment, the temporary storage of the information indexed by internet search engines, and if the answer to that question is affirmative, whether the presence of this connecting factor may be presumed where the undertaking refuses to disclose the place where it stores those indexes. The fourth sub‑question asks whether the legislation implementing the Directive must be applied, in the light of Article 8 of the Charter, in the Member State where the centre of gravity of the dispute is situated and where more effective protection of the rights of European Union citizens is possible.

53. I shall first address the last sub‑question, which the national court has posed ‘regardless of the answers to the foregoing questions and particularly in the event that [the Court] considers that the connecting factors referred to in Article 4(1) of the Directive are not present’.

B – The geographical centre of gravity of the dispute in itself is not sufficient to render the Directive applicable

54. According to Article 51(2) thereof, the Charter does not extend the field of application of European Union law beyond the powers of the Union or establish any new power or task for the Union, or modify powers and tasks as defined in the Treaties. (34) This principle also applies to Article 8 of the Charter on protection of personal data. Hence, the interpretation of the Directive in accordance with the Charter cannot add any new elements that might give rise to the territorial applicability of the national legislation implementing the Directive to those laid down in Article 4(1) of the Directive. Article 8 of the Charter must, of course, be taken into account in the interpretation of the concepts used in Article 4(1) of the Directive, but the points of attachment defined by the EU legislator cannot be supplemented with an entirely new criterion by reference to that fundamental right. (35)

55. The Article 29 Working Party rightly emphasised that the territorial scope of application of the Directive and the national implementing legislation is triggered either by the location of the establishment of the controller, or the location of the means or equipment being used when the controller is established outside the EEA. Nationality or place of habitual residence of data subjects is not decisive, nor is the physical location of the personal data. (36)

56. The Article 29 Working Party has proposed that in future legislation relevant targeting of individuals could be taken into account in relation to controllers not established in the EU. (37) In the Commission Proposal for a General Data Protection Regulation (2012) (38) the offering of goods or services to data subjects residing in the European Union would be a factor making EU data protection law applicable to third country controllers. Such an approach, attaching the territorial applicability of EU legislation to the targeted public, is consistent with the Court’s case-law on the applicability of the ecommerce Directive 2000/31, (39) Regulation No 44/2001, (40) and Directive 2001/29 (41) to cross-border situations.

57. By contrast, the criterion of a targeted public, in the present case Spanish users of Google’s internet search engine, in whose eyes the data subject’s reputation may have been harmed as a result of the disputed announcements, does not seem to be a factor triggering the territorial applicability of the Directive and its national implementation legislation.

58. Therefore, the centre of gravity of the dispute in Spain cannot be added to the criteria set out in Article 4(1) of the Directive which, in my opinion, fully harmonises the territorial scope of application of Member States’ data protection laws. This applies irrespective of whether such a centre of gravity is the nationality or residence of the data subject concerned, the location of the disputed personal data in the newspaper’s website, or the fact that Google’s Spanish website especially targeted the Spanish public. (42)

59. For these reasons I propose that, if the Court finds it necessary to answer that question, it should answer the fourth sub-question in the negative.

C – The applicability of the criterion of ‘establishment in the EU’ to a third country internet search engine service provider

60. According to Article 4(1) of the Directive, the primary factor that gives rise to the territorial applicability of the national data protection legislation is the processing of personal data carried out in the context of the activities of an establishment of the controller on the territory of the Member State. Further, when a controller is not established on EU territory but uses means or equipment (43) situated on the territory of the Member State for processing of personal data, the legislation of that Member State applies unless such equipment or means is used only for purposes of transit through the territory of the EU.

61. As noted above, the Directive and Article 4 thereof were adopted before the large-scale provision of on-line services on the internet started. Moreover, in this respect, its wording is not consistent and is incomplete. (44) It is no wonder that data protection experts have had considerable difficulties in interpreting it in relation to the internet. The facts of the present case illustrate these problems.

62. Google Inc. is a Californian firm with subsidiaries in various EU Member States. Its European operations are to a certain extent coordinated by its Irish subsidiary. It currently has data centres at least in Belgium and Finland. Information on the exact geographical location of the functions relating to its search engine is not made public. Google claims that no processing of personal data relating to its search engine takes place in Spain. Google Spain acts as commercial representative of Google for its advertising functions. In this capacity is has taken responsibility for the processing of personal data relating to its Spanish advertising customers. Google denies that its search engine performs any operations on the host servers of the source web pages, or that it collects information by means of cookies of non registered users of its search engine.

63. In this factual context the wording of Article 4(1) of the Directive is not very helpful. Google has several establishments on EU territory. This fact would, according to a literal interpretation, exclude the applicability of the equipment condition laid down in Article 4(1)(c) of the Directive. On the other hand, it is not clear to what extent and where processing of personal data of EU resident data subjects takes place in the context of its EU subsidiaries.

64. In my opinion the Court should approach the question of territorial applicability from the perspective of the business model of internet search engine service providers. This, as I have mentioned, normally relies on keyword advertising which is the source of income and, as such, the economic raison d’être for the provision of a free information location tool in the form of a search engine. The entity in charge of keyword advertising (called ‘referencing service provider’ in the Court’s case-law (45)) is linked to the internet search engine. This entity needs presence on national advertising markets. For this reason Google has established subsidiaries in many Member States which clearly constitute establishments within the meaning of Article 4(1)(a) of the Directive. It also provides national web domains such as google.es or google.fi. The activity of the search engine takes this national diversification into account in various ways relating to the display of the search results because the normal financing model of keyword advertising follows the pay-per-click principle. (46)

65. For these reasons I would adhere to the Article 29 Working Party’s conclusion to the effect that the business model of an internet search engine service provider must be taken into account in the sense that its establishment plays a relevant role in the processing of personal data if it is linked to a service involved in selling targeted advertisement to inhabitants of that Member State. (47)

66. Moreover, even if Article 4 of the Directive is based on a single concept of controller as regards its substantive provisions, I think that for the purposes of deciding on the preliminary issue of territorial applicability, an economic operator must be considered as a single unit, and thus, at this stage of analysis, not be dissected on the basis of its individual activities relating to processing of personal data or different groups of data subjects to which its activities relate.

67. In conclusion, processing of personal data takes place within the context of a controller’s establishment if that establishment acts as the bridge for the referencing service to the advertising market of that Member State, even if the technical data processing operations are situated in other Member States or third countries.

68. For this reason, I propose that the Court should answer the first group of preliminary questions in the sense that processing of personal data is carried out in the context of the activities of an ‘establishment’ of the controller within the meaning of Article 4(1)(a) of the Directive when the undertaking providing the search engine sets up in a Member State for the purpose of promoting and selling advertising space on the search engine, an office or subsidiary which orientates its activity towards the inhabitants of that State.

VI – Second group of questions relating to scope of application ratione materiae of the Directive

69. The second group of questions pertains to the legal position of an internet search engine service provider offering access to an internet search engine in the light of the provisions of the Directive. The national court has formulated them as concerning the notions of ‘processing’ of personal data (question 2.1), and ‘controller’ (question 2.2.), the competences of the national data protection authority to give orders directly to the internet search engine service provider (question 2.3) and the possible exclusion of protection of personal data by the internet search engine service provider concerning information lawfully published by third parties on the internet (question 2.4). These last two sub‑questions are relevant only if the internet search engine service provider can be considered as processing personal data on third-party source web pages and as being the controller thereof.

A – Processing of personal data by an internet search engine

70. The first sub‑question in this group concerns the applicability of the notions of ‘personal data’ and ‘processing’ thereof to a internet search engine service provider such as Google, on the assumption that we are not discussing personal data of users or advertisers, but personal data published on third-party source web pages, and processed by internet search engine operated by the service provider. This processing is described by the national court as consisting of locating information published or included on the internet by third parties, indexing it automatically, storing it temporarily and finally, making it available to internet users according to a particular order of preference.

71. In my opinion an affirmative answer to this sub-question does not require much discussion. The concept of personal data is given a wide definition in the Directive, this wide definition has been applied by the Article 29 Working Party and it has been confirmed by the Court. (48)

72. As to ‘processing’, source web pages on the internet may and often do include names, images, addresses, telephone numbers, descriptions and other indications, with the help of which a natural person can be identified. The fact that their character as personal data would remain ‘unknown’ to internet search engine service provider, whose search engine works without any human interaction with the data gathered, indexed and displayed for search purposes, does not change this finding. (49) The same applies to the fact that the presence of personal data in the source web pages is in a certain sense random for the internet search engine service provider because for the service provider, or more precisely for the crawling, analysing and indexing functions of the search engine targeting all web pages accessible on the internet, there may be no technical or operational difference between a source web page containing personal data and another not including such data. (50) In my opinion these facts should, however, influence the interpretation of the concept of ‘controller’.

73. Google’s search engine’s crawler function, called ‘googlebot’, crawls on the internet constantly and systematically and, advancing from one source web page to another on the basis of hyperlinks between the pages, requests the visited sites to send to it a copy of the visited page. (51) The copies of such source web pages are analysed by Google’s indexing function. Sign strings (keywords, search terms) found on the pages are recorded in the index of the search engine. (52) Google’s elaborate search algorithm also assesses the relevance of the search results. The combinations of these keywords with the URL addresses, where they can be found, form the index of the search engine. The searches initiated by the users are executed within the index. For the purposes of indexing and displaying the search results, the copy of the pages is registered in the cache memory of the search engine. (53)

74. A copy of the sought source web page, stored in cache, can be displayed after the user has made the search. However, the user can access the original page if, for example, he seeks the display of pictures in the source web page. The cache is updated frequently but there may be situations where the page displayed by the search engine does not correspond to the source web pages in the host server because of the changes made to it or its deletion. (54)

75. It goes without saying that the operations described in the previous paragraphs count as ‘processing’ of the personal data on the source web pages copied, indexed, cached and displayed by the search engine. More particularly they entail collection, recording, organisation and storage of such personal data and they may entail their use, disclosure by transmission, dissemination or otherwise making available and combining of personal data in the sense of Article 2(b) of the Directive.

B – The concept of ‘controller’

76. A controller (55) is according to Article 2(d) of the Directive ‘the natural or legal person … which alone or jointly with others determines the purposes and means of the processing of personal data’. In my opinion the core issue in this case is whether, and to what extent, an internet search engine service provider is covered by this definition.

77. All parties except for Google and the Greek Government propose an affirmative answer to this question, which might easily be defended as a logical conclusion of a literal and perhaps even teleological interpretation of the Directive, given that the basic definitions of the Directive were formulated in a comprehensive manner in order to cover new developments. In my opinion such an approach would, however, represent a method that completely ignores the fact that when the Directive was drated it was not possible to take into account the emergence of the internet and the various related new phenomena.

78. When the Directive was adopted the World Wide Web had barely become a reality, and search engines were at their nascent stage. The provisions of the Directive simply do not take into account the fact that enormous masses of decentrally hosted electronic documents and files are accessible from anywhere on the globe and that their contents can be copied and analysed and disseminated by parties having no relation whatsoever to their authors or those who have uploaded them onto a host server connected to the internet.

79. I recall that in Lindqvist the Court did not follow the maximalist approach proposed by the Commission in relation to the interpretation of the notion of transfer of data to third countries. The Court stated that ‘[given], first, the state of development of the internet at the time [the Directive] was drawn up and, second, the absence, in Chapter IV, of criteria applicable to the use of internet, one cannot presume that the Community legislature intended the expression “transfer [of data] to a third country” to cover the loading, by an individual in Mrs Lindqvist’s position, of data onto an internet page, even if those data are thereby made accessible to persons in third countries with the technical means to access them’. (56) In my opinion this implies that in the interpretation of the Directive, vis-à-vis new technological phenomena, the principle of proportionality, the objectives of the Directive and means provided therein for their attainment must be taken into account in order to achieve a balanced and reasonable outcome.

80. To my mind, one key question here is whether it matters that within the definition of controller the Directive refers to the controller as the person ‘determining the purposes and means of the processing of the personal data’ (emphasis added). The parties who consider Google to be a controller base this assessment on the undeniable fact that the service provider running an internet search engine determines the purposes and means of the processing of data for his purposes.

81. I doubt, however, whether this leads to a truthful construction of the Directive in a situation where the object of processing consists of files containing personal data and other data in a haphazard, indiscriminate and random manner. Does the European law professor mentioned in my example in paragraph 29 above determine the purposes and means of the processing of personal data included in the Court’s judgments he has downloaded to his laptop? The finding of the Article 29 Working Party according to which ‘users of the search engine service could strictly speaking also be considered as controllers’ reveals the irrational nature of the blind literal interpretation of the Directive in the context of the internet. (57) The Court should not accept an interpretation which makes a controller of processing of personal data published on the internet of virtually everybody owning a smartphone or a tablet or a laptop computer.

82. In my opinion the general scheme of the Directive, most language versions and the individual obligations it imposes on the controller are based on the idea of responsibility of the controller over the personal data processed in the sense that the controller is aware of the existence of a certain defined category of information amounting to personal data and the controller processes this data with some intention which relates to their processing as personal data. (58)

83. The Article 29 Working Party correctly notes that ‘[t]he concept of controller is a functional concept, intended to allocate responsibilities where the factual influence is, and thus based on a factual rather than a formal analysis’. (59) It continues that ‘the controller must determine which data shall be processed for the purpose(s) envisaged’. (60) The substantive provisions of the Directive, and more particularly Articles 6, 7 and 8 thereof, are, in my opinion, based on the assumption that the controller knows what he is doing in relation to the personal data concerned, in the sense that he is aware of what kind of personal data he is processing and why. In other words, the data processing must appear to him as processing of personal data, that is ‘information relating to an identified or identifiable natural person’ in some semantically relevant way and not a mere computer code. (61)

C – An internet search engine service provider is not a ‘controller’ of personal data on third-party source web pages

84. The internet search engine service provider merely supplying an information location tool does not exercise control over personal data included on third-party web pages. The service provider is not ‘aware’ of the existence of personal data in any other sense than as a statistical fact web pages are likely to include personal data. In the course of processing of the source web pages for the purposes of crawling, analysing and indexing, personal data does not manifest itself as such in any particular way.

85. It is for this reason that I find the approach of the Article 29 Working Party adequate as it seeks to draw a line between the entirely passive and intermediary functions of search engines and situations where their activity represents real control over the personal data processed. (62) For the sake of completeness, it needs to be added that issue of whether the personal data has become public (63) or has been disclosed legally on third-party source web pages is not relevant for application of the Directive. (64)

86. The internet search engine service provider has no relationship with the content of third-party source web pages on the internet where personal data may appear. Moreover, as the search engine works on the basis of copies of the source web pages that its crawler function has retrieved and copied, the service provider does not have any means of changing the information in the host servers. Provision of an information location tool does not imply any control over the content. It does not even enable the internet search engine service provider to distinguish between personal data, in the sense of the Directive, that relates to an identifiable living natural person, and other data.

87. Here I would draw from the principle expressed in recital 47 in the preamble to the Directive. It states that the controller of messages containing personal data transmitted by telecommunication or by electronic mail is the originator of the message and not the person offering transmission services. This recital, as well as the exceptions to liability provided in the ecommerce Directive 2000/31 (Articles 12, 13 and 14), builds on the legal principle according to which automated, technical and passive relationships to electronically stored or transmitted content do not create control or liability over it.

88. The Article 29 Working Party has emphasised that, first and foremost, the purpose of the concept of controller is to determine who is to be responsible for compliance with data protection rules and to allocate this responsibility to the locus of the factual influence. (65) According to the Working Party, ‘[t]he principle of proportionality requires that to the extent that a search engine provider acts purely as an intermediary, it should not be considered as the principal controller with regard to the content related processing of personal data that is taking place. In this case the principal controllers of personal data are the information providers.’ (66)

89. In my view the internet search engine service provider cannot in law or in fact fulfil the obligations of controller provided in Articles 6, 7 and 8 of the Directive in relation to the personal data on source web pages hosted on third-party servers. Therefore a reasonable interpretation of the Directive requires that the service provider is not generally considered as having that position. (67)

90. An opposite opinion would entail internet search engines being incompatible with EU law, a conclusion I would find absurd. Specifically, if internet search engine service providers were considered as controllers of the personal data on third-party source web pages and if on any of these pages there would be ‘special categories of data’ referred to in Article 8 of the Directive (e.g. personal data revealing political opinions or religious beliefs or data concerning the health or sex life of individuals), the activity of the internet search engine service provider would automatically become illegal, when the stringent conditions laid down in that article for the processing of such data were not met.

D – Circumstances in which the internet search engine service provider is a ‘controller’

91. Internet search engine service provider clearly controls the index of the search engine which links key words to the relevant URL addresses. The service provider determines how the index is structured, and it may technically block certain search results, for example by not displaying URL addresses from certain countries or domains within the search results. (68) Moreover, the internet search engine service provider controls its index in the sense that he decides whether exclusion codes (69) on source web page are to be complied with or not.

92. In contrast, the contents of the cache memory of the internet search engine cannot be considered as falling within the control of the service provider because the cache is the result of completely technical and automated processes producing a mirror image of the text data of the crawled web pages, with the exception of data excluded from indexing and archiving. It is of interest that some Member States seem to provide special horizontal exceptions regarding the liability of search engines analogous to the exception provided in ecommerce Directive 2000/31 for certain information society service providers. (70)

93. However, with regard to the contents of cache, a decision not to comply with the exclusion codes (71) on a web page entails in my opinion control in the sense of the Directive over such personal data. The same applies in situations where the internet search engine service provider does not update a web page in its cache despite a request received from the website.

E – The obligations of an internet search engine service provider as ‘controller’

94. It is obvious that if and when the internet search engine service provider can be considered as ‘controller’ he must comply with the obligations provided by the Directive.

95. As to the criteria relating making data processing legitimate in the absence of a data subject’s consent (Article 7(a) of the Directive), it seems obvious that provision of internet search engine services pursues as such legitimate interests (Article 7(f) of the Directive), namely (i) making information more easily accessible for internet users; (ii) rendering dissemination of the information uploaded on the internet more effective; and (iii) enabling various information society services supplied by the internet search engine service provider that are ancillary to the search engine, such as the provision of keyword advertising. These three purposes relate respectively to three fundamentals rights protected by the Charter, namely freedom of information and freedom of expression (both in Article 11) and freedom to conduct a business (Article 16). Hence, an internet search engine service provider pursues legitimate interests, within the meaning of Article 7(f) of the Directive, when he processes data made available on the internet, including personal data.

96. As controller, an internet search engine service provider must respect the requirements laid down in Article 6 of the Directive. In particular, the personal data must be adequate, relevant, and not excessive in relation to the purposes for which they are collected, and up to date, but not out dated for the purposes for which they were collected. Moreover, the interests of the ‘controller’, or third parties in whose interest the processing in exercised, and those of the data subject, must be weighed.

97. In the main proceedings, the data subject’s claim seeks to remove from Google’s index the indexing of his name and surnames with the URL addresses of the newspaper pages displaying the personal data he is seeking to suppress. Indeed, names of persons are used as search terms, and they are recorded as keywords in search engines’ indexes. Yet, usually a name does not as such suffice for direct identification of a natural person on the internet because globally there are several, even thousands or millions of persons with the same name or combination of a given name(s) and surname. (72) Nevertheless, I assume that in most cases combining a given name and surname as a search term enables the indirect identification of a natural person in the sense of Article 2(a) of the Directive as the search result in a search engine’s index reveals a limited set of links permitting the internet user to distinguish between persons with the same name.

98. A search engine’s index attaches names and other identifiers used as a search term to one or several links to web pages. Inasmuch as the link is adequate in the sense that the data corresponding to the search term really appears or has appeared on the linked web pages, the index in my opinion complies with the criteria of adequacy, relevancy, proportionality, accuracy and completeness, set out in Articles 6(c) and 6(d) of the Directive. As to the temporal aspects referred to in Articles 6(d) and 6(e) (personal data being up to date and personal data not being stored longer than necessary), these issues should also be addressed from the point of view of the processing in question, that is provision of information location service, and not as an issue relating to the content of the source web pages. (73)

F – Conclusion on the second group of questions

99. On the basis of this reasoning, I take the view that a national data protection authority cannot require an internet search engine service provider to withdraw information from its index except for the cases where this service provider has not complied with the exclusion codes (74) or where a request emanating from the website regarding update of cache memory has not been complied with. This scenario does not seem pertinent for the present preliminary reference. A possible ‘notice and take down procedure’ (75) concerning links to source web pages with illegal or inappropriate contents is a matter of national law civil liability based on grounds other than the protection of personal data. (76)

100. For these reasons I propose that the Court answers the second group of questions in the sense that under the circumstances specified in the preliminary reference an internet search engine service provider ‘processes’ personal data in the sense of Article 2(b) of the Directive. However, the service provider cannot be considered as ‘controller’ of the processing of such personal data in the sense of Article 2(d) of the Directive with the exception explained above.

VII – Third question relating to the data subject’s possible ‘right to be forgotten’

A – Preliminary observations

101. The third preliminary question is only relevant if the Court either rejects the conclusion I have reached above to the effect that Google is not generally to be considered as a ‘controller’ under Article 2(d) of the Directive, or to the extent the Court accepts my assertion that there are instances where an internet search engine service provider such as Google could be considered as having such a position. Otherwise, the section that follows is redundant.

102. In any event, by its third question the national court asks whether the rights to erasure and blocking of data, provided for in Article 12(b) of the Directive, and the right to object, provided for in Article 14(a) of the Directive, extend to enabling the data subject to contact the internet search engine service providers himself in order to prevent indexing of the information relating to him personally that has been published on third parties’ web pages. By so doing, a data subject seeks to prevent potentially prejudicial information from being known to internet users, or is expressing a desire for the information to be consigned to oblivion, even though the information in question has been lawfully published by third parties. In other words the national court asks in substance whether a ‘right to be forgotten’ can be founded on Article 12(b) and 14(a) of the Directive. This is the first issue to be addressed in the analysis that follows, which will be based on the wording and objectives of those provisions.

103. If I conclude that Articles 12(b) and 14(a) of the Directive, in and of themselves, do not afford this protection, I will then consider whether such an interpretation is compatible with the Charter. (77) This will require consideration of the right to protection of personal data in Article 8, right to respect for private and family life in Article 7, freedom of expression and information as protected in Article 11 (and both with respect to the freedom of expression of publishers of web pages and the freedom of internet users to receive information), and the freedom to conduct a business in Article 16. Indeed, the rights of data subjects in Articles 7 and 8 will need to be juxtaposed against the rights protected by Articles 11 and 16 of those who wish to disseminate or access the data.

B – Do the rights to rectification, erasure, blocking and objection provided in the Directive amount to a data subject’s right ‘to be forgotten’?

104. The rights to rectification, erasure and blocking of data provided in Article 12(b) of the Directive concern data, the processing of which does not comply with the provisions of the Directive, in particular because of the incomplete or inaccurate nature of the data (my emphasis).

105. The order for reference recognises that the information appearing on the web pages concerned cannot be regarded as incomplete or inaccurate. Even less is it claimed that Google’s index or the contents of its cache containing such data may be so described. Therefore, the right to rectification, erasure or blocking, referred to in Article 12(b) of the Directive, will only arise if Google’s processing of personal data from third-party source web pages is incompatible with the Directive for other reasons.

106. Article 14(a) of the Directive obliges Member States to grant a data subject the right to object at any time, on compelling legitimate grounds relating to his particular situation, to the processing of data relating to him, save where otherwise provided by national legislation. This applies especially in cases referred to in Articles 7(e) and 7(f) of the Directive, that is where processing is necessary in view of a public interest or for the purposes of the legitimate interests pursued by the controller or by third parties. Furthermore, according to Article 14(a), ‘the processing instigated by the controller’ may no longer involve the objected data if the objection is justified.

107. In the situations where internet search engine service providers are considered to be controllers of the processing of personal data, Article 6(2) of the Directive obliges them to weigh the interests of the data controller, or third parties in whose interest the processing is exercised, against those of the data subject. As the Court observed in ASNEF and FECEMD, whether or not the data in question already appears in public sources is relevant to this balancing exercise. (78)

108. However, as almost all of the parties having presented written observations in this case have asserted, I consider that the Directive does not provide for a general right to be forgotten in the sense that a data subject is entitled to restrict or terminate dissemination of personal data that he considers to be harmful or contrary to his interests. The purpose of processing and the interests served by it, when compared to those of the data subject, are the criteria to be applied when data is processed without the subject’s consent, and not the subjective preferences of the latter. A subjective preference alone does not amount to a compelling legitimate ground within the meaning of Article 14(a) of the Directive.

109. Even if the Court were to find that internet search engine service providers were responsible as controllers, quod non, for personal data on third-party source web pages, a data subject would still not have an absolute ‘right to be forgotten’ which could be relied on against these service providers. However, the service provider would need to put itself in the position of the publisher of the source web page and verify whether dissemination of the personal data on the page can at present be considered as legal and legitimate for the purposes of the Directive. In other words, the service provider would need to abandon its intermediary function between the user and the publisher and assume responsibility for the content of the source web page, and when needed, to censure the content by preventing or limiting access to it.

110. For the sake of completeness it is useful to recall that the Commission Proposal for a General Data Protection Regulation provides in its Article 17 for a right to be forgotten. However, the proposal seems have met with considerable opposition, and it does not purport to represent a codification of existing law, but an important legal innovation. Therefore it does not seem affect the answer to be given to the preliminary question. It is of interest, however, that according to Article 17(2) of the proposal ‘[w]here the controller … has made the personal data public, it shall take all reasonable steps … in relation to data for the publication of which the controller is responsible, to inform third parties which are processing such data, that a data subject requests them to erase any links to, or copy or replication of that personal data’. This text seems to consider internet search engine service providers more as third parties than as controllers in their own right.

111. I therefore conclude that Articles 12(b) and 14(a) of the Directive do not provide for a right to be forgotten. I will now consider whether this interpretation of these provisions complies with the Charter.

C – The fundamental rights in issue

112. Article 8 of the Charter guarantees everyone the right to the protection of his personal data. Such data must be processed fairly for specified purposes and on the basis of the consent of the person concerned, or some other legitimate basis laid down by law. Everyone has the right of access to data which has been collected concerning him, and the right to have it rectified. Compliance with these rules shall be subject to control by an independent authority.

113. In my opinion this fundamental right, being a restatement of the European Union and Council of Europe acquis in this field, emphasises the importance of protection of personal data, but it does not as such add any significant new elements to the interpretation of the Directive.

114. According to Article 7 of the Charter, everyone has the right to respect for his or her private and family life, home and communications. This provision, being in substance identical to Article 8 of the European Convention for the Protection of Human Rights and Fundamental Freedoms, signed in Rome on 4 November 1950 (ECHR), must be duly taken into account in the interpretation of the relevant provisions of the Directive, which requires the Member States to protect in particular the right to privacy.

115. I would recall that in the context of the ECHR, Article 8 thereof also covers issues relating to protection of personal data. For this reason, and in conformity with Article 52(3) of the Charter, the case-law of the European Court of Human Rights on Article 8 ECHR is relevant both to the interpretation of Article 7 of the Charter and to the application of the Directive in conformity with Article 8 of the Charter.

116. The European Court of Human Rights concluded in Niemietz that professional and business activities of an individual may fall within the scope of private life as protected under Article 8 ECHR. (79) This approach has been applied in subsequent case-law of that court.

117. Moreover, this Court found in Volker und Markus Schecke and Eifert (80) that ‘the right to respect for private life with regard to the processing of personal data, recognised by Articles 7 and 8 of the Charter, concerns any information [my emphasis] relating to an identified or identifiable individual … and the limitations which may lawfully be imposed on the right to protection of personal data correspond to those tolerated in relation to Article 8 [ECHR]’.

118. I conclude on the basis of Volker und Markus Schecke and Eifert that the protection of private life under the Charter, with regard to the processing of personal data, covers all information relating to an individual irrespective of whether he acts in a purely private sphere or as an economic operator or, for example, as a politician. In view of the the wide notions of personal data and its processing in EU law, it seems to follow from abovementioned case-law that any act of communication relying on automatic means such as by means of telecommunications, e‑mail or social media concerning a natural person constitutes as such a putative interference of that fundamental right that requires justification. (81)

119. I have concluded in paragraph 75 that an internet search engine service provider is engaged in processing of personal data displayed on third-party source web pages. Hence it follows from the Court’s judgment in Volker und Markus Schecke and Eifert that, independently of how his role is classified under the Directive, there is interference with the Article 7 Charter right to privacy of the concerned data subjects. According to the ECHR and the Charter any interference to protected rights must be based on law and be necessary in a democratic society. In the present case we are not faced with interference by public authorities in need of justification but of the question of the extent that interference by private subjects can be tolerated. The limits to this are set out in the Directive, and they are thus based on law, as required by the ECHR and the Charter. Hence, when the Directive is interpreted, the exercise precisely concerns the interpretation of the limits set to data processing by private subjects in light of the Charter. From this follows the question of whether there is a positive obligation on the EU and the Member States to enforce, as against internet search engine service providers, which are private subjects, a right to be forgotten. (82) This in turn leads to questions of justification for interference in Article 7 and 8 of the Charter, and the relationship with the competing rights of freedom of expression and information, and the right to conduct a business.

D – Rights of freedom of expression and information, and the right to conduct a business

120. The present case concerns, from many angles, freedom of expression and information enshrined in Article 11 of the Charter, which corresponds to Article 10 ECHR. Article 11(1) of the Charter states that ‘[e]veryone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers.’ (83)

121. The internet users’ right to seek and receive information made available on the internet is protected by Article 11 of the Charter. (84) This concerns both information on the source web pages and the information provided by internet search engines. As I have already mentioned, the internet has revolutionalised access to and dissemination of all kinds of information and enabled new forms of communication and social interaction between individuals. In my opinion the fundamental right to information merits particular protection in EU law, especially in view of the ever‑growing tendency of authoritarian regimes elsewhere to limit access to the internet or to censure content made accessible by it. (85)

122. Publishers of web pages equally enjoy protection under Article 11 of the Charter. Making content available on the internet counts as such as use of freedom of expression, (86) even more so when the publisher has linked his page to other pages and has not limited its indexing or archiving by search engines, thereby indicating his wish for wide dissemination of content. Web publication is a means for individuals to participate in debate or disseminate their own content or content uploaded by others on internet. (87)

123. In particular, the present preliminary reference concerns personal data published in the historical archives of a newspaper. In Times Newspapers Ltd v. the United Kingdom (nos. 1 and 2), the European Court of Human Rights observed that internet archives make a substantial contribution to preserving and making available news and information: ‘Such archives constitute an important source for education and historical research, particularly as they are readily accessible to the public and are generally free. … However, the margin of appreciation afforded to States in striking the balance between the competing rights is likely to be greater where news archives of past events, rather than news reporting of current affairs, are concerned. In particular, the duty of the press to act in accordance with the principles of responsible journalism by ensuring accuracy [my emphasis] of historical, rather than perishable, information published is likely to be more stringent in the absence of any urgency in publishing the material.’ (88)

124. Commercial internet search engine service providers offer their information location services in the context of business activity aiming at revenue from keyword advertising. This makes it a business, the freedom of which is recognised under Article 16 of the Charter in accordance with EU law and national law. (89)

125. Moreover, it needs to be recalled that none of the fundamental rights at stake in this case are absolute. They may be limited provided that there is a justification acceptable in view of the conditions set out in Article 52(1) of the Charter. (90)

E – Can a data subject’s ‘right to be forgotten’ be derived from Article 7 of the Charter?

126. Finally, it is necessary to ponder whether interpretation of Articles 12(b) and 14(a) of the Directive in light of the Charter, and more particularly of Article 7 thereof, could lead to the recognition of a ‘right to be forgotten’ in the sense referred to by the national court. At the outset such a finding would not be against Article 51(2) of the Charter because it would concern precision of the scope of the data subject’s right of access and right to object already recognised by the Directive, not the creation of new rights or widening the scope of EU law.

127. The European Court of Human Rights held in the Aleksey Ovchinnikov case (91) that ‘in certain circumstances a restriction on reproducing information that has already entered the public domain may be justified, for example to prevent further airing of the details of an individual’s private life which do not come within the scope of any political or public debate on a matter of general importance’. The fundamental right to protection of private life can thus in principle be invoked even if the information concerned is already in the public domain.

128. However, a data subject’s right to protection of his private life must be balanced with other fundamental rights, especially with freedom of expression and freedom of information.

129. A newspaper publisher’s freedom of information protects its right to digitally republish its printed newspapers on the internet. In my opinion the authorities, including data protection authorities, cannot censure such republishing. The Times Newspapers Ltd v. the United Kingdom (nos. 1 and 2) judgment of the European Court of Human Rights (92) demonstrates that the liability of the publisher regarding accuracy of historical publications may be more stringent than those of current news, and may require the use of appropriate caveats supplementing the contested content. However, in my opinion there could be no justification for requiring digital republishing of an issue of a newspaper with content different from the originally published printed version. That would amount to falsification of history.

130. The data protection problem at the heart of the present litigation only appears if an internet user types the data subject’s name and surnames into the search engine, thereby being given a link to the newspaper’s web pages with the contested announcements. In such a situation the internet user is actively using his right to receive information concerning the data subject from public sources for reasons known only to him. (93)

131. In contemporary information society, the right to search information published on the internet by means of search engines is one of the most important ways to exercise that fundamental right. This right undoubtedly covers the right to seek information relating to other individuals that is, in principle, protected by the right to private life such as information on the internet relating to an indivdual’s activities as a businessman or politician. An internet user’s right to information would be compromised if his search for information concerning an individual did not generate search results providing a truthful reflection of the relevant web pages but a ‘bowdlerised’ (94) version thereof.

132. An internet search engine service provider lawfully exercises both his freedom to conduct business and freedom of expression when he makes available internet information location tools relying on a search engine.

133. The particularly complex and difficult constellation of fundamental rights that this case presents prevents justification for reinforcing the data subjects’ legal position under the Directive, and imbuing it with a right to be forgotten. This would entail sacrificing pivotal rights such as freedom of expression and information. I would also discourage the Court from concluding that these conflicting interests could satisfactorily be balanced in individual cases on a case‑by‑case basis, with the judgment to be left to the internet search engine service provider. Such ‘notice and take down procedures’, if required by the Court, are likely either to lead to the automatic withdrawal of links to any objected contents or to an unmanageable number of requests handled by the most popular and important internet search engine service providers. (95) In this context it is necessary to recall that ‘notice and take down procedures’ that appear in the ecommerce Directive 2000/31 relate to unlawful content, but in the context of the case at hand we are faced with a request for suppressing legitimate and legal information that has entered the public sphere.

134. In particular, internet search engine service providers should not be saddled with such an obligation. This would entail an interference with the freedom of expression of the publisher of the web page, who would not enjoy adequate legal protection in such a situation, any unregulated ‘notice and take down procedure’ being a private matter between the data subject and the search engine service provider. (96) It would amount to the censuring of his published content by a private party. (97) It is a completely different thing that the States have positive obligations to provide an effective remedy against the publisher infringing the right to private life, which in the context of internet would concern the publisher of the web page.

135. As the Article 29 Working Party has observed, it is possible that the secondary liability of the search engine service providers under national law may lead to duties amounting to blocking access to third‑party websites with illegal contents such as web pages infringing IP rights, or displaying libellous or criminal information. (98)

136. In contrast any generalised right to be forgotten cannot be invoked against them on the basis of the Directive even when it is interpreted in harmony with the Charter.

137. For these reasons I propose that the Court should answer the third preliminary question to the effect that the rights to erasure and blocking of data, provided for in Article 12(b), and the right to object, provided for by Article 14(a), of the Directive, do not extend to such a right to be forgotten as described in the preliminary reference.

VIII – Conclusion

138. In the light of the above considerations, I am of the opinion that the Court should reply as follows to the questions referred by the Audiencia Nacional:

1. Processing of personal data is carried out in the context of the activities of an ‘establishment’ of the controller within the meaning of Article 4(1)(a) of Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data when the undertaking providing the internet search engine sets up in a Member State, for the purposes of promoting and selling advertising space on the search engine, an office or subsidiary which orientates its activity towards the inhabitants of that State.

2. An internet search engine service provider, whose search engine locates information published or included on the internet by third parties, indexes it automatically, stores it temporarily and finally makes it available to internet users according to a particular order of preference, ‘processes’ personal data in the sense of Article 2(b) of Directive 95/46 when that information contains personal data.

However, the internet search engine service provider cannot be considered as ‘controller’ of the processing of such personal data in the sense of Article 2(d) of Directive 95/46, with the exception of the contents of the index of its search engine, provided that the service provider does not index or archive personal data against the instructions or requests of the publisher of the web page.

3. The rights to erasure and blocking of data, provided for in Article 12(b), and the right to object, provided for in Article 14(a), of Directive 95/46, do not confer on the data subject a right to address himself to a search engine service provider in order to prevent indexing of the information relating to him personally, published legally on third parties’ web pages, invoking his wish that such information should not be known to internet users when he considers that it might be prejudicial to him or he wishes it to be consigned to oblivion.

1 – Original language: English.

2 – Harvard Law Review, Vol. IV, No 5, 15 December 1890,.

3 – In actual fact the ‘internet’ comprises two main services, namely the World Wide Web and email services. While the internet, as a network of interconnected computers, has existed in various forms for some time, commencing with the Arpanet (United States), the freely accessible open network with www addresses and common code structure only started in the early 1990s. It seems that the historically correct term would be World Wide Web. However, given the current usage and terminological choices made in Court’s case-law, in the following the word ‘internet’ is primarily used to refer to the World Wide Web part of the network.

4 – The location of web pages is identified with an individual address, the ‘URL’ (Uniform Resource Locator), a system created in 1994. A web page can be accessed by typing its URL in the web browser, directly or with the help of a domain name. The web pages must be coded with some markup language. HyperText Markup Language (HTML) is the main markup language for creating web pages and other information that can be displayed in a web browser.

5 – The scope of the three issues is illustrated by the following information (although no exact figures are available). First, it has been estimated that there could be more than 600 million websites on the internet. On these websites there appears to be more than 40 billion web pages. Second, with regard to the search engines, their number is much more limited: it appears that there are less than 100 important search engines, and currently Google seems to have a huge share in many markets. It has been said that success of Google’s search engine is based on very powerful web crawlers, efficient indexing systems and technology that allows the search results to be sorted by their relevance to the user (including the patended PageRank algorithm), see López-Tarruella, A., ‘Introduction: Google Pushing the Boundaries of Law’, Google and the Law. Empirical Approaches to Legal Aspects of Knowledge‑Economy Business Models, Ed. López‑Tarruella, A., T.M.C. Asser Press, The Hague, 2012, pp. 1-8, p. 2. Third, more than three quarters of people in Europe use the internet and in so far that they use the search engines, their personal data, as internet search engine users, may be gathered and processed by the internet search engine used.

6 – Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data (OJ 1995 L 281, p. 31).

7 – See, in general, Article 29 Working Party, Opinion 1/2008 on data protection issues related to search engines (WP 148). Google’s privacy policy, as regards the users of its internet search engine, is under scrutiny by the data protection authorities of the Member States. The action is lead by the French Data Protection Authority (the CNIL). For recent developments, see letter dated 16 October 2012 of Article 29 Working Party to Google, available on website mentioned in footnote 22 below.

8 – Point 19 below.

9 – In the following, ‘internet search engine’ refers to the combination of software and equipment enabling the feature of searching text and audiovisual content on the internet. Specific issues relating to search engines operating within a defined internet domain (or website) such as are not discussed in this opinion. The economic operator providing for access to a search engine is referred to as the ‘internet search engine service provider’. In the present case Google Inc. appears to be the service provider providing access to Google search engine as well as many additional search functions such as maps. and news..

10 – Case C‑101/01 Lindqvist [2003] ECR I‑12971.

11 – Joined Cases C‑465/00, C‑138/01 and C‑139/01 Österreichischer Rundfunk and Others [2003] ECR I‑4989.

12 – Case C‑73/07 Satakunnan Markkinapörssi and Satamedia [2008] ECR I‑9831.

13 – Joined Cases C‑92/09 and C‑93/09 Volker und Markus Schecke and Eifert [2010] ECR I‑0000.

14 – Joined Cases C‑236/08 to C‑238/08 Google France and Google [2010] ECR I‑2417; Case C‑558/08 Portakabin [2010] ECR I‑6963; Case C‑324/09 L’Oréal and Others [2011] ECR I‑0000; Case C‑323/09 Interflora and Interflora British Unit [2011] ECR I‑0000; and Case C‑523/10 Wintersteiger [2012] ECR I‑0000.

15 – Proposal for a Regulation of the European Parliament and of the Council on the protection of individuals with regards to the processing of personal data and on the free movement of such data (General Data Protection Regulation). COM(2012)11 final.

16 – BOE No 298, 14 December 1999, p. 43088.

17 – According to its recital 11, the ‘principles of the protection of the rights and freedoms of individuals, notably the right to privacy, which are contained in this Directive, give substance to and amplify those contained in the Council of Europe Convention of 28 January 1981 for the protection of individuals with regard to automatic processing of personal data’.

18– Article 29 Working Party, Opinion 1/2010 on the concepts of ‘controller’ and ‘processor’ (WP 169), pp. 3-4.

19 – For example, Joined Cases C‑509/09 and C‑161/10 eDate Advertising and Martinez [2011] ECR I‑0000, paragraph 45.

20 – A newspaper normally includes personal data such as names of natural persons. This personal data is processed when it is consulted by automatic means. This processing is within the scope of application of the Directive unless it is exercised by a natural person in the course of a purely personal or household activity. See Article 2(a) and (b) and Article 3(2) of the Directive. Moreover, reading a paper document or displaying images including personal data also amounts to its processing. See Dammann, U. and Simitis, S., EG-Datenschutzrichtlinie, Nomos Verlagsgesellschaft, Baden-Baden, 1997, p. 110.

21 – Lindqvist, points 67–70, as regards the interpretation of Article 25 of the Directive.

22 – The opinions are available at .

23 – Internet search engines develop constantly and the purpose here is only to give an overview of the salient features that are currently relevant.

24 – Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on electronic commerce) (OJ 2000 L 178, p. 1).

25 – See recital 18 in the preamble to and Article 2(a) of ecommerce Directive 2000/31, read together with Article 1(2) of Directive 98/34/EC of the European Parliament and of the Council of 22 June 1998 laying down a procedure for the provision of information in the field of technical standards and regulations and of rules on information society services (OJ 1998 L 204, p. 37), as amended by Directive 98/48/EC of the European Parliament and of the Council of 20 July 1998 (OJ 1998 L 217, p. 18).

26 – Lindqvist, paragraphs 25‑27.

27 – A typical current exclusion code (or robot exclusion protocol) is called ‘robots.txt’; see or .

28 – Exclusion codes do not, however, technically prevent indexing or displaing, but the service provider running a search engine can decide to ignore them. Major internet search engine service providers, Google included, claim that they comply with such codes included in the source web page. See the Article 29 Working Party, Opinion 1/2008, p. 14.

29 – See the judgment of the European Court of Human Rights, K.U. v. Finland, no. 2872/02, § 43 and § 48, ECHR 2008, where the Court referred to the existence of positive obligations inherent in an effective respect for private or family life. These obligations may involve the adoption of measures designed to secure respect for private life even in the sphere of the relations of individuals between themselves. In K.U. v. Finland the State had a positive obligation to ensure that an effective remedy was available against the publisher.

30 – However, the internet is not a single enormous data bank established by the ‘Big Brother’ but a decentralised system of information originating from innumerable independent sources where accessibility and dissemination of information rely on intermediary services having as such nothing to do with the contents.

31 – See, in this respect, my opinion in L’Oréal and Others, points 54 et seq.

32 – This corresponds to the third situation mentioned in paragraph 3 above.

33 – For an example of a keywords advertising system (Google’s AdWords) see Google France and Google, paragraphs 22 and 23; Case C‑278/08 BergSpechte [2010] ECR I‑2517, paragraphs 5‑7; Portakabin, paragraphs 8‑10; and Interflora and Interflora British Unit, paragraphs 9-13.

34 – Case C‑400/10 PPU McB. [2010] ECR I‑8965, paragraphs 51 and 59; Case C‑256/11 Dereci and Others [2011] ECR I‑0000, paragraphs 71 and 72; Case C‑40/11 Iida [2012] ECR I‑0000, paragraph 78; and Case C‑617/10 Åkerberg Fransson [2013] ECR I‑0000, paragraph 23.

35 – For example in McB. the Court resisted an interpretation, which was sought on the basis of Article 7 of the Charter, of ‘rights of custody’ in Article 2(9) of Council Regulation (EC) No 2201/2003 of 27 November 2003 concerning jurisdiction and the recognition and enforcement of judgments in matrimonial matters and the matters of parental responsibility, repealing Regulation (EC) No 1347/2000 (OJ 2003 L 338, p. 1) that would have enlarged its meaning. That said, of course, if it is impossible to interpret an EU legislative provision in conformity with fundamental rights protected by EU law, that provision must be declared invalid. See Case C‑236/09 Association belge des Consommateurs Test‑Achats and Others [2011] ECR I‑773, paragraphs 30-34.

36 – Article 29 Working Party, Opinion 8/2010 on applicable law (WP 179), p. 8.

37 – Article 29 Working Party, Opinion 8/2010, pp. 24 and 31.

38 – Article 3(2)(a) of the Commission Proposal.

39 – L’Oréal and Others and the ecommerce Directive 2000/31.

40 – Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (OJ 2001 L 12, p. 1), Joined Cases C‑585/08 and C‑144/09 Pammer and Hotel Alpenhof [2010] ECR I‑12527, and Wintersteiger. See also my Opinion in Case C‑170/12 Pinckney, pending.

41 – Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society (OJ 2001 L 167, p. 10) and Case C‑5/11 Donner [2012] ECR I‑0000.

42 – The reference does not specify what is meant by ‘centre of gravity’, but this expression was used by Advocate General Cruz Villalón in his Opinion in eDate Advertising and Martinez, points 32 and 55.

43 – Article 29 Working Party, Opinion 8/2010, pp. 8 and 9. The Working Party also points out that the word ‘equipment’ used in the English version of the Directive is too narrow because the other language versions speak about ‘means’ which also covers non-material devices such as cookies (pp. 20 and 21).

44 – See, in particular, Article 29 Working Party, Opinion 8/2010, p. 19 where it is submitted that Article 4(1)(c) of the Directive should apply, despite its wording, where the controller has establishments in the EU but their activities are unrelated to the concerned processing of personal data.

45 – See Google France and Google, paragraph 23.

46 – See Google France and Google, paragraph 25, and Article 29 Working Party, Opinion 1/2008, pp. 5‑6. It is easy to verify that the use of the same keywords on different national Google domains may trigger the display of different search results and advertisements.

47 – Article 29 Working Party, Opinion 1/2008, p. 10.

48 – See Article 2(a) of the Directive, according to which personal data means ‘any information relating to an identified or identifiable natural person’. A wide range of examples is given by Article 29 Working Party, in its Opinion 4/2007 on the concept of personal data (WP 136). The Court confirmed the wide interpretation in Lindqvist, paragraphs 24‑27. See also Österreichischer Rundfunk and Other, paragraph 64; Satakunnan Markkinapörssi and Satamedia, paragraphs 35‑37; Case C‑524/06 Huber [2008] ECR I‑9705, paragraph 43; Case C‑553/07 Rijkeboer [2009] ECR I‑0000, paragraph 62; Case C‑461/10 Bonnier Audio and Others [2012] ECR I‑0000, paragraph 93; and Volker und Markus Schecke and Eifert, paragraphs 23, 55 and 56.

49 – Article 29 Working Party recalls that ‘it is not necessary for information to be considered as personal data that it is contained in a structured database or file. Also information contained in free text in an electronic document may qualify as personal data …’, see Opinion 4/2007, p. 8.

50 – There are search engines or search engine features specially targeting personal data, which, as such, can be identifiable because of their form (for example, social security numbers) or composition (strings of signs corresponding to names and surnames). See the Article 29 Working Party, Opinion 1/2008, p. 14. Such search engines may raise particular data protection issues that fall outside of the scope of this Opinion.

51 – However, so-called orphan pages without any links to other web pages remain inaccessible for the search engine.

52 – Web pages found by the crawler are stored in Google’s index database which is sorted alphabetically by search term, with each index entry storing a list of documents in which the term appears and the location within the text where it occurs. Certain words like articles, pronouns and common adverbs or certain single digits and single letters are not indexed. See .

53 – These copies (so-called ‘snapshots’) of web pages stored in Google’s cache only consist of HTML code, and not images which must be loaded from the original location. See Peguera, M., ‘Copyright Issues Regarding Google Images and Google Cache’, Google and the Law, pp. 169–202, at p. 174.

54 – Internet search engine service providers usually allow the webmasters to ask for the updating of the cache copy of the web page. Instructions on how to do this can be found on Google’s Webmaster Tools page.

55 – It seems language versions of the Directive, other than the English, such as the French, German, Spanish, Swedish and Dutch, speak of an entity being ‘responsible’ for data processing, not of a controller. Some language versions, such as the Finnish and Polish use more neutral terms (in Finnish, ‘rekisterinpitäjä’; in Polish ‘administrator danych’).

56 – Lindqvist, paragraph 68.

57– Article 29 Working Party, Opinion 1/2008, p.14, footnote 17. According to the Opinion, the role of users would typically be outside the scope of the Data Protection Directive as ‘purely personal activity’. In my opinion this assumption is not tenable. Typically internet users also use search engines in activities that are not purely personal, such as use for purposes relating to work, studies, business or third-sector activities.

58 – The Article 29 Working Party gives in its Opinion 4/2007 numerous examples of the concept of and processing of personal data, including the controller, and it seems to me that in all of the examples presented this condition is fulfilled.

59 – Article 29 Working Party, Opinion 1/2010, p. 9.

60 – Ibid., p. 14.

61 – Dammann and Simitis (p. 120) observe that processing by automatic means must not only concern the support where the data is recorded (Datenträger), but also relate to the data in their semantic or substantive dimension. In my opinion it is crucial that personal data is according to the directive ‘information’, i.e. semantically relevant content.

62 – Article 29 Working Party, Opinion 1/2008, p. 14.

63 – Lindqvist, paragraph 27.

64 – Satakunnan Markkinapörssi and Satamedia, paragraph 37.

65 – Article 29 Working Party, Opinion 1/2010, pp. 4 and 9.

66 – Article 29 Working Party, Opinion 1/2008, p. 14.

67 – Article 29 Working Party, Opinion 1/2008, p. 14, however adds that the extent to which it has an obligation to remove or block personal data may depend on the general tort law and liability regulations of the particular Member State. In some Member States national legislation provides ‘notice and take down’ procedures that the internet search engine service provider must follow in order to avoid liability.

68 – According to one author such filtering is done by Google in nearly all countries, for example in relation to infringements of intellectual property rights. Moreover, in the United States information critical to scientology has been filtered. In France and Germany Google is filtering search results relating to ‘Nazi memorabilia, Holocaust deniers, white supremacist and sites that make propaganda against the democractic constitutional order’. For further examples see Friedmann, D., ‘Paradoxes, Google and China: How Censorship can Harm and Intellectual Property can Harness Innovation’, Google and the Law,,p p. 303‑327,at p. 307.

69 – See paragraph 41 above.

70 – First Report on the application of [ecommerce Directive 2000/31], COM(2003)702 final, p. 13, footnote 69 and Article 29 Working Party, Opinion 1/2008, p. 13, footnote 16.

71 – See paragraph 41 above.

72 – The capacity of a personal name to identify a natural person is context dependent. A common name may not individualise a person on the internet but surely, for example, within a school class. In computerised processing of personal data a person is usually assigned to a unique identifier in order to avoid confusion between two persons. Typical examples of such identifiers are social security numbers. See in this regard Article 29 Working Party, Opinion 4/2007, p. 13 and Opinion 1/2008, p. 9, footnote 11.

73 – It is interesting to note, however, that, in the context of data stored by government agencies, the European Court of Human Rights has held that ‘domestic law should notably ensure that such data are relevant and not excessive in relation to the purpose for which they are stored; and preserved in a from which permits identification of the data subjects for no longer than is required for the purpose for which those data are stored’ (see S. and Marper v. United Kingdom, nos. 30562/04 and 30566/04, § 103, ECHR 2008; see also Segerstedt-Wiberg and Others v. Sweden, no. 62332/00, § 90, ECHR 2006‑VII). However, the European Court of Human Rights has equally recognised, in the context of the Article 10 ECHR, right to freedom of expression, ‘the substantial contribution made by internet archives to preserving and making available news and information’ (Times Newspapers Ltd v. the United Kingdom (nos. 1 and 2), nos. 3002/03 and 23676/03, § 45, ECHR 2009).

74 – See paragraph 41 above.

75 – Cf. Article 14 of the ecommerce Directive.

76– Article 29 Working Party, Opinion 1/2008, p. 14.

77 – This was the approach developed by the Court in McB, paragraphs 44 and 49..

78 – Joined Cases C‑468/10 and C‑469/10 ASNEF and FECEMD [2011] ECR I‑0000, paragraphs 44–45. The European Court of Human Rights has noted that publication of personal data elsewhere ends the overriding interest relating to protection of confidentiality, see Aleksey Ovchinnikov v. Russia, no. 24061/04, § 49, 16 December 2010,.

79 – European Court of Human Rights: Niemietz v. Germany, 16 December 1992, § 29, Series A no. 251-B; Amann v. Switzerland [GC], no. 27798/95, § 65, ECHR 2000‑II; and Rotaru v. Romania [GC], no. 28341/95, § 43, ECHR 2000 V.

80 – Paragraph 52 of the judgment.

81 – In contrast, the European Court of Human Rights has declined from giving a definition of private life in positive terms. According to that Court, the notion of private life is a broad one, which is not susceptible to exhaustive definition (see Costello‑Roberts v. the United Kingdom, 25 March 1993, § 36, Series A no. 247‑C).

82 – On positive obligations on the State to act to protect privacy, when it is being breached by private sector actors, and the need to balance any such obligation on the right to freedom of expression of the latter, see for example Von Hannover v. Germany, no. 59320/00, ECHR 2004-VI, and Ageyevy v. Russia, no. 7075/10, 18 April 2013.

83 – European Court of Human Rights: Handyside v. the United Kingdom, 7 December 1976, § 49, Series A no. 24; Müller and Others v. Switzerland, 24 May 1988, § 33, Series A no. 133; Vogt v. Germany, 26 September 1995, § 52, Series A no. 323; and Guja v. Moldova [GC], no. 14277/04, § 69, ECHR 2008. See also Case C‑274/99 P Connolly v Commission [2001] ECR I‑1611, paragraph 39 and Opinion of Advocate General Kokott in Satakunnan Markkinapörssi and Satamedia, point 38.

84 – Case C‑360/10 SABAM v Netlog [2012] ECR I‑0000, paragraph 48.

85 – United Nations, Human Rights Council, Report of the Special Rapporteur on the promotion and protection of the right to freedom of opinion and expression, Frank La Rue (Document A/HRC/17/27), of 16 May 2011.

86 – Satakunnan Markkinapörssi and Satamedia, paragraph 60.

87 – It should be recalled here that the journalism exception in Article 9 of the Directive applies ‘not only to media undertakings but also to every person engaged in journalism’, see Satakunnan Markkinapörssi and Satamedia, paragraph 58.

88 – European Court of Human Rights: Times Newspapers Ltd (nos. 1 and 2), § 45.

89 – Case C‑70/10 Scarlet Extended [2011] ECR I‑0000, paragraph 46, and SABAM v Netlog, paragraph 44

90 – See also Joined Cases C‑317/08 to C‑320/08 Alassini and Others [2010] ECR I‑221, paragraph 63, where it was held that ‘it is settled case-law that fundamental rights do not constitute unfettered prerogatives and may be restricted, provided that the restrictions in fact correspond to objectives of general interest pursued by the measure in question and that they do not involve, with regard to the objectives pursued, a disproportionate and intolerable interference which infringes upon the very substance of the rights guaranteed (see, to that effect, Case C‑28/05 Doktor and Others [2006] ECR I‑5431, paragraph 75 and the case-law cited, and the judgment of the European Court of Human Rights in Fogarty v. the United Kingdom, no. 37112/97, § 33, ECHR 2001‑XI (extracts))’.

91 – Paragraph 50 of the judgment.

92 – Cited above.

93 – On the right to receive information, see European Court of Human Rights, Observer and Guardian v. the United Kingdom, 26 November 1991, § 60, Series A no. 216, and Timpul Info‑Magazin and Anghel v. Moldova, no. 42864/05, § 34, 27 November 2007.

94 – Thomas Bowdler (1754–1825) published a sanitised version of William Shakespeare’s works which intended to be more appropriate for 19th century women and children than the original.

95 – SABAM v Netlog, paragraphs 45‑47.

96 – My Opinion in L’Oréal and Others, point 155.

97 – SABAM v Netlog, paragraphs 48 and 50.

98 – Article 29 Working Party, Opinion 1/2008,p p. 14‑15.

MDY Industries v. Blizzard Entertainment

629 F.3d 928, 2010

CALLAHAN, Circuit Judge:

Blizzard Entertainment, Inc. (“Blizzard”) is the creator of World of Warcraft (“WoW”), a popular multiplayer online role-playing game in which players interact in a virtual world while advancing through the game's 70 levels. MDY Industries, LLC and its sole member Michael Donnelly (“Donnelly”) (sometimes referred to collectively as “MDY”) developed and sold Glider, a software program that automatically plays the early levels of WoW for players.

MDY brought this action for a declaratory judgment to establish that its Glider sales do not infringe Blizzard's copyright or other rights, and Blizzard asserted counterclaims under the Digital Millennium Copyright Act (“DMCA”), 17 U.S.C. § 1201 et seq., and for tortious interference with contract under Arizona law. The district court found MDY and Donnelly liable for secondary copyright infringement, violations of DMCA § 1201(a)(2) and (b)(1), and tortious interference with contract. We reverse the district court except as to MDY's liability for violation of DMCA § 1201(a)(2) and remand for trial on Blizzard's claim for tortious interference with contract.

I.

A. World of Warcraft

In November 2004, Blizzard created WoW, a “massively multiplayer online role-playing game” in which players interact in a virtual world. WoW has ten million subscribers, of which two and a half million are in North America. The WoW software has two components: (1) the game client software that a player installs on the computer; and (2) the game server software, which the player accesses on a subscription basis by connecting to WoW's online servers. WoW does not have single-player or offline modes.

WoW players roleplay different characters, such as humans, elves, and dwarves. A player's central objective is to advance the character through the game's 70 levels by participating in quests and engaging in battles with monsters. As a player advances, the character collects rewards such as in-game currency, weapons, and armor. WoW's virtual world has its own economy, in which characters use their virtual currency to buy and sell items directly from each other, through vendors, or using auction houses. Some players also utilize WoW's chat capabilities to interact with others.

B. Blizzard's use agreements

Each WoW player must read and accept Blizzard's End User License Agreement (“EULA”) and Terms of Use (“ToU”) on multiple occasions. The EULA pertains to the game client, so a player agrees to it both before installing the game client and upon first running it. The ToU pertains to the online service, so a player agrees to it both when creating an account and upon first connecting to the online service. Players who do not accept both the EULA and the ToU may return the game client for a refund.

C. Development of Glider and Warden

Donnelly is a WoW player and software programmer. In March 2005, he developed Glider, a software “bot” (short for robot) that automates play of WoW's early levels, for his personal use. A user need not be at the computer while Glider is running. As explained in the Frequently Asked Questions (“FAQ”) on MDY's website for Glider:

Glider ... moves the mouse around and pushes keys on the keyboard. You tell it about your character, where you want to kill things, and when you want to kill. Then it kills for you, automatically. You can do something else, like eat dinner or go to a movie, and when you return, you'll have a lot more experience and loot.

Glider does not alter or copy WoW's game client software, does not allow a player to avoid paying monthly subscription dues to Blizzard, and has no commercial use independent of WoW. Glider was not initially designed to avoid detection by Blizzard.

The parties dispute Glider's impact on the WoW experience. Blizzard contends that Glider disrupts WoW's environment for non-Glider players by enabling Glider users to advance quickly and unfairly through the game and to amass additional game assets. MDY contends that Glider has a minimal effect on non-Glider players, enhances the WoW experience for Glider users, and facilitates disabled players' access to WoW by auto-playing the game for them.

In summer 2005, Donnelly began selling Glider through MDY's website for fifteen to twenty-five dollars per license. Prior to marketing Glider, Donnelly reviewed Blizzard's EULA and client-server manipulation policy. He reached the conclusion that Blizzard had not prohibited bots in those documents.

In September 2005, Blizzard launched Warden, a technology that it developed to prevent its players who use unauthorized third-party software, including bots, from connecting to WoW's servers. Warden was able to detect Glider, and Blizzard immediately used Warden to ban most Glider users. MDY responded by modifying Glider to avoid detection and promoting its new anti-detection features on its website's FAQ. It added a subscription service, Glider Elite, which offered “additional protection from game detection software” for five dollars a month.

Thus, by late 2005, MDY was aware that Blizzard was prohibiting bots. MDY modified its website to indicate that using Glider violated Blizzard's ToU. In November 2005, Donnelly wrote in an email interview, “Avoiding detection is rather exciting, to be sure. Since Blizzard does not want bots running at all, it's a violation to use them.” Following MDY's anti-detection modifications, Warden only occasionally detected Glider. As of September 2008, MDY had gross revenues of $3.5 million based on 120,000 Glider license sales.

D. Financial and practical impact of Glider

Blizzard claims that from December 2004 to March 2008, it received 465,000 complaints about WoW bots, several thousand of which named Glider. Blizzard spends $940,000 annually to respond to these complaints, and the parties have stipulated that Glider is the principal bot used by WoW players. Blizzard introduced evidence that it may have lost monthly subscription fees from Glider users, who were able to reach WoW's highest levels in fewer weeks than players playing manually. Donnelly acknowledged in a November 2005 email that MDY's business strategy was to make Blizzard's anti-bot detection attempts financially prohibitive:

The trick here is that Blizzard has a finite amount of development and test resources, so we want to make it bad business to spend that much time altering their detection code to find Glider, since Glider's negative effect on the game is debatable.... [W]e attack th[is] weakness and try to make it a bad idea or make their changes very risky, since they don't want to risk banning or crashing innocent customers.

E. Pre-litigation contact between MDY and Blizzard

In August 2006, Blizzard sent MDY a cease-and-desist letter alleging that MDY's website hosted WoW screenshots and a Glider install file, all of which infringed Blizzard's copyrights. Donnelly removed the screenshots and requested Blizzard to clarify why the install file was infringing, but Blizzard did not respond. In October 2006, Blizzard's counsel visited Donnelly's home, threatening suit unless MDY immediately ceased selling Glider and remitted all profits to Blizzard. MDY immediately commenced this action.

II.

On December 1, 2006, MDY filed an amended complaint seeking a declaration that Glider does not infringe Blizzard's copyright or other rights. In February 2007, Blizzard filed counterclaims and third-party claims against MDY and Donnelly for, inter alia, contributory and vicarious copyright infringement, violation of DMCA § 1201(a)(2) and (b)(1), and tortious interference with contract.

. . .

On April 1, 2009, the district court entered judgment against MDY and Donnelly for $6.5 million, an adjusted figure to which the parties stipulated based on MDY's DMCA liability and post-summary judgment Glider sales. The district court permanently enjoined MDY from distributing Glider. MDY's efforts to stay injunctive relief pending appeal were unsuccessful. On April 29, 2009, MDY timely filed this appeal. On May 12, 2009, Blizzard timely cross-appealed the district court's holding that MDY did not violate DMCA § 1201(a)(2) and (b)(1) as to the game software's source code.

III.

We review de novo the district court's (1) orders granting or denying summary judgment; (2) conclusions of law after a bench trial; and (3) interpretations of state law. . . . We review the district court's findings of fact for clear error. . . .

IV.

We first consider whether MDY committed contributory or vicarious infringement (collectively, “secondary infringement”) of Blizzard's copyright by selling Glider to WoW players. See ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1454 (7th Cir.1996) (“A copyright is a right against the world. Contracts, by contrast, generally affect only their parties.”). To establish secondary infringement, Blizzard must first demonstrate direct infringement. . . . To establish direct infringement, Blizzard must demonstrate copyright ownership and violation of one of its exclusive rights by Glider users. . . . MDY is liable for contributory infringement if it has “intentionally induc[ed] or encourag[ed] direct infringement” by Glider users. MGM Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 930, 125 S.Ct. 2764, 162 L.Ed.2d 781 (2005). MDY is liable for vicarious infringement if it (1) has the right and ability to control Glider users' putatively infringing activity and (2) derives a direct financial benefit from their activity. Id. If Glider users directly infringe, MDY does not dispute that it satisfies the other elements of contributory and vicarious infringement.

As a copyright owner, Blizzard possesses the exclusive right to reproduce its work. 17 U.S.C. § 106(1). The parties agree that when playing WoW, a player's computer creates a copy of the game's software in the computer's random access memory (“RAM”), a form of temporary memory used by computers to run software programs. This copy potentially infringes unless the player (1) is a licensee whose use of the software is within the scope of the license or (2) owns the copy of the software. See Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 1121 (9th Cir.1999) (“Sun I”); 17 U.S.C. § 117(a). As to the scope of the license, ToU § 4(B), “Limitations on Your Use of the Service,” provides:

You agree that you will not ... (ii) create or use cheats, bots, “mods,” and/or hacks, or any other third-party software designed to modify the World of Warcraft experience; or (iii) use any third-party software that intercepts, “mines,” or otherwise collects information from or through the Program or Service.

By contrast, if the player owns the copy of the software, the “essential step” defense provides that the player does not infringe by making a copy of the computer program where the copy is created and used solely “as an essential step in the utilization of the computer program in conjunction with a machine.” 17 U.S.C. § 117(a)(1).

A. Essential step defense

We consider whether WoW players, including Glider users, are owners or licensees of their copies of WoW software. If WoW players own their copies, as MDY contends, then Glider users do not infringe by reproducing WoW software in RAM while playing, and MDY is not secondarily liable for copyright infringement.

In Vernor v. Autodesk, Inc., we recently distinguished between “owners” and “licensees” of copies for purposes of the essential step defense. Vernor v. Autodesk, Inc., 621 F.3d 1102, 1108–09 (9th Cir.2010); see also MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 519 n. 5 (9th Cir.1993); Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330, 1333, 1335–36 (9th Cir.1995); Wall Data, Inc. v. Los Angeles County Sheriff's Dep't, 447 F.3d 769, 784–85 (9th Cir.2006). In Vernor, we held “that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user's ability to transfer the software; and (3) imposes notable use” restrictions. 621 F.3d at 1111 (internal footnote omitted).

Applying Vernor, we hold that WoW players are licensees of WoW's game client software. Blizzard reserves title in the software and grants players a non-exclusive, limited license. Blizzard also imposes transfer restrictions if a player seeks to transfer the license: the player must (1) transfer all original packaging and documentation; (2) permanently delete all of the copies and installation of the game client; and (3) transfer only to a recipient who accepts the EULA. A player may not sell or give away the account.

Blizzard also imposes a variety of use restrictions. The game must be used only for non-commercial entertainment purposes and may not be used in cyber cafes and computer gaming centers without Blizzard's permission. Players may not concurrently use unauthorized third-party programs. Also, Blizzard may alter the game client itself remotely without a player's knowledge or permission, and may terminate the EULA and ToU if players violate their terms. Termination ends a player's license to access and play WoW. Following termination, players must immediately destroy their copies of the game and uninstall the game client from their computers, but need not return the software to Blizzard.

Since WoW players, including Glider users, do not own their copies of the software, Glider users may not claim the essential step defense. 17 U.S.C. § 117(a)(1). Thus, when their computers copy WoW software into RAM, the players may infringe unless their usage is within the scope of Blizzard's limited license.

B. Contractual covenants vs. license conditions

“A copyright owner who grants a nonexclusive, limited license ordinarily waives the right to sue licensees for copyright infringement, and it may sue only for breach of contract.” Sun I, 188 F.3d at 1121 (internal quotations omitted). However, if the licensee acts outside the scope of the license, the licensor may sue for copyright infringement. Id. (citing S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1087 (9th Cir.1989)). Enforcing a copyright license “raises issues that lie at the intersection of copyright and contract law.” Id. at 1122.

We refer to contractual terms that limit a license's scope as “conditions,” the breach of which constitute copyright infringement. Id. at 1120. We refer to all other license terms as “covenants,” the breach of which is actionable only under contract law. Id. We distinguish between conditions and covenants according to state contract law, to the extent consistent with federal copyright law and policy. Foad Consulting Group v. Musil Govan Azzalino, 270 F.3d 821, 827 (9th Cir.2001).

A Glider user commits copyright infringement by playing WoW while violating a ToU term that is a license condition. To establish copyright infringement, then, Blizzard must demonstrate that the violated term—ToU § 4(B)—is a condition rather than a covenant. Sun I, 188 F.3d at 1122. Blizzard's EULAs and ToUs provide that they are to be interpreted according to Delaware law. Accordingly, we first construe them under Delaware law, and then evaluate whether that construction is consistent with federal copyright law and policy.

A covenant is a contractual promise, i.e., a manifestation of intention to act or refrain from acting in a particular way, such that the promisee is justified in understanding that the promisor has made a commitment. See Travel Centers of Am. LLC v. Brog, No. 3751–CC, 2008 Del. Ch. LEXIS 183, *9 (Del. Ch. Dec. 5, 2008); see also Restatement (Second) of Contracts § 2 (1981). A condition precedent is an act or event that must occur before a duty to perform a promise arises. AES P.R., L.P. v. Alstom Power, Inc., 429 F.Supp.2d 713, 717 (D.Del.2006) (citing Delaware state law); see also Restatement (Second) of Contracts § 224. Conditions precedent are disfavored because they tend to work forfeitures. AES, 429 F.Supp.2d at 717 (internal citations omitted). Wherever possible, equity construes ambiguous contract provisions as covenants rather than conditions. See Wilmington Tr. Co. v. Clark, 325 A.2d 383, 386 (Del.Ch.1974). However, if the contract is unambiguous, the court construes it according to its terms. AES, 429 F.Supp.2d at 717 (citing 17 Am.Jur.2d Contracts § 460 (2006)).

Applying these principles, ToU § 4(B)(ii) and (iii)'s prohibitions against bots and unauthorized third-party software are covenants rather than copyright-enforceable conditions. See Greenwood v. CompuCredit Corp., 615 F.3d 1204, 1212, (9th Cir.2010) (“[H]eadings and titles are not meant to take the place of the detailed provisions of the text,” and ... “the heading of a section cannot limit the plain meaning of the text.” (quoting Bhd. of R.R. Trainmen v. Balt. & Ohio R.R., 331 U.S. 519, 528—29, 67 S.Ct. 1387, 91 L.Ed. 1646 (1947))). Although ToU § 4 is titled, “Limitations on Your Use of the Service,” nothing in that section conditions Blizzard's grant of a limited license on players' compliance with ToU § 4's restrictions. To the extent that the title introduces any ambiguity, under Delaware law, ToU § 4(B) is not a condition, but is a contractual covenant. Cf. Sun Microsystems, Inc. v. Microsoft Corp., 81 F.Supp.2d 1026, 1031–32 (N.D.Cal.2000) (“Sun II ”) (where Sun licensed Microsoft to create only derivative works compatible with other Sun software, Microsoft's “compatibility obligations” were covenants because the license was not specifically conditioned on their fulfillment).

To recover for copyright infringement based on breach of a license agreement, (1) the copying must exceed the scope of the defendant's license and (2) the copyright owner's complaint must be grounded in an exclusive right of copyright (e.g., unlawful reproduction or distribution). See Storage Tech. Corp. v. Custom Hardware Eng'g & Consulting, Inc., 421 F.3d 1307, 1315–16 (Fed.Cir.2005). Contractual rights, however, can be much broader:

[C]onsider a license in which the copyright owner grants a person the right to make one and only one copy of a book with the caveat that the licensee may not read the last ten pages. Obviously, a licensee who made a hundred copies of the book would be liable for copyright infringement because the copying would violate the Copyright Act's prohibition on reproduction and would exceed the scope of the license. Alternatively, if the licensee made a single copy of the book, but read the last ten pages, the only cause of action would be for breach of contract, because reading a book does not violate any right protected by copyright law.

Id. at 1316. Consistent with this approach, we have held that the potential for infringement exists only where the licensee's action (1) exceeds the license's scope (2) in a manner that implicates one of the licensor's exclusive statutory rights. See, e.g., Sun I, 188 F.3d at 1121–22 (remanding for infringement determination where defendant allegedly violated a license term regulating the creation of derivative works).

Here, ToU § 4 contains certain restrictions that are grounded in Blizzard's exclusive rights of copyright and other restrictions that are not. For instance, ToU § 4(D) forbids creation of derivative works based on WoW without Blizzard's consent. A player who violates this prohibition would exceed the scope of her license and violate one of Blizzard's exclusive rights under the Copyright Act. In contrast, ToU § 4(C)(ii) prohibits a player's disruption of another player's game experience. Id. A player might violate this prohibition while playing the game by harassing another player with unsolicited instant messages. Although this conduct may violate the contractual covenants with Blizzard, it would not violate any of Blizzard's exclusive rights of copyright. The antibot provisions at issue in this case, ToU § 4(B)(ii) and (iii), are similarly covenants rather than conditions. A Glider user violates the covenants with Blizzard, but does not thereby commit copyright infringement because Glider does not infringe any of Blizzard's exclusive rights. For instance, the use does not alter or copy WoW software.

Were we to hold otherwise, Blizzard—or any software copyright holder—could designate any disfavored conduct during software use as copyright infringement, by purporting to condition the license on the player's abstention from the disfavored conduct. The rationale would be that because the conduct occurs while the player's computer is copying the software code into RAM in order for it to run, the violation is copyright infringement. This would allow software copyright owners far greater rights than Congress has generally conferred on copyright owners.FN3

FN3. A copyright holder may wish to enforce violations of license agreements as copyright infringements for several reasons. First, breach of contract damages are generally limited to the value of the actual loss caused by the breach. See 24 Richard A. Lord, Williston on Contracts § 65:1 (4th ed.2007). In contrast, copyright damages include the copyright owner's actual damages and the infringer's actual profits, or statutory damages of up to $150,000 per work. 17 U.S.C. § 504; see Frank Music Corp. v. MGM, Inc., 772 F.2d 505, 512 n. 5 (9th Cir.1985). Second, copyright law offers injunctive relief, seizure of infringing articles, and awards of costs and attorneys' fees. 17 U.S.C. §§ 502–03, 505. Third, as amicus Software & Information Industry Association highlights, copyright law allows copyright owners a remedy against “downstream” infringers with whom they are not in privity of contract. See ProCD, Inc., 86 F.3d at 1454.

We conclude that for a licensee's violation of a contract to constitute copyright infringement, there must be a nexus between the condition and the licensor's exclusive rights of copyright. Here, WoW players do not commit copyright infringement by using Glider in violation of the ToU. MDY is thus not liable for secondary copyright infringement, which requires the existence of direct copyright infringement. Grokster, 545 U.S. at 930, 125 S.Ct. 2764.

It follows that because MDY does not infringe Blizzard's copyrights, we need not resolve MDY's contention that Blizzard commits copyright misuse. Copyright misuse is an equitable defense to copyright infringement, the contours of which are still being defined. See Practice Mgmt. Info. Corp. v. Am. Med. Ass'n, 121 F.3d 516, 520 (9th Cir.1997). The remedy for copyright misuse is to deny the copyright holder the right to enforce its copyright during the period of misuse. Since MDY does not infringe, we do not consider whether Blizzard committed copyright misuse.

We thus reverse the district court's grant of summary judgment to Blizzard on its secondary copyright infringement claims. Accordingly, we must also vacate the portion of the district court's permanent injunction that barred MDY and Donnelly from “infringing, or contributing to the infringement of, Blizzard's copyrights in WoW software.”

Capitol Records, LLC v. ReDigi Inc.

--- F.Supp.2d ----, 2013 WL 1286134 (S.D.N.Y.), 2013

MEMORANDUM AND ORDER

RICHARD J. SULLIVAN, District Judge.

Capitol Records, LLC (“Capitol”), the recording label for such classic vinyls as Frank Sinatra's “Come Fly With Me” and The Beatles' “Yellow Submarine,” brings this action against ReDigi Inc. (“ReDigi”), a twenty-first century technology company that touts itself as a “virtual” marketplace for “pre-owned” digital music. What has ensued in a fundamental clash over culture, policy, and copyright law, with Capitol alleging that ReDigi's web-based service amounts to copyright infringement in violation of the Copyright Act of 1976 (the “Copyright Act”), 17 U.S.C. § 101 et seq. Now before the Court are Capitol's motion for partial summary judgment and ReDigi's motion for summary judgment, both filed pursuant to Federal Rule of Civil Procedure 56. Because this is a court of law and not a congressional subcommittee or technology blog, the issues are narrow, technical, and purely legal. Thus, for the reasons that follow, Capitol's motion is granted and ReDigi's motion is denied.

I. BACKGROUND

A. Facts

ReDigi markets itself as “the world's first and only online marketplace for digital used music.” (Capitol 56.1 Stmt., Doc. No. 50 (“Cap. 56.1”), ¶ 6.) Launched on October 13, 2011, ReDigi's website invites users to “sell their legally acquired digital music files, and buy used digital music from others at a fraction of the price currently available on iTunes.” (Id. ¶¶ 6, 9.) Thus, much like used record stores, ReDigi permits its users to recoup value on their unwanted music. Unlike used record stores, however, ReDigi's sales take place entirely in the digital domain. (See ReDigi Reply 56.1 Stmt., Doc. No. 83 (“RD Rep. 56.1”), 4 ¶ 16.)

To sell music on ReDigi's website, a user must first download ReDigi's “Media Manager” to his computer. (ReDigi 56.1 Stmt., Doc. No. 56 (“RD 56.1”), ¶ 8.) Once installed, Media Manager analyzes the user's computer to build a list of digital music files eligible for sale. (Id.) A file is eligible only if it was purchased on iTunes or from another ReDigi user; music downloaded from a CD or other file-sharing website is ineligible for sale. (Id.) After this validation process, Media Manager continually runs on the user's computer and attached devices to ensure that the user has not retained music that has been sold or uploaded for sale. (Id. ¶ 10.) However, Media Manager cannot detect copies stored in other locations. (Cap. 56.1 ¶¶ 59–61, 63; see Capitol Reply 56.1 Stmt., Doc. No. 78 (“Cap. Rep. 56.1”), ¶ 10.) If a copy is detected, Media Manager prompts the user to delete the file. (Cap. 56.1 ¶ 64.) The file is not deleted automatically or involuntarily, though ReDigi's policy is to suspend the accounts of users who refuse to comply. (Id.)

After the list is built, a user may upload any of his eligible files to ReDigi's “Cloud Locker,” an ethereal moniker for what is, in fact, merely a remote server in Arizona. (RD 56.1 ¶¶ 9, 11; Cap. 56.1 ¶ 22.) ReDigi's upload process is a source of contention between the parties. (See RD 56.1 ¶ ¶ 14–23; Cap. Rep. 56.1 ¶¶ 14–23.) ReDigi asserts that the process involves “migrating” a user's file, packet by packet—“analogous to a train”—from the user's computer to the Cloud Locker so that data does not exist in two places at any one time.FN2 (RD 56.1 ¶¶ 14, 36.) Capitol asserts that, semantics aside, ReDigi's upload process “necessarily involves copying” a file from the user's computer to the Cloud Locker. (Cap. Rep. 56.1 ¶ 14.) Regardless, at the end of the process, the digital music file is located in the Cloud Locker and not on the user's computer. (RD 56.1 ¶ 21.) Moreover, Media Manager deletes any additional copies of the file on the user's computer and connected devices. (Id. ¶ 38.)

Once uploaded, a digital music file undergoes a second analysis to verify eligibility. (Cap. 56.1 ¶¶ 31–32.) If ReDigi determines that the file has not been tampered with or offered for sale by another user, the file is stored in the Cloud Locker, and the user is given the option of simply storing and streaming the file for personal use or offering it for sale in ReDigi's marketplace. (Id. ¶¶ 33–37.) If a user chooses to sell his digital music file, his access to the file is terminated and transferred to the new owner at the time of purchase. (Id. ¶ 49.) Thereafter, the new owner can store the file in the Cloud Locker, stream it, sell it, or download it to her computer and other devices. (Id. ¶ 50.) No money changes hands in these transactions. (RD Rep. 56.15 ¶ 18.) Instead, users buy music with credits they either purchased from ReDigi or acquired from other sales. (Id.) ReDigi credits, once acquired, cannot be exchanged for money. (Id.) Instead, they can only be used to purchase additional music. (Id.)

To encourage activity in its marketplace, ReDigi initially permitted users to preview thirty-second clips and view album cover art of songs posted for sale pursuant to a licensing agreement with a third party. (See RD 56.1 ¶¶ 73–78.) However, shortly after its launch, ReDigi lost the licenses. (Id.) Accordingly, ReDigi now sends users to either YouTube or iTunes to listen to and view this promotional material. (Id. ¶¶ 77, 79.) ReDigi also offers its users a number of incentives. (Cap. 56.1 ¶ 39.) For instance, ReDigi gives twenty-cent credits to users who post files for sale and enters active sellers into contests for prizes. (Id. ¶¶ 39, 42.) ReDigi also encourages sales by advising new users via email that they can “[c]ash in” their music on the website, tracking and posting the titles of sought after songs on its website and in its newsletter, notifying users when they are low on credits and advising them to either purchase more credits or sell songs, and connecting users who are seeking unavailable songs with potential sellers. (Id. ¶¶ 39–48.)

Finally, ReDigi earns a fee for every transaction. (Id. ¶ 54.) ReDigi's website prices digital music files at fifty-nine to seventy-nine cents each. (Id. ¶ 55.) When users purchase a file, with credits, 20% of the sale price is allocated to the seller, 20% goes to an “escrow” fund for the artist, and 60% is retained by ReDigi.FN3 (Id.)

B. Procedural History

Capitol, which owns a number of the recordings sold on ReDigi's website, commenced this action by filing the Complaint on January 6, 2012. (See Complaint, dated Jan. 5, 2012, Doc. No. 1 (“Compl.”); Cap. 56.1 ¶¶ 68–73.) In its Complaint, Capitol alleges multiple violations of the Copyright Act, 17 U.S.C. § 101, et seq., including direct copyright infringement, inducement of copyright infringement, contributory and vicarious copyright infringement, and common law copyright infringement. (Compl. ¶¶ 44–88.) Capitol seeks preliminary and permanent injunctions of ReDigi's services, as well as damages, attorney's fees and costs, interest, and any other appropriate relief. (Id. at 17–18.) On February 6, 2012, the Court denied Capitol's motion for a preliminary injunction, finding that Capitol had failed to establish irreparable harm. (Doc. No. 26.)

On July 20, 2012, Capitol filed its motion for partial summary judgment on the claims that ReDigi directly and secondarily infringed Capitol's reproduction and distribution rights. (Doc. No. 48.) ReDigi filed its cross-motion the same day, seeking summary judgment on all grounds of liability, including ReDigi's alleged infringement of Capitol's performance and display rights.FN4 (Doc. No. 54.) Both parties responded on August 14, 2012 and replied on August 24, 2012. (Doc. Nos. 76, 79, 87, 90.) The Court heard oral argument on October 5, 2012.

II. LEGAL STANDARD

Pursuant to Federal Rule of Civil Procedure 56(a), a court may not grant a motion for summary judgment unless “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party bears the burden of showing that it is entitled to summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The court “is not to weigh evidence but is instead required to view the evidence in the light most favorable to the party opposing summary judgment, to draw all reasonable inferences in favor of that party, and to eschew credibility assessments.” Amnesty Am. v. Town of W. Hartford, 361 F.3d 113, 122 (2d Cir.2004) (internal quotation marks omitted); accord Anderson, 477 U.S. at 249, 106 S.Ct. 2505. As such, “if there is any evidence in the record from any source from which a reasonable inference in the [nonmoving party's] favor may be drawn, the moving party simply cannot obtain a summary judgment.” Binder & Binder PC v. Barnhart, 481 F.3d 141, 148 (2d Cir.2007) (internal quotation marks omitted).

Inferences and burdens of proof on cross-motions for summary judgment are the same as those for a unilateral motion. See Straube v. Fla. Union Free Sch. Dist., 801 F.Supp. 1164, 1174 (S.D.N.Y.1992). “That is, each cross-movant must present sufficient evidence to satisfy its burden of proof on all material facts.” U.S. Underwriters Ins. Co. v. Roka LLC, No. 99 Civ. 10136(AGS), 2000 WL 1473607, at *3 (S.D.N.Y. Sept. 29, 2000); see Barhold v. Rodriguez, 863 F.2d 233, 236 (2d Cir.1988).

III. DISCUSSION

Section 106 of the Copyright Act grants “the owner of copyright under this title” certain “exclusive rights,” including the right “to reproduce the copyrighted work in copies or phonorecords,” “to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership,” and to publicly perform and display certain copyrighted works. 17 U.S.C. §§ 106(1), (3)-(5). However, these exclusive rights are limited by several subsequent sections of the statute. Pertinently, Section 109 sets forth the “first sale” doctrine, which provides that “the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” Id. § 109(a). The novel question presented in this action is whether a digital music file, lawfully made and purchased, may be resold by its owner through ReDigi under the first sale doctrine. The Court determines that it cannot.

A. Infringement of Capitol's Copyrights

To state a claim for copyright infringement, a plaintiff must establish that it owns a valid copyright in the work at issue and that the defendant violated one of the exclusive rights the plaintiff holds in the work. Twin Peaks Prods., Inc. v. Publ'ns Int'l, Ltd., 996 F.2d 1366, 1372 (2d Cir.1993) (citing Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361, 111 S.Ct. 1282, 113 L.Ed.2d 358 (1991)). It is undisputed that Capitol owns copyrights in a number of the recordings sold on ReDigi's website. (See Cap. 56.1 ¶¶ 68–73; RD Rep. 56.118–19, ¶¶ 68–73; Decl. of Richard S. Mandel, dated July 19, 2012, Doc. No. 52 (“Mandel Decl.”), ¶ 16, Ex. M; Decl. of Alasdair J. McMullan, dated July 19, 2012, Doc. No. 51 (“McMullan Decl.”), ¶¶ 3–5, Ex. 1.) It is also undisputed that Capitol did not approve the reproduction or distribution of its copyrighted recordings on ReDigi's website. Thus, if digital music files are “reproduce[d]” and “distribute[d]” on ReDigi's website within the meaning of the Copyright Act, Capitol's copyrights have been infringed.

1. Reproduction Rights

Courts have consistently held that the unauthorized duplication of digital music files over the Internet infringes a copyright owner's exclusive right to reproduce. See, e.g., A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1014 (9th Cir.2001). However, courts have not previously addressed whether the unauthorized transfer of a digital music file over the Internet—where only one file exists before and after the transfer—constitutes reproduction within the meaning of the Copyright Act. The Court holds that it does.

The Copyright Act provides that a copyright owner has the exclusive right “to reproduce the copyrighted work in ... phonorecords.” 17 U.S.C. § 106(1) (emphasis added). Copyrighted works are defined to include, inter alia, “sound recordings,” which are “works that result from the fixation of a series of musical, spoken, or other sounds.” Id. § 101. Such works are distinguished from their material embodiments. These include phonorecords, which are the “material objects in which sounds ... are fixed by any method now known or later developed, and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” Id. § 101 (emphasis added). Thus, the plain text of the Copyright Act makes clear that reproduction occurs when a copyrighted work is fixed in a new material object. See Matthew Bender & Co., Inc. v. W. Pub. Co., 158 F.3d 693, 703 (2d Cir.1998).

The legislative history of the Copyright Act bolsters this reading. The House Report on the Copyright Act distinguished between sound recordings and phonorecords, stating that “[t]he copyrightable work comprises the aggregation of sounds and not the tangible medium of fixation. Thus, ‘sound recordings' as copyrightable subject matter are distinguished from ‘phonorecords[,]’ the latter being physical objects in which sounds are fixed.” H.R.Rep. No. 94–1476, at 56 (1976), 1976 U.S.C.C.A.N. 5659, 5669. Similarly, the House and Senate Reports on the Act both explained:

Read together with the relevant definitions in [S]ection 101, the right “to reproduce the copyrighted work in copies or phonorecords” means the right to produce a material object in which the work is duplicated, transcribed, imitated, or simulated in a fixed form from which it can be “perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” Id. at 61, 1976 U.S.C.C.A.N. at 5675; S.Rep. No. 94–473, at 58 (1975). Put differently, the reproduction right is the exclusive right to embody, and to prevent others from embodying, the copyrighted work (or sound recording) in a new material object (or phonorecord). See Nimmer on Copyright § 8.02 (stating that “in order to infringe the reproduction right, the defendant must embody the plaintiff's work in a ‘material object’ ”).

Courts that have dealt with infringement on peer-to-peer (“P2P”) file-sharing systems provide valuable guidance on the application of this right in the digital domain. For instance, in London–Sire Records, Inc. v. John Doe 1, the court addressed whether users of P2P software violated copyright owners' distribution rights. 542 F.Supp.2d 153, 166 & n. 16 (D.Mass.2008). Citing the “material object” requirement, the court expressly differentiated between the copyrighted work—or digital music file—and the phonorecord—or “appropriate segment of the hard disk” that the file would be embodied in following its transfer. Id. at 171. Specifically,

[w]hen a user on a[P2P] network downloads a song from another user, he receives into his computer a digital sequence representing the sound recording. That sequence is magnetically encoded on a segment of his hard disk (or likewise written on other media). With the right hardware and software, the downloader can use the magnetic sequence to reproduce the sound recording. The electronic file (or, perhaps more accurately, the appropriate segment of the hard disk) is therefore a “phonorecord” within the meaning of the statute.

Id. (emphasis added). Accordingly, when a user downloads a digital music file or “digital sequence” to his “hard disk,” the file is “reproduce[d]” on a new phonorecord within the meaning of the Copyright Act. Id.

This understanding is, of course, confirmed by the laws of physics. It is simply impossible that the same “material object” can be transferred over the Internet. Thus, logically, the court in London–Sire noted that the Internet transfer of a file results in a material object being “created elsewhere at its finish.” Id. at 173. Because the reproduction right is necessarily implicated when a copyrighted work is embodied in a new material object, and because digital music files must be embodied in a new material object following their transfer over the Internet, the Court determines that the embodiment of a digital music file on a new hard disk is a reproduction within the meaning of the Copyright Act.

This finding holds regardless of whether one or multiple copies of the file exist. London–Sire, like all of the P2P cases, obviously concerned multiple copies of one digital music file. But that distinction is immaterial under the plain language of the Copyright Act. Simply put, it is the creation of a new material object and not an additional material object that defines the reproduction right. The dictionary defines “reproduction” to mean, inter alia, “to produce again” or “to cause to exist again or anew.” See Merriam–Webster Collegiate Edition 994 (10th ed. 1998) (emphasis added). Significantly, it is not defined as “to produce again while the original exists.” Thus, the right “to reproduce the copyrighted work in ... phonorecords” is implicated whenever a sound recording is fixed in a new material object, regardless of whether the sound recording remains fixed in the original material object.

Given this finding, the Court concludes that ReDigi's service infringes Capitol's reproduction rights under any description of the technology. ReDigi stresses that it “migrates” a file from a user's computer to its Cloud Locker, so that the same file is transferred to the ReDigi server and no copying occurs.FN5 However, even if that were the case, the fact that a file has moved from one material object—the user's computer—to another—the ReDigi server—means that a reproduction has occurred. Similarly, when a ReDigi user downloads a new purchase from the ReDigi website to her computer, yet another reproduction is created. It is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created.

ReDigi struggles to avoid this conclusion by pointing to C.M. Paula Co. v. Logan, a 1973 case from the Northern District of Texas where the defendant used chemicals to lift images off of greeting cards and place them on plaques for resale. 355 F.Supp. 189, 190 (N.D.Tex.1973); (see ReDigi Mem. of Law, dated July 20, 2012, Doc. No. 55 (“ReDigi Mem.”), at 13). The court determined that infringement did not occur because “should defendant desire to make one hundred ceramic plaques ..., defendant would be required to purchase one hundred separate ... prints.” C.M. Paula, 355 F.Supp. at 191. ReDigi argues that, like the defendant in C.M. Paula, its users must purchase a song on iTunes in order to sell a song on ReDigi. (ReDigi Mem. 13.) Therefore, no “duplication” occurs. See C.M. Paula, 355 F.Supp. at 191 (internal quotation marks omitted). ReDigi's argument is unavailing. Ignoring the questionable merits of the court's holding in C.M. Paula, ReDigi's service is distinguishable from the process in that case. There, the copyrighted print, or material object, was lifted from the greeting card and transferred in toto to the ceramic tile; no new material object was created. By contrast, ReDigi's service by necessity creates a new material object when a digital music file is either uploaded to or downloaded from the Cloud Locker.

ReDigi also argues that the Court's conclusion would lead to “irrational” outcomes, as it would render illegal any movement of copyrighted files on a hard drive, including relocating files between directories and defragmenting. (ReDigi Opp'n, dated Aug. 14, 2012, Doc. No. 79 (“ReDigi Opp'n”), at 8.) However, this argument is nothing more than a red herring. As Capitol has conceded, such reproduction is almost certainly protected under other doctrines or defenses, and is not relevant to the instant motion. (Cap. Reply, dated Aug. 24, 2012, Doc. No. 87 (“Cap. Reply”), at 5 n. 1.)

Accordingly, the Court finds that, absent the existence of an affirmative defense, the sale of digital music files on ReDigi's website infringes Capitol's exclusive right of reproduction.

. . .

2. First Sale

The first sale defense, a common law principle recognized in Bobbs–Merrill Co. v. Straus, 210 U.S. 339, 350, 28 S.Ct. 722, 52 L.Ed. 1086 (1908) and now codified at Section 109(a) of the Copyright Act, provides that:

Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.

17 U.S.C. § 109. Under the first sale defense, “once the copyright owner places a copyrighted item [here, a phonorecord] in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution.” Quality King Distribs., Inc. v. L'anza Research Int'l, Inc., 523 U.S. 135, 152, 118 S.Ct. 1125, 140 L.Ed.2d 254 (1998); see Kirtsaeng v. John Wiley & Sons, Inc., ––– U.S. ––––, 133 S.Ct. 1351, 1354–55, 185 L.Ed.2d 392 (2013).

ReDigi asserts that its service, which involves the resale of digital music files lawfully purchased on iTunes, is protected by the first sale defense. (ReDigi Mem. 19.) The Court disagrees . . .

[T]he first sale doctrine does not protect ReDigi's distribution of Capitol's copyrighted works. This is because, as an unlawful reproduction, a digital music file sold on ReDigi is not “lawfully made under this title.” 17 U.S.C. § 109(a). Moreover, the statute protects only distribution by “the owner of a particular copy or phonorecord ... of that copy or phonorecord.” Id. Here, a ReDigi user owns the phonorecord that was created when she purchased and downloaded a song from iTunes to her hard disk. But to sell that song on ReDigi, she must produce a new phonorecord on the ReDigi server. Because it is therefore impossible for the user to sell her “particular” phonorecord on ReDigi, the first sale statute cannot provide a defense. Put another way, the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce. Here, ReDigi is not distributing such material items; rather, it is distributing reproductions of the copyrighted code embedded in new material objects, namely, the ReDigi server in Arizona and its users' hard drives. The first sale defense does not cover this any more than it covered the sale of cassette recordings of vinyl records in a bygone era.

Rejecting such a conclusion, ReDigi argues that, because “ ‘technological change has rendered its literal terms ambiguous, the Copyright Act must be construed in light of [its] basic purpose,’ ” namely, to incentivize creative work for the “ultimate[ ] ... cause of promoting broad public availability of literature, music, and the other arts.” Sony, 464 U.S. at 432, 104 S.Ct. 774 (quoting Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156, 95 S.Ct. 2040, 45 L.Ed.2d 84 (1975)). Thus, ReDigi asserts that refusal to apply the first sale doctrine to its service would grant Capitol “a Court sanctioned extension of rights under the [C]opyright [A]ct ... which is against policy, and should not be endorsed by this Court.” (ReDigi Mem. 24.)

The Court disagrees. ReDigi effectively requests that the Court amend the statute to achieve ReDigi's broader policy goals—goals that happen to advance ReDigi's economic interests. However, ReDigi's argument fails for two reasons. First, while technological change may have rendered Section 109(a) unsatisfactory to many contemporary observers and consumers, it has not rendered it ambiguous. The statute plainly applies to the lawful owner's “particular” phonorecord, a phonorecord that by definition cannot be uploaded and sold on ReDigi's website. Second, amendment of the Copyright Act in line with ReDigi's proposal is a legislative prerogative that courts are unauthorized and ill suited to attempt.

Nor are the policy arguments as straightforward or uncontested as ReDigi suggests. Indeed, when confronting this precise subject in its report on the Digital Millenium Copyright Act, 17 U.S.C. § 512, the United States Copyright Office (the “USCO”) rejected extension of the first sale doctrine to the distribution of digital works, noting that the justifications for the first sale doctrine in the physical world could not be imported into the digital domain. See USCO, Library of Cong., DMCA Section 104 Report (2001) (“DMCA Report”); see also Cartoon Network LP v. CSC Holdings, Inc., 536 F.3d 121, 129 (2d Cir.2008) (finding that the DMCA report is entitled to deference under Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944)). For instance, the USCO stated that “the impact of the [first sale] doctrine on copyright owners [is] limited in the off-line world by a number of factors, including geography and the gradual degradation of books and analog works.” DMCA Report at xi. Specifically,

[p]hysical copies of works degrade with time and use, making used copies less desirable than new ones. Digital information does not degrade, and can be reproduced perfectly on a recipient's computer. The “used” copy is just as desirable as (in fact, is indistinguishable from) a new copy of the same work. Time, space, effort and cost no longer act as barriers to the movement of copies, since digital copies can be transmitted nearly instantaneously anywhere in the world with minimal effort and negligible cost. The need to transport physical copies of works, which acts as a natural brake on the effect of resales on the copyright owner's market, no longer exists in the realm of digital transmissions. The ability of such “used” copies to compete for market share with new copies is thus far greater in the digital world.

Id. at 82–83 (footnotes omitted). Thus, while ReDigi mounts attractive policy arguments, they are not as one-sided as it contends.

Finally, ReDigi feebly argues that the Court's reading of Section 109(a) would in effect exclude digital works from the meaning of the statute. (ReDigi Mem. 21.) That is not the case. Section 109(a) still protects a lawful owner's sale of her “particular” phonorecord, be it a computer hard disk, iPod, or other memory device onto which the file was originally downloaded. While this limitation clearly presents obstacles to resale that are different from, and perhaps even more onerous than, those involved in the resale of CDs and cassettes, the limitation is hardly absurd—the first sale doctrine was enacted in a world where the ease and speed of data transfer could not have been imagined. There are many reasons, some discussed herein, for why such physical limitations may be desirable. It is left to Congress, and not this Court, to deem them outmoded.

Accordingly, the Court concludes that the first sale defense does not permit sales of digital music files on ReDigi's website.

Princeton University Press v. Michigan Document Services

99 F.3d 1381 (6th Cir. 1996)

David A. Nelson, Circuit Judge.

This is a copyright infringement case. The corporate defendant, Michigan Document Services, Inc., is a commercial copyshop that reproduced substantial segments of copyrighted works of scholarship, bound the copies into “coursepacks,” and sold the coursepacks to students for use in fulfilling reading assignments given by professors at the University of Michigan. The copyshop acted without permission from the copyright holders, and the main question presented is whether the “fair use” doctrine codified at 17 U.S.C. § 107 obviated the need to obtain such permission.

Answering this question “no,” and finding the infringement willful, the district court entered a summary judgment order in which the copyright holders were granted equitable relief and were awarded damages that may have been enhanced for willfulness. Princeton Univ. Press v. Michigan Document Servs., Inc., 855 F.Supp. 905 (E.D.Mich.1994). A three-judge panel of this court reversed the judgment on appeal, but a majority of the active judges of the court subsequently voted to rehear the case en banc. The appeal has now been argued before the full court.

We agree with the district court that the defendants' commercial exploitation of the copyrighted materials did not constitute fair use, and we shall affirm that branch of the district court's judgment. We believe that the district court erred in its finding of willfulness, however, and we shall vacate the damages award because of its possible linkage to that finding.

Thanks to relatively recent advances in technology, the coursepack-an artifact largely unknown to college students when the author of this opinion was an undergraduate-has become almost as ubiquitous at American colleges and universities as the conventional textbook. From the standpoint of the professor responsible for developing and teaching a particular course, the availability of coursepacks has an obvious advantage; by selecting readings from a variety of sources, the professor can create what amounts to an anthology perfectly tailored to the course the professor wants to present.

The physical production of coursepacks is typically handled by a commercial copyshop. The professor gives the copyshop the materials of which the coursepack is to be made up, and the copyshop does the rest. Adding a cover page and a table of contents, perhaps, the copyshop runs off as many sets as are needed, does the necessary binding, and sells the finished product to the professor's students.

Ann Arbor, the home of the University of Michigan, is also home to several copyshops. Among them is defendant Michigan Document Services (MDS), a corporation owned by defendant James Smith. We are told that MDS differs from most, if not all, of its competitors in at least one important way: it does not request permission from, nor does it pay agreed royalties to, copyright owners.

Mr. Smith has been something of a crusader against the system under which his competitors have been paying agreed royalties, or “permission fees” as they are known in the trade. The story begins in March of 1991, when Judge Constance Baker Motley, of the United States District Court for the Southern District of New York, decided the first reported case involving the copyright implications of educational coursepacks. See Basic Books, Inc. v. Kinko's Graphics Corp., 758 F.Supp. 1522 (S.D.N.Y.1991), holding that a Kinko's copyshop had violated the copyright statute by creating and selling coursepacks without permission from the publishing houses that held the copyrights. After Kinko's, we are told, many copyshops that had not previously requested permission from copyright holders began to obtain such permission. Mr. Smith chose not to do so. He consulted an attorney, and the attorney apparently advised him that while it was “risky” not to obtain permission, there were flaws in the Kinko's decision. Mr. Smith also undertook his own study of the fair use doctrine, reading what he could find on this subject in a law library. He ultimately concluded that the Kinko's case had been wrongly decided, and he publicized this conclusion through speeches, writings, and advertisements. His advertisements stressed that professors whose students purchased his coursepacks would not have to worry about delays attendant upon obtaining permission from publishers.

Not surprisingly, Mr. Smith attracted the attention of the publishing industry. Three publishers-Princeton University Press, MacMillan, Inc., and St. Martin's Press, Inc.-eventually brought the present suit against Mr. Smith and his corporation.

Each of the plaintiff publishers maintains a department that processes requests for permission to reproduce portions of copyrighted works. (In addition, copyshops may request such permission through the Copyright Clearance Center, a national clearinghouse.) Macmillan and St. Martin's, both of which are for-profit companies, claim that they generally respond within two weeks to requests for permission to make copies for classroom use. Princeton, a non-profit organization, claims to respond within two to four weeks. Mr. Smith has not put these claims to the test, and he has not paid permission fees.

The plaintiffs allege infringement of the copyrights on six different works that were excerpted without permission. The works in question, and the statistics on the magnitude of the excerpts, are as follows: Nancy J. Weiss, Farewell to the Party of Lincoln: Black Politics in the Age of FDR (95 pages copied, representing 30 percent of the entire book); Walter Lippmann, Public Opinion (45 pages copied, representing 18 percent of the whole); Robert E. Layne, Political Ideology: Why the American Common Man Believes What He Does (78 pages, 16 percent); Roger Brown, Social Psychology (52 pages, 8 percent); Milton Rokeach, The Nature of Human Values (77 pages, 18 percent); James S. Olson and Randy Roberts, Where the Domino Fell, America and Vietnam, 1945-1950 (17 pages, 5 percent). The extent of the copying is undisputed, and the questions presented by the case appear to be purely legal in nature.

II

The fair use doctrine, which creates an exception to the copyright monopoly, “permits [and requires] courts to avoid rigid application of the copyright statute when, on occasion, it would stifle the very creativity which that law is designed to foster.” Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 577, 114 S.Ct. 1164, 1170, 127 L.Ed.2d 500 (1994), quoting Stewart v. Abend, 495 U.S. 207, 236, 110 S.Ct. 1750, 1768, 109 L.Ed.2d 184 (1990). Initially developed by the courts, the doctrine was codified at 17 U.S.C. § 107 in 1976. Congress used the following formulation in Section 107:

“[T]he fair use of a copyrighted work, including such use by reproduction in copies ... for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include-

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;

(2) the nature of the copyrighted work;

(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for or value of the copyrighted work....”

This language does not provide blanket immunity for “multiple copies for classroom use.” Rather, “whether a use referred to in the first sentence of Section 107 is a fair use in a particular case ... depend[s] upon the application of the determinative factors.” Campbell, 510 U.S. at 578 n. 9, 114 S.Ct. at 1170 n. 9, quoting S.Rep. No. 94-473, p. 62.

The four statutory factors may not have been created equal. In determining whether a use is “fair,” the Supreme Court has said that the most important factor is the fourth, the one contained in 17 U.S.C. § 107(4). . . . We take it that this factor, “the effect of the use upon the potential market for or value of the copyrighted work,” is at least primus inter pares, figuratively speaking, and we shall turn to it first.

The burden of proof as to market effect rests with the copyright holder if the challenged use is of a “noncommercial” nature. The alleged infringer has the burden, on the other hand, if the challenged use is “commercial” in nature. Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 451, 104 S.Ct. 774, 793, 78 L.Ed.2d 574 (1984). In the case at bar the defendants argue that the burden of proof rests with the publishers because the use being challenged is “noncommercial.” We disagree.

It is true that the use to which the materials are put by the students who purchase the coursepacks is noncommercial in nature. But the use of the materials by the students is not the use that the publishers are challenging. What the publishers are challenging is the duplication of copyrighted materials for sale by a for-profit corporation that has decided to maximize its profits-and give itself a competitive edge over other copyshops-by declining to pay the royalties requested by the holders of the copyrights.

The defendants' use of excerpts from the books at issue here was no less commercial in character than was The Nation magazine's use of copyrighted material in Harper & Row, where publication of a short article containing excerpts from the still unpublished manuscript of a book by President Ford was held to be an unfair use. Like the students who purchased unauthorized coursepacks, the purchasers of The Nation did not put the contents of the magazine to commercial use—but that did not stop the Supreme Court from characterizing the defendant's use of the excerpts as “a publication [that] was commercial as opposed to nonprofit....” Harper & Row, 471 U.S. at 562, 105 S.Ct. at 2231. And like the use that is being challenged in the case now before us, the use challenged in Harper & Row was “presumptively an unfair exploitation of the monopoly privilege that belongs to the owner of the copyright.” Id., quoting Sony, 464 U.S. at 451, 104 S.Ct. at 793

The strength of the Sony presumption may vary according to the context in which it arises, and the presumption disappears entirely where the challenged use is one that transforms the original work into a new artistic creation. See Campbell, 510 U.S. at 587-89, 114 S.Ct. at 1176. Perhaps the presumption is weaker in the present case than it would be in other contexts. There is a presumption of unfairness here, nonetheless, and we are not persuaded that the defendants have rebutted it.

If we are wrong about the existence of the presumption—if the challenged use is not commercial, in other words, and if the plaintiff publishers have the burden of proving an adverse effect upon either the potential market for the copyrighted work or the potential value of the work—we believe that the publishers have carried the burden of proving a diminution in potential market value.

One test for determining market harm [is this:] “[T]o negate fair use,” the Supreme Court has said, “one need only show that if the challenged use ‘should become widespread, it would adversely affect the potential market for the copyrighted work.’ ” Harper & Row, 471 U.S. at 568, 105 S.Ct. at 2234, quoting Sony, 464 U.S. at 451, 104 S.Ct. at 793 (emphasis supplied in part). Under this test, we believe, it is reasonably clear that the plaintiff publishers have succeeded in negating fair use.

As noted above, most of the copyshops that compete with MDS in the sale of coursepacks pay permission fees for the privilege of duplicating and selling excerpts from copyrighted works. The three plaintiffs together have been collecting permission fees at a rate approaching $500,000 a year. If copyshops across the nation were to start doing what the defendants have been doing here, this revenue stream would shrivel and the potential value of the copyrighted works of scholarship published by the plaintiffs would be diminished accordingly.

The defendants contend that it is circular to assume that a copyright holder is entitled to permission fees and then to measure market loss by reference to the lost fees. They argue that market harm can only be measured by lost sales of books, not permission fees. But the circularity argument proves too much. Imagine that the defendants set up a printing press and made exact reproductions-asserting that such reproductions constituted “fair use”-of a book to which they did not hold the copyright. Under the defendants' logic it would be circular for the copyright holder to argue market harm because of lost copyright revenues, since this would assume that the copyright holder had a right to such revenues.

A “circularity” argument indistinguishable from that made by the defendants here was rejected by the Second Circuit in American Geophysical, 60 F.3d at 929-31 (Jon O. Newman, C.J.), where the photocopying of scientific articles for use by Texaco researchers was held to be an unfair use. It is true, the Second Circuit acknowledged, that “a copyright holder can always assert some degree of adverse [e]ffect on its potential licensing revenues as a consequence of [the defendant's use] ... simply because the copyright holder has not been paid a fee to permit that particular use.” Id. at 929 n. 17. But such an assertion will not carry much weight if the defendant has “filled a market niche that the [copyright owner] simply had no interest in occupying.” Id. at 930 (quoting Twin Peaks Prods., Inc. v. Publications Int'l, Ltd., 996 F.2d 1366, 1377 (2d Cir.1993)). Where, on the other hand, the copyright holder clearly does have an interest in exploiting a licensing market-and especially where the copyright holder has actually succeeded in doing so-“it is appropriate that potential licensing revenues for photocopying be considered in a fair use analysis.” American Geophysical, 60 F.3d at 930. Only “traditional, reasonable, or likely to be developed markets” are to be considered in this connection, and even the availability of an existing system for collecting licensing fees will not be conclusive. Id. at 930-31. But Congress has implicitly suggested that licensing fees should be recognized in appropriate cases as part of the potential market for or value of the copyrighted work, and it was primarily because of lost licensing revenue that the Second Circuit agreed with the finding of the district court in American Geophysical that “the publishers have demonstrated a substantial harm to the value of their copyrights through [Texaco's] copying.” Id. at 931 (quoting the district court opinion (Pierre N. Leval, J.) reported at 802 F.Supp. 1, 21 (S.D.N.Y.1992)).

The approach followed by Judges Newman and Leval in the American Geophysical litigation is fully consistent with the Supreme Court case law. In Harper & Row, where there is no indication in the opinion that the challenged use caused any diminution in sales of President Ford's memoirs, the Court found harm to the market for the licensing of excerpts. The Court's reasoning—which was obviously premised on the assumption that the copyright holder was entitled to licensing fees for use of its copyrighted materials—is no more circular than that employed here. And in Campbell, where the Court was unwilling to conclude that the plaintiff had lost licensing revenues under the fourth statutory factor, the Court reasoned that a market for critical parody was not one “that creators of original works would in general develop or license others to develop.” Campbell, 510 U.S. at 592, 114 S.Ct. at 1178.

The potential uses of the copyrighted works at issue in the case before us clearly include the selling of permission to reproduce portions of the works for inclusion in coursepacks-and the likelihood that publishers actually will license such reproduction is a demonstrated fact. A licensing market already exists here, as it did not in a case on which the plaintiffs rely, Williams & Wilkins Co. v. United States, 203 Ct.Cl. 74, 487 F.2d 1345 (1973), aff'd by an equally divided Court, 420 U.S. 376, 95 S.Ct. 1344, 43 L.Ed.2d 264 (1975). Thus there is no circularity in saying, as we do say, that the potential for destruction of this market by widespread circumvention of the plaintiffs' permission fee system is enough, under the Harper & Row test, “to negate fair use.”

Our final point with regard to the fourth statutory factor concerns the affidavits of the three professors who assigned one or more of the copyrighted works to be read by their students. The defendants make much of the proposition that these professors only assigned excerpts when they would not have required their students to purchase the entire work. But what seems significant to us is that none of these affidavits shows that the professor executing the affidavit would have refrained from assigning the copyrighted work if the position taken by the copyright holder had been sustained beforehand.

It is true that Professor Victor Lieberman, who assigned the excerpt from the Olson and Roberts book on America and Vietnam, raises questions about the workability of the permission systems of “many publishers.” In 1991, Professor Lieberman avers, a Kinko's copyshop to which he had given materials for inclusion in a coursepack experienced serious delays in obtaining permissions from unnamed publishers. Professor Lieberman does not say that timely permission could not have been obtained from the publisher of the Olson and Roberts book, however, and he does not say that he would have refrained from assigning the work if the copyshop had been required to pay a permission fee for it.

It is also true that the publisher of one of the copyrighted works in question here (Public Opinion, by Walter Lippmann) would have turned down a request for permission to copy the 45-page excerpt included in a coursepack prepared to the specifications of Professor Donald Kinder. The excerpt was so large that the publisher would have preferred that students buy the book itself, and the work was available in an inexpensive paperback edition. But Professor Kinder does not say that he would have refrained from assigning the excerpt from the Lippmann book if it could not have been included in the coursepack. Neither does he say that he would have refrained from assigning any of the other works mentioned in his affidavit had he known that the defendants would be required to pay permission fees for them.

The third professor, Michael Dawson, assigned a 95-page excerpt from the book on black politics by Nancy Weiss. Professor Dawson does not say that a license was not available from the publisher of the Weiss book, and he does not say that the license fee would have deterred him from assigning the book.

III

In the context of nontransformative uses, at least, and except insofar as they touch on the fourth factor, the other statutory factors seem considerably less important. We shall deal with them relatively briefly.

A

As to “the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes,” 17 U.S.C. § 107(1), we have already explained our reasons for concluding that the challenged use is of a commercial nature.

The defendants argue that the copying at issue here would be considered “nonprofit educational” if done by the students or professors themselves. The defendants also note that they can profitably produce multiple copies for less than it would cost the professors or the students to make the same number of copies. Most of the copyshops with which the defendants compete have been paying permission fees, however, and we assume that these shops too can perform the copying on a more cost-effective basis than the professors or students can. This strikes us as a more significant datum than the ability of a black market copyshop to beat the do-it-yourself cost.

As to the proposition that it would be fair use for the students or professors to make their own copies, the issue is by no means free from doubt. We need not decide this question, however, for the fact is that the copying complained of here was performed on a profit-making basis by a commercial enterprise. And “[t]he courts have ... properly rejected attempts by for-profit users to stand in the shoes of their customers making nonprofit or noncommercial uses.” Patry, Fair Use in Copyright Law, at 420 n. 34. As the House Judiciary Committee stated in its report on the 1976 legislation,

“[I]t would not be possible for a non-profit institution, by means of contractual arrangements with a commercial copying enterprise, to authorize the enterprise to carry out copying and distribution functions that would be exempt if conducted by the non-profit institution itself.” H.R.Rep. No. 1476, 94th Cong., 2d Sess. at 74 (1976), U.S.Code Cong. & Admin.News 5659, 5687-88.

It should be noted, finally, that the degree to which the challenged use has transformed the original copyrighted works-another element in the first statutory factor-is virtually indiscernible. If you make verbatim copies of 95 pages of a 316-page book, you have not transformed the 95 pages very much-even if you juxtapose them to excerpts from other works and package everything conveniently. This kind of mechanical “transformation” bears little resemblance to the creative metamorphosis accomplished by the parodists in the Campbell case.

B

The second statutory factor, “the nature of the copyrighted work,” is not in dispute here. The defendants acknowledge that the excerpts copied for the coursepacks contained creative material, or “expression;” it was certainly not telephone book listings that the defendants were reproducing. This factor too cuts against a finding of fair use.

C

The third statutory factor requires us to assess “the amount and substantiality of the portion used in relation to the copyrighted work as a whole.” Generally speaking, at least, “the larger the volume (or the greater the importance) of what is taken, the greater the affront to the interests of the copyright owner, and the less likely that a taking will qualify as a fair use.” Pierre N. Leval, Toward a Fair Use Standard, 103 HARV. L. REV. 1105, 1122 (1990).

The amounts used in the case at bar--8,000 words in the shortest excerpt--far exceed the 1,000-word safe harbor that we shall discuss in the next part of this opinion. See H.R.Rep. No. 1476, 94th Cong., 2d Sess. (1976), reprinted after 17 U.S.C.A. § 107. The defendants were using as much as 30 percent of one copyrighted work, and in no case did they use less than 5 percent of the copyrighted work as a whole. These percentages are not insubstantial. And to the extent that the third factor requires some type of assessment of the “value” of the excerpted material in relation to the entire work, the fact that the professors thought the excerpts sufficiently important to make them required reading strikes us as fairly convincing “evidence of the qualitative value of the copied material.” Harper & Row, 471 U.S. at 565, 105 S.Ct. at 2233. We have no reason to suppose that in choosing the excerpts to be copied, the professors passed over material that was more representative of the major ideas of the work as a whole in preference to material that was less representative.

The third factor may have more significance for the 95-page excerpt from the black politics book than for the 17-page excerpt from the Vietnam book. In each instance, however, the defendants have failed to carry their burden of proof with respect to “amount and substantiality.”

IV

We turn now to the pertinent legislative history. The general revision of the copyright law enacted in 1976 was developed through a somewhat unusual process. Congress and the Register of Copyrights initiated and supervised negotiations among interested groups-groups that included authors, publishers, and educators-over specific legislative language. Most of the language that emerged was enacted into law or was made a part of the committee reports. See Jessica Litman, Copyright, Compromise, and Legislative History, 72 CORNELL L. R EV. 857 (1987). The statutory fair use provisions are a direct result of this process. Id. at 876-77. So too is the “Agreement on Guidelines for Classroom Copying in Not-for-Profit Educational Institutions With Respect to Books and Periodicals”-commonly called the “Classroom Guidelines”-set out in H.R.Rep. No. 1476 at 68-71, 94th Cong., 2d Sess. (1976). The House and Senate conferees explicitly accepted the Classroom Guidelines “as part of their understanding of fair use,” H.R. Conf. Rep. No. 1733, 94th Cong.2d Sess. at 70 (1976), and the Second Circuit has characterized the guidelines as “persuasive authority....” American Geophysical, 60 F.3d at 919 n. 5, citing Kinko's, 758 F.Supp. at 1522-36.

There are strong reasons to consider this legislative history. The statutory factors are not models of clarity, and the fair use issue has long been a particularly troublesome one. . . . Not surprisingly, courts have often turned to the legislative history when considering fair use questions . . .

Although the Classroom Guidelines purport to “state the minimum and not the maximum standards of educational fair use,” they do evoke a general idea, at least, of the type of educational copying Congress had in mind. The guidelines allow multiple copies for classroom use provided that (1) the copying meets the test of brevity (1,000 words, in the present context); (2) the copying meets the test of spontaneity, under which “[t]he inspiration and decision to use the work and the moment of its use for maximum teaching effectiveness [must be] so close in time that it would be unreasonable to expect a timely reply to a request for permission;” (3) no more than nine instances of multiple copying take place during a term, and only a limited number of copies are made from the works of any one author or from any one collective work; (4) each copy contains a notice of copyright; (5) the copying does not substitute for the purchase of “books, publishers' reprints or periodicals;” and (6) the student is not charged any more than the actual cost of copying. The Classroom Guidelines also make clear that unauthorized copying to create “anthologies, compilations or collective works” is prohibited. H.R.Rep. No. 1476 at 69.

In its systematic and premeditated character, its magnitude, its anthological content, and its commercial motivation, the copying done by MDS goes well beyond anything envisioned by the Congress that chose to incorporate the guidelines in the legislative history. Although the guidelines do not purport to be a complete and definitive statement of fair use law for educational copying, and although they do not have the force of law, they do provide us general guidance. The fact that the MDS copying is light years away from the safe harbor of the guidelines weighs against a finding of fair use.

Although the Congress that passed the Copyright Act in 1976 would pretty clearly have thought it unfair for a commercial copyshop to appropriate as much as 30 percent of a copyrighted work without paying the license fee demanded by the copyright holder, the changes in technology and teaching practices that have occurred over the last two decades might conceivably make Congress more sympathetic to the defendants' position today. If the law on this point is to be changed, however, we think the change should be made by Congress and not by the courts.

V

We take as our text for the concluding part of this discussion of fair use Justice Stewart's well-known exposition of the correct approach to “ambiguities” (see Sony, 464 U.S. at 431-32, 104 S.Ct. at 783-84) in the copyright law:

“The immediate effect of our copyright law is to secure a fair return for an ‘author's' creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good. ‘The sole interest of the United States and the primary object in conferring the monopoly,’ this Court has said, ‘lie in the general benefits derived by the public from the labors of authors.’ ... When technological change has rendered its literal terms ambiguous, the Copyright Act must be construed in light of this basic purpose.” Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156, 95 S.Ct. 2040, 2044, 45 L.Ed.2d 84 (1975) (footnotes and citations omitted).

The defendants attach considerable weight to the assertions of numerous academic authors that they do not write primarily for money and that they want their published writings to be freely copyable. The defendants suggest that unlicensed copying will “stimulate artistic creativity for the general public good.”

This suggestion would be more persuasive if the record did not demonstrate that licensing income is significant to the publishers. It is the publishers who hold the copyrights, of course-and the publishers obviously need economic incentives to publish scholarly works, even if the scholars do not need direct economic incentives to write such works.

The writings of most academic authors, it seems fair to say, lack the general appeal of works by a Walter Lippmann, for example. (Lippmann is the only non-academic author whose writings are involved in this case.) One suspects that the profitability of at least some of the other books at issue here is marginal. If publishers cannot look forward to receiving permission fees, why should they continue publishing marginally profitable books at all? And how will artistic creativity be stimulated if the diminution of economic incentives for publishers to publish academic works means that fewer academic works will be published?

The fact that a liberal photocopying policy may be favored by many academics who are not themselves in the publishing business has little relevance in this connection. As Judge Leval observed in American Geophysical,

“It is not surprising that authors favor liberal photocopying; generally such authors have a far greater interest in the wide dissemination of their work than in royalties-all the more so when they have assigned their royalties to the publisher. But the authors have not risked their capital to achieve dissemination. The publishers have. Once an author has assigned her copyright, her approval or disapproval of photocopying is of no further relevance.” 802 F.Supp. at 27.

In the case at bar the district court was not persuaded that the creation of new works of scholarship would be stimulated by depriving publishers of the revenue stream derived from the sale of permissions. Neither are we. On the contrary, it seems to us, the destruction of this revenue stream can only have a deleterious effect upon the incentive to publish academic writings.

. . .

VIII

The grant of summary judgment on the fair use issue is AFFIRMED. The award of damages is VACATED, and the case is REMANDED for reconsideration of damages and for entry of a separate judgment not inconsistent with this opinion.

Bill Graham Archives v. Dorling Kindersley Ltd.

448 F.3d 605, 2006

RESTANI, Judge.

This appeal concerns the scope of copyright protection afforded artistic concert posters reproduced in reduced size in a biography of the musical group the Grateful Dead. Asserted copyright holder Bill Graham Archives, LLC (“BGA” or “Appellant”) appeals from a judgment of the District Court for the Southern District of New York dismissing, on motion for summary judgment, its copyright infringement action against Dorling Kindersley Limited, Dorling Kindersley Publishing, Inc., and R.R. Donnelley & Sons Company (collectively “DK” or “Appellees”). We review the district court's grant of summary judgment de novo, and we agree with the court that DK's reproduction of BGA's images is protected by the fair use exception to copyright infringement.

BACKGROUND

In October of 2003, DK published Grateful Dead: The Illustrated Trip (“Illustrated Trip ”), in collaboration with Grateful Dead Productions, intended as a cultural history of the Grateful Dead. The resulting 480-page coffee table book tells the story of the Grateful Dead along a timeline running continuously through the book, chronologically combining over 2000 images representing dates in the Grateful Dead's history with explanatory text. A typical page of the book features a collage of images, text, and graphic art designed to simultaneously capture the eye and inform the reader. Plaintiff BGA claims to own the copyright to seven images displayed in Illustrated Trip, which DK reproduced without BGA's permission.

Initially, DK sought permission from BGA to reproduce the images. In May of 2003, the CEO of Grateful Dead Productions sent a letter to BGA seeking permission for DK to publish the images. BGA responded by offering permission in exchange for Grateful Dead Productions' grant of permission to BGA to make CDs and DVDs out of concert footage in BGA's archives. Next, DK directly contacted BGA seeking to negotiate a license agreement, but the parties disagreed as to an appropriate license fee. Nevertheless, DK proceeded with publication of Illustrated Trip without entering a license fee agreement with BGA. Specifically, DK reproduced seven artistic images originally depicted on Grateful Dead event posters and tickets.FN1 BGA's seven images are displayed in significantly reduced form and are accompanied by captions describing the concerts they represent.

FN1. The disputed images appear as follows: (1) on page 76, a concert poster for the Grateful Dead, Jefferson Airplane, and Big Brother and the Holding Company playing at the Hollywood Bowl; (2) on page 103, a concert poster for the Grateful Dead, Jefferson Airplane, and Sons of Champlin playing at the Winterland Arena; (3) on page 130, a picture of the front and back of a concert ticket for a show at the Fillmore Theatre, reused for a Grateful Dead concert at the Winterland Arena; (4) on page 254, a concert poster for Grateful Dead shows at the Warfield Theatre; (5) on page 361, a concert poster for a Grateful Dead show at the Oakland Coliseum; (6) on page 397, a concert poster for a Grateful Dead show on New Year's Eve; and (7) on page 421, a fake in-house poster for a New Year's Eve 1993 concert.

When DK refused to meet BGA's post-publication license fee demands, BGA filed suit for copyright infringement. BGA sought to enjoin further publication of Illustrated Trip, the destruction of all unsold books, and actual and statutory damages. The parties cross-moved for summary judgment, with the primary issue before the district court being whether DK's use of BGA's images constituted fair use under the Copyright Act of 1976, 17 U.S.C. § 101 et seq. (“Copyright Act”). After applying the statutory fair use balancing test, the district court determined that DK's reproduction of the images was fair use and granted DK's motion for summary judgment.

DISCUSSION

Section 106 of the Copyright Act grants copyright holders a bundle of exclusive rights, including the right to “reproduce the copyrighted work in copies,” and the right “to prepare derivative works based upon the copyrighted work.” 17 U.S.C. § 106. For purposes of the motion, the district court assumed plaintiff possessed these rights in the contested images and there is no dispute that copying the images was not authorized by plaintiff. The issue before us on appeal, as it was in the district court, is whether DK's unauthorized use of BGA's copyrighted images is fair use.

The fair use doctrine is a statutory exception to copyright infringement. Section 107 of the Copyright Act permits the unauthorized use or reproduction of copyrighted work if it is “for purposes such as criticism, comment, news reporting, teaching ..., scholarship, or research.” 17 U.S.C. § 107. Whether such “fair use” exists involves a case-by-case determination using four non-exclusive, statutorily provided factors in light of the purposes of copyright. Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 549, 105 S.Ct. 2218, 85 L.Ed.2d 588 (1985). The factors are: (1) “the purpose and character of the use;” (2) “the nature of the copyrighted work;” (3) “the amount and substantiality of the portion used in relation to the copyrighted work as a whole;” and (4) “the effect of the use upon the potential market for or value of the copyrighted work.” 17 U.S.C. § 107. “The ultimate test of fair use ... is whether the copyright law's goal of promoting the Progress of Science and useful Arts would be better served by allowing the use than by preventing it.” Castle Rock Entm't, Inc. v. Carol Publ'g Group, 150 F.3d 132, 141 (2d Cir.1998) (internal citations and quotation marks omitted).

In this case, the district court concluded that the balance of fair use factors weighs in favor of DK. Although the issue of fair use is a mixed question of law and fact, the court may resolve issues of fair use at the summary judgment stage where there are no genuine issues of material fact as to such issues. Wright v. Warner Books, Inc., 953 F.2d 731, 735 (2d Cir.1991). As there are no genuine issues of material fact here, we review the district court's legal conclusions de novo. New Era Publ'ns Int'l, ApS v. Carol Publ'g Group, 904 F.2d 152, 155 (2d Cir.1990). We agree with the district court that DK's use of the copyrighted images is protected as fair use.

I. Purpose and Character of Use

We first address “the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes.” 17 U.S.C. § 107(1).Most important to the court's analysis of the first factor is the “transformative” nature of the work. See Pierre N. Leval, Toward a Fair Use Standard, 103 Harv. L.Rev. 1105, 1111 (1990). The question is “whether the new work merely supersede[s] the objects of the original creation, or instead adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message.” Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 579, 114 S.Ct. 1164, 127 L.Ed.2d 500 (1994) (internal citations and quotation marks omitted) (alteration in original).

Here, the district court determined that Illustrated Trip is a biographical work, and the original images are not, and therefore accorded a strong presumption in favor of DK's use. In particular, the district court concluded that DK's use of images placed in chronological order on a timeline is transformatively different from the mere expressive use of images on concert posters or tickets. Because the works are displayed to commemorate historic events, arranged in a creative fashion, and displayed in significantly reduced form, the district court held that the first fair use factor weighs heavily in favor of DK.

Appellant challenges the district court's strong presumption in favor of fair use based on the biographical nature of Illustrated Trip. Appellant argues that based on this purported error the district court failed to examine DK's justification for its use of each of the images. Moreover, Appellant argues that as a matter of law merely placing poster images along a timeline is not a transformative use. Appellant asserts that each reproduced image should have been accompanied by comment or criticism related to the artistic nature of the image.

We disagree with Appellant's limited interpretation of transformative use and we agree with the district court that DK's actual use of each image is transformatively different from the original expressive purpose. Preliminarily, we recognize, as the district court did, that Illustrated Trip is a biographical work documenting the 30-year history of the Grateful Dead. While there are no categories of presumptively fair use, see Campbell v. Acuff-Rose Music, Inc., 510 U.S. at 584, 114 S.Ct. 1164, courts have frequently afforded fair use protection to the use of copyrighted material in biographies, recognizing such works as forms of historic scholarship, criticism, and comment that require incorporation of original source material for optimum treatment of their subjects. See 17 U.S.C. § 107 (stating that fair use of a copyrighted work “for purposes such as criticism, comment ... [or] scholarship ... is not an infringement of copyright”); Am. Geophysical Union v. Texaco, Inc., 60 F.3d 913, 932 (2d Cir.1994) (Jacobs, J., dissenting) (noting that “[m]uch of our fair use case law has been generated by the use of quotation in biographies, a practice that fits comfortably within the[ ] statutory categories of uses illustrative of uses that can be fair”) (internal quotation marks omitted) (alteration in original); Salinger v. Random House, Inc., 811 F.2d 90, 96 (2d Cir.1987) (holding that quotation of Salinger's letters in a biography could be considered criticism, scholarship, and research, which are among the illustrative statutory categories of fair use enumerated in 17 U.S.C. § 107). No less a recognition of biographical value is warranted in this case simply because the subject made a mark in pop culture rather than some other area of human endeavor. See Twin Peaks Prods., Inc. v. Publ'ns Int'l, Ltd., 996 F.2d 1366, 1374 (2d Cir.1993) (noting that a work that comments about “pop culture” is not removed from the scope of Section 107 simply because it is not erudite).

In the instant case, DK's purpose in using the copyrighted images at issue in its biography of the Grateful Dead is plainly different from the original purpose for which they were created. Originally, each of BGA's images fulfilled the dual purposes of artistic expression and promotion. The posters were apparently widely distributed to generate public interest in the Grateful Dead and to convey information to a large number people about the band's forthcoming concerts. In contrast, DK used each of BGA's images as historical artifacts to document and represent the actual occurrence of Grateful Dead concert events featured on Illustrated Trip 's timeline.

In some instances, it is readily apparent that DK's image display enhances the reader's understanding of the biographical text. In other instances, the link between image and text is less obvious; nevertheless, the images still serve as historical artifacts graphically representing the fact of significant Grateful Dead concert events selected by the Illustrated Trip 's author for inclusion in the book's timeline. We conclude that both types of uses fulfill DK's transformative purpose of enhancing the biographical information in Illustrated Trip, a purpose separate and distinct from the original artistic and promotional purpose for which the images were created. See Elvis Presley Enters., Inc. v. Passport Video, 349 F.3d 622, 628-29 (9th Cir.2003) (finding the use of television clips to be transformative where “the clips play for only a few seconds and are used for reference purposes while a narrator talks over them or interviewees explain their context in Elvis' career,” but not to be transformative where the clips “play without much interruption, [and t]he purpose of showing these clips likely goes beyond merely making a reference for a biography, but instead serves the same intrinsic entertainment value that is protected by Plaintiffs' copyrights”); see also Hofheinz v. A & E Television Networks, Inc., 146 F.Supp.2d 442, 446-47 (S.D.N.Y.2001) (ruling that unauthorized inclusion of copyrighted film clips in actor's biographical film was protected fair use because the biography “was not shown to recreate the creative expression reposing in plaintiff's [copyrighted] film, [but] for the transformative purpose of enabling the viewer to understand the actor's modest beginnings in the film business”). In sum, because DK's use of the disputed images is transformative both when accompanied by referencing commentary and when standing alone, we agree with the district court that DK was not required to discuss the artistic merits of the images to satisfy this first factor of fair use analysis.

The author uses images to enhance the reader's understanding of the statement that Radio City Music Hall executives were unfamiliar with Grateful Dead iconography by displaying nearly identical concert promotion posters for the Warfield Theatre and the Radio City Music Hall.

While the concert poster image does not necessarily enhance the reader's understanding of the text, it serves as a recognizable representation of the concert. It also documents concert information and provides notable historic details, such as the fact that, at this relatively early stage of its career, the Grateful Dead received second billing to Jefferson Airplane.

This conclusion is strengthened by the manner in which DK displayed the images. First, DK significantly reduced the size of the reproductions. See Kelly v. Arriba Soft Corp., 336 F.3d 811, 818-20 (9th Cir.2003) (finding online search engine's use of thumbnail-sized images to be highly transformative). While the small size is sufficient to permit readers to recognize the historical significance of the posters, it is inadequate to offer more than a glimpse of their expressive value. In short, DK used the minimal image size necessary to accomplish its transformative purpose.

Second, DK minimized the expressive value of the reproduced images by combining them with a prominent timeline, textual material, and original graphical artwork, to create a collage of text and images on each page of the book. To further this collage effect, the images are displayed at angles and the original graphical artwork is designed to blend with the images and text. Overall, DK's layout ensures that the images at issue are employed only to enrich the presentation of the cultural history of the Grateful Dead, not to exploit copyrighted artwork for commercial gain. See Hofheinz, 146 F.Supp. at 446.

Third, BGA's images constitute an inconsequential portion of Illustrated Trip. The extent to which unlicensed material is used in the challenged work can be a factor in determining whether a biographer's use of original materials has been sufficiently transformative to constitute fair use. See Craft v. Kobler, 667 F.Supp. 120, 129 (S.D.N.Y.1987) (Leval, J.) (finding biography of Stravinsky to be unfair in part because the takings were numerous and were the “liveliest and most entertaining part of the biography”). Although our circuit has counseled against considering the percentage the allegedly infringing work comprises of the copyrighted work in conducting third-factor fair use analysis, see NXIVM Corp. v. Ross Inst., 364 F.3d 471, 480 (2d Cir.2004), several courts have done so, see, e.g., Harper, 471 U.S. at 565-66, 105 S.Ct. 2218 (finding the fact that quotes from President Ford's unpublished memoirs played a central role in the allegedly infringing magazine article, constituting 13% of that article, weighed against a finding of fair use); Salinger, 811 F.2d at 98-99 (finding the fact that letters are quoted or paraphrased on approximately 40% of the book's 192 pages weighs against fair use). We find this inquiry more relevant in the context of first-factor fair use analysis.

In the instant case, the book is 480 pages long, while the BGA images appear on only seven pages. Although the original posters range in size from 13" x 19" to more than 19" x 27," the largest reproduction of a BGA image in Illustrated Trip is less than 3" x 4 1/2 ," less than 1/20 the size of the original. And no BGA image takes up more than one-eighth of a page in a book or is given more prominence than any other image on the page. In total, the images account for less than one-fifth of one percent of the book. This stands in stark contrast to the wholesale takings in cases such as those described above, and we are aware of no case where such an insignificant taking was found to be an unfair use of original materials.

Finally, as to this first factor, we briefly address the commercial nature of Illustrated Trip. See Harper, 471 U.S. at 562, 105 S.Ct. 2218 (stating that the fact that the purpose of a new use is commercial weighs against finding fair use). Even though Illustrated Trip is a commercial venture, we recognize that “nearly all of the illustrative uses listed in the preamble paragraph of § 107 ... are generally conducted for profit ....” Campbell, 510 U.S. at 584, 114 S.Ct. 1164 (internal quotation marks omitted). Moreover, “[t]he crux of the profit/nonprofit distinction is not whether the sole motive of the use is monetary gain but whether the user stands to profit from exploitation of the copyrighted material without paying the customary price.” Harper, 471 U.S. at 562, 105 S.Ct. 2218. Here, Illustrated Trip does not exploit the use of BGA's images as such for commercial gain. Significantly, DK has not used any of BGA's images in its commercial advertising or in any other way to promote the sale of the book. Illustrated Trip merely uses pictures and text to describe the life of the Grateful Dead. By design, the use of BGA's images is incidental to the commercial biographical value of the book.

Accordingly, we conclude that the first fair use factor weighs in favor of DK because DK's use of BGA's images is transformatively different from the images' original expressive purpose and DK does not seek to exploit the images' expressive value for commercial gain.

II. Nature of the Copyrighted Work

The second factor in a fair use determination is “the nature of the copyrighted work.” 17 U.S.C. § 107(2). To resolve this inquiry the court considers “the protection of the reasonable expectations of one who engages in the kinds of creation/authorship that the copyright seeks to encourage.” Leval, supra, at 1122. “[C]reative expression for public dissemination falls within the core of the copyright's protective purposes.” Campbell, 510 U.S. at 586, 114 S.Ct. 1164.

The district court determined that the second factor weighs against DK because the images are creative artworks, which are traditionally the core of intended copyright protection. Nevertheless, the court limited the weight it placed on this factor because the posters have been published extensively. Appellant agrees that the district court properly weighed the second factor against DK, although it questions the lesser protection given to published works. Appellees counter that because the images are mixed factual and creative works and have been long and extensively published, the second factor tilts toward fair use.

We agree with the district court that the creative nature of artistic images typically weighs in favor of the copyright holder. We recognize, however, that the second factor may be of limited usefulness where the creative work of art is being used for a transformative purpose. See Campbell, 510 U.S. at 586, 114 S.Ct. 1164 (stating that the second factor is not “likely to help much in separating the fair use sheep from the infringing goats” in cases involving transformative copying of “publicly known, expressive works”). This is not a case such as Ringgold v. Black Entm't Television, Inc., 126 F.3d 70 (2d Cir.1997), in which we held that the creative work was being used for the same decorative purpose as the original. Here, we conclude that DK is using BGA's images for the transformative purpose of enhancing the biographical information provided in Illustrated Trip. Accordingly, we hold that even though BGA's images are creative works, which are a core concern of copyright protection, the second factor has limited weight in our analysis because the purpose of DK's use was to emphasize the images' historical rather than creative value.

III. Amount and Substantiality of the Portion Used

The third fair use factor asks the court to examine “the amount and substantiality of the portion used in relation to the copyrighted work as a whole.” 17 U.S.C. § 107(3). We review this factor with reference to the copyrighted work, not the infringing work. New Era, 904 F.2d at 159. The court must examine the quantitative and qualitative aspects of the portion of the copyrighted material taken. Campbell, 510 U.S. at 586, 114 S.Ct. 1164.

The district court determined that even though the images are reproduced in their entirety, the third fair use factor weighs in favor of DK because the images are displayed in reduced size and scattered among many other images and texts. In faulting this conclusion, Appellant contends that the amount used is substantial because the images are copied in their entirety. Neither our court nor any of our sister circuits has ever ruled that the copying of an entire work favors fair use. At the same time, however, courts have concluded that such copying does not necessarily weigh against fair use because copying the entirety of a work is sometimes necessary to make a fair use of the image. See Kelly, 336 F.3d at 821 (concluding that images used for a search engine database are necessarily copied in their entirety for the purpose of recognition); Nunez v. Caribbean Int'l News Corp., 235 F.3d 18, 24 (1st Cir.2000) (concluding that to copy any less than the entire image would have made the picture useless to the story). Adopting this reasoning, we conclude that the third-factor inquiry must take into account that the “the extent of permissible copying varies with the purpose and character of the use.” Campbell, 510 U.S. at 586-87, 114 S.Ct. 1164.

Here, DK used BGA's images because the posters and tickets were historical artifacts that could document Grateful Dead concert events and provide a visual context for the accompanying text. To accomplish this use, DK displayed reduced versions of the original images and intermingled these visuals with text and original graphic art. As a consequence, even though the copyrighted images are copied in their entirety, the visual impact of their artistic expression is significantly limited because of their reduced size. See Kelly, 336 F.3d at 821 (concluding that thumbnails are not a substitute for full-size images). We conclude that such use by DK is tailored to further its transformative purpose because DK's reduced size reproductions of BGA's images in their entirety displayed the minimal image size and quality necessary to ensure the reader's recognition of the images as historical artifacts of Grateful Dead concert events. Accordingly, the third fair use factor does not weigh against fair use.

IV. Effect of the Use upon the Market for or Value of the Original

The fourth factor is “the effect of the use upon the potential market for or value of the copyrighted work.” 17 U.S.C. § 107(4). The court looks to not only the market harm caused by the particular infringement, but also to whether, if the challenged use becomes widespread, it will adversely affect the potential market for the copyrighted work. Harper, 471 U.S. at 568, 105 S.Ct. 2218. This analysis requires a balancing of “the benefit the public will derive if the use is permitted and the personal gain the copyright owner will receive if the use is denied.” MCA, Inc. v. Wilson, 677 F.2d 180, 183 (2d Cir.1981).

In the instant case, the parties agree that DK's use of the images did not impact BGA's primary market for the sale of the poster images. Instead, we look to whether DK's unauthorized use usurps BGA's potential to develop a derivative market. Appellant argues that DK interfered with the market for licensing its images for use in books. Appellant contends that there is an established market for licensing its images and it suffered both the loss of royalty revenue directly from DK and the opportunity to obtain royalties from others.

“It is indisputable that, as a general matter, a copyright holder is entitled to demand a royalty for licensing others to use its copyrighted work, and that the impact on potential licensing revenues is a proper subject for consideration in assessing the fourth factor.” Texaco, 60 F.3d at 929 (citations omitted). We have noted, however, that “were a court automatically to conclude in every case that potential licensing revenues were impermissibly impaired simply because the secondary user did not pay a fee for the right to engage in the use, the fourth fair use factor would always favor the copyright holder.” Id. at 930 n. 17 (emphasis added); see Princeton Univ. Press v. Mich. Document Servs., 99 F.3d 1381, 1387 (6th Cir.1996) (stating that a copyright holder must have a right to copyright revenues before finding that a failure to pay a license fee equals market harm); Leval, supra, at 1124 (stating that “[b]y definition every fair use involves some loss of royalty revenue because the secondary user has not paid royalties”); 4 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 13.05[A][4] (2005) (stating that “it is a given in every fair use case that plaintiff suffers a loss of a potential market if that potential is defined as the theoretical market for licensing the very use at bar”). Accordingly, we do not find a harm to BGA's license market merely because DK did not pay a fee for BGA's copyrighted images.

Instead, we look at the impact on potential licensing revenues for “traditional, reasonable, or likely to be developed markets.” Texaco, 60 F.3d at 930. In order to establish a traditional license market, Appellant points to the fees paid to other copyright owners for the reproduction of their images in Illustrated Trip. Moreover, Appellant asserts that it established a market for licensing its images, and in this case expressed a willingness to license images to DK. Neither of these arguments shows impairment to a traditional, as opposed to a transformative market.FN5 See Leval, supra, at 1125 (explaining that “[t]he fourth factor disfavors a finding of fair use only when the market is impaired because the ... material serves the consumer as a substitute, or, ... supersedes the use of the original”) (internal quotation marks omitted).

FN5. To the contrary, had the book been commercially successful-which it was not-it might have garnered interest in the original images in full size because the reduced images have such minimal expressive impact. An afficionado might seek more than a “peek.”

Here, unlike in Texaco, we hold that DK's use of BGA's images is transformatively different from their original expressive purpose.FN6 In a case such as this, a copyright holder cannot prevent others from entering fair use markets merely “by developing or licensing a market for parody, news reporting, educational or other transformative uses of its own creative work.” Castle Rock, 150 F.3d at 146 n. 11. “[C]opyright owners may not preempt exploitation of transformative markets ....” Id. Moreover, a publisher's willingness to pay license fees for reproduction of images does not establish that the publisher may not, in the alternative, make fair use of those images. Campbell, 510 U.S. at 585 n. 18, 114 S.Ct. 1164 (stating that “being denied permission to use [or pay license fees for] a work does not weigh against a finding of fair use”). Since DK's use of BGA's images falls within a transformative market, BGA does not suffer market harm due to the loss of license fees.

FN6. Texaco may also be distinguished because in that case we found that scientific researchers' copying of scientific journal articles caused those journals to lose license revenues, because the researchers were looking to their own copies of the articles rather than downloading them from online databases such as Lexis, which paid the journals a license fee. See 60 F.3d at 929-32. In other words, Texaco involved direct evidence that the allegedly infringing use would cause the owner to lose license revenues derived from a substantially similar use.

Here, in contrast, BGA's direct evidence of its license revenues involves a use that is markedly different from the use by DK. The licenses BGA sold to other publishers were for substantially less transformative uses of its posters: full-page, prominently displayed reproductions of BGA's images, with little discussion of the images or their historical context, much less any compilation of other related works into a coherent whole. Indeed, one of the images BGA points to was used as the cover of a book. DK's use of BGA's images is markedly more original than the other uses that BGA has licensed and BGA thus has not shown direct evidence of significant lost license revenue from the uses at issue here.

V. Balance of Factors

On balance, we conclude, as the district court did, that the fair use factors weigh in favor of DK's use. For the first factor, we conclude that DK's use of concert posters and tickets as historical artifacts of Grateful Dead performances is transformatively different from the original expressive purpose of BGA's copyrighted images. While the second factor favors BGA because of the creative nature of the images, its weight is limited because DK did not exploit the expressive value of the images. Although BGA's images are copied in their entirety, the third factor does not weigh against fair use because the reduced size of the images is consistent with the author's transformative purpose. Finally, we conclude that DK's use does not harm the market for BGA's sale of its copyrighted artwork, and we do not find market harm based on BGA's hypothetical loss of license revenue from DK's transformative market.

CONCLUSION

For the foregoing reasons, we conclude that DK's use of BGA's copyrighted images in its book Illustrated Trip is fair use. Accordingly, we AFFIRM.

MDY Industries v. Blizzard Entertainment

629 F.3d 928, 2010

CALLAHAN, Circuit Judge:

***

V.

After MDY began selling Glider, Blizzard launched Warden, its technology designed to prevent players who used bots from connecting to the WoW servers. Blizzard used Warden to ban most Glider users in September 2005. Blizzard claims that MDY is liable under DMCA § 1201(a)(2) and (b)(1) because it thereafter programmed Glider to avoid detection by Warden.

A. The Warden technology

Warden has two components. The first is a software module called “scan.dll,” which scans a computer's RAM prior to allowing the player to connect to WoW's servers. If scan.dll detects that a bot is running, such as Glider, it will not allow the player to connect and play. After Blizzard launched Warden, MDY reconfigured Glider to circumvent scan.dll by not loading itself until after scan.dll completed its check. Warden's second component is a “resident” component that runs periodically in the background on a player's computer when it is connected to WoW's servers. It asks the computer to report portions of the WoW code running in RAM, and it looks for patterns of code associated with known bots or cheats. If it detects a bot or cheat, it boots the player from the game, which halts the computer's copying of copyrighted code into RAM.

B. The Digital Millennium Copyright Act

Congress enacted the DMCA in 1998 to conform United States copyright law to its obligations under two World Intellectual Property Organization (“WIPO”) treaties, which require contracting parties to provide effective legal remedies against the circumvention of protective technological measures used by copyright owners. See Universal City Studios, Inc. v. Corley, 273 F.3d 429, 440 (2d Cir.2001). In enacting the DMCA, Congress sought to mitigate the problems presented by copyright enforcement in the digital age. Id. The DMCA contains three provisions directed at the circumvention of copyright owners' technological measures. The Supreme Court has yet to construe these provisions, and they raise questions of first impression in this circuit.

The first provision, 17 U.S.C. § 1201(a)(1)(A), is a general prohibition against “circumventing a technological measure that effectively controls access to a work protected under [the Copyright Act].” The second prohibits trafficking in technology that circumvents a technological measure that “effectively controls access” to a copyrighted work. 17 U.S.C. § 1201(a)(2). The third prohibits trafficking in technology that circumvents a technological measure that “effectively protects” a copyright owner's right. 17 U.S.C. § 1201(b)(1).

C. The district court's decision

The district court assessed whether MDY violated DMCA § 1201(a)(2) and (b)(1) with respect to three WoW components. First, the district court considered the game client software's literal elements: the source code stored on players' hard drives. Second, the district court considered the game client software's individual non-literal elements: the 400,000+ discrete visual and audible components of the game, such as a visual image of a monster or its audible roar. Finally, it considered the game's dynamic non-literal elements: that is, the “real-time experience of traveling through different worlds, hearing their sounds, viewing their structures, encountering their inhabitants and monsters, and encountering other players.”

The district court granted MDY partial summary judgment as to Blizzard's § 1201(a)(2) claim with respect to WoW's literal elements. The district court reasoned that Warden does not effectively control access to the literal elements because WoW players can access the literal elements without connecting to a game server and encountering Warden; they need only install the game client software on their computers. The district court also ruled for MDY following trial as to Blizzard's § 1201(a)(2) claim with respect to WoW's individual non-literal elements, reasoning that these elements could also be accessed on a player's hard drive without encountering Warden.

The district court, however, ruled for Blizzard following trial as to its § 1201(a)(2) and (b)(1) claims with respect to WoW's dynamic non-literal elements, or the “real-time experience” of playing WoW. It reasoned that Warden effectively controlled access to these elements, which could not be accessed without connecting to Blizzard's servers. It also found that Glider allowed its users to circumvent Warden by avoiding or bypassing its detection features, and that MDY marketed Glider for use in circumventing Warden.

We turn to consider whether Glider violates DMCA § 1201(a)(2) and (b)(1) by allowing users to circumvent Warden to access WoW's various elements. MDY contends that Warden's scan.dll and resident components are separate, and only scan.dll should be considered as a potential access control measure under § 1201(a)(2). However, in our view, an access control measure can both (1) attempt to block initial access and (2) revoke access if a secondary check determines that access was unauthorized. Our analysis considers Warden's scan.dll and resident components together because the two components have the same purpose: to prevent players using detectable bots from continuing to access WoW software.

D. Construction of § 1201

One of the issues raised by this appeal is whether certain provisions of § 1201 prohibit circumvention of access controls when access does not constitute copyright infringement. To answer this question and others presented by this appeal, we address the nature and interrelationship of the various provisions of § 1201 in the overall context of the Copyright Act.

We begin by considering the scope of DMCA § 1201's three operative provisions, §§ 1201(a)(1), 1201(a)(2), and 1201(b)(1). We consider them side-by-side, because “[w]e do not ... construe statutory phrases in isolation; we read statutes as a whole. Thus, the [term to be construed] must be read in light of the immediately following phrase....” United States v. Morton, 467 U.S. 822, 828, 104 S.Ct. 2769, 81 L.Ed.2d 680 (1984); see also Padash v. I.N.S., 358 F.3d 1161, 1170 (9th Cir.2004) (we analyze the statutory provision to be construed “in the context of the governing statute as a whole, presuming congressional intent to create a coherent regulatory scheme”).

1. Text of the operative provisions

“We begin, as always, with the text of the statute.” Hawaii v. Office of Hawaiian Affairs, 556 U.S. 163, 129 S.Ct. 1436, 1443, 173 L.Ed.2d 333 (2009) (quoting Permanent Mission of India to United Nations v. City of New York, 551 U.S. 193, 197, 127 S.Ct. 2352, 168 L.Ed.2d 85 (2007)). Section 1201(a)(1)(A) prohibits “circumvent[ing] a technological measure that effectively controls access to a work protected under this title.” Sections 1201(a)(2) and (b)(1) provide that “[n]o person shall manufacture, import, offer to the public, provide, or otherwise traffic in any technology, product, service, device, component, or part thereof, that—

[pic]

(emphasis added).

2. Our harmonization of the DMCA's operative provisions

For the reasons set forth below, we believe that § 1201 is best understood to create two distinct types of claims. First, § 1201(a) prohibits the circumvention of any technological measure that effectively controls access to a protected work and grants copyright owners the right to enforce that prohibition. Cf. Corley, 273 F.3d at 441 (“[T]he focus of subsection 1201(a)(2) is circumvention of technologies designed to prevent access to a work”). Second, and in contrast to § 1201(a), § 1201(b)(1) prohibits trafficking in technologies that circumvent technological measures that effectively protect “a right of a copyright owner.” Section 1201(b)(1)'s prohibition is thus aimed at circumventions of measures that protect the copyright itself: it entitles copyright owners to protect their existing exclusive rights under the Copyright Act. Those exclusive rights are reproduction, distribution, public performance, public display, and creation of derivative works. 17 U.S.C. § 106. Historically speaking, preventing “access” to a protected work in itself has not been a right of a copyright owner arising from the Copyright Act.

Our construction of § 1201 is compelled by the four significant textual differences between § 1201(a) and (b). First, § 1201(a)(2) prohibits the circumvention of a measure that “effectively controls access to a work protected under this title,” whereas § 1201(b)(1) concerns a measure that “effectively protects a right of a copyright owner under this title in a work or portion thereof.” (emphasis added). We read § 1201(b)(1)'s language—“right of a copyright owner under this title”—to reinforce copyright owners' traditional exclusive rights under § 106 by granting them an additional cause of action against those who traffic in circumventing devices that facilitate infringement. Sections 1201(a)(1) and (a)(2), however, use the term “work protected under this title.” Neither of these two subsections explicitly refers to traditional copyright infringement under § 106. Accordingly, we read this term as extending a new form of protection, i.e., the right to prevent circumvention of access controls, broadly to works protected under Title 17, i.e., copyrighted works.

Second, as used in § 1201(a), to “circumvent a technological measure” means “to descramble a scrambled work, to decrypt an encrypted work, or otherwise to avoid, bypass, remove, deactivate, or impair a technological measure, without the authority of the copyright owner.” 17 U.S.C. § 1201(a)(3)(A). These two specific examples of unlawful circumvention under § 1201(a)—descrambling a scrambled work and decrypting an encrypted work—are acts that do not necessarily infringe or facilitate infringement of a copyright.FN6 Descrambling or decrypting only enables someone to watch or listen to a work without authorization, which is not necessarily an infringement of a copyright owner's traditional exclusive rights under § 106. Put differently, descrambling and decrypting do not necessarily result in someone's reproducing, distributing, publicly performing, or publicly displaying the copyrighted work, or creating derivative works based on the copyrighted work.

FN6. Perhaps for this reason, Congress did not list descrambling and decrypting as circumventing acts that would violate § 1201(b)(1). See 17 U.S.C. § 1201(b)(2)(A).

The third significant difference between the subsections is that § 1201(a)(1)(A) prohibits circumventing an effective access control measure, whereas § 1201(b) prohibits trafficking in circumventing devices, but does not prohibit circumvention itself because such conduct was already outlawed as copyright infringement. The Senate Judiciary Committee explained:

This ... is the reason there is no prohibition on conduct in 1201(b) akin to the prohibition on circumvention conduct in 1201(a)(1). The prohibition in 1201(a)(1) is necessary because prior to this Act, the conduct of circumvention was never before made unlawful. The device limitation on 1201(a)(2) enforces this new prohibition on conduct. The copyright law has long forbidden copyright infringements, so no new prohibition was necessary.

S.Rep. No. 105–90, at 11 (1998). This difference reinforces our reading of § 1201(b) as strengthening copyright owners' traditional rights against copyright infringement and of § 1201(a) as granting copyright owners a new anti-circumvention right.

Fourth, in § 1201(a)(1)(B)–(D), Congress directs the Library of Congress (“Library”) to identify classes of copyrighted works for which “noninfringing uses by persons who are users of a copyrighted work are, or are likely to be, adversely affected, and the [anti-circumvention] prohibition contained in [§ 1201(a)(1)(A) ] shall not apply to such users with respect to such classes of works for the ensuing 3–year period.” There is no analogous provision in § 1201(b). We impute this lack of symmetry to Congress' need to balance copyright owners' new anti-circumvention right with the public's right to access the work. Cf. H.R.Rep. No. 105–551, pt. 2, at 26 (1998) (specifying that the House Commerce Committee “endeavored to specify, with as much clarity as possible, how the right against anti-circumvention (sic) would be qualified to maintain balance between the interests of content creators and information users.”). Sections 1201(a)(1)(B)–(D) thus promote the public's right to access by allowing the Library to exempt circumvention of effective access control measures in particular situations where it concludes that the public's right to access outweighs the owner's interest in restricting access. In limiting the owner's right to control access, the Library does not, and is not permitted to, authorize infringement of a copyright owner's traditional exclusive rights under the copyright. Rather, the Library is only entitled to moderate the new anti-circumvention right created by, and hence subject to the limitations in, DMCA § 1201(a)(1).

Our reading of § 1201(a) and (b) ensures that neither section is rendered superfluous. A violation of § 1201(a)(1)(A), which prohibits circumvention itself, will not be a violation of § 1201(b), which does not contain an analogous prohibition on circumvention. A violation of § 1201(a)(2), which prohibits trafficking in devices that facilitate circumvention of access control measures, will not always be a violation of § 1201(b)(1), which prohibits trafficking in devices that facilitate circumvention of measures that protect against copyright infringement. Of course, if a copyright owner puts in place an effective measure that both (1) controls access and (2) protects against copyright infringement, a defendant who traffics in a device that circumvents that measure could be liable under both § 1201(a) and (b). Nonetheless, we read the differences in structure between § 1201(a) and (b) as reflecting Congress's intent to address distinct concerns by creating different rights with different elements.

3. Our construction of the DMCA is consistent with the legislative history

Although the text suffices to resolve the issues before us, we also consider the legislative history in order to address the parties' arguments concerning it. Our review of that history supports the view that Congress created a new anticircumvention right in § 1201(a)(2) independent of traditional copyright infringement and granted copyright owners a new weapon against copyright infringement in § 1201(b)(1). For instance, the Senate Judiciary Committee report explains that § 1201(a)(2) and (b)(1) are “not interchangeable”: they were “designed to protect two distinct rights and to target two distinct classes of devices,” and “many devices will be subject to challenge only under one of the subsections.” S.Rep. No. 105–190, at 12 (1998). That is, § 1201(a)(2) “is designed to protect access to a copyrighted work,” while § 1201(b)(1) “is designed to protect the traditional copyright rights of the copyright owner.” Id. Thus, the Senate Judiciary Committee understood § 1201 to create the following regime:

[I]f an effective technological protection measure does nothing to prevent access to the plain text of the work, but is designed to prevent that work from being copied, then a potential cause of action against the manufacturer of a device designed to circumvent the measure lies under § 1201(b)(1), but not under § 1201(a)(2). Conversely, if an effective technological protection measure limits access to the plain text of a work only to those with authorized access, but provides no additional protection against copying, displaying, performing or distributing the work, then a potential cause of action against the manufacturer of a device designed to circumvent the measure lies under § 1201(a)(2), but not under § 1201(b).

Id. The Senate Judiciary Committee proffered an example of § 1201(a) liability with no nexus to infringement, stating that if an owner effectively protected access to a copyrighted work by use of a password, it would violate § 1201(a)(2)(A)

T]o defeat or bypass the password and to make the means to do so, as long as the primary purpose of the means was to perform this kind of act. This is roughly analogous to making it illegal to break into a house using a tool, the primary purpose of which is to break into houses.

Id. at 12. The House Judiciary Committee similarly states of § 1201(a)(2), “The act of circumventing a technological protection measure put in place by a copyright owner to control access to a copyrighted work is the electronic equivalent of breaking into a locked room in order to obtain a copy of a book.” See H.R.Rep. No. 105–551, pt. 1, at 17 (1998). We note that bypassing a password and breaking into a locked room in order to read or view a copyrighted work would not infringe on any of the copyright owner's exclusive rights under § 106.

We read this legislative history as confirming Congress's intent, in light of the current digital age, to grant copyright owners an independent right to enforce the prohibition against circumvention of effective technological access controls. In § 1201(a), Congress was particularly concerned with encouraging copyright owners to make their works available in digital formats such as “on-demand” or “pay-per-view,” which allow consumers effectively to “borrow” a copy of the work for a limited time or a limited number of uses. As the House Commerce Committee explained:

[A]n increasing number of intellectual property works are being distributed using a “client-server” model, where the work is effectively “borrowed” by the user (e.g., infrequent users of expensive software purchase a certain number of uses, or viewers watch a movie on a pay-per-view basis). To operate in this environment, content providers will need both the technology to make new uses possible and the legal framework to ensure they can protect their work from piracy.

See H.R.Rep. No. 105–551 pt. 2, at 23 (1998).

Our review of the legislative history supports our reading of § 1201: that section (a) creates a new anticircumvention right distinct from copyright infringement, while section (b) strengthens the traditional prohibition against copyright infringement. We now review the decisions of the Federal Circuit that have interpreted § 1201 differently.

. . .

E. Blizzard's § 1201(a)(2) claim

1. WoW's literal elements and individual non-literal elements

We agree with the district court that MDY's Glider does not violate DMCA § 1201(a)(2) with respect to WoW's literal elements and individual non-literal elements, because Warden does not effectively control access to these WoW elements. First, Warden does not control access to WoW's literal elements because these elements—the game client's software code—are available on a player's hard drive once the game client software is installed. Second, as the district court found:

Since a player need not encounter Warden to access WoW's individual non-literal elements, Warden does not effectively control access to those elements.

Our conclusion is in accord with the Sixth Circuit's decision in Lexmark International v. Static Control Components, 387 F.3d 522 (6th Cir.2004). In Lexmark, the plaintiff sold laser printers equipped with an authentication sequence, verified by the printer's copyrighted software, that ensured that only plaintiff's own toner cartridges could be inserted into the printers. Id. at 530. The defendant sold microchips capable of generating an authentication sequence that rendered other manufacturers' cartridges compatible with plaintiff's printers. Id.

The Sixth Circuit held that plaintiff's § 1201(a)(2) claim failed because its authentication sequence did not effectively control access to its copyrighted computer program. Id. at 546. Rather, the mere purchase of one of plaintiff's printers allowed “access” to the copyrighted program. Any purchaser could read the program code directly from the printer memory without encountering the authentication sequence. Id. The authentication sequence thus blocked only one form of access: the ability to make use of the printer. However, it left intact another form of access: the review and use of the computer program's literal code. Id. The Sixth Circuit explained:

Just as one would not say that a lock on the back door of a house “controls access” to a house whose front door does not contain a lock and just as one would not say that a lock on any door of a house “controls access” to the house after its purchaser receives the key to the lock, it does not make sense to say that this provision of the DMCA applies to otherwise-readily-accessible copyrighted works. Add to this the fact that the DMCA not only requires the technological measure to “control access” but requires the measure to control that access “effectively,” 17 U.S.C. § 1201(a)(2), and it seems clear that this provision does not naturally extend to a technological measure that restricts one form of access but leaves another route wide open.

Id. at 547.

Here, a player's purchase of the WoW game client allows access to the game's literal elements and individual non-literal elements. Warden blocks one form of access to these elements: the ability to access them while connected to a WoW server. However, analogously to the situation in Lexmark, Warden leaves open the ability to access these elements directly via the user's computer. We conclude that Warden is not an effective access control measure with respect to WoW's literal elements and individual non-literal elements, and therefore, that MDY does not violate § 1201(a)(2) with respect to these elements.

2. WoW's dynamic non-literal elements

We conclude that MDY meets each of the six textual elements for violating § 1201(a)(2) with respect to WoW's dynamic non-literal elements. That is, MDY (1) traffics in (2) a technology or part thereof (3) that is primarily designed, produced, or marketed for, or has limited commercially significant use other than (4) circumventing a technological measure (5) that effectively controls access (6) to a copyrighted work. See 17 U.S.C. § 1201(a)(2).

The first two elements are met because MDY “traffics in a technology or part thereof”—that is, it sells Glider. The third and fourth elements are met because Blizzard has established that MDY markets Glider for use in circumventing Warden, thus satisfying the requirement of § 1201(a)(2)(C). FN16 Indeed, Glider has no function other than to facilitate the playing of WoW. The sixth element is met because, as the district court held, WoW's dynamic non-literal elements constitute a copyrighted work. See, e.g., Atari Games Corp. v. Oman, 888 F.2d 878, 884–85 (D.C.Cir.1989) (the audiovisual display of a computer game is copyrightable independently from the software program code, even though the audiovisual display generated is partially dependent on user input).

FN16. To “circumvent a technological measure” under § 1201(a) means to “descramble a scrambled work, to decrypt an encrypted work, or otherwise to avoid, bypass, remove, deactivate, or impair a technological measure, without the authority of the copyright owner.” 17 U.S.C. § 1201(a)(3)(A) (emphasis added). A circuit split exists with respect to the meaning of the phrase “without the authority of the copyright owner.” The Federal Circuit has concluded that this definition imposes an additional requirement on a § 1201(a)(2) plaintiff: to show that the defendant's circumventing device enables third parties to access the copyrighted work without the copyright owner's authorization. See Chamberlain, 381 F.3d at 1193. The Second Circuit has adopted a different view, explaining that § 1201(a)(3)(A) plainly exempts from § 1201(a) liability those whom a copyright owner authorizes to circumvent an access control measure, not those whom a copyright owner authorizes to access the work. Corley, 273 F.3d at 444 & n. 15; see also 321 Studios v. MGM Studios, Inc., 307 F.Supp.2d 1085, 1096 (N.D.Cal.2004) (same).

We find the Second Circuit's view to be the sounder construction of the statute's language, and conclude that § 1201(a)(2) does not require a plaintiff to show that the accused device enables third parties to access the work without the copyright owner's authorization. Thus, Blizzard has satisfied the “circumvention” element of a § 1201(a)(2) claim, because Blizzard has demonstrated that it did not authorize MDY to circumvent Warden.

The fifth element is met because Warden is an effective access control measure. To “effectively control access to a work,” a technological measure must “in the ordinary course of its operation, require[ ] the application of information, or a process or a treatment, with the authority of the copyright owner, to gain access to the work.” 17 U.S.C. § 1201(a)(3)(B). Both of Warden's two components “require[ ] the application of information, or a process or a treatment ... to gain access to the work.” For a player to connect to Blizzard's servers which provide access to WoW's dynamic non-literal elements, scan.dll must scan the player's computer RAM and confirm the absence of any bots or cheats. The resident component also requires a “process” in order for the user to continue accessing the work: the user's computer must report portions of WoW code running in RAM to the server. Moreover, Warden's provisions were put into place by Blizzard, and thus, function “with the authority of the copyright owner.” Accordingly, Warden effectively controls access to WoW's dynamic non-literal elements.FN17 We hold that MDY is liable under § 1201(a)(2) with respect to WoW's dynamic non-literal elements. Accordingly, we affirm the district court's entry of a permanent injunction against MDY to prevent future § 1201(a)(2) violations.

FN17. The statutory definition of the phrase “effectively control access to a work” does not require that an access control measure be strong or circumvention-proof. Rather, it requires an access control measure to provide some degree of control over access to a copyrighted work. As one district court has observed, if the word “effectively” were read to mean that the statute protects “only successful or efficacious technological means of controlling access,” it would “gut” DMCA § 1201(a)(2), because it would “limit the application of the statute to access control measures that thwart circumvention, but withhold protection for those measures that can be circumvented.” See Universal City Studios v. Reimerdes, 111 F.Supp.2d 294, 318 (S.D.N.Y.2000) (“Defendants would have the Court construe the statute to offer protection where none is needed but to withhold protection precisely where protection is essential.”).

F. Blizzard's § 1201(b)(1) claim

Blizzard may prevail under § 1201(b)(1) only if Warden “effectively protect[s] a right” of Blizzard under the Copyright Act. Blizzard contends that Warden protects its reproduction right against unauthorized copying. We disagree.

First, although WoW players copy the software code into RAM while playing the game, Blizzard's EULA and ToU authorize all licensed WoW players to do so. We have explained that ToU § 4(B)'s bot prohibition is a license covenant rather than a condition. Thus, a Glider user who violates this covenant does not infringe by continuing to copy code into RAM. Accordingly, MDY does not violate § 1201(b)(1) by enabling Glider users to avoid Warden's interruption of their authorized copying into RAM.

Second, although WoW players can theoretically record game play by taking screen shots, there is no evidence that Warden detects or prevents such allegedly infringing copying. This is logical, because Warden was designed to reduce the presence of cheats and bots, not to protect WoW's dynamic non-literal elements against copying. We conclude that Warden does not effectively protect any of Blizzard's rights under the Copyright Act, and MDY is not liable under § 1201(b)(1) for Glider's circumvention of Warden.

Music Markets and Mythologies

Henry H. Perritt, Jr. [FNa1]

9 J. Marshall Rev. Intell. Prop. L. 831 (2010)

INTRODUCTION

      The revolution in the marketplace for music is in its early stages. New technologies make available new ways to perform creation, intermediation, and consumption activities. [FN1] Some emerging enterprises are experimenting with new business models for connecting musicians with their fans. [FN2] As in the early days of e-commerce, circa 1998, it is too soon to know who will become hugely successful and who will fade from the scene. It is possible, however, to estimate the basic features of the new marketplace. It will not look at all like the old one.

      Confronted with change, the major firms in the popular music industry [FN3] have mounted a major public-relations and litigation campaign premised on the idea that the world of popular music is under a grave threat. [FN4] This article debunks the myth propagated by dominant players in the current music industry that the problem is illicit file sharing. It explains how new technologies based on more powerful personal computers (“PCs”), portable music players, and the Internet are reshaping the marketplace for popular music so as to facilitate more direct access between musicians and their fans. It predicts that the overall demand for popular music will continue to increase because music is becoming more portable, that opportunities will increase for “indie” musicians, [FN5] even as the fortunes of the major record labels are eclipsed. It concludes by recommending some general directions for reform and application of copyright law in the new marketplace, and by describing new business models and labor markets for musicians.

I. THE MYTH VERSUS THE FACTS

      If one were to believe the drumbeat of the major music labels, the world of music is facing a catastrophe. A future without music looms unless intellectual property laws are strengthened to expand the labels' control over how music is distributed and consumed. Their message comprises four propositions:

       CDs (“Compact Discs”) are music. The major labels publicize declines in CD sales as though those declines represent a decline in the willingness of consumers to pay for music. [FN6]

       The major labels promote art. They characterize their own interests as equivalent to the interests of musicians. [FN7]

       Thieves are ruining everything. Consumers are less willing to pay for music and thus reward artists for their artistic efforts, the labels say, because of the misconduct of “thieves”--pirates who sell music of others below the cost of creating it and depraved high-school and college students who proliferate free copies. [FN8]

       Protecting copyright should be at the center of American foreign policy. They are distorting American foreign policy, inducing public officials to move intellectual property protection to near the top of the list of priorities for negotiations with major powers such as China, Russia and India, and with scores of developing nations. [FN9]

      The facts are out of synch with the drumbeat.

       The real goal is to stifle competition enabled by new technologies. The major labels' trade association, the Recording Industry Association of America (“RIAA”), has filed some 20,000 lawsuits, most against individuals engaged in file sharing. [FN10] Most of the suits do not go to trial because the RIAA employs contract collection agencies that threaten the defendants with ruin unless they “settle” for $8,000 to $10,000, depending on the apparent wealth and income of the defendant. [FN11] The courts have been sluggish in punishing such abusive practices. [FN12] It's as though the law had empowered typewriter manufacturers to launch a blizzard of lawsuits to discourage the early use of word-processing software and hardware.

      The avalanche of litigation is only the latest in a long tradition of major interests in the music industry trying to stifle competition resulting from new technology. Music rights holders fought phonographs [FN13] and music radio in its early days. [FN14] The major labels were found by the Federal Trade Commission to have violated the antitrust laws in the late 1990s by prohibiting retailers from selling music CDs at discounted prices. [FN15] The industry's campaign against use of the new technologies began before it was possible to buy music in digital formats. The industry had made sure of that by refusing to offer its catalog in any of the new formats until relatively recently. [FN16]

       The major record labels would not, of course, have attained their present size if they did not perform a useful function in the market. The problem they face, however, is not that they suddenly are under attack by teenage pirates; the problem is that the intermediation activities they have organized their bureaucracies to perform have become obsolete because of new technologies. In a music marketplace characterized by live performances in huge venues, recording of music on analog tape, sales of recorded music on physical artifacts such as vinyl records, cassette tapes and CDs, and over-the-air radio broadcasts, the major labels aggregated capital for capital-intensive recording sessions and concert promotion and production. [FN17] They selected what they thought were the best among hundreds of thousands of aspiring musicians and signed “record deals” with them, managed the manufacturing process for the physical recordings, advertised their rock stars and other talent through their network of paid contacts with radio stations, music reviewers, and brick-and-mortar retailers, and warehoused and distributed the physical recordings. [FN18]

      But the institutional context in which the major labels have a comparative advantage is melting away like an iceberg under them. [FN19] The threat they face is not one of attack on their property, but irrelevance. Analysis of the relative cost and efficiency of old versus new methods for selecting, recording, performing, distributing, and promoting music shows that a new architecture for the music marketplace is emerging quickly, an architecture which has little need for what the major labels do well. [FN20]

       Music revenue is increasing even as sales of physical units decline. To be sure, revenue from CD sales has declined dramatically, and the decline continues, often accelerating, with each recent reporting period. [FN21] Music consumers prefer downloadable digital files to CDs, but the revenue potential of digital sales is insufficient to support the same business model that was built on CDs. [FN22] Sales of CDs have declined every year from 2004 to 2008, by 8% from 2004-2005, 12% from 2005-2006, 17% from 2006-2007, 25% from 2007-2008, and 20.5% from 2008-2009. [FN23] Sales for 2008 were down 55%, compared with 1998. [FN24] Revenue from CD sales was down by a similar amount. [FN25] Over the same five years unit sales of digital singles increased by 163% for 2004-2005, 60% for 2005-2006, 38% from 2006-2007, 28% from 2007-2008, and 9.2% from 2008-2009 and revenue from sales of digital singles increased by the similar percentages. [FN26] Unit sales of digital albums increased 198% from 2004-2005, 103% from 2005-2006, 54% from 2006-2007, 34% from 2007-2008, and 20.2% from 2008-2009 with revenue from sales of digital albums up by similar amounts. [FN27]

      Moreover--and this is the important part--the total number of digital sales was over 1 billion in 2009, exceeding 385 million total shipments of CDs. [FN28] Digital album sales were much less--76 million. [FN29]

      This shows, not a decline in the willingness of consumers to buy music, but a shift in consumer preferences from physical to digital formats, and to singles as opposed to albums. [FN30] The hemorrhaging of major-label revenue may threaten the interests of the labels, but it does not prove that the music world is being savaged by thieves. It shows that consumers are willing to buy music. But it also shows that they prefer more convenient formats, that they resist having the songs they want being tied to songs they do not want, and that they want the prices they are charged to reflect the much lower costs of production and distribution which new technologies make possible.

      Despite the explosion in demand for downloadable digital formats, the revenue flows are much less than for CDs. [FN31] Total revenues from digital sales were $2 billion in 2009, compared to $4.2 billion for CDs shipped in the same year. [FN32] This reflects a generally lower price for digital formats (averaging just under $1 for digital singles) compared with CDs (averaging just over $14 for albums--almost all CD sales are album sales), and the consumer preference for singles. [FN33]

      Other realities limit the revenue potential of downloadable digital formats. They are available from multiple sites on the Internet, some licensed, some not, directly from musicians on their websites [FN34] or on their MySpace [FN35] and YouTube pages, [FN36] as well as from music services such as iTunes. [FN37] This results in a much more competitive market structure at the retail level, which puts continuing pressure on prices. It also makes it likely that musicians, their fans, and their promoters will make some of their music available for downloading for free.

       Manufacturing and distribution costs are approaching zero. Apple iTunes is able to sell digital music at $0.99 per song and artists are able to sell songs for less than that and still make money because the combination of digital formats, the Internet, and pervasive e-commerce utilities, have reduced the cost of reproducing and distributing music almost to zero, jerking the rug out from under a business model in which manufacturing and distribution costs dwarf other cost elements. [FN38] In addition, the same and related technologies have dramatically reduced the costs of producing music, rendering obsolete other aspects of the business model in which access to capital-intensive recording and mastering has to be rationed to allow access only to those with the highest probability of producing blockbuster songs. [FN39]

       Advertising and promotion must be performed through new channels. Outreach to potential fans through the Internet and blog reaction to new music has become more important than traditional advertising channels, rendering mostly obsolete expertise, relationships and embedded capital tied to old channels. As reduced barriers to entry increase the supply of music available to consumers, and as portability of music increases demand, tools to help consumers find new music have become even more important than before, but the relevant tools are new and have different economics from the old approaches of promotion and payola.

       Tied sales of songs are unpopular. In 2009, 94% of the digital sales (by unit) were singles and 6% were albums. By contrast, in the same year, 99.7% of the physical CD sales were albums and 0.3% were singles. [FN40] Consumers now can purchase only the songs they want rather than having to purchase a collection of songs bundled by the dozen on CDs. [FN41] The CD format ties less popular songs (or those the sellers believe would be less popular) to more popular songs. Now that consumers are free to purchase only what they want, they buy fewer copies of the less popular songs. Suppliers no longer can “push” songs by tying them to the coattails of other songs. This is not a bad thing for consumers, but it reduces revenue for suppliers of less popular songs.

      Based on RIAA figures, consumers bought 37 million fewer CD albums in the first half of 2006 than in the first half of 2005. [FN42] They bought 119 million more digital singles and 6.5 million more digital albums. [FN43] That is about 30 million fewer album sales. [FN44] If one assumes twelve songs per album, that represents a decline of 360 million in sales of individual songs. The increase in digital single sales was 119 million or almost exactly a third of the loss in individual songs on album formats. [FN45] That consumers who are free to buy only what they want would choose to buy only about a third of what is available on albums is plausible.

       As the portability of music increases, so does demand. Meanwhile, consumers are enjoying more music, not less. They are not at the mercy of major-label A&R personnel and executives to define their tastes. They get cheaper music. They can buy only the songs they want. The possibility of carrying hundreds of songs in their shirt pockets and listening to them whenever they want is not only more attractive than standing in line at the checkout counter to buy CDs selected from a limited inventory, it likely increases the overall demand for music because it opens up more hours per day during which it can be enjoyed.

      The established industry was slow to satisfy this new demand. [FN46] The attractiveness of the new technologies was strong enough that new enterprises sprang up to supply the exploding demand for music in .mp3 formats. [FN47] It was not as though someone went to a 7-Eleven store where magazines were offered for sale and elected to steal one instead. It is more like a situation in which 7-Eleven refused to sell magazines and had made commercial deals with potential importers to prevent them from importing, and people wanting to read magazines smuggled them in. Smuggling, like copyright infringement, is illegal. [FN48] But copyright infringement in the form of unlicensed conversion of music to .mp3 formats and trading in those formats exploded only when the established industry tried to block the use of new technologies with significant consumer benefits. [FN49]

      Since the mid 1990s, of course, it has been possible to buy .mp3 files over the Internet and sales have mushroomed. [FN50] People are perfectly willing to buy digital music, and only now is the industry beginning to cooperate fully in making music available in those formats, while pressuring Steve Jobs to raise prices for iTunes, and trying to throw a litigation monkey wrench into the works of the phenomenally successful MySpace. [FN51]

      It surely is not immoral for the major labels to try to protect a past technology that produces higher margins, nor for the Tower Records of the world to try to protect a business that arose to manage transaction costs that are no longer present. But the problem for the labels is a backward looking business philosophy, not an erosion of morals in those who want to listen to music in the most convenient way possible.

       The increased competition and the demise of traditional gatekeepers means a sharp reduction in prices--approaching zero--for recorded music. In a competitive market, prices approach marginal costs. [FN52] The marginal cost of a copy of an .mp3 file is effectively zero. [FN53] That means that prices for recorded music are trending inexorably toward zero.

       Copyright is unenforceable and hence essentially irrelevant except at the margins of the new order. Pervasive enforcement of copyright in connection with most exchanges of recorded music at the consumer level is impracticable. [FN54] It cannot be done without imposing significant new burdens on Internet intermediaries, [FN55] and this cannot be done without destroying the core features of the Internet. The decentralized and immediate accessibility of MySpace for direct distribution of music by musicians would be impossible if MySpace were obligated to pre-screen every upload for possible intellectual property (“IP”) infringement.

      The same is true of the web hosting sites on which musicians create their own web pages and make them available to the world.

      Law's role--particularly the role of copyright law--in the music industry has declined. It will continue to decline. Music copyright has suffered two body blows: because of the proliferation of digital copies, it has become less enforceable and, as the value of recorded music declines, it is less worthwhile to try to enforce it. [FN56]

      Copyright protection for recorded music at the consumer level has become essentially unenforceable. [FN57] Digital recording technologies make it possible to produce perfect copies of recorded music cheaply and quickly. [FN58] Compression algorithms embedded in software known as “codecs” produce relatively small files that can be distributed in a few seconds via the Internet. [FN59]

      The economic viability of licensed channels for recorded music is more a function of lower consumer transaction costs for iTunes--but not for many major-label sources--than of respect for intellectual property rights.

       New institutions for managing consumer search costs and musician promotion are emerging.

“Time is money.” Time also is not unlimited. 350,000 new songs were released on CD format in 2006. If each one takes three minutes to play, and the average consumer listens to only one minute before deciding whether he likes it, it would require 350,000 minutes, or about 6,000 hours to sample all of them. That is 250 days per year, without allowing any time for sleep. No one is that compulsive about music [--let alone] the physiological problems of sleep deprivation. [Furthermore,] that does not allow for the other new songs created each year that never get released on CDs by major record labels[, which] surely number in the tens of millions. So consumers need some way to reduce search costs. [FN60]

      Under the old model, the labels reduced search costs by selecting only a small fraction of available music to produce, promote, distribute, and sell, leaving musicians without a major record label deal mostly out of the marketplace. Radio stations exposed potential consumers to new music, almost all of it sold by the major labels. [FN61] Press and media coverage was focused primarily on artists with major record label deals. [FN62]

      The most interesting question about the evolution of the new marketplace, considered in the next section, is the shape new kinds of intermediaries will take as they meet the needs of consumers to manage search costs, and the needs of musicians to make consumers aware of their music. [FN63]

[FN1]. See Jon Pareles, A World of Megabeats and Megabytes, N.Y. TIMES, Jan. 3, 2010, at AR1.

[FN2]. See id.

[FN3]. 1 ROBERT LIND ET AL., ENTERTAINMENT LAW 3D: LEGAL CONCEPTS AND BUSINESS PRACTICES § 1.142 (2008) (noting that the Recording Industry Association of America represents the interests of the recording industry); Frank Ahrens, Music Industry Sues Online Song Swappers; Trade Group Says First Batch of Lawsuits Targets 261 Major Offenders, WASH. POST, Sept. 9, 2003, at A01 (noting that the Recording Industry Association of America represents the music industry's five largest music companies of Universal Music, Sony Music Entertainment, Warner Music Group, BMG Entertainment and EMI).

[FN4]. RIAA to Stop Mass Lawsuits, ROLLING STONE, Feb. 5, 2009, at 18 (“After suing 35,000 people since September 2003 for illegally sharing music files online, the Recording Industry Association of America announced in December that it has halted its controversial lawsuit campaign.”).

[FN5]. “Indie” musicians are independent musicians without major record label deals. Stephen Lee, Re-Examining the Concept of the ‘Independent’ Record Company: The Case of Wax Trax! Records, 14 POPULAR MUSIC 13, 13 (1995).

[FN6]. See Piracy: Online and on the Street, RECORDING INDUSTRY ASS'N AM., (last visited May 24, 2010) (“It's commonly known as piracy, but it's a too benign term that doesn't even begin to adequately describe the toll that music theft takes on the many artists, songwriters, musicians, record label employees and others whose hard work and great talent make music possible.”).

[FN7]. See Who We Are, RECORDING INDUSTRY ASS'N AM., http:// aboutus.php (last visited May 24, 2010).

       The Recording Industry Association of America (RIAA) is the trade organization that supports and promotes the creative and financial vitality of the major music companies. Its members are the music labels that comprise the most vibrant record industry in the world. RIAA® members create, manufacture and/or distribute approximately 85% of all legitimate recorded music produced and sold in the United States.

       In support of this mission, the RIAA works to protect the intellectual property and First Amendment rights of artists ....

Id. (emphasis added).

[FN8]. Michael Carney, File Sharers Sued; Music Industry Cracks Down on Internet ‘Piracy’, WASH. TIMES, July 16, 2003, at A2; see Ann Bartow, Electrifying Copyright Norms and Making Cyberspace More Like a Book, 48 VILL. L. REV. 13, 58-59 (2003).

[FN9]. See David Lague, U.S. Official Presses China to Punish Piracy, N.Y. TIMES (Nov. 15, 2006), http:// 2006/11/15/business/worldbusiness/15yuan.html?_ r=1&adxnnl=1&adxnnlx=1267293993-zEThyTWvQA+06mRJqIqN+Q (reporting on U.S. Commerce Secretary's call to China to reduce infringement of U.S. intellectual property).

[FN10]. File Sharing, ELECTRONIC FRONTIER FOUND., http:// issues/file-sharing (last visited May 24, 2010) (describing the abusive nature of music-label litigation); see ELEC. FRONTIER FOUND., RIAA V. THE PEOPLE: FIVE YEARS LATER 4-5 (2008), (describing litigation and collection practices).

[FN11]. See David Canton, Peer-to-Peer Filing Sharing Now a Fact of Internet Life, LONDON FREE PRESS (Ontario), Nov. 3, 2008, at BM5 (explaining that the RIAA threatens “individuals with expensive litigation ... that leaves a lay person with no alternative but to settle for amounts ranging from $3,000 to $11,000”).

[FN12]. See Sosa v. DIRECTV, Inc., 437 F.3d 923, 928-39 (9th Cir. 2006) (rejecting Racketeer Influenced and Corrupt Organizations Act claims against satellite television service that sent more than 10,000 demand letters to consumers asserting legal claims that were “weak”).

[FN13]. See Stern v. Rosey, 17 App. D.C. 562, 564-66 (D.C. Cir. 1901) (affirming dismissal of suit by music rights holder against seller of phonograph wax cylinders).

[FN14]. See, e.g., Buck v. Jewell-LaSalle Realty Co., 283 U.S. 191, 195-202 (1931) (holding that, in suit for injunction against a hotel, radio broadcasts of copyrighted songs made available to hotel guests, constituted a “public performance” of the works).

[FN15]. See Market for Prerecorded Music, Statement of Chairman Robert Pitofsky & Commissioners Sheila F. Anthony, Mozelle W. Thompson, Orson Swindle, & Thomas B. Leary, FED. TRADE COMMISSION, http:// os/2000/09/musicstatement.htm (last visited May 24, 2010); Press Release, Fed. Trade Comm'n, Record Companies Settle FTC Charges of Restraining Competition in CD Music Mkt.: All Five Major Music Distributors Agree to Abandon Advertising Pricing Policies (May 10, 2000), http:// opa/2000/05/cdpres.shtm.

[FN16]. See, e.g., Patrick Foster, Record Companies Have a Trick Up Their Sleeve for Downloads; Big Four Challenge Apple with Online Album Format, THE TIMES (London), Aug. 8, 2009, at 28, available at http:// business.timesonline.co.uk/tol/business/industry_ sectors/media/article6788159.ece.

[FN17]. See PATRICK BURKART & TOM MCCOURT, DIGITAL MUSIC WARS: OWNERSHIP AND CONTROL OF THE CELESTIAL JUKEBOX 18 (2006).

[FN18]. See id.

[FN19]. See The Music Industry: From Major to Minor, ECONOMIST, Jan. 12, 2008, at 80.

[FN20]. See Henry H. Perritt, Jr., New Architectures for Music: Law Should Get Out of the Way, 29 HASTINGS COMM. & ENT. L.J. 259, 320 (2007) (exploring changing economics of music production, distribution and consumption, and relationship between these changes and copyright law).

[FN21]. See RECORDING INDUS. ASS'N OF AM., 2008 YEAR-END SHIPMENT STATISTICS, MANUFACTURER'S UNIT SHIPMENTS AND RETAIL DOLLAR VALUE (2008), [hereinafter RIAA 2008] (showing a 26.6% decline in CD sales from 2007 to 2008); RECORDING INDUS. ASS'N OF AM., 2006 RIAA MID-YEAR STATISTICS, MANUFACTURER'S UNIT SHIPMENTS AND DOLLAR VALUE (2006), [hereinafter RIAA 2006] (showing a 13.9% decline in CD unit sales for the first-six months of 2006, compared with a similar period of 2005).

[FN22]. See Glenn Peoples, Analysis: The Digital Revenue Slowdown, (Sept. 8, 2009), display/industry/e3ia3f2289d03ed2216c96c78087debf9f1.

[FN23]. RECORDING INDUS. ASS'N OF AM., 2007 YEAR-END SHIPMENT STATISTICS, MANUFACTURERS' UNIT SHIPMENTS AND RETAIL DOLLAR VALUE (2007), http:// 76.74.24.142/81128FFD-028F-282E-1CE5-FDBF16A46388.pdf [hereinafter RIAA 2007]; see RIAA 2008, supra note 21; RECORDING INDUS. ASS'N OF AM., 2009 YEAR-END SHIPMENT STATISTICS, MANUFACTURERS' UNIT SHIPMENTS AND RETAIL DOLLAR VALUE (2009), [hereinafter RIAA 2009].

[FN24]. See Edna Gundersen, Moving in All Directions; Sales Slides, Pirates Aplenty, Microtrends in Pop - All Altered by the Internet, USA TODAY, Dec. 29, 2009, § Life, at 1D.

[FN25]. RIAA 2009, supra note 23 (reporting revenue down 21.9% from 2008); RIAA 2008, supra note 21 (reporting physical CD shipments down 26.6% and Total Retail Revenue for physical shipments down 27%); see also RIAA 2007, supra note 23 (showing ten-year numbers that illustrate the gradual decline of physical sales).

[FN26]. RIAA 2009, supra note 23; RIAA 2008, supra note 21; RIAA 2007, supra note 23.

[FN27]. RIAA 2009, supra note 23; RIAA 2008, supra note 21; RIAA 2007, supra note 23.

[FN28]. RIAA 2009, supra note 23; RIAA 2008, supra note 21.

[FN29]. RIAA 2009, supra note 23.

[FN30]. See id.

[FN31]. See id.

[FN32]. Id.

[FN33]. RIAA 2008, supra note 21 (taking the “Dollar Value” of both digital singles and physical CDs for 2008 and dividing it by “Units Shipped” for 2008 yielded an average price of $0.99 per digital download and $14.22 per CD).

[FN34]. E.g., COLDPLAY, (last visited May 25, 2010).

[FN35]. MYSPACE, (last visited May 25, 2010)

[FN36]. YOUTUBE, (last visited May 25, 2010)

[FN37]. See ITUNES, (last visited May 25, 2010).

[FN38]. Christopher Sprigman, The 99¢ Question, 5 J. TELECOMM. & HIGH TECH. L. 87, 87-89 (2006).

[FN39]. See Mark F. Schultz, Live Performance, Copyright, and the Future of the Music Business, 43 U. RICH. L. REV. 685, 689-90 (2009).

[FN40]. RIAA 2009, supra note 23 (reporting total digital single sales of 1138.3 million; total digital album sales of 76.4 million; total physical CD single sales of 0.9 million; total physical album sales of 292.0 million).

[FN41]. See Jeff Leeds, With CD Sales Falling, Labels Seek New Deals with Apple, N.Y. TIMES, Mar. 26, 2007, at C1 [hereinafter Leeds, CD Sales Falling].

[FN42]. RIAA 2006, supra note 21.

[FN43]. Id.

[FN44]. Id.

[FN45]. Id.

[FN46]. See John Tehranian, All Rights Reversed? Reassessing Copyright and Patent Enforcement in the Digital Age, 72 U. CIN. L. REV. 45, 77-78 (2003).

[FN47]. See Nicola F. Sharpe & Olufunmilayo B. Arewa, Is Apple Playing Fair? Navigating the iPod Fairplay DRM Controversy, 5 NW. J. TECH. & INTELL. PROP. 332, 337-38 (2007), http:// law.northwestern.edu/journals/njtip/v5/n2/5/.

[FN48]. 17 U.S.C. §§ 501, 506(a) (2006) (copyright infringement); 18 U.S.C. § 545 (2006) (smuggling).

[FN49]. See generally STEVE KNOPPER, APPETITE FOR SELF-DESTRUCTION: THE SPECTACULAR CRASH OF THE RECORD INDUSTRY IN THE DIGITAL AGE (2009) (describing specific instances in which established music industry tried to block, rather than adapting to, new ways of making and distributing popular music).

[FN50]. See Sharpe & Arewa, supra note 47, at 337-38.

[FN51]. See UMG Recordings, Inc. v. MySpace, Inc., 526 F. Supp. 2d 1046, 1053-54 (C.D. Cal. 2007). The complaint alleges widespread infringement by MySpace subscribers. Complaint for Direct, Contributory, and Vicarious Copyright Infringement, for Inducement of Copyright Infringement, and for Violations of California Business and Professions Code § 17200 ¶¶ 19-20, UMG Recordings, Inc. v. MySpace, Inc., 526 F. Supp. 2d 1046 (C.D. Cal. 2007) (No. CV 06-07361 AHM (AJWx)).

[FN52]. See DONALD STEVENSON WATSON & MALCOLM GETZ, PRICE THEORY AND ITS USES 219-29 (5th ed. 1981) (1963) (deriving short-term equilibrium price).

[FN53]. Sprigman, supra note 38, at 88-89.

[FN54]. See Robert J. Delchin, Musical Copyright Law: Past, Present and Future of Online Music Distribution, 22 CARDOZO ARTS & ENT. L.J. 343, 395 (2004).

[FN55]. See 17 U.S.C. § 512(d) (2006).

[FN56]. See Schultz, supra note 39, at 689.

[FN57]. See Delchin, supra note 54, at 350.

[FN58]. Id. at 350-51.

[FN59]. See id. at 350-52.

[FN60]. Perritt, Jr., supra note 20, at 313-14.

[FN61]. See Ankur Srivastava, The Anti-Competitive Music Industry and the Case for Compulsory Licensing in the Digital Distribution of Music, 22 TOURO L. REV. 375, 395-97, 399 (2006).

[FN62]. See id. at 394-95.

[FN63]. See Jon Pareles, 2006, Brought To You By You, N.Y. TIMES, Dec. 10, 2006, § 2, at 1 (reporting that the Internet has become an “incessant public audition,” diluting the winnowing down once performed by record label A & R departments, but multiplying choices “promise ever more diversity, ever more possibility for innovation and unexpected delight”).

Metro-Goldwyn-Mayer Studios v. Grokster

125 S.Ct. 2764 (2005)

Justice SOUTER delivered the opinion of the Court.

The question is under what circumstances the distributor of a product capable of both lawful and unlawful use is liable for acts of copyright infringement by third parties using the product. We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.

I

A

Respondents, Grokster, Ltd., and StreamCast Networks, Inc., defendants in the trial court, distribute free software products that allow computer users to share electronic files through peer-to-peer networks, so called because users' computers communicate directly with each other, not through central servers. The advantage of peer-to-peer networks over information networks of other types shows up in their substantial and growing popularity. Because they need no central computer server to mediate the exchange of information or files among users, the high-bandwidth communications capacity for a server may be dispensed with, and the need for costly server storage space is eliminated. Since copies of a file (particularly a popular one) are available on many users' computers, file requests and retrievals may be faster than on other types of networks, and since file exchanges do not travel through a server, communications can take place between any computers that remain connected to the network without risk that a glitch in the server will disable the network in its entirety. Given these benefits in security, cost, and efficiency, peer-to-peer networks are employed to store and distribute electronic files by universities, government agencies, corporations, and libraries, among others.13

Other users of peer-to-peer networks include individual recipients of Grokster's and StreamCast's software, and although the networks that they enjoy through using the software can be used to share any type of digital file, they have prominently employed those networks in sharing copyrighted music and video files without authorization. A group of copyright holders (MGM for short, but including motion picture studios, recording companies, songwriters, and music publishers) sued Grokster and StreamCast for their users' copyright infringements, alleging that they knowingly and intentionally distributed their software to enable users to reproduce and distribute the copyrighted works in violation of the Copyright Act. . . . MGM sought damages and an injunction.

Discovery during the litigation revealed the way the software worked, the business aims of each defendant company, and the predilections of the users. Grokster's eponymous software employs what is known as FastTrack technology, a protocol developed by others and licensed to Grokster. StreamCast distributes a very similar product except that its software, called Morpheus, relies on what is known as Gnutella technology. A user who downloads and installs either software possesses the protocol to send requests for files directly to the computers of others using software compatible with FastTrack or Gnutella. On the FastTrack network opened by the Grokster software, the user's request goes to a computer given an indexing capacity by the software and designated a supernode, or to some other computer with comparable power and capacity to collect temporary indexes of the files available on the computers of users connected to it. The supernode (or indexing computer) searches its own index and may communicate the search request to other supernodes. If the file is found, the supernode discloses its location to the computer requesting it, and the requesting user can download the file directly from the computer located. The copied file is placed in a designated sharing folder on the requesting user's computer, where it is available for other users to download in turn, along with any other file in that folder.

In the Gnutella network made available by Morpheus, the process is mostly the same, except that in some versions of the Gnutella protocol there are no supernodes. In these versions, peer computers using the protocol communicate directly with each other. When a user enters a search request into the Morpheus software, it sends the request to computers connected with it, which in turn pass the request along to other connected peers. The search results are communicated to the requesting computer, and the user can download desired files directly from peers’ computers. As this description indicates, Grokster and StreamCast use no servers to intercept the content of the search requests or to mediate the file transfers conducted by users of the software, there being no central point through which the substance of the communications passes in either direction.

Although Grokster and StreamCast do not therefore know when particular files are copied, a few searches using their software would show what is available on the networks the software reaches. MGM commissioned a statistician to conduct a systematic search, and his study showed that nearly 90% of the files available for download on the FastTrack system were copyrighted works. Grokster and StreamCast dispute this figure, raising methodological problems and arguing that free copying even of copyrighted works may be authorized by the rightholders. They also argue that potential noninfringing uses of their software are significant in kind, even if infrequent in practice. Some musical performers, for example, have gained new audiences by distributing their copyrighted works for free across peer-to-peer networks, and some distributors of unprotected content have used peer-to-peer networks to disseminate files, Shakespeare being an example. Indeed, StreamCast has given Morpheus users the opportunity to download the briefs in this very case, though their popularity has not been quantified.

As for quantification, the parties' anecdotal and statistical evidence entered thus far to show the content available on the FastTrack and Gnutella networks does not say much about which files are actually downloaded by users, and no one can say how often the software is used to obtain copies of unprotected material. But MGM's evidence gives reason to think that the vast majority of users' downloads are acts of infringement, and because well over 100 million copies of the software in question are known to have been downloaded, and billions of files are shared across the FastTrack and Gnutella networks each month, the probable scope of copyright infringement is staggering.

Grokster and StreamCast concede the infringement in most downloads, and it is uncontested that they are aware that users employ their software primarily to download copyrighted files, even if the decentralized FastTrack and Gnutella networks fail to reveal which files are being copied, and when. From time to time, moreover, the companies have learned about their users' infringement directly, as from users who have sent e-mail to each company with questions about playing copyrighted movies they had downloaded, to whom the companies have responded with guidance. And MGM notified the companies of 8 million copyrighted files that could be obtained using their software.

Grokster and StreamCast are not, however, merely passive recipients of information about infringing use. The record is replete with evidence that from the moment Grokster and StreamCast began to distribute their free software, each one clearly voiced the objective that recipients use it to download copyrighted works, and each took active steps to encourage infringement.

After the notorious file-sharing service, Napster, was sued by copyright holders for facilitation of copyright infringement, A & M Records, Inc. v. Napster, Inc., 114 F.Supp.2d 896 (N.D.Cal.2000), aff'd in part, rev'd in part, 239 F.3d 1004 (C.A.9 2001), StreamCast gave away a software program of a kind known as OpenNap, designed as compatible with the Napster program and open to Napster users for downloading files from other Napster and OpenNap users' computers. Evidence indicates that “[i]t was always [StreamCast's] intent to use [its OpenNap network] to be able to capture email addresses of [its] initial target market so that [it] could promote [its] StreamCast Morpheus interface to them,”; indeed, the OpenNap program was engineered “‘to leverage Napster's 50 million user base.”

StreamCast monitored both the number of users downloading its OpenNap program and the number of music files they downloaded. It also used the resulting OpenNap network to distribute copies of the Morpheus software and to encourage users to adopt it. Internal company documents indicate that StreamCast hoped to attract large numbers of former Napster users if that company was shut down by court order or otherwise, and that StreamCast planned to be the next Napster. A kit developed by StreamCast to be delivered to advertisers, for example, contained press articles about StreamCast's potential to capture former Napster users, and it introduced itself to some potential advertisers as a company “which is similar to what Napster was.” It broadcast banner advertisements to users of other Napster-compatible software, urging them to adopt its OpenNap. An internal e-mail from a company executive stated: “‘We have put this network in place so that when Napster pulls the plug on their free service ... or if the Court orders them shut down prior to that ... we will be positioned to capture the flood of their 32 million users that will be actively looking for an alternative.’” Thus, StreamCast developed promotional materials to market its service as the best Napster alternative. One proposed advertisement read: “Napster Inc. has announced that it will soon begin charging you a fee. That's if the courts don't order it shut down first. What will you do to get around it?” Another proposed ad touted StreamCast's software as the “# 1 alternative to Napster” and asked “[w]hen the lights went off at Napster ... where did the users go?” (ellipsis in original).7 StreamCast even planned to flaunt the illegal uses of its software; when it launched the OpenNap network, the chief technology officer of the company averred that “[t]he goal is to get in trouble with the law and get sued. It's the best way to get in the new[s].”

The evidence that Grokster sought to capture the market of former Napster users is sparser but revealing, for Grokster launched its own OpenNap system called Swaptor and inserted digital codes into its Web site so that computer users using Web search engines to look for “Napster” or “[f]ree filesharing” would be directed to the Grokster Web site, where they could download the Grokster software. And Grokster's name is an apparent derivative of Napster.

StreamCast's executives monitored the number of songs by certain commercial artists available on their networks, and an internal communication indicates they aimed to have a larger number of copyrighted songs available on their networks than other file-sharing networks. The point, of course, would be to attract users of a mind to infringe, just as it would be with their promotional materials developed showing copyrighted songs as examples of the kinds of files available through Morpheus. Morpheus in fact allowed users to search specifically for “Top 40” songs, which were inevitably copyrighted. Similarly, Grokster sent users a newsletter promoting its ability to provide particular, popular copyrighted materials.

In addition to this evidence of express promotion, marketing, and intent to promote further, the business models employed by Grokster and StreamCast confirm that their principal object was use of their software to download copyrighted works. Grokster and StreamCast receive no revenue from users, who obtain the software itself for nothing. Instead, both companies generate income by selling advertising space, and they stream the advertising to Grokster and Morpheus users while they are employing the programs. As the number of users of each program increases, advertising opportunities become worth more. While there is doubtless some demand for free Shakespeare, the evidence shows that substantive volume is a function of free access to copyrighted work. Users seeking Top 40 songs, for example, or the latest release by Modest Mouse, are certain to be far more numerous than those seeking a free Decameron, and Grokster and StreamCast translated that demand into dollars.

Finally, there is no evidence that either company made an effort to filter copyrighted material from users' downloads or otherwise impede the sharing of copyrighted files. Although Grokster appears to have sent e-mails warning users about infringing content when it received threatening notice from the copyright holders, it never blocked anyone from continuing to use its software to share copyrighted files. StreamCast not only rejected another company's offer of help to monitor infringement, but blocked the Internet Protocol addresses of entities it believed were trying to engage in such monitoring on its networks.

B

After discovery, the parties on each side of the case cross-moved for summary judgment. The District Court . . . held that those who used the Grokster and Morpheus software to download copyrighted media files directly infringed MGM's copyrights, a conclusion not contested on appeal, but the court nonetheless granted summary judgment in favor of Grokster and StreamCast as to any liability arising from distribution of the then current versions of their software. Distributing that software gave rise to no liability in the court's view, because its use did not provide the distributors with actual knowledge of specific acts of infringement.

The Court of Appeals affirmed. In the court's analysis, a defendant was liable as a contributory infringer when it had knowledge of direct infringement and materially contributed to the infringement. But the court read Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), as holding that distribution of a commercial product capable of substantial noninfringing uses could not give rise to contributory liability for infringement unless the distributor had actual knowledge of specific instances of infringement and failed to act on that knowledge. The fact that the software was capable of substantial noninfringing uses in the Ninth Circuit's view meant that Grokster and StreamCast were not liable, because they had no such actual knowledge, owing to the decentralized architecture of their software. The court also held that Grokster and StreamCast did not materially contribute to their users' infringement because it was the users themselves who searched for, retrieved, and stored the infringing files, with no involvement by the defendants beyond providing the software in the first place.

The Ninth Circuit also considered whether Grokster and StreamCast could be liable under a theory of vicarious infringement. The court held against liability because the defendants did not monitor or control the use of the software, had no agreed-upon right or current ability to supervise its use, and had no independent duty to police infringement. We granted certiorari.

II

A

MGM and many of the amici fault the Court of Appeals's holding for upsetting a sound balance between the respective values of supporting creative pursuits through copyright protection and promoting innovation in new communication technologies by limiting the incidence of liability for copyright infringement. The more artistic protection is favored, the more technological innovation may be discouraged; the administration of copyright law is an exercise in managing the trade-off. [cit.]

The tension between the two values is the subject of this case, with its claim that digital distribution of copyrighted material threatens copyright holders as never before, because every copy is identical to the original, copying is easy, and many people (especially the young) use file-sharing software to download copyrighted works. This very breadth of the software's use may well draw the public directly into the debate over copyright policy, and the indications are that the ease of copying songs or movies using software like Grokster's and Napster's is fostering disdain for copyright protection. As the case has been presented to us, these fears are said to be offset by the different concern that imposing liability, not only on infringers but on distributors of software based on its potential for unlawful use, could limit further development of beneficial technologies.8

The argument for imposing indirect liability in this case is, however, a powerful one, given the number of infringing downloads that occur every day using StreamCast's and Grokster's software. When a widely shared service or product is used to commit infringement, it may be impossible to enforce rights in the protected work effectively against all direct infringers, the only practical alternative being to go against the distributor of the copying device for secondary liability on a theory of contributory or vicarious infringement. See In re Aimster Copyright Litigation, 334 F.3d 643, 645-646 (C.A.7 2003).

One infringes contributorily by intentionally inducing or encouraging direct infringement, see Gershwin Pub. Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (C.A.2 1971), and infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it, Shapiro, Bernstein & Co. v. H.L. Green Co., 316 F.2d 304, 307 (C.A.2 1963).9 Although “[t]he Copyright Act does not expressly render anyone liable for infringement committed by another,” Sony Corp. v. Universal City Studios, 464 U.S., at 434, these doctrines of secondary liability emerged from common law principles and are well established in the law, id., at 486 (Blackmun, J., dissenting); [cit.].

B

Despite the currency of these principles of secondary liability, this Court has dealt with secondary copyright infringement in only one recent case, and because MGM has tailored its principal claim to our opinion there, a look at our earlier holding is in order. In Sony Corp. v. Universal City Studios, this Court addressed a claim that secondary liability for infringement can arise from the very distribution of a commercial product. There, the product, novel at the time, was what we know today as the videocassette recorder or VCR. Copyright holders sued Sony as the manufacturer, claiming it was contributorily liable for infringement that occurred when VCR owners taped copyrighted programs because it supplied the means used to infringe, and it had constructive knowledge that infringement would occur. At the trial on the merits, the evidence showed that the principal use of the VCR was for “ ‘time-shifting,’ ” or taping a program for later viewing at a more convenient time, which the Court found to be a fair, not an infringing, use. There was no evidence that Sony had expressed an object of bringing about taping in violation of copyright or had taken active steps to increase its profits from unlawful taping. Although Sony's advertisements urged consumers to buy the VCR to “‘record favorite shows'” or “ ‘build a library’ ” of recorded programs, neither of these uses was necessarily infringing.

On those facts, with no evidence of stated or indicated intent to promote infringing uses, the only conceivable basis for imposing liability was on a theory of contributory infringement arising from its sale of VCRs to consumers with knowledge that some would use them to infringe. But because the VCR was “capable of commercially significant noninfringing uses,” we held the manufacturer could not be faulted solely on the basis of its distribution.

This analysis reflected patent law's traditional staple article of commerce doctrine, now codified, that distribution of a component of a patented device will not violate the patent if it is suitable for use in other ways. 35 U.S.C. § 271(c); [cit]. The doctrine was devised to identify instances in which it may be presumed from distribution of an article in commerce that the distributor intended the article to be used to infringe another's patent, and so may justly be held liable for that infringement. “One who makes and sells articles which are only adapted to be used in a patented combination will be presumed to intend the natural consequences of his acts; he will be presumed to intend that they shall be used in the combination of the patent.” [cit.]

In sum, where an article is “good for nothing else” but infringement, [cit.], there is no legitimate public interest in its unlicensed availability, and there is no injustice in presuming or imputing an intent to infringe. [cit]. Conversely, the doctrine absolves the equivocal conduct of selling an item with substantial lawful as well as unlawful uses, and limits liability to instances of more acute fault than the mere understanding that some of one's products will be misused. It leaves breathing room for innovation and a vigorous commerce. See Sony Corp. v. Universal City Studios, supra, at 442; [cit].

The parties and many of the amici in this case think the key to resolving it is the Sony rule and, in particular, what it means for a product to be “capable of commercially significant noninfringing uses.” Sony Corp. v. Universal City Studios, supra, at 442. MGM advances the argument that granting summary judgment to Grokster and StreamCast as to their current activities gave too much weight to the value of innovative technology, and too little to the copyrights infringed by users of their software, given that 90% of works available on one of the networks was shown to be copyrighted. Assuming the remaining 10% to be its noninfringing use, MGM says this should not qualify as “substantial,” and the Court should quantify Sony to the extent of holding that a product used “principally” for infringement does not qualify. As mentioned before, Grokster and StreamCast reply by citing evidence that their software can be used to reproduce public domain works, and they point to copyright holders who actually encourage copying. Even if infringement is the principal practice with their software today, they argue, the noninfringing uses are significant and will grow.

We agree with MGM that the Court of Appeals misapplied Sony, which it read as limiting secondary liability quite beyond the circumstances to which the case applied. Sony barred secondary liability based on presuming or imputing intent to cause infringement solely from the design or distribution of a product capable of substantial lawful use, which the distributor knows is in fact used for infringement. The Ninth Circuit has read Sony's limitation to mean that whenever a product is capable of substantial lawful use, the producer can never be held contributorily liable for third parties' infringing use of it; it read the rule as being this broad, even when an actual purpose to cause infringing use is shown by evidence independent of design and distribution of the product, unless the distributors had “specific knowledge of infringement at a time at which they contributed to the infringement, and failed to act upon that information.” Because the Circuit found the StreamCast and Grokster software capable of substantial lawful use, it concluded on the basis of its reading of Sony that neither company could be held liable, since there was no showing that their software, being without any central server, afforded them knowledge of specific unlawful uses.

This view of Sony, however, was error, converting the case from one about liability resting on imputed intent to one about liability on any theory. Because Sony did not displace other theories of secondary liability, and because we find below that it was error to grant summary judgment to the companies on MGM's inducement claim, we do not revisit Sony further, as MGM requests, to add a more quantified description of the point of balance between protection and commerce when liability rests solely on distribution with knowledge that unlawful use will occur. It is enough to note that the Ninth Circuit's judgment rested on an erroneous understanding of Sony and to leave further consideration of the Sony rule for a day when that may be required.

C

Sony's rule limits imputing culpable intent as a matter of law from the characteristics or uses of a distributed product. But nothing in Sony requires courts to ignore evidence of intent if there is such evidence, and the case was never meant to foreclose rules of fault-based liability derived from the common law.10 Sony Corp. v. Universal City Studios, 464 U.S., at 439 (“If vicarious liability is to be imposed on Sony in this case, it must rest on the fact that it has sold equipment with constructive knowledge” of the potential for infringement). Thus, where evidence goes beyond a product's characteristics or the knowledge that it may be put to infringing uses, and shows statements or actions directed to promoting infringement, Sony's staple-article rule will not preclude liability.

The classic case of direct evidence of unlawful purpose occurs when one induces commission of infringement by another, or “entic[es] or persuad[es] another” to infringe, Black's Law Dictionary 790 (8th ed.2004), as by advertising. Thus at common law a copyright or patent defendant who “not only expected but invoked [infringing use] by advertisement” was liable for infringement “on principles recognized in every part of the law.” Kalem Co. v. Harper Brothers, 222 U.S., at 62-63 (copyright infringement). See also Henry v. A.B. Dick Co., 224 U.S., at 48-49 (contributory liability for patent infringement may be found where a good's “most conspicuous use is one which will co-operate in an infringement when sale to such user is invoked by advertisement” of the infringing use); [cit]; Rumford Chemical Works v. Hecker, 20 F.Cas. 1342, 1346 (No. 12,133) (C.C.D.N.J.1876) (demonstrations of infringing activity along with “avowals of the [infringing] purpose and use for which it was made” supported liability for patent infringement).

The rule on inducement of infringement as developed in the early cases is no different today. Evidence of “active steps ... taken to encourage direct infringement,” Oak Industries, Inc. v. Zenith Electronics Corp., 697 F.Supp. 988, 992 (N.D.Ill.1988), such as advertising an infringing use or instructing how to engage in an infringing use, show an affirmative intent that the product be used to infringe, and a showing that infringement was encouraged overcomes the law's reluctance to find liability when a defendant merely sells a commercial product suitable for some lawful use, [cit.]

For the same reasons that Sony took the staple-article doctrine of patent law as a model for its copyright safe-harbor rule, the inducement rule, too, is a sensible one for copyright. We adopt it here, holding that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties. We are, of course, mindful of the need to keep from trenching on regular commerce or discouraging the development of technologies with lawful and unlawful potential. Accordingly, just as Sony did not find intentional inducement despite the knowledge of the VCR manufacturer that its device could be used to infringe, mere knowledge of infringing potential or of actual infringing uses would not be enough here to subject a distributor to liability. Nor would ordinary acts incident to product distribution, such as offering customers technical support or product updates, support liability in themselves. The inducement rule, instead, premises liability on purposeful, culpable expression and conduct, and thus does nothing to compromise legitimate commerce or discourage innovation having a lawful promise.

III

A

The only apparent question about treating MGM's evidence as sufficient to withstand summary judgment under the theory of inducement goes to the need on MGM's part to adduce evidence that StreamCast and Grokster communicated an inducing message to their software users. The classic instance of inducement is by advertisement or solicitation that broadcasts a message designed to stimulate others to commit violations. MGM claims that such a message is shown here. It is undisputed that StreamCast beamed onto the computer screens of users of Napster-compatible programs ads urging the adoption of its OpenNap program, which was designed, as its name implied, to invite the custom of patrons of Napster, then under attack in the courts for facilitating massive infringement. Those who accepted StreamCast's OpenNap program were offered software to perform the same services, which a factfinder could conclude would readily have been understood in the Napster market as the ability to download copyrighted music files. Grokster distributed an electronic newsletter containing links to articles promoting its software's ability to access popular copyrighted music. And anyone whose Napster or free file-sharing searches turned up a link to Grokster would have understood Grokster to be offering the same file-sharing ability as Napster, and to the same people who probably used Napster for infringing downloads; that would also have been the understanding of anyone offered Grokster's suggestively named Swaptor software, its version of OpenNap. And both companies communicated a clear message by responding affirmatively to requests for help in locating and playing copyrighted materials.

In StreamCast's case, of course, the evidence just described was supplemented by other unequivocal indications of unlawful purpose in the internal communications and advertising designs aimed at Napster users (“When the lights went off at Napster ... where did the users go?”). Whether the messages were communicated is not to the point on this record. The function of the message in the theory of inducement is to prove by a defendant's own statements that his unlawful purpose disqualifies him from claiming protection (and incidentally to point to actual violators likely to be found among those who hear or read the message). Proving that a message was sent out, then, is the preeminent but not exclusive way of showing that active steps were taken with the purpose of bringing about infringing acts, and of showing that infringing acts took place by using the device distributed. Here, the summary judgment record is replete with other evidence that Grokster and StreamCast, unlike the manufacturer and distributor in Sony, acted with a purpose to cause copyright violations by use of software suitable for illegal use.

Three features of this evidence of intent are particularly notable. First, each company showed itself to be aiming to satisfy a known source of demand for copyright infringement, the market comprising former Napster users. StreamCast's internal documents made constant reference to Napster, it initially distributed its Morpheus software through an OpenNap program compatible with Napster, it advertised its OpenNap program to Napster users, and its Morpheus software functions as Napster did except that it could be used to distribute more kinds of files, including copyrighted movies and software programs. Grokster's name is apparently derived from Napster, it too initially offered an OpenNap program, its software's function is likewise comparable to Napster's, and it attempted to divert queries for Napster onto its own Web site. Grokster and StreamCast's efforts to supply services to former Napster users, deprived of a mechanism to copy and distribute what were overwhelmingly infringing files, indicate a principal, if not exclusive, intent on the part of each to bring about infringement.

Second, this evidence of unlawful objective is given added significance by MGM's showing that neither company attempted to develop filtering tools or other mechanisms to diminish the infringing activity using their software. While the Ninth Circuit treated the defendants' failure to develop such tools as irrelevant because they lacked an independent duty to monitor their users' activity, we think this evidence underscores Grokster's and StreamCast's intentional facilitation of their users' infringement.12

Third, there is a further complement to the direct evidence of unlawful objective. It is useful to recall that StreamCast and Grokster make money by selling advertising space, by directing ads to the screens of computers employing their software. As the record shows, the more the software is used, the more ads are sent out and the greater the advertising revenue becomes. Since the extent of the software's use determines the gain to the distributors, the commercial sense of their enterprise turns on high-volume use, which the record shows is infringing. This evidence alone would not justify an inference of unlawful intent, but viewed in the context of the entire record its import is clear.

The unlawful objective is unmistakable.

B

In addition to intent to bring about infringement and distribution of a device suitable for infringing use, the inducement theory of course requires evidence of actual infringement by recipients of the device, the software in this case. As the account of the facts indicates, there is evidence of infringement on a gigantic scale, and there is no serious issue of the adequacy of MGM's showing on this point in order to survive the companies' summary judgment requests. Although an exact calculation of infringing use, as a basis for a claim of damages, is subject to dispute, there is no question that the summary judgment evidence is at least adequate to entitle MGM to go forward with claims for damages and equitable relief.

* * *

In sum, this case is significantly different from Sony and reliance on that case to rule in favor of StreamCast and Grokster was error. Sony dealt with a claim of liability based solely on distributing a product with alternative lawful and unlawful uses, with knowledge that some users would follow the unlawful course. The case struck a balance between the interests of protection and innovation by holding that the product's capability of substantial lawful employment should bar the imputation of fault and consequent secondary liability for the unlawful acts of others.

MGM's evidence in this case most obviously addresses a different basis of liability for distributing a product open to alternative uses. Here, evidence of the distributors' words and deeds going beyond distribution as such shows a purpose to cause and profit from third-party acts of copyright infringement. If liability for inducing infringement is ultimately found, it will not be on the basis of presuming or imputing fault, but from inferring a patently illegal objective from statements and actions showing what that objective was.

There is substantial evidence in MGM's favor on all elements of inducement, and summary judgment in favor of Grokster and StreamCast was error. On remand, reconsideration of MGM's motion for summary judgment will be in order.

The judgment of the Court of Appeals is vacated, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

. . .

Justice BREYER, with whom Justice STEVENS and Justice O'CONNOR join, concurring.

I agree with the Court that the distributor of a dual-use technology may be liable for the infringing activities of third parties where he or she actively seeks to advance the infringement. I further agree that, in light of our holding today, we need not now “revisit” Sony. . . Other Members of the Court, however, take up the Sony question: whether Grokster's product is “capable of ‘substantial’ or ‘commercially significant’ noninfringing uses.” And they answer that question by stating that the Court of Appeals was wrong when it granted summary judgment on the issue in Grokster's favor. I write to explain why I disagree with them on this matter.

I

. . . .

A

I begin with Sony's standard. In Sony, the Court considered the potential copyright liability of a company that did not itself illegally copy protected material, but rather sold a machine-a Video Cassette Recorder (VCR)-that could be used to do so. . . . Sony knew many customers would use its VCRs to engage in unauthorized copying and “ ‘library-building.’” But that fact, said the Court, was insufficient to make Sony itself an infringer. And the Court ultimately held that Sony was not liable for its customers' acts of infringement.

[T]he Court wrote that the sale of copying equipment, “like the sale of other articles of commerce, does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial noninfringing uses.” The Court ultimately characterized the legal “question” in the particular case as “whether [Sony's VCR] is capable of commercially significant noninfringing uses ” (while declining to give “precise content” to these terms).

It then applied this standard. The Court had before it a survey (commissioned by the District Court and then prepared by the respondents) showing that roughly 9% of all VCR recordings were of the type—namely, religious, educational, and sports programming—owned by producers and distributors testifying on Sony's behalf who did not object to time-shifting. A much higher percentage of VCR users had at one point taped an authorized program, in addition to taping unauthorized programs. And the plaintiffs—not a large class of content providers as in this case—owned only a small percentage of the total available unauthorized programming. But of all the taping actually done by Sony's customers, only around 9% was of the sort the Court referred to as authorized.

The Court found that the magnitude of authorized programming was “significant,” and it also noted the “significant potential for future authorized copying.” The Court supported this conclusion by referencing the trial testimony of professional sports league officials and a religious broadcasting representative. It also discussed (1) a Los Angeles educational station affiliated with the Public Broadcasting Service that made many of its programs available for home taping, and (2) Mr. Rogers' Neighborhood, a widely watched children's program. On the basis of this testimony and other similar evidence, the Court determined that producers of this kind had authorized duplication of their copyrighted programs “in significant enough numbers to create a substantial market for a noninfringing use of the” VCR. Id., at 447, n. 28, 104 S.Ct. 774 (emphasis added).

The Court, in using the key word “substantial,” indicated that these circumstances alone constituted a sufficient basis for rejecting the imposition of secondary liability. See id., at 456 (“Sony demonstrated a significant likelihood that substantial numbers of copyright holders” would not object to time-shifting (emphasis added)). Nonetheless, the Court buttressed its conclusion by finding separately that, in any event, unauthorized timeshifting often constituted not infringement, but “fair use.” Id., at 447-456.

B

When measured against Sony's underlying evidence and analysis, the evidence now before us shows that Grokster passes Sony's test—that is, whether the company's product is capable of substantial or commercially significant noninfringing uses. For one thing, petitioners' (hereinafter MGM) own expert declared that 75% of current files available on Grokster are infringing and 15% are “likely infringing.” That leaves some number of files near 10% that apparently are noninfringing, a figure very similar to the 9% or so of authorized time-shifting uses of the VCR that the Court faced in Sony.

As in Sony, witnesses here explained the nature of the noninfringing files on Grokster's network without detailed quantification. Those files include: [authorized copies of music by artists such as Wilco, Janis Ian, Pearl Jam, Dave Matthews, John Mayer, and others; free electronic books and other works from various online publishers, including Project Gutenberg; public domain and authorized software, such as WinZip 8.1; and licensed music videos and television and movie segments distributed via digital video packaging with the permission of the copyright holder.]

The nature of these and other lawfully swapped files is such that it is reasonable to infer quantities of current lawful use roughly approximate to those at issue in Sony. At least, MGM has offered no evidence sufficient to survive summary judgment that could plausibly demonstrate a significant quantitative difference. To be sure, in quantitative terms these uses account for only a small percentage of the total number of uses of Grokster's product. But the same was true in Sony, which characterized the relatively limited authorized copying market as “substantial.” (The Court made clear as well in Sony that the amount of material then presently available for lawful copying-if not actually copied-was significant, and the same is certainly true in this case.)

Importantly, Sony also used the word “capable,” asking whether the product is “capable of ”substantial noninfringing uses. Its language and analysis suggest that a figure like 10%, if fixed for all time, might well prove insufficient, but that such a figure serves as an adequate foundation where there is a reasonable prospect of expanded legitimate uses over time. See ibid. (noting a “significant potential for future authorized copying”). And its language also indicates the appropriateness of looking to potential future uses of the product to determine its “capability.”

Here the record reveals a significant future market for noninfringing uses of Grokster-type peer-to-peer software. Such software permits the exchange of any sort of digital file-whether that file does, or does not, contain copyrighted material. As more and more uncopyrighted information is stored in swappable form, it seems a likely inference that lawful peer-to-peer sharing will become increasingly prevalent. . . .

And that is just what is happening. Such legitimate noninfringing uses are coming to include the swapping of: research information (the initial purpose of many peer-to-peer networks); public domain films (e.g., those owned by the Prelinger Archive); historical recordings and digital educational materials (e.g., those stored on the Internet Archive); digital photos (OurPictures, for example, is starting a P2P photo-swapping service); “shareware” and “freeware” (e.g., Linux and certain Windows software); secure licensed music and movie files (Intent MediaWorks, for example, protects licensed content sent across P2P networks); news broadcasts past and present (the BBC Creative Archive lets users “rip, mix and share the BBC”); user-created audio and video files (including “podcasts” that may be distributed through P2P software); and all manner of free “open content” works collected by Creative Commons (one can search for Creative Commons material on StreamCast). I can find nothing in the record that suggests that this course of events will not continue to flow naturally as a consequence of the character of the software taken together with the foreseeable development of the Internet and of information technology. Cf. ante, at 2770 (opinion of the Court) (discussing the significant benefits of peer-to-peer technology).

There may be other now-unforeseen noninfringing uses that develop for peer-to-peer software, just as the home-video rental industry (unmentioned in Sony) developed for the VCR. But the foreseeable development of such uses, when taken together with an estimated 10% noninfringing material, is sufficient to meet Sony's standard. And while Sony considered the record following a trial, there are no facts asserted by MGM in its summary judgment filings that lead me to believe the outcome after a trial here could be any different. The lower courts reached the same conclusion.

Of course, Grokster itself may not want to develop these other noninfringing uses. But Sony's standard seeks to protect not the Groksters of this world (which in any event may well be liable under today's holding), but the development of technology more generally. And Grokster's desires in this respect are beside the point.

II

The real question here, I believe, is not whether the record evidence satisfies Sony. As I have interpreted the standard set forth in that case, it does. And of the Courts of Appeals that have considered the matter, only one has proposed interpreting Sony more strictly than I would do-in a case where the product might have failed under any standard. In re Aimster Copyright Litigation, 334 F.3d 643, 653 (C.A.7 2003) (defendant “failed to show that its service is ever used for any purpose other than to infringe” copyrights (emphasis added)); [cit].

Instead, the real question is whether we should modify the Sony standard, as MGM requests, or interpret Sony more strictly, as I believe Justice Ginsburg's approach would do in practice. Compare ante, at 2784-2787 (concurring) (insufficient evidence in this case of both present lawful uses and of a reasonable prospect that substantial noninfringing uses would develop over time), with Sony, 464 U.S., at 442-47 (basing conclusion as to the likely existence of a substantial market for authorized copying upon general declarations, some survey data, and common sense).

As I have said, Sony itself sought to “strike a balance between a copyright holder's legitimate demand for effective—not merely symbolic—protection of the statutory monopoly, and the rights of others freely to engage in substantially unrelated areas of commerce.” Id., at 442. Thus, to determine whether modification, or a strict interpretation, of Sony is needed, I would ask whether MGM has shown that Sony incorrectly balanced copyright and new-technology interests. In particular: (1) Has Sony (as I interpret it) worked to protect new technology? (2) If so, would modification or strict interpretation significantly weaken that protection? (3) If so, would new or necessary copyright-related benefits outweigh any such weakening?

A

The first question is the easiest to answer. Sony's rule, as I interpret it, has provided entrepreneurs with needed assurance that they will be shielded from copyright liability as they bring valuable new technologies to market.

Sony's rule is clear. That clarity allows those who develop new products that are capable of substantial noninfringing uses to know, ex ante, that distribution of their product will not yield massive monetary liability. At the same time, it helps deter them from distributing products that have no other real function than-or that are specifically intended for-copyright infringement, deterrence that the Court's holding today reinforces (by adding a weapon to the copyright holder's legal arsenal).

Sony's rule is strongly technology protecting. The rule deliberately makes it difficult for courts to find secondary liability where new technology is at issue. It establishes that the law will not impose copyright liability upon the distributors of dual-use technologies (who do not themselves engage in unauthorized copying) unless the product in question will be used almost exclusively to infringe copyrights (or unless they actively induce infringements as we today describe). Sony thereby recognizes that the copyright laws are not intended to discourage or to control the emergence of new technologies, including (perhaps especially) those that help disseminate information and ideas more broadly or more efficiently. Thus Sony's rule shelters VCRs, typewriters, tape recorders, photocopiers, computers, cassette players, compact disc burners, digital video recorders, MP3 players, Internet search engines, and peer-to-peer software. But Sony's rule does not shelter descramblers, even if one could theoretically use a descrambler in a noninfringing way. . . .

Sony's rule is forward looking. It does not confine its scope to a static snapshot of a product's current uses (thereby threatening technologies that have undeveloped future markets). Rather, as the VCR example makes clear, a product's market can evolve dramatically over time. And Sony-by referring to a capacity for substantial noninfringing uses-recognizes that fact. Sony's word “capable” refers to a plausible, not simply a theoretical, likelihood that such uses will come to pass, and that fact anchors Sony in practical reality. Cf. Aimster, supra, at 651.

Sony's rule is mindful of the limitations facing judges where matters of technology are concerned. Judges have no specialized technical ability to answer questions about present or future technological feasibility or commercial viability where technology professionals, engineers, and venture capitalists themselves may radically disagree and where answers may differ depending upon whether one focuses upon the time of product development or the time of distribution. Consider, for example, the question whether devices can be added to Grokster's software that will filter out infringing files. MGM tells us this is easy enough to do, as do several amici that produce and sell the filtering technology. Grokster says it is not at all easy to do, and not an efficient solution in any event, and several apparently disinterested computer science professors agree. Which account should a judge credit? Sony says that the judge will not necessarily have to decide.

Given the nature of the Sony rule, it is not surprising that in the last 20 years, there have been relatively few contributory infringement suits-based on a product distribution theory-brought against technology providers (a small handful of federal appellate court cases and perhaps fewer than two dozen District Court cases in the last 20 years). I have found nothing in the briefs or the record that shows that Sony has failed to achieve its innovation-protecting objective.

B

The second, more difficult, question is whether a modified Sony rule (or a strict interpretation) would significantly weaken the law's ability to protect new technology. Justice Ginsburg's approach would require defendants to produce considerably more concrete evidence-more than was presented here-to earn Sony's shelter. That heavier evidentiary demand, and especially the more dramatic (case-by-case balancing) modifications that MGM and the Government seek, would, I believe, undercut the protection that Sony now offers.

To require defendants to provide, for example, detailed evidence-say business plans, profitability estimates, projected technological modifications, and so forth-would doubtless make life easier for copyrightholder plaintiffs. But it would simultaneously increase the legal uncertainty that surrounds the creation or development of a new technology capable of being put to infringing uses. Inventors and entrepreneurs (in the garage, the dorm room, the corporate lab, or the boardroom) would have to fear (and in many cases endure) costly and extensive trials when they create, produce, or distribute the sort of information technology that can be used for copyright infringement. They would often be left guessing as to how a court, upon later review of the product and its uses, would decide when necessarily rough estimates amounted to sufficient evidence. They would have no way to predict how courts would weigh the respective values of infringing and noninfringing uses; determine the efficiency and advisability of technological changes; or assess a product's potential future markets. The price of a wrong guess-even if it involves a good-faith effort to assess technical and commercial viability-could be large statutory damages (not less than $750 and up to $30,000 per infringed work ). 17 U.S.C. § 504(c)(1). The additional risk and uncertainty would mean a consequent additional chill of technological development.

C

The third question-whether a positive copyright impact would outweigh any technology-related loss-I find the most difficult of the three. I do not doubt that a more intrusive Sony test would generally provide greater revenue security for copyright holders. But it is harder to conclude that the gains on the copyright swings would exceed the losses on the technology roundabouts.

For one thing, the law disfavors equating the two different kinds of gain and loss; rather, it leans in favor of protecting technology. As Sony itself makes clear, the producer of a technology which permits unlawful copying does not himself engage in unlawful copying-a fact that makes the attachment of copyright liability to the creation, production, or distribution of the technology an exceptional thing. See 464 U.S., at 431 (courts “must be circumspect” in construing the copyright laws to preclude distribution of new technologies). Moreover, Sony has been the law for some time. And that fact imposes a serious burden upon copyright holders like MGM to show a need for change in the current rules of the game, including a more strict interpretation of the test.

In any event, the evidence now available does not, in my view, make out a sufficiently strong case for change. To say this is not to doubt the basic need to protect copyrighted material from infringement. . . . But these highly general principles cannot by themselves tell us how to balance the interests at issue in Sony or whether Sony's standard needs modification. And at certain key points, information is lacking.

Will an unmodified Sony lead to a significant diminution in the amount or quality of creative work produced? Since copyright's basic objective is creation and its revenue objectives but a means to that end, this is the underlying copyright question. And its answer is far from clear.

Unauthorized copying likely diminishes industry revenue, though it is not clear by how much. . . . .

The extent to which related production has actually and resultingly declined remains uncertain, though there is good reason to believe that the decline, if any, is not substantial. . . .

More importantly, copyright holders at least potentially have other tools available to reduce piracy and to abate whatever threat it poses to creative production. As today's opinion makes clear, a copyright holder may proceed against a technology provider where a provable specific intent to infringe (of the kind the Court describes) is present. Services like Grokster may well be liable under an inducement theory.

In addition, a copyright holder has always had the legal authority to bring a traditional infringement suit against one who wrongfully copies. Indeed, since September 2003, the Recording Industry Association of America (RIAA) has filed “thousands of suits against people for sharing copyrighted material.” [cit]. These suits have provided copyright holders with damages; have served as a teaching tool, making clear that much file sharing, if done without permission, is unlawful; and apparently have had a real and significant deterrent effect. . . .

Further, copyright holders may develop new technological devices that will help curb unlawful infringement. Some new technology, called “digital ‘watermarking’ ” and “digital fingerprint[ing],” can encode within the file information about the author and the copyright scope and date, which “fingerprints” can help to expose infringers. . .

At the same time, advances in technology have discouraged unlawful copying by making lawful copying (e.g., downloading music with the copyright holder's permission) cheaper and easier to achieve. Several services now sell music for less than $1 per song. (, for example, charges $0.88 each). Consequently, many consumers initially attracted to the convenience and flexibility of services like Grokster are now migrating to lawful paid services (services with copying permission) where they can enjoy at little cost even greater convenience and flexibility without engaging in unlawful swapping. . . .

Thus, lawful music downloading services-those that charge the customer for downloading music and pay royalties to the copyright holder-have continued to grow and to produce substantial revenue. . . .And more advanced types of non-music-oriented P2P networks have also started to develop, drawing in part on the lessons of Grokster.

Finally, as Sony recognized, the legislative option remains available. Courts are less well suited than Congress to the task of “accommodat[ing] fully the varied permutations of competing interests that are inevitably implicated by such new technology.” Sony, 464 U.S., at 431. . . .

I do not know whether these developments and similar alternatives will prove sufficient, but I am reasonably certain that, given their existence, a strong demonstrated need for modifying Sony (or for interpreting Sony's standard more strictly) has not yet been shown. That fact, along with the added risks that modification (or strict interpretation) would impose upon technological innovation, leads me to the conclusion that we should maintain Sony, reading its standard as I have read it. As so read, it requires affirmance of the Ninth Circuit's determination of the relevant aspects of the Sony question . . .

CompuServe Incorporated v. Cyber Promotions

962 F. Supp. 1015 1997

OPINION:

MEMORANDUM OPINION AND ORDER

This case presents novel issues regarding the commercial use of the Internet, specifically the right of an online computer service to prevent a commercial enterprise from sending unsolicited electronic mail advertising to its subscribers.

Plaintiff CompuServe Incorporated ("CompuServe") is one of the major national commercial online computer services. It operates a computer communication service through a proprietary nationwide computer network. In addition to allowing access to the extensive content available within its own proprietary network, CompuServe also provides its subscribers with a link to the much larger resources of the Internet. This allows its subscribers to send and receive electronic messages, known as "e-mail," by the Internet.

Defendants Cyber Promotions, Inc. and its president Sanford Wallace are in the business of sending unsolicited e-mail advertisements on behalf of themselves and their clients to hundreds of thousands of Internet users, many of whom are CompuServe subscribers. CompuServe has notified defendants that they are prohibited from using its computer equipment to process and store the unsolicited e-mail and has requested that they terminate the practice. Instead, defendants have sent an increasing volume of e-mail solicitations to CompuServe subscribers. CompuServe has attempted to employ technological means to block the flow of defendants' e-mail transmission to its computer equipment, but to no avail.

This matter is before the Court on the application of CompuServe for a preliminary injunction which would extend the duration of the temporary restraining order issued by this Court on October 24, 1996 and which would in addition prevent defendants from sending unsolicited advertisements to CompuServe subscribers.

For the reasons which follow, this Court holds that where defendants engaged in a course of conduct of transmitting a substantial volume of electronic data in the form of unsolicited e-mail to plaintiff's proprietary computer equipment, where defendants continued such practice after repeated demands to cease and desist, and where defendants deliberately evaded plaintiff's affirmative efforts to protect its computer equipment from such use, plaintiff has a viable claim for trespass to personal property and is entitled to injunctive relief to protect its property.

. . .

Over the past several months, CompuServe has received many complaints from subscribers threatening to discontinue their subscription unless CompuServe prohibits electronic mass mailers from using its equipment to send unsolicited advertisements. CompuServe asserts that the volume of messages generated by such mass mailings places a significant burden on its equipment which has finite processing and storage capacity. CompuServe receives no payment from the mass mailers for processing their unsolicited advertising. However, CompuServe's subscribers pay for their access to CompuServe's services in increments of time and thus the process of accessing, reviewing and discarding unsolicited e-mail costs them money, which is one of the reasons for their complaints. CompuServe has notified defendants that they are prohibited from using its proprietary computer equipment to process and store unsolicited e-mail and has requested them to cease and desist from sending unsolicited e-mail to its subscribers. Nonetheless, defendants have sent an increasing volume of e-mail solicitations to CompuServe subscribers.

In an effort to shield its equipment from defendants' bulk e-mail, CompuServe has implemented software programs designed to screen out the messages and block their receipt. In response, defendants have modified their equipment and the messages they send in such a fashion as to circumvent CompuServe's screening software. Allegedly, defendants have been able to conceal the true origin of their messages by falsifying the point-of-origin information contained in the header of the electronic messages. Defendants have removed the "sender" information in the header of their messages and replaced it with another address. Also, defendants have developed the capability of configuring their computer servers to conceal their true domain name and appear on the Internet as another computer, further concealing the true origin of the messages. By manipulating this data, defendants have been able to continue sending messages to CompuServe's equipment in spite of CompuServe's protests and protective efforts.

Defendants assert that they possess the right to continue to send these communications to CompuServe subscribers. CompuServe contends that, in doing so, the defendants are trespassing upon its personal property.

. . .

IV.

This Court will now address the second aspect of plaintiff's motion in which it seeks to enjoin defendants Cyber Promotions, Inc. and its president Sanford Wallace from sending any unsolicited advertisements to any electronic mail address maintained by CompuServe.

CompuServe predicates this aspect of its motion for a preliminary injunction on the common law theory of trespass to personal property or to chattels, asserting that defendants' continued transmission of electronic messages to its computer equipment constitutes an actionable tort.

. . .

The Restatement § 217(b) states that a trespass to chattel may be committed by intentionally using or intermeddling with the chattel in possession of another. Restatement § 217, Comment e defines physical "intermeddling" as follows: ... intentionally bringing about a physical contact with the chattel. The actor may commit a trespass by an act which brings him into an intended physical contact with a chattel in the possession of another[.]

Electronic signals generated and sent by computer have been held to be sufficiently physically tangible to support a trespass cause of action. Thrifty-Tel, Inc. v. Bezenek, 46 Cal. App. 4th 1559, 1567 (1996); State v. McGraw, 480 N.E.2d 552, 554 (Ind. 1985) (Indiana Supreme Court recognizing in dicta that a hacker's unauthorized access to a computer was more in the nature of trespass than criminal conversion) and State v. Riley, 121 Wash. 2d 22, 846 P.2d 1365 (1993) (computer hacking as the criminal offense of "computer trespass" under Washington law). It is undisputed that plaintiff has a possessory interest in its computer systems. Further, defendants' contact with plaintiff's computers is clearly intentional. Although electronic messages may travel through the Internet over various routes, the messages are affirmatively directed to their destination.

Defendants, citing Restatement (Second) of Torts § 221, which defines "dispossession", assert that not every interference with the personal property of another is actionable and that physical dispossession or substantial interference with the chattel is required. Defendants then argue that they did not, in this case, physically dispossess plaintiff of its equipment or substantially interfere with it. However, the Restatement (Second) of Torts § 218 defines the circumstances under which a trespass to chattels may be actionable:

One who commits a trespass to a chattel is subject to liability to the possessor of the chattel if, but only if,

(a) he dispossesses the other of the chattel, or

(b) the chattel is impaired as to its condition, quality, or value, or

(c) the possessor is deprived of the use of the chattel for a substantial time, or

(d) bodily harm is caused to the possessor, or harm is caused to some person or thing in which the possessor has a legally protected interest.

Therefore, an interference resulting in physical dispossession is just one circumstance under which a defendant can be found liable.

. . .

A plaintiff can sustain an action for trespass to chattels, as opposed to an action for conversion, without showing a substantial interference with its right to possession of that chattel. Thrifty-Tel, Inc., 46 Cal. App. 4th at 1567 (quoting Zaslow v. Kroenert, 29 Cal. 2d 541, 176 P.2d 1 (Cal. 1946)). Harm to the personal property or diminution of its quality, condition, or value as a result of defendants' use can also be the predicate for liability. Restatement § 218(b).

An unprivileged use or other intermeddling with a chattel which results in actual impairment of its physical condition, quality or value to the possessor makes the actor liable for the loss thus caused. In the great majority of cases, the actor's intermeddling with the chattel impairs the value of it to the possessor, as distinguished from the mere affront to his dignity as possessor, only by some impairment of the physical condition of the chattel. There may, however, be situations in which the value to the owner of a particular type of chattel may be impaired by dealing with it in a manner that does not affect its physical condition. ... In such a case, the intermeddling is actionable even though the physical condition of the chattel is not impaired.

The Restatement (Second) of Torts § 218, comment h. In the present case, any value CompuServe realizes from its computer equipment is wholly derived from the extent to which that equipment can serve its subscriber base. Michael Mangino, a software developer for CompuServe who monitors its mail processing computer equipment, states by affidavit that handling the enormous volume of mass mailings that CompuServe receives places a tremendous burden on its equipment. Defendants' more recent practice of evading CompuServe's filters by disguising the origin of their messages commandeers even more computer resources because CompuServe's computers are forced to store undeliverable e-mail messages and labor in vain to return the messages to an address that does not exist. To the extent that defendants' multitudinous electronic mailings demand the disk space and drain the processing power of plaintiff's computer equipment, those resources are not available to serve CompuServe subscribers. Therefore, the value of that equipment to CompuServe is diminished even though it is not physically damaged by defendants' conduct.

Next, plaintiff asserts that it has suffered injury aside from the physical impact of defendants' messages on its equipment. Restatement § 218(d) also indicates that recovery may be had for a trespass that causes harm to something in which the possessor has a legally protected interest. Plaintiff asserts that defendants' messages are largely unwanted by its subscribers, who pay incrementally to access their e-mail, read it, and discard it. Also, the receipt of a bundle of unsolicited messages at once can require the subscriber to sift through, at his expense, all of the messages in order to find the ones he wanted or expected to receive. These inconveniences decrease the utility of CompuServe's e-mail service and are the foremost subject in recent complaints from CompuServe subscribers. Patrick Hole, a customer service manager for plaintiff, states by affidavit that in November 1996 CompuServe received approximately 9,970 e-mail complaints from subscribers about junk e-mail, a figure up from approximately two hundred complaints the previous year. Approximately fifty such complaints per day specifically reference defendants. Defendants contend that CompuServe subscribers are provided with a simple procedure to remove themselves from the mailing list. However, the removal procedure must be performed by the e-mail recipient at his expense, and some CompuServe subscribers complain that the procedure is inadequate and ineffectual.

Many subscribers have terminated their accounts specifically because of the unwanted receipt of bulk e-mail messages. Defendants' intrusions into CompuServe's computer systems, insofar as they harm plaintiff's business reputation and goodwill with its customers, are actionable under Restatement § 218(d).

The reason that the tort of trespass to chattels requires some actual damage as a prima facie element, whereas damage is assumed where there is a trespass to real property, can be explained as follows:

The interest of a possessor of a chattel in its inviolability, unlike the similar interest of a possessor of land, is not given legal protection by an action for nominal damages for harmless intermeddlings with the chattel. In order that an actor who interferes with another's chattel may be liable, his conduct must affect some other and more important interest of the possessor. Therefore, one who intentionally intermeddles with another's chattel is subject to liability only if his intermeddling is harmful to the possessor's materially valuable interest in the physical condition, quality, or value of the chattel, or if the possessor is deprived of the use of the chattel for a substantial time, or some other legally protected interest of the possessor is affected as stated in Clause (c). Sufficient legal protection of the possessor's interest in the mere inviolability of his chattel is afforded by his privilege to use reasonable force to protect his possession against even harmless interference.

Restatement (Second) of Torts § 218, Comment e (emphasis added). Plaintiff CompuServe has attempted to exercise this privilege to protect its computer systems. However, defendants' persistent affirmative efforts to evade plaintiff's security measures have circumvented any protection those self-help measures might have provided. In this case CompuServe has alleged and supported by affidavit that it has suffered several types of injury as a result of defendants' conduct. The foregoing discussion simply underscores that the damage [**24] sustained by plaintiff is sufficient to sustain an action for trespass to chattels. However, this Court also notes that the implementation of technological means of self-help, to the extent that reasonable measures are effective, is particularly appropriate in this type of situation and should be exhausted before legal action is proper.

Under Restatement § 252, the owner of personal property can create a privilege in the would-be trespasser by granting consent to use the property. A great portion of the utility of CompuServe's e-mail service is that it allows subscribers to receive messages from individuals and entities located anywhere on the Internet. Certainly, then, there is at least a tacit invitation for anyone on the Internet to utilize plaintiff's computer equipment to send e-mail to its subscribers. Buchanan Marine, Inc. v. McCormack Sand Co., 743 F. Supp. 139 (E.D.N.Y. 1990) (whether there is consent to community use is a material issue of fact in an action for trespass to chattels). However, in or around October 1995, CompuServe employee Jon Schmidt specifically told Mr. Wallace that he was "prohibited from using CompuServe's equipment to send his junk e-mail messages." There is apparently some factual dispute as to this point, but it is clear from the record that Mr. Wallace became aware at about this time that plaintiff did not want to receive messages from Cyber Promotions and that plaintiff was taking steps to block receipt of those messages.

Defendants argue that plaintiff made the business decision to connect to the Internet and that therefore it cannot now successfully maintain an action for trespass to chattels. Their argument is analogous to the argument that because an establishment invites the public to enter its property for business purposes, it cannot later restrict or revoke access to that property, a proposition which is erroneous under Ohio law. See, e.g., State v. Carriker, 5 Ohio App. 2d 255, 214 N.E.2d 809 (1964) (the law in Ohio is that a business invitee's privilege [**26] to remain on the premises of another may be revoked upon the reasonable notification to leave by the owner or his agents); Allstate Ins. Co. v. U.S. Associates Realty, Inc., 11 Ohio App. 3d 242, 464 N.E.2d 169 (1983) (notice of express restriction or limitation on invitation turns business invitee into trespasser). On or around October 1995, CompuServe notified defendants that it no longer consented to the use of its proprietary computer equipment. Defendants' continued use thereafter was a trespass. Restatement (Second) of Torts §§ 252 and 892A(5); see also Restatement (Second) of Torts § 217, Comment f ("The actor may commit a new trespass by continuing an intermeddling which he has already begun, with or without the consent of the person in possession. Such intermeddling may persist after the other's consent, originally given, has been terminated."); Restatement (Second) of Torts § 217, Comment g.

Further, CompuServe expressly limits the consent it grants to Internet users to send e-mail to its proprietary computer systems by denying unauthorized parties the use of CompuServe equipment to send unsolicited electronic mail messages. This policy statement, posted by CompuServe online, states as follows:

CompuServe is a private online and communications services company. CompuServe does not permit its facilities to be used by unauthorized parties to process and store unsolicited e-mail. If an unauthorized party attempts to send unsolicited messages to e-mail addresses on a CompuServe service, CompuServe will take appropriate action to attempt to prevent those messages from being processed by CompuServe ....

Defendants Cyber Promotions, Inc. and its president Sanford Wallace have used plaintiff's equipment in a fashion that exceeds that consent. The use of personal property exceeding consent is a trespass. City of Amsterdam v. Daniel Goldreyer, Ltd., 882 F. Supp. 1273 (E.D.N.Y. 1995); Restatement (Second) of Torts § 256. It is arguable that CompuServe's policy statement, insofar as it may serve as a limitation upon the scope of its consent to the use of its computer equipment, may be insufficiently communicated to potential third-party users when it is merely posted at some location on the network. However, in the present case the record indicates that defendants were actually notified that they were using CompuServe's equipment in an unacceptable manner. To prove that a would-be trespasser acted with the intent required to support liability in tort it is crucial that defendant be placed on notice that he is trespassing.

. . .

Having considered the relevant factors, this Court concludes that the preliminary injunction that plaintiff requests is appropriate.

V.

Based on the foregoing, plaintiff's motion for a preliminary injunction is GRANTED. The temporary restraining order filed on October 24, 1996 by this Court is hereby extended in duration until final judgment is entered in this case. Further, defendants Cyber Promotions, Inc. and its president Sanford Wallace are enjoined from sending any unsolicited advertisements to any electronic mail address maintained by plaintiff CompuServe during the pendency of this action.

It is so ORDERED.

JAMES L. GRAHAM

eBay, Inc. v. Bidder's Edge, Inc.

100 F.Supp.2d 1058 (N.D. Cal. 2000)

Whyte, District Judge.

Plaintiff eBay, Inc.'s (“eBay”) motion for preliminary injunction was heard by the court on April 14, 2000. . . . For the reasons set forth below, the court preliminarily enjoins defendant Bidder's Edge, Inc. (“BE”) from accessing eBay's computer systems by use of any automated querying program without eBay's written authorization.

I. BACKGROUND

eBay is an Internet-based, person-to-person trading site. eBay offers sellers the ability to list items for sale and prospective buyers the ability to search those listings and bid on items. The seller can set the terms and conditions of the auction. The item is sold to the highest bidder. The transaction is consummated directly between the buyer and seller without eBay's involvement. A potential purchaser looking for a particular item can access the eBay site and perform a key word search for relevant auctions and bidding status. eBay has also created category listings that identify items in over 2500 categories, such as antiques, computers, and dolls. Users may browse these category listing pages to identify items of interest.

Users of the eBay site must register and agree to the eBay User Agreement. Users agree to the seven page User Agreement by clicking on an “I Accept” button located at the end of the User Agreement. The current version of the User Agreement prohibits the use of “any robot, spider, other automatic device, or manual process to monitor or copy our web pages or the content contained herein without our prior expressed written permission.” It is not clear that the version of the User Agreement in effect at the time BE began searching the eBay site prohibited such activity, or that BE ever agreed to comply with the User Agreement.

eBay currently has over 7 million registered users. Over 400,000 new items are added to the site every day. Every minute, 600 bids are placed on almost 3 million items. Users currently perform, on average, 10 million searches per day on eBay's database. Bidding for and sales of items are continuously ongoing in millions of separate auctions.

A software robot is a computer program which operates across the Internet to perform searching, copying and retrieving functions on the web sites of others.[1] A software robot is capable of executing thousands of instructions per minute, far in excess of what a human can accomplish. Robots consume the processing and storage resources of a system, making that portion of the system's capacity unavailable to the system owner or other users. Consumption of sufficient system resources will slow the processing of the overall system and can overload the system such that it will malfunction or “crash.” A severe malfunction can cause a loss of data and an interruption in services.

The eBay site employs “robot exclusion headers.” A robot exclusion header is a message, sent to computers programmed to detect and respond to such headers, that eBay does not permit unauthorized robotic activity. Programmers who wish to comply with the Robot Exclusion Standard design their robots to read a particular data file, “robots.txt,” and to comply with the control directives it contains.

To enable computers to communicate with each other over the Internet, each is assigned a unique Internet Protocol (“IP”) address. When a computer requests information from another computer over the Internet, the requesting computer must offer its IP address to the responding computer in order to allow a response to be sent. These IP addresses allow the identification of the source of incoming requests. eBay identifies robotic activity on its site by monitoring the number of incoming requests from each particular IP address. Once eBay identifies an IP address believed to be involved in robotic activity, an investigation into the identity, origin and owner of the IP address may be made in order to determine if the activity is legitimate or authorized. If an investigation reveals unauthorized robotic activity, eBay may attempt to ignore (“block”) any further requests from that IP address. Attempts to block requests from particular IP addresses are not always successful.

. . . Blocking queries . . . is both inefficient, because it creates an endless game of hide-and-seek, and potentially counterproductive, as it runs a substantial risk of blocking requests from legitimate, desirable users . . .

BE . . . does not host auctions. BE is an auction aggregation site designed to offer on-line auction buyers the ability to search for items across numerous on-line auctions without having to search each host site individually. As of March 2000, the BE web site contained information on more that five million items being auctioned on more than one hundred auction sites. BE also provides its users with additional auction-related services and information. The information available on the BE site is contained in a database of information that BE compiles through access to various auction sites such as eBay. When a user enters a search for a particular item at BE, BE searches its database and generates a list of every item in the database responsive to the search, organized by auction closing date and time. Rather than going to each host auction site one at a time, a user who goes to BE may conduct a single search to obtain information about that item on every auction site tracked by BE. It is important to include information regarding eBay auctions on the BE site because eBay is by far the biggest consumer to consumer on-line auction site. . . .

In early 1998, eBay gave BE permission to include information regarding eBay-hosted auctions for Beanie Babies and Furbies in the BE database. In early 1999, BE added to the number of person-to-person auction sites it covered and started covering a broader range of items hosted by those sites, including eBay. On April 24, 1999, eBay verbally approved BE crawling the eBay web site for a period of 90 days. The parties contemplated that during this period they would reach a formal licensing agreement. They were unable to do so.

It appears that the primary dispute was over the method BE uses to search the eBay database. eBay wanted BE to conduct a search of the eBay system only when the BE system was queried by a BE user. This reduces the load on the eBay system and increases the accuracy of the BE data. BE wanted to recursively crawl the eBay system to compile its own auction database. This increases the speed of BE searches and allows BE to track the auctions generally and automatically update its users when activity occurs in particular auctions, categories of auctions, or when new items are added.

In late August or early September 1999, eBay requested by telephone that BE cease posting eBay auction listings on its site. BE agreed to do so. In October 1999, BE learned that other auction aggregations sites were including information regarding eBay auctions. On November 2, 1999, BE issued a press release indicating that it had resumed including eBay auction listings on its site. On November 9, 1999, eBay sent BE a letter reasserting that BE's activities were unauthorized, insisting that BE cease accessing the eBay site, alleging that BE's activities constituted a civil trespass and offering to license BE's activities. eBay and BE were again unable to agree on licensing terms. As a result, eBay attempted to block BE from accessing the eBay site; by the end of November, 1999, eBay had blocked a total of 169 IP addresses it believed BE was using to query eBay's system. BE elected to continue crawling eBay's site by using proxy servers to evade eBay's IP blocks.

Approximately 69% of the auction items contained in the BE database are from auctions hosted on eBay. BE estimates that it would lose one-third of its users if it ceased to cover the eBay auctions.

The parties agree that BE accessed the eBay site approximate 100,000 times a day. eBay alleges that BE activity constituted up to 1.53% of the number of requests received by eBay, and up to 1.10% of the total data transferred by eBay during certain periods in October and November of 1999. . . .

Trespass to chattels “lies where an intentional interference with the possession of personal property has proximately cause injury.” Thrifty-Tel v. Bezenek, 46 Cal.App.4th 1559, 1566, 54 Cal.Rptr.2d 468 (1996). Trespass to chattels “although seldom employed as a tort theory in California” was recently applied to cover the unauthorized use of long distance telephone lines. Id. Specifically, the court noted “the electronic signals generated by the [defendants'] activities were sufficiently tangible to support a trespass cause of action.” Id. at n. 6. Thus, it appears likely that the electronic signals sent by BE to retrieve information from eBay's computer system are also sufficiently tangible to support a trespass cause of action.

In order to prevail on a claim for trespass based on accessing a computer system, the plaintiff must establish: (1) defendant intentionally and without authorization interfered with plaintiff's possessory interest in the computer system; and (2) defendant's unauthorized use proximately resulted in damage to plaintiff. See Thrifty-Tel, 46 Cal.App.4th at 1566, 54 Cal.Rptr.2d 468; see also Itano v. Colonial Yacht Anchorage, 267 Cal.App.2d 84, 90, 72 Cal.Rptr. 823 (1968) (“When conduct complained of consists of intermeddling with personal property ‘the owner has a cause of action for trespass or case, and may recover only the actual damages suffered by reason of the impairment of the property or the loss of its use.’ ”) (quoting Zaslow v. Kroenert, 29 Cal.2d 541, 550, 176 P.2d 1 (1946)). Here, eBay has presented evidence sufficient to establish a strong likelihood of proving both prongs and ultimately prevailing on the merits of its trespass claim.

a. BE's Unauthorized Interference

eBay argues that BE's use was unauthorized and intentional. eBay is correct. BE does not dispute that it employed an automated computer program to connect with and search eBay's electronic database. BE admits that, because other auction aggregators were including eBay's auctions in their listing, it continued to “crawl” eBay's web site even after eBay demanded BE terminate such activity.

BE argues that it cannot trespass eBay's web site because the site is publicly accessible. BE's argument is unconvincing. eBay's servers are private property, conditional access to which eBay grants the public. eBay does not generally permit the type of automated access made by BE. In fact, eBay explicitly notifies automated visitors that their access is not permitted. “In general, California does recognize a trespass claim where the defendant exceeds the scope of the consent.” Baugh v. CBS, Inc., 828 F.Supp. 745, 756 (N.D.Cal.1993).

Even if BE's web crawlers were authorized to make individual queries of eBay's system, BE's web crawlers exceeded the scope of any such consent when they began acting like robots by making repeated queries. See City of Amsterdam v. Daniel Goldreyer, Ltd., 882 F.Supp. 1273, 1281 (E.D.N.Y.1995) (“One who uses a chattel with the consent of another is subject to liability in trespass for any harm to the chattel which is caused by or occurs in the course of any use exceeding the consent, even though such use is not a conversion.”). Moreover, eBay repeatedly and explicitly notified BE that its use of eBay's computer system was unauthorized. The entire reason BE directed its queries through proxy servers was to evade eBay's attempts to stop this unauthorized access. The court concludes that BE's activity is sufficiently outside of the scope of the use permitted by eBay that it is unauthorized for the purposes of establishing a trespass. See Civic Western Corp. v. Zila Industries, Inc., 66 Cal.App.3d 1, 17, 135 Cal.Rptr. 915 (1977) (“It seems clear, however, that a trespass may occur if the party, entering pursuant to a limited consent, ... proceeds to exceed those limits ...”) (discussing trespass to real property).

eBay argues that BE interfered with eBay's possessory interest in its computer system. Although eBay appears unlikely to be able to show a substantial interference at this time, such a showing is not required. Conduct that does not amount to a substantial interference with possession, but which consists of intermeddling with or use of another's personal property, is sufficient to establish a cause of action for trespass to chattel. See Thrifty-Tel, 46 Cal.App.4th at 1567, 54 Cal.Rptr.2d 468 (distinguishing the tort from conversion). Although the court admits some uncertainty as to the precise level of possessory interference required to constitute an intermeddling, there does not appear to be any dispute that eBay can show that BE's conduct amounts to use of eBay's computer systems. Accordingly, eBay has made a strong showing that it is likely to prevail on the merits of its assertion that BE's use of eBay's computer system was an unauthorized and intentional interference with eBay's possessory interest.

b. Damage to eBay's Computer System

A trespasser is liable when the trespass diminishes the condition, quality or value of personal property. See CompuServe, Inc. v. Cyber Promotions, 962 F.Supp. 1015 (S.D.Ohio 1997). The quality or value of personal property may be “diminished even though it is not physically damaged by defendant's conduct.” Id. at 1022. The Restatement offers the following explanation for the harm requirement:

The interest of a possessor of a chattel in its inviolability, unlike the similar interest of a possessor of land, is not given legal protection by an action for nominal damages for harmless intermeddlings with the chattel. In order that an actor who interferes with another's chattel may be liable, his conduct must affect some other and more important interest of the possessor. Therefore, one who intentionally intermeddles with another's chattel is subject to liability only if his intermeddling is harmful to the possessor's materially valuable interest in the physical condition, quality, or value of the chattel, or if the possessor is deprived of the use of the chattel for a substantial time, or some other legally protected interest of the possessor is affected.... Sufficient legal protection of the possessor's interest in the mere inviolability of his chattel is afforded by his privilege to use reasonable force to protect his possession against even harmless interference.

Restatement (Second) of Torts § 218 cmt. e (1977).

eBay is likely to be able to demonstrate that BE's activities have diminished the quality or value of eBay's computer systems. BE's activities consume at least a portion of plaintiff's bandwidth and server capacity. . . . Although eBay does not claim that this consumption has led to any physical damage to eBay's computer system, nor does eBay provide any evidence to support the claim that it may have lost revenues or customers based on this use, eBay's claim is that BE's use is appropriating eBay's personal property by using valuable bandwidth and capacity, and necessarily compromising eBay's ability to use that capacity for its own purposes. See CompuServe, 962 F.Supp. at 1022 (“any value [plaintiff] realizes from its computer equipment is wholly derived from the extent to which that equipment can serve its subscriber base.”).

BE argues that its searches represent a negligible load on plaintiff's computer systems, and do not rise to the level of impairment to the condition or value of eBay's computer system required to constitute a trespass. However, it is undisputed that eBay's server and its capacity are personal property, and that BE's searches use a portion of this property. Even if, as BE argues, its searches use only a small amount of eBay's computer system capacity, BE has nonetheless deprived eBay of the ability to use that portion of its personal property for its own purposes. The law recognizes no such right to use another's personal property.

Accordingly, BE's actions appear to have caused injury to eBay and appear likely to continue to cause injury to eBay. If the court were to hold otherwise, it would likely encourage other auction aggregators to crawl the eBay site, potentially to the point of denying effective access to eBay's customers. If preliminary injunctive relief were denied, and other aggregators began to crawl the eBay site, there appears to be little doubt that the load on eBay's computer system would qualify as a substantial impairment of condition or value. California law does not require eBay to wait for such a disaster before applying to this court for relief. The court concludes that eBay has made a strong showing that it is likely to prevail on the merits of its trespass claim . . .

IV. ORDER

Bidder's Edge . . . [is] hereby enjoined pending the trial of this matter, from using any automated query program, robot, web crawler or other similar device, without written authorization, to access eBay's computer systems or networks, for the purpose of copying any part of eBay's auction database.

Craigslist v. 3Taps

--- F.Supp.2d ---- (2013), 2013 WL 1819999 (N.D.Cal.)

ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS; GRANTING MOTION TO BIFURCATE AND STAY DISCOVERY

CHARLES R. BREYER, District Judge.

This case is before the Court on three defendants' motions to dismiss (two of which are identical) and a motion to bifurcate and stay discovery. Plaintiff craigslist, Inc. (“Craigslist”) has brought seventeen claims against three companies and one individual—3taps, Inc. (“3Taps”); Padmapper, Inc. (“Padmapper”); Discover Home Network, Inc. d/b/a Lovely (“Lovely”); and Brian R. Niessen, an individual affiliated with 3Taps—essentially alleging that all defendants have improperly harvested and reproduced the contents of Craigslist's website. 3Taps, Padmapper, and Lovely move to dismiss various claims.

The Court GRANTS the motions to dismiss IN PART—dismissing a subset of the copyright claims as well as the claims against Padmapper premised on civil conspiracy. The Court also GRANTS the motion to bifurcate and stay discovery on the antitrust counterclaims and overlapping affirmative defenses.

I. BACKGROUND

Craigslist operates a well known and widely used website that allows users to submit and browse classified advertisements. FAC (dkt.35) ¶¶ 1, 25, 28–34. According to the First Amended Complaint (“FAC”), “[m]ore than 60 million Americans visit craigslist each month, and they collectively post several hundred million classified ads each year.” Id. ¶ 25. Craigslist's service is organized by geographic area, and within each given area by types of products and services. Id. ¶ 29. Craigslist provides ancillary features, such as anonymous email forwarding, to support its classified ad service. E.g., id. ¶ 34.

Use of the Craigslist website is governed by its Terms of Use (“TOU”). Id. ¶¶ 14, 126; see generally Kao Decl. Ex. B (“TOU”) (dkt.60–3).FN1 Users must affirmatively accept the TOU before posting an ad, and Craigslist alleges that “Defendants affirmatively accepted and agreed to be bound by the TOU.” Id. ¶¶ 36–37, 128–29. The TOU include a number of restrictions on the use of Craigslist's website and content included therein. See generally TOU.

The TOU also grant Craigslist a broad license to use and republish content submitted by its users. TOU at 3. For a period in the summer of 2012, Craigslist presented users with a statement during the ad submission process “confirming” that Craigslist acquires an exclusive license to all ads submitted by users. FAC ¶ 38. Aside from that statement, the TOU do not specify whether Craigslist's license is exclusive. See TOU at 3.

Craigslist has submitted a number of copyright registration applications. FAC ¶¶ 51–53. The parties dispute the scope of those registrations.

Defendants 3Taps, Padmapper, and Lovely aggregate and republish ads from Craigslist. Id. ¶¶ 63, 65, 99, 104, 112. Craigslist alleges that 3Taps copies (or “scrapes”) all content posted to Craigslist in real time, directly from the Craigslist website. Id. ¶¶ 3, 78–80. 3Taps markets a “Craigslist API” FN2 to allow third parties to access large amounts of content from Craigslist, id. ¶¶ 3, 5, 64, and also operates the , which “essentially replicated the entire craigslist website,” id. ¶ 65, including “all of craigslist's posts,” id. ¶ 68.

Padmapper provides real estate listings, largely consisting of real estate ads originally posted to Craigslist. Id. ¶ 99. Craigslist alleges that Padmapper initially copied content directly from Craigslist. Id. ¶ 101. After receiving a cease and desist letter, Padmapper did not use Craigslist content for several weeks, but then announced that it was “Bringing Craigslist Back,” and began obtaining Craigslist content from other parties, including 3Taps. Id. ¶¶ 101–04.

Lovely also provides real estate listings through a website and mobile application, including Craigslist content that it receives from 3Taps. Id. ¶ 112.

Craigslist has sent letters to 3Taps, Padmapper, and Lovely demanding that they “cease and desist all ... craigslist-related activities” and informing them that they were “no longer authorized to access ... craigslist's website or services for any reason.” FAC ¶¶ 132–34; Kao Decl. Ex. A (dkt 60–2) at 3 (cease and desist letter to 3Taps, referenced in the FAC). Craigslist filed this action against 3Taps and Padmapper on July 20, 2012, see generally Compl. (dkt.1), and later filed the FAC, which added Lovely and Niessen as defendants, and brought additional claims. See generally FAC.

The FAC alleges claims for (1) trespass; (2) breach of contract; (3) misappropriation; (4) copyright infringement; (5) contributory copyright infringement; (6) federal trademark infringement; (7) federal false designation of origin; (8) federal dilution of a famous mark; (9) federal cyberpiracy prevention; (10) California trademark infringement; (11) common law trademark infringement; (12) California unfair competition; (13) violations of the Computer Fraud and Abuse Act (CFAA); (14) violations of the California Comprehensive Computer Data Access and Fraud Act; (15) aiding and abetting trespass; (16) aiding and abetting misappropriation; and (17) an accounting. See generally id.FN3

3Taps and Lovely have filed identical motions to dismiss the fourth and fifth claims, regarding copyright infringement, and the thirteenth and fourteenth claims, regarding the CFAA and its state-law counterpart. 3Taps Mot. (dkt.48); Lovely Mot. (dkt.50). Padmapper joins the other defendants' motions regarding the copyright claims, and separately moves to dismiss the trespass, trademark, and breach of contract claims, as well as civil conspiracy theories of liability that Craigslist incorporates into several claims. Padmapper Joinder (dkt.52); Padmapper Mot. (dkt.46).

Padmapper and 3Taps have also filed antitrust counterclaims. Padmapper Am. Counterclaim (dkt.44); 3Taps Am. Counterclaim (dkt.47). Craigslist moves to bifurcate the counterclaims and to stay discovery on them. Mot. to Bifurcate (dkt.61).

II. LEGAL STANDARD

A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in a complaint. Ileto v. Glock, Inc., 349 F.3d 1191, 1199–1200 (9th Cir.2003). “Detailed factual allegations” are not required, but the Rule does call for sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. In determining facial plausibility, whether a complaint states a plausible claim is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679. Allegations of material fact are taken as true and construed in the light most favorable to the non-moving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337–38 (9th Cir.1996).

A complaint should not be dismissed without leave to amend unless it is clear that the claims could not be saved by amendment. Swartz v. KPMG LLP, 476 F.3d 756, 760 (9th Cir.2007).

. . .

E. Craigslist's Trespass Claim Adequately Alleges Injury

Padmapper moves to dismiss Craigslist's trespass claim on the grounds that it does not adequately allege injury. Under California common law, the tort of trespass to chattel encompasses unauthorized access to a computer system where “(1) defendant intentionally and without authorization interfered with plaintiff's possessory interest in the computer system; and (2) defendant's unauthorized use proximately resulted in damage to plaintiff.” eBay, Inc. v. Bidder's Edge, Inc., 100 F.Supp.2d 1058, 1069–70 (N.D.Cal.2000); see also Intel Corp. v. Hamidi, 30 Cal.4th 1342, 1354–55, 1 Cal.Rptr.3d 32, 71 P.3d 296 (2003) (citing eBay as “the leading case”); Thrifty–Tel, Inc. v. Bezenek, 46 Cal.App.4th 1559, 1566 & n. 6, 54 Cal.Rptr.2d 468 (1996) (among the first cases to apply this tort in an electronic context). For such a claim to lie, the defendant's access to the system must cause “actual damage,” such as impairment as to the “condition, quality, or value” of the system or deprivation of its use “for a substantial time.” Hamidi, 30 Cal.4th at 1357, 1 Cal.Rptr.3d 32, 71 P.3d 296 (citations omitted). “[T]he tort does not encompass ... an electronic communication that neither damages the recipient computer system nor impairs its functioning.” Id. at 1347, 1 Cal.Rptr.3d 32, 71 P.3d 296.

Craigslist alleges that “Defendants' unauthorized interference, intermeddling, and access with [sic] craigslist, its website, computer systems, and its servers, among other harms, reduces craigslist's capacity to service its users because it occupies and uses craigslist's resources.” FAC ¶ 121. Given the scope of Defendants' alleged use of Craigslist's website, it is plausible that such access could divert sufficient computing and communications resources to impair the website's and servers' functionality. See FAC ¶ 3 (alleging that one defendant “boasts that it mass copies tens of millions of postings from craigslist in ‘real time’ ”).

On the other hand, it is also possible that Defendant's actions caused no such impairment. See Hamidi, 30 Cal.4th at 1360, 1 Cal.Rptr.3d 32, 71 P.3d 296 (finding that after the defendant sent thousands of unsolicited email messages through Intel's email system, “[t]he system worked as designed, delivering the messages without any physical or functional harm or disruption”). Whether Defendants caused actual damage or impairment to Craigslist's computer systems is a question of fact more appropriate for summary judgment or trial than for a motion to dismiss. See Coupons, Inc. v. Stottlemire, No. CV 07–03457 HRL, 2008 WL 3245006, at *6 (N.D.Cal. July 2, 2008) (“Although [a lack of significant injury] may be an appropriate argument once more facts have been established, it would be premature to dismiss the trespass to chattels claim at this time.”); cf. Hamidi, 30 Cal.4th at 1364, 1 Cal.Rptr.3d 32, 71 P.3d 296 (considering the extent of injuries in the context of summary judgment rather than a motion to dismiss).

Padmapper points to district court orders dismissing electronic trespass claims where plaintiffs failed to allege more than de minimis injury as a result of unauthorized access to a mobile devices. Hernandez v. Path, Inc., No. 12–CV–01515 YGR, 2012 WL 5194120, at *7–8 (N.D.Cal. Oct.19, 2012) (noting that the plaintiff alleged “depletion of ‘two to three seconds of battery capacity’ ”); In re iPhone Application Litig., 844 F.Supp.2d 1040, 1069 (N.D.Cal.2012) (holding that the plaintiffs' allegations did “not plausibly establish a significant reduction in service constituting an interference with the intended functioning of the system”). Here, while Craigslist will need to support its claim of actual injury with evidence at summary judgment or trial, Craigslist's allegation of injury is sufficient for the purpose of Padmapper's Motion to Dismiss. See Coupons, Inc., 2008 WL 3245006, at *6. The Court therefore DENIES Padmapper's motion to dismiss Craigslist's trespass claim.

Pearl Investments, LLC v. Standard I/O, Inc.

257 F.Supp.2d 326 (D.Me.,2003)

ORDER AFFIRMING RECOMMENDED DECISION OF THE MAGISTRATE JUDGE

HORNBY, District Judge.

The United States Magistrate Judge filed with the court on March 21, 2003, with copies to counsel, his Recommended Decision on Cross-Motions for Summary Judgment (Docket Item 59 (sealed version) and Docket Item 62 (expanded public version)). The plaintiff and third-party defendant filed an objection to the Recommended Decision on April 4, 2003. I have reviewed and considered the Recommended Decision (sealed version), together with the entire record; I have made a de novo determination of all matters adjudicated by the Recommended Decision; and I concur with the recommendations of the United States Magistrate Judge for the reasons set forth in his Recommended Decision, and determine that no further proceeding is necessary.

. . .

Remaining for trial are the following: Count I of the Complaint (misappropriation of trade secrets) against Chunn only, with the caveat that Pearl is precluded from premising any such claim on contents found on the HDD; Count III of the Complaint (violation of the DMCA) against Chunn only; Count V of the Complaint (breach of contract) against both Standard and Chunn; Count VI of the Complaint (breach of warranty/services) against both Standard and Chunn, to the extent asserting breach of express warranty only; and Count II of the Counterclaim, with respect only to the amount of damages to be awarded Chunn.

SO ORDERED.

COHEN, United States Magistrate Judge.

RECOMMENDED DECISION ON CROSS–MOTIONS FOR SUMMARY JUDGMENT

Plaintiff Pearl Investments, LLC (“Pearl”) and defendants Standard I/O, Inc. (“Standard”) and Jesse Chunn (together, “Defendants”) cross-move for summary judgment as to Counts I and V of Pearl's eight-count complaint, and the Defendants move for summary judgment as to the remaining counts, in this action arising from Standard's provision of custom computer programming to Pearl. Motion for Partial Summary Judgment of Liability on Counts I and V of the Complaint and for Summary Judgment on Counterclaims. In addition, Chunn, Pearl and third-party defendant Dennis Daudelin cross-move for summary judgment as to Count II of Chunn's four-count counterclaim/third-party complaint, and Pearl and Daudelin move for summary judgment as to the remaining two counts applicable to them (Counts I and IV). Chunn concedes Pearl's and Daudelin's entitlement to summary judgment as to Count IV of the Counterclaim. For the reasons that follow, I recommend that both motions be granted in part and denied in part.

I. Summary Judgment Standards

Summary judgment is appropriate only if the record shows “that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). “In this regard, ‘material’ means that a contested fact has the potential to change the outcome of the suit under the governing law if the dispute over it is resolved favorably to the nonmovant. By like token, ‘genuine’ means that ‘the evidence about the fact is such that a reasonable jury could resolve the point in favor of the nonmoving party.’ ” Navarro v. Pfizer Corp., 261 F.3d 90, 93–94 (1st Cir.2001) (quoting McCarthy v. Northwest Airlines, Inc., 56 F.3d 313, 315 (1st Cir.1995)).

. . .

II. Factual Context

The parties' statements of material facts, credited to the extent either admitted or supported by record citations in accordance with Local Rule 56, reveal the following relevant to this recommended decision:

Pearl is a Maine limited liability company with its principal place of business in Portland, Maine. Plaintiff's Statement of Undisputed Material Facts in Support of Their [sic] Motion for Partial Summary Judgment of Liability on Counts I and V of the Complaint (“Plaintiff's SMF”) (Docket No. 20) (sealed) ¶ 1; Defendants' Opposing Statement of Material Facts in Opposition to Plaintiff's Motion for Summary Judgment and in Support of the Cross–Motion for Summary Judgment (“Defendants' Opposing SMF”) (Docket No. 31) ¶ 1. Pearl develops and operates automated stock-trading computer systems (collectively and individually, “Pearl's ATS”). Id. ¶ 2. Standard is a Maine corporation with its principal place of business in Portland, Maine. Id. ¶ 3. Standard provides custom software programming for third parties. Id. ¶ 4. Chunn, a Maine resident, is the sole owner of Standard. Id. ¶¶ 5–6.

In April 2000, Pearl hired Standard to perform software-programming services in relation to Pearl's ATS. Chunn was initially offered an equity interest in Pearl to carry out the programming, but declined the offer. Instead, he proposed that Standard would do the programming work at a reduced hourly rate on a time-and-materials basis. Pearl agreed.

Standard provided software-development services from April 2000 through June 2001, with some miscellaneous transition work by Michael Farnsworth completed by mid-July. Chunn personally worked on computer programming for Pearl from April 2000 through June 22, 2001.

The automated trading system that Chunn and Standard developed for Pearl consisted of software that carried out trading of corporate securities without human intervention over alternative trading systems known as electronic communications networks, or ECNs. ECNs are private trading systems maintained separately from public markets such as NASDAQ, although they trade the same securities. They enable buy and sell orders for stocks to be displayed and matched by market professionals and “day-traders.”

On any given ECN, the various offers for a particular security are displayed as a “book” for that security, with the highest offer to buy (or “bid”) and the lowest offer to sell (or “ask”) shown at the “top” of the “book.” The difference between the highest bid price and the lowest ask price is the “spread” for that security at a given time. ECN arbitrage opportunities are only possible between books on different ECNs.

An automated trading system necessarily includes a component that determines when and how the system will enter the market. A system could be programmed to enter the market immediately either by buying a security (i.e., accepting an ask) or by accepting a bid and “selling short,” i.e., selling a security that is not yet owned in the expectation that the price will go down and the shares to cover the trade could be purchased later for less. Alternatively, rather than accepting an offer to buy or sell, the trading system could place a bid or an ask on the book and wait to see whether that bid or ask was accepted. The trading system also must include a component that determines when and how to exit the market, either by selling a security that is owned or buying a security to “cover” a short sale.

Pearl's ATS are modular software systems, meaning that they comprise numerous software components, each of which performs independent functions, but all of which operate as a single system. Among those various components is a single component, referred to as the “signal generator,” that contains the system's trading logic. This modular approach allowed Pearl to execute its business model of conceiving, developing and implementing several systems based on different signal generators, such systems being developed as resources allowed.

Among many possible signal generators, Pearl had the resources to develop only two initial systems. Other signal-generator concepts were discussed and analyzed to varying degrees and reserved for future development.

The software for the first system that Standard and Chunn helped develop, “Engine 1,” was an “arbitrage” system in that it was designed to purchase a security on one ECN and sell it on a different ECN to profit from the differences in the price of that security in the two different ECNs. For example, if one thousand shares of Oracle were selling at 90 on the Island ECN, and someone were simultaneously bidding to buy the same number of shares on the Instanet ECN for 90, there would be an opportunity to buy the shares on Island and sell them on Instanet for a profit of $250, minus commissions. he software developed by Standard automatically both identified such arbitrage opportunities and executed the respective trades.

During the fall of 2000, Standard succeeded in producing the first version of the software to carry out the automated arbitrage transactions. The software was installed on several servers owned by Pearl and located at a computer facility maintained by On–Site Trading, Inc. (“On–Site”) in New York. Id. On the first day of automated trading, the system generated approximately [REDACTED] in revenue. During the last four months of 2000, it generated about [REDACTED] in revenue. Pearl considered acquiring Standard, and a letter of intent was signed on September 15, 2000.

In the meantime, employees of Standard operated the trading system and provided office space for one full-time Pearl employee, Doug Robertson. Standard kept a current backup copy of the software it had developed for Pearl in “SourceSafe” files. While Standard was running the trading system for Pearl, programmer Farnsworth had an established practice of printing and storing daily trading records—a practice that was solely for Pearl's benefit. Pearl conceded that for Standard to print out the trading records, it needed passwords to Pearl's clearing account (as distinguished from passwords to Pearl's computers), which passwords were given to Standard.

By February 2001 the financial conditions for the acquisition had not been met, and the parties' letter of intent expired of its own terms. At a Pearl company meeting on February 16, 2001 several courses of action to reduce Pearl's operating costs were discussed, including moving some or all of Pearl's development work in-house. At the same meeting Daudelin asked: “Should we consider a stock grant for a tighter NDA and non-compete? How much?” By March 2001 the parties had decided not to merge their operations, and Pearl had decided to establish its own separate office and hire its own employees to write software programs and monitor the stock-trading system. In April 2001, Pearl rented its own office space for the first time and moved its equipment out of the Standard offices into the new space. By April, Pearl had also advised Standard that it was winding down its use of Standard's services.

Although the Pearl arbitrage system was the primary trading “engine” developed by Standard and used by Pearl, it was not the only trading system considered. Standard presented another, non-arbitrage automated trading system to Pearl as a concept. Chunn and Standard employee Famsworth referred to that system as the “Scalper.” The Scalper was specified to trade a single stock at a time on the Island ECN. Chunn testified at his deposition that he could not recall details of the Scalper system. However, on March 16, 2001 Farnsworth e-mailed to Pearl representatives Daudelin and Robertson a Scalper Design Definition Document and flow chart outlining details of the Scalper system.

The Scalper Design Definition Document describes the Scalper system as follows:

[REDACTED]

As its trading parameters initially were set up, the Scalper would

[REDACTED]

Pearl specifically informed Standard and Chunn that “any deviation from the document that also creates a working signal is good.”

Pearl ran simulation testing on the initial parameters of the Scalper and concluded that they would not generate a signal that would result in the desired trading opportunities. However, the Scalper system concept [REDACTED] was potentially promising. The development of new parameters was postponed for budget reasons. No software to carry out trading using the Scalper was ever developed by Pearl employees.

Because Pearl's business relies on identifying market inefficiencies and/or predictive indicators, it is extremely important to Pearl that few or no other automated trading systems are implemented that might eliminate, reduce or affect a particular inefficiency or market inefficiencies in general.

Daudelin, Pearl's chief executive officer, made it clear to Standard employees (including Chunn) on several occasions that the existence of Pearl's ATS and all aspects of it, including various signal generators and related components, constituted proprietary and confidential information owned by Pearl. Pearl has not made any patent applications relating to its trading methodologies or systems. In its copyright applications related to computer programs for its trading methodologies, Pearl has carefully excised any trade secrets about exactly how the trading methodologies work.

On April 10, 2000, prior to the disclosure of any details about Pearl's methods to Chunn, Chunn signed a non-disclosure and confidentiality agreement (“NDA”). The NDA provides, in part:

I agree to make full and prompt disclosure to the Company [Pearl] of all business opportunities relating to manual and automated stock market trading and any other businesses in which the Company may be engaged during the course of my contract with the Company, (collectively, “Business Opportunities”), as well as of all computer software systems, methods, designs, processes, algorithms and trade secrets whether patentable, copyrightable or not, made, conceived or reduced to practice by me or under my direction or jointly with others during the term of my contract with the Company (all of which are collectively termed “Discoveries”). I hereby assign and transfer to the Company without further compensation the entire worldwide right, title and interest in and to all Discoveries and any patents, patent applications, copyrights, copyright registrations, or trade secrets covering such Discoveries....

The NDA also provides:

I understand that the Company's confidential information includes matters not generally known outside the Company, such as computer software systems, object and source code, methods, designs, processes, algorithms and trade secrets relating to manual and automated stock market trading including business operations, methodologies and the techniques of the Company. I further understand that while I am under contract by the Company, I may obtain or hear of confidential information of the Company and of other parties, which has been provided to the Company in confidence. I agree not to disclose, use or copy any confidential information of the Company (whether or not produced by me) or of other parties, which has been provided to the Company in confidence, except as the Company may authorize or direct.

Section III of the NDA provides that ownership of copyrights and other intellectual property rights “in the designs, drawings, and related documents and works of authorship created for the Company or within the scope of my contacts with the Company belong to the Company exclusively throughout the world.” The NDA also provides that the obligations thereunder “shall survive any termination of contracts with the Company.”

The following employees of Standard also signed one or more nondisclosure agreements: Mike Farnsworth, Janet Chunn, Sue Davidson, Marc Grover and Michael Moore. Janet Chunn, the controller of Standard, signed an NDA purportedly on behalf of Standard on April 24, 2000. Pearl also required that On–Site, then its broker, execute a confidentiality agreement.

Prior to being hired by Pearl, Standard and Chunn had never worked with or developed any automated stock-trading systems. Chunn opened a trading account with On–Site and deposited money to fund the account on March 29, 2001. Before On–Site would agree to open Chunn's account, it insisted that Pearl give its consent. Daudelin gave that consent on Pearl's behalf. Chunn purchased a server with his own money and had it delivered to On–Site. He directed On–Site that it should maintain his server separate and apart from the equipment being stored for Pearl. . On–Site agreed to that request.

Chunn wrote his software on the server he had installed at On–Site using a remote utility program that enabled him to connect over the Internet from his office and computer at Standard. Chunn insisted on keeping his personal trading system separate from work being performed by others at Standard. Working on his own time, Chunn created software for his own experimental automated trading system.

Chunn described his trading system as follows:

Well, the way it was going to work some day was it would look at the number of shares that—the number of shares that—excuse me, it has been awhile. I've got to remember. The number of executions—the number of shares executed on the buy side of the book for a specific symbol versus the number of shares executed on the sell side of the book for that same symbol, and whether or not those executions were happening on the buy side or on the sell side.

So that if most executions happened on the buy side, my theory was, and this never came to fruition because I didn't have enough time, but the theory was that since more people were coming over to the buy side—it has been a long time. If more people were executing at the price the buyers were offering to pay, then the price was going to go down. If more executions were happening at the price that the sellers were offering to sell for, then the price would go up. I may have that backwards. Again, it has been a long time. I never did get it to work. That's how it works, although I might have it in reverse. And, of course, there was a lot more to it, but that was the basic premises.

Chunn's ATS was programmed to trade only on the Island ECN. [REDACTED]

Chunn carried out the first manual trades using his system on April 12, 2001. He did not begin to trade automatically until on or about May 18, 2001. In all, Chunn traded stock manually and automatically using his system on twenty-eight separate days between April 12 and October 23, 2001. In that time, he traded only three stocks: [REDACTED]. All automated trades were conducted over the same ECN; there was no arbitrage. Chunn lost a total of $9,274.79 as a result of these transactions. Chunn and his wife—not Standard—reported the losses from use of the trading system on their personal tax returns.

Pearl never authorized Standard or Chunn to develop an automated trading system or to use any of Pearl's trading concepts or software. Pearl never implicitly nor explicitly consented to Standard's or Chunn's use of any Pearl trade secrets. For the only trades that Chunn carried out, he did not need, and went out of his way not to use, the specific software components that Pearl ultimately identified as trade secrets: [REDACTED], the execution system, the broker system, the feed parser system and the control panel and node manager.

In early November 2001, On–Site's assets were sold to A.B. Watley (“ABW”), a New York-based brokerage house. At about that time, Douglas Robertson, Pearl's chief technology officer, telephoned Tim Reynolds, a network engineer for ABW, and asked him to install a Linux operating system on Pearl's Pionex server. Reynolds told Robertson that he had installed the Linux operating system, but Robertson connected to the server and found no evidence of the installation. In a subsequent telephone conversation, Reynolds asked Robertson which Pionex server he was to install the Linux system on. Because Pearl had only one Pionex server, this led Pearl to discover that Reynolds had installed Linux on a server other than Pearl's. The server was plugged into Pearl's KVM (keyboard, video, mouse) box and router. The purpose of the router at the ABW facility was to control access to Pearl's computer network.

On–Site provided hardware racks and IP ports for each user to connect to its system. Pearl had not authorized the connection of any additional servers to the Pearl network. Pearl's ATS operates and executes trades in the millisecond range and, therefore, is extremely dependent upon operating on maximum speed and efficiency, as has been demonstrated by internal experimentation.

After consulting with legal counsel, and with the sole intent of preserving the suspect server for legal proceedings, Daudelin drove to ABW's premises on November 15, 2001, took pictures of the server (which was unplugged and shut down before he arrived) and the networking hardware to which it was connected, removed the server and returned to his home in Harvard, Massachusetts. As it turned out, the Linux software was installed on Chunn's server, overwriting his hard drive and obliterating his programming code. Pearl had not authorized Standard or Chunn to use any element of Pearl's network or server, to view any Pearl data or to develop or operate an automated trading system. After discovering that the server was owned by Chunn, Pearl's legal counsel tried over the ensuing several weeks to reach agreement with Chunn's legal counsel on the best manner to preserve any evidence contained on the hard disk drive (“HDD”) within the server.

Counsel for Chunn provided proof of Chunn's ownership and demanded the return of his server beginning on December 14, 2001. In early January 2002, Daudelin delivered the server to Pearl's counsel. Prior to doing so, Daudelin removed the HDD from the server and delivered it to Pearl's counsel at the same time he delivered the server. Counsel for Pearl placed the HDD in a secure location and informed counsel for Standard and Chunn that it could pick up the server (without the HDD) while the parties attempted to agree on the best manner to preserve any evidence contained on the HDD. In early January 2002, Pearl purchased a replacement hard disk drive and delivered it to counsel for Standard and Chunn. On January 9, 2002 counsel for Pearl delivered the server (without the HDD) to counsel for Standard and Chunn.

On February 4, 2002 counsel for Pearl sent the HDD that was removed from Chunn's server to Pearl's expert for imaging, with explicit instructions that no information on the drive was to be accessed or viewed in any way. Pearl's expert made a duplicate copy of the HDD, and the original HDD was returned to counsel for Pearl, who retained the drive in a secure location until a protective order was agreed to by the parties. Only after Pearl's expert executed a protective order on September 24, 2002 was the expert instructed to perform any forensic analysis of the drive.

The original HDD was returned to the Defendants' counsel on October 24, 2002 in response to a discovery request by the Defendants. At no point did any employee of Pearl turn on, boot up or in any way access the server or the HDD or view the contents of the HDD.

In late November 2001, shortly after Chunn's server was seized by Daudelin, Chunn was informed by ABW employee Matt Ventura that the company no longer wanted his business and was terminating his account. Chunn had done nothing to ABW to cause it to terminate his account, which was profitable for ABW. Defendants' He paid commissions on the trades that he conducted, which produced revenues for ABW. There is no evidence that Pearl or Daudelin used fraud or intimidation to cause ABW to sever its relationship with Chunn.

In just over a year, from the end of September 2000 through the end of October 2001, the total value of securities sold by Pearl through On–Site was approximately [REDACTED]. The total value of securities purchased was approximately the same. One could assume conservatively that the average price per share of a NASDAQ security traded by Pearl during this period was less than $50. One also could assume conservatively that Pearl paid a commission of at least $1 for each one hundred shares traded.

Pearl's experts have determined that the installation of the Linux operating system on the HDD destroyed all the files on it. As a result, there is no confidential information about Chunn's trading system on the server. No “files copied from Pearl's ATS” were found on Chunn's hard drive, as Pearl's experts admit. Pearl's technical expert, Pat Tormey, retrieved GUIDs from the remnants of the HDD identifying discrete components of Pearl's software. These GUIDs were installed on the HDD prior to the installation of the Linux operating system and the overwriting of the HDD.

III. Analysis

A. Count I of Complaint: Misappropriation of Trade Secrets

In Count I of its complaint, Pearl alleges that the Defendants disclosed and used trade secrets without its consent in violation of two sections of the Maine Uniform Trade Secrets Act (“UTSA”), 10 M.R.S.A. §§ 1543–44. The parties cross-move for summary judgment as to this count. Drawing all reasonable inferences against the grant of summary judgment, I find Standard entitled to prevail as to the entirety of Count I and Chunn entitled to prevail as to any asserted violation of the UTSA premised on the existence of certain GUIDs on his HDD.

I turn first to the matter of Standard's potential liability. As Pearl clarifies in its summary-judgment papers, it premises its UTSA claim on the creation of the Chunn ATS. It argues (without citation to authority) that Standard should be held liable for any asserted misappropriation on grounds that (i) Chunn owns all of Standard's assets, (ii) Chunn admits to using Standard's office and pieces of office equipment (e.g., his computer) in creating the Chunn ATS and (iii) Farnsworth was paid regular Standard salary to work on the Chunn ATS. The latter asserted fact is disputed; however, even assuming arguendo its truth, the existence of these three facts, standing alone, is insufficient to hold Standard liable for any misappropriation.

Pearl does not explain how, and I fail to see how (in the absence of a piercing-of-the-corporate-veil type of argument), the bare fact of Chunn's ownership of Standard is relevant. Chunn's use of some of Standard's property and one of its employees to create the Chunn ATS is relevant; however, it is not dispositive. As the Defendants point out, “[u]nder Maine law, a servant's tort is committed in the scope of employment only if it is actuated, at least in part, by a purpose to serve the master.” Thus, “actions that are done with a private, rather than a work-related, purpose to commit wrongdoing are outside the scope of employment.”

It is undisputed that Chunn opened the On–Site account in the name of himself and his wife, that he paid for the server used to develop the Chunn ATS with his own money and that he and his wife, not Standard, reported losses from trading on the system on their taxes. On the cognizable evidence, a reasonable fact-finder could draw only one conclusion: that Chunn's use of some Standard property and the time of a Standard employee was incidental to a private purpose—the development of an ATS in the name of, and for the benefit of, himself and his wife, not of Standard. Thus, even assuming arguendo that Chunn misappropriated Scalper trade secrets in developing the Chunn ATS, Standard cannot be held liable for his misdeeds. It accordingly is entitled to summary judgment as to Count I.

This leaves Chunn and Pearl, to whom I now turn. Pearl predicates its UTSA claim on (i) similarities between the Scalper system and the Chunn ATS and (ii) the presence on the HDD of GUIDs from Pearl's ATS. Neither side demonstrates entitlement to summary judgment with respect to the Scalper theory; however, I find that Pearl fails to generate a triable issue with respect to the HDD.

Turning first to the Scalper, there is (as the Defendants suggest) a threshold triable issue whether Pearl owned the Scalper concept—an assertion that hinges on operation of the “Discoveries” section of the NDA. Per the terms of the NDA executed by Chunn, he assigned to Pearl such systems, methods, designs and so forth as were “conceived or reduced to practice by me or under my direction or jointly with others during the term of my contract with the Company.” There is no evidence of the existence of any written contract between Chunn and Pearl apart from the NDA. Nor is it clear that the two formed any separate oral agreement. These circumstances create an ambiguity as to the meaning of the phrase, “during the term of my contract with the Company.” See, e.g., Villas by the Sea Owners Ass'n v. Garrity, 748 A.2d 457, 461 (Me.2000) (“When a contract is found to be ambiguous, a court may look to extrinsic evidence of the intent of the parties. Additionally, the court may look to extrinsic evidence to reveal a latent ambiguity.”) (citations omitted). While the parties adduce sufficient extrinsic evidence to reveal the ambiguity, they do not adduce sufficient evidence to resolve it. A trier of fact accordingly must do so.

Further, even assuming arguendo that Pearl owns the Scalper concept or methodology, there is no direct evidence that Chunn misappropriated it. Pearl therefore relies (as it may) on the existence of similarities between the Scalper and the Chunn ATS to prove the wrongful act. However, the parties dispute the extent to which the concepts differ, and that dispute must be resolved before a trier of fact rationally can infer whether Chunn did or did not base his ATS on the Scalper.

I turn next to the HDD theory, which amounts to an assertion that Chunn essentially copied parts of the so-called “Engine 1” ATS (a working program) rather than the Scalper (a design concept that Pearl did not translate into a program). As an initial matter, Chunn argues that the HDD evidence (and any inferences therefrom) should be excluded on the basis that Pearl or its agents were responsible for its spoliation. However, Pearl did not ask or authorize On–Site to overwrite Chunn's HDD, nor is Pearl responsible for Chunn's alleged failure to make a backup copy of its contents. Nor, even assuming arguendo that Daudelin wrongfully seized and retained the HDD, does Chunn have any evidence that its contents were destroyed, tampered with or in any other way further spoiled as a result. Thus, Chunn fails to demonstrate loss of evidence attributable to negligent or worse conduct on the part of Daudelin or Pearl. Compare, e.g., Silvestri v. General Motors Corp., 271 F.3d 583, 593 (4th Cir.2001) (“[S]ometimes even the inadvertent, albeit negligent, loss of evidence will justify dismissal because of the resulting unfairness: The expansion of sanctions for the inadvertent loss of evidence recognizes ... the resulting unfairness inherent in allowing a party to destroy evidence and then to benefit from that conduct or omission.”) (citation and internal quotation marks omitted).

Nonetheless, the HDD theory falters for a different reason—that Pearl fails to adduce sufficient cognizable evidence to raise a genuine issue regarding it. Assuming arguendo that one resolves any chain-of-custody doubts in Pearl's favor, one could reasonably infer that Chunn (or someone acting at Chunn's direction) copied some of Pearl's files in building Chunn's ATS. However, Chunn adduces evidence (which Pearl tries, but fails, effectively to controvert) that for the only trades he carried out, he did not need, and went out of his way not to use, the specific software components that Pearl ultimately identified as trade secrets: [REDACTED], the execution system, the broker system, the feed parser system and the control panel and node manager.

Moreover, although Pearl attempted to adduce its own evidence concerning the nature of the copying that the GUIDs revealed (i.e., that components of Pearl's ATS were copied and that these particular components were protected by copyright registration), that evidence was not supported by the citations given. In the absence of any cognizable evidence that the GUIDs trace back to trade-secret data, there is no triable issue whether Chunn misappropriated trade secrets based on the presence on the HDD of the GUIDs.

I accordingly recommend that Standard be granted and Pearl be denied summary judgment as to Count I and that Chunn be granted partial summary judgment with respect only to any theory of violation of the UTSA premised on the presence of GUIDs on the HDD.

B. Count II of Complaint: Computer Fraud and Abuse Act

In Count II of its complaint, Pearl alleges that the Defendants violated the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030, by virtue of their alleged unauthorized accessing of “Pearl's Network” to obtain valuable ATS information. The Defendants' bid for summary judgment as to this count, predicated in part on an assertion that Pearl has not demonstrated that it suffered the requisite damages, , should be granted.

The CFAA provides in relevant part:

Any person who suffers damage or loss by reason of a violation of this section [18 U.S.C. § 1030] may maintain a civil action against the violator to obtain compensatory damages and injunctive relief or other equitable relief. A civil action for a violation of this section may be brought only if the conduct involves 1 of the factors set forth in clause (i), (ii), (iii), (iv), or (v) of subsection (a)(5)(B)....

18 U.S.C. § 1030(g). The five clauses of subsection (a)(5)(B) are as follows:

(i) loss to 1 or more persons during any 1–year period (and, for purposes of an investigation, prosecution, or other proceeding brought by the United States only, loss resulting from a related course of conduct affecting 1 or more other protected computers) aggregating at least $5,000 in value;

(ii) the modification or impairment, or potential modification or impairment, of the medical examination, diagnosis, treatment, or care of 1 or more individuals;

(iii) physical injury to any person;

(iv) a threat to public health or safety; or

(v) damage affecting a computer system used by or for a government entity in furtherance of the administration of justice, national defense, or national security[.]

Id. § 1030(a)(5)(B). Pearl's allegations implicate only the first of these clauses: “loss to 1 or more persons during any 1–year period ... aggregating at least $5,000 in value[.]” Id. § (a)(5)(B)(i). In its papers opposing summary judgment, Pearl argues that the Defendants' alleged wrongful connection to its system adversely affected the system's speed and operation, thereby causing damages. However, while Pearl adduces evidence that speed was important to the operation of its ATS, it sets forth no cognizable evidence that the Defendants' alleged conduct damaged its system in any quantifiable amount, let alone in an amount approximating more than $5,000 in one year. This is fatal to its CFAA cause of action. Compare, e.g., America Online, Inc. v. National Health Care Discount, Inc., 174 F.Supp.2d 890, 899–901 (N.D.Iowa 2001) (detailing evidence demonstrating damage incurred by plaintiff in amounts exceeding $5,000 in each of three years as result of defendant's transmission of unsolicited e-mail in violation of CFAA).

The Defendants therefore are entitled to summary judgment as to Count II.

C. Count III of Complaint: Digital Millenium Copyright Act

In Count III of its complaint, Pearl alleges that the Defendants violated the Digital Millenium Copyright Act (“DMCA”), 17 U.S.C. § 1201(a)(1)(A), by circumventing the protections of Pearl's encrypted, password-protected virtual private network (“VPN”) to gain unauthorized access to data that included Pearl's copyrighted software. Both Defendants seek summary judgment as to this count; however, only Standard is entitled to prevail.

Pearl predicates its DMCA claim on the alleged creation of a “tunnel” from the Chunn server at On–Site to Pearl's On–Site network. See Plaintiff's S/J Opposition at 12. The Defendants repeat their argument (made in the context of Count I) that the conduct in issue is that of Chunn, qua individual, and that Pearl's evidence and arguments fall short of creating a triable issue as to Standard's liability. For reasons discussed above in connection with Count I, the Defendants are correct. Standard is entitled to summary judgment as to Count III.

The Defendants' arguments with respect to Chunn are less persuasive. They first suggest that because no court has extended the protections of the DMCA to VPNs (an assertion that my research corroborates), this court should refrain from doing so. See Defendants' S/J Motion at 12. Although this appears to be an issue of first impression, it is not a difficult one.

The relevant portion of the DMCA bars any person from “circumvent[ing] a technological measure that effectively controls access to a work protected under this title [Title 17, Copyrights].” 17 U.S.C. § 1201(a)(1)(A). To “circumvent a technological measure” means “to descramble a scrambled work, to decrypt an encrypted work, or otherwise to avoid, bypass, remove, deactivate, or impair a technological measure, without the authority of the copyright owner.” Id. § 1201(a)(3)(A). A technological measure “effectively controls access to a work” if “the measure, in the ordinary course of its operation, requires the application of information, or a process or a treatment, with the authority of the copyright owner, to gain access to the work.” Id. § 1201(a)(3)(B). As the District Court for the Southern District of New York has observed:

The DMCA contains two principal anticircumvention provisions. The first, Section 1201(a)(1), governs the act of circumventing a technological protection measure put in place by a copyright owner to control access to a copyrighted work, an act described by Congress as the electronic equivalent of breaking into a locked room in order to obtain a copy of a book.

Universal City Studios, Inc. v. Reimerdes, 111 F.Supp.2d 294, 316 (S.D.N.Y.2000), aff'd, 273 F.3d 429 (2d Cir.2001) (citations and internal quotation marks omitted). The VPN, as described by Pearl, squarely fits the definition of “a technological protection measure put in place by a copyright owner to control access to a copyrighted work.” Pearl's VPN is the “electronic equivalent” of a locked door.

The Defendants next posit that, in any event, the VPN in issue here should not be considered a “technological measure” inasmuch as it did not effectively control Chunn's access in view of the fact that he had written the software in question himself and maintained a backup file of it for Pearl. This contention plainly is without merit. The question of whether a technological measure “effectively controls access” is analyzed solely with reference to how that measure works “in the ordinary course of its operation.” 17 U.S.C. § 1201(a)(3)(B). The fact that Chunn had alternative means of access to the works is irrelevant to whether the VPN effectively controlled access to them.

The Defendants finally argue that the evidence is undisputed that employees of On–Site, rather than Chunn, configured his server and router and therefore he could not have been responsible for the alleged “tunnel” from his server to the Pearl VPN. See Defendants' S/J Motion at 13. However, the parties dispute whether On–Site employees alone configured users' servers and routers. If a fact-finder were to credit Pearl's version of these facts, it reasonably could infer that Chunn configured his server and router to tunnel into Pearl's network.

For these reasons, Standard alone is entitled to summary judgment as to Count III.

D. Count IV of Complaint: Copyright Infringement

In Count IV of its complaint, Pearl alleges that the Defendants infringed its copyrights in the following software components registered with the U.S. Copyright Office: (i) Pearl Engine 1 Control Panel & Node Managers, (ii) Pearl Engine 1 Execution & Broker System, (iii) Pearl Engine 1 Feed Parsers System and (iv) Pearl Engine 1 IMDB System. The Defendants' bid for summary judgment as to this count should be granted.

Pearl's copyright-infringement claim rests on its evidence that GUIDs traceable to its files were found on Chunn's HDD. As the Defendants argue, the claim implodes for lack of evidence. First, as discussed above in the context of Count I, there is insufficient evidence to hold Standard liable for the conduct in question, which implicates Chunn's attempts to create his own ATS. Second, Pearl fails to generate cognizable evidence that the GUIDs found on Chunn's HDD were traceable to the above-cited copyright-registered software components.

Third and finally, even assuming arguendo that those GUIDs could be linked to one or more of those components, in the absence of a copy of the Chunn ATS a fact-finder could not make the type of comparison between the original work and the allegedly infringing work necessary to analysis of whether a copyright has been infringed. See, e.g., Yankee Candle Co. v. Bridgewater Candle Co., 259 F.3d 25, 33 (1st Cir.2001) (“This Court conducts a two-part test to determine if illicit copying has occurred. First, a plaintiff must prove that the defendant copied the plaintiff's copyrighted work, either directly or through indirect evidence. Second, the plaintiff must prove that the copying of the copyrighted material was so extensive that it rendered the infringing and copyrighted works substantially similar.”) (citations and internal quotation marks omitted).

Both Standard and Chunn accordingly are entitled to summary judgment as to Count IV.

E. Count V of Complaint: Breach of Contract

In Count V of its complaint, Pearl asserts that the Defendants breached (i) an agreement between Standard and Pearl requiring that programming work be performed in a professional and workmanlike manner and (ii) agreements between Pearl and the Defendants prohibiting disclosure or use of information other than as needed to serve Pearl's needs. The parties cross-move for summary judgment as to this count.

In its summary-judgment papers, Pearl narrows the scope of what is in issue, clarifying that it presses a claim that Standard and Chunn breached the NDA, not the programming-work contract, and that the NDA was breached by virtue of the Scalper to create Chunn's ATS.

As noted above in the context of Count I, there are triable issues whether (i) Pearl owned the Scalper concept by operation of NDAs signed by Chunn and purportedly by Standard (via Janet Chunn) and (ii) the Scalper program and the Chunn ATS are similar enough to permit an inference that Chunn based his ATS on the Scalper.

Accordingly, neither side demonstrates its entitlement to summary judgment as to Count V.

F. Counts VI–VII of Complaint: Breach of Warranty

The Defendants next move for summary judgment as to Pearl's breach-of-warranty claims: Count VI (breach of warranty/services), alleging that the Defendants breached express and implied warranties that their work would be sufficient to meet Pearl's needs and would be performed in a professional and workmanlike manner, and Count VII (breach of warranty/goods), alleging that the software and upgrade sold to Pearl breached warranties of merchantability and fitness for a particular purposes implied by operation of two sections of the Maine Uniform Commercial Code (“UCC”), 11 M.R.S.A. §§ 2–314 and 2–315.

Although the Defendants purport to seek summary judgment as to the entirety of Count VI, they confine their argument to that portion asserting breach of an implied services warranty. They contend, in essence, that no such implied warranty exists. I agree. I find no Maine case addressing whether a warranty should be implied in the context of the provision of services. Pearl cites Libby v. Woodman Potato Co., 135 Me. 305, 195 A. 569 (1937), for the proposition that such a warranty is implied in Maine law, but Libby concerned (and addressed) only goods.

Inasmuch as appears from my research, courts in other jurisdiction have been wary of recognizing implied warranties in the context of performance of services, doing so only for compelling public-policy reasons. See, e.g., Rocky Mountain Helicopters, Inc. v. Lubbock County Hosp. Dist., 987 S.W.2d 50, 53 (Tex.1998) (“An implied warranty that services will be performed in a good and workmanlike manner may arise under the common law when public policy mandates. Public policy does not justify imposing an implied warranty for service transactions in the absence of a demonstrated, compelling need.”) (citations omitted); Held v. 7–Eleven Food Store, 108 Misc.2d 754, 438 N.Y.S.2d 976, 979 (N.Y.Sup.Ct.1981) (“The Courts of our state do not recognize a cause of action based upon breach of warranty arising out of the performance of services. If a service is performed negligently the cause of action accruing is for that negligence. Likewise, if it constitutes a breach of contract, the action is for that breach. The distinction in the case of a sale of goods is that a warranty gives rise to a cause of action without fault.”) (citations omitted).

There is no reason to believe the Law Court would recognize an implied services warranty in the circumstances of this case. The Defendants thus demonstrate entitlement to summary judgment as to that portion of Count VI alleging breach of an implied warranty (services), but not that portion alleging breach of an express warranty (services), as to which no argument is made.

The Defendants seek summary judgment as to Count VII (breach of warranty/goods) on the basis that the UCC is inapplicable to the contract in issue. As the First Circuit has noted, under Maine law “the test for inclusion or exclusion from Article 2 [of the UCC] is not whether the goods and non-goods parts of the contract are mixed, but rather, whether their predominant factor, their thrust, their purpose, reasonably stated ... is a transaction of sale.” Cianbro Corp. v. Curran–Lavoie, Inc., 814 F.2d 7, 14 (1st Cir.1987) (citation and internal quotation marks omitted).

Inasmuch as appears, the Law Court has not had occasion to consider whether a contract for the provision of software primarily constitutes a good or a service. Pearl asserts that the weight of authority favors treatment of software programs as goods for purposes of the UCC. See Micro Data Base Sys., Inc. v. Dharma Sys., Inc., 148 F.3d 649, 654–55 (7th Cir.1998); Advent Sys. Ltd. v. Unisys Corp., 925 F.2d 670, 675–76 (3rd Cir.1991); RRX Indus., Inc. v. Lab–Con, Inc., 772 F.2d 543, 546–47 (9th Cir.1985). However, I agree with the Defendants, see Defendants' S/J Reply at 6 & n. 6, that the cases on which Pearl relies are distinguishable. The programmers in Dharma, Unisys and RRX sold preexisting software (albeit with custom modifications or upgrades to adapt it to the user's needs or equipment) and were paid in a manner primarily reflecting sale of goods, e.g., in Dharma, an upfront software licensing fee coupled with fees for modifications. See Dharma, 148 F.3d at 651, 654–55; Unisys, 925 F.2d at 674, 676; RRX, 772 F.2d at 545–46. By contrast, in the instant case, Standard and Pearl agreed that Standard would create ATS software from scratch (concept to realization) for which it would be paid on a time and materials basis.

I find cases more closely on point than Dharma, Unisys and RRX holding that, for purposes of applicability of the UCC, development of a software system from scratch primarily constitutes a service. See Multi–Tech Sys., Inc. v. Floreat, Inc., No. CIV. 01–1320 DDA/FLN, 2002 WL 432016, at *3–*4 (D.Minn. Mar. 18, 2002) (“The few cases considering the question indicate that the UCC does not apply to an agreement to design and develop a product, even if compensation under that agreement is based in part on later sales of that product.... Any software in a tangible medium that Floreat provided to Multi–Tech pursuant to the 1992 and 1995 Contracts at best was incidental to the predominant purpose of those agreements, which was to develop and improve the MultiExpress PCS and MultiModem PCS product.”); Wharton Mg't Group v. Sigma Consultants, Inc., 1990 WL 18360, at *3 (Del.Super.Ct. Jan. 29, 1990), aff'd, No. 69, 1990, 1990 WL 168240 (Del. Sept. 19, 1990) (“Wharton bargained for Sigma's skill in developing a system to meet its specific needs.... The service element of the transaction so dominates the subject matter of the contract that, even though a tangible end product seemingly within the definition of ‘goods' was produced, the contract is more readily characterized as one for services. Where, as here, the contract is exclusively or primarily for services, it is outside the scope of Article 2 of the U.C.C.”).

I am satisfied that on these facts the Law Court likewise would hold the UCC inapplicable. The Defendants accordingly are entitled to summary judgment as to Count VII.

G. Count VIII of Complaint: Trespass to Chattels

The Defendants next move for summary judgment as to Count VIII of the Complaint, in which Pearl alleges that they committed trespass to chattels in accessing and using Pearl's network without authorization.

The Defendants repeat their argument that this claim does not sufficiently implicate Standard to hold it liable for the tortious acts alleged. I agree. The conduct in issue is the plug-in of Chunn's server to Pearl's router and KVM switch. Standard is entitled to summary judgment as to Count VIII for the same reasons that it is entitled to summary judgment as to Count I.

In any event, both Defendants are entitled to summary judgment as to this count for a different reason. “A trespass to chattels occurs when one party intentionally uses or intermeddles with personal property in rightful possession of another without authorization.” America Online, Inc. v. IMS, 24 F.Supp.2d 548, 550 (E.D.Va.1998) (citing Restatement (Second) of Torts § 217(b)). “One who commits a trespass to a chattel is liable to the possessor of the chattel if the chattel is impaired as to its condition, quality, or value.” Id. (quoting Restatement (Second) of Torts § 218(b)).

As the Defendants point out, even assuming arguendo that Chunn did access Pearl's network without authorization, there is no evidence that in so doing he impaired its condition, quality or value. On this basis both Defendants accordingly are entitled to summary judgment as to Count VIII.

H. Counterclaim Count I: Tortious Interference

In Count I of his counterclaim, Chunn alleges that Pearl and Daudelin tortiously interfered with a contract or prospective business advantage by intimidating ABW into canceling its contract with him. Pearl and Daudelin seek summary judgment as to this count on grounds that Chunn cannot demonstrate that either engaged in fraud or intimidation causing ABW to cancel the contract in issue. I agree.

The Law Court has “long recognized that if a person by fraud or intimidation procures the breach of a contract that would have continued but for such wrongful interference, that person can be liable in damages for such tortious interference.” Pombriant v. Blue Cross/Blue Shield of Me., 562 A.2d 656, 659 (Me.1989).

The relevant cognizable evidence, viewed in the light most favorable to Chunn, amounts to the following: that (i) Chunn himself did nothing to trigger cancellation of his ABW contract, (ii) the contract was canceled shortly after Daudelin drove to ABW's facilities and seized Chunn's server, (iii) the Pearl account generated a significant amount of revenue for ABW and (iv) Daudelin was known in other contexts to have bullied people. While this is enough for a trier of fact to infer that ABW canceled the contract because of Daudelin and Pearl, it is not enough to support a reasonable inference that Daudelin or Pearl procured its cancellation by means of fraud or intimidation. Such an inference would cross the line from the reasonable to the speculative. “[I]mprobable inferences and unsupported speculation are insufficient to establish a genuine dispute of fact.” Robroy, 200 F.3d at 2 (citations and internal punctuation omitted).

Daudelin and Pearl accordingly are entitled to summary judgment as to Count I of Chunn's counterclaim.

I. Counterclaim Count II: Conversion

In Count II of his counterclaim, Chunn asserts that Daudelin, acting on behalf of and in concert with Pearl, wrongfully converted to his own use property owned by Chunn without Chunn's knowledge or consent.

Pearl and Daudelin suggest that the outcome is the same with respect to this claim regardless of whether the law of Maine or New York applies, see Plaintiff's S/J Motion at 17, and I agree. Under Maine law, “[t]he necessary elements to make out a claim for conversion are: (1) a showing that the person claiming that his property was converted has a property interest in the property; (2) that he had the right to possession at the time of the alleged conversion; and (3) that the party with the right to possession made a demand for its return that was denied by the holder.” Withers v. Hackett, 714 A.2d 798, 800 (Me.1998). In New York, conversion is defined as the “unauthorized assumption and exercise of the right of ownership over goods belonging to another to the exclusion of the owner's rights.” Vigilant Ins. Co. of Am. v. Housing Auth. of City of El Paso, Tex., 87 N.Y.2d 36, 637 N.Y.S.2d 342, 660 N.E.2d 1121, 1126 (1995) (citations and internal quotation marks omitted).

It is undisputed that Daudelin seized Chunn's server from ABW without Chunn's knowledge or permission and that Daudelin and Pearl were unwilling to return the server, despite demand, without certain conditions that evidently were unacceptable to Chunn. Daudelin and Pearl emphasize that the server was discovered to have been connected to Pearl's KVM and router without its authorization and that Daudelin's intent was solely to preserve evidence for any later claim against whomever owned the server.

As Chunn observes, wrongful intent is not a necessary element of a claim of conversion (and, conversely, good faith is not a defense), see, e.g., Schwartz v. Schwartz, 81 Misc.2d 177, 365 N.Y.S.2d 584, 588 (N.Y.City Civ.Ct.1974), aff'd as modified on other grounds, 82 Misc.2d 51, 365 N.Y.S.2d 589 (N.Y.Sup.App.Term 1975) (“Suffice it to say, in answer to the good faith argument, that wrongful intent is not an essential element of a conversion. It is entirely immaterial to the issue here under consideration even if that were the fact, that these defendants acted in good faith under the direction of Bertha Schwartz or that they derived no beneficial use of the money in the ordinary sense, for the essence of the wrong (the conversion) is that the use and possession were dealt with in a manner adverse to the plaintiff and inconsistent with his right of dominion.”) (citations and internal quotation marks omitted); Laverrierre v. Casco Bank & Trust Co., 155 Me. 97, 100, 151 A.2d 276 (Me.1959) (“Ordinarily, a wrongful sale of another's personal property, because it is an assertion of dominion over the property in defiance of, or inconsistent with, the owner's rights is a tortious conversion. This is true even though the wrongful sale is made in good faith or because of honest mistake.”).

To the extent that Pearl and Daudelin suggest that, rather than having been “mistaken,” they were privileged to act as they did (for example, to prevent spoliation of evidence), they fail to develop the argument, citing no authority for any claimed privilege. See Plaintiff's S/J Reply at 7–8. They thereby effectively waive the point. See, e.g., Graham v. United States, 753 F.Supp. 994, 1000 (D.Me.1990) (“It is settled beyond peradventure that issues mentioned in a perfunctory manner, unaccompanied by some effort at developed argumentation are deemed waived.”) (citation and internal quotation marks omitted).

Nor is summary judgment staved off by Pearl's and Daudelin's contention that Chunn fails to show damages, see Plaintiff's S/J Motion at 19—an assertion that Chunn disputes.

Chunn accordingly is entitled to summary judgment as to liability with respect to Count II of his counterclaim, with damages to be determined by a trier of fact.

IV. Conclusion

For the foregoing reasons, I recommend that the Plaintiff's S/J Motion be GRANTED as to Counts I and IV of the Counterclaim and otherwise DENIED, and that the Defendants' S/J Motion be GRANTED with respect to (i) Standard, as to Counts I and III of the Complaint; (ii) Chunn, as to Count I of the Complaint to the extent the claimed violation of the UTSA is predicated on the existence of GUIDs on the Chunn HDD; (iii) both Standard and Chunn, as to Counts II, IV, VII and VIII of the Complaint and that portion of Count VI of the Complaint asserting violation of an implied warranty/services; and (iv) Count II of the Counterclaim; and otherwise DENIED.

Should this recommended decision be adopted, remaining for trial will be the following: Count I of the Complaint (misappropriation of trade secrets) against Chunn only, with the caveat that Pearl be precluded from premising any such claim on contents found on the HDD; Count III of the Complaint (violation of the DMCA) against Chunn only; Count V of the Complaint (breach of contract) against both Standard and Chunn; Count VI of the Complaint (breach of warranty/services) against both Standard and Chunn, to the extent asserting breach of express warranty only; and Count II of the Counterclaim, with respect only to the amount of damages to be awarded Chunn.

The British Horseracing Board Ltd v. William Hill Organization Ltd.

(ECJ 2004)

Judgment:

. . .

[The British Horseracing Board maintains a large amount of information about race horses and races in a database. William Hill, one of Britain’s largest off-track betting services, displayed some of this information on its web sites. It did so without authorization from the British Horseracing Board. The latter sued for violation of Britain’s implementation of The Directive On The Legal Protection Of Databases.]

Legal background

3. The directive, according to Article 1(1) thereof, concerns the legal protection of databases in any form. A database is defined, in Article 1(2) of the directive, as (a collection of independent works, data or other materials arranged in a systematic or methodical way and individually accessible by electronic or other means(.

4. Article 3 of the directive provides for copyright protection for databases which, (by reason of the selection or arrangement of their contents, constitute the author(s own intellectual creation(.

5. Article 7 of the directive provides for a sui generis right in the following terms:

Object of protection

1. Member States shall provide for a right for the maker of a database which shows that there has been qualitatively and/or quantitatively a substantial investment in either the obtaining, verification or presentation of the contents to prevent extraction and/or re-utilisation of the whole or of a substantial part, evaluated qualitatively and/or quantitatively, of the contents of that database.

2. For the purposes of this Chapter:

(a) (extraction( shall mean the permanent or temporary transfer of all or a substantial part of the contents of a database to another medium by any means or in any form;

(b) (re-utilisation( shall mean any form of making available to the public all or a substantial part of the contents of a database by the distribution of copies, by renting, by on-line or other forms of transmission. The first sale of a copy of a database within the Community by the rightholder or with his consent shall exhaust the right to control resale of that copy within the Community; public lending is not an act of extraction or re-utilisation.

3. The right referred to in paragraph 1 may be transferred, assigned or granted under contractual licence.

4. The right provided for in paragraph 1 shall apply irrespective of the eligibility of that database for protection by copyright or by other rights. Moreover, it shall apply irrespective of eligibility of the contents of that database for protection by copyright or by other rights. Protection of databases under the right provided for in paragraph 1 shall be without prejudice to rights existing in respect of their content.

5. The repeated and systematic extraction and/or re-utilisation of insubstantial parts of the contents of the database implying acts which conflict with a normal exploitation of that database or which unreasonably prejudice the legitimate interests of the maker of the database shall not be permitted.

6. Article 8(1) of the directive provides:

(The maker of a database which is made available to the public in whatever manner may not prevent a lawful user of the database from extracting and/or re-utilising insubstantial parts of its contents, evaluated qualitatively and/or quantitatively, for any purposes whatsoever. Where the lawful user is authorised to extract and/or re-utilise only part of the database, this paragraph shall apply only to that part.(

7. Under Article 9 of the directive (Member States may stipulate that lawful users of a database which is made available to the public in whatever manner may, without the authorisation of its maker, extract or re-utilise a substantial part of its contents:

(a) in the case of extraction for private purposes of the contents of a non-electronic database;

(b) in the case of extraction for the purposes of illustration for teaching or scientific research, as long as the source is indicated and to the extent justified by the non-commercial purpose to be achieved;

(c) in the case of extraction and/or re-utilisation for the purposes of public security or an administrative or judicial procedure.(

. . .

31. Against that background, the expression (investment in ( the obtaining ( of the contents( of a database must, as William Hill and the Belgian, German and Portuguese Governments point out, be understood to refer to the resources used to seek out existing independent materials and collect them in the database, and not to the resources used for the creation as such of independent materials. The purpose of the protection by the sui generis right provided for by the directive is to promote the establishment of storage and processing systems for existing information and not the creation of materials capable of being collected subsequently in a database.

32. That interpretation is backed up by the 39th recital of the preamble to the directive, according to which the aim of the sui generis right is to safeguard the results of the financial and professional investment made in (obtaining and collection of the contents( of a database. As the Advocate General notes in points 41 to 46 of her Opinion, despite slight variations in wording, all the language versions of the 39th recital support an interpretation which excludes the creation of the materials contained in a database from the definition of obtaining.

33. The 19th recital of the preamble to the directive, according to which the compilation of several recordings of musical performances on a CD does not represent a substantial enough investment to be eligible under the sui generis right, provides an additional argument in support of that interpretation. Indeed, it appears from that recital that the resources used for the creation as such of works or materials included in the database, in this case on a CD, cannot be deemed equivalent to investment in the obtaining of the contents of that database and cannot, therefore, be taken into account in assessing whether the investment in the creation of the database was substantial.

34. The expression (investment in ( the ( verification ( of the contents( of a database must be understood to refer to the resources used, with a view to ensuring the reliability of the information contained in that database, to monitor the accuracy of the materials collected when the database was created and during its operation. The resources used for verification during the stage of creation of data or other materials which are subsequently collected in a database, on the other hand, are resources used in creating a database and cannot therefore be taken into account in order to assess whether there was substantial investment in the terms of Article 7(1) of the directive.

35. In that light, the fact that the creation of a database is linked to the exercise of a principal activity in which the person creating the database is also the creator of the materials contained in the database does not, as such, preclude that person from claiming the protection of the sui generis right, provided that he establishes that the obtaining of those materials, their verification or their presentation, in the sense described in paragraphs 31 to 34 of this judgment, required substantial investment in quantitative or qualitative terms, which was independent of the resources used to create those materials.

36. Thus, although the search for data and the verification of their accuracy at the time a database is created do not require the maker of that database to use particular resources because the data are those he created and are available to him, the fact remains that the collection of those data, their systematic or methodical arrangement in the database, the organisation of their individual accessibility and the verification of their accuracy throughout the operation of the database may require substantial investment in quantitative and/or qualitative terms within the meaning of Article 7(1) of the directive.

. . .

65. Although William Hill is a lawful user of the database made accessible to the public, at least as regards the part of that database representing information about races, it appears from the order for reference that it carries out acts of extraction and re-utilisation within the meaning of Article 7(2) of the directive. First, it extracts data originating in the BHB database by transferring them from one medium to another. It integrates those data into its own electronic system. Second, it re-utilises those data by then making them available to the public on its internet site in order to allow its clients to bet on horse races.

66. According to the order for reference, that extraction and re-utilisation was carried out without the authorisation of BHB and Others. Since the present case does not fall within any of the cases described in Article 9 of the directive, acts such as those carried out by William Hill could be prevented by BHB and Others under their sui generis right provided that they affect the whole or a substantial part of the contents of the BHB database within the meaning of Article 7(1) of the directive. If such acts affected insubstantial parts of the database they would be prohibited only if the conditions in Article 7(5) of the directive were fulfilled.

. . .

74. In that regard, it appears from the order for reference that the materials displayed on William Hill(s internet sites, which derive from the BHB database, represent only a very small proportion of the whole of that database, as stated in paragraph 19 of this judgment. It must therefore be held that those materials do not constitute a substantial part, evaluated quantitatively, of the contents of that database.

75. According to the order for reference, the information published by William Hill concerns only the following aspects of the BHB database: the names of all the horses running in the race concerned, the date, the time and/or the name of the race and the name of the racecourse, as also stated in paragraph 19 of this judgment.

76. In order to assess whether those materials represent a substantial part, evaluated qualitatively, of the contents of the BHB database, it must be considered whether the human, technical and financial efforts put in by the maker of the database in obtaining, verifying and presenting those data constitute a substantial investment.

77. BHB and Others submit, in that connection, that the data extracted and re-utilised by William Hill are of crucial importance because, without lists of runners, the horse races could not take place. They add that those data represent a significant investment, as demonstrated by the role played by a call centre employing more than 30 operators.

78. However, it must be observed, first, that the intrinsic value of the data affected by the act of extraction and/or re-utilisation does not constitute a relevant criterion for assessing whether the part in question is substantial, evaluated qualitatively. The fact that the data extracted and re-utilised by William Hill are vital to the organisation of the horse races which BHB and Others are responsible for organising is thus irrelevant to the assessment whether the acts of William Hill concern a substantial part of the contents of the BHB database.

79. Next, it must be observed that the resources used for the creation as such of the materials included in a database cannot be taken into account in assessing whether the investment in the creation of that database was substantial, as stated in paragraphs 31 to 33 of this judgment.

80. The resources deployed by BHB to establish, for the purposes of organising horse races, the date, the time, the place and/or name of the race, and the horses running in it, represent an investment in the creation of materials contained in the BHB database. Consequently, and if, as the order for reference appears to indicate, the materials extracted and re-utilised by William Hill did not require BHB and Others to put in investment independent of the resources required for their creation, it must be held that those materials do not represent a substantial part, in qualitative terms, of the BHB database.

81. That being so, there is thus no need to reply to the first question referred. The change made by the person making the extraction and re-utilisation to the arrangement or the conditions of individual accessibility of the data affected by that act cannot, in any event, have the effect of transforming a part of the contents of the database at issue which is not substantial into a substantial part.

United States v. Nosal

676 F.3d 854 (2012)

OPINION

KOZINSKI, Chief Judge:

Computers have become an indispensable part of our daily lives. We use them for work; we use them for play. Sometimes we use them for play at work. Many employers have adopted policies prohibiting the use of work computers for nonbusiness purposes. Does an employee who violates such a policy commit a federal crime? How about someone who violates the terms of service of a social networking website? This depends on how broadly we read the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. ß 1030.

FACTS

David Nosal used to work for Korn/Ferry, an executive search firm. Shortly after he left the company, he convinced some of his former colleagues who were still working for Korn/Ferry to help him start a competing business. The employees used their log-in credentials to download source lists, names and contact information from a confidential database on the company's computer, and then transferred that information to Nosal. The employees were authorized to access the database, but Korn/Ferry had a policy that forbade disclosing confidential information.1 The government indicted Nosal on twenty counts, including trade secret theft, mail fraud, conspiracy and violations of the CFAA. The CFAA counts charged Nosal with violations of 18 U.S.C. ß 1030(a)(4), for aiding and abetting the Korn/Ferry employees in "exceed[ing their] authorized access" with intent to defraud.

1 The opening screen of the database also included the warning: "This product is intended to be used by Korn/Ferry employees for work on Korn/Ferry business only."

Nosal filed a motion to dismiss the CFAA counts, arguing that the statute targets only hackers, not individuals who access a computer with authorization but then misuse information they obtain by means of such access. The district court initially rejected Nosal's argument, holding that when a person accesses a computer "knowingly and with the intent to defraud . . . [it] renders the access unauthorized or in excess of authorization." Shortly afterwards, however, we decided LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009), which construed narrowly the phrases "without authorization" and "exceeds authorized access" in the CFAA. Nosal filed a motion for reconsideration and a second motion to dismiss.

The district court reversed field and followed Brekka's guidance that "[t]here is simply no way to read [the definition of 'exceeds authorized access'] to incorporate corporate policies governing use of information unless the word alter is interpreted to mean misappropriate," as "[s]uch an interpretation would defy the plain meaning of the word alter, as well as common sense." Accordingly, the district court dismissed counts 2 and 4-7 for failure to state an offense. The government appeals. We have jurisdiction over this interlocutory appeal. 18 U.S.C. ß 3731; United States v. Russell, 804 F.2d 571, 573 (9th Cir. 1986). We review de novo. United States v. Boren, 278 F.3d 911, 913 (9th Cir. 2002).

DISCUSSION

The CFAA defines "exceeds authorized access" as "to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter." 18 U.S.C. ß 1030(e)(6). This language can be read either of two ways: First, as Nosal suggests and the district court held, it could refer to someone who's authorized to access only certain data or files but accesses unauthorized data or files—what is colloquially known as "hacking." For example, assume an employee is permitted to access only product information on the company's computer but accesses customer data: He would "exceed[ ] authorized access" if he looks at the customer lists. Second, as the government proposes, the language could refer to someone who has unrestricted physical access to a computer, but is limited in the use to which he can put the information. For example, an employee may be authorized to access customer lists in order to do his job but not to send them to a competitor.

The government argues that the statutory text can support only the latter interpretation of "exceeds authorized access." In its opening brief, it focuses on the word "entitled" in the phrase an "accesser is not entitled so to obtain or alter." Id. ß 1030(e)(6) (emphasis added). Pointing to one dictionary definition of "entitle" as "to furnish with a right," Webster's New Riverside University Dictionary 435, the government argues that Korn/Ferry's computer use policy gives employees certain rights, and when the employees violated that policy, they "exceed[ed] authorized access." But "entitled" in the statutory text refers to how an accesser "obtain[s] or alter[s]" the information, whereas the computer use policy uses "entitled" to limit how the information is used after it is obtained. This is a poor fit with the statutory language. An equally or more sensible reading of "entitled" is as a synonym for "authorized." So read,"exceeds authorized access" would refer to data or files on a computer that one is not authorized to access.

In its reply brief and at oral argument, the government focuses on the word "so" in the same phrase. See 18 U.S.C. ß 1030(e)(6) ("accesser is not entitled so to obtain or alter" (emphasis added)). The government reads "so" to mean "in that manner," which it claims must refer to use restrictions. In the government's view, reading the definition narrowly would render "so" superfluous.

The government's interpretation would transform the CFAA from an anti-hacking statute into an expansive misappropriation statute. This places a great deal of weight on a two-letter word that is essentially a conjunction. If Congress meant to expand the scope of criminal liability to everyone who uses a computer in violation of computer use restrictions—which may well include everyone who uses a computer—we would expect it to use language better suited to that purpose.3 Under the presumption that Congress acts interstitially, we construe a statute as displacing a substantial portion of the common law only where Congress has clearly indicated its intent to do so. See Jones v. United States, 529 U.S. 848, 858, 120 S. Ct. 1904, 146 L. Ed. 2d 902 (2000) ("[U]nless Congress conveys its purpose clearly, it will not be deemed to have significantly changed the federal-state balance in the prosecution of crimes." (internal quotation marks omitted)).

3 Congress did just that in the federal trade secrets statute--18 U.S.C. ß 1832--where it used the common law terms for misappropriation, including "with intent to convert," "steals," "appropriates" and "takes." See 18 U.S.C. ß 1832(a). The government also charged Nosal with violating 18 U.S.C. ß 1832, and those charges remain pending.

In any event, the government's "so" argument doesn't work because the word has meaning even if it doesn't refer to use restrictions. Suppose an employer keeps certain information in a separate database that can be viewed on a computer screen, but not copied or downloaded. If an employee circumvents the security measures, copies the information to a thumb drive and walks out of the building with it in his pocket, he would then have obtained access to information in the computer that he is not "entitled so to obtain." Or, let's say an employee is given full access to the information, provided he logs in with his username and password. In an effort to cover his tracks, he uses another employee's login to copy information from the database. Once again, this would be an employee who is authorized to access the information but does so in a manner he was not authorized "so to obtain." Of course, this all assumes that "so" must have a substantive meaning to make sense of the statute. But Congress could just as well have included "so" as a connector or for emphasis.4

4 The government fails to acknowledge that its own construction of "exceeds authorized access" suffers from the same flaw of superfluity by rendering an entire element of subsection 1030(a)(4) meaningless. Subsection 1030(a)(4) requires a person to (1) knowingly and (2) with intent to defraud (3) access a protected computer (4) without authorization or exceeding authorized access (5) in order to further the intended fraud. See 18 U.S.C. ß 1030(a)(4). Using a computer to defraud the company necessarily contravenes company policy. Therefore, if someone accesses a computer with intent to defraud--satisfying elements (2) and (3)--he would invariably satisfy (4) under the government's definition.

While the CFAA is susceptible to the government's broad interpretation, we find Nosal's narrower one more plausible. Congress enacted the CFAA in 1984 primarily to address the growing problem of computer hacking, recognizing that, "[i]n intentionally trespassing into someone else's computer files, the offender obtains at the very least information as to how to break into that computer system." S. Rep. No. 99-432, at 9 (1986) (Conf. Rep.). The government agrees that the CFAA was concerned with hacking, which is why it also prohibits accessing a computer "without authorization." According to the government, that prohibition applies to hackers, so the "exceeds authorized access" prohibition must apply to people who are authorized to use the computer, but do so for an unauthorized purpose. But it is possible to read both prohibitions as applying to hackers: "[W]ithout authorization" would apply to outside hackers (individuals who have no authorized access to the computer at all) and "exceeds authorized access" would apply to inside hackers (individuals whose initial access to a computer is authorized but who access unauthorized information or files). This is a perfectly plausible construction of the statutory language that maintains the CFAA's focus on hacking rather than turning it into a sweeping Internet-policing mandate.5

5 Although the legislative history of the CFAA discusses this anti-hacking purpose, and says nothing about exceeding authorized use of information, the government claims that the legislative history supports its interpretation. It points to an earlier version of the statute, which defined "exceeds authorized access" as "having accessed a computer with authorization, uses the opportunity such access provides for purposes to which such authorization does not extend." Pub. L. No. 99-474, ß 2(c), 100 Stat. 1213 (1986). But that language was removed and replaced by the current phrase and definition. And Senators Mathias and Leahy--members of the Senate Judiciary Committee--explained that the purpose of replacing the original broader language was to "remove[ ] from the sweep of the statute one of the murkier grounds of liability, under which a[n] . . . employee's access to computerized data might be legitimate in some circumstances, but criminal in other (not clearly distinguishable) circumstances." S. Rep. No. 99-432, at 21. Were there any need to rely on legislative history, it would seem to support Nosal's position rather than the government's.

The government's construction of the statute would expand its scope far beyond computer hacking to criminalize any unauthorized use of information obtained from a computer. This would make criminals of large groups of people who would have little reason to suspect they are committing a federal crime. While ignorance of the law is no excuse, we can properly be skeptical as to whether Congress, in 1984, meant to criminalize conduct beyond that which is inherently wrongful, such as breaking into a computer.

The government argues that defendants here did have notice that their conduct was wrongful by the fraud and materiality requirements in subsection 1030(a)(4), which punishes whoever:

knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computer and the value of such use is not more than $5,000 in any 1-year period.

18 U.S.C. ß 1030(a)(4). But "exceeds authorized access" is used elsewhere in the CFAA as a basis for criminal culpability without intent to defraud. Subsection 1030(a)(2)(C) requires only that the person who "exceeds authorized access" have "obtain[ed] . . . information from any protected computer." Because "protected computer" is defined as a computer affected by or involved in interstate commerce—effectively all computers with Internet access—the government's interpretation of "exceeds authorized access" makes every violation of a private computer use policy a federal crime. See id. ß 1030(e)(2)(B).

The government argues that our ruling today would construe "exceeds authorized access" only in subsection 1030(a)(4), and we could give the phrase a narrower meaning when we construe other subsections. This is just not so: Once we define the phrase for the purpose of subsection 1030(a)(4), that definition must apply equally to the rest of the statute pursuant to the "standard principle of statutory construction . . . that identical words and phrases within the same statute should normally be given the same meaning." Powerex Corp. v. Reliant Energy Servs., Inc., 551 U.S. 224, 232, 127 S. Ct. 2411, 168 L. Ed. 2d 112 (2007). The phrase appears five times in the first seven subsections of the statute, including subsection 1030(a)(2)(C). See 18 U.S.C. ß 1030(a)(1), (2), (4) and (7). Giving a different interpretation to each is impossible because Congress provided a single definition of "exceeds authorized access" for all iterations of the statutory phrase. See id. ß 1030(e)(6). Congress obviously meant "exceeds authorized access" to have the same meaning throughout section 1030. We must therefore consider how the interpretation we adopt will operate wherever in that section the phrase appears.

In the case of the CFAA, the broadest provision is subsection 1030(a)(2)(C), which makes it a crime to exceed authorized access of a computer connected to the Internet without any culpable intent. Were we to adopt the government's proposed interpretation, millions of unsuspecting individuals would find that they are engaging in criminal conduct.

Minds have wandered since the beginning of time and the computer gives employees new ways to procrastinate, by g-chatting with friends, playing games, shopping or watching sports highlights. Such activities are routinely prohibited by many computer-use policies, although employees are seldom disciplined for occasional use of work computers for personal purposes. Nevertheless, under the broad interpretation of the CFAA, such minor dalliances would become federal crimes. While it's unlikely that you'll be prosecuted for watching on your work computer, you could be. Employers wanting to rid themselves of troublesome employees without following proper procedures could threaten to report them to the FBI unless they quit.6 Ubiquitous, seldom-prosecuted crimes invite arbitrary and discriminatory enforcement.7

6 Enforcement of the CFAA against minor workplace dalliances is not chimerical. Employers have invoked the CFAA against employees in civil cases. In a recent Florida case, after an employee sued her employer for wrongful termination, the company counterclaimed that plaintiff violated section 1030(a)(2)(C) by making personal use of the Internet at work--checking Facebook and sending personal email--in violation of company policy. See Lee v. PMSI, Inc., No. 8:10-cv-2904-T-23TBM, 2011 U.S. Dist. LEXIS 52828, 2011 WL 1742028 (M.D. Fla. May 6, 2011). The district court dismissed the counterclaim, but it could not have done so if "exceeds authorized access" included violations of private computer use policies.

7 This concern persists even if intent to defraud is required. Suppose an employee spends six hours tending his FarmVille stable on his work computer. The employee has full access to his computer and the Internet, but the company has a policy that work computers may be used only for business purposes. The employer should be able to fire the employee, but that's quite different from having him arrested as a federal criminal. Yet, under the government's construction of the statute, the employee "exceeds authorized access" by using the computer for non-work activities. Given that the employee deprives his company of six hours of work a day, an aggressive prosecutor might claim that he's defrauding the company, and thereby violating section 1030(a)(4).

Employer-employee and company-consumer relationships are traditionally governed by tort and contract law; the government's proposed interpretation of the CFAA allows private parties to manipulate their computer-use and personnel policies so as to turn these relationships into ones policed by the criminal law. Significant notice problems arise if we allow criminal liability to turn on the vagaries of private polices that are lengthy, opaque, subject to change and seldom read. Consider the typical corporate policy that computers can be used only for business purposes. What exactly is a "nonbusiness purpose"? If you use the computer to check the weather report for a business trip? For the company softball game? For your vacation to Hawaii? And if minor personal uses are tolerated, how can an employee be on notice of what constitutes a violation sufficient to trigger criminal liability?

Basing criminal liability on violations of private computer use polices can transform whole categories of otherwise innocuous behavior into federal crimes simply because a computer is involved. Employees who call family members from their work phones will become criminals if they send an email instead. Employees can sneak in the sports section of the New York Times to read at work, but they'd better not visit . And sudoku enthusiasts should stick to the printed puzzles, because visiting from their work computers might give them more than enough time to hone their sudoku skills behind bars.

The effect this broad construction of the CFAA has on workplace conduct pales by comparison with its effect on everyone else who uses a computer, smart-phone, iPad, Kindle, Nook, X-box, Blu-Ray player or any other Internet-enabled device. The Internet is a means for communicating via computers: Whenever we access a web page, commence a download, post a message on somebody's Facebook wall, shop on Amazon, bid on eBay, publish a blog, rate a movie on IMDb, read , watch YouTube and do the thousands of other things we routinely do online, we are using one computer to send commands to other computers at remote locations. Our access to those remote computers is governed by a series of private agreements and policies that most people are only dimly aware of and virtually no one reads or understands.

For example, it's not widely known that, up until very recently, Google forbade minors from using its services. See Google Terms of Service, effective April 16, 2007--March 1, 2012, ß 2.3, policies/terms/ archive/20070416 ("You may not use the Services and may not accept the Terms if . . . you are not of legal age to form a binding contract with Google . . . .") (last visited Mar. 4, 2012).9 Adopting the government's interpretation would turn vast numbers of teens and pre-teens into juvenile delinquents--and their parents and teachers into delinquency contributors. Similarly, Facebook makes it a violation of the terms of service to let anyone log into your account. See Facebook Statement of Rights and Responsibilities ß 4.8 http:// legal/terms ("You will not share your password, . . . let anyone else access your account, or do anything else that might jeopardize the security of your account.") (last visited Mar. 4, 2012). Yet it's very common for people to let close friends and relatives check their email or access their online accounts. Some may be aware that, if discovered, they may suffer a rebuke from the ISP or a loss of access, but few imagine they might be marched off to federal prison for doing so.

9 A number of other well-known websites, including Netflix, eBay, Twitter and Amazon, have this age restriction.

Or consider the numerous dating websites whose terms of use prohibit inaccurate or misleading information. See, e.g., eHarmony Terms of Service ß 2(I), http:// about/terms ("You will not provide inaccurate, misleading or false information to eHarmony or to any other user.") (last visited Mar. 4, 2012). Or eBay and Craigslist, where it's a violation of the terms of use to post items in an inappropriate category. See, e.g., eBay User Agreement, ("While using eBay sites, services and tools, you will not: post content or items in an inappropriate category or areas on our sites and services . . . .") (last visited Mar. 4, 2012). Under the government's proposed interpretation of the CFAA, posting for sale an item prohibited by Craigslist's policy, or describing yourself as "tall, dark and handsome," when you're actually short and homely, will earn you a handsome orange jumpsuit.

Not only are the terms of service vague and generally unknown--unless you look real hard at the small print at the bottom of a webpage--but website owners retain the right to change the terms at any time and without notice. See, e.g., YouTube Terms of Service ß 1.B, terms ("YouTube may, in its sole discretion, modify or revise these Terms of Service and policies at any time, and you agree to be bound by such modifications or revisions.") (last visited Mar. 4, 2012). Accordingly, behavior that wasn't criminal yesterday can become criminal today without an act of Congress, and without any notice whatsoever.

The government assures us that, whatever the scope of the CFAA, it won't prosecute minor violations. But we shouldn't have to live at the mercy of our local prosecutor. Cf. United States v. Stevens, 130 S. Ct. 1577, 1591, 176 L. Ed. 2d 435 (2010) ("We would not uphold an unconstitutional statute merely because the Government promised to use it responsibly."). And it's not clear we can trust the government when a tempting target comes along. Take the case of the mom who posed as a 17-year-old boy and cyber-bullied her daughter's classmate. The Justice Department prosecuted her under 18 U.S.C. ß 1030(a)(2)(C) for violating MySpace's terms of service, which prohibited lying about identifying information, including age. See United States v. Drew, 259 F.R.D. 449 (C.D. Cal. 2009). Lying on social media websites is common: People shave years off their age, add inches to their height and drop pounds from their weight. The difference between puffery and prosecution may depend on whether you happen to be someone an AUSA has reason to go after.

In United States v. Kozminski, 487 U.S. 931, 108 S. Ct. 2751, 101 L. Ed. 2d 788 (1988), the Supreme Court refused to adopt the government's broad interpretation of a statute because it would "criminalize a broad range of day-to-day activity." Id. at 949. Applying the rule of lenity, the Court warned that the broader statutory interpretation would "delegate to prosecutors and juries the inherently legislative task of determining what type of . . . activities are so morally reprehensible that they should be punished as crimes" and would "subject individuals to the risk of arbitrary or discriminatory prosecution and conviction." Id. By giving that much power to prosecutors, we're inviting discriminatory and arbitrary enforcement.

We remain unpersuaded by the decisions of our sister circuits that interpret the CFAA broadly to cover violations of corporate computer use restrictions or violations of a duty of loyalty. See United States v. Rodriguez, 628 F.3d 1258 (11th Cir. 2010); United States v. John, 597 F.3d 263 (5th Cir. 2010); Int'l Airport Ctrs., LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006). These courts looked only at the culpable behavior of the defendants before them, and failed to consider the effect on millions of ordinary citizens caused by the statute's unitary definition of "exceeds authorized access." They therefore failed to apply the long-standing principle that we must construe ambiguous criminal statutes narrowly so as to avoid "making criminal law in Congress's stead." United States v. Santos, 553 U.S. 507, 514, 128 S. Ct. 2020, 170 L. Ed. 2d 912 (2008).

We therefore respectfully decline to follow our sister circuits and urge them to reconsider instead. For our part, we continue to follow in the path blazed by Brekka, 581 F.3d 1127, and the growing number of courts that have reached the same conclusion. These courts recognize that the plain language of the CFAA "target[s] the unauthorized procurement or alteration of information, not its misuse or misappropriation." Shamrock Foods Co. v. Gast, 535 F. Supp. 2d 962, 965 (D. Ariz. 2008) (internal quotation marks omitted); see also Orbit One Commc'ns, Inc. v. Numerex Corp., 692 F. Supp. 2d 373, 385 (S.D.N.Y. 2010) ("The plain language of the CFAA supports a narrow reading. The CFAA expressly prohibits improper 'access' of computer information. It does not prohibit misuse or misappropriation."); Diamond Power Int'l, Inc. v. Davidson, 540 F. Supp. 2d 1322, 1343 (N.D. Ga. 2007) ("[A] violation for 'exceeding authorized access' occurs where initial access is permitted but the access of certain information is not permitted."); Int'l Ass'n of Machinists & Aerospace Workers v. Werner-Matsuda, 390 F. Supp. 2d 479, 499 (D. Md. 2005) ("[T]he CFAA, however, do[es] not prohibit the unauthorized disclosure or use of information, but rather unauthorized access.").

CONCLUSION

We need not decide today whether Congress could base criminal liability on violations of a company or website's computer use restrictions. Instead, we hold that the phrase "exceeds authorized access" in the CFAA does not extend to violations of use restrictions. If Congress wants to incorporate misappropriation liability into the CFAA, it must speak more clearly. The rule of lenity requires "penal laws . . . to be construed strictly." United States v. Wiltberger, 18 U.S. (5 Wheat.) 76, 95, 5 L. Ed. 37 (1820). "[W]hen choice has to be made between two readings of what conduct Congress has made a crime, it is appropriate, before we choose the harsher alternative, to require that Congress should have spoken in language that is clear and definite." Jones, 529 U.S. at 858 (internal quotation marks and citation omitted).

The rule of lenity not only ensures that citizens will have fair notice of the criminal laws, but also that Congress will have fair notice of what conduct its laws criminalize. We construe criminal statutes narrowly so that Congress will not unintentionally turn ordinary citizens into criminals. "[B]ecause of the seriousness of criminal penalties, and because criminal punishment usually represents the moral condemnation of the community, legislatures and not courts should define criminal activity." United States v. Bass, 404 U.S. 336, 348, 92 S. Ct. 515, 30 L. Ed. 2d 488 (1971). "If there is any doubt about whether Congress intended [the CFAA] to prohibit the conduct in which [Nosal] engaged, then 'we must choose the interpretation least likely to impose penalties unintended by Congress.'" United States v. Cabaccang, 332 F.3d 622, 635 n.22 (9th Cir. 2003) (quoting United States v. Arzate-Nunez, 18 F.3d 730, 736 (9th Cir. 1994)).

This narrower interpretation is also a more sensible reading of the text and legislative history of a statute whose general purpose is to punish hacking--the circumvention of technological access barriers--not misappropriation of trade secrets--a subject Congress has dealt with elsewhere. See supra note 3. Therefore, we hold that "exceeds authorized access" in the CFAA is limited to violations of restrictions on access to information, and not restrictions on its use.

Because Nosal's accomplices had permission to access the company database and obtain the information contained within, the government's charges fail to meet the element of "without authorization, or Accordingly, we affirm the judgment of the district court dismissing counts 2 and 4-7 for failure to state an offense. The government may, of course, prosecute Nosal on the remaining counts of the indictment.

AFFIRMED.

DISSENT

SILVERMAN, Circuit Judge, with whom TALLMAN, Circuit Judge concurs, dissenting:

This case has nothing to do with playing sudoku, checking email, fibbing on dating sites, or any of the other activities that the majority rightly values. It has everything to do with stealing an employer's valuable information to set up a competing business with the purloined data, siphoned away from the victim, knowing such access and use were prohibited in the defendants' employment contracts. The indictment here charged that Nosal and his co-conspirators knowingly exceeded the access to a protected company computer they were given by an executive search firm that employed them; that they did so with the intent to defraud; and further, that they stole the victim's valuable proprietary information by means of that fraudulent conduct in order to profit from using it. In ridiculing scenarios not remotely presented by this case, the majority does a good job of knocking down straw men—far-fetched hypotheticals involving neither theft nor intentional fraudulent conduct, but innocuous violations of office policy.

The majority also takes a plainly written statute and parses it in a hyper-complicated way that distorts the obvious intent of Congress. No other circuit that has considered this statute finds the problems that the majority does.

18 U.S.C. ß 1030(a)(4) is quite clear. It states, in relevant part:

(a) Whoever--

(4) knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value . . .

shall be punished . . . .

Thus, it is perfectly clear that a person with both the requisite mens rea and the specific intent to defraud -- but only such persons -- can violate this subsection in one of two ways: first, by accessing a computer without authorization, or second, by exceeding authorized access. 18 U.S.C. ß 1030(e)(6) defines "exceeds authorized access" as "to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter."

"As this definition makes clear, an individual who is authorized to use a computer for certain purposes but goes beyond those limitations is considered by the CFAA as someone who has 'exceed[ed] authorized access.'" LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1133 (9th Cir. 2009).

"[T]he definition of the term 'exceeds authorized access' from ß 1030(e)(6) implies that an employee can violate employer-placed limits on accessing information stored on the computer and still have authorization to access that computer. The plain language of the statute therefore indicates that 'authorization' depends on actions taken by the employer." Id. at 1135. In Brekka, we explained that a person "exceeds authorized access" when that person has permission to access a computer but accesses information on the computer that the person is not entitled to access. Id. at 1133. In that case, an employee allegedly emailed an employer's proprietary documents to his personal computer to use in a competing business. Id. at 1134. We held that one does not exceed authorized access simply by "breach[ing] a state law duty of loyalty to an employer" and that, because the employee did not breach a contract with his employer, he could not be liable under the Computer Fraud and Abuse Act. Id. at 1135, 1135 n.7.

This is not an esoteric concept. A bank teller is entitled to access a bank's money for legitimate banking purposes, but not to take the bank's money for himself. A new car buyer may be entitled to take a vehicle around the block on a test drive. But the buyer would not be entitled -- he would "exceed his authority" -- to take the vehicle to Mexico on a drug run. A person of ordinary intelligence understands that he may be totally prohibited from doing something altogether, or authorized to do something but prohibited from going beyond what is authorized. This is no doubt why the statute covers not only "unauthorized access," but also "exceed[ing] authorized access." The statute contemplates both means of committing the theft.

The majority holds that a person "exceeds authorized access" only when that person has permission to access a computer generally, but is completely prohibited from accessing a different portion of the computer (or different information on the computer). The majority's interpretation conflicts with the plain language of the statute. Furthermore, none of the circuits that have analyzed the meaning of "exceeds authorized access" as used in the Computer Fraud and Abuse Act read the statute the way the majority does. Both the Fifth and Eleventh Circuits have explicitly held that employees who knowingly violate clear company computer restrictions agreements "exceed authorized access" under the CFAA.

In United States v. John, 597 F.3d 263, 271-73 (5th Cir. 2010), the Fifth Circuit held that an employee of Citigroup exceeded her authorized access in violation of ß 1030(a)(2) when she accessed confidential customer information in violation of her employer's computer use restrictions and used that information to commit fraud. As the Fifth Circuit noted in John, "an employer may 'authorize' employees to utilize computers for any lawful purpose but not for unlawful purposes and only in furtherance of the employer's business. An employee would 'exceed[ ] authorized access' if he or she used that access to obtain or steal information as part of a criminal scheme." Id. at 271 (alteration in original). At the very least, when an employee "knows that the purpose for which she is accessing information in a computer is both in violation of an employer's policies and is part of [a criminally fraudulent] scheme, it would be 'proper' to conclude that such conduct 'exceeds authorized access.'" Id. at 273.

Similarly, the Eleventh Circuit held in United States v. Rodriguez, 628 F.3d 1258, 1263 (11th Cir. 2010), that an employee of the Social Security Administration exceeded his authorized access under ß 1030(a)(2) when he obtained personal information about former girlfriends and potential paramours and used that information to send the women flowers or to show up at their homes. The court rejected Rodriguez's argument that unlike the defendant in John, his use was "not criminal." The court held: "The problem with Rodriguez's argument is that his use of information is irrelevant if he obtained the information without authorization or as a result of exceeding authorized access." Id.; see also EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577, 583-84 (1st Cir. 2001) (holding that an employee likely exceeded his authorized access when he used that access to disclose information in violation of a confidentiality agreement).

The Third Circuit has also implicitly adopted the Fifth and Eleventh circuit's reasoning. In United States v. Teague, 646 F.3d 1119, 1121-22 (8th Cir. 2011), the court upheld a conviction under ß 1030(a)(2) and (c)(2)(A) where an employee of a government contractor used his privileged access to a government database to obtain President Obama's private student loan records.

The indictment here alleges that Nosal and his coconspirators knowingly exceeded the authority that they had to access their employer's computer, and that they did so with the intent to defraud and to steal trade secrets and proprietary information from the company's database for Nosal's competing business. It is alleged that at the time the employee coconspirators accessed the database they knew they only were allowed to use the database for a legitimate business purpose because the co-conspirators allegedly signed an agreement which restricted the use and disclosure of information on the database except for legitimate Korn/Ferry business. Moreover, it is alleged that before using a unique username and password to log on to the Korn/Ferry computer and database, the employees were notified that the information stored on those computers were the property of Korn/Ferry and that to access the information without relevant authority could lead to disciplinary action and criminal prosecution. Therefore, it is alleged, that when Nosal's co-conspirators accessed the database to obtain Korn/Ferry's secret source lists, names, and contact information with the intent to defraud Korn/Ferry by setting up a competing company to take business away using the stolen data, they "exceed[ed their] authorized access" to a computer with an intent to defraud Korn/Ferry and therefore violated 18 U.S.C. ß 1030(a)(4). If true, these allegations adequately state a crime under a commonsense reading of this particular subsection.

Furthermore, it does not advance the ball to consider, as the majority does, the parade of horribles that might occur under different subsections of the CFAA, such as subsection (a)(2)(C), which does not have the scienter or specific intent to defraud requirements that subsection (a)(4) has. Maldonado v. Morales, 556 F.3d 1037, 1044 (9th Cir. 2009) ("The role of the courts is neither to issue advisory opinions nor to declare rights in hypothetical cases, but to adjudicate live cases or controversies.") (citation and internal quotation marks omitted). Other sections of the CFAA may or may not be unconstitutionally vague or pose other problems. We need to wait for an actual case or controversy to frame these issues, rather than posit a laundry list of wacky hypotheticals. I express no opinion on the validity or application of other subsections of 18 U.S.C ß 1030, other than ß 1030(a)(4), and with all due respect, neither should the majority.

The majority's opinion is driven out of a well meaning but ultimately misguided concern that if employment agreements or internet terms of service violations could subject someone to criminal liability, all internet users will suddenly become criminals overnight. I fail to see how anyone can seriously conclude that reading in contravention of office policy could come within the ambit of 18 U.S.C. ß 1030(a)(4), a statute explicitly requiring an intent to defraud, the obtaining of something of value by means of that fraud, while doing so "knowingly." And even if an imaginative judge can conjure up far-fetched hypotheticals producing federal prison terms for accessing word puzzles, jokes, and sports scores while at work, well, . . . that is what an as-applied challenge is for. Meantime, back to this case, 18 U.S.C. ß 1030(a)(4) clearly is aimed at, and limited to, knowing and intentional fraud. Because the indictment adequately states the elements of a valid crime, the district court erred in dismissing the charges.

I respectfully dissent.

United States v. Morris

928 F.2d 504 (1991)

JON O. NEWMAN, Circuit Judge:

This appeal presents two narrow issues of statutory construction concerning a provision Congress recently adopted to strengthen protection against computer crimes. Section 2(d) of the Computer Fraud and Abuse Act of 1986, 18 U.S.C. Section 1030(a)(5)(A) (1988), punishes anyone who intentionally accesses without authorization a category of computers known as "[f]ederal interest computers" and damages or prevents authorized use of information in such computers, causing loss of $1,000 or more. The issues raised are (1) whether the Government must prove not only that the defendant intended to access a federal interest computer, but also that the defendant intended to prevent authorized use of the computer's information and thereby cause loss; and (2) what satisfies the statutory requirement of "access without authorization."

These questions are raised on an appeal by Robert Tappan Morris from the May 16, 1990, judgment of the District Court for the Northern District of New York (Howard G. Munson, Judge) convicting him, after a jury trial, of violating 18 U.S.C. Section 1030(a)(5)(A). Morris released into Internet, a national computer network, a computer program known as a "worm" that spread and multiplied, eventually causing computers at various educational institutions and military sites to "crash" or cease functioning.

We conclude that section 1030(a)(5)(A) does not require the Government to demonstrate that the defendant intentionally prevented authorized use and thereby caused loss. We also find that there was sufficient evidence for the jury to conclude that Morris acted "without authorization" within the meaning of section 1030(a)(5)(A). We therefore affirm.

FACTS

In the fall of 1988, Morris was a first-year graduate student in Cornell University's computer science Ph.D. program. Through undergraduate work at Harvard and in various jobs he had acquired significant computer experience and expertise. When Morris entered Cornell, he was given an account on the computer at the Computer Science Division. This account gave him explicit authorization to use computers at Cornell. Morris engaged in various discussions with fellow graduate students about the security of computer networks and his ability to penetrate it.

In October 1988, Morris began work on a computer program, later known as the Internet "worm" or "virus." The goal of this program was to demonstrate the inadequacies of current security measures on computer networks by exploiting the security defects that Morris had discovered. The tactic he selected was release of a worm into network computers. Morris designed the program to spread across a national network of computers after being inserted at one computer location connected to the network. Morris released the worm into Internet, which is a group of national networks that connect university, governmental, and military computers around the country. The network permits communication and transfer of information between computers on the network.

Morris sought to program the Internet worm to spread widely without drawing attention to itself. The worm was supposed to occupy little computer operation time, and thus not interfere with normal use of the computers. Morris programmed the worm to make it difficult to detect and read, so that other programmers would not be able to "kill" the worm easily. Morris also wanted to ensure that the worm did not copy itself onto a computer that already had a copy. Multiple copies of the worm on a computer would make the worm easier to detect and would bog down the system and ultimately cause the computer to crash. Therefore, Morris designed the worm to "ask" each computer whether it already had a copy of the worm. If it responded "no," then the worm would copy onto the computer; if it responded "yes," the worm would not duplicate. However, Morris was concerned that other programmers could kill the worm by programming their own computers to falsely respond "yes" to the question. To circumvent this protection, Morris programmed the worm to duplicate itself every seventh time it received a "yes" response. As it turned out, Morris underestimated the number of times a computer would be asked the question, and his one-out-of-seven ratio resulted in far more copying than he had anticipated. The worm was also designed so that it would be killed when a computer was shut down, an event that typically occurs once every week or two. This would have prevented the worm from accumulating on one computer, had Morris correctly estimated the likely rate of reinfection.

Morris identified four ways in which the worm could break into computers on the network: (1) through a "hole" or "bug" (an error) in SEND MAIL, a computer program that transfers and receives electronic mail on a computer; (2) through a bug in the "finger demon" program, a program that permits a person to obtain limited information about the users of another computer; (3) through the "trusted hosts" feature, which permits a user with certain privileges on one computer to have equivalent privileges on another computer without using a password; and (4) through a program of password guessing, whereby various combinations of letters are tried out in rapid sequence in the hope that one will be an authorized user's password, which is entered to permit whatever level of activity that user is authorized to perform.

On November 2, 1988, Morris released the worm from a computer at the Massachusetts Institute of Technology. MIT was selected to disguise the fact that the worm came from Morris at Cornell. Morris soon discovered that the worm was replicating and reinfecting machines at a much faster rate than he had anticipated. Ultimately, many machines at locations around the country either crashed or became "catatonic." When Morris realized what was happening, he contacted a friend at Harvard to discuss a solution. Eventually, they sent an anonymous message from Harvard over the network, instructing programmers how to kill the worm and prevent reinfection. However, because the network route was clogged, this message did not get through until it was too late. Computers were affected at numerous installations, including leading universities, military sites, and medical research facilities. The estimated cost of dealing with the worm at each installation ranged from $200 to more than $53,000.

Morris was found guilty, following a jury trial, of violating 18 U.S.C. Section 1030(a)(5)(A). He was sentenced to three years of probation, 400 hours of community service, a fine of $10,050, and the costs of his supervision.

DISCUSSION

I. The intent requirement in section 1030(a)(5)(A)

Section 1030(a)(5)(A), covers anyone who (5) intentionally accesses a Federal interest computer without authorization, and by means of one or more instances of such conduct alters, damages, or destroys information in any such Federal interest computer, or prevents authorized use of any such computer or information, and thereby (A) causes loss to one or more others of a value aggregating $1,000 or more during any one year period; ... [emphasis added].

The District Court concluded that the intent requirement applied only to the accessing and not to the resulting damage. Judge Munson found recourse to legislative history unnecessary because he considered the statute clear and unambiguous. However, the Court observed that the legislative history supported its reading of section 1030(a)(5)(A).

Morris argues that the Government had to prove not only that he intended the unauthorized access of a federal interest computer, but also that he intended to prevent others from using it, and thus cause a loss. The adverb "intentionally," he contends, modifies both verb phrases of the section. The Government urges that since punctuation sets the "accesses" phrase off from the subsequent "damages" phrase, the provision unambiguously shows that "intentionally" modifies only "accesses." Absent textual ambiguity, the Government asserts that recourse to legislative history is not appropriate. See Burlington N.R. Co. v. Oklahoma Tax Comm'n, 481 U.S. 454, 461, 107 S.Ct. 1855, 1859, 95 L.Ed.2d 404 (1987); Consumer Product Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980); United States v. Holroyd, 732 F.2d 1122, 1125 (2d Cir. 1984).

With some statutes, punctuation has been relied upon to indicate that a phrase set off by commas is independent of the language that followed. See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989) (interpreting the Bankruptcy Code). However, we have been advised that punctuation is not necessarily decisive in construing statutes, see Costanzo v. Tillinghast, 287 U.S. 341, 344, 53 S.Ct. 152, 153, 77 L.Ed. 350 (1932), and with many statutes, a mental state adverb adjacent to initial words has been applied to phrases or clauses appearing later in the statute without regard to the punctuation or structure of the statute. See Liparota v. United States, 471 U.S. 419, 426-29, 105 S.Ct. 2084, 2088-90, 85 L.Ed.2d 434 (1985) (interpreting food stamps provision); United States v. Nofziger, 878 F.2d 442, 446-50 (D.C.Cir.) (interpreting government "revolving door" statute), cert. denied, --- U.S. ----, 110 S.Ct. 564, 107 L.Ed.2d 559 (1989); United States v. Johnson & Towers, Inc., 741 F.2d 662, 667-69 (3d Cir. 1984) (interpreting the conservation act), cert. denied, 469 U.S. 1208, 105 S.Ct. 1171, 84 L.Ed.2d 321 (1985). In the present case, we do not believe the comma after "authorization" renders the text so clear as to preclude review of the legislative history.

The first federal statute dealing with computer crimes was passed in 1984, Pub.L. No. 98-473 (codified at 18 U.S.C. Section 1030 (Supp. II 1984)). The specific provision under which Morris was convicted was added in 1986, Pub.L. No. 99-474, along with some other changes. The 1986 amendments made several changes relevant to our analysis.

First, the 1986 amendments changed the scienter requirement in section 1030(a)(2) from "knowingly" to "intentionally." SeePub.L. No. 99-474, section 2(a)(1). The subsection now covers anyone who (2) intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains information contained in a financial record of a financial institution, or of a card issuer as defined in section 1602(n) of title 15, or contained in a file of a consumer reporting agency on a consumer, as such terms are defined in the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.). According to the Senate Judiciary Committee, Congress changed the mental state requirement in section 1030(a)(2) for two reasons. Congress sought only to proscribe intentional acts of unauthorized access, not "mistaken, inadvertent, or careless" acts of unauthorized access. S.Rep. No. 99-432, 99th Cong., 2d Sess. 5 (1986), reprinted in 1986 U.S. Code Cong. & Admin. News 2479, 2483 [hereinafter Senate Report].

Also, Congress expressed concern that the "knowingly" standard "might be inappropriate for cases involving computer technology." Id. The concern was that a scienter requirement of "knowingly" might encompass the acts of an individual "who inadvertently 'stumble[d] into' someone else's computer file or computer data," especially where such individual was authorized to use a particular computer. Id. at 6, 1986 U.S.Code Cong. & Admin.News at 2483. The Senate Report concluded that "[t]he substitution of an 'intentional' standard is designed to focus Federal criminal prosecutions on those whose conduct evinces a clear intent to enter, without proper authorization, computer files or data belonging to another." Id., U.S.Code Cong. & Admin.News at 2484. Congress retained the "knowingly" standard in other subsections of section 1030. See 18 U.S.C. Section 1030(a)(1), (a)(4).

This use of a mens rea standard to make sure that inadvertent accessing was not covered is also emphasized in the Senate Report's discussion of section 1030(a)(3) and section 1030(a)(5), under which Morris was convicted. Both subsections were designed to target "outsiders," individuals without authorization to access any federal interest computer. Senate Report at 10, U.S.Code Cong. & Admin.News at 2488. The rationale for the mens rea requirement suggests that it modifies only the "accesses" phrase, which was the focus of Congress's concern in strengthening the scienter requirement.

The other relevant change in the 1986 amendments was the introduction of subsection (a)(5) to replace its earlier version, subsection (a)(3) of the 1984 act, 18 U.S.C. Section 1030(a)(3) (Supp. II 1984). The predecessor subsection covered anyone who knowingly accesses a computer without authorization, or having accessed a computer with authorization, uses the opportunity such access provides for purposes to which such authorization does not extend, and by means of such conduct knowingly uses, modifies, destroys, or discloses information in, or prevents authorized use of, such computer, if such computer is operated for or on behalf of the Government of United States and such conduct affects such operation. The 1986 version changed the mental state requirement from "knowingly" to "intentionally," and did not repeat it after the "accesses" phrase, as had the 1984 version. By contrast, other subsections of section 1030 have retained "dual intent" language, placing the scienter requirement at the beginning of both the "accesses" phrase and the "damages" phrase. See, e.g., 18 U.S.C. Section 1030(a)(1).

Morris notes the careful attention that Congress gave to selecting the scienter requirement for current subsections (a)(2) and (a)(5). Then, relying primarily on comments in the Senate and House reports, Morris argues that the "intentionally" requirement of section 1030(a)(5)(A) describes both the conduct of accessing and damaging. As he notes, the Senate Report said that "[t]he new subsection 1030(a)(5) to be created by the bill is designed to penalize those who intentionally alter, damage, or destroy certain computerized data belonging to another." Senate Report at 10, U.S.Code Cong. & Admin.News at 2488. The House Judiciary Committee stated that "the bill proposes a new section (18 U.S.C. 1030(a)(5)) which can be characterized as a 'malicious damage' felony violation involving a Federal interest computer. We have included an 'intentional' standard for this felony and coverage is extended only to outside trespassers with a $1,000 threshold damage level." H.R.Rep. No. 99-612, 99th Cong.2d Sess. at 7 (1986). A member of the Judiciary Committee also referred to the section 1030(a)(5) offense as a "malicious damage" felony during the floor debate. 132 Cong.Rec. H3275, 3276 (daily ed. June 3, 1986) (remarks of Rep. Hughes).

The Government's argument that the scienter requirement in section 1030(a)(5)(A) applies only to the "accesses" phrase is premised primarily upon the difference between subsection (a)(5)(A) and its predecessor in the 1984 statute. The decision to state the scienter requirement only once in subsection (a)(5)(A), along with the decision to change it from "knowingly" to "intentionally," are claimed to evince a clear intent upon the part of Congress to apply the scienter requirement only to the "accesses" phrase, though making that requirement more difficult to satisfy. This reading would carry out the Congressional objective of protecting the individual who "inadvertently 'stumble[s] into' someone else's computer file." Senate Report at 6, U.S. Code Cong. & Admin. News at 2483.

The Government also suggests that the fact that other subsections of section 1030 continue to repeat the scienter requirement before both phrases of a subsection is evidence that Congress selectively decided within the various subsections of section 1030 where the scienter requirement was and was not intended to apply. Morris responds with a plausible explanation as to why certain other provisions of section 1030 retain dual intent language. Those subsections use two different mens rea standards; therefore it is necessary to refer to the scienter requirement twice in the subsection. For example, section 1030(a)(1) covers anyone who (1) knowingly accesses a computer without authorization or exceeds authorized access, and by means of such conduct obtains information that has been determined by the United States Government pursuant to an Executive order or statute to require protection against unauthorized disclosure for reasons of national defense or foreign relations, or any restricted data ... with the intent or reason to believe that such information so obtained is to be used to the injury of the United States, or to the advantage of any foreign nation.

Since Congress sought in subsection (a)(1) to have the "knowingly" standard govern the "accesses" phrase and the "with intent" standard govern the "results" phrase, it was necessary to state the scienter requirement at the beginning of both phrases. By contrast, Morris argues, where Congress stated the scienter requirement only once, at the beginning of the "accesses" phrase, it was intended to cover both the "accesses" phrase and the phrase that followed it.

There is a problem, however, with applying Morris's explanation to section 1030(a)(5)(A). As noted earlier, the predecessor of subsection (a)(5)(A) explicitly placed the same mental state requirement before both the "accesses" phrase and the "damages" phrase. In relevant part, that predecessor in the 1984 statute covered anyone who "knowingly accesses a computer without authorization, ... and by means of such conduct knowingly uses, modifies, destroys, or discloses information in, or prevents authorized use of, such computer...." 18 U.S.C. Section 1030(a)(3) (Supp. II 1984) (emphasis added). This earlier provision demonstrates that Congress has on occasion chosen to repeat the same scienter standard in the "accesses" phrase and the subsequent phrase of a subsection of the Computer Fraud Statute. More pertinently, it shows that the 1986 amendments adding subsection (a)(5)(A) placed the scienter requirement adjacent only to the "accesses" phrase in contrast to a predecessor provision that had placed the same standard before both that phrase and the subsequent phrase.

Despite some isolated language in the legislative history that arguably suggests a scienter component for the "damages" phrase of section 1030(a)(5)(A), the wording, structure, and purpose of the subsection, examined in comparison with its departure from the format of its predecessor provision persuade us that the "intentionally" standard applies only to the "accesses" phrase of section 1030(a)(5)(A), and not to its "damages" phrase.

II. The unauthorized access requirement in section 1030(a)(5)(A)

Section 1030(a)(5)(A) penalizes the conduct of an individual who "intentionally accesses a Federal interest computer without authorization." Morris contends that his conduct constituted, at most, "exceeding authorized access" rather than the "unauthorized access" that the subsection punishes. Morris argues that there was insufficient evidence to convict him of "unauthorized access," and that even if the evidence sufficed, he was entitled to have the jury instructed on his "theory of defense."

We assess the sufficiency of the evidence under the traditional standard. Morris was authorized to use computers at Cornell, Harvard, and Berkeley, all of which were on INTERNET. As a result, Morris was authorized to communicate with other computers on the network to send electronic mail (SEND MAIL), and to find out certain information about the users of other computers (finger demon). The question is whether Morris's transmission of his worm constituted exceeding authorized access or accessing without authorization.

The Senate Report stated that section 1030(a)(5)(A), like the new section 1030(a)(3), would "be aimed at 'outsiders,' i.e., those lacking authorization to access any Federal interest computer." Senate Report at 10, U.S.Code Cong. & Admin.News at 2488. But the Report also stated, in concluding its discussion on the scope of section 1030(a)(3), that it applies "where the offender is completely outside the Government, ... or where the offender's act of trespass is interdepartmental in nature." Id. at 8, U.S.Code Cong. & Admin.News at 2486 (emphasis added).

Morris relies on the first quoted portion to argue that his actions can be characterized only as exceeding authorized access, since he had authorized access to a federal interest computer. However, the second quoted portion reveals that Congress was not drawing a bright line between those who have some access to any federal interest computer and those who have none. Congress contemplated that individuals with access to some federal interest computers would be subject to liability under the computer fraud provisions for gaining unauthorized access to other federal interest computers. See, e.g., id. (stating that a Labor Department employee who uses Labor's computers to access without authorization an FBI computer can be criminally prosecuted).

The evidence permitted the jury to conclude that Morris's use of the SEND MAIL and finger demon features constituted access without authorization. While a case might arise where the use of SEND MAIL or finger demon falls within a nebulous area in which the line between accessing without authorization and exceeding authorized access may not be clear, Morris's conduct here falls well within the area of unauthorized access. Morris did not use either of those features in any way related to their intended function. He did not send or read mail nor discover information about other users; instead he found holes in both programs that permitted him a special and unauthorized access route into other computers.

Moreover, the jury verdict need not be upheld solely on Morris's use of SEND MAIL and finger demon. As the District Court noted, in denying Morris' motion for acquittal, although the evidence may have shown that defendant's initial insertion of the worm simply exceeded his authorized access, the evidence also demonstrated that the worm was designed to spread to other computers at which he had no account and no authority, express or implied, to unleash the worm program. Moreover, there was also evidence that the worm was designed to gain access to computers at which he had no account by guessing their passwords. Accordingly, the evidence did support the jury's conclusion that defendant accessed without authority as opposed to merely exceeding the scope of his authority. In light of the reasonable conclusions that the jury could draw from Morris's use of SEND MAIL and finger demon, and from his use of the trusted hosts feature and password guessing, his challenge to the sufficiency of the evidence fails.

Morris endeavors to bolster his sufficiency argument by contending that his conduct was not punishable under subsection (a)(5) but was punishable under subsection (a)(3). That concession belies the validity of his claim that he only exceeded authorization rather than made unauthorized access. Neither subsection (a)(3) nor (a)(5) punishes conduct that exceeds authorization. Both punish a person who "accesses" "without authorization" certain computers. Subsection (a)(3) covers the computers of a department or agency of the United States; subsection (a)(5) more broadly covers any federal interest computers, defined to include, among other computers, those used exclusively by the United States, 18 U.S.C. Section 1030(e)(2)(A), and adds the element of causing damage or loss of use of a value of $1,000 or more. If Morris violated subsection (a)(3), as he concedes, then his conduct in inserting the worm into the Internet must have constituted "unauthorized access" under subsection (a)(5) to the computers of the federal departments the worm reached, for example, those of NASA and military bases.

To extricate himself from the consequence of conceding that he made "unauthorized access" within the meaning of subsection (a)(3), Morris subtly shifts his argument and contends that he is not within the reach of subsection (a)(5) at all. He argues that subsection (a)(5) covers only those who, unlike himself, lack access to any federal interest computer. It is true that a primary concern of Congress in drafting subsection (a)(5) was to reach those unauthorized to access any federal interest computer. The Senate Report stated, "[T]his subsection [(a)(5)] will be aimed at 'outsiders,' i.e., those lacking authorization to access any Federal interest computer." Senate Report at 10, U.S. Code Cong. & Admin. News at 2488. But the fact that the subsection is "aimed" at such "outsiders" does not mean that its coverage is limited to them. Congress understandably thought that the group most likely to damage federal interest computers would be those who lack authorization to use any of them. But it surely did not mean to insulate from liability the person authorized to use computers at the State Department who causes damage to computers at the Defense Department. Congress created the misdemeanor offense of subsection (a)(3) to punish intentional trespasses into computers for which one lacks authorized access; it added the felony offense of subsection (a)(5) to punish such a trespasser who also causes damage or loss in excess of $1,000, not only to computers of the United States but to any computer within the definition of federal interest computers. With both provisions, Congress was punishing those, like Morris, who, with access to some computers that enable them to communicate on a network linking other computers, gain access to other computers to which they lack authorization and either trespass, in violation of subsection (a)(3), or cause damage or loss of $1,000 or more, in violation of subsection (a)(5).

Morris also contends that the District Court should have instructed the jury on his theory that he was only exceeding authorized access. The District Court decided that it was unnecessary to provide the jury with a definition of "authorization." We agree. Since the word is of common usage, without any technical or ambiguous meaning, the Court was not obliged to instruct the jury on its meaning. See, e.g., United States v. Chenault, 844 F.2d 1124, 1131 (5th Cir. 1988) ("A trial court need not define specific statutory terms unless they are outside the common understanding of a juror or are so technical or specific as to require a definition.").

An instruction on "exceeding authorized access" would have risked misleading the jury into thinking that Morris could not be convicted if some of his conduct could be viewed as falling within this description. Yet, even if that phrase might have applied to some of his conduct, he could nonetheless be found liable for doing what the statute prohibited, gaining access where he was unauthorized and causing loss.

Additionally, the District Court properly refused to charge the jury with Morris's proposed jury instruction on access without authorization. That instruction stated, "To establish the element of lack of authorization, the government must prove beyond a reasonable doubt that Mr. Morris was an 'outsider,' that is, that he was not authorized to access any Federal interest computer in any manner." As the analysis of the legislative history reveals, Congress did not intend an individual's authorized access to one federal interest computer to protect him from prosecution, no matter what other federal interest computers he accesses.

CONCLUSION

For the foregoing reasons, the judgment of the District Court is affirmed.

International Airport Centers, L.L.C. v. Citrin

440 F.3d 418( 2006)

POSNER, Circuit Judge.

This appeal from the dismissal of the plaintiffs' suit for failure to state a claim mainly requires us to interpret the word “transmission” in a key provision of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030. The complaint alleges the following facts, which for purposes of deciding the appeal we must take as true. The defendant, Citrin, was employed by the plaintiffs-affiliated companies engaged in the real estate business that we'll treat as one to simplify the opinion, and call “IAC”-to identify properties that IAC might want to acquire, and to assist in any ensuing acquisition. IAC lent Citrin a laptop to use to record data that he collected in the course of his work in identifying potential acquisition targets.

Citrin decided to quit IAC and go into business for himself, in breach of his employment contract. Before returning the laptop to IAC, he deleted all the data in it-not only the data that he had collected but also data that would have revealed to IAC improper conduct in which he had engaged before he decided to quit. Ordinarily, pressing the “delete” key on a computer (or using a mouse click to delete) does not affect the data sought to be deleted; it merely removes the index entry and pointers to the data file so that the file appears no longer to be there, and the space allocated to that file is made available for future write commands. Such “deleted” files are easily recoverable. But Citrin loaded into the laptop a secure-erasure program, designed, by writing over the deleted files, to prevent their recovery. Thomas J. Fitzgerald, “Deleted But Not Gone: Programs Help Protect Confidential Data by Making Disks and Drives Unreadable,” New York Times (national ed.), Nov. 3, 2005, p. C9. IAC had no copies of the files that Citrin erased.

The provision of the Computer Fraud and Abuse Act on which IAC relies provides that whoever “knowingly causes the transmission of a program, information, code, or command, and as a result of such conduct, intentionally causes damage without authorization, to a protected computer [a defined term that includes the laptop that Citrin used],” violates the Act. 18 U.S.C. § 1030(a)(5)(A)(i). Citrin argues that merely erasing a file from a computer is not a “transmission.” Pressing a delete or erase key in fact transmits a command, but it might be stretching the statute too far (especially since it provides criminal as well as civil sanctions for its violation) to consider any typing on a computer keyboard to be a form of “transmission” just because it transmits a command to the computer.

There is more here, however: the transmission of the secure-erasure program to the computer. We do not know whether the program was downloaded from the Internet or copied from a floppy disk (or the equivalent of a floppy disk, such as a CD) inserted into a disk drive that was either inside the computer or attached to it by a wire. Oddly, the complaint doesn't say; maybe IAC doesn't know-maybe all it knows is that when it got the computer back, the files in it had been erased. But we don't see what difference the precise mode of transmission can make. In either the Internet download or the disk insertion, a program intended to cause damage (not to the physical computer, of course, but to its files-but “damage” includes “any impairment to the integrity or availability of data, a program, a system, or information,” 18 U.S.C. § 1030(e)(8)) is transmitted to the computer electronically. The only difference, so far as the mechanics of transmission are concerned, is that the disk is inserted manually before the program on it is transmitted electronically to the computer. The difference vanishes if the disk drive into which the disk is inserted is an external drive, connected to the computer by a wire, just as the computer is connected to the Internet by a telephone cable or a broadband cable or wirelessly.

There is the following contextual difference between the two modes of transmission, however: transmission via disk requires that the malefactor have physical access to the computer. By using the Internet, Citrin might have erased the laptop's files from afar by transmitting a virus. Such long-distance attacks can be more difficult to detect and thus to deter or punish than ones that can have been made only by someone with physical access, usually an employee. The inside attack, however, while easier to detect may also be easier to accomplish. Congress was concerned with both types of attack: attacks by virus and worm writers, on the one hand, which come mainly from the outside, and attacks by disgruntled programmers who decide to trash the employer's data system on the way out (or threaten to do so in order to extort payments), on the other. If the statute is to reach the disgruntled programmer, which Congress intended by providing that whoever “intentionally accesses a protected computer without authorization, and as a result of such conduct, recklessly causes damage” violates the Act, 18 U.S.C. § 1030(a)(5)(A)(ii) (emphasis added), it can't make any difference that the destructive program comes on a physical medium, such as a floppy disk or CD.

Citrin violated that subsection too. For his authorization to access the laptop terminated when, having already engaged in misconduct and decided to quit IAC in violation of his employment contract, he resolved to destroy files that incriminated himself and other files that were also the property of his employer, in violation of the duty of loyalty that agency law imposes on an employee. United States v. Galindo, 871 F.2d 99, 101 (9th Cir.1989); Shurgard Storage Centers, Inc. v. Safeguard Self Storage, Inc., 119 F.Supp.2d 1121, 1124-25 (W.D.Wash.2000); see Restatement (Second) of Agency §§ 112, 387 (1958).

Muddying the picture some, the Computer Fraud and Abuse Act distinguishes between “without authorization” and “exceeding authorized access,” 18 U.S.C. §§ 1030(a)(1), (2), (4), and, while making both punishable, defines the latter as “access[ing] a computer with authorization and ... us[ing] such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.” § 1030(e)(6). That might seem the more apt description of what Citrin did.

The difference between “without authorization” and “exceeding authorized access” is paper thin, see Pacific Aerospace & Electronics, Inc. v. Taylor, 295 F.Supp.2d 1188, 1196-97 (E.D.Wash.2003), but not quite invisible. In EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577, 583-84 (1st Cir.2001), for example, the former employee of a travel agent, in violation of his confidentiality agreement with his former employer, used confidential information that he had obtained as an employee to create a program that enabled his new travel company to obtain information from his former employer's website that he could not have obtained as efficiently without the use of that confidential information. The website was open to the public, so he was authorized to use it, but he exceeded his authorization by using confidential information to obtain better access than other members of the public.

Our case is different. Citrin's breach of his duty of loyalty terminated his agency relationship (more precisely, terminated any rights he might have claimed as IAC's agent-he could not by unilaterally terminating any duties he owed his principal gain an advantage!) and with it his authority to access the laptop, because the only basis of his authority had been that relationship. “Violating the duty of loyalty, or failing to disclose adverse interests, voids the agency relationship.” State v. DiGiulio, 172 Ariz. 156, 835 P.2d 488, 492 (App.1992). “Unless otherwise agreed, the authority of the agent terminates if, without knowledge of the principal, he acquires adverse interests or if he is otherwise guilty of a serious breach of loyalty to the principal.” Id.; Restatement, supra, § 112; see also Shurgard Storage Centers, Inc. v. Safeguard Self Storage, Inc., supra, 119 F.Supp.2d at 1123, 1125; cf. Phansalkar v. Andersen Weinroth & Co., 344 F.3d 184, 201-02 (2d Cir.2003) (per curiam); Restatement, supra, § 409(1) and comment b and illustration 2.

Citrin points out that his employment contract authorized him to “return or destroy ” data in the laptop when he ceased being employed by IAC (emphasis added). But it is unlikely, to say the least, that the provision was intended to authorize him to destroy data that he knew the company had no duplicates of and would have wanted to have-if only to nail Citrin for misconduct. The purpose of the provision may have been to avoid overloading the company with returned data of no further value, which the employee should simply have deleted. More likely the purpose was simply to remind Citrin that he was not to disseminate confidential data after he left the company's employ-the provision authorizing him to return or destroy data in the laptop was limited to “Confidential” information. There may be a dispute over whether the incriminating files that Citrin destroyed contained “confidential” data, but that issue cannot be resolved on this appeal.

The judgment is reversed with directions to reinstate the suit, including the supplemental claims that the judge dismissed because he was dismissing IAC's federal claim.

REVERSED AND REMANDED.

Edwards v. The First American Corporation

610 F.3d 514 (2010)

GRABER, Circuit Judge:

Plaintiff Denise P. Edwards filed a complaint against Defendants The First American Corporation (“First American”) and its wholly owned subsidiary, First American Title Insurance Company (“First American Title”) (collectively, “Defendants”). The complaint alleged a violation of the Real Estate Settlement Procedures Act of 1974 (“RESPA”), 12 U.S.C. § 2607. According to Plaintiff, First American improperly paid millions of dollars to individual title companies and in exchange those title companies entered into exclusive referral agreements with First American. Plaintiff moved for class certification, and certain discovery, which the district court denied. Plaintiff's appeal from those rulings is addressed separately in a memorandum disposition filed this date. At the same time as Plaintiff filed her motions, Defendants moved to dismiss the complaint for lack of standing. The district court denied the motion, and Defendants brought this appeal. We have jurisdiction pursuant to 28 U.S.C. § 1292(b). See also 28 U.S.C. § 1292(e); Fed.R.Civ.P. 23(f). For the reasons that follow, we affirm.

First American is a publicly traded holding company that owns, in addition to First American Title, several other companies in the field of real estate-related information services. First American Title is a title insurance underwriter that issues title insurance policies to real estate owners and lenders in 47 states and the District of Columbia. Defendants assert that First American has an ownership interest in a small proportion of the thousands of title insurance agencies that are authorized to sell First American Title policies. Plaintiff contends that, in exchange for First American's purchase of a minority interest, many of these title agencies enter into “exclusive” agency agreements with First American Title, pursuant to which the agencies agreed to sell First American Title's title insurance policies generally. Defendants assert that few First American Title “exclusive” agency agreements are completely exclusive. Plaintiff claims that these agreements are actually exclusive and thus illegal under the anti-kickback provisions of RESPA.

According to Plaintiff's allegations, she was affected by one such exclusive agency agreement between First American and Tower City. In 1998, First American paid Tower City $2 million in cash and securities. According to Plaintiff's allegations, in exchange, First American received a 17.5% minority interest in Tower City, and Tower City entered into a “Captive Title Insurance Agreement” that required it to refer all future title insurance business “exclusively” to First American Title. Plaintiff further alleges that Tower City had agreements with and regularly referred business to at least three other title insurers prior to 1998, but then began referring customers exclusively to First American after they entered into the Captive Title Insurance Agreement.

Plaintiff, a resident of Cleveland, Ohio, bought a home in Cleveland in September 2006. Tower City was the settlement agent and conducted the closing at its office in Highland Heights, Ohio. At or before settlement, Plaintiff received a “HUD–1 Settlement Statement” showing, on line 1108, that she would pay $455.43 and the seller would pay $273.42 for title insurance. Plaintiff claims that her title insurance was referred to First American pursuant to an exclusive agency agreement, which Plaintiff alleges was illegal under RESPA.

Plaintiff filed a complaint in district court. Defendants responded by filing a motion to dismiss for lack of subject matter jurisdiction. Specifically, Defendants claimed that Plaintiff lacked both Article III standing and statutory standing under RESPA. The district court denied Defendants' motion, holding that RESPA gave Plaintiff certain rights, the violation of which conferred standing. We review de novo. Mortensen v. County of Sacramento, 368 F.3d 1082, 1086 (9th Cir.2004).

There are three requirements for Article III standing—injury, causation, and redressability. Fulfillment Servs. Inc. v. UPS, 528 F.3d 614, 618 (9th Cir.2008). The parties disagree about the injury component only. Defendants argue that Plaintiff has not suffered a concrete injury in fact because she has not alleged that the charge for title insurance was higher than it would have been without the exclusivity agreement. Plaintiff does not and cannot make this allegation because Ohio law mandates that all title insurers charge the same price. Ohio Rev.Code Ann. §§ 3935.04, 3935.07 (West 2010). Nonetheless, Plaintiff counters that the damages provision in RESPA gives rise to a statutory cause of action whether or not an overcharge occurred. We agree with Plaintiff.

“The injury required by Article III can exist solely by virtue of ‘statutes creating legal rights, the invasion of which creates standing.’ ” Fulfillment Servs., 528 F.3d at 618–19 (quoting Warth v. Seldin, 422 U.S. 490, 500, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975)). “Essentially, the standing question in such cases is whether the constitutional or statutory provision on which the claim rests properly can be understood as granting persons in the plaintiff's position a right to judicial relief.” Warth, 422 U.S. at 500, 95 S.Ct. 2197. Thus, we must look to the text of RESPA to determine whether it prohibited Defendants' conduct; if it did, then Plaintiff has demonstrated an injury sufficient to satisfy Article III.

It is well settled in this court that “statutory interpretation begins with the plain language of the statute.” United States v. Chaney, 581 F.3d 1123, 1126 (9th Cir.2009) (brackets and internal quotation marks omitted). “The preeminent canon of statutory interpretation requires us to presume that the legislature says in a statute what it means and means in a statute what it says there. Thus, our inquiry begins with the statutory text, and ends there as well if the text is unambiguous.” Satterfield v. Simon & Schuster, Inc., 569 F.3d 946, 951 (9th Cir.2009) (brackets and internal quotation marks omitted).

RESPA prohibits the payment of “any fee, kickback, or thing of value” in exchange for business referrals and also forbids that a “portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service” be paid for services that are not actually rendered to the customer. 12 U.S.C. § 2607(a), (b). Whenever a violation of these prohibitions occurs, the statute provides that the defendants are liable to the “person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for such settlement service.” Id. § 2607(d)(2) (emphasis added).

These RESPA provisions are clear. A person who is charged for a settlement service involved in a violation is entitled to three times the amount of any charge paid. The use of the term “any” demonstrates that charges are neither restricted to a particular type of charge, such as an overcharge, nor limited to a specific part of the settlement service. Further, the term “overcharge” does not exist anywhere within the text of the statute.

Because the statutory text does not limit liability to instances in which a plaintiff is overcharged, we hold that Plaintiff has established an injury sufficient to satisfy Article III. The legislative history of RESPA supports our holding. As first enacted in 1974, RESPA entitled purchasers to damages “in an amount equal to three times the value or amount of the fee or thing of value” that changed hands. Pub.L. No. 93–533, § 8(D)(2), 88 Stat. 1724 (1974) (amended 1983). This provision failed to account for “controlled business arrangements” like the alleged agreement between Tower City and First American Title, whereby an entity could provide a referral without the direct payment of a referral fee. A 1982 House Committee Report noted that these practices could result in harm beyond an increase in the cost of settlement services:

[T]he advice of the person making the referral may lose its impartiality and may not be based on his professional evaluation of the quality of service provided if the referror or his associates have a financial interest in the company being recommended. [Because the settlement industry] almost exclusively rel[ies] on referrals ... the growth of controlled business arrangements effectively reduce[s] the kind of healthy competition generated by independent settlement service providers.

H.R.Rep. No. 97–532, at 52 (1982).

Acting on this concern, Congress exempted controlled business arrangements from liability only in limited circumstances, 12 U.S.C. § 2607(c)(4), and eliminated the “thing of value” phrasing in the damages provision, replacing it with “any charge paid” for the settlement service, id. § 2607(d)(2). Calculating the penalty with reference to the entire amount of the settlement service appears to address instances in which no direct referral fee has been paid. Indeed, these no-fee situations were the impetus behind Congress' enactment of the 1983 amendment. See H.R.Rep. No. 98–123, at 77 (1983) (expecting that RESPA violators “involved in controlled business arrangements ... shall be ... liable ... in the amount of three times the amount of the charge paid for the settlement service”).

Because RESPA gives Plaintiff a statutory cause of action, we hold that Plaintiff has standing to pursue her claims against Defendants. Our holding places us in agreement with two of our sister circuits. In Carter v. Welles–Bowen Realty, Inc., 553 F.3d 979, 989 (6th Cir.2009), the Sixth Circuit held that a plaintiff has standing to sue a settlement service provider under RESPA, even if that plaintiff was not overcharged for settlement services. The court came to that conclusion after looking at the text of RESPA and then examining its legislative history and the overall intent of RESPA. Id. at 986–88. The Third Circuit held similarly in Alston v. Countrywide Financial Corp., 585 F.3d 753, 755 (3d Cir.2009), stating that Congress created a private right of action without requiring an overcharge allegation.

AFFIRMED in part; REVERSED in part and REMANDED. The parties shall bear their own costs on appeal.

James R. Clapper, Jr., Director of National Intelligence v. Amnesty International USA

133 S.Ct. 1138 (2013)

Justice ALITO delivered the opinion of the Court.

Section 702 of the Foreign Intelligence Surveillance Act of 1978, 50 U.S.C. § 1881a (2006 ed., Supp. V), allows the Attorney General and the Director of National Intelligence to acquire foreign intelligence information by jointly authorizing the surveillance of individuals who are not “United States persons” FN1 and are reasonably believed to be located outside the United States. Before doing so, the Attorney General and the Director of National Intelligence normally must obtain the Foreign Intelligence Surveillance Court's approval. Respondents are United States persons whose work, they allege, requires them to engage in sensitive international communications with individuals who they believe are likely targets of surveillance under § 1881a. Respondents seek a declaration that § 1881a is unconstitutional, as well as an injunction against § 1881a-authorized surveillance. The question before us is whether respondents have Article III standing to seek this prospective relief.

FN1. The term “United States person” includes citizens of the United States, aliens admitted for permanent residence, and certain associations and corporations. 50 U.S.C. § 1801(i); see § 1881(a).

Respondents assert that they can establish injury in fact because there is an objectively reasonable likelihood that their communications will be acquired under § 1881a at some point in the future. But respondents' theory of future injury is too speculative to satisfy the well-established requirement that threatened injury must be “certainly impending.” E.g., Whitmore v. Arkansas, 495 U.S. 149, 158, 110 S.Ct. 1717, 109 L.Ed.2d 135 (1990). And even if respondents could demonstrate that the threatened injury is certainly impending, they still would not be able to establish that this injury is fairly traceable to § 1881a. As an alternative argument, respondents contend that they are suffering present injury because the risk of § 1881a-authorized surveillance already has forced them to take costly and burdensome measures to protect the confidentiality of their international communications. But respondents cannot manufacture standing by choosing to make expenditures based on hypothetical future harm that is not certainly impending. We therefore hold that respondents lack Article III standing.

I

A

In 1978, after years of debate, Congress enacted the Foreign Intelligence Surveillance Act (FISA) to authorize and regulate certain governmental electronic surveillance of communications for foreign intelligence purposes. See 92 Stat. 1783, 50 U.S.C. § 1801 et seq.; 1 D. Kris & J. Wilson, National Security Investigations & Prosecutions §§ 3.1, 3.7 (2d ed. 2012) (hereinafter Kris & Wilson). In enacting FISA, Congress legislated against the backdrop of our decision in United States v. United States Dist. Court for Eastern Dist. of Mich., 407 U.S. 297, 92 S.Ct. 2125, 32 L.Ed.2d 752 (1972) ( Keith ), in which we explained that the standards and procedures that law enforcement officials must follow when conducting “surveillance of ‘ordinary crime’ ” might not be required in the context of surveillance conducted for domestic national-security purposes. Id., at 322–323, 92 S.Ct. 2125. Although the Keith opinion expressly disclaimed any ruling “on the scope of the President's surveillance power with respect to the activities of foreign powers,” id., at 308, 92 S.Ct. 2125, it implicitly suggested that a special framework for foreign intelligence surveillance might be constitutionally permissible, see id., at 322–323, 92 S.Ct. 2125.

In constructing such a framework for foreign intelligence surveillance, Congress created two specialized courts. In FISA, Congress authorized judges of the Foreign Intelligence Surveillance Court (FISC) to approve electronic surveillance for foreign intelligence purposes if there is probable cause to believe that “the target of the electronic surveillance is a foreign power or an agent of a foreign power,” and that each of the specific “facilities or places at which the electronic surveillance is directed is being used, or is about to be used, by a foreign power or an agent of a foreign power.” § 105(a)(3), 92 Stat. 1790; see § 105(b)(1)(A), (b)(1)(B), ibid.; 1 Kris & Wilson § 7:2, at 194–195; id., § 16:2, at 528–529. Additionally, Congress vested the Foreign Intelligence Surveillance Court of Review with jurisdiction to review any denials by the FISC of applications for electronic surveillance. § 103(b), 92 Stat. 1788; 1 Kris & Wilson § 5:7, at 151–153.

In the wake of the September 11th attacks, President George W. Bush authorized the National Security Agency (NSA) to conduct warrantless wiretapping of telephone and e-mail communications where one party to the communication was located outside the United States and a participant in “the call was reasonably believed to be a member or agent of al Qaeda or an affiliated terrorist organization,” App. to Pet. for Cert. 403a. See id., at 263a–265a, 268a, 273a–279a, 292a–293a; American Civil Liberties Union v. NSA, 493 F.3d 644, 648 (C.A.6 2007) (ACLU ) (opinion of Batchelder, J.). In January 2007, the FISC issued orders authorizing the Government to target international communications into or out of the United States where there was probable cause to believe that one participant to the communication was a member or agent of al Qaeda or an associated terrorist organization. App. to Pet. for Cert. 312a, 398a, 405a. These FISC orders subjected any electronic surveillance that was then occurring under the NSA's program to the approval of the FISC. Id., at 405a; see id., at 312a, 404a. After a FISC Judge subsequently narrowed the FISC's authorization of such surveillance, however, the Executive asked Congress to amend FISA so that it would provide the intelligence community with additional authority to meet the challenges of modern technology and international terrorism. Id., at 315a–318a, 331a–333a, 398a; see id., at 262a, 277a–279a, 287a.

When Congress enacted the FISA Amendments Act of 2008 (FISA Amendments Act), 122 Stat. 2436, it left much of FISA intact, but it “established a new and independent source of intelligence collection authority, beyond that granted in traditional FISA.” 1 Kris & Wilson § 9:11, at 349–350. As relevant here, § 702 of FISA, 50 U.S.C. § 1881a (2006 ed., Supp. V), which was enacted as part of the FISA Amendments Act, supplements pre-existing FISA authority by creating a new framework under which the Government may seek the FISC's authorization of certain foreign intelligence surveillance targeting the communications of non-U.S. persons located abroad. Unlike traditional FISA surveillance, § 1881a does not require the Government to demonstrate probable cause that the target of the electronic surveillance is a foreign power or agent of a foreign power. Compare § 1805(a)(2)(A), (a)(2)(B), with § 1881a(d)(1), (i)(3)(A); 638 F.3d 118, 126 (C.A.2 2011); 1 Kris & Wilson § 16:16, at 584. And, unlike traditional FISA, § 1881a does not require the Government to specify the nature and location of each of the particular facilities or places at which the electronic surveillance will occur. Compare § 1805(a)(2)(B), (c)(1) (2006 ed. and Supp. V), with § 1881a(d)(1), (g)(4), (i)(3)(A); 638 F.3d, at 125–126; 1 Kris & Wilson § 16:16, at 585.FN2

FN2. Congress recently reauthorized the FISA Amendments Act for another five years. See 126 Stat. 1631.

The present case involves a constitutional challenge to § 1881a. Surveillance under § 1881a is subject to statutory conditions, judicial authorization, congressional supervision, and compliance with the Fourth Amendment. Section 1881a provides that, upon the issuance of an order from the Foreign Intelligence Surveillance Court, “the Attorney General and the Director of National Intelligence may authorize jointly, for a period of up to 1 year ..., the targeting of persons reasonably believed to be located outside the United States to acquire foreign intelligence information.” § 1881a(a). Surveillance under § 1881a may not be intentionally targeted at any person known to be in the United States or any U.S. person reasonably believed to be located abroad. § 1881a(b)(1)–(3); see also § 1801(i). Additionally, acquisitions under § 1881a must comport with the Fourth Amendment. § 1881a(b)(5). Moreover, surveillance under § 1881a is subject to congressional oversight and several types of Executive Branch review. See § 1881a(f)(2), (l ); Amnesty Int'l USA v. McConnell, 646 F.Supp.2d 633, 640–641 (S.D.N.Y.2009).

Section 1881a mandates that the Government obtain the Foreign Intelligence Surveillance Court's approval of “targeting” procedures, “minimization” procedures, and a governmental certification regarding proposed surveillance. § 1881a(a), (c)(1), (i)(2), (i)(3). Among other things, the Government's certification must attest that (1) procedures are in place “that have been approved, have been submitted for approval, or will be submitted with the certification for approval by the [FISC] that are reasonably designed” to ensure that an acquisition is “limited to targeting persons reasonably believed to be located outside” the United States; (2) minimization procedures adequately restrict the acquisition, retention, and dissemination of nonpublic information about unconsenting U.S. persons, as appropriate; (3) guidelines have been adopted to ensure compliance with targeting limits and the Fourth Amendment; and (4) the procedures and guidelines referred to above comport with the Fourth Amendment. § 1881a(g)(2); see § 1801(h).

The Foreign Intelligence Surveillance Court's role includes determining whether the Government's certification contains the required elements. Additionally, the Court assesses whether the targeting procedures are “reasonably designed” (1) to “ensure that an acquisition ... is limited to targeting persons reasonably believed to be located outside the United States” and (2) to “prevent the intentional acquisition of any communication as to which the sender and all intended recipients are known ... to be located in the United States.” § 1881a(i)(2)(B). The Court analyzes whether the minimization procedures “meet the definition of minimization procedures under section 1801(h) ..., as appropriate.” § 1881a(i)(2)(C). The Court also assesses whether the targeting and minimization procedures are consistent with the statute and the Fourth Amendment. See § 1881a(i)(3)(A).FN3

FN3. The dissent attempts to downplay the safeguards established by § 1881a. See post, at 1156 – 1157 (opinion of BREYER, J.). Notably, the dissent does not directly acknowledge that § 1881a surveillance must comport with the Fourth Amendment, see § 1881a(b)(5), and that the Foreign Intelligence Surveillance Court must assess whether targeting and minimization procedures are consistent with the Fourth Amendment, see § 1881a(i)(3)(A).

B

Respondents are attorneys and human rights, labor, legal, and media organizations whose work allegedly requires them to engage in sensitive and sometimes privileged telephone and e-mail communications with colleagues, clients, sources, and other individuals located abroad. Respondents believe that some of the people with whom they exchange foreign intelligence information are likely targets of surveillance under § 1881a. Specifically, respondents claim that they communicate by telephone and e-mail with people the Government “believes or believed to be associated with terrorist organizations,” “people located in geographic areas that are a special focus” of the Government's counterterrorism or diplomatic efforts, and activists who oppose governments that are supported by the United States Government. App. to Pet. for Cert. 399a.

Respondents claim that § 1881a compromises their ability to locate witnesses, cultivate sources, obtain information, and communicate confidential information to their clients. Respondents also assert that they “have ceased engaging” in certain telephone and e-mail conversations. Id., at 400a. According to respondents, the threat of surveillance will compel them to travel abroad in order to have in-person conversations. In addition, respondents declare that they have undertaken “costly and burdensome measures” to protect the confidentiality of sensitive communications. Ibid.

C

On the day when the FISA Amendments Act was enacted, respondents filed this action seeking (1) a declaration that § 1881a, on its face, violates the Fourth Amendment, the First Amendment, Article III, and separation-of-powers principles and (2) a permanent injunction against the use of § 1881a. Respondents assert what they characterize as two separate theories of Article III standing. First, they claim that there is an objectively reasonable likelihood that their communications will be acquired under § 1881a at some point in the future, thus causing them injury. Second, respondents maintain that the risk of surveillance under § 1881a is so substantial that they have been forced to take costly and burdensome measures to protect the confidentiality of their international communications; in their view, the costs they have incurred constitute present injury that is fairly traceable to § 1881a.

After both parties moved for summary judgment, the District Court held that respondents do not have standing. McConnell, 646 F.Supp.2d, at 635. On appeal, however, a panel of the Second Circuit reversed. The panel agreed with respondents' argument that they have standing due to the objectively reasonable likelihood that their communications will be intercepted at some time in the future. 638 F.3d, at 133, 134, 139. In addition, the panel held that respondents have established that they are suffering “present injuries in fact—economic and professional harms—stemming from a reasonable fear of future harmful government conduct.” Id., at 138. The Second Circuit denied rehearing en banc by an equally divided vote. 667 F.3d 163 (2011).

Because of the importance of the issue and the novel view of standing adopted by the Court of Appeals, we granted certiorari, 566 U.S. ––––, 132 S.Ct. 2431, 182 L.Ed.2d 1061 (2012), and we now reverse.

II

Article III of the Constitution limits federal courts' jurisdiction to certain “Cases” and “Controversies.” As we have explained, “[n]o principle is more fundamental to the judiciary's proper role in our system of government than the constitutional limitation of federal-court jurisdiction to actual cases or controversies.” DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 341, 126 S.Ct. 1854, 164 L.Ed.2d 589 (2006) (internal quotation marks omitted); Raines v. Byrd, 521 U.S. 811, 818, 117 S.Ct. 2312, 138 L.Ed.2d 849 (1997) (internal quotation marks omitted); see, e.g., Summers v. Earth Island Institute, 555 U.S. 488, 492–493, 129 S.Ct. 1142, 173 L.Ed.2d 1 (2009). “One element of the case-or-controversy requirement” is that plaintiffs “must establish that they have standing to sue.” Raines, supra, at 818, 117 S.Ct. 2312; see also Summers, supra, at 492–493, 129 S.Ct. 1142; DaimlerChrysler Corp., supra, at 342, 126 S.Ct. 1854; Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992).

The law of Article III standing, which is built on separation-of-powers principles, serves to prevent the judicial process from being used to usurp the powers of the political branches. Summers, supra, at 492–493, 129 S.Ct. 1142; DaimlerChrysler Corp., supra, at 341–342, 353, 126 S.Ct. 1854; Raines, supra, at 818–820, 117 S.Ct. 2312; Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 471–474, 102 S.Ct. 752, 70 L.Ed.2d 700 (1982); Schlesinger v. Reservists Comm. to Stop the War, 418 U.S. 208, 221–222, 94 S.Ct. 2925, 41 L.Ed.2d 706 (1974). In keeping with the purpose of this doctrine, “[o]ur standing inquiry has been especially rigorous when reaching the merits of the dispute would force us to decide whether an action taken by one of the other two branches of the Federal Government was unconstitutional.” Raines, supra, at 819–820, 117 S.Ct. 2312; see Valley Forge Christian College, supra, at 473–474, 102 S.Ct. 752; Schlesinger, supra, at 221–222, 94 S.Ct. 2925. “Relaxation of standing requirements is directly related to the expansion of judicial power,” United States v. Richardson, 418 U.S. 166, 188, 94 S.Ct. 2940, 41 L.Ed.2d 678 (1974) (Powell, J., concurring); see also Summers, supra, at 492–493, 129 S.Ct. 1142; Schlesinger, supra, at 222, 94 S.Ct. 2925, and we have often found a lack of standing in cases in which the Judiciary has been requested to review actions of the political branches in the fields of intelligence gathering and foreign affairs, see, e.g., Richardson, supra, at 167–170, 94 S.Ct. 2940 (plaintiff lacked standing to challenge the constitutionality of a statute permitting the Central Intelligence Agency to account for its expenditures solely on the certificate of the CIA Director); Schlesinger, supra, at 209–211, 94 S.Ct. 2925 (plaintiffs lacked standing to challenge the Armed Forces Reserve membership of Members of Congress); Laird v. Tatum, 408 U.S. 1, 11–16, 92 S.Ct. 2318, 33 L.Ed.2d 154 (1972) (plaintiffs lacked standing to challenge an Army intelligence-gathering program).

To establish Article III standing, an injury must be “concrete, particularized, and actual or imminent; fairly traceable to the challenged action; and redressable by a favorable ruling.” Monsanto Co. v. Geertson Seed Farms, 561 U.S. ––––, ––––, 130 S.Ct. 2743, 2752, 177 L.Ed.2d 461 (2010); see also Summers, supra, at 493, 129 S.Ct. 1142; Defenders of Wildlife, 504 U.S., at 560–561, 112 S.Ct. 2130. “Although imminence is concededly a somewhat elastic concept, it cannot be stretched beyond its purpose, which is to ensure that the alleged injury is not too speculative for Article III purposes—that the injury is certainly impending.” Id., at 565, n. 2, 112 S.Ct. 2130 (internal quotation marks omitted). Thus, we have repeatedly reiterated that “threatened injury must be certainly impending to constitute injury in fact,” and that “[a]llegations of possible future injury” are not sufficient. Whitmore, 495 U.S., at 158, 110 S.Ct. 1717 (emphasis added; internal quotation marks omitted); see also Defenders of Wildlife, supra, at 565, n. 2, 567, n. 3, 112 S.Ct. 2130; see DaimlerChrysler Corp., supra, at 345, 126 S.Ct. 1854; Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167, 190, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000); Babbitt v. Farm Workers, 442 U.S. 289, 298, 99 S.Ct. 2301, 60 L.Ed.2d 895 (1979).

III

A

Respondents assert that they can establish injury in fact that is fairly traceable to § 1881a because there is an objectively reasonable likelihood that their communications with their foreign contacts will be intercepted under § 1881a at some point in the future. This argument fails. As an initial matter, the Second Circuit's “objectively reasonable likelihood” standard is inconsistent with our requirement that “threatened injury must be certainly impending to constitute injury in fact.” Whitmore, supra, at 158, 110 S.Ct. 1717 (internal quotation marks omitted); see also DaimlerChrysler Corp., supra, at 345, 126 S.Ct. 1854; Laidlaw, supra, at 190, 120 S.Ct. 693; Defenders of Wildlife, supra, at 565, n. 2, 112 S.Ct. 2130; Babbitt, supra, at 298, 99 S.Ct. 2301. Furthermore, respondents' argument rests on their highly speculative fear that: (1) the Government will decide to target the communications of non-U.S. persons with whom they communicate; (2) in doing so, the Government will choose to invoke its authority under § 1881a rather than utilizing another method of surveillance; (3) the Article III judges who serve on the Foreign Intelligence Surveillance Court will conclude that the Government's proposed surveillance procedures satisfy § 1881a's many safeguards and are consistent with the Fourth Amendment; (4) the Government will succeed in intercepting the communications of respondents' contacts; and (5) respondents will be parties to the particular communications that the Government intercepts. As discussed below, respondents' theory of standing, which relies on a highly attenuated chain of possibilities, does not satisfy the requirement that threatened injury must be certainly impending. See Summers, supra, at 496, 129 S.Ct. 1142 (rejecting a standing theory premised on a speculative chain of possibilities); Whitmore, supra, at 157–160, 110 S.Ct. 1717 (same). Moreover, even if respondents could demonstrate injury in fact, the second link in the above-described chain of contingencies—which amounts to mere speculation about whether surveillance would be under § 1881a or some other authority—shows that respondents cannot satisfy the requirement that any injury in fact must be fairly traceable to § 1881a.

First, it is speculative whether the Government will imminently target communications to which respondents are parties. Section 1881a expressly provides that respondents, who are U.S. persons, cannot be targeted for surveillance under § 1881a. See § 1881a(b)(1)–(3); 667 F.3d, at 173 (Raggi, J., dissenting from denial of rehearing en banc). Accordingly, it is no surprise that respondents fail to offer any evidence that their communications have been monitored under § 1881a, a failure that substantially undermines their standing theory. See ACLU, 493 F.3d, at 655–656, 673–674 (opinion of Batchelder, J.) (concluding that plaintiffs who lacked evidence that their communications had been intercepted did not have standing to challenge alleged NSA surveillance). Indeed, respondents do not even allege that the Government has sought the FISC's approval for surveillance of their communications. Accordingly, respondents' theory necessarily rests on their assertion that the Government will target other individuals—namely, their foreign contacts.

Yet respondents have no actual knowledge of the Government's § 1881a targeting practices. Instead, respondents merely speculate and make assumptions about whether their communications with their foreign contacts will be acquired under § 1881a. See 667 F.3d, at 185–187 (opinion of Raggi, J.). For example, journalist Christopher Hedges states: “I have no choice but to assume that any of my international communications may be subject to government surveillance, and I have to make decisions ... in light of that assumption.” App. to Pet. for Cert. 366a (emphasis added and deleted). Similarly, attorney Scott McKay asserts that, “[b]ecause of the [FISA Amendments Act], we now have to assume that every one of our international communications may be monitored by the government.” Id., at 375a (emphasis added); see also id., at 337a, 343a–344a, 350a, 356a. “The party invoking federal jurisdiction bears the burden of establishing” standing—and, at the *1149 summary judgment stage, such a party “can no longer rest on ... ‘mere allegations,’ but must ‘set forth’ by affidavit or other evidence ‘specific facts.’ ” Defenders of Wildlife, 504 U.S., at 561, 112 S.Ct. 2130. Respondents, however, have set forth no specific facts demonstrating that the communications of their foreign contacts will be targeted. Moreover, because § 1881a at most authorizes—but does not mandate or direct—the surveillance that respondents fear, respondents' allegations are necessarily conjectural. See United Presbyterian Church in U.S.A. v. Reagan, 738 F.2d 1375, 1380 (C.A.D.C.1984) (SCALIA, J.); 667 F.3d, at 187 (opinion of Raggi, J.). Simply put, respondents can only speculate as to how the Attorney General and the Director of National Intelligence will exercise their discretion in determining which communications to target.FN4

FN4. It was suggested at oral argument that the Government could help resolve the standing inquiry by disclosing to a court, perhaps through an in camera proceeding, (1) whether it is intercepting respondents' communications and (2) what targeting or minimization procedures it is using. See Tr. of Oral Arg. 13–14, 44, 56. This suggestion is puzzling. As an initial matter, it is respondents' burden to prove their standing by pointing to specific facts, Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992), not the Government's burden to disprove standing by revealing details of its surveillance priorities. Moreover, this type of hypothetical disclosure proceeding would allow a terrorist (or his attorney) to determine whether he is currently under U.S. surveillance simply by filing a lawsuit challenging the Government's surveillance program. Even if the terrorist's attorney were to comply with a protective order prohibiting him from sharing the Government's disclosures with his client, the court's postdisclosure decision about whether to dismiss the suit for lack of standing would surely signal to the terrorist whether his name was on the list of surveillance targets.

Second, even if respondents could demonstrate that the targeting of their foreign contacts is imminent, respondents can only speculate as to whether the Government will seek to use § 1881a-authorized surveillance (rather than other methods) to do so. The Government has numerous other methods of conducting surveillance, none of which is challenged here. Even after the enactment of the FISA Amendments Act, for example, the Government may still conduct electronic surveillance of persons abroad under the older provisions of FISA so long as it satisfies the applicable requirements, including a demonstration of probable cause to believe that the person is a foreign power or agent of a foreign power. See § 1805. The Government may also obtain information from the intelligence services of foreign nations. Brief for Petitioners 33. And, although we do not reach the question, the Government contends that it can conduct FISA-exempt human and technical surveillance programs that are governed by Executive Order 12333. See Exec. Order No. 12333, §§ 1.4, 2.1–2.5, 3 CFR 202, 210–212 (1981), reprinted as amended, note following 50 U.S.C. § 401, pp. 543, 547–548. Even if respondents could demonstrate that their foreign contacts will imminently be targeted—indeed, even if they could show that interception of their own communications will imminently occur—they would still need to show that their injury is fairly traceable to § 1881a. But, because respondents can only speculate as to whether any (asserted) interception would be under § 1881a or some other authority, they cannot satisfy the “fairly traceable” requirement.

Third, even if respondents could show that the Government will seek the Foreign Intelligence Surveillance Court's authorization to acquire the communications of respondents' foreign contacts under § 1881a, respondents can only speculate as to whether that court will authorize such surveillance. In the past, we have been reluctant to endorse standing theories that require guesswork as to how independent decisionmakers will exercise their judgment. In Whitmore, for example, the plaintiff's theory of standing hinged largely on the probability that he would obtain federal habeas relief and be convicted upon retrial. In holding that the plaintiff lacked standing, we explained that “[i]t is just not possible for a litigant to prove in advance that the judicial system will lead to any particular result in his case.” 495 U.S., at 159–160, 110 S.Ct. 1717; see Defenders of Wildlife, 504 U.S., at 562, 112 S.Ct. 2130.

We decline to abandon our usual reluctance to endorse standing theories that rest on speculation about the decisions of independent actors. Section 1881a mandates that the Government must obtain the Foreign Intelligence Surveillance Court's approval of targeting procedures, minimization procedures, and a governmental certification regarding proposed surveillance. § 1881a(a), (c)(1), (i)(2), (i)(3). The Court must, for example, determine whether the Government's procedures are “reasonably designed ... to minimize the acquisition and retention, and prohibit the dissemination, of nonpublicly available information concerning unconsenting United States persons.” § 1801(h); see § 1881a(i)(2), (i)(3)(A). And, critically, the Court must also assess whether the Government's targeting and minimization procedures comport with the Fourth Amendment. § 1881a(i)(3)(A).

Fourth, even if the Government were to obtain the Foreign Intelligence Surveillance Court's approval to target respondents' foreign contacts under § 1881a, it is unclear whether the Government would succeed in acquiring the communications of respondents' foreign contacts. And fifth, even if the Government were to conduct surveillance of respondents' foreign contacts, respondents can only speculate as to whether their own communications with their foreign contacts would be incidentally acquired.

In sum, respondents' speculative chain of possibilities does not establish that injury based on potential future surveillance is certainly impending or is fairly traceable to § 1881a.FN5

FN5. Our cases do not uniformly require plaintiffs to demonstrate that it is literally certain that the harms they identify will come about. In some instances, we have found standing based on a “substantial risk” that the harm will occur, which may prompt plaintiffs to reasonably incur costs to mitigate or avoid that harm. Monsanto Co. v. Geertson Seed Farms, 561 U.S. ––––, ––––, 130 S.Ct. 2743, 2754–2755, 177 L.Ed.2d 461 (2010). See also Pennell v. City of San Jose, 485 U.S. 1, 8, 108 S.Ct. 849, 99 L.Ed.2d 1 (1988); Blum v. Yaretsky, 457 U.S. 991, 1000–1001, 102 S.Ct. 2777, 73 L.Ed.2d 534 (1982); Babbitt v. Farm Workers, 442 U.S. 289, 298, 99 S.Ct. 2301, 60 L.Ed.2d 895 (1979). But to the extent that the “substantial risk” standard is relevant and is distinct from the “clearly impending” requirement, respondents fall short of even that standard, in light of the attenuated chain of inferences necessary to find harm here. See supra, at 1148 – 1150. In addition, plaintiffs bear the burden of pleading and proving concrete facts showing that the defendant's actual action has caused the substantial risk of harm. Plaintiffs cannot rely on speculation about “ ‘the unfettered choices made by independent actors not before the court.’ ” Defenders of Wildlife, 504 U.S., at 562, 112 S.Ct. 2130.

B

Respondents' alternative argument—namely, that they can establish standing based on the measures that they have undertaken to avoid § 1881a-authorized surveillance—fares no better. Respondents assert that they are suffering ongoing injuries that are fairly traceable to § 1881a because the risk of surveillance under § 1881a requires them to take costly and burdensome measures to protect the confidentiality of their communications. Respondents claim, for instance, that the threat of surveillance sometimes compels them to avoid certain e-mail and phone conversations, to “tal[k] in generalities rather than specifics,” or to travel so that they can have in-person conversations. Tr. of Oral Arg. 38; App. to Pet. for Cert. 338a, 345a, 367a, 400a.FN6 The Second Circuit panel concluded that, because respondents are already suffering such ongoing injuries, the likelihood of interception under § 1881a is relevant only to the question whether respondents' ongoing injuries are “fairly traceable” to § 1881a. See 638 F.3d, at 133–134; 667 F.3d, at 180 (opinion of Raggi, J.). Analyzing the “fairly traceable” element of standing under a relaxed reasonableness standard, see 638 F.3d, at 133–134, the Second Circuit then held that “plaintiffs have established that they suffered present injuries in fact—economic and professional harms—stemming from a reasonable fear of future harmful government conduct,” id., at 138.

FN6. For all the focus on respondents' supposed need to travel abroad in light of potential § 1881a surveillance, respondents cite only one specific instance of travel: an attorney's trip to New York City to meet with other lawyers. See App. to Pet. for Cert. 352a. This domestic travel had but a tenuous connection to § 1881a, because § 1881a-authorized acquisitions “may not intentionally target any person known at the time of acquisition to be located in the United States.” § 1881a(b)(1); see also 667 F.3d 163, 202 (C.A.2 2011) (Jacobs, C.J., dissenting from denial of rehearing en banc); id., at 185 (opinion of Raggi, J. (same)).

The Second Circuit's analysis improperly allowed respondents to establish standing by asserting that they suffer present costs and burdens that are based on a fear of surveillance, so long as that fear is not “fanciful, paranoid, or otherwise unreasonable.” See id., at 134. This improperly waters down the fundamental requirements of Article III. Respondents' contention that they have standing because they incurred certain costs as a reasonable reaction to a risk of harm is unavailing—because the harm respondents seek to avoid is not certainly impending. In other words, respondents cannot manufacture standing merely by inflicting harm on themselves based on their fears of hypothetical future harm that is not certainly impending. See Pennsylvania v. New Jersey, 426 U.S. 660, 664, 96 S.Ct. 2333, 49 L.Ed.2d 124 (1976) (per curiam ); National Family Planning & Reproductive Health Assn., Inc., 468 F.3d 826, 831 (C.A.D.C.2006). Any ongoing injuries that respondents are suffering are not fairly traceable to § 1881a.

If the law were otherwise, an enterprising plaintiff would be able to secure a lower standard for Article III standing simply by making an expenditure based on a nonparanoid fear. As Judge Raggi accurately noted, under the Second Circuit panel's reasoning, respondents could, “for the price of a plane ticket, ... transform their standing burden from one requiring a showing of actual or imminent ... interception to one requiring a showing that their subjective fear of such interception is not fanciful, irrational, or clearly unreasonable.” 667 F.3d, at 180 (internal quotation marks omitted). Thus, allowing respondents to bring this action based on costs they incurred in response to a speculative threat would be tantamount to accepting a repackaged version of respondents' first failed theory of standing. See ACLU, 493 F.3d, at 656–657 (opinion of Batchelder, J.).

Another reason that respondents' present injuries are not fairly traceable to § 1881a is that even before § 1881a was enacted, they had a similar incentive to engage in many of the countermeasures that they are now taking. See id., at 668–670. For instance, respondent Scott McKay's declaration describes—and the dissent heavily relies on—Mr. McKay's “knowledge” that thousands of communications involving one of his clients were monitored in the past. App. to Pet. for Cert. 370a; post, at 1156 – 1157, 1158 – 1159. But this surveillance was conducted pursuant to FISA authority that predated § 1881a. See Brief for Petitioners 32, n. 11; Al–Kidd v. Gonzales, No. 05–cv–93, 2008 WL 5123009 (D.Idaho, Dec. 4, 2008). Thus, because the Government was allegedly conducting surveillance of Mr. McKay's client before Congress enacted § 1881a, it is difficult to see how the safeguards that Mr. McKay now claims to have implemented can be traced to § 1881a.

Because respondents do not face a threat of certainly impending interception under § 1881a, the costs that they have incurred to avoid surveillance are simply the product of their fear of surveillance,FN7 and our decision in Laird makes it clear that such a fear is insufficient to create standing. See 408 U.S., at 10–15, 92 S.Ct. 2318. The plaintiffs in Laird argued that their exercise of First Amendment rights was being “chilled by the mere existence, without more, of [the Army's] investigative and data-gathering activity.” Id., at 10, 92 S.Ct. 2318. While acknowledging that prior cases had held that constitutional violations may arise from the chilling effect of “regulations that fall short of a direct prohibition against the exercise of First Amendment rights,” the Court declared that none of those cases involved a “chilling effect aris[ing] merely from the individual's knowledge that a governmental agency was engaged in certain activities or from the individual's concomitant fear that, armed with the fruits of those activities, the agency might in the future take some other and additional action detrimental to that individual.” Id., at 11, 92 S.Ct. 2318. Because “[a]llegations of a subjective ‘chill’ are not an adequate substitute for a claim of specific present objective harm or a threat of specific future harm,” id., at 13–14, 92 S.Ct. 2318, the plaintiffs in Laird—and respondents here—lack standing. See ibid.; ACLU, supra, at 661–662 (opinion of Batchelder, J.) (holding that plaintiffs lacked standing because they “allege[d] only a subjective apprehension” of alleged NSA surveillance and “a personal (self-imposed) unwillingness to communicate”); United Presbyterian Church, 738 F.2d, at 1378 (holding that plaintiffs lacked standing to challenge the legality of an Executive Order relating to surveillance because “the ‘chilling effect’ which is produced by their fear of being subjected to illegal surveillance and which deters them from conducting constitutionally protected activities, is foreclosed as a basis for standing” by Laird ).

FN7. Although respondents' alternative theory of standing rests primarily on choices that they have made based on their subjective fear of surveillance, respondents also assert that third parties might be disinclined to speak with them due to a fear of surveillance. See App. to Pet. for Cert. 372a–373a, 352a–353a. To the extent that such assertions are based on anything other than conjecture, see Defenders of Wildlife, 504 U.S., at 560, 112 S.Ct. 2130, they do not establish injury that is fairly traceable to § 1881a, because they are based on third parties' subjective fear of surveillance, see Laird, 408 U.S., at 10–14, 92 S.Ct. 2318.

For the reasons discussed above, respondents' self-inflicted injuries are not fairly traceable to the Government's purported activities under § 1881a, and their subjective fear of surveillance does not give rise to standing.

IV

A

Respondents incorrectly maintain that “[t]he kinds of injuries incurred here—injuries incurred because of [respondents'] reasonable efforts to avoid greater injuries that are otherwise likely to flow from the conduct they challenge—are the same kinds of injuries that this Court held to support standing in cases such as” Laidlaw, Meese v. Keene, 481 U.S. 465, 107 S.Ct. 1862, 95 L.Ed.2d 415 (1987), and Monsanto. Brief for Respondents 24. As an initial matter, none of these cases holds or even suggests that plaintiffs can establish standing simply by claiming that they experienced a “chilling effect” that resulted from a governmental policy that does not regulate, constrain, or compel any action on their part. Moreover, each of these cases was very different from the present case.

In Laidlaw, plaintiffs' standing was based on “the proposition that a company's continuous and pervasive illegal discharges of pollutants into a river would cause nearby residents to curtail their recreational use of that waterway and would subject them to other economic and aesthetic harms.” 528 U.S., at 184, 120 S.Ct. 693. Because the unlawful discharges of pollutants were “concededly ongoing,” the only issue was whether “nearby residents”—who were members of the organizational plaintiffs—acted reasonably in refraining from using the polluted area. Id., at 183–184, 120 S.Ct. 693. Laidlaw is therefore quite unlike the present case, in which it is not “concede[d]” that respondents would be subject to unlawful surveillance but for their decision to take preventive measures. See ACLU, 493 F.3d, at 686 (opinion of Batchelder, J.) (distinguishing Laidlaw on this ground); id., at 689–690 (Gibbons, J., concurring) (same); 667 F.3d, at 182–183 (opinion of Raggi, J.) (same). Laidlaw would resemble this case only if (1) it were undisputed that the Government was using § 1881a-authorized surveillance to acquire respondents' communications and (2) the sole dispute concerned the reasonableness of respondents' preventive measures.

In Keene, the plaintiff challenged the constitutionality of the Government's decision to label three films as “political propaganda.” 481 U.S., at 467, 107 S.Ct. 1862. The Court held that the plaintiff, who was an attorney and a state legislator, had standing because he demonstrated, through “detailed affidavits,” that he “could not exhibit the films without incurring a risk of injury to his reputation and of an impairment of his political career.” Id., at 467, 473–475, 107 S.Ct. 1862. Unlike the present case, Keene involved “more than a ‘subjective chill’ ” based on speculation about potential governmental action; the plaintiff in that case was unquestionably regulated by the relevant statute, and the films that he wished to exhibit had already been labeled as “political propaganda.” See ibid.; ACLU, 493 F.3d, at 663–664 (opinion of Batchelder, J.); id., at 691 (Gibbons, J., concurring).

Monsanto, on which respondents also rely, is likewise inapposite. In Monsanto, conventional alfalfa farmers had standing to seek injunctive relief because the agency's decision to deregulate a variety of genetically engineered alfalfa gave rise to a “significant risk of gene flow to non-genetically-engineered varieties of alfalfa.” 561 U.S., at ––––, 130 S.Ct., at 2755. The standing analysis in that case hinged on evidence that genetically engineered alfalfa “ ‘seed fields [we]re currently being planted in all the major alfalfa seed production areas' ”; the bees that pollinate alfalfa “ ‘have a range of at least two to ten miles' ”; and the alfalfa seed farms were concentrated in an area well within the bees' pollination range. Id., at –––– – ––––, and n. 3, 130 S.Ct., at 2754–2755, and n. 3. Unlike the conventional alfalfa farmers in Monsanto, however, respondents in the present case present no concrete evidence to substantiate their fears, but instead rest on mere conjecture about possible governmental actions.

B

Respondents also suggest that they should be held to have standing because otherwise the constitutionality of § 1881a could not be challenged. It would be wrong, they maintain, to “insulate the government's surveillance activities from meaningful judicial review.” Brief for Respondents 60. Respondents' suggestion is both legally and factually incorrect. First, “ ‘[t]he assumption that if respondents have no standing to sue, no one would have standing, is not a reason to find standing.’ ” Valley Forge Christian College, 454 U.S., at 489, 102 S.Ct. 752; Schlesinger, 418 U.S., at 227, 94 S.Ct. 2925; see also Richardson, 418 U.S., at 179, 94 S.Ct. 2940; Raines, 521 U.S., at 835, 117 S.Ct. 2312 (Souter, J., joined by GINSBURG, J., concurring in judgment).

Second, our holding today by no means insulates § 1881a from judicial review. As described above, Congress created a comprehensive scheme in which the Foreign Intelligence Surveillance Court evaluates the Government's certifications, targeting procedures, and minimization procedures—including assessing whether the targeting and minimization procedures comport with the Fourth Amendment. § 1881a(a), (c)(1), (i)(2), (i)(3). Any dissatisfaction that respondents may have about the Foreign Intelligence Surveillance Court's rulings—or the congressional delineation of that court's role—is irrelevant to our standing analysis.

Additionally, if the Government intends to use or disclose information obtained or derived from a § 1881a acquisition in judicial or administrative proceedings, it must provide advance notice of its intent, and the affected person may challenge the lawfulness of the acquisition. §§ 1806(c), 1806(e), 1881e(a) (2006 ed. and Supp. V).FN8 Thus, if the Government were to prosecute one of respondent-attorney's foreign clients using § 1881a-authorized surveillance, the Government would be required to make a disclosure. Although the foreign client might not have a viable Fourth Amendment claim, see, e.g., United States v. Verdugo–Urquidez, 494 U.S. 259, 261, 110 S.Ct. 1056, 108 L.Ed.2d 222 (1990), it is possible that the monitoring of the target's conversations with his or her attorney would provide grounds for a claim of standing on the part of the attorney. Such an attorney would certainly have a stronger evidentiary basis for establishing standing than do respondents in the present case. In such a situation, unlike in the present case, it would at least be clear that the Government had acquired the foreign client's communications using § 1881a-authorized surveillance.

FN8. The possibility of judicial review in this context is not farfetched. In United States v. Damrah, 412 F.3d 618 (C.A.6 2005), for example, the Government made a pretrial disclosure that it intended to use FISA evidence in a prosecution; the defendant (unsuccessfully) moved to suppress the FISA evidence, even though he had not been the target of the surveillance; and the Sixth Circuit ultimately held that FISA's procedures are consistent with the Fourth Amendment. See id., at 622, 623, 625.

Finally, any electronic communications service provider that the Government directs to assist in § 1881a surveillance may challenge the lawfulness of that directive before the FISC. § 1881a(h)(4), (6). Indeed, at the behest of a service provider, the Foreign Intelligence Surveillance Court of Review previously analyzed the constitutionality of electronic surveillance directives issued pursuant to a now-expired set of FISA amendments. See In re Directives Pursuant to Section 105B of Foreign Intelligence Surveillance Act, 551 F.3d 1004, 1006–1016 (2008) (holding that the provider had standing and that the directives were constitutional).

* * *

We hold that respondents lack Article III standing because they cannot demonstrate that the future injury they purportedly fear is certainly impending and because they cannot manufacture standing by incurring costs in anticipation of non-imminent harm. We therefore reverse the judgment of the Second Circuit and remand the case for further proceedings consistent with this opinion.

It is so ordered.

Justice BREYER, with whom Justice GINSBURG, Justice SOTOMAYOR, and Justice KAGAN join, dissenting.

The plaintiffs' standing depends upon the likelihood that the Government, acting under the authority of 50 U.S.C. § 1881a (2006 ed., Supp. V), will harm them by intercepting at least some of their private, foreign, telephone, or e-mail conversations. In my view, this harm is not “speculative.” Indeed it is as likely to take place as are most future events that commonsense inference and ordinary knowledge of human nature tell us will happen. This Court has often found the occurrence of similar future events sufficiently certain to support standing. I dissent from the Court's contrary conclusion.

I

Article III specifies that the “judicial Power” of the United States extends only to actual “Cases” and “Controversies.” § 2. It thereby helps to ensure that the legal questions presented to the federal courts will not take the form of abstract intellectual problems resolved in the “rarified atmosphere of a debating society” but instead those questions will be presented “in a concrete factual context conducive to a realistic appreciation of the consequences of judicial action.” Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 472, 102 S.Ct. 752, 70 L.Ed.2d 700 (1982) (purpose of Article III); Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) (similar); Babbitt v. Farm Workers, 442 U.S. 289, 297, 99 S.Ct. 2301, 60 L.Ed.2d 895 (1979) (similar).

The Court has recognized that the precise boundaries of the “case or controversy” requirement are matters of “degree ... not discernible by any precise test.” Ibid. At the same time, the Court has developed a subsidiary set of legal rules that help to determine when the Constitution's requirement is met. See Lujan, 504 U.S., at 560–561, 112 S.Ct. 2130; id., at 583, 112 S.Ct. 2130 (Stevens, J., concurring in judgment). Thus, a plaintiff must have “standing” to bring a legal claim. And a plaintiff has that standing, the Court has said, only if the action or omission that the plaintiff challenges has caused, or will cause, the plaintiff to suffer an injury that is “concrete and particularized,” “actual or imminent,” and “redress[able] by a favorable decision.” Id., at 560–561, 112 S.Ct. 2130 (internal quotation marks omitted).

No one here denies that the Government's interception of a private telephone or e-mail conversation amounts to an injury that is “concrete and particularized.” Moreover, the plaintiffs, respondents here, seek as relief a judgment declaring unconstitutional (and enjoining enforcement of) a statutory provision authorizing those interceptions; and, such a judgment would redress the injury by preventing it. Thus, the basic question is whether the injury, i.e., the interception, is “actual or imminent.”

II

A

Since the plaintiffs fear interceptions of a kind authorized by § 1881a, it is important to understand just what kind of surveillance that section authorizes. Congress enacted § 1881a in 2008, as an amendment to the pre-existing Foreign Intelligence Surveillance Act of 1978, 50 U.S.C. § 1801 et seq. Before the amendment, the Act authorized the Government (acting within the United States) to monitor private electronic communications between the United States and a foreign country if (1) the Government's purpose was, in significant part, to obtain foreign intelligence information (which includes information concerning a “foreign power” or “territory” related to our “national defense” or “security” or the “conduct of ... foreign affairs”), (2) the Government's surveillance target was “a foreign power or an agent of a foreign power,” and (3) the Government used surveillance procedures designed to “minimize the acquisition and retention, and prohibit the dissemination, of” any private information acquired about Americans. §§ 1801(e), (h), 1804(a).

In addition the Government had to obtain the approval of the Foreign Intelligence Surveillance Court. To do so, it had to submit an application describing (1) each “specific target,” (2) the “nature of the information sought,” and (3) the “type of communications or activities to be subjected to the surveillance.” § 1804(a). It had to certify that, in significant part, it sought to obtain foreign intelligence information. Ibid. It had to demonstrate probable cause to believe that each specific target was “a foreign power or an agent of a foreign power.” §§ 1804(a), 1805(a). It also had to describe instance-specific procedures to be used to minimize intrusions upon Americans' privacy (compliance with which the court subsequently could assess). §§ 1804(a), 1805(d)(3).

The addition of § 1881a in 2008 changed this prior law in three important ways. First, it eliminated the requirement that the Government describe to the court each specific target and identify each facility at which its surveillance would be directed, thus permitting surveillance on a programmatic, not necessarily individualized, basis. § 1881a(g). Second, it eliminated the requirement that a target be a “foreign power or an agent of a foreign power.” Ibid. Third, it diminished the court's authority to insist upon, and eliminated its authority to supervise, instance-specific privacy-intrusion minimization procedures (though the Government still must use court-approved general minimization procedures). § 1881a(e). Thus, using the authority of § 1881a, the Government can obtain court approval for its surveillance of electronic communications between places within the United States and targets in foreign territories by showing the court (1) that “a significant purpose of the acquisition is to obtain foreign intelligence information,” and (2) that it will use general targeting and privacy-intrusion minimization procedures of a kind that the court had previously approved. § 1881a(g).

B

It is similarly important to understand the kinds of communications in which the plaintiffs say they engage and which they believe the Government will intercept. Plaintiff Scott McKay, for example, says in an affidavit (1) that he is a lawyer; (2) that he represented “Mr. Sami Omar Al–Hussayen,*1157 who was acquitted in June 2004 on terrorism charges”; (3) that he continues to represent “Mr. Al–Hussayen, who, in addition to facing criminal charges after September 11, was named as a defendant in several civil cases”; (4) that he represents Khalid Sheik Mohammed, a detainee, “before the Military Commissions at Guantánamo Bay, Cuba”; (5) that in representing these clients he “communicate[s] by telephone and email with people outside the United States, including Mr. Al–Hussayen himself,” “experts, investigators, attorneys, family members ... and others who are located abroad”; and (6) that prior to 2008 “the U.S. government had intercepted some 10,000 telephone calls and 20,000 email communications involving [his client] Al–Hussayen.” App. to Pet. for Cert. 369a–371a.

Another plaintiff, Sylvia Royce, says in her affidavit (1) that she is an attorney; (2) that she “represent[s] Mohammedou Ould Salahi, a prisoner who has been held at Guantánamo Bay as an enemy combatant”; (3) that, “[i]n connection with [her] representation of Mr. Salahi, [she] receive[s] calls from time to time from Mr. Salahi's brother, ... a university student in Germany”; and (4) that she has been told that the Government has threatened Salahi “that his family members would be arrested and mistreated if he did not cooperate.” Id., at 349a–351a.

The plaintiffs have noted that McKay no longer represents Mohammed and Royce no longer represents Ould Salahi. Brief for Respondents 15, n. 11. But these changes are irrelevant, for we assess standing as of the time a suit is filed, see Davis v. Federal Election Comm'n, 554 U.S. 724, 734, 128 S.Ct. 2759, 171 L.Ed.2d 737 (2008), and in any event McKay himself continues to represent Al Hussayen, his partner now represents Mohammed, and Royce continues to represent individuals held in the custody of the U.S. military overseas.

A third plaintiff, Joanne Mariner, says in her affidavit (1) that she is a human rights researcher, (2) that “some of the work [she] do[es] involves trying to track down people who were rendered by the CIA to countries in which they were tortured”; (3) that many of those people “the CIA has said are (or were) associated with terrorist organizations”; and (4) that, to do this research, she “communicate[s] by telephone and e-mail with ... former detainees, lawyers for detainees, relatives of detainees, political activists, journalists, and fixers” “all over the world, including in Jordan, Egypt, Pakistan, Afghanistan, [and] the Gaza Strip.” App. to Pet. for Cert. 343a–344a.

Other plaintiffs, including lawyers, journalists, and human rights researchers, say in affidavits (1) that they have jobs that require them to gather information from foreigners located abroad; (2) that they regularly communicate electronically (e.g., by telephone or e-mail) with foreigners located abroad; and (3) that in these communications they exchange “foreign intelligence information” as the Act defines it. Id., at 334a–375a.

III

Several considerations, based upon the record along with commonsense inferences, convince me that there is a very high likelihood that Government, acting under the authority of § 1881a, will intercept at least some of the communications just described. First, the plaintiffs have engaged, and continue to engage, in electronic communications of a kind that the 2008 amendment, but not the prior Act, authorizes the Government to intercept. These communications include discussions with family members of those detained at Guantanamo, friends and acquaintances of those persons, and investigators, experts and others with knowledge of circumstances related to terrorist activities. These persons are foreigners located outside the United States. They are not “foreign power[s]” or “agent[s] of ... foreign power [s].” And the plaintiffs state that they exchange with these persons “foreign intelligence information,” defined to include information that “relates to” “international terrorism” and “the national defense or the security of the United States.” See 50 U.S.C. § 1801 (2006 ed. and Supp. V); see, e.g., App. to Pet. for Cert. 342a, 366a, 373a–374a.

Second, the plaintiffs have a strong motive to engage in, and the Government has a strong motive to listen to, conversations of the kind described. A lawyer representing a client normally seeks to learn the circumstances surrounding the crime (or the civil wrong) of which the client is accused. A fair reading of the affidavit of Scott McKay, for example, taken together with elementary considerations of a lawyer's obligation to his client, indicates that McKay will engage in conversations that concern what suspected foreign terrorists, such as his client, have done; in conversations that concern his clients' families, colleagues, and contacts; in conversations that concern what those persons (or those connected to them) have said and done, at least in relation to terrorist activities; in conversations that concern the political, social, and commercial environments in which the suspected terrorists have lived and worked; and so forth. See, e.g., id., at 373a–374a. Journalists and human rights workers have strong similar motives to conduct conversations of this kind. See, e.g., id., at 342a (Declaration of Joanne Mariner, stating that “some of the information [she] exchange[s] by telephone and e-mail relates to terrorism and counterterrorism, and much of the information relates to the foreign affairs of the United States”).

At the same time, the Government has a strong motive to conduct surveillance of conversations that contain material of this kind. The Government, after all, seeks to learn as much as it can reasonably learn about suspected terrorists (such as those detained at Guantanamo), as well as about their contacts and activities, along with those of friends and family members. See Executive Office of the President, Office of Management and Budget, Statement of Administration Policy on S. 2248, p. 4 (Dec. 17, 2007) (“Part of the value of the [new authority] is to enable the Intelligence Community to collect expeditiously the communications of terrorists in foreign countries who may contact an associate in the United States”). And the Government is motivated to do so, not simply by the desire to help convict those whom the Government believes guilty, but also by the critical, overriding need to protect America from terrorism. See id., at 1 (“Protection of the American people and American interests at home and abroad requires access to timely, accurate, and insightful intelligence on the capabilities, intentions, and activities of ... terrorists”).

Third, the Government's past behavior shows that it has sought, and hence will in all likelihood continue to seek, information about alleged terrorists and detainees through means that include surveillance of electronic communications. As just pointed out, plaintiff Scott McKay states that the Government (under the authority of the pre–2008 law) “intercepted some 10,000 telephone calls and 20,000 email communications involving [his client] Mr. Al–Hussayen.” App. to Pet. for Cert. 370a.

Fourth, the Government has the capacity to conduct electronic surveillance of the kind at issue. To some degree this capacity rests upon technology available to the Government. See 1 D. Kris & J. Wilson, National Security Investigations & Prosecutions § 16:6, p. 562 (2d ed. 2012) (“NSA's technological abilities are legendary”); id., § 16:12, at 572–577 (describing the National Security Agency's capacity to monitor “very broad facilities” such as international switches). See, e.g., Lichtblau & Risen, Spy Agency Mined Vast Data Trove, Officials Report, N.Y. Times, Dec. 24, 2005, p. A1 (describing capacity to trace and to analyze large volumes of communications into and out of the United States); Lichtblau & Shane, Bush is Pressed Over New Report on Surveillance, N.Y. Times, May 12, 2006, p. A1 (reporting capacity to obtain access to records of many, if not most, telephone calls made in the United States); Priest & Arkin, A Hidden World, Growing Beyond Control, Washington Post, July 19, 2010, p. A1 (reporting that every day, collection systems at the National Security Agency intercept and store 1.7 billion e-mails, telephone calls and other types of communications). Cf. Statement of Administration Policy on S. 2248, supra, at 1156 (rejecting a provision of the Senate bill that would require intelligence analysts to count “the number of persons located in the United States whose communications were reviewed” as “impossible to implement” (internal quotation marks omitted)). This capacity also includes the Government's authority to obtain the kind of information here at issue from private carriers such as AT & T and Verizon. See 50 U.S.C. § 1881a(h). We are further told by amici that the Government is expanding that capacity. See Brief for Electronic Privacy Information Center et al. as 22–23 (National Security Agency will be able to conduct surveillance of most electronic communications between domestic and foreign points).

Of course, to exercise this capacity the Government must have intelligence court authorization. But the Government rarely files requests that fail to meet the statutory criteria. See Letter from Ronald Weich, Assistant Attorney General, to Joseph R. Biden, Jr., 1 (Apr. 30, 2012) (In 2011, of the 1,676 applications to the intelligence court, two were withdrawn by the Government, and the remaining 1,674 were approved, 30 with some modification), online at http:// justice. gov/ nsd/ foia/ foia_ library/ 2011 fisa- ltr. pdf. (as visited Feb. 22, 2013, and available in Clerk of Court's case file). As the intelligence court itself has stated, its review under § 1881a is “narrowly circumscribed.” In re Proceedings Required by § 702(i) of the FISA Amendments Act of 2008, No. Misc. 08–01 (Aug. 17, 2008), p. 3. There is no reason to believe that the communications described would all fail to meet the conditions necessary for approval. Moreover, compared with prior law, § 1881a simplifies and thus expedites the approval process, making it more likely that the Government will use § 1881a to obtain the necessary approval.

The upshot is that (1) similarity of content, (2) strong motives, (3) prior behavior, and (4) capacity all point to a very strong likelihood that the Government will intercept at least some of the plaintiffs' communications, including some that the 2008 amendment, § 1881a, but not the pre–2008 Act, authorizes the Government to intercept.

At the same time, nothing suggests the presence of some special factor here that might support a contrary conclusion. The Government does not deny that it has both the motive and the capacity to listen to communications of the kind described by plaintiffs. Nor does it describe any system for avoiding the interception of an electronic communication that happens to include a party who is an American lawyer, journalist, or human rights worker. One can, of course, always imagine some special circumstance that negates a virtual likelihood, no matter how strong. But the same is true about most, if not all, ordinary inferences about future events. Perhaps, despite pouring rain, the streets will remain dry (due to the presence of a special chemical). But ordinarily a party that seeks to defeat a strong natural inference must bear the burden of showing that some such special circumstance exists. And no one has suggested any such special circumstance here.

Consequently, we need only assume that the Government is doing its job (to find out about, and combat, terrorism) in order to conclude that there is a high probability that the Government will intercept at least some electronic communication to which at least some of the plaintiffs are parties. The majority is wrong when it describes the harm threatened plaintiffs as “speculative.”

IV

A

The majority more plausibly says that the plaintiffs have failed to show that the threatened harm is “certainly impending.” Ante, at 1147 (internal quotation marks omitted). But, as the majority appears to concede, see ante, at 1150, and n. 5, certainty is not, and never has been, the touchstone of standing. The future is inherently uncertain. Yet federal courts frequently entertain actions for injunctions and for declaratory relief aimed at preventing future activities that are reasonably likely or highly likely, but not absolutely certain, to take place. And that degree of certainty is all that is needed to support standing here.

The Court's use of the term “certainly impending” is not to the contrary. Sometimes the Court has used the phrase “certainly impending” as if the phrase described a sufficient, rather than a necessary, condition for jurisdiction. See Pennsylvania v. West Virginia, 262 U.S. 553, 593, 43 S.Ct. 658, 67 L.Ed. 1117 (1923) (“If the injury is certainly impending that is enough”). See also Babbitt, 442 U.S., at 298, 99 S.Ct. 2301 (same). On other occasions, it has used the phrase as if it concerned when, not whether, an alleged injury would occur. Thus, in Lujan, 504 U.S., at 564, n. 2, 112 S.Ct. 2130, the Court considered a threatened future injury that consisted of harm that plaintiffs would suffer when they “soon” visited a government project area that (they claimed) would suffer environmental damage. The Court wrote that a “mere profession of an intent, some day, to return” to the project area did not show the harm was “imminent,” for “soon” might mean nothing more than “in this lifetime.” Id., at 564–565, n. 2, 112 S.Ct. 2130 (internal quotation marks omitted). Similarly, in McConnell v. Federal Election Comm'n, 540 U.S. 93, 124 S.Ct. 619, 157 L.Ed.2d 491 (2003), the Court denied standing because the Senator's future injury (stemming from a campaign finance law) would not affect him until his reelection. That fact, the Court said, made the injury “too remote temporally to satisfy Article III standing.” Id., at 225–226, 124 S.Ct. 619.

On still other occasions, recognizing that “ ‘imminence’ is concededly a somewhat elastic concept,” Lujan, supra, at 565, n. 2, 112 S.Ct. 2130, the Court has referred to, or used (sometimes along with “certainly impending”) other phrases such as “reasonable probability” that suggest less than absolute, or literal certainty. See Babbitt, supra, at 298, 99 S.Ct. 2301 (plaintiff “must demonstrate a realistic danger of sustaining a direct injury” (emphasis added)); Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167, 190, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000) (“[I]t is the plaintiff's burden to establish standing by demonstrating that ... the defendant's allegedly wrongful behavior will likely occur or continue”). See also Monsanto Co. v. Geertson Seed Farms, 561 U.S. ––––, ––––, 130 S.Ct. 2743, 2754–2755, 177 L.Ed.2d 461 (2010) (“ ‘ “reasonable probability” ’ ” and “substantial risk”); Davis, 554 U.S., at 734, 128 S.Ct. 2759 (“realistic and impending threat of direct injury”); MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 129, 127 S.Ct. 764, 166 L.Ed.2d 604 (2007) (“genuine threat of enforcement”); Department of Commerce v. United States House of Representatives, 525 U.S. 316, 333, 119 S.Ct. 765, 142 L.Ed.2d 797 (1999) ( “substantially likely” (internal quotation marks omitted)); Clinton v. City of New York, 524 U.S. 417, 432, 118 S.Ct. 2091, 141 L.Ed.2d 393 (1998) ( “sufficient likelihood of economic injury”); Pennell v. San Jose, 485 U.S. 1, 8, 108 S.Ct. 849, 99 L.Ed.2d 1 (1988) (“realistic danger” (internal quotation marks omitted)); Blum v. Yaretsky, 457 U.S. 991, 1001, 102 S.Ct. 2777, 73 L.Ed.2d 534 (1982) (“quite realistic” threat); Bryant v. Yellen, 447 U.S. 352, 367–368, 100 S.Ct. 2232, 65 L.Ed.2d 184 (1980) (“likely”); Buckley v. Valeo, 424 U.S. 1, 74, 96 S.Ct. 612, 46 L.Ed.2d 659 (1976) (per curiam ) (“reasonable probability”). Taken together the case law uses the word “certainly” as if it emphasizes, rather than literally defines, the immediately following term “impending.”

B

1

More important, the Court's holdings in standing cases show that standing exists here. The Court has often found standing where the occurrence of the relevant injury was far less certain than here. Consider a few, fairly typical, cases. Consider Pennell, supra. A city ordinance forbade landlords to raise the rent charged to a tenant by more than 8 percent where doing so would work an unreasonably severe hardship on that tenant. Id., at 4–5, 108 S.Ct. 849. A group of landlords sought a judgment declaring the ordinance unconstitutional. The Court held that, to have standing, the landlords had to demonstrate a “ ‘realistic danger of sustaining a direct injury as a result of the statute's operation.’ ” Id., at 8, 108 S.Ct. 849 (emphasis added). It found that the landlords had done so by showing a likelihood of enforcement and a “probability,” ibid., that the ordinance would make the landlords charge lower rents—even though the landlords had not shown (1) that they intended to raise the relevant rents to the point of causing unreasonably severe hardship; (2) that the tenants would challenge those increases; or (3) that the city's hearing examiners and arbitrators would find against the landlords. Here, even more so than in Pennell, there is a “realistic danger ” that the relevant harm will occur.

Or, consider Blum, supra. A group of nursing home residents receiving Medicaid benefits challenged the constitutionality (on procedural grounds) of a regulation that permitted their nursing home to transfer them to a less desirable home. Id., at 999–1000, 102 S.Ct. 2777. Although a Medicaid committee had recommended transfers, Medicaid-initiated transfer had been enjoined and the nursing home itself had not threatened to transfer the plaintiffs. But the Court found “standing” because “the threat of transfers” was “not ‘imaginary or speculative’ ” but “quite realistic,” hence “sufficiently substantial.” Id., at 1000–1001, 102 S.Ct. 2777 (quoting Younger v. Harris, 401 U.S. 37, 42, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971)). The plaintiffs' injury here is not imaginary or speculative, but “quite realistic.”

Or, consider Davis, supra. The plaintiff, a candidate for the United States House of Representatives, self-financed his campaigns. He challenged the constitutionality of an election law that relaxed the limits on an opponent's contributions when a self-financed candidate's spending itself exceeded certain other limits. His opponent, in fact, had decided not to take advantage of the increased contribution limits that the statute would have allowed. Id., at 734, 128 S.Ct. 2759. But the Court nonetheless found standing because there was a “realistic and impending threat,” not a certainty, that the candidate's opponent would do so at the time the plaintiff filed the complaint. Id., at 734–735, 128 S.Ct. 2759. The threat facing the plaintiffs here is as “realistic and impending.”

Or, consider MedImmune, supra. The plaintiff, a patent licensee, sought a declaratory judgment that the patent was invalid. But, the plaintiff did not face an imminent threat of suit because it continued making royalty payments to the patent holder. In explaining why the plaintiff had standing, we (1) assumed that if the plaintiff stopped making royalty payments it would have standing (despite the fact that the patent holder might not bring suit), (2) rejected the Federal Circuit's “reasonable apprehension of imminent suit” requirement, and (3) instead suggested that a “genuine threat of enforcement” was likely sufficient. Id., at 128, 129, 132, n. 11, 127 S.Ct. 764 (internal quotation marks omitted). A “genuine threat” is present here.

Moreover, courts have often found probabilistic injuries sufficient to support standing. In Duke Power Co. v. Carolina Environmental Study Group, Inc., 438 U.S. 59, 98 S.Ct. 2620, 57 L.Ed.2d 595 (1978), for example, the plaintiffs, a group of individuals living near a proposed nuclear powerplant, challenged the constitutionality of the Price–Anderson Act, a statute that limited the plant's liability in the case of a nuclear accident. The plaintiffs said that, without the Act, the defendants would not build a nuclear plant. And the building of the plant would harm them, in part, by emitting “non-natural radiation into [their] environment.” Id., at 74, 98 S.Ct. 2620. The Court found standing in part due to “our generalized concern about exposure to radiation and the apprehension flowing from the uncertainty about the health and genetic consequences of even small emissions.” Ibid. (emphasis added). See also Monsanto Co., supra, at ––––, 130 S.Ct., at 2754–2755 (“A substantial risk of gene flow injures respondents in several ways” (emphasis added)).

See also lower court cases, such as Mountain States Legal Foundation v. Glickman, 92 F.3d 1228, 1234–1235 (C.A.D.C.1996) (plaintiffs attack Government decision to limit timber harvesting; standing based upon increased risk of wildfires); Natural Resources Defense Council v. EPA, 464 F.3d 1, 7 (C.A.D.C.2006) (plaintiffs attack Government decision deregulating methyl bromide; standing based upon increased lifetime risk of developing skin cancer); Constellation Energy Commodities Group, Inc. v. FERC, 457 F.3d 14, 20 (C.A.D.C.2006) (standing based on increased risk of nonrecovery inherent in the reduction of collateral securing a debt of uncertain amount); Sutton v. St. Jude Medical S.C., Inc., 419 F.3d 568, 570–575 (C.A.6 2005) (standing based on increased risk of harm caused by implantation of defective medical device); Johnson v. Allsteel, Inc., 259 F.3d 885, 888–891 (C.A.7 2001) (standing based on increased risk that Employee Retirement Income Security Act beneficiary will not be covered due to increased amount of discretion given to ERISA administrator).

How could the law be otherwise? Suppose that a federal court faced a claim by homeowners that (allegedly) unlawful dam-building practices created a high risk that their homes would be flooded. Would the court deny them standing on the ground that the risk of flood was only 60, rather than 90, percent?

Would federal courts deny standing to a plaintiff in a diversity action who claims an anticipatory breach of contract where the future breach depends on probabilities? The defendant, say, has threatened to load wheat onto a ship bound for India despite a promise to send the wheat to the United States. No one can know for certain that this will happen. Perhaps the defendant will change his mind; perhaps the ship will turn and head for the United States. Yet, despite the uncertainty, the Constitution does not prohibit a federal court from hearing such a claim. See 23 R. Lord, Williston on Contracts § 63:35 (4th ed. 2002) (plaintiff may bring an anticipatory breach suit even though the defendant's promise is one to perform in the future, it has not yet been broken, and defendant may still retract the repudiation). E.g., Wisconsin Power & Light Co. v. Century Indemnity Co., 130 F.3d 787, 792–793 (C.A.7 1997) (plaintiff could sue insurer that disclaimed liability for all costs that would be incurred in the future if environmental agencies required cleanup); Combs v. International Ins. Co., 354 F.3d 568, 598–601 (C.A.6 2004) (similar).

Would federal courts deny standing to a plaintiff who seeks to enjoin as a nuisance the building of a nearby pond which, the plaintiff believes, will very likely, but not inevitably, overflow his land? See 42 Am. Jur. 2d Injunctions §§ 2, 5 (2010) (noting that an injunction is ordinarily preventive in character and restrains actions that have not yet been taken, but threaten injury). E.g., Central Delta Water Agency v. United States, 306 F.3d 938, 947–950 (C.A.9 2002) (standing to seek injunction where method of operating dam was highly likely to severely hamper plaintiffs' ability to grow crops); Consolidated Companies, Inc. v. Union Pacific R. Co., 499 F.3d 382, 386 (C.A.5 2007) (standing to seek injunction requiring cleanup of land adjacent to plaintiff's tract because of threat that contaminants might migrate to plaintiff's tract).

Neither do ordinary declaratory judgment actions always involve the degree of certainty upon which the Court insists here. See, e.g., Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273, 61 S.Ct. 510, 85 L.Ed. 826 (1941) (insurance company could seek declaration that it need not pay claim against insured automobile driver who was in an accident even though the driver had not yet been found liable for the accident); Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239–244, 57 S.Ct. 461, 81 L.Ed. 617 (1937) (insurance company could seek declaration that it need not pay plaintiff for disability although plaintiff had not yet sought disability payments). See also, e.g., Associated Indemnity Corp. v. Fairchild Industries, Inc., 961 F.2d 32, 35–36 (C.A.2 1992) (insured could seek declaration that insurance company must pay liability even before insured found liable).

2

In some standing cases, the Court has found that a reasonable probability of future injury comes accompanied with present injury that takes the form of reasonable efforts to mitigate the threatened effects of the future injury or to prevent it from occurring. Thus, in Monsanto Co., 561 U.S., at ––––, 130 S.Ct., at 2754–2756 plaintiffs, a group of conventional alfalfa growers, challenged an agency decision to deregulate genetically engineered alfalfa. They claimed that deregulation would harm them because their neighbors would plant the genetically engineered seed, bees would obtain pollen from the neighbors' plants, and the bees would then (harmfully) contaminate their own conventional alfalfa with the genetically modified gene. The lower courts had found a “reasonable probability” that this injury would occur. Ibid. (internal quotation marks omitted).

Without expressing views about that probability, we found standing because the plaintiffs would suffer present harm by trying to combat the threat. Ibid. The plaintiffs, for example, “would have to conduct testing to find out whether and to what extent their crops have been contaminated.” Id., at ––––, 130 S.Ct., at 2755. And they would have to take “measures to minimize the likelihood of potential contamination and to ensure an adequate supply of non-genetically-engineered alfalfa.” Ibid. We held that these “harms, which [the plaintiffs] will suffer even if their crops are not actually infected with” the genetically modified gene, “are sufficiently concrete to satisfy the injury-in-fact prong of the constitutional standing analysis.” Id., at ––––, 130 S.Ct., at 2755.

Virtually identical circumstances are present here. Plaintiff McKay, for example, points out that, when he communicates abroad about, or in the interests of, a client (e.g., a client accused of terrorism), he must “make an assessment” whether his “client's interests would be compromised” should the Government “acquire the communications.” App. to Pet. for Cert. 375a. If so, he must either forgo the communication or travel abroad. Id., at 371a–372a (“I have had to take measures to protect the confidentiality of information that I believe is particularly sensitive,” including “travel that is both time-consuming and expensive”).

Since travel is expensive, since forgoing communication can compromise the client's interests, since McKay's assessment itself takes time and effort, this case does not differ significantly from Monsanto. And that is so whether we consider the plaintiffs' present necessary expenditure of time and effort as a separate concrete, particularized, imminent harm, or consider it as additional evidence that the future harm (an interception) is likely to occur. See also Friends of the Earth, Inc., 528 U.S., at 183–184, 120 S.Ct. 693 (holding that plaintiffs who curtailed their recreational activities on a river due to reasonable concerns about the effect of pollutant discharges into that river had standing); Meese v. Keene, 481 U.S. 465, 475, 107 S.Ct. 1862, 95 L.Ed.2d 415 (1987) (stating that “the need to take ... affirmative steps to avoid the risk of harm ... constitutes a cognizable injury”).

3

The majority cannot find support in cases that use the words “certainly impending” to deny standing. While I do not claim to have read every standing case, I have examined quite a few, and not yet found any such case. The majority refers to Whitmore v. Arkansas, 495 U.S. 149, 110 S.Ct. 1717, 109 L.Ed.2d 135 (1990). But in that case the Court denied standing to a prisoner who challenged the validity of a death sentence given to a different prisoner who refused to challenge his own sentence. The plaintiff feared that in the absence of an appeal, his fellow prisoner's death sentence would be missing from the State's death penalty database and thereby skew the database against him, making it less likely his challenges to his own death penalty would succeed. The Court found no standing. Id., at 161, 110 S.Ct. 1717. But the fellow prisoner's lack of appeal would have harmed the plaintiff only if (1) the plaintiff separately obtained federal habeas relief and was then reconvicted and resentenced to death, (2) he sought review of his new sentence, and (3) during that review, his death sentence was affirmed only because it was compared to an artificially skewed database. Id., at 156–157, 110 S.Ct. 1717. These events seemed not very likely to occur.

In DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 126 S.Ct. 1854, 164 L.Ed.2d 589 (2006), taxpayers challenged the constitutionality of a tax break offered by state and local governments to a car manufacturer. We found no standing. But the plaintiffs would have suffered resulting injury only if that the tax break had depleted state and local treasuries and the legislature had responded by raising their taxes. Id., at 344, 126 S.Ct. 1854.

In Lujan, the case that may come closest to supporting the majority, the Court also found no standing. But, as I pointed out, supra, at 1160 – 1161, Lujan is a case where the Court considered when, not whether, the threatened harm would occur. 504 U.S., at 564, n. 2, 112 S.Ct. 2130. The relevant injury there consisted of a visit by environmental group's members to a project site where they would find (unlawful) environmental depredation. Id., at 564, 112 S.Ct. 2130. The Court pointed out that members had alleged that they would visit the project sites “soon.” But it wrote that “soon” might refer to almost any time in the future. Ibid., n. 2. By way of contrast, the ongoing threat of terrorism means that here the relevant interceptions will likely take place imminently, if not now.

The Court has, of course, denied standing in other cases. But they involve injuries less likely, not more likely, to occur than here. In a recent case, Summers v. Earth Island Institute, 555 U.S. 488, 129 S.Ct. 1142, 173 L.Ed.2d 1 (2009), for example, the plaintiffs challenged a regulation exempting certain timber sales from public comment and administrative appeal. The plaintiffs claimed that the regulations injured them by interfering with their esthetic enjoyment and recreational use of the forests. The Court found this harm too unlikely to occur to support standing. Id., at 496, 129 S.Ct. 1142. The Court noted that one plaintiff had not pointed to a specific affected forest that he would visit. The Court concluded that “[t]here may be a chance, but ... hardly a likelihood,” that the plaintiff's “wanderings will bring him to a parcel about to be affected by a project unlawfully subject to the regulations.” Id., at 495, 129 S.Ct. 1142 (emphasis added).

4

In sum, as the Court concedes, see ante, at 1150, and n. 5, the word “certainly” in the phrase “certainly impending” does not refer to absolute certainty. As our case law demonstrates, what the Constitution requires is something more akin to “reasonable probability” or “high probability.” The use of some such standard is all that is necessary here to ensure the actual concrete injury that the Constitution demands. The considerations set forth in Parts II and III, supra, make clear that the standard is readily met in this case.

* * *

While I express no view on the merits of the plaintiffs' constitutional claims, I do believe that at least some of the plaintiffs have standing to make those claims. I dissent, with respect, from the majority's contrary conclusion.

Friends of the Earth v. Laidlaw Environmental Services

528 U.S. 167 (2000)

Justice GINSBURG delivered the opinion of the Court.

This case presents an important question concerning the operation of the citizen-suit provisions of the Clean Water Act. Congress authorized the federal district courts to entertain Clean Water Act suits initiated by “a person or persons having an interest which is or may be adversely affected.” 33 U.S.C. §§ 1365(a), (g). To impel future compliance with the Act, a district court may prescribe injunctive relief in such a suit; additionally or alternatively, the court may impose civil penalties payable to the United States Treasury. § 1365(a). In the Clean Water Act citizen suit now before us, the District Court determined that injunctive relief was inappropriate because the defendant, after the institution of the litigation, achieved substantial compliance with the terms of its discharge permit. 956 F.Supp. 588, 611 (D.S.C.1997). The court did, however, assess a civil penalty of $405,800. Id., at 610. The “total deterrent effect” of the penalty would be adequate to forestall future violations, the court reasoned, taking into account that the defendant “will be required to reimburse plaintiffs for a significant amount of legal fees and has, itself, incurred significant legal expenses.” Id., at 610–611.

The Court of Appeals vacated the District Court's order. 149 F.3d 303 (C.A.4 1998). The case became moot, the appellate court declared, once the defendant fully complied with the terms of its permit and the plaintiff failed to appeal the denial of equitable relief. “[C]ivil penalties payable to the government,” the Court of Appeals stated, “would not redress any injury Plaintiffs have suffered.” Id., at 307. Nor were attorneys' fees in order, the Court of Appeals noted, because absent relief on the merits, plaintiffs could not qualify as prevailing parties. Id., at 307, n. 5.

We reverse the judgment of the Court of Appeals. The appellate court erred in concluding that a citizen suitor's claim for civil penalties must be dismissed as moot when the defendant, albeit after commencement of the litigation, has come into compliance. In directing dismissal of the suit on grounds of mootness, the Court of Appeals incorrectly conflated our case law on initial standing to bring suit, see, e.g., Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998), with our case law on postcommencement mootness, see, e.g., City of Mesquite v. Aladdin's Castle, Inc., 455 U.S. 283, 102 S.Ct. 1070, 71 L.Ed.2d 152 (1982). A defendant's voluntary cessation of allegedly unlawful conduct ordinarily does not suffice to moot a case. The Court of Appeals also misperceived the remedial potential of civil penalties. Such penalties may serve, as an alternative to an injunction, to deter future violations and thereby redress the injuries that prompted a citizen suitor to commence litigation.

I

A

In 1972, Congress enacted the Clean Water Act (Act), also known as the Federal Water Pollution Control Act, 86 Stat. 816, as amended, 33 U.S.C. § 1251 et seq. Section 402 of the Act, 33 U.S.C. § 1342, provides for the issuance, by the Administrator of the Environmental Protection Agency (EPA) or by authorized States, of National Pollutant Discharge Elimination System (NPDES) permits. NPDES permits impose limitations on the discharge of pollutants, and establish related monitoring and reporting requirements, in order to improve the cleanliness and safety of the Nation's waters. Noncompliance with a permit constitutes a violation of the Act. § 1342(h).

Under § 505(a) of the Act, a suit to enforce any limitation in an NPDES permit may be brought by any “citizen,” defined as “a person or persons having an interest which is or may be adversely affected.” 33 U.S.C. §§ 1365(a), (g). Sixty days before initiating a citizen suit, however, the would-be plaintiff must give notice of the alleged violation to the EPA, the State in which the alleged violation occurred, and the alleged violator. § 1365(b)(1)(A). “[T]he purpose of notice to the alleged violator is to give it an opportunity to bring itself into complete compliance with the Act and thus ... render unnecessary a citizen suit.” Gwaltney of Smithfield, Ltd. v. Chesapeake Bay Foundation, Inc., 484 U.S. 49, 60, 108 S.Ct. 376, 98 L.Ed.2d 306 (1987). Accordingly, we have held that citizens lack statutory standing under § 505(a) to sue for violations that have ceased by the time the complaint is filed. Id., at 56–63, 108 S.Ct. 376. The Act also bars a citizen from suing if the EPA or the State has already commenced, and is “diligently prosecuting,” an enforcement action. 33 U.S.C. § 1365(b)(1)(B).

The Act authorizes district courts in citizen-suit proceedings to enter injunctions and to assess civil penalties, which are payable to the United States Treasury. § 1365(a). In determining the amount of any civil penalty, the district court must take into account “the seriousness of the violation or violations, the economic benefit (if any) resulting from the violation, any history of such violations, any good-faith efforts to comply with the applicable requirements, the economic impact of the penalty on the violator, and such other matters as justice may require.” § 1319(d). In addition, the court “may award costs of litigation (including reasonable attorney and expert witness fees) to any prevailing or substantially prevailing party, whenever the court determines such award is appropriate.” § 1365(d).

B

In 1986, defendant-respondent Laidlaw Environmental Services (TOC), Inc., bought a hazardous waste incinerator facility in Roebuck, South Carolina, that included a wastewater treatment plant. (The company has since changed its name to Safety–Kleen (Roebuck), Inc., but for simplicity we will refer to it as “Laidlaw” throughout.) Shortly after Laidlaw acquired the facility, the South Carolina Department of Health and Environmental Control (DHEC), acting under 33 U.S.C. § 1342(a)(1), granted Laidlaw an NPDES permit authorizing the company to discharge treated water into the North Tyger River. The permit, which became effective on January 1, 1987, placed limits on Laidlaw's discharge of several pollutants into the river, including—of particular relevance to this case—mercury, an extremely toxic pollutant. The permit also regulated the flow, temperature, toxicity, and pH of the effluent from the facility, and imposed monitoring and reporting obligations.

Once it received its permit, Laidlaw began to discharge various pollutants into the waterway; repeatedly, Laidlaw's discharges exceeded the limits set by the permit. In particular, despite experimenting with several technological fixes, Laidlaw consistently failed to meet the permit's stringent 1.3 ppb (parts per billion) daily average limit on mercury discharges. The District Court later found that Laidlaw **702 had violated the mercury limits on 489 occasions between 1987 and 1995. 956 F.Supp., at 613–621.

On April 10, 1992, plaintiff-petitioners Friends of the Earth (FOE) and Citizens Local Environmental Action Network, Inc. (CLEAN) (referred to collectively in this opinion, together with later joined plaintiff-petitioner Sierra Club, as “FOE”) took the preliminary step necessary to the institution of litigation. They sent a letter to Laidlaw notifying the company of their intention to file a citizen suit against it under § 505(a) of the Act after the expiration of the requisite 60–day notice period, i.e., on or after June 10, 1992. Laidlaw's lawyer then contacted DHEC to ask whether DHEC would consider filing a lawsuit against Laidlaw. The District Court later found that Laidlaw's reason for requesting that DHEC file a lawsuit against it was to bar FOE's proposed citizen suit through the operation of 33 U.S.C. § 1365(b)(1)(B). 890 F.Supp. 470, 478 (D.S.C.1995). DHEC agreed to file a lawsuit against Laidlaw; the company's lawyer then drafted the complaint for DHEC and paid the filing fee. On June 9, 1992, the last day before FOE's 60–day notice period expired, DHEC and Laidlaw reached a settlement requiring Laidlaw to pay $100,000 in civil penalties and to make “ ‘every effort’ ” to comply with its permit obligations. Id., at 479–481.

On June 12, 1992, FOE filed this citizen suit against Laidlaw under § 505(a) of the Act, alleging noncompliance with the NPDES permit and seeking declaratory and injunctive relief and an award of civil penalties. Laidlaw moved for summary judgment on the ground that FOE had failed to present evidence demonstrating injury in fact, and therefore lacked Article III standing to bring the lawsuit. Record, Doc. No. 43. In opposition to this motion, FOE submitted affidavits and deposition testimony from members of the plaintiff organizations. Record, Doc. No. 71 (Exhs. 41–51). The record before the District Court also included affidavits from the organizations' members submitted by FOE in support of an earlier motion for preliminary injunctive relief. Record, Doc. No. 21 (Exhs. 5–10). After examining this evidence, the District Court denied Laidlaw's summary judgment motion, finding—albeit “by the very slimmest of margins”—that FOE had standing to bring the suit. App. in No. 97–1246(C.A.4), pp. 207–208 (Tr. of Hearing 39–40 (June 30, 1993)).

Laidlaw also moved to dismiss the action on the ground that the citizen suit was barred under 33 U.S.C. § 1365(b)(1)(B) by DHEC's prior action against the company. The United States, appearing as amicus curiae, joined FOE in opposing the motion. After an extensive analysis of the Laidlaw–DHEC settlement and the circumstances under which it was reached, the District Court held that DHEC's action against Laidlaw had not been “diligently prosecuted”; consequently, the court allowed FOE's citizen suit to proceed. 890 F.Supp., at 499.FN1 The record indicates that after FOE initiated the suit, but before the District Court rendered judgment, Laidlaw violated the mercury discharge limitation in its permit 13 times. 956 F.Supp., at 621. The District Court also found that Laidlaw had committed 13 monitoring and 10 reporting violations during this period. Id., at 601. The last recorded mercury discharge violation occurred in January 1995, long after the complaint was filed but about two years before judgment was rendered. Id., at 621.

FN1. The District Court noted that “Laidlaw drafted the state—court complaint and settlement agreement, filed the lawsuit against itself, and paid the filing fee.” 890 F.Supp., at 489. Further, “the settlement agreement between DHEC and Laidlaw was entered into with unusual haste, without giving the Plaintiffs the opportunity to intervene.” Ibid. The court found “most persuasive” the fact that “in imposing the civil penalty of $100,000 against Laidlaw, DHEC failed to recover, or even to calculate, the economic benefit that Laidlaw received by not complying with its permit.” Id., at 491.

On January 22, 1997, the District Court issued its judgment. 956 F.Supp. 588 (D.S.C.). It found that Laidlaw had gained a total economic benefit of $1,092,581 as a result of its extended period of noncompliance with the mercury discharge limit in its permit. Id., at 603. The court concluded, however, that a civil penalty of $405,800 was adequate in light of the guiding factors listed in 33 U.S.C. § 1319(d). 956 F.Supp., at 610. In particular, the District Court stated that the lesser penalty was appropriate taking into account the judgment's “total deterrent effect.” In reaching this determination, the court “considered that Laidlaw will be required to reimburse plaintiffs for a significant amount of legal fees.” Id., at 610–611. The court declined to grant FOE's request for injunctive relief, stating that an injunction was inappropriate because “Laidlaw has been in substantial compliance with all parameters in its NPDES permit since at least August 1992.” Id., at 611.

FOE appealed the District Court's civil penalty judgment, arguing that the penalty was inadequate, but did not appeal the denial of declaratory or injunctive relief. Laidlaw cross-appealed, arguing, among other things, that FOE lacked standing to bring the suit and that DHEC's action qualified as a diligent prosecution precluding FOE's litigation. The United States continued to participate as amicus curiae in support of FOE.

On July 16, 1998, the Court of Appeals for the Fourth Circuit issued its judgment. 149 F.3d 303. The Court of Appeals assumed without deciding that FOE initially had standing to bring the action, id., at 306, n. 3, but went on to hold that the case had become moot. The appellate court stated, first, that the elements of Article III standing—injury, causation, and redressability—must persist at every stage of review, or else the action becomes moot. Id., at 306. Citing our decision in Steel Co., the Court of Appeals reasoned that the case had become moot because “the only remedy currently available to [FOE]—civil penalties payable to the government—would not redress any injury [FOE has] suffered.” 149 F.3d, at 306–307. The court therefore vacated the District Court's order and remanded with instructions to dismiss the action. In a footnote, the Court of Appeals added that FOE's “failure to obtain relief on the merits of [its] claims precludes any recovery of attorneys' fees or other litigation costs because such an award is available only to a ‘prevailing or substantially prevailing party.’ ” Id., at 307, n. 5 (quoting 33 U.S.C. § 1365(d)).

According to Laidlaw, after the Court of Appeals issued its decision but before this Court granted certiorari, the entire incinerator facility in Roebuck was permanently closed, dismantled, and put up for sale, and all discharges from the facility permanently ceased. Respondent's Suggestion of Mootness 3.

We granted certiorari, 525 U.S. 1176, 119 S.Ct. 1111, 143 L.Ed.2d 107 (1999), to resolve the inconsistency between the Fourth Circuit's decision in this case and the decisions of several other Courts of Appeals, which have held that a defendant's compliance with its permit after the commencement of litigation does not moot claims for civil penalties under the Act. See, e.g., Atlantic States Legal Foundation, Inc. v. Stroh Die Casting Co., 116 F.3d 814, 820 (C.A.7), cert. denied, 522 U.S. 981, 118 S.Ct. 442, 139 L.Ed.2d 379 (1997); Natural Resources Defense Council, Inc. v. Texaco Rfg. and Mktg., Inc., 2 F.3d 493, 503–504 (C.A.3 1993); Atlantic States Legal Foundation, Inc. v. Pan American Tanning Corp., 993 F.2d 1017, 1020–1021 (C.A.2 1993); Atlantic States Legal Foundation, Inc. v. Tyson Foods, Inc., 897 F.2d 1128, 1135–1136 (C.A.11 1990).

II

A

The Constitution's case-or-controversy limitation on federal judicial authority, Art. III, § 2, underpins both our standing and our mootness jurisprudence, but the two inquiries differ in respects critical to the proper resolution of this case, so we address them separately. Because the Court of Appeals was persuaded that the case had become moot and so held, it simply assumed without deciding that FOE had initial standing. See Arizonans for Official English v. Arizona, 520 U.S. 43, 66–67, 117 S.Ct. 1055, 137 L.Ed.2d 170 (1997) (court may assume without deciding that standing exists in order to analyze mootness). But because we hold that the Court of Appeals erred in declaring the case moot, we have an obligation to assure ourselves that FOE had Article III standing at the outset of the litigation. We therefore address the question of standing before turning to mootness.

In Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992), we held that, to satisfy Article III's standing requirements, a plaintiff must show (1) it has suffered an “injury in fact” that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and 3) it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision. An association has standing to bring suit on behalf of its members when its members would otherwise have standing to sue in their own right, the interests at stake are germane to the organization's purpose, and neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit. Hunt v. Washington State Apple Advertising Comm'n, 432 U.S. 333, 343, 97 S.Ct. 2434, 53 L.Ed.2d 383 (1977).

Laidlaw contends first that FOE lacked standing from the outset even to seek injunctive relief, because the plaintiff organizations failed to show that any of their members had sustained or faced the threat of any “injury in fact” from Laidlaw's activities. In support of this contention Laidlaw points to the District Court's finding, made in the course of setting the penalty amount, that there had been “no demonstrated proof of harm to the environment” from Laidlaw's mercury discharge violations. 956 F.Supp., at 602; see also ibid. (“[T]he NPDES permit violations at issue in this citizen suit did not result in any health risk or environmental harm.”).

The relevant showing for purposes of Article III standing, however, is not injury to the environment but injury to the plaintiff. To insist upon the former rather than the latter as part of the standing inquiry (as the dissent in essence does, post, at 713–714) is to raise the standing hurdle higher than the necessary showing for success on the merits in an action alleging noncompliance with an NPDES permit. Focusing properly on injury to the plaintiff, the District Court found that FOE had demonstrated sufficient injury to establish standing. App. in No. 97–1246(CA4), at 207–208 (Tr. of Hearing 39–40). For example, FOE member Kenneth Lee Curtis averred in affidavits that he lived a half-mile from Laidlaw's facility; that he occasionally drove over the North Tyger River, and that it looked and smelled polluted; and that he would like to fish, camp, swim, and picnic in and near the river between 3 and 15 miles downstream from the facility, as he did when he was a teenager, but would not do so because he was concerned that the water was polluted by Laidlaw's discharges. Record, Doc. No. 71 (Exhs. 41, 42). Curtis reaffirmed these statements in extensive deposition testimony. For example, he testified that he would like to fish in the river at a specific spot he used as a boy, but that he would not do so now because of his concerns about Laidlaw's discharges. Ibid. (Exh. 43, at 52–53; Exh. 44, at 33).

Other members presented evidence to similar effect. CLEAN member Angela Patterson attested that she lived two miles from the facility; that before Laidlaw operated the facility, she picnicked, walked, birdwatched, and waded in and along the North Tyger River because of the natural beauty of the area; that she no longer engaged in these activities in or near the river because she was concerned about harmful effects from discharged pollutants; and that she and her husband would like to purchase a home near the river but did not intend to do so, in part because of Laidlaw's discharges. Record, Doc. No. 21 (Exh. 10). CLEAN member Judy Pruitt averred that she lived one-quarter mile from Laidlaw's facility and would like to fish, hike, and picnic along the North Tyger River, but has refrained from those activities because of the discharges. Ibid. (Exh. 7). FOE member Linda Moore attested that she lived 20 miles from Roebuck, and would use the North Tyger River south of Roebuck and the land surrounding it for recreational purposes were she not concerned that the water contained harmful pollutants. Record, Doc. No. 71 (Exhs. 45, 46). In her deposition, Moore testified at length that she would hike, picnic, camp, swim, boat, and drive near or in the river were it not for her concerns about illegal discharges. Ibid. (Exh. 48, at 29, 36–37, 62–63, 72). CLEAN member Gail Lee attested that her home, which is near Laidlaw's facility, had a lower value than similar homes located farther from the facility, and that she believed the pollutant discharges accounted for some of the discrepancy. Record, Doc. No. 21 (Exh. 9). Sierra Club member Norman Sharp averred that he had canoed approximately 40 miles downstream of the Laidlaw facility and would like to canoe in the North Tyger River closer to Laidlaw's discharge point, but did not do so because he was concerned that the water contained harmful pollutants. Ibid. (Exh. 8).

These sworn statements, as the District Court determined, adequately documented injury in fact. We have held that environmental plaintiffs adequately allege injury in fact when they aver that they use the affected area and are persons “for whom the aesthetic and recreational values of the area will be lessened” by the challenged activity. Sierra Club v. Morton, 405 U.S. 727, 735, 92 S.Ct. 1361, 31 L.Ed.2d 636 (1972). See also Defenders of Wildlife, 504 U.S., at 562–563, 112 S.Ct. 2130 (“Of course, the desire to use or observe an animal species, even for purely esthetic purposes, is undeniably a cognizable interest for purposes of standing.”).

Our decision in Lujan v. National Wildlife Federation, 497 U.S. 871, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990), is not to the contrary. In that case an environmental organization assailed the Bureau of Land Management's “land withdrawal review program,” a program covering millions of acres, alleging that the program illegally opened up public lands to mining activities. The defendants moved for summary judgment, challenging the plaintiff organization's standing to initiate the action under the Administrative Procedure Act, 5 U.S.C. § 702. We held that the plaintiff could not survive the summary judgment motion merely by offering “averments which state only that one of [the organization's] members uses unspecified portions of an immense tract of territory, on some portions of which mining activity has occurred or probably will occur by virtue of the governmental action.” 497 U.S., at 889, 110 S.Ct. 3177.

In contrast, the affidavits and testimony presented by FOE in this case assert that Laidlaw's discharges, and the affiant members' reasonable concerns about the effects of those discharges, directly affected those affiants' recreational, aesthetic, and economic interests. These submissions present dispositively more than the mere “general averments” and “conclusory allegations” found inadequate in National Wildlife Federation. Id., at 888, 110 S.Ct. 3177. Nor can the affiants' conditional statements—that they would use the nearby North Tyger River for recreation if Laidlaw were not discharging pollutants into it—be equated with the speculative “ ‘some day’ intentions” to visit endangered species halfway around the world that we held insufficient to show injury in fact in Defenders of Wildlife. 504 U.S., at 564, 112 S.Ct. 2130.

Los Angeles v. Lyons, 461 U.S. 95, 103 S.Ct. 1660, 75 L.Ed.2d 675 (1983), relied on by the dissent, post, at 714, does not weigh against standing in this case. In Lyons, we held that a plaintiff lacked standing to seek an injunction against the enforcement of a police chokehold policy because he could not credibly allege that he faced a realistic threat from the policy. 461 U.S., at 107, n. 7, 103 S.Ct. 1660. In the footnote from Lyons cited by the dissent, we noted that “[t]he reasonableness of Lyons' fear is dependent upon the likelihood of a recurrence of the allegedly unlawful conduct,” and that his “subjective apprehensions” that such a recurrence would even take place were not enough to support standing. Id., at 108, n. 8, 103 S.Ct. 1660. Here, in contrast, it is undisputed that Laidlaw's unlawful conduct—discharging pollutants in excess of permit limits—was occurring at the time the complaint was filed. Under Lyons, then, the only “subjective” issue here is “[t]he reasonableness of [the] fear” that led the affiants to respond to that concededly ongoing conduct by refraining from use of the North Tyger River and surrounding areas. Unlike the dissent, post, at 714, we see nothing “improbable” about the proposition that a company's continuous and pervasive illegal discharges of pollutants into a river would cause nearby residents to curtail their recreational use of that waterway and would subject them to other economic and aesthetic harms. The proposition is entirely reasonable, the District Court found it was true in this case, and that is enough for injury in fact.

Laidlaw argues next that even if FOE had standing to seek injunctive relief, it lacked standing to seek civil penalties. Here the asserted defect is not injury but redressability. Civil penalties offer no redress to private plaintiffs, Laidlaw argues, because they are paid to the Government, and therefore a citizen plaintiff can never have standing to seek them.

Laidlaw is right to insist that a plaintiff must demonstrate standing separately for each form of relief sought. See, e.g., Lyons, 461 U.S., at 109, 103 S.Ct. 1660 (notwithstanding the fact that plaintiff had standing to pursue damages, he lacked standing to pursue injunctive relief); see also Lewis v. Casey, 518 U.S. 343, 358, n. 6, 116 S.Ct. 2174, 135 L.Ed.2d 606 (1996) (“[S]tanding is not dispensed in gross.”). But it is wrong to maintain that citizen plaintiffs facing ongoing violations never have standing to seek civil penalties.

We have recognized on numerous occasions that “all civil penalties have some deterrent effect.” Hudson v. United States, 522 U.S. 93, 102, 118 S.Ct. 488, 139 L.Ed.2d 450 (1997); see also, e.g., Department of Revenue of Mont. v. Kurth Ranch, 511 U.S. 767, 778, 114 S.Ct. 1937, 128 L.Ed.2d 767 (1994). More specifically, Congress has found that civil penalties in Clean Water Act cases do more than promote immediate compliance by limiting the defendant's economic incentive to delay its attainment of permit limits; they also deter future violations. This congressional determination warrants judicial attention and respect. “The legislative history of the Act reveals that Congress wanted the district court to consider the need for retribution and deterrence, in addition to restitution, when it imposed civil penalties. ... [The district court may] seek to deter future violations by basing the penalty on its economic impact.” Tull v. United States, 481 U.S. 412, 422–423, 107 S.Ct. 1831, 95 L.Ed.2d 365 (1987).

It can scarcely be doubted that, for a plaintiff who is injured or faces the threat of future injury due to illegal conduct ongoing at the time of suit, a sanction that effectively abates that conduct and prevents its recurrence provides a form of redress. Civil penalties can fit that description. To the extent that they encourage defendants to discontinue current violations and deter them from committing future ones, they afford redress to citizen plaintiffs who are injured or threatened with injury as a consequence of ongoing unlawful conduct.

The dissent argues that it is the availability rather than the imposition of civil penalties that deters any particular polluter from continuing to pollute. Post, at 718–719. This argument misses the mark in two ways. First, it overlooks the interdependence of the availability and the imposition; a threat has no deterrent value unless it is credible that it will be carried out. Second, it is reasonable for Congress to conclude that an actual award of civil penalties does in fact bring with it a significant quantum of deterrence over and above what is achieved by the mere prospect of such penalties. A would-be polluter may or may not be dissuaded by the existence of a remedy on the books, but a defendant once hit in its pocketbook will surely think twice before polluting again.FN2

FN2. The dissent suggests that there was little deterrent work for civil penalties to do in this case because the lawsuit brought against Laidlaw by DHEC had already pushed the level of deterrence to “near the top of the graph.” Post, at 718. This suggestion ignores the District Court's specific finding that the penalty agreed to by Laidlaw and DHEC was far too low to remove Laidlaw's economic benefit from noncompliance, and thus was inadequate to deter future violations. 890 F.Supp. 470, 491–494, 497–498 (D.S.C.1995). And it begins to look especially farfetched when one recalls that Laidlaw itself prompted the DHEC lawsuit, paid the filing fee, and drafted the complaint. See supra, at 702, n. 1.

We recognize that there may be a point at which the deterrent effect of a claim for civil penalties becomes so insubstantial or so remote that it cannot support citizen standing. The fact that this vanishing point is not easy to ascertain does not detract from the deterrent power of such penalties in the ordinary case. Justice Frankfurter's observations for the Court, made in a different context nearly 60 years ago, hold true here as well:

“How to effectuate policy—the adaptation of means to legitimately sought ends—is one of the most intractable of legislative problems. Whether proscribed conduct is to be deterred by qui tam action or triple damages or injunction, or by criminal prosecution, or merely by defense to actions in contract, or by some, or all, of these remedies in combination, is a matter within the legislature's range of choice. Judgment on the deterrent effect of the various weapons in the armory of the law can lay little claim to scientific basis.” Tigner v. Texas, 310 U.S. 141, 148, 60 S.Ct. 879, 84 L.Ed. 1124 (1940).FN3

FN3. In Tigner the Court rejected an equal protection challenge to a statutory provision exempting agricultural producers from the reach of the Texas antitrust laws.

In this case we need not explore the outer limits of the principle that civil penalties provide sufficient deterrence to support redressability. Here, the civil penalties sought by FOE carried with them a deterrent effect that made it likely, as opposed to merely speculative, that the penalties would redress FOE's injuries by abating current violations and preventing future ones—as the District Court reasonably found when it assessed a penalty of $405,800. 956 F.Supp., at 610–611.

Laidlaw contends that the reasoning of our decision in Steel Co. directs the conclusion that citizen plaintiffs have no standing to seek civil penalties under the Act. We disagree. Steel Co. established that citizen suitors lack standing to seek civil penalties for violations that have abated by the time of suit. 523 U.S., at 106–107, 118 S.Ct. 1003. We specifically noted in that case that there was no allegation in the complaint of any continuing or imminent violation, and that no basis for such an allegation appeared to exist. Id., at 108, 118 S.Ct. 1003; see also Gwaltney, 484 U.S., at 59, 108 S.Ct. 376 (“the harm sought to be addressed by the citizen suit lies in the present or the future, not in the past”). In short, Steel Co. held that private plaintiffs, unlike the Federal Government, may not sue to assess penalties for wholly past violations, but our decision in that case did not reach the issue of standing to seek penalties for violations that are ongoing at the time of the complaint and that could continue into the future if undeterred.FN4

FN4. In insisting that the redressability requirement is not met, the dissent relies heavily on Linda R.S. v. Richard D., 410 U.S. 614, 93 S.Ct. 1146, 35 L.Ed.2d 536 (1973). That reliance is sorely misplaced. In Linda R. S., the mother of an out-of-wedlock child filed suit to force a district attorney to bring a criminal prosecution against the absentee father for failure to pay child support. Id., at 616, 93 S.Ct. 1146. In finding that the mother lacked standing to seek this extraordinary remedy, the Court drew attention to “the special status of criminal prosecutions in our system,” id., at 619, 93 S.Ct. 1146, and carefully limited its holding to the “unique context of a challenge to [the nonenforcement of] a criminal statute,” id., at 617, 93 S.Ct. 1146. Furthermore, as to redressability, the relief sought in Linda R. S.—a prosecution which, if successful, would automatically land the delinquent father in jail for a fixed term, id., at 618, 93 S.Ct. 1146, with predictably negative effects on his earning power—would scarcely remedy the plaintiff's lack of child support payments. In this regard, the Court contrasted “the civil contempt model whereby the defendant ‘keeps the keys to the jail in his own pocket’ and may be released whenever he complies with his legal obligations.” Ibid. The dissent's contention, post, at 716, that “precisely the same situation exists here” as in Linda R. S. is, to say the least, extravagant.

Putting aside its mistaken reliance on Linda R. S., the dissent's broader charge that citizen suits for civil penalties under the Act carry “grave implications for democratic governance,” post, at 715, seems to us overdrawn. Certainly the Federal Executive Branch does not share the dissent's view that such suits dissipate its authority to enforce the law. In fact, the Department of Justice has endorsed this citizen suit from the outset, submitting amicus briefs in support of FOE in the District Court, the Court of Appeals, and this Court. See supra, at 702, 703. As we have already noted, supra, at 701, the Federal Government retains the power to foreclose a citizen suit by undertaking its own action. 33 U.S.C. § 1365(b)(1)(B). And if the Executive Branch opposes a particular citizen suit, the statute allows the Administrator of the EPA to “intervene as a matter of right” and bring the Government's views to the attention of the court. § 1365(c)(2).

B

Satisfied that FOE had standing under Article III to bring this action, we turn to the question of mootness.

The only conceivable basis for a finding of mootness in this case is Laidlaw's voluntary conduct—either its achievement by August 1992 of substantial compliance with its NPDES permit or its more recent shutdown of the Roebuck facility. It is well settled that “a defendant's voluntary cessation of a challenged practice does not deprive a federal court of its power to determine the legality of the practice.” City of Mesquite, 455 U.S., at 289, 102 S.Ct. 1070. “[I]f it did, the courts would be compelled to leave ‘[t]he defendant ... free to return to his old ways.’ ” Id., at 289, n. 10, 102 S.Ct. 1070 (citing United States v. W.T. Grant Co., 345 U.S. 629, 632, 73 S.Ct. 894, 97 L.Ed. 1303 (1953)). In accordance with this principle, the standard we have announced for determining whether a case has been mooted by the defendant's voluntary conduct is stringent: “A case might become moot if subsequent events made it absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur.” United States v. Concentrated Phosphate Export Assn., 393 U.S. 199, 203, 89 S.Ct. 361, 21 L.Ed.2d 344 (1968). The “heavy burden of persua[ding]” the court that the challenged conduct cannot reasonably be expected to start up again lies with the party asserting mootness. Ibid.

The Court of Appeals justified its mootness disposition by reference to Steel Co., which held that citizen plaintiffs lack standing to seek civil penalties for wholly past violations. In relying on Steel Co., the Court of Appeals confused mootness with standing. The confusion is understandable, given this Court's repeated statements that the doctrine of mootness can be described as “the doctrine of standing set in a time frame: The requisite personal interest that must exist at the commencement of the litigation (standing) must continue throughout its existence (mootness).” Arizonans for Official English, 520 U.S., at 68, n. 22, 117 S.Ct. 1055 (quoting United States Parole Comm'n v. Geraghty, 445 U.S. 388, 397, 100 S.Ct. 1202, 63 L.Ed.2d 479 (1980), in turn quoting Monaghan, Constitutional Adjudication: The Who and When, 82 Yale L.J. 1363, 1384 (1973)) (internal quotation marks omitted).

Careful reflection on the long-recognized exceptions to mootness, however, reveals that the description of mootness as “standing set in a time frame” is not comprehensive. As just noted, a defendant claiming that its voluntary compliance moots a case bears the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur. Concentrated Phosphate Export Assn., 393 U.S., at 203, 89 S.Ct. 361. By contrast, in a lawsuit brought to force compliance, it is the plaintiff's burden to establish standing by demonstrating that, if unchecked by the litigation, the defendant's allegedly wrongful behavior will likely occur or continue, and that the “threatened injury [is] certainly impending.” Whitmore v. Arkansas, 495 U.S. 149, 158, 110 S.Ct. 1717, 109 L.Ed.2d 135 (1990) (citations and internal quotation marks omitted). Thus, in Lyons, as already noted, we held that a plaintiff lacked initial standing to seek an injunction against the enforcement of a police chokehold policy because he could not credibly allege that he faced a realistic threat arising from the policy. 461 U.S., at 105–110, 103 S.Ct. 1660. Elsewhere in the opinion, however, we noted that a citywide moratorium on police chokeholds—an action that surely diminished the already slim likelihood that any particular individual would be choked by police—would not have mooted an otherwise valid claim for injunctive relief, because the moratorium by its terms was not permanent. Id., at 101, 103 S.Ct. 1660. The plain lesson of these cases is that there are circumstances in which the prospect that a defendant will engage in (or resume) harmful conduct may be too speculative to support standing, but not too speculative to overcome mootness.

Furthermore, if mootness were simply “standing set in a time frame,” the exception to mootness that arises when the defendant's allegedly unlawful activity is “capable of repetition, yet evading review,” could not exist. When, for example, a mentally disabled patient files a lawsuit challenging her confinement in a segregated institution, her postcomplaint transfer to a community-based program will not moot the action, Olmstead v. L.C., 527 U.S. 581, 594, n. 6, 119 S.Ct. 2176, 144 L.Ed.2d 540 (1999), despite the fact that she would have lacked initial standing had she filed the complaint after the transfer. Standing admits of no similar exception; if a plaintiff lacks standing at the time the action commences, the fact that the dispute is capable of repetition yet evading review will not entitle the complainant to a federal judicial forum. See Steel Co., 523 U.S., at 109, 118 S.Ct. 1003 (“ ‘the mootness exception for disputes capable of repetition yet evading review ... will not revive a dispute which became moot before the action commenced’ ”) (quoting Renne v. Geary, 501 U.S. 312, 320, 111 S.Ct. 2331, 115 L.Ed.2d 288 (1991)).

We acknowledged the distinction between mootness and standing most recently in Steel Co.:

“The United States ... argues that the injunctive relief does constitute remediation because ‘there is a presumption of [future] injury when the defendant has voluntarily ceased its illegal activity in response to litigation,’ even if that occurs before a complaint is filed.... This makes a sword out of a shield. The ‘presumption’ the Government refers to has been applied to refute the assertion of mootness by a defendant who, when sued in a complaint that alleges present or threatened injury, ceases the complained-of activity.... It is an immense and unacceptable stretch to call the presumption into service as a substitute for the allegation of present or threatened injury upon which initial standing must be based.” 523 U.S., at 109, 118 S.Ct. 1003.

Standing doctrine functions to ensure, among other things, that the scarce resources of the federal courts are devoted to those disputes in which the parties have a concrete stake. In contrast, by the time mootness is an issue, the case has been brought and litigated, often (as here) for years. To abandon the case at an advanced stage may prove more wasteful than frugal. This argument from sunk costs FN5 does not license courts to retain jurisdiction over cases in which one or both of the parties plainly lack a continuing interest, as when the parties have settled or a plaintiff pursuing a nonsurviving claim has died. See, e.g., DeFunis v. Odegaard, 416 U.S. 312, 94 S.Ct. 1704, 40 L.Ed.2d 164 (1974) (per curiam) (non-class-action challenge to constitutionality of law school admissions process mooted when plaintiff, admitted pursuant to preliminary injunction, neared graduation and defendant law school conceded that, as a matter of ordinary school policy, plaintiff would be allowed to finish his final term); Arizonans, 520 U.S., at 67, 117 S.Ct. 1055 (non-class-action challenge to state constitutional amendment declaring English the official language of the State became moot when plaintiff, a state employee who sought to use her bilingual skills, left state employment). But the argument surely highlights an important difference between the two doctrines. See generally Honig v. Doe, 484 U.S. 305, 329–332, 108 S.Ct. 592, 98 L.Ed.2d 686 (1988) (REHNQUIST, C. J., concurring).

FN5. Of course we mean sunk costs to the judicial system, not to the litigants. Lewis v. Continental Bank Corp., 494 U.S. 472, 110 S.Ct. 1249, 108 L.Ed.2d 400 (1990) (cited by the dissent, post, at 721), dealt with the latter, noting that courts should use caution to avoid carrying forward a moot case solely to vindicate a plaintiff's interest in recovering attorneys' fees.

In its brief, Laidlaw appears to argue that, regardless of the effect of Laidlaw's compliance, FOE doomed its own civil penalty claim to mootness by failing to appeal the District Court's denial of injunctive relief. Brief for Respondent 14–17. This argument misconceives the statutory scheme. Under § 1365(a), the district court has discretion to determine which form of relief is best suited, in the particular case, to abate current violations and deter future ones. “[A] federal judge sitting as chancellor is not mechanically obligated to grant an injunction for every violation of law.” Weinberger v. Romero–Barcelo, 456 U.S. 305, 313, 102 S.Ct. 1798, 72 L.Ed.2d 91 (1982). Denial of injunctive relief does not necessarily mean that the district court has concluded there is no prospect of future violations for civil penalties to deter. Indeed, it meant no such thing in this case. The District Court denied injunctive relief, but expressly based its award of civil penalties on the need for deterrence. See 956 F.Supp., at 610–611. As the dissent notes, post, at 717, federal courts should aim to ensure “ ‘the framing of relief no broader than required by the precise facts.’ ” Schlesinger v. Reservists Comm. to Stop the War, 418 U.S. 208, 222, 94 S.Ct. 2925, 41 L.Ed.2d 706 (1974). In accordance with this aim, a district court in a Clean Water Act citizen suit properly may conclude that an injunction would be an excessively intrusive remedy, because it could entail continuing superintendence of the permit holder's activities by a federal court—a process burdensome to court and permit holder alike. See City of Mesquite, 455 U.S., at 289, 102 S.Ct. 1070 (although the defendant's voluntary cessation of the challenged practice does not moot the case, “[s]uch abandonment is an important factor bearing on the question whether a court should exercise its power to enjoin the defendant from renewing the practice”).

Laidlaw also asserts, in a supplemental suggestion of mootness, that the closure of its Roebuck facility, which took place after the Court of Appeals issued its decision, mooted the case. The facility closure, like Laidlaw's earlier achievement of substantial compliance with its permit requirements, might moot the case, but—we once more reiterate—only if one or the other of these events made it absolutely clear that Laidlaw's permit violations could not reasonably be expected to recur. Concentrated Phosphate Export Assn., 393 U.S., at 203, 89 S.Ct. 361. The effect of both Laidlaw's compliance and the facility closure on the prospect of future violations is a disputed factual matter. FOE points out, for example—and Laidlaw does not appear to contest—that Laidlaw retains its NPDES permit. These issues have not been aired in the lower courts; they remain open for consideration on remand.FN6

FN6. We note that it is far from clear that vacatur of the District Court's judgment would be the appropriate response to a finding of mootness on appeal brought about by the voluntary conduct of the party that lost in the District Court. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 115 S.Ct. 386, 130 L.Ed.2d 233 (1994) (mootness attributable to a voluntary act of a nonprevailing party ordinarily does not justify vacatur of a judgment under review); see also Walling v. James V. Reuter, Inc., 321 U.S. 671, 64 S.Ct. 826, 88 L.Ed. 1001 (1944).

C

FOE argues that it is entitled to attorneys' fees on the theory that a plaintiff can be a “prevailing party” for purposes of 33 U.S.C. § 1365(d) if it was the “catalyst” that triggered a favorable outcome. In the decision under review, the Court of Appeals noted that its Circuit precedent construed our decision in Farrar v. Hobby, 506 U.S. 103, 113 S.Ct. 566, 121 L.Ed.2d 494 (1992), to require rejection of that theory. 149 F.3d, at 307, n. 5 (citing S–1 & S–2 v. State Bd. of Ed. of N. C., 21 F.3d 49, 51 (C.A.4 1994) (en banc)). Cf. Foreman v. Dallas County, 193 F.3d 314, 320 (C.A.5 1999) (stating, in dicta, that “[a]fter Farrar ... the continuing validity of the catalyst theory is in serious doubt”).

Farrar acknowledged that a civil rights plaintiff awarded nominal damages may be a “prevailing party” under 42 U.S.C. § 1988. 506 U.S., at 112, 113 S.Ct. 566. The case involved no catalytic effect. Recognizing that the issue was not presented for this Court's decision in Farrar, several Courts of Appeals have expressly concluded that Farrar did not repudiate the catalyst theory. See Marbley v. Bane, 57 F.3d 224, 234 (C.A.2 1995); Baumgartner v. Harrisburg Housing Authority, 21 F.3d 541, 546–550 (C.A.3 1994); Zinn v. Shalala, 35 F.3d 273, 276 (C.A.7 1994); Little Rock School Dist. v. Pulaski County Special Sch. Dist., # 1, 17 F.3d 260, 263, n. 2 (C.A.8 1994); Kilgour v. Pasadena, 53 F.3d 1007, 1010 (C.A.9 1995); Beard v. Teska, 31 F.3d 942, 951–952 (C.A.10 1994); Morris v. West Palm Beach, 194 F.3d 1203, 1207 (C.A.11 1999). Other Courts of Appeals have likewise continued to apply the catalyst theory notwithstanding Farrar. Paris v. United States Dept. of Housing and Urban Development, 988 F.2d 236, 238 (C.A.1 1993); Citizens Against Tax Waste v. Westerville City School, 985 F.2d 255, 257 (C.A.6 1993).

It would be premature, however, for us to address the continuing validity of the catalyst theory in the context of this case. The District Court, in an order separate from the one in which it imposed civil penalties against Laidlaw, stayed the time for a petition for attorneys' fees until the time for appeal had expired or, if either party appealed, until the appeal was resolved. See 149 F.3d, at 305 (describing order staying time for attorneys' fees petition). In the opinion accompanying its order on penalties, the District Court stated only that “this court has considered that Laidlaw will be required to reimburse plaintiffs for a significant amount of legal fees,” and referred to “potential fee awards.” 956 F.Supp., at 610–611. Thus, when the Court of Appeals addressed the availability of counsel fees in this case, no order was before it either denying or awarding fees. It is for the District Court, not this Court, to address in the first instance any request for reimbursement of costs, including fees.

* * *

For the reasons stated, the judgment of the United States Court of Appeals for the Fourth Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

Justice STEVENS, concurring.

Although the Court has identified a sufficient reason for rejecting the Court of Appeals' mootness determination, it is important also to note that the case would not be moot even if it were absolutely clear that respondent had gone out of business and posed no threat of future permit violations. The District Court entered a valid judgment requiring respondent to pay a civil penalty of $405,800 to the United States. No postjudgment conduct of respondent could retroactively invalidate that judgment. A record of voluntary postjudgment compliance that would justify a decision that injunctive relief is unnecessary, or even a decision that any claim for injunctive relief is now moot, would not warrant vacation of the valid money judgment.

Furthermore, petitioners' claim for civil penalties would not be moot even if it were absolutely clear that respondent's violations could not reasonably be expected to recur because respondent achieved substantial compliance with its permit requirements after petitioners filed their complaint but before the District Court entered judgment. As the Courts of Appeals (other than the court below) have uniformly concluded, a polluter's voluntary postcomplaint cessation of an alleged violation will not moot a citizen-suit claim for civil penalties even if it is sufficient to moot a related claim for injunctive or declaratory relief.FN* This conclusion is consistent with the structure of the Clean Water Act, which attaches liability for civil penalties at the time a permit violation occurs. 33 U.S.C. § 1319(d) (“Any person who violates [certain provisions of the Act or certain permit conditions and limitations] shall be subject to a civil penalty ...”). It is also consistent with the character of civil penalties, which, for purposes of mootness analysis, should be equated with punitive damages rather than with injunctive or declaratory relief. See Tull v. United States, 481 U.S. 412, 422–423, 107 S.Ct. 1831, 95 L.Ed.2d 365 (1987). No one contends that a defendant's postcomplaint conduct could moot a claim for punitive damages; civil penalties should be treated the same way.

FN* Comfort Lake Assn. v. Dresel Contracting, Inc., 138 F.3d 351, 356 (C.A.8 1998); Atlantic States Legal Foundation, Inc. v. Stroh Die Casting Co., 116 F.3d 814, 820(C.A.7), cert. denied, 522 U.S. 981, 118 S.Ct. 442, 139 L.Ed.2d 379 (1997); Natural Resources Defense Council v. Texaco Refining & Mktg., Inc., 2 F.3d 493, 502–503 (C.A.3 1993); Atlantic States Legal Foundation, Inc. v. Pan Am. Tanning Corp., 993 F.2d 1017, 1020–1021 (C.A.2 1993); Atlantic States Legal Foundation, Inc. v. Tyson Foods, Inc., 897 F.2d 1128, 1134–1137 (C.A.11 1990); Chesapeake Bay Foundation, Inc. v. Gwaltney of Smithfield, Ltd., 890 F.2d 690, 696–697 (C.A.4 1989). Cf. Powell v. McCormack, 395 U.S. 486, 496, n. 8, 89 S.Ct. 1944, 23 L.Ed.2d 491 (1969) (“Where several forms of relief are requested and one of these requests subsequently becomes moot, the Court has still considered the remaining requests”).

The cases cited by the Court in its discussion of the mootness issue all involved requests for injunctive or declaratory relief. In only one, Los Angeles v. Lyons, 461 U.S. 95, 103 S.Ct. 1660, 75 L.Ed.2d 675 (1983), did the plaintiff seek damages, and in that case the opinion makes it clear that the inability to obtain injunctive relief would have no impact on the damages claim. Id., at 105, n. 6, 109, 103 S.Ct. 1660. There is no precedent, either in our jurisprudence, or in any other of which I am aware, that provides any support for the suggestion that postcomplaint factual developments that might moot a claim for injunctive or declaratory relief could either moot a claim for monetary relief or retroactively invalidate a valid money judgment.

Justice KENNEDY, concurring.

*18 Difficult and fundamental questions are raised when we ask whether exactions of public fines by private litigants, and the delegation of Executive power which might be inferable from the authorization, are permissible in view of the responsibilities committed to the Executive by Article II of the Constitution of the United States. The questions presented in the petition for certiorari did not identify these issues with particularity; and neither the Court of Appeals in deciding the case nor the parties in their briefing before this Court devoted specific attention to the subject. In my view these matters are best reserved for a later case. With this observation, I join the opinion of the Court.

Justice SCALIA, with whom Justice THOMAS joins, dissenting.

The Court begins its analysis by finding injury in fact on the basis of vague affidavits that are undermined by the District Court's express finding that Laidlaw's discharges caused no demonstrable harm to the environment. It then proceeds to marry private wrong with public remedy in a union that violates traditional principles of federal standing—thereby permitting law enforcement to be placed in the hands of private individuals. Finally, the Court suggests that to avoid mootness one needs even less of a stake in the outcome than the Court's watered-down requirements for initial standing. I dissent from all of this.

I

Plaintiffs, as the parties invoking federal jurisdiction, have the burden of proof and persuasion as to the existence of standing. Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) (hereinafter Lujan ); FW/PBS, Inc. v. Dallas, 493 U.S. 215, 231, 110 S.Ct. 596, 107 L.Ed.2d 603 (1990). The plaintiffs in this case fell far short of carrying their burden of demonstrating injury in fact. The Court cites affiants' testimony asserting that their enjoyment of the North Tyger River has been diminished due to “concern” that the water was polluted, and that they “believed” that Laidlaw's mercury exceedances had reduced the value of their homes. Ante, at 704–705. These averments alone cannot carry the plaintiffs' burden of demonstrating that they have suffered a “concrete and particularized” injury, Lujan, 504 U.S., at 560, 112 S.Ct. 2130. General allegations of injury may suffice at the pleading stage, but at summary judgment plaintiffs must set forth “specific facts” to support their claims. Id., at 561, 112 S.Ct. 2130. And where, as here, the case has proceeded to judgment, those specific facts must be “ ‘supported adequately by the evidence adduced at trial,’ ” ibid. (quoting Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 115, n. 31, 99 S.Ct. 1601, 60 L.Ed.2d 66 (1979)). In this case, the affidavits themselves are woefully short on “specific facts,” and the vague allegations of injury they do make are undermined by the evidence adduced at trial.

Typically, an environmental plaintiff claiming injury due to discharges in violation of the Clean Water Act argues that the discharges harm the environment, and that the harm to the environment injures him. This route to injury is barred in the present case, however, since the District Court concluded after considering all the evidence that there had been “no demonstrated proof of harm to the environment,” 956 F.Supp. 588, 602 (D.S.C.1997), that the “permit violations at issue in this citizen suit did not result in any health risk or environmental harm,” ibid., that “[a]ll available data ... fail to show that Laidlaw's actual discharges have resulted in harm to the North Tyger River,” id., at 602–603, and that “the overall quality of the river exceeds levels necessary to support ... recreation in and on the water,” id., at 600.

The Court finds these conclusions unproblematic for standing, because “[t]he relevant showing for purposes of Article III standing ... is not injury to the environment but injury to the plaintiff.” Ante, at 704. This statement is correct, as far as it goes. We have certainly held that a demonstration of harm to the environment is not enough to satisfy the injury-in-fact requirement unless the plaintiff can demonstrate how he personally was harmed. E.g., Lujan, supra, at 563, 112 S.Ct. 2130. In the normal course, however, a lack of demonstrable harm to the environment will translate, as it plainly does here, into a lack of demonstrable harm to citizen plaintiffs. While it is perhaps possible that a plaintiff could be harmed even though the environment was not, such a plaintiff would have the burden of articulating and demonstrating the nature of that injury. Ongoing “concerns” about the environment are not enough, for “[i]t is the reality of the threat of repeated injury that is relevant to the standing inquiry, not the plaintiff's subjective apprehensions,” Los Angeles v. Lyons, 461 U.S. 95, 107, n. 8, 103 S.Ct. 1660, 75 L.Ed.2d 675 (1983). At the very least, in the present case, one would expect to see evidence supporting the affidavits' bald assertions regarding decreasing recreational usage and declining home values, as well as evidence for the improbable proposition that Laidlaw's violations, even though harmless to the environment, are somehow responsible for these effects. Cf. Gladstone, supra, at 115, 99 S.Ct. 1601 (noting that standing could be established by “convincing evidence” that a decline in real estate values was attributable to the defendant's conduct). Plaintiffs here have made no attempt at such a showing, but rely entirely upon unsupported and unexplained affidavit allegations of “concern.”

Indeed, every one of the affiants deposed by Laidlaw cast into doubt the (in any event inadequate) proposition that subjective “concerns” actually affected their conduct. Linda Moore, for example, said in her affidavit that she would use the affected waterways for recreation if it were not for her concern about pollution. Record, Doc. No. 71 (Exhs. 45, 46). Yet she testified in her deposition that she had been to the river only twice, once in 1980 (when she visited someone who lived by the river) and once after this suit was filed. Record, Doc. No. 62 (Moore Deposition 23–24). Similarly, Kenneth Lee Curtis, who claimed he was injured by being deprived of recreational activity at the river, admitted that he had not been to the river since he was “a kid,” ibid. (Curtis Deposition, pt. 2, p. 38), and when asked whether the reason he stopped visiting the river was because of pollution, answered “no,” id., at 39. As to Curtis's claim that the river “looke[d] and smell[ed] polluted,” this condition, if present, was surely not caused by Laidlaw's discharges, which according to the District Court “did not result in any health risk or environmental harm.” 956 F.Supp., at 602. The other affiants cited by the Court were not deposed, but their affidavits state either that they would use the river if it were not polluted or harmful (as the court subsequently found it is not), Record, Doc. No. 21 (Exhs. 7, 8, and 9), or said that the river looks polluted (which is also incompatible with the court's findings), ibid. (Exh. 10). These affiants have established nothing but “subjective apprehensions.”

The Court is correct that the District Court explicitly found standing—albeit “by the very slimmest of margins,” and as “an awfully close call.” App. in No. 97–1246 (C.A.4), pp. 207–208 (Tr. of Hearing 39–40 (June 30, 1993)). That cautious finding, however, was made in 1993, long before the court's 1997 conclusion that Laidlaw's discharges did not harm the environment. As we have previously recognized, an initial conclusion that plaintiffs have standing is subject to reexamination, particularly if later evidence proves inconsistent with that conclusion. Gladstone, 441 U.S., at 115, and n. 31, 99 S.Ct. 1601; Wyoming v. Oklahoma, 502 U.S. 437, 446, 112 S.Ct. 789, 117 L.Ed.2d 1 (1992). Laidlaw challenged the existence of injury in fact on appeal to the Fourth Circuit, but that court did not reach the question. Thus no lower court has reviewed the injury-in-fact issue in light of the extensive studies that led the District Court to conclude that the environment was not harmed by Laidlaw's discharges.

Inexplicably, the Court is untroubled by this, but proceeds to find injury in fact in the most casual fashion, as though it is merely confirming a careful analysis made below. Although we have previously refused to find standing based on the “conclusory allegations of an affidavit,” Lujan v. National Wildlife Federation, 497 U.S. 871, 888, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990), the Court is content to do just that today. By accepting plaintiffs' vague, contradictory, and unsubstantiated allegations of “concern” about the environment as adequate to prove injury in fact, and accepting them even in the face of a finding that the environment was not demonstrably harmed, the Court makes the injury-in-fact requirement a sham. If there are permit violations, and a member of a plaintiff environmental organization lives near the offending plant, it would be difficult not to satisfy today's lenient standard.

II

The Court's treatment of the redressability requirement—which would have been unnecessary if it resolved the injury-in-fact question correctly—is equally cavalier. As discussed above, petitioners allege ongoing injury consisting of diminished enjoyment of the affected waterways and decreased property values. They allege that these injuries are caused by Laidlaw's continuing permit violations. But the remedy petitioners seek is neither recompense for their injuries nor an injunction against future violations. Instead, the remedy is a statutorily specified “penalty” for past violations, payable entirely to the United States Treasury. Only last Term, we held that such penalties do not redress any injury a citizen plaintiff has suffered from past violations. Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 106–107, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998). The Court nonetheless finds the redressability requirement satisfied here, distinguishing Steel Co. on the ground that in this case petitioners allege ongoing violations; payment of the penalties, it says, will remedy petitioners' injury by deterring future violations by Laidlaw. Ante, at 706–707. It holds that a penalty payable to the public “remedies” a threatened private harm, and suffices to sustain a private suit.

That holding has no precedent in our jurisprudence, and takes this Court beyond the “cases and controversies” that Article III of the Constitution has entrusted to its resolution. Even if it were appropriate, moreover, to allow Article III's remediation requirement to be satisfied by the indirect private consequences of a public penalty, those consequences are entirely too speculative in the present case. The new standing law that the Court makes—like all expansions of standing beyond the traditional constitutional limits—has grave implications for democratic governance. I shall discuss these three points in turn.

A

In Linda R.S. v. Richard D., 410 U.S. 614, 93 S.Ct. 1146, 35 L.Ed.2d 536 (1973), the plaintiff, mother of an illegitimate child, sought, on behalf of herself, her child, and all others similarly situated, an injunction against discriminatory application of Art. 602 of the Texas Penal Code. Although that provision made it a misdemeanor for “any parent” to refuse to support his or her minor children under 18 years of age, it was enforced only against married parents. That refusal, the plaintiff contended, deprived her and her child of the equal protection of the law by denying them the deterrent effect of the statute upon the father's failure to fulfill his support obligation. The Court held that there was no Article III standing. There was no “ ‘direct’ relationship,” it said, “between the alleged injury and the claim sought to be adjudicated,” since “[t]he prospect that prosecution will, at least in the future, result in payment of support can, at best, be termed only speculative.” Id., at 618, 93 S.Ct. 1146. “[Our cases] demonstrate that, in American jurisprudence at least, a private citizen lacks a judicially cognizable interest in the prosecution or nonprosecution of another.” Id., at 619, 93 S.Ct. 1146.

Although the Court in Linda R.S. recited the “logical nexus” analysis of Flast v. Cohen, 392 U.S. 83, 88 S.Ct. 1942, 20 L.Ed.2d 947 (1968), which has since fallen into desuetude, “it is clear that standing was denied ... because of the unlikelihood that the relief requested would redress appellant's claimed injury.” Duke Power Co. v. Carolina Environmental Study Group, Inc., 438 U.S. 59, 79, n. 24, 98 S.Ct. 2620, 57 L.Ed.2d 595 (1978). There was no “logical nexus” between nonenforcement of the statute and Linda R. S.'s failure to receive support payments because “[t]he prospect that prosecution will ... result in payment of support” was “speculative,” Linda R. S., supra, at 618, 93 S.Ct. 1146—that is to say, it was uncertain whether the relief would prevent the injury.FN1 Of course precisely the same situation exists here. The principle that “in American jurisprudence ... a private citizen lacks a judicially cognizable interest in the prosecution or nonprosecution of another” applies no less to prosecution for civil penalties payable to the State than to prosecution for criminal penalties owing to the State.

FN1. The decision in Linda R.S. did not turn, as today's opinion imaginatively suggests, on the father's short-term inability to pay support if imprisoned. Ante, at 708, n. 4. The Court's only comment upon the imprisonment was that, unlike imprisonment for civil contempt, it would not condition the father's release upon payment. The Court then continued: “The prospect that prosecution will, at least in the future”—i.e., upon completion of the imprisonment—“result in payment of support can, at best, be termed only speculative.” Linda R. S., 410 U.S., at 618, 93 S.Ct. 1146.

The Court's opinion reads as though the only purpose and effect of the redressability requirement is to assure that the plaintiff receive some of the benefit of the relief that a court orders. That is not so. If it were, a federal tort plaintiff fearing repetition of the injury could ask for tort damages to be paid not only to himself but to other victims as well, on the theory that those damages would have at least some deterrent effect beneficial to him. Such a suit is preposterous because the “remediation” that is the traditional business of Anglo–American courts is relief specifically tailored to the plaintiff's injury, and not any sort of relief that has some incidental benefit to the plaintiff. Just as a “generalized grievance” that affects the entire citizenry cannot satisfy the injury-in-fact requirement even though it aggrieves the plaintiff along with everyone else, see Lujan, 504 U.S., at 573–574, 112 S.Ct. 2130, so also a generalized remedy that deters all future unlawful activity against all persons cannot satisfy the remediation requirement, even though it deters (among other things) repetition of this particular unlawful activity against these particular plaintiffs.

Thus, relief against prospective harm is traditionally afforded by way of an injunction, the scope of which is limited by the scope of the threatened injury. Lewis v. Casey, 518 U.S. 343, 357–360, 116 S.Ct. 2174, 135 L.Ed.2d 606 (1996); Lyons, 461 U.S., at 105–107, and n. 7, 103 S.Ct. 1660. In seeking to overturn that tradition by giving an individual plaintiff the power to invoke a public remedy, Congress has done precisely what we have said it cannot do: convert an “undifferentiated public interest” into an “individual right” vindicable in the courts. Lujan, supra, at 577, 112 S.Ct. 2130; Steel Co., 523 U.S., at 106, 118 S.Ct. 1003. The sort of scattershot redress approved today makes nonsense of our statement in Schlesinger v. Reservists Comm. to Stop the War, 418 U.S. 208, 222, 94 S.Ct. 2925 (1974), that the requirement of injury in fact “insures the framing of relief no broader than required by the precise facts.” A claim of particularized future injury has today been made the vehicle for pursuing generalized penalties for past violations, and a threshold showing of injury in fact has become a lever that will move the world.

B

As I have just discussed, it is my view that a plaintiff's desire to benefit from the deterrent effect of a public penalty for past conduct can never suffice to establish a case or controversy of the sort known to our law. Such deterrent effect is, so to speak, “speculative as a matter of law.” Even if that were not so, however, the deterrent effect in the present case would surely be speculative as a matter of fact.

The Court recognizes, of course, that to satisfy Article III, it must be “likely,” as opposed to “merely speculative,” that a favorable decision will redress plaintiffs' injury, Lujan, supra, at 561, 112 S.Ct. 2130. See ante, at 704. Further, the Court recognizes that not all deterrent effects of all civil penalties will meet this standard—though it declines to “explore the outer limits” of adequate deterrence, ante, at 707. It concludes, however, that in the present case “the civil penalties sought by FOE carried with them a deterrent effect” that satisfied the “likely [rather than] speculative” standard. Ibid. There is little in the Court's opinion to explain why it believes this is so.

The Court cites the District Court's conclusion that the penalties imposed, along with anticipated fee awards, provided “adequate deterrence.” Ante, at 703, 707; 956 F.Supp., at 611. There is absolutely no reason to believe, however, that this meant “deterrence adequate to prevent an injury to these plaintiffs that would otherwise occur.” The statute does not even mention deterrence in general (much less deterrence of future harm to the particular plaintiff) as one of the elements that the court should consider in fixing the amount of the penalty. (That element can come in, if at all, under the last, residual category of “such other matters as justice may require.” 33 U.S.C. § 1319(d).) The statute does require the court to consider “the seriousness of the violation or violations, the economic benefit (if any) resulting from the violation, any history of such violations, any good-faith efforts to comply with the applicable requirements, [and] the economic impact of the penalty on the violator....” Ibid., see 956 F.Supp., at 601. The District Court meticulously discussed, in subsections (a) through (e) of the portion of its opinion entitled “Civil Penalty,” each one of those specified factors, and then—under subsection (f) entitled “Other Matters As Justice May Require,” it discussed “1. Laidlaw's Failure to Avail Itself of the Reopener Clause,” “2. Recent Compliance History,” and “3. The Ever–Changing Mercury Limit.” There is no mention whatever—in this portion of the opinion or anywhere else—of the degree of deterrence necessary to prevent future harm to these particular plaintiffs. Indeed, neither the District Court's final opinion (which contains the “adequate deterrence” statement) nor its earlier opinion dealing with the preliminary question whether South Carolina's previous lawsuit against Laidlaw constituted “diligent prosecution” that would bar citizen suit, see 33 U.S.C. § 1365(b)(1)(B), displayed any awareness that deterrence of future injury to the plaintiffs was necessary to support standing.

The District Court's earlier opinion did, however, quote with approval the passage from a District Court case which began: “ ‘Civil penalties seek to deter pollution by discouraging future violations. To serve this function, the amount of the civil penalty must be high enough to insure that polluters cannot simply absorb the penalty as a cost of doing business.’ ” App. 122, quoting PIRG v. Powell Duffryn Terminals, Inc., 720 F.Supp. 1158, 1166 (D.N.J. 1989). When the District Court concluded the “Civil Penalty” section of its opinion with the statement that “[t]aken together, this court believes the above penalty, potential fee awards, and Laidlaw's own direct and indirect litigation expenses provide adequate deterrence under the circumstances of this case,” 956 F.Supp., at 611, it was obviously harking back to this general statement of what the statutorily prescribed factors (and the “as justice may require” factors, which in this case did not include particularized or even generalized deterrence) were designed to achieve. It meant no more than that the court believed the civil penalty it had prescribed met the statutory standards.

The Court points out that we have previously said “ ‘all civil penalties have some deterrent effect,’ ” ante, at 706 (quoting Hudson v. United States, 522 U.S. 93, 102, 118 S.Ct. 488, 139 L.Ed.2d 450 (1997)). That is unquestionably true: As a general matter, polluters as a class are deterred from violating discharge limits by the availability of civil penalties. However, none of the cases the Court cites focused on the deterrent effect of a single imposition of penalties on a particular lawbreaker. Even less did they focus on the question whether that particularized deterrent effect (if any) was enough to redress the injury of a citizen plaintiff in the sense required by Article III. They all involved penalties pursued by the government, not by citizens. See id., at 96, 118 S.Ct. 488; Department of Revenue of Mont. v. Kurth Ranch, 511 U.S. 767, 773, 114 S.Ct. 1937, 128 L.Ed.2d 767 (1994); Tull v. United States, 481 U.S. 412, 414, 107 S.Ct. 1831, 95 L.Ed.2d 365 (1987).

If the Court had undertaken the necessary inquiry into whether significant deterrence of the plaintiffs' feared injury was “likely,” it would have had to reason something like this: Strictly speaking, no polluter is deterred by a penalty for past pollution; he is deterred by the fear of a penalty for future pollution. That fear will be virtually nonexistent if the prospective polluter knows that all emissions violators are given a free pass; it will be substantial under an emissions program such as the federal scheme here, which is regularly and notoriously enforced; it will be even higher when a prospective polluter subject to such a regularly enforced program has, as here, been the object of public charges of pollution and a suit for injunction; and it will surely be near the top of the graph when, as here, the prospective polluter has already been subjected to state penalties for the past pollution. The deterrence on which the plaintiffs must rely for standing in the present case is the marginal increase in Laidlaw's fear of future penalties that will be achieved by adding federal penalties for Laidlaw's past conduct.

I cannot say for certain that this marginal increase is zero; but I can say for certain that it is entirely speculative whether it will make the difference between these plaintiffs' suffering injury in the future and these plaintiffs' going unharmed. In fact, the assertion that it will “likely” do so is entirely farfetched. The speculativeness of that result is much greater than the speculativeness we found excessive in Simon v. Eastern Ky. Welfare Rights Organization, 426 U.S. 26, 43, 96 S.Ct. 1917, 48 L.Ed.2d 450 (1976), where we held that denying § 501(c)(3) charitable-deduction tax status to hospitals that refused to treat indigents was not sufficiently likely to assure future treatment of the indigent plaintiffs to support standing. And it is much greater than the speculativeness**719 we found excessive in Linda R.S. v. Richard D., discussed supra, at 715–716, where we said that “[t]he prospect that prosecution [for nonsupport] will ... result in payment of support can, at best, be termed only speculative,” 410 U.S., at 618, 93 S.Ct. 1146.

In sum, if this case is, as the Court suggests, within the central core of “deterrence” standing, it is impossible to imagine what the “outer limits” could possibly be. The Court's expressed reluctance to define those “outer limits” serves only to disguise the fact that it has promulgated a revolutionary new doctrine of standing that will permit the entire body of public civil penalties to be handed over to enforcement by private interests.

C

Article II of the Constitution commits it to the President to “take Care that the Laws be faithfully executed,” Art. II, § 3, and provides specific methods by which all persons exercising significant executive power are to be appointed, Art. II, § 2. As Justice KENNEDY'S concurrence correctly observes, the question of the conformity of this legislation with Article II has not been argued—and I, like the Court, do not address it. But Article III, no less than Article II, has consequences for the structure of our government, see Schlesinger, 418 U.S., at 222, 94 S.Ct. 2925, and it is worth noting the changes in that structure which today's decision allows.

By permitting citizens to pursue civil penalties payable to the Federal Treasury, the Act does not provide a mechanism for individual relief in any traditional sense, but turns over to private citizens the function of enforcing the law. A Clean Water Act plaintiff pursuing civil penalties acts as a self-appointed mini-EPA. Where, as is often the case, the plaintiff is a national association, it has significant discretion in choosing enforcement targets. Once the association is aware of a reported violation, it need not look long for an injured member, at least under the theory of injury the Court applies today. See supra, at 700–702. And once the target is chosen, the suit goes forward without meaningful public control.FN2 The availability of civil penalties vastly disproportionate to the individual injury gives citizen plaintiffs massive bargaining power—which is often used to achieve settlements requiring the defendant to support environmental projects of the plaintiffs' choosing. See Greve, The Private Enforcement of Environmental Law, 65 Tulane L.Rev. 339, 355–359 (1990). Thus is a public fine diverted to a private interest.

FN2. The Court points out that the Government is allowed to intervene in a citizen suit, see ante, at 708, n. 4; 33 U.S.C. § 1365(c)(2), but this power to “bring the Government's views to the attention of the court,” ante, at 708, n. 4, is meager substitute for the power to decide whether prosecution will occur. Indeed, according the Chief Executive of the United States the ability to intervene does no more than place him on a par with John Q. Public, who can intervene—whether the Government likes it or not—when the United States files suit. § 1365(b)(1)(B).

To be sure, the EPA may foreclose the citizen suit by itself bringing suit. 33 U.S.C. § 1365(b)(1)(B). This allows public authorities to avoid private enforcement only by accepting private direction as to when enforcement should be undertaken—which is no less constitutionally bizarre. Elected officials are entirely deprived of their discretion to decide that a given violation should not be the object of suit at all, or that the enforcement decision should be postponed.FN3 See § 1365(b)(1)(A) (providing that citizen plaintiff need only wait 60 days after giving notice of the violation to the government before proceeding with action). This is the predictable and inevitable consequence of the Court's allowing the use of public remedies for private wrongs.

FN3. The Court observes that “the Federal Executive Branch does not share the dissent's view that such suits dissipate its authority to enforce the law,” since it has “endorsed this citizen suit from the outset.” Ante, at 708, n. 4. Of course, in doubtful cases a long and uninterrupted history of Presidential acquiescence and approval can shed light upon the constitutional understanding. What we have here—acquiescence and approval by a single administration—does not deserve passing mention.

III

Finally, I offer a few comments regarding the Court's discussion of whether FOE's claims became moot by reason of Laidlaw's substantial compliance with the permit limits. I do not disagree with the conclusion that the Court reaches. Assuming that the plaintiffs had standing to pursue civil penalties in the first instance (which they did not), their claim might well not have been mooted by Laidlaw's voluntary compliance with the permit, and leaving this fact-intensive question open for consideration on remand, as the Court does, ante, at 711, seems sensible.FN4 In reaching this disposition, however, the Court engages in a troubling discussion of the purported distinctions between the doctrines of standing and mootness. I am frankly puzzled as to why this discussion appears at all. Laidlaw's claimed compliance is squarely within the bounds of our “voluntary cessation” doctrine, which is the basis for the remand. Ante, at 710.FN5 There is no reason to engage in an interesting academic excursus upon the differences between mootness and standing in order to invoke this obviously applicable rule.FN6

FN4. In addition to the compliance and plant-closure issues, there also remains open on remand the question whether the current suit was foreclosed because the earlier suit by the State was “diligently prosecuted.” See 33 U.S.C. § 1365(b)(1)(B). Nothing in the Court's opinion disposes of the issue. The opinion notes the District Court's finding that Laidlaw itself played a significant role in facilitating the State's action. Ante, at 702, n. 1, 707, n. 2. But there is no incompatibility whatever between a defendant's facilitation of suit and the State's diligent prosecution—as prosecutions of felons who confess their crimes and turn themselves in regularly demonstrate. Laidlaw was entirely within its rights to prefer state suit to this private enforcement action; and if it had such a preference it would have been prudent—given that a State must act within 60 days of receiving notice of a citizen suit, see § 1365(b)(1)(A), and given the number of cases state agencies handle—for Laidlaw to make sure its case did not fall through the cracks. South Carolina's interest in the action was not a feigned last minute contrivance. It had worked with Laidlaw in resolving the problem for many years, and had previously undertaken an administrative enforcement action resulting in a consent order. 890 F.Supp. 470, 476 (D.S.C.1995). South Carolina has filed an amicus brief arguing that allowing citizen suits to proceed despite ongoing state enforcement efforts “will provide citizens and federal judges the opportunity to relitigate and second-guess the enforcement and permitting actions of South Carolina and other States.” Brief for South Carolina as Amicus Curiae 6.

FN5. Unlike Justice STEVENS' concurrence, the opinion for the Court appears to recognize that a claim for civil penalties is moot when it is clear that no future injury to the plaintiff at the hands of the defendant can occur. The concurrence suggests that civil penalties, like traditional damages remedies, cannot be mooted by absence of threatened injury. The analogy is inapt. Traditional money damages are payable to compensate for the harm of past conduct, which subsists whether future harm is threatened or not; civil penalties are privately assessable (according to the Court) to deter threatened future harm to the plaintiff. Where there is no threat to the plaintiff, he has no claim to deterrence. The proposition that impossibility of future violation does not moot the case holds true, of course, for civil-penalty suits by the government, which do not rest upon the theory that some particular future harm is being prevented.

FN6. The Court attempts to frame its exposition as a corrective to the Fourth Circuit, which it claims “confused mootness with standing.” Ante, at 708. The Fourth Circuit's conclusion of nonjusticiability rested upon the belief (entirely correct, in my view) that the only remedy being pursued on appeal, civil penalties, would not redress FOE's claimed injury. 149 F.3d 303, 306 (1998). While this might be characterized as a conclusion that FOE had no standing to pursue civil penalties from the outset, it can also be characterized, as it was by the Fourth Circuit, as a conclusion that, when FOE declined to appeal denial of the declaratory judgment and injunction, and appealed only the inadequacy of the civil penalties (which it had no standing to pursue) the case as a whole became moot. Given the Court's erroneous conclusion that civil penalties can redress private injury, it of course rejects both formulations—but neither of them necessitates the Court's academic discourse comparing the mootness and standing doctrines.

Because the discussion is not essential—indeed, not even relevant—to the Court's decision, it is of limited significance. Nonetheless, I am troubled by the Court's too-hasty retreat from our characterization of mootness as “the doctrine of standing set in a time frame.” Arizonans for Official English v. Arizona, 520 U.S. 43, 68, n. 22, 117 S.Ct. 1055, 137 L.Ed.2d 170 (1997). We have repeatedly recognized that what is required for litigation to continue is essentially identical to what is required for litigation to begin: There must be a justiciable case or controversy as required by Article III. “Simply stated, a case is moot when the issues presented are no longer ‘live’ or the parties lack a legally cognizable interest in the outcome.” Powell v. McCormack, 395 U.S. 486, 496, 89 S.Ct. 1944, 23 L.Ed.2d 491 (1969). A court may not proceed to hear an action if, subsequent to its initiation, the dispute loses “its character as a present, live controversy of the kind that must exist if [the court is] to avoid advisory opinions on abstract propositions of law.” Hall v. Beals, 396 U.S. 45, 48, 90 S.Ct. 200, 24 L.Ed.2d 214 (1969) (per curiam). See also Preiser v. Newkirk, 422 U.S. 395, 401, 95 S.Ct. 2330, 45 L.Ed.2d 272 (1975); Steffel v. Thompson, 415 U.S. 452, 459, n. 10, 94 S.Ct. 1209, 39 L.Ed.2d 505 (1974). Because the requirement of a continuing case or controversy derives from the Constitution, Liner v. Jafco, Inc., 375 U.S. 301, 306, n. 3, 84 S.Ct. 391, 11 L.Ed.2d 347 (1964), it may not be ignored when inconvenient, United States v. Alaska S.S. Co., 253 U.S. 113, 116, 40 S.Ct. 448, 64 L.Ed. 808 (1920) (moot question cannot be decided, “[h]owever convenient it might be”), or, as the Court suggests, to save “sunk costs,” compare ante, at 710, with Lewis v. Continental Bank Corp., 494 U.S. 472, 480, 110 S.Ct. 1249, 108 L.Ed.2d 400 (1990) (“[R]easonable caution is needed to be sure that mooted litigation is not pressed forward ... solely in order to obtain reimbursement of sunk costs”).

It is true that mootness has some added wrinkles that standing lacks. One is the “voluntary cessation” doctrine to which the Court refers. Ante, at 708. But it is inaccurate to regard this as a reduction of the basic requirement for standing that obtained at the beginning of the suit. A genuine controversy must exist at both stages. And just as the initial suit could be brought (by way of suit for declaratory judgment) before the defendant actually violated the plaintiff's alleged rights, so also the initial suit can be continued even though the defendant has stopped violating the plaintiff's alleged rights. The “voluntary cessation” doctrine is nothing more than an evidentiary presumption that the controversy reflected by the violation of alleged rights continues to exist. Steel Co., 523 U.S., at 109, 118 S.Ct. 1003. Similarly, the fact that we do not find cases moot when the challenged conduct is “capable of repetition, yet evading review” does not demonstrate that the requirements for mootness and for standing differ. “Where the conduct has ceased for the time being but there is a demonstrated probability that it will recur, a real-life controversy between parties with a personal stake in the outcome continues to exist.” Honig v. Doe, 484 U.S. 305, 341, 108 S.Ct. 592, 98 L.Ed.2d 686 (1988) (SCALIA, J., dissenting) (emphasis deleted).

Part of the confusion in the Court's discussion is engendered by the fact that it compares standing, on the one hand, with mootness based on voluntary cessation, on the other hand. Ante, at 709. The required showing that it is “absolutely clear” that the conduct “could not reasonably be expected to recur” is not the threshold showing required for mootness, but the heightened showing required in a particular category of cases where we have sensibly concluded that there is reason to be skeptical that cessation of violation means cessation of live controversy. For claims of mootness based on changes in circumstances other than voluntary cessation, the showing we have required is less taxing, and the inquiry is indeed properly characterized as one of “ ‘standing set in a time frame.’ ” See Arizonans, supra, at 67, 68, n. 22, 117 S.Ct. 1055 (case mooted where plaintiff's change in jobs deprived case of “still vital claim for prospective relief”); Spencer v. Kemna, 523 U.S. 1, 7, 118 S.Ct. 978, 140 L.Ed.2d 43 (1998) (case mooted by petitioner's completion of his sentence, since “throughout the litigation, the plaintiff must have suffered, or be threatened with, an actual injury traceable to the defendant and likely to be redressed by a favorable judicial decision” (internal quotation marks omitted)); Lewis, supra, at 478–480, 116 S.Ct. 2174 (case against State mooted by change in federal law that eliminated parties' “personal stake” in the outcome).

In sum, while the Court may be correct that the parallel between standing and mootness is imperfect due to realistic evidentiary presumptions that are by their nature applicable only in the mootness context, this does not change the underlying principle that “ ‘[t]he requisite personal interest that must exist at the commencement of the litigation ... must continue throughout its existence....’ ” Arizonans, supra, at 68, n. 22, 117 S.Ct. 1055 (quoting United States Parole Comm'n v. Geraghty, 445 U.S. 388, 397, 100 S.Ct. 1202, 63 L.Ed.2d 479 (1980)).

* * *

By uncritically accepting vague claims of injury, the Court has turned the Article III requirement of injury in fact into a “mere pleading requirement,” Lujan, 504 U.S., at 561, 112 S.Ct. 2130; and by approving the novel theory that public penalties can redress anticipated private wrongs, it has come close to “mak[ing] the redressability requirement vanish,” Steel Co., supra, at 107, 118 S.Ct. 1003. The undesirable and unconstitutional consequence of today's decision is to place the immense power of suing to enforce the public laws in private hands. I respectfully dissent.

Bose v. Interclick, Inc.

Not Reported in F.Supp.2d, 2011 WL 4343517 (S.D.N.Y. 2011)

MEMORANDUM AND ORDER

DEBORAH A. BATTS, District Judge.

Plaintiff Sonal Bose (“Bose”), individually and on behalf of all others similarly situated, brings suit against Defendant Interclick, Inc. (“Interclick”), an Advertising Network company, and McDonald's USA LLC, McDonald's Corp., CBS Corp., Mazda Motor Corp. of America, Inc., Microsoft Corp., and Does 1–50 (collectively, the “Advertiser Defendants”) under the Computer Fraud and Abuse Act (“CFAA”), New York General Business Law Section 349, and New York State common law. All Defendants move to dismiss on the grounds that Plaintiff fails to allege cognizable injury or meet the $5,000.00 threshold to state a claim under the CFAA, and that Plaintiff's state law claims fail as a matter of law. For the reasons below, Defendants' Motions to Dismiss are GRANTED in part and DENIED in part.

I. BACKGROUND

The facts and allegations are set forth in Bose's Amended Complaint (“pl.”). Bose's factual assertions are assumed true for the purposes of this motion.

Bose is a resident of the city, county, and state of New York. (pl.¶ 7.) Bose is a consumer who frequently uses the Internet. (Id. ¶ 76.)

Interclick is an “Advertising Network” company. (Id. ¶¶ 8, 24.) Interclick purchases advertisement display space from websites, and displays advertisements of interest to a computer user. (Id. ¶ 30.) Websites on the Internet frequently display third-party advertisements. (Id. 130.) These websites sell advertising display space either directly to advertisers or to Advertising Network companies like Interclick. (Id. ¶¶ 24–25.) Interclick's clients are advertising companies and agencies that pay fees to Interclick to display their advertisements on websites within Interclick's advertising network. (Id. ¶¶ 21, 24.)

Many Advertising Network companies use “browser cookies,” which are text files that gather information about a computer user's internet habits. (pl.¶ 30.) Browser cookies contain unique identifiers and associate “browsing history information” with particular computers. (Id. ¶ 30.) Advertising Networks use this browsing history information to create “behavioral profiles.” When a computer user visits a web page on which the Advertising Network provides advertisements, the Advertising Network company uses a behavioral profile to select particular advertisements to display on that computer. (Id. ¶ 30.) Computer users can delete these browser cookies to prevent third parties from associating the user's browsing history information with their subsequent web activity. (Id. ¶¶ 32, 82.)

Bose, however, alleges that Interclick used “flash cookies” (or Local Shared Objects (“LSOs”)) to back up browser cookies. (pl.¶ 39.) When a computer user deletes a browser cookie, the flash cookie “respawns” the browser cookie without notice to or consent of the user. (Id. ¶ 39.) The flash cookie “may be” larger than a browser cookie. (Id. ¶ 88.) In October 2010, Bose examined her computer and found a flash cookie placed there from Interclick. (Id. ¶ 77.)

Bose also alleges that Interclick used “history sniffing” code invisible to the computer user. (pl.¶ 47.) This code, which contained a list of Web page hyperlinks, used the computer's browser to determine whether the computer had previously visited those hyperlinks, and transmitted the results to Interclick's servers. (Id. ¶ 47.) Interclick used data on the computer's browsing history to select particular advertisements to display on that computer. (Id. ¶ 47.)

On December 8, 2010, Bose filed suit against Interclick. A suit against the Advertiser Defendants followed on December 23, 2010, and those cases were consolidated with the filing of the First Amended Complaint on March 21, 2011. Plaintiff alleges that Interclick violated the CFAA by monitoring Plaintiff's web browsing. (Id. ¶ 1.) Bose alleges that the Defendants invaded her privacy, misappropriated personal information, and interfered with the operation of her computer. (Id. ¶ 3.) On April 18, 2011, all Defendants moved to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).

II. DISCUSSION

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B. The Computer Fraud and Abuse Act

The CFAA provides, in pertinent part, “[w]hoever intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains information from any protected computer ... shall be punished.” 18 U.S.C. § 1030(a)(2)(C). Under § 1030(a)(5)(C), the CFAA also subjects to criminal liability someone who “intentionally accesses a protected computer without authorization, and as a result of such conduct, causes damage.”

Although the CFAA is a criminal statute, it also provides a civil remedy. Under the civil enforcement provision of the CFAA, “[a]ny person who suffers damage or loss by reason of a violation of this section may maintain a civil action against the violator to obtain compensatory damages and injunctive relief or other equitable relief .” 18 U.S.C. § 1030(g); see also Nexans Wires S.A. v. Sark–USA, Inc., 166 Fed. App'x 559, 562 (2d Cir. Feb.13, 2006) (recognizing that a Plaintiff can only bring a civil action if the Plaintiff satisfies one of five factors set forth in § 1030(c)(4)(A)(i)[2]). The relevant factor in this case is whether Defendants' conduct caused “loss to 1 or more persons during any 1–year period ... aggregating at least $5,000 in value.” § 1030(c)(4)(A) (i)(I).

1. Damage or Loss under the CFAA

The CFAA defines “damage” as “any impairment to the integrity or availability of data, a program, a system, or information.” § 1030(e)(8). “Loss,” in turn, includes “any reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service.” § 1030(e)(11). In addition, any damage or loss must meet the $5,000.00 minimum statutory threshold specified in § 1030(c)(4)(A)(i)(I). , Inc. v. Verio, 356 F.3d 393, 439 (2d Cir.2004) (citing In re Double C lick Inc. Privacy Litiq., 154 F.Supp.2d 497, 520–23 (S.D.N.Y.2001)).

Here, Bose pleads three types of damage or loss: (1) damage due to impairment of Bose's computer and computer-related services and resources; (2) loss due to Interdict's collection of personal information from Bose; and (3) loss due to an interruption of Bose's Internet service. (pl.¶¶ 94–116.)

a. Damage to Computer–Related Resources

With regard to damage or impairment of a computer system, physical damage to a computer is not necessary to allege damage or loss. EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577, 585 (1st Cir.2001) (noting that instances of physical damage to computers are likely to become less common while the value and cost of maintaining computer security are increasing); see also Tyco Int'l (US) Inc. v. John Does 1–3, No. 01 Civ. 3856, 2003 WL 21638205, at *1 (S.D.N.Y. July 11, 2003). Any loss incurred from “securing or remedying” a computer system after an alleged CFAA violation still constitutes loss. In re Double Click Inc. Privacy Litig., 154 F.Supp.2d 497, 524 (S.D.N.Y.2001) ( “S.Rep. No. 104–357 seems to make clear that Congress intended the term ‘loss' to target remedial expenses borne by victims that could not properly be considered direct damage caused by a computer hacker.”). Accordingly, Courts have sustained claims where a Defendant accessed a Plaintiff's computer system in order to copy the Plaintiff's system for the Defendant's own competitor computer system. I.M.S. Inquiry Mgmt. Sys., Ltd. v. Berkshire Info., 307 F.Supp.2d 521, 525 (S.D.N.Y.2004) (finding that harm to the integrity of plaintiff's data system constitutes loss).

Courts have found that losses include the costs of seeking to “identify evidence of the breach, assess any damage it may have caused, and determine whether any remedial measures were needed to rescue the network.” Univ. Sports Pub. Co. v. Playmakers Media Co., 725 F.Supp.2d 378, 388 (S.D.N.Y.2010); see also Ipreo Holdings LLC v. Thomson Reuters Corp., No. 09 CV 8099(BSJ), 2011 WL 855872, *7 (S.D.N.Y. Mar.8, 2011) (holding that a Plaintiff can meet the loss requirement through “damage assessment and/or remedial measures, even without pleading actual damage”); Kaufman v. Nest Seekers, LLC, No. 05 CV 6782(GBD), 2006 WL 2807177, at *8 (S.D.N.Y. Sept.26, 2006) (denying motion to dismiss because “costs involved in investigating the damage to [a] computer system may constitute ... loss”); see also I.M.S. Inquiry Mgmt. Sys., Ltd., 307 F.Supp.2d 521 at 526 (holding that a Plaintiff sufficiently alleged loss where Defendant's unauthorized activity “forced Plaintiff to incur costs of more than $5,000 in damage assessment and remedial measures”).

Here, Bose fails to quantify any damage that Interclick caused to her “computers, systems or data that could require economic remedy.” See In re DoubleClick Inc. Privacy Litig., 154 F.Supp.2d at 521. Bose alleges that Interclick impaired the functioning and diminished the value of Bose's computer in a general fashion (See Am. Compl. ¶ 115), but fails to make any specific allegation as to the cost of repairing or investigating the alleged damage to her computer. See Fink v. Time Warner Cable, No. 08 Civ. 9628(LTS)(KNF), 2009 WL 2207920, *4 (S.D.N.Y. July 23, 2009) (dismissing a CFAA claim because Plaintiff only alleged that Defendant caused damage by “impairing the integrity or availability of data and information,” which was “insufficiently factual to frame plausibly the damages element of Plaintiff's CFAA claim”); see also Czech v. Wall St. on Demand, Inc., 674 F.Supp.2d 1102, 1118 (D.Minn.2009) (holding that a Plaintiff's claim that unwanted text messages “caused the wireless devices of [Plaintiff] to slow and/or lag in operation” and “impair[ ] the availability of and interrupt[ ] the wireless-device service,” was conclusory). Bose's claims therefore fail because she does not quantify the repair cost or cost associated with investigating the alleged damage.

b. Collection of Personal Information

Bose's allegations concerning “invasion of [her] privacy,” “trespass,” and “misappropriation of confidential data” are also not cognizable economic losses. See In re Double C lick Inc. Privacy Litig., 154 F.Supp.2d at 524 n. 33; see also S. Rep No. 101–544 (1990) (noting that the CFAA is limited to “economic damages,” except for violations related to medical records).

Only economic damages or loss can be used to meet the $5,000.00 threshold. In re DoubleClick Inc. Privacy Litig., 154 F.Supp.2d at 519 (holding that computer users' demographic information were not compensable “economic damages”); see also Civic Ctr. Motors, Ltd. v. Mason St. Imp. Cars, Ltd., 387 F.Supp.2d 378, 382 (S.D.N.Y.2005) (holding that lost profits from defendant's unfair competitive edge were not economic damages under the CFAA). The limit based on economic damages under the CFAA “precludes damages for death, personal injury, mental distress, and the like.” Creative Computing v. LLC, 386 F.3d 930, 935 (9th Cir.2004).

Here, Bose alleges loss from Interclick's collection of her personal information without her permission through flash cookies and history sniffing code. (pl.¶¶ 94–109.) Unlike in DoubleClick, where Plaintiffs could “easily and at no cost prevent [the Defendant] from collecting information by simply selecting options on their browsers or downloading an ‘opt out’ cookie,” Bose alleges that Interclick circumvented “browser privacy controls” without her consent. (pl.¶ 79); see 154 F.Supp.2d at 521.

This Court is not persuaded by Plaintiff's attempt to distinguish DoubleClick. In LaCourt v. Specific Media, Inc., a court in the Central District of California dismissed a CFAA claim by plaintiffs who alleged that they set “privacy and security controls” on their computers to block and delete third party cookies, and that the defendant had a “Flash cookie” installed on plaintiffs' computers without notice or consent. See LaCourt v. Specific Media, Inc., No. SACV 10–1256–GW(JCGx), 2011 WL 1661532, at *1 (C.D.Cal. Apr. 28, 2011). Finding that plaintiffs had failed to allege economic injury, the court noted,

the Complaint does not identify a single individual who was foreclosed from entering into a ‘value-for-value exchange’ as a result of [defendant's] alleged conduct. Furthermore, there are no facts in the [complaint] that indicate that the Plaintiffs themselves ascribed an economic value to their unspecified personal information. Finally, even assuming an opportunity to engage in a ‘value-for-value exchange,’ Plaintiffs do not explain how they were ‘deprived’ of the economic value of their personal information simply because their unspecified personal information was purportedly collected by a third party.

LaCourt, 2011 WL 1661532, at *5.

The deficiencies noted by the court in LaCourt are also present here.

Furthermore, as noted by the court in DoubleClick, personal data and demographic information concerning consumers are constantly collected by marketers, mail-order catalogues and retailers. In re DoubleClick Inc. Privacy Litiq., 154 F.Supp.2d at 525. The collection of demographic information does not “constitute[ ] damage to consumers or unjust enrichment to collectors.” Id. Advertising on the Internet is no different from advertising on television or in newspapers. Id. Even if Bose took steps to prevent the data collection, her injury is still insufficient to meet the statutory threshold. See LaCourt, 2011 WL 1661532, at *5 (holding that a Plaintiff's inability to delete or control cookies may constitute de minimis injury, but such injury was still insufficient to meet the $5,000.00 threshold).

The court's reasoning in DoubleClick is still persuasive, as the court concluded in LaCourt:

While Plaintiffs attempt to distinguish DoubleClick on the ground they have alleged that they were deprived not of “mere demographic information,” but “of the value of their personal data,” it is not clear what they mean by this. Defendant observes that, if anything, the Plaintiffs in DoubleClick alleged that the Defendant collected much more information than Specific Media supposedly collected in this case, including “names, e-mail addresses, home and business addresses, telephone numbers, searches performed on the Internet, Web pages or sites visited on the Internet and other communications and information that users would not ordinarily expect advertisers to be able to collect.”

Id. (citing In re Double C lick Inc. Privacy Litig., 154 F.Supp.2d at 503).

Bose's claim that Interclick collected her personal information therefore does not constitute cognizable loss sufficient to meet the $5,000.00 statutory threshold.

c. Interruption of Service.

Bose also fails to allege specific damage or loss incurred due to alleged interruption of service, or costs incurred to remedy the alleged interruption of service. (pl.¶ 111–116.) Even if a flash cookie may reach up to 100 kilobytes in size and may occupy space on Bose's hard drive, Bose fails to demonstrate that the flash cookie caused damage, a slowdown, or a shutdown to her computer. See Czech, 674 F.Supp.2d at 1117 (holding that damage caused by an “impairment of performance” of a cell phone occurs only when the “cumulative impact of all calls or messages at any given time exceeds the device's finite capacity so as to result in a slowdown, if not an outright ‘shutdown,’ of service”). Thus, Bose's claim of interruption of service is insufficient to meet the $5,000.00 statutory threshold for loss.

2. Aggregation

Bose alleges that when her claims and other class members' claims are aggregated, the $5,000.00 threshold is met. (pl.¶¶ 120, 150.)

The Second Circuit has not yet addressed whether losses can be aggregated for purposes of the CFAA before a class is certified, but it has indicated approval of DoubleClick 's thorough exploration of the CFAA. , Inc., 356 F.3d at 439–440 (noting in DoubleClick “excellent statutory construction analysis and thorough exploration of legislative history”). In DoubleClick, the court concluded that damage and loss may only be “aggregated across victims and over time” for a “single act.” 154 F.Supp.2d at 523 (declining to aggregate claims that defendant placed cookies on multiple computers and noting that the CFAA defines damage in § 1030(e)(8) in the singular form, “any impairment to the integrity or availability of data, a program, a system, or information,” rather than the plural form, “any impairments to the integrity or availability of data, programs, systems, or information”); see also S.Rep. No. 99–132, at 5 (1986) (explaining that loss caused by the “same act” can be aggregated to meet the $5,000.00 threshold). Plaintiff's claims that Interclick placed cookies on multiple computers could not be aggregated to reach the $5,000.00 threshold under the reasoning in DoubleClick.

Moreover, even if a plaintiff represents a class, she must still demonstrate that she herself has been personally injured. Lewis v. Casey, 518 U.S. 343, 357, 116 S.Ct. 2174, 135 L.Ed.2d 606 (1996); see also In re America Online, Inc., 168 F.Supp.2d 1359, 1374–75 (S.D.Fla.2001) (dismissing a CFAA claim even if damages can be aggregated across multiple computers because Plaintiff failed to specify individuals who suffered the loss, whether they were individuals within the class, outside the class or named representatives).

Some courts in the Ninth Circuit have concluded that damages can be aggregated across multiple computers. The court in In re Toys R Us, Inc., Privacy Litig., explained aggregation: “Certain types of malicious mischief may cause smaller amounts of damage to numerous individuals, and thereby collectively create a loss of more than $1,000.” No. 00 Civ. 2746, 2001 WL 34517252, at *11 n. 20 (N.D.Cal. Oct.9, 2001) (quoting Sen. Rep. No. 99–132). The court concluded that because the committee referred to “numerous individuals,” damages across multiple computers could be aggregated. Id. (holding that when “Defendants caused an identical file to be implanted in each of the Plaintiffs' computers, resulting in damages of a uniform nature,” Plaintiffs could aggregate “damages exceeding $5,000 during any one-year period to one or more individuals”). Under this reasoning, multiple intrusions across a one-year period can cause a single impairment to data, and the statute does not limit impairment to the result of a single intrusion or a single corrupted byte. Creative Computing, 386 F.3d at 934–35.

Nevertheless, courts within the Ninth Circuit to have considered the question subsequently have raised doubts concerning whether even after aggregation, Plaintiffs can meet the $5,000.00 threshold when they allege damages similar to those alleged in this case. See LaCourt, 2011 WL 1661532, *6 (finding that Plaintiffs “failed to plausibly allege that they and the putative class—even in the aggregate—have suffered $5,000 in economic damages in a one year period as a result of [the Defendant's] actions”). As in LaCourt, Plaintiff here has failed to allege facts that would allow this Court to conclude that damages meet the $5,000.00 threshold, even when aggregated across the putative class.

Accordingly, Bose's Amended Complaint must be dismissed because she failed to assert personal economic loss under the CFAA.

C. State Law Claims

Plaintiff claims that this Court has jurisdiction over the remaining state law claims under the Class Action Fairness Act of 2005, 28 U.S.C. § 1332 (hereinafter, “CAFA”), because the aggregate claims of Plaintiff and the proposed Class exceed $5,000,000.00, there is minimal diversity of citizenship between Defendants and the proposed Class, and the Classes each consist of more than one hundred members. (pl.¶ 16.) Defendants move to dismiss the state law claims on the grounds that Plaintiff has failed to meet the $5,000,000.00 threshold, and that Plaintiff has failed to state a claim under the relevant state laws.

As an initial matter, this Court notes that Plaintiff's failure to meet the $5,000.00 threshold under the CFAA is not, as Defendants argue, necessarily fatal to Bose's attempt to assert CAFA jurisdiction over her state law claims. Damages under the CFAA are narrowly defined, and Plaintiff and the Class Members may be entitled to damages under state law that are not cognizable under the CFAA. This Court must therefore address Plaintiff's state law claims.

i. New York General Business Law § 349

Plaintiff alleges that Defendants' information collecting activities constitute a deceptive business act or practice under Section 349 of the New York General Business law. (pl.¶ 155.) Section 349 was originally enacted as a broad consumer protection measure. See Stutman v. Chemical Bank, 95 N.Y.2d 24, 28, 709 N.Y.S.2d 892, 731 N.E.2d 608 (N.Y.2000); N.Y. Gen. Bus. Law. § 349 (McKinney 2011). To state a claim under Section 349, a plaintiff must demonstrate three elements: “first, that the challenged act or practice was consumer-oriented; second, that it was misleading in a material way; and third, that the plaintiff suffered injury as a result of the deceptive act.” Id. at 29, 709 N.Y.S.2d 892, 731 N.E.2d 608; see also Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, 85 N.Y.2d 20, 25, 623 N.Y.S.2d 529, 647 N.E.2d 741 (N.Y.1995). The deceptive practice must be “likely to mislead a reasonable consumer acting reasonably under the circumstances.” Oswego, 85 N.Y.2d at 26, 623 N.Y.S.2d 529, 647 N.E.2d 741. “The phrase deceptive acts or practices” under the statute is not the mere invention of a scheme or marketing strategy, but the actual misrepresentation or omission to a consumer.” Goshen v. Mutual Life Ins. Co. of N.Y., 98 N.Y.2d 314, 325, 746 N.Y.S.2d 858, 774 N.E.2d 1190 (N.Y.2002). In addition, a plaintiff must prove “actual” injury to recover under the statute, though not necessarily pecuniary harm. Oswego, 85 N.Y.2d at 26, 623 N.Y.S.2d 529, 647 N.E.2d 741.

Plaintiff alleges that Defendant Interclick used LSOs and browser history sniffing code to circumvent consumers' ordinary browser privacy and security settings on their computers. (pl.¶ 156.) This conduct misled consumers into believing their digital information was private when in reality it was being tracked without their knowledge. (pl.¶ 157.) Plaintiff alleges that consumers were harmed in that they suffered “the loss of privacy through the exposure of the [sic] personal and private information and evasion of privacy controls on their computers.” (pl.¶ 160.)

Interclick first argues that Plaintiff cannot meet the second element of a claim under Section 349 because Plaintiff has failed to allege misleading conduct on the part of Interclick. Interclick argues that as Plaintiff was unaware of Interclick's actions while they were occurring, Plaintiff could not have been misled into entering into any consumer transaction. (Interclick Mem. L., p. 18.) Interclick would thus have this Court interpose a reliance element into the Section 349 analysis. The New York Court of Appeals has specifically rejected that proposition. See Stutman, 95 N.Y.2d at 30, 709 N.Y.S.2d 892, 731 N.E.2d 608 (“Plaintiffs need not additionally allege that they would not otherwise have entered into the transaction.”)

In its reply papers, Interclick modifies its argument slightly, contending that Plaintiff fails to allege any misrepresentation or omission by Interclick to Plaintiff. (Interclick Rep. Mem. L., at 8 .) Although the paradigmatic case under Section 349 involves a business making a false or misleading statement in advertising aimed at consumers, see, e.g., Waldman v. New Chapter, Inc., 714 F.Supp.2d 398, 405 (E.D.N.Y.2010), courts have allowed claims under Section 349 where misleading statements are made to third parties resulting in harm to consumers. See Securitron Magnalock Corp. v. Schnabolk, 65 F.3d 256, 264 (2d Cir.1995) (finding false statements by a competitor to a regulatory agency actionable under Section 349); Kuklachev v. Gelfman, 600 F.Supp.2d 437, 476 (E.D.N.Y.2009) (“The relevant question ‘is whether the matter affects the public interest in New York, not whether the suit is brought by a consumer.’ ”) (quoting Securitron, 65 F.3d at 257). A claim under Section 349 need not, as Interclick argues, involve an allegation of a deceptive statement made by Interclick to Plaintiff. It need only allege that Interclick engaged in a deceptive practice that affected the consuming public. Plaintiff has alleged as much.

Interclick next claims that Plaintiff has failed to allege any injury as a result of any misleading act or omission. To state a claim under Section 349, a plaintiff must allege “actual” injury, though not necessarily pecuniary injury. Stutman, 95 N.Y.2d at 29, 709 N.Y.S.2d 892, 731 N.E.2d 608. Although collection of personal information does not constitute “economic” injury for purposes of the CFAA, courts have recognized similar privacy violations as injuries for purposes of Section 349. See Meyerson v. Prime Realty Services, LLC, 7 Misc.3d 911, 920, 796 N.Y.S.2d 848 (N.Y.Sup.Ct.2005) (“[I]t cannot be doubted that a privacy invasion claim—and an accompanying request for attorney's fees-may be stated under [Section] 349 based on nonpecuniary injury ...”); Anonymous v. CVS Corp., 728 N.Y.2d 333, 340 (N.Y.Sup.Ct.2001) (allowing Section 349 claim for violation of privacy when local pharmacy transferred prescription records to a national chain without advance notice to consumers).

Plaintiff has therefore adequately pled a claim under Section 349 with respect to Defendant Interclick. Nevertheless, Plaintiff has not alleged any facts demonstrating that the Advertiser Defendants were involved in any of the allegedly deceptive conduct. Therefore, Defendant Interclick's Motion to Dismiss as to Plaintiff's Section 349 claim is DENIED, and the Advertiser Defendants' Motion to Dismiss the Section 349 claim is GRANTED.

ii. Trespass to Chattels

Plaintiff appears to allege two potential grounds for a trespass to chattels claim: first, that Defendants' have dispossessed Plaintiff and the other Class Members of the economic value of their personal information, and second, that Defendants' impaired the value of Plaintiff's and the other Class Members' computers by installing Flash LSOs and browser history sniffing code on those computers. (pl.¶¶ 168–170.)

A trespass to chattels occurs when a party intentionally, and without justification or consent, physically interferes with the use and enjoyment of personal property in another's possession, and thereby harms that personal property. In re JetBlue Airways Corp. Litig., 379 F.Supp.2d 299, 327 (E.D.N.Y.2005); see also , Inc. v. Verio, Inc., 356 F.3d 393, 404 (2d Cir.2004). Nevertheless, “one who intentionally interferes with another's chattel is liable only if the interference results in harm to ‘the [owner's] materially valuable interest in the physical condition, quality, or value of the chattel, or if the [owner] is deprived of the use of the chattel for a substantial time.’ “ School of Visual Arts v. Kuprewicz, 3 Misc.3d 278, 771 N.Y.S.2d 804, 807–08 (N .Y.Sup.Ct.2003) (citing Restatement 2d of Torts § 218, Comment e .)

Although Plaintiff's claim that she was dispossessed of the economic value of her personal information is of dubious merit, see discussion of CFAA claim, supra; JetBlue, 379 F.Supp.2d at 328–329, Plaintiff's trespass to chattels claim regarding Interclick's placement of unauthorized Flash LSOs and history-sniffing code, considering there is no allegation that the devices materially affected the condition, quality, or value of the computer, is arguably sufficient to survive a motion to dismiss. School of Visual Arts v. Kuprewicz, 3 Misc.3d 278, 771 N.Y.S.2d 804, 808 (N.Y.Sup.Ct.2003) (sustaining trespass to chattels claim where plaintiff alleged that unsolicited emails “deplete hard disk space, drained processing power, and adversely affected other system resources”).

Plaintiff's claim with respect to Interclick thus survives. Again, however, Plaintiff has not alleged any facts indicating that the Advertiser Defendants committed a trespass. Accordingly, Defendant Interclick's Motion to Dismiss as to Plaintiff's trespass to chattels claim is DENIED, and the Advertiser Defendants' Motion to Dismiss the trespass to chattels claim is GRANTED.

iii. Breach of Implied Contract

In order to recover for breach of implied contract or quasi-contract under New York law, a plaintiff must establish: “(1) the performance of services in good faith, (2) the acceptance of the services by the person to whom they are rendered, (3) an expectation of compensation therefore, and (4) the reasonable value of the services.” Mid–Hudson Catskill Rural Migrant Ministry, Inc. v. Fine Host Corp., 418 F.3d 168, 175 (2d Cir.2005) (internal quotations and citations omitted).

Plaintiff describes the implied contractual relationship as follows: “Plaintiff and Class Members provided their personal information in good faith to websites (publishers), reasonably expected that such information would be exchanged with the advertisers and that Plaintiff and Class Members would in turn receive the goods and services offered by such websites” [sic]. (pl. ¶ 183.) Under this theory of implied contract, Plaintiff fails to allege that this bargain was unfulfilled in any way. She does not allege that she or the Class Members were denied the benefit for which they had “bargained,” i.e., receiving the goods and services offered by the websites to whom they offered their personal information.

Therefore, Defendants' 12(b)(6) Motions to Dismiss Plaintiff's breach of implied contract claim are GRANTED.

iv. Tortious Interference with Contract

Plaintiff further alleges that when she visited websites on which Interclick operated, she entered into agreements with the operators of those websites, including privacy policies and terms of service. Plaintiff alleges that Defendants' activities were in conflict with the privacy policies and caused the websites to breach those policies, therefore constituting a tortious interference with contract.

The elements of a tortious interference claim are: (1) that a valid contract exists; (2) that a “third party” had knowledge of the contract; (3) that the third party intentionally and improperly procured the breach of the contract; and (4) that the breach resulted in damage to the plaintiff. See TVT Records v. Island Def Jam Music Group, 412 F.3d 82, 88 (2d Cir.2005); Finley v. Giacobbe, 79 F.3d 1285, 1294 (2d Cir.1996).

Plaintiff has not stated a claim for tortious interference with contract because she has not alleged any facts regarding the nature of the privacy agreements that she had with any of the websites. Furthermore, Plaintiff does not specify any individual contract that was breached, but just claims generally that Plaintiff had contracts with various website operators which were all breached. (pl.¶ 194.) Plaintiff's allegations are far too general to state a claim for tortious interference with contract, because without facts regarding the terms of the contracts or the specific parties to the contracts, it cannot be determined if a contract indeed existed or if Defendants' activities procured a breach of those contracts.

Therefore, Defendants' 12(b)(6) Motions to Dismiss as to Plaintiff's tortious interference with contract claim are GRANTED.

D. Leave to Replead

When a complaint has been dismissed, permission to amend it “shall be freely given when justice so requires.” Fed.R.Civ.P. 15(a). However, a court may dismiss without leave to amend when amendment would be “futile,” or would not survive a motion to dismiss. Gatt Communications, Inc. v. PMC Associates, 10–CV–8, 2011 WL 1044898 at *7 (S.D.N.Y. Mar.10, 2011) (citing Oneida Indian Nation of N.Y. v. City of Sherrill, 337 F.3d 139, 168 (2d Cir.2003).

Here, Plaintiff has alleged no specific interaction with any of the Advertiser Defendants, nor has she alleged any knowledge or active participation by the Advertiser Defendants in Interclick's alleged unauthorized access to the computers of Plaintiff and the Class Members. Plaintiff's claims against the Advertiser Defendant are futile and would not survive a motion to dismiss. Those claims are therefore dismissed, with prejudice.

Furthermore, as Plaintiff cannot meet the requisite statutory threshold under CFAA or state the necessary contractual relationships for a Breach of Implied Contract or Tortious Interference with Contract claim, those claims are dismissed, with prejudice.

III. CONCLUSION

For the above reasons, the Advertiser Defendants' Motion to Dismiss is GRANTED and Plaintiff's claims against McDonald's Corporation, CBS Corporation, Mazda Motor of America, Inc., Microsoft Corporation, and McDonald's USA, LLC, are dismissed with prejudice;

Interclick's Motion to Dismiss is GRANTED with respect to Plaintiff's CFAA claim. Plaintiff's Breach of Implied Contract Claim, and Plaintiff's Tortious Interference with Contract claim, and those claims are dismissed with prejudice;

Interclick's Motion to Dismiss is DENIED with respect to Plaintiff's claim under New York General Business Law Section 349, and Plaintiff's Trespass to Chattels claim; and

Defendant Interclick shall answer the remaining claims within 30 days of the date of this Order.

SO ORDERED.

In re Google, Inc. Privacy Policy Litigation

2012 WL 6738343 (N.D.Cal.)

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS WITH LEAVE TO AMEND

PAUL S. GREWAL, United States Magistrate Judge.

In this putative consumer privacy class action, Defendant Google, Inc. (“Google”) moves to dismiss Plaintiffs Robert B. Demars, Lorena Barios, Nicholas Anderson, Matthew Villani, Scott McCullough, David Nisenbaum, Pedro Marti, and Allison C. Weiss's (collectively, “Plaintiffs”) consolidated compl ai nt.FN1 In light of Plaintiffs' concessions in their opposition, FN2 the operative complaint alleges violations of the Wiretap Act, 18 U.S.C. 2511 et seq., California's Right of Publicity Statute, Cal. Civ.Code 3344, California's Unfair Competition Law, Cal. Bus. & Prof.Code 17200 et seq., California's Consumer Legal Remedies Act, Cal. Civ.Code 1750 et seq., common law breach of contract, common law intrusion upon seclusion, common law commercial misappropriation, and violation of consumer protection laws of the various states. The parties appeared for hearing. Having studied the papers and considered the arguments of counsel, the court GRANTS Google's motion to dismiss with leave to amend.

FN1. The other consolidated actions are: De Mars et al. v. Google, Inc., 12–CV–01382 (filed on March 20, 2012) and Anderson v. Google, Inc., 12–CV–01565 (filed on March 29, 2012).

FN2. See Docket No. 37 at 25.

I. BACKGROUND

Unless otherwise noted, the following allegations are taken from the consolidated complaint and are presumed true for purposes of ruling on the pending motion.

Plaintiffs bring this nationwide class action against Google on behalf of all persons and entities in the United States who acquired a Googl e account between August 19, 2004 and February 29, 2012 and maintained such an account until on or after March 1, 2012.FN3 Before March 1, 2012, Google maintained approximately 70 separate privacy policies for each of its products, each of which confirmed that Google used a consumer's personal information for only that particular product. On March 1, 2012, Google announced that it was eliminating the majority of its separate privacy policies in favor of a single, universal privacy policy that allows Google to crossreference and use consumers' personal information across multiple Googl e products. Google explained the basis for the change in policy as follows:

FN3. Plaintiffs also bring a nationwide class action against Google on behalf of a subclass of persons and entities in the United States that acquired a device powered by Android between August 19, 2004 and February 29, 2012, and continued to own that device on or after March 1, 2012. (the “Android Subclass”).

The main change is for consumers with Google Accounts ... Our new Privacy Policy makes clear that, if you're signed in, we may combine information that you've provided from one service with information from other services. In short, we'll treat you as a single user across all our products, which will mean simpler, more intuitive Google experience.FN4

FN4. Docket No. 1 ¶ 8.

In other words, Google may now combine information collected from a consumer's Gmail account with information collected from that consumer's Google search queries, along with the consumer's activities on other Google products, such as YouTube, Picasa, Maps, Docs, and Reader. According to Plaintiffs, in violation of its prior policies, Google now combines across its products logs of the following consumer information, without consumer consent:

• first and last name;

• home or other physical address (including street name and city);

• current, physical location, a consumer's email address, and other online contact information (such as the identifier or screen name);

• IP address;

• telephone number (both home and mobile numbers);

• list of contacts;

• search history from Google's search engine;

• web surfing history from cookies placed on the computer; and

• posts on Google+.

Plaintiffs contend that Google's new policy violates its prior policies because the new policy no longer allows consumers to keep information gathered from one Google product separate from information gathered from other Google products. Plaintiffs further contend that Google's new policy violates consumers' privacy rights by allowing Google to take information from a consumer's Gmail account and Google+ account, for which consumers may have one expectation of privacy, for use in a different context, such as to personalize Google search engine results, or to personalize advertisements shown while a consumer is surfing the i nternet, products for which a consumer may have an entirely different expectation of privacy.FN5

FN5. According to Plaintiffs, the Federal Trade Commission (“FTC”) previously found Google deceptively claimed that it would seek the consent of consumers before using their information for a purpose other than for which it was collected, and that Google had misrepresented consumers' ability to exercise control over their information. On October 11, 2011, Google and the FTC entered into a consent order to resolve the matter.

Plaintiffs allege that they each acquired a Gmai l account before the March 1, 2012 announcement of the new policy.FN6 Plaintiffs also allege that that they each purchased an Androidpowered mobile phone before the March 1 date, that they did not consent to Google's post-March 1 data aggregation activities, and that they received no compensation for these activities.FN7

FN6. See Docket No. 14 at 7–9.

FN7. See id.

II. LEGAL STANDARDS

To satisfy Article III, a plaintiff “must show that (1) it has suffered an ‘injury in fact’ that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.” FN8 A suit brought by a plaintiff without Article III standing is not a “case or controversy,” and an Article III federal court therefore lacks subject matter jurisdiction over the suit.FN9 In that event, the suit should be dismissed under Rule 12(b)(1).FN10 The injury required by Article III may exist by virtue of “statutes creating legal rights, the invasion of which creates standing.” FN11 In such cases, the “standing question ... is whether the constitutional or standing provision on which the claim rests properly can be understood as granting persons in the plaintiff's position a right to judicial relief.” FN12

FN8. See Friends of the Earth, Inc. v. Laidlaw Envtl. Sys. (TOC), Inc., 528 U.S. 167, 180–181, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000).

FN9. Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 101, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998).

FN10. See id. at 109–110.

FN11. See Edwards v. First Am. Corp., 610 F.3d 514, 517 (9th Cir.2010) (quoting Warth v. Seldin, 422 U.S. 490, 500, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975)).

FN12. See id.

A complaint must state a “short plain statement of the claim showing that the pleader is entitled to relief.” FN13 While “detailed factual allegations” are not required, a complaint must include “more than an unadorned, the defendant-unlawfully-harmed-me accusation.” FN14 In other words, a complaint must have sufficient factual allegations to “state a claim to relief that is plausible on its face.” FN15 A claim is facially plausible “when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” FN16 Accordingly, under Fed.R.Civ.P. 12(b)(6), which tests the legal sufficiency of the claims alleged in the complaint, “[d]ismissal can be based on the lack of cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.” FN17

FN13. Fed.R.Civ.P. 8(a)(2).

FN14. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

FN15. Id. at 1940 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

FN16. Id.

FN17. Balistreri v. Pacifica Police Dep't., 901 F.2d 696, 699 (9th Cir.1990).

When evaluating a Rule 12(b)(6) motion, the court must accept all material allegations in the complaint as true and construe them in the light most favorable to the non-moving party.FN18 Review of a motion to dismiss is limited to the face of the complaint, materials incorporated into the complaint by reference, and matters of which the court may take judicial notice.FN19 The court is not required to accept “legal conclusions cast in the form of factual allegations if those conclusions cannot reasonably be drawn from the facts alleged.” FN20 Further, the court need not accept as true allegations that contradict matters that are either subject to judicial notice or attached as exhibits to the compl ai nt.FN21

FN18. See Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1061 (9th Cir.2008).

FN19. See id. at 1061.

FN20. Clegg v. Cult Awareness Network, 18 F.3d 752, 754–55 (9th Cir.1994).

FN21. See In re Gilead Sciences Securities Litigation, 536 F.3d 1049, 1055 (9th Cir.2008).

“Dismissal with prejudice and without leave to amend is not appropriate unless it is clear that the complaint could not be saved by amendment.” FN22 A dismissal with prejudice, except one for lack of jurisdiction, improper venue, or failure to join a party operates as an adjudication on the merits.FN23 Dismissal without leave to amend, however, may be granted for reasons of undue delay, bad faith, repeated failure to cure deficiencies by previous amendments, futility of the amendment, and prej udice.FN24

FN22. Eminence Capital, LLC. v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir.2003).

FN23. See Fed.R.Civ.P. 41(b).

FN24. See Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962); Abagninin v. AMVAC Chem. Corp., 545 F.3d 733, 742 (9th Cir.2008).

III. DISCUSSION

A. Request for Judicial Notice

The parties request that the court take judicial notice of certain documents. Together with its motion Google requests that the court take judicial notice of both its past and present Terms of Service and Privacy Policies, an announcement dated January 24, 2012, its current account signup page, and sample notices to users of its new policy.FN25 Except for noticing the existence (but not the contents) of Google's January 24, 2012 announcement of the change in its privacy pol icy FN26 and the February 2009 Gmai l Privacy Policy,FN27 Plaintiffs object to the court taking judicial notice of any prior or new Terms of Service,FN28 Google privacy policies, FN29 a current account signup page,FN30 or any sample notices to users.FN31 Plaintiffs dispute that their consolidated class action complaint either references the exhibits FN32 or that they are authentic. FN33

FN25. Docket No. 30, Exs. A–I.

FN26. Id. Ex. E.

FN27. Id. Ex. C.

FN28. Id. Exs. A, G.

FN29. Id. Exs. B, D, H.

FN30. Id. Ex. F.

FN31. Id. Ex. I.

FN32. Id. Exs. A–D, G and H.

FN33. Docket No. 30, Exs. B, D, H.

For their part, Plaintiffs request that the court take judicial notice of the following: (1) the October 11, 2011 consent decree between Google and the FTC; FN34 (2) an FTC press release dated August 9, 2012; FN35 (3) the FTC's complaint against Google; FN36 and (4) a Gmai l Legal Notices page from before March 1, 2012.FN37 Google objects to notice of any of Plaintiffs' documents, contending that the FTC proceedings which Plaintiffs seek to introduce relate to Google Buzz, a product not specifically at issue in this case, and also that the consent order did not constitute any admission by Google that the law had been violated as alleged in the FTC's complaint. Google also objects to the Gmai l Legal Notice on the grounds that its authenticity cannot readily be established.

FN34. Docket No. 38, Ex. 1.

FN35. Id. Ex. 2.

FN36. Id. Ex. 3.

FN37. Id. Ex. 4.

When asked to take judicial notice of documents, the general rule is that a court “may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion.” FN38 A court may, however, “consider unattached evidence on which the complaint ‘necessarily relies' if: (1) the complaint refers to the document; (2) the document is central to the plaintiff's claim; and (3) no party questions the authenticity of the document.” FN39 In addition, Fed.R.Evid. 201 allows a court to take judicial notice of “matters of public record,” but not facts that may be subject to a reasonable dispute.FN40 Taking judicial notice of “matters of public record” under Fed.R.Evid. 201 and consideration of documents “necessarily relie[d]” upon in the complaint are two separate exceptions to the general rule that a court may not consider beyond the pleadings on a Rule 12(b)(6) motion.FN41 The Ninth Circuit further instructs that a district court may consider contract terms beyond those cited in a complaint if the contract's authenticity is not contested and the complaint necessarily relies on that contract.FN42

FN38. United States v. Corinthian Colleges, 655 F.3d 984, 998–99 (9th Cir.2011) (internal citations omitted).

FN39. See id.

FN40. See Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir.2001). See also Fed.R.Evid. 201(b)(2) (allowing judicial notice of facts not subject to a reasonable dispute because “they can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned”).

FN41. See Lee, 250 F.3d at 689–90.

FN42. See Perrine v. FHP, Inc., 146 F.3d 699, 706 (9th Cir.1998).

Applying these standards, the court will take judicial notice of Google Exhibits A–E, G–H on the grounds that they are either a matter of public record,FN43 Plaintiffs' complaint necessarily relied upon them,FN44 or Plaintiffs have not objected to them.FN45 For similar reasons, the court will also take judicial notice of Plaintiffs' Exhibits 1–3. The court sustains the objections by the parties to each of the remaining disputed exhibits on the grounds that the exhibit's authenticity is either disputed or the exhibit constitutes inadmissible hearsay.

FN43. See Docket No. 30, Exs. A–D, G–H.

FN44. See id. Exs. A–D, G–H.

FN45. See id. Exs. C, E.

B. Article III Standing

The court observes that Plaintiffs have raised serious questions regarding Google's respect for consumers' privacy. But before it may consider these questions, the court must heed the constraints Article III imposes upon its jurisdiction to do so.

With respect to their claims regarding the cost of replacing their Android-powered phones to escape the burden imposed by Google's new policy, Plaintiffs fail to allege injury in fact to themselves. This alone is sufficient to dismiss Plaintiffs' replacement-related clai ms.FN46 In Birdsong, the Ninth Circuit reviewed claims that Apple's iPod with its capacity to produce sound as loud as 120 decibels created a risk of hearing loss. The Ninth Circuit held:

FN46. See Birdsong v. Apple, Inc., 590 F.3d 955, 960–61 (9th Cir.2009) (“The plaintiffs have not shown the requisite injury to themselves and therefore lack standing” under Article III.).

The plaintiffs do not claim that they suffered or imminently will suffer hearing loss from their iPod use. The plaintiffs do not even claim that they used their iPods in a way that exposed them to the alleged risk of hearing loss. At most, the plaintiffs plead a potential risk of hearing loss not to themselves, but to other unidentified iPod user who might choose to use their iPods in an unsafe manner. The risk of injury the plaintiffs allege is not concrete and particularized as to themselves.

This same logic applies to Plaintiffs' allegations against Google here. In the consolidated complaint, Plaintiffs do not allege that they have ever purchased a replacement mobile phone for the Android-based phones at issue. While individuals who did purchase such a replacement might have standing to pursue the associated costs, by including no such allegations in their complaint, Plaintiffs stand apart.

Plaintiffs' current allegations fall short in another way. Plaintiffs have not identified a concrete harm from the alleged combination of their personal information across Google's products and contrary to Google's previous policy sufficient to create an injury in fact. As Judge Koh noted in In re iPhone Application Litig.,FN47 a recent case from the Central District of California is instructive.FN48 In Spectrum Media, the plaintiffs accused an online third-party advertising network of installing cookies on their computers to circumvent user privacy controls and to track i nternet use without user knowledge or consent. The court held that the plaintiffs lacked Article III standing because (1) they had not alleged that any named plaintiff was actually harmed by the defendant's alleged conduct and (2) they had not alleged any “particularized example” of economic injury or harm to their computers, but instead offered only abstract concepts, such as “opportunity costs,” “value-for-value exchanges,” “consumer choice,” and “diminished performance.” FN49 Other cases have held the same.FN50

FN47. Case No. 11–MD–02250–LHK, 2011 WL 4403963 (N.D.Cal. Sept.20, 2011).

FN48. See Genevive La Court v. Specific Media, Case No. SACV–10–1256–JW, 2011 WL 1661532, (C.D.Cal. Apr.28, 2011).

FN49. Specific Media, 2011 WL 1661532, at *7–13.

FN50. See In re Doubleclick, Inc. Privacy Litig., 154 F.Supp.2d 497, 525 (S.D.N.Y.2001) (holding that unauthorized collection of personal information by a third party is not “economic loss”); In re JetBlue Airways Corp. Privacy Litig., 379 F.Supp.2d 299, 327 (E.D.N.Y.2005) (holding that airline's disclosure of passenger data to third party in violation of airline's privacy policy had no compensable value); In re iPhone Application Litig., 2011 WL 4403963, at *4–6 (holding that undifferentiated “lost opportunity costs” and “value-for-value exchanges” resulting from collection and tracking of personal information were not cognizable injuries in fact); Low v. LinkedIn Corp., Case No. 11–CV–01468–LHK, 2011 WL 5509848, at *4 (N.D.Cal. Nov.11, 2011) (rejecting sufficiency of independent economic value of personal information to establish injury in fact).

Plaintiffs' arguments to the contrary are not persuasive. These arguments all reduce to the central notion that, in contrast to the plaintiffs in each of the cases discuss above, Plaintiffs here have alleged cognizable, non-pecuniary harm in addition to pecuniary damages by virtue of Google's statutory and common law violations. But a careful review of these cases proves this assertion to be false. For example, like Plaintiffs here, the plaintiffs in In re iPhone Application Litig. also brought claims under statutes like California's Consumer Legal Remedies Act and California's Unfair Competition Law as well as common law claims.FN51 Similarly, in Low, the plaintiff argued that the loss of personal information, even in the absence of any cognizable economic harm, was sufficient to confer Article III standing. But as Judge Koh explained, nothing in the precedent of the Ninth Circuit or other appellate courts confers standing on a party that has brought statutory or common law claims based on nothing more than the unauthorized disclosure of personal information, let alone an unauthorized disclosure by a defendant to itself.FN52

FN51. See In re iPhone Application Litig., 2011 WL 4403963, at *3.

FN52. See Low, 2011 WL 5509848, at *6 (discussing Krottner v. Starbucks Corp., 628 F.3d 1139 (9th Cir.2010); Pisciotti vOld Nat'l Bankcorp, 499 F.3d 629, 634 (7th Cir.2007)).

If it could survive Google's Rule 12(b)(6) challenge, Plaintiffs' Wiretap Act claim might help, in that a violation of the rights provided under the statute may be sufficient by itself to confer standi ng.FN53 A Wiretap Act claim requires, at a minimum, (a) an “electronic communication” and (b) interception of that communication by someone other than “a provider of wire or electronic communication service ... in the normal course of” business or disclosure to someone other than the intended reci pient .FN54 An interception claim under the Wiretap Act also requires the use of a defined “device,” which cannot include Google's own systems and software. The Wiretap Act expressly excludes from its definition of “device” any equipment “being used by a provider of wire or electronic communication service in the ordinary course of business.”

FN53. See In re Facebook Privacy Litig., 791 F.Supp.2d 705, 712 (N.D.Cal.2011) (holding that the “Wiretap Act provides that any person whose electronic communications is ‘intercepted, disclosed or intentionally used’ in violation of the Act may in a civil action recover from the entity which engaged in that violation”).

FN54. 18 U.S.C. § 2510(5)(a)(ii).

Plaintiffs contend that, under the Wiretap Act, an interception occurred when their content from one Google product was stored on Google's servers and then combined with information from another Google product that also was stored on Google's servers. Plaintiffs further contend that because the Wiretap Act defines “device” broadly as “any device or apparatus which can be used to intercept a[n] ... electronic communication,” FN55 Google's cookies, application platforms, and servers constitute devices under that act in that they intercept information from one Google product to store on Google's servers and then to combine with information collected by other Google products. Plaintiffs utterly fail, however, to cite to any authority that supports either the notion that a provider can intercept information already in its possession by violating limitations imposed by a privacy policy or the inescapably plain language of the Wiretap Act that excludes from the definition of a “device” a provider's own equipment used in the ordinary course of business.

FN55. 18 U.S.C. § 2510(5).

Similarly, Plaintiffs' might find support in California's Right of Publicity Act. But to sustain a right of publicity claim, Plaintiffs must allege in their complaint that Googl e somehow utilized their name, voice, signature, photograph or likeness without their consent.FN56 This Plaintiffs simply do not do.FN57

FN56. Eastwood v. Superior Court, 149 Cal.App.3d 409, 417–18, 198 Cal.Rptr. 342 (1983) (explaining that a right of publicity claim provides that “[a]ny person who knowingly uses another's name, voice, signature, photograph, or likeness, in any manner, on or in products, merchandise, or goods, or for purposes of advertising or selling, or soliciting purchases of, products, merchandise, goods or services, without such person's prior consent ... shall be liable for any damages sustained by the person or persons injured as a result thereof.”).

FN57. The court appreciates Plaintiffs' arguments in their opposition regarding Google's “+1” feature, but agrees with Google that the court's jurisdiction does not extend to materials not properly incorporated into the complaint.

As Judge Koh and the Central Distict both have observed, “[i]t is not obvious that Plaintiffs cannot articulate some actual or imminent injury in fact. It is just that at this point they haven't offered a coherent and factually supported theory of what that injury might be.” FN58

FN58. In re iPhone Application Litig., 2011 WL 4403963, at *6 (quoting Specific Media, 2011 WL 1661532, at *6).

In light of Plaintiffs' failure to allege fact sufficient to confer Article III standing, the court must refrain from addressing the remainder of Google's arguments and instead respect its lack of jurisdiction.

IV. CONCLUSION

Google's motion to dismiss is GRANTED with leave to amend. Plaintiffs shall file any amended complaint no later than January 31, 2012.

IT IS SO ORDERED.

Zeran v. America Online, Inc.

129 F 3d 327 (4th Cir. 1997)

Wilkinson, Chief Judge:

Kenneth Zeran brought this action against America Online, Inc. ("AOL"), arguing that AOL unreasonably delayed in removing defamatory messages posted by an unidentified third party, refused to post retractions of those messages, and failed to screen for similar postings thereafter. The district court granted judgment for AOL on the grounds that the Communications Decency Act of 1996 ("CDA") -- 47 U.S.C. § 230 -- bars Zeran's claims. Zeran appeals, arguing that § 230 leaves intact liability for interactive computer service providers who possess notice of defamatory material posted through their services. . . . [W]e affirm the judgment of the district court.

I.

. . . The instant case comes before us on a motion for judgment on the pleadings, see Fed. R. Civ. P. 12(c), so we accept the facts alleged in the complaint as true. Bruce v. Riddle , 631 F.2d 272, 273 (4th Cir. 1980). On April 25, 1995, an unidentified person posted a message on an AOL bulletin board advertising "Naughty Oklahoma T-Shirts." The posting described the sale of shirts featuring offensive and tasteless slogans related to the April 19, 1995, bombing of the Alfred P. Murrah Federal Building in Oklahoma City. Those interested in purchasing the shirts were instructed to call "Ken" at Zeran's home phone number in Seattle, Washington. As a result of this anonymously perpetrated prank, Zeran received a high volume of calls, comprised primarily of angry and derogatory messages, but also including death threats. Zeran could not change his phone number because he relied on its availability to the public in running his business out of his home. Later that day, Zeran called AOL and informed a company representative of his predicament. The employee assured Zeran that the posting would be removed from AOL's bulletin board but explained that as a matter of policy AOL would not post a retraction. The parties dispute the date that AOL removed this original posting from its bulletin board.

On April 26, the next day, an unknown person posted another message advertising additional shirts with new tasteless slogans related to the Oklahoma City bombing. Again, interested buyers were told to call Zeran's phone number, to ask for "Ken," and to "please call back if busy" due to high demand. The angry, threatening phone calls intensified. Over the next four days, an unidentified party continued to post messages on AOL's bulletin board, advertising additional items including bumper stickers and key chains with still more offensive slogans. During this time period, Zeran called AOL repeatedly and was told by company representatives that the individual account from which the messages were posted would soon be closed. Zeran also reported his case to Seattle FBI agents. By April 30, Zeran was receiving an abusive phone call approximately every two minutes.

Meanwhile, an announcer for Oklahoma City radio station KRXO received a copy of the first AOL posting. On May 1, the announcer related the message's contents on the air, attributed them to "Ken" at Zeran's phone number, and urged the listening audience to call the number. After this radio broadcast, Zeran was inundated with death threats and other violent calls from Oklahoma City residents. Over the next few days, Zeran talked to both KRXO and AOL representatives. He also spoke to his local police, who subsequently surveilled his home to protect his safety. By May 14, after an Oklahoma City newspaper published a story exposing the shirt advertisements as a hoax and after KRXO made an on-air apology, the number of calls to Zeran's residence finally subsided to fifteen per day.

Zeran first filed suit on January 4, 1996, against radio station KRXO in the United States District Court for the Western District of Oklahoma. On April 23, 1996, he filed this separate suit against AOL in the same court. Zeran did not bring any action against the party who posted the offensive messages.(  

. . .AOL answered Zeran's complaint and interposed 47 U.S.C. § 230 as an affirmative defense. AOL then moved for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c). The district court granted AOL's motion, and Zeran filed this appeal.

II.

A.

Because § 230 was successfully advanced by AOL in the district court as a defense to Zeran's claims, we shall briefly examine its operation here. Zeran seeks to hold AOL liable for defamatory speech initiated by a third party. He argued to the district court that once he notified AOL of the unidentified third party's hoax, AOL had a duty to remove the defamatory posting promptly, to notify its subscribers of the message's false nature, and to effectively screen future defamatory material. Section 230 entered this litigation as an affirmative defense pled by AOL. The company claimed that Congress immunized interactive computer service providers from claims based on information posted by a third party. The relevant portion of § 230 states: "No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider." 47 U.S.C. § 230(c)(1).2 By its plain language, § 230 creates a federal immunity to any cause of action that would make service providers liable for information originating with a third-party user of the service. Specifically, § 230 precludes courts from entertaining claims that would place a computer service provider in a publisher's role. Thus, lawsuits seeking to hold a service provider liable for its exercise of a publisher's traditional editorial functions--such as deciding whether to publish, withdraw, postpone or alter content--are barred.

The purpose of this statutory immunity is not difficult to discern. Congress recognized the threat that tort-based lawsuits pose to freedom of speech in the new and burgeoning Internet medium. The imposition of tort liability on service providers for the communications of others represented, for Congress, simply another form of intrusive government regulation of speech. Section 230 was enacted, in part, to maintain the robust nature of Internet communication and, accordingly, to keep government interference in the medium to a minimum. In specific statutory findings, Congress recognized the Internet and interactive computer services as offering "a forum for a true diversity of political discourse, unique opportunities for cultural development, and myriad avenues for intellectual activity." Id. § 230(a)(3). It also found that the Internet and interactive computer services "have flourished, to the benefit of all Americans, with a minimum of government regulation." Id. §230(a)(4) (emphasis added). Congress further stated that it is "the policy of the United States . . . to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation." Id. § 230(b)(2) (emphasis added).

None of this means, of course, that the original culpable party who posts defamatory messages would escape accountability. While Congress acted to keep government regulation of the Internet to a minimum, it also found it to be the policy of the United States "to ensure vigorous enforcement of Federal criminal laws to deter and punish trafficking in obscenity, stalking, and harassment by means of computer." Id. § 230(b)(5). Congress made a policy choice, however, not to deter harmful online speech through the separate route of imposing tort liability on companies that serve as intermediaries for other parties' potentially injurious messages.

Congress' purpose in providing the § 230 immunity was thus evident. Interactive computer services have millions of users. See Reno v. ACLU , 117 S. Ct. at 2334 (noting that at time of district court trial, "commercial online services had almost 12 million individual subscribers"). The amount of information communicated via interactive computer services is therefore staggering. The specter of tort liability in an area of such prolific speech would have an obvious chilling effect. It would be impossible for service providers to screen each of their millions of postings for possible problems. Faced with potential liability for each message republished by their services, interactive computer service providers might choose to severely restrict the number and type of messages posted. Congress considered the weight of the speech interests implicated and chose to immunize service providers to avoid any such restrictive effect.

Another important purpose of § 230 was to encourage service providers to self-regulate the dissemination of offensive material over their services. In this respect, § 230 responded to a New York state court decision, Stratton Oakmont, Inc. v. Prodigy Servs. Co. , 1995 WL 323710 (N.Y. Sup. Ct. May 24, 1995). There, the plaintiffs sued Prodigy--an interactive computer service like AOL--for defamatory comments made by an unidentified party on one of Prodigy's bulletin boards. The court held Prodigy to the strict liability standard normally applied to original publishers of defamatory statements, rejecting Prodigy's claims that it should be held only to the lower "knowledge" standard usually reserved for distributors. The court reasoned that Prodigy acted more like an original publisher than a distributor both because it advertised its practice of controlling content on its service and because it actively screened and edited messages posted on its bulletin boards.

Congress enacted § 230 to remove the disincentives to self-regulation created by the Stratton Oakmont decision. Under that court's holding, computer service providers who regulated the dissemination of offensive material on their services risked subjecting themselves to liability, because such regulation cast the service provider in the role of a publisher. Fearing that the specter of liability would therefore deter service providers from blocking and screening offensive material, Congress enacted § 230's broad immunity "to remove disincentives for the development and utilization of blocking and filtering technologies that empower parents to restrict their children's access to objectionable or inappropriate online material." 47 U.S.C. § 230(b)(4). In line with this purpose,§ 230 forbids the imposition of publisher liability on a service provider for the exercise of its editorial and self-regulatory functions.

B.

Zeran argues, however, that the § 230 immunity eliminates only publisher liability, leaving distributor liability intact. Publishers can be held liable for defamatory statements contained in their works even absent proof that they had specific knowledge of the statement's inclusion. W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 113, at 810 (5th ed. 1984). According to Zeran, interactive computer service providers like AOL are normally considered instead to be distributors, like traditional news vendors or book sellers. Distributors cannot be held liable for defamatory statements contained in the materials they distribute unless it is proven at a minimum that they have actual knowledge of the defamatory statements upon which liability is predicated. Id. at 811 (explaining that distributors are not liable "in the absence of proof that they knew or had reason to know of the existence of defamatory matter contained in matter published"). Zeran contends that he provided AOL with sufficient notice of the defamatory statements appearing on the company's bulletin board. This notice is significant, says Zeran, because AOL could be held liable as a distributor only if it acquired knowledge of the defamatory statements' existence.

Because of the difference between these two forms of liability, Zeran contends that the term "distributor" carries a legally distinct meaning from the term "publisher." Accordingly, he asserts that Congress' use of only the term "publisher" in §230 indicates a purpose to immunize service providers only from publisher liability. He argues that distributors are left unprotected by§ 230 and, therefore, his suit should be permitted to proceed against AOL. We disagree. Assuming arguendo that Zeran has satisfied the requirements for imposition of distributor liability, this theory of liability is merely a subset, or a species, of publisher liability, and is therefore also foreclosed by § 230.

The terms "publisher" and "distributor" derive their legal significance from the context of defamation law. Although Zeran attempts to artfully plead his claims as ones of negligence, they are indistinguishable from a garden variety defamation action. Because the publication of a statement is a necessary element in a defamation action, only one who publishes can be subject to this form of tort liability. Restatement (Second) of Torts § 558(b) (1977); Keeton et al., supra , § 113, at 802. Publication does not only describe the choice by an author to include certain information. In addition, both the negligent communication of a defamatory statement and the failure to remove such a statement when first communicated by another party--each alleged by Zeran here under a negligence label--constitute publication. Restatement (Second) of Torts § 577; see also Tacket v. General Motors Corp., 836 F.2d 1042, 1046-47 (7th Cir. 1987). In fact, every repetition of a defamatory statement is considered a publication. Keeton et al., supra, §113, at 799.

In this case, AOL is legally considered to be a publisher. "[E]very one who takes part in the publication . . . is charged with publication." Id. Even distributors are considered to be publishers for purposes of defamation law: Those who are in the business of making their facilities available to disseminate the writings composed, the speeches made, and the information gathered by others may also be regarded as participating to such an extent in making the books, newspapers, magazines, and information available to others as to be regarded as publishers. They are intentionally making the contents available to others, sometimes without knowing all of the contents--including the defamatory content--and sometimes without any opportunity to ascertain, in advance, that any defamatory matter was to be included in the matter published. Id. at 803. AOL falls squarely within this traditional definition of a publisher and, therefore, is clearly protected by § 230's immunity.

Zeran contends that decisions like Stratton Oakmont and Cubby, Inc. v. CompuServe Inc., 776 F. Supp. 135 (S.D.N.Y. 1991), recognize a legal distinction between publishers and distributors. He misapprehends, however, the significance of that distinction for the legal issue we consider here. It is undoubtedly true that mere conduits, or distributors, are subject to a different standard of liability. As explained above, distributors must at a minimum have knowledge of the existence of a defamatory statement as a prerequisite to liability. But this distinction signifies only that different standards of liability may be applied within the larger publisher category, depending on the specific type of publisher concerned. See Keeton et al., supra, §113, at 799-800 (explaining that every party involved is charged with publication, although degrees of legal responsibility differ). To the extent that decisions like Stratton and Cubby utilize the terms "publisher" and "distributor" separately, the decisions correctly describe two different standards of liability. Stratton and Cubby do not, however, suggest that distributors are not also a type of publisher for purposes of defamation law.

Zeran simply attaches too much importance to the presence of the distinct notice element in distributor liability. The simple fact of notice surely cannot transform one from an original publisher to a distributor in the eyes of the law. To the contrary, once a computer service provider receives notice of a potentially defamatory posting, it is thrust into the role of a traditional publisher. The computer service provider must decide whether to publish, edit, or withdraw the posting. In this respect, Zeran seeks to impose liability on AOL for assuming the role for which § 230 specifically proscribes liability--the publisher role.

. . .

Zeran next contends that interpreting §230 to impose liability on service providers with knowledge of defamatory content on their services is consistent with the statutory purposes outlined in Part II(A). Zeran fails, however, to understand the practical implications of notice liability in the interactive computer service context. Liability upon notice would defeat the dual purposes advanced by § 230 of the CDA. Like the strict liability imposed by the Stratton Oakmont court, liability upon notice reinforces service providers' incentives to restrict speech and abstain from self-regulation.

If computer service providers were subject to distributor liability, they would face potential liability each time they receive notice of a potentially defamatory statement--from any party, concerning any message. Each notification would require a careful yet rapid investigation of the circumstances surrounding the posted information, a legal judgment concerning the information's defamatory character, and an on-the-spot editorial decision whether to risk liability by allowing the continued publication of that information. Although this might be feasible for the traditional print publisher, the sheer number of postings on interactive computer services would create an impossible burden in the Internet context. Cf. Auvil v. CBS 60 Minutes , 800 F. Supp. 928, 931 (E.D. Wash. 1992) (recognizing that it is unrealistic for network affiliates to "monitor incoming transmissions and exercise on-the-spot discretionary calls"). Because service providers would be subject to liability only for the publication of information, and not for its removal, they would have a natural incentive simply to remove messages upon notification, whether the contents were defamatory or not. See Philadelphia Newspapers, Inc. v. Hepps, 475 U.S. 767, 777 (1986) (recognizing that fears of unjustified liability produce a chilling effect antithetical to First Amendment's protection of speech). Thus, like strict liability, liability upon notice has a chilling effect on the freedom of Internet speech.

Similarly, notice-based liability would deter service providers from regulating the dissemination of offensive material over their own services. Any efforts by a service provider to investigate and screen material posted on its service would only lead to notice of potentially defamatory material more frequently and thereby create a stronger basis for liability. Instead of subjecting themselves to further possible lawsuits, service providers would likely eschew any attempts at self-regulation.

More generally, notice-based liability for interactive computer service providers would provide third parties with a no-cost means to create the basis for future lawsuits. Whenever one was displeased with the speech of another party conducted over an interactive computer service, the offended party could simply "notify" the relevant service provider, claiming the information to be legally defamatory. In light of the vast amount of speech communicated through interactive computer services, these notices could produce an impossible burden for service providers, who would be faced with ceaseless choices of suppressing controversial speech or sustaining prohibitive liability. Because the probable effects of distributor liability on the vigor of Internet speech and on service provider self-regulation are directly contrary to § 230's statutory purposes, we will not assume that Congress intended to leave liability upon notice intact.

Zeran finally contends that the interpretive canon favoring retention of common law principles unless Congress speaks directly to the issue counsels a restrictive reading of the § 230 immunity here. See United States v. Texas, 507 U.S. 529, 534 (1993). This interpretive canon does not persuade us to reach a different result. Here, Congress has indeed spoken directly to the issue by employing the legally significant term "publisher," which has traditionally encompassed distributors and original publishers alike.

The decision cited by Zeran, United States v. Texas, also recognized that abrogation of common law principles is appropriate when a contrary statutory purpose is evident. Id. This is consistent with the Court's earlier cautions against courts' application of the canon with excessive zeal: "`The rule that statutes in derogation of the common law are to be strictly construed does not require such an adherence to the letter as would defeat an obvious legislative purpose or lessen the scope plainly intended to be given to the measure.'" Isbrandtsen Co. v. Johnson, 343 U.S. 779, 783 (1952). . . . Zeran's argument flies in the face of this warning. As explained above, interpreting § 230 to leave distributor liability in effect would defeat the two primary purposes of the statute and would certainly "lessen the scope plainly intended" by Congress' use of the term "publisher."

Section 230 represents the approach of Congress to a problem of national and international dimension. The Supreme Court underscored this point in ACLU v. Reno, finding that the Internet allows "tens of millions of people to communicate with one another and to access vast amounts of information from around the world. [It] is ‘a unique and wholly new medium of worldwide human communication.’” 117 S. Ct. at 2334 (citation omitted). Application of the canon invoked by Zeran here would significantly lessen Congress' power, derived from the Commerce Clause, to act in a field whose international character is apparent. While Congress allowed for the enforcement of "any State law that is consistent with [§ 230]," 47 U.S.C. § 230(d)(3), it is equally plain that Congress' desire to promote unfettered speech on the Internet must supersede conflicting common law causes of action. Section 230(d)(3) continues: "No cause of action may be brought and no liability may be imposed under any State or local law that is inconsistent with this section." With respect to federal-state preemption, the Court has advised: "[W]hen Congress has ‘unmistakably . . . ordained,’ that its enactments alone are to regulate a part of commerce, state laws regulating that aspect of commerce must fall. The result is compelled whether Congress' command is explicitly stated in the statute's language or implicitly contained in its structure and purpose." Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977) (citations omitted). Here, Congress' command is explicitly stated. Its exercise of its commerce power is clear and counteracts the caution counseled by the interpretive canon favoring retention of common law principles.  

Tiffany v. eBay

600 F.3d 93 (2010)

SACK, Circuit Judge:

eBay, Inc. (“eBay”), through its eponymous online marketplace, has revolutionized the online sale of goods, especially used goods. It has facilitated the buying and selling by hundreds of millions of people and entities, to their benefit and eBay's profit. But that marketplace is sometimes employed by users as a means to perpetrate fraud by selling counterfeit goods.

Plaintiffs Tiffany (NJ) Inc. and Tiffany and Company (together, “Tiffany”) have created and cultivated a brand of jewelry bespeaking high-end quality and style. Based on Tiffany's concern that some use eBay's website to sell counterfeit Tiffany merchandise, Tiffany has instituted this action against eBay, asserting various causes of action-sounding in trademark infringement, trademark dilution and false advertising-arising from eBay's advertising and listing practices. For the reasons set forth below, we affirm the district court's judgment with respect to Tiffany's claims of trademark infringement and dilution but remand for further proceedings with respect to Tiffany's false advertising claim.

BACKGROUND

By opinion dated July 14, 2008, following a week-long bench trial, the United States District Court for the Southern District of New York (Richard J. Sullivan, Judge ) set forth its findings of fact and conclusions of law. Tiffany (NJ) Inc. v. eBay, Inc., 576 F.Supp.2d 463 (S.D.N.Y.2008) ( “Tiffany ”). When reviewing a judgment following a bench trial in the district court, we review the court's findings of fact for clear error and its conclusions of law de novo. Giordano v. Thomson, 564 F.3d 163, 168 (2d Cir.2009). Except where noted otherwise, we conclude that the district court's findings of fact are not clearly erroneous. We therefore rely upon those non-erroneous findings in setting forth the facts of, and considering, this dispute.

eBay

eBay FN1 is the proprietor of ebay. com, an Internet-based marketplace that allows those who register with it to purchase goods from and sell goods to one another. It “connect[s] buyers and sellers and [ ] enable[s] transactions, which are carried out directly between eBay members.” Tiffany, 576 F.Supp.2d at 475.FN2 In its auction and listing services, it “provides the venue for the sale [of goods] and support for the transaction[s], [but] it does not itself sell the items” listed for sale on the site, id. at 475, nor does it ever take physical possession of them, id. Thus, “eBay generally does not know whether or when an item is delivered to the buyer.” Id.

FN1. eBay appears to be short for Echo Bay-the name of eBay's founder's consulting firm was Echo Bay Technology Group. The name “EchoBay” was already in use, so eBay was employed as the name for the website. See http:// en. wikipedia. org/ wiki/ EBay# Origins_ and_ history (last visited Feb. 26, 2010); http:// news. softpedia. com/ news/ eBay- Turns- Ten- Happy- Birthday- 7502. shtml (last visited Feb. 26, 2010).

FN2. In addition to providing auction-style and fixed-priced listings, eBay is also the proprietor of a traditional classified service. Id. at 474.

eBay has been enormously successful. More than six million new listings are posted on its site daily. Id. At any given time it contains some 100 million listings. Id.

eBay generates revenue by charging sellers to use its listing services. For any listing, it charges an “insertion fee” based on the auction's starting price for the goods being sold and ranges from $0.20 to $4.80. Id. For any completed sale, it charges a “final value fee” that ranges from 5.25% to 10% of the final sale price of the item. Id. Sellers have the option of purchasing, at additional cost, features “to differentiate their listings, such as a border or bold-faced type.” Id.

eBay also generates revenue through a company named PayPal, which it owns and which allows users to process their purchases. PayPal deducts, as a fee for each transaction that it processes, 1.9% to 2.9% of the transaction amount, plus $0.30. Id. This gives eBay an added incentive to increase both the volume and the price of the goods sold on its website. Id.

Tiffany

Tiffany is a world-famous purveyor of, among other things, branded jewelry. Id. at 471-72. Since 2000, all new Tiffany jewelry sold in the United States has been available exclusively through Tiffany's retail stores, catalogs, and website, and through its Corporate Sales Department. Id. at 472-73. It does not use liquidators, sell overstock merchandise, or put its goods on sale at discounted prices. Id. at 473. It does not-nor can it, for that matter-control the “legitimate secondary market in authentic Tiffany silvery jewelry,” i.e., the market for second-hand Tiffany wares. Id. at 473. The record developed at trial “offere[d] little basis from which to discern the actual availability of authentic Tiffany silver jewelry in the secondary market.” Id. at 474.

Sometime before 2004, Tiffany became aware that counterfeit Tiffany merchandise was being sold on eBay's site. Prior to and during the course of this litigation, Tiffany conducted two surveys known as “Buying Programs,” one in 2004 and another in 2005, in an attempt to assess the extent of this practice. Under those programs, Tiffany bought various items on eBay and then inspected and evaluated them to determine how many were counterfeit. Id. at 485. Tiffany found that 73.1% of the purported Tiffany goods purchased in the 2004 Buying Program and 75.5% of those purchased in the 2005 Buying Program were counterfeit. Id. The district court concluded, however, that the Buying Programs were “methodologically flawed and of questionable value,” id. at 512, and “provide[d] limited evidence as to the total percentage of counterfeit goods available on eBay at any given time,” id. at 486. The court nonetheless decided that during the period in which the Buying Programs were in effect, a “significant portion of the ‘Tiffany’ sterling silver jewelry listed on the eBay website ... was counterfeit,” id., and that eBay knew “that some portion of the Tiffany goods sold on its website might be counterfeit,” id. at 507. The court found, however, that “a substantial number of authentic Tiffany goods are [also] sold on eBay.” Id. at 509.

Reducing or eliminating the sale of all second-hand Tiffany goods, including genuine Tiffany pieces, through eBay's website would benefit Tiffany in at least one sense: It would diminish the competition in the market for genuine Tiffany merchandise. See id. at 510 n. 36 (noting that “there is at least some basis in the record for eBay's assertion that one of Tiffany's goals in pursuing this litigation is to shut down the legitimate secondary market in authentic Tiffany goods”). The immediate effect would be loss of revenue to eBay, even though there might be a countervailing gain by eBay resulting from increased consumer confidence about the bona fides of other goods sold through its website.

Anti-Counterfeiting Measures

Because eBay facilitates many sales of Tiffany goods, genuine and otherwise, and obtains revenue on every transaction, it generates substantial revenues from the sale of purported Tiffany goods, some of which are counterfeit. “eBay's Jewelry & Watches category manager estimated that, between April 2000 and June 2004, eBay earned $4.1 million in revenue from completed listings with ‘Tiffany’ in the listing title in the Jewelry & Watches category.” Id. at 481. Although eBay was generating revenue from all sales of goods on its site, including counterfeit goods, the district court found eBay to have “an interest in eliminating counterfeit Tiffany merchandise from eBay ... to preserve the reputation of its website as a safe place to do business.” Id. at 469. The buyer of fake Tiffany goods might, if and when the forgery was detected, fault eBay. Indeed, the district court found that “buyers ... complain[ed] to eBay” about the sale of counterfeit Tiffany goods. Id. at 487. “[D]uring the last six weeks of 2004, 125 consumers complained to eBay about purchasing ‘Tiffany’ items through the eBay website that they believed to be counterfeit.” Id.

Because eBay “never saw or inspected the merchandise in the listings,” its ability to determine whether a particular listing was for counterfeit goods was limited. Id. at 477-78. Even had it been able to inspect the goods, moreover, in many instances it likely would not have had the expertise to determine whether they were counterfeit. Id. at 472 n. 7 (“[I]n many instances, determining whether an item is counterfeit will require a physical inspection of the item, and some degree of expertise on the part of the examiner.”).

Notwithstanding these limitations, eBay spent “as much as $20 million each year on tools to promote trust and safety on its website.” Id. at 476. For example, eBay and PayPal set up “buyer protection programs,” under which, in certain circumstances, the buyer would be reimbursed for the cost of items purchased on eBay that were discovered not to be genuine. Id. at 479. eBay also established a “Trust and Safety” department, with some 4,000 employees “devoted to trust and safety” issues, including over 200 who “focus exclusively on combating infringement” and 70 who “work exclusively with law enforcement.” Id. at 476.

By May 2002, eBay had implemented a “fraud engine,” “which is principally dedicated to ferreting out illegal listings, including counterfeit listings.” Id. at 477. eBay had theretofore employed manual searches for keywords in listings in an effort to “identify blatant instances of potentially infringing ... activity.” Id. “The fraud engine uses rules and complex models that automatically search for activity that violates eBay policies.” Id. In addition to identifying items actually advertised as counterfeit, the engine also incorporates various filters designed to screen out less-obvious instances of counterfeiting using “data elements designed to evaluate listings based on, for example, the seller's Internet protocol address, any issues associated with the seller's account on eBay, and the feedback the seller has received from other eBay users.” Id. In addition to general filters, the fraud engine incorporates “Tiffany-specific filters,” including “approximately 90 different keywords” designed to help distinguish between genuine and counterfeit Tiffany goods. Id. at 491. During the period in dispute, FN3 eBay also “periodically conducted [manual] reviews of listings in an effort to remove those that might be selling counterfeit goods, including Tiffany goods.” Id.

FN3. In its findings, the district court often used the past tense to describe eBay's anticounterfeiting efforts. We do not take this usage to suggest that eBay has discontinued these efforts, but only to emphasize that its findings are issued with respect to a particular period of time prior to the completion of trial and issuance of its decision.

For nearly a decade, including the period at issue, eBay has also maintained and administered the “Verified Rights Owner (‘VeRO’) Program”-a “ ‘notice-and-takedown’ system” allowing owners of intellectual property rights, including Tiffany, to “report to eBay any listing offering potentially infringing items, so that eBay could remove such reported listings.” Id. at 478. Any such rights-holder with a “good-faith belief that [a particular listed] item infringed on a copyright or a trademark” could report the item to eBay, using a “Notice Of Claimed Infringement form or NOCI form.” Id. During the period under consideration, eBay's practice was to remove reported listings within twenty-four hours of receiving a NOCI, but eBay in fact deleted seventy to eighty percent of them within twelve hours of notification. Id.

On receipt of a NOCI, if the auction or sale had not ended, eBay would, in addition to removing the listing, cancel the bids and inform the seller of the reason for the cancellation. If bidding had ended, eBay would retroactively cancel the transaction. Id. In the event of a cancelled auction, eBay would refund the fees it had been paid in connection with the auction. Id. at 478-79.

In some circumstances, eBay would reimburse the buyer for the cost of a purchased item, provided the buyer presented evidence that the purchased item was counterfeit. Id. at 479.FN4 During the relevant time period, the district court found, eBay “never refused to remove a reported Tiffany listing, acted in good faith in responding to Tiffany's NOCIs, and always provided Tiffany with the seller's contact information.” Id. at 488.

FN4. We note, however, that, Tiffany's “About Me” page on the eBay website states that Tiffany does not authenticate merchandise. Pl.'s Ex. 290.

Thus, it may be difficult for a purchaser to proffer evidence to eBay supporting a suspicion that the “Tiffany” merchandise he or she bought is counterfeit.

In addition, eBay has allowed rights owners such as Tiffany to create an “About Me” webpage on eBay's website “to inform eBay users about their products, intellectual property rights, and legal positions.” Id. at 479. eBay does not exercise control over the content of those pages in a manner material to the issues before us.

Tiffany, not eBay, maintains the Tiffany “About Me” page. With the headline *100 “BUYER BEWARE,” the page begins: “Most of the purported TIFFANY & CO. silver jewelry and packaging available on eBay is counterfeit.” Pl.'s Ex. 290 (bold face type in original). It also says, inter alia:

The only way you can be certain that you are purchasing a genuine TIFFANY & CO. product is to purchase it from a Tiffany & Co. retail store, via our website ( tiffany. com) or through a Tiffany & Co. catalogue. Tiffany & Co. stores do not authenticate merchandise. A good jeweler or appraiser may be able to do this for you.

Id.

In 2003 or early 2004, eBay began to use “special warning messages when a seller attempted to list a Tiffany item.” Tiffany, 576 F.Supp.2d at 491. These messages “instructed the seller to make sure that the item was authentic Tiffany merchandise and informed the seller that eBay ‘does not tolerate the listing of replica, counterfeit, or otherwise unauthorized items' and that violation of this policy ‘could result in suspension of [the seller's] account.’ ” Id. (alteration in original). The messages also provided a link to Tiffany's “About Me” page with its “buyer beware” disclaimer. Id. If the seller “continued to list an item despite the warning, the listing was flagged for review.” Id.

In addition to cancelling particular suspicious transactions, eBay has also suspended from its website “ ‘hundreds of thousands of sellers every year,’ tens of thousands of whom were suspected [of] having engaged in infringing conduct.” Id. at 489. eBay primarily employed a “ ‘three strikes rule’ ” for suspensions, but would suspend sellers after the first violation if it was clear that “the seller ‘listed a number of infringing items,’ and ‘[selling counterfeit merchandise] appears to be the only thing they've come to eBay to do.’ ” Id. But if “a seller listed a potentially infringing item but appeared overall to be a legitimate seller, the ‘infringing items [were] taken down, and the seller [would] be sent a warning on the first offense and given the educational information, [and] told that ... if they do this again, they will be suspended from eBay.’ ” Id. (alterations in original).FN5

FN5. According to the district court, “eBay took appropriate steps to warn and then to suspend sellers when eBay learned of potential trademark infringement under that seller's account.” Tiffany, 576 F.Supp.2d at 489. The district court concluded that it was understandable that eBay did not have a “hard-and-fast, one-strike rule” of suspending sellers because a NOCI “did not constitute a definitive finding that the listed item was counterfeit” and because “suspension was a very serious matter, particularly to those sellers who relied on eBay for their livelihoods.” Id. The district court ultimately found eBay's policy to be “appropriate and effective in preventing sellers from returning to eBay and re-listing potentially counterfeit merchandise.” Id.

By late 2006, eBay had implemented additional anti-fraud measures: delaying the ability of buyers to view listings of certain brand names, including Tiffany's, for 6 to 12 hours so as to give rights-holders such as Tiffany more time to review those listings; developing the ability to assess the number of items listed in a given listing; and restricting one-day and three-day auctions and cross-border trading for some brand-name items. Id. at 492.

The district court concluded that “eBay consistently took steps to improve its technology and develop anti-fraud measures as such measures became technologically feasible and reasonably available.” Id. at 493.

eBay's Advertising

At the same time that eBay was attempting to reduce the sale of counterfeit items on its website, it actively sought to promote sales of premium and branded jewelry, including Tiffany merchandise, on its site. Id. at 479-80. Among other things,

eBay “advised its sellers to take advantage of the demand for Tiffany merchandise as part of a broader effort to grow the Jewelry & Watches category.” Id. at 479. And prior to 2003, eBay advertised the availability of Tiffany merchandise on its site. eBay's advertisements trumpeted “Mother's Day Gifts!,” Pl.'s Exs. 392, 1064, a “Fall FASHION BRAND BLOWOUT,” Pl.'s Ex. 392, “Jewelry Best Sellers,” id., “GREAT BRANDS, GREAT PRICES,” Pl.'s Ex. 1064, or “Top Valentine's Deals,” Pl.'s Ex. 392, among other promotions. It encouraged the viewer to “GET THE FINER THINGS.” Pl.'s Ex. 392. These advertisements provided the reader with hyperlinks, at least one of each of which was related to Tiffany merchandise-“Tiffany,” “Tiffany & Co. under $150,” “Tiffany & Co,” “Tiffany Rings,” or “Tiffany & Co. under $50.” Pl.'s Exs. 392, 1064.

eBay also purchased sponsored-link advertisements on various search engines to promote the availability of Tiffany items on its website. Tiffany, 576 F.Supp.2d at 480. In one such case, in the form of a printout of the results list from a search on Yahoo! for “tiffany,” the second sponsored link read “Tiffany on eBay. Find tiffany items at low prices. With over 5 million items for sale every day, you'll find all kinds of unique [unreadable] Marketplace. ebay. com.” Pl.'s Ex. 1065 (bold face type in original). Tiffany complained to eBay of the practice in 2003, and eBay told Tiffany that it had ceased buying sponsored links. Tiffany, 576 F.Supp.2d at 480. The district court found, however, that eBay continued to do so indirectly through a third party. Id.

Procedural History

By amended complaint dated July 15, 2004, Tiffany initiated this action. It alleged, inter alia, that eBay's conduct-i.e., facilitating and advertising the sale of “Tiffany” goods that turned out to be counterfeit-constituted direct and contributory trademark infringement, trademark dilution, and false advertising. On July 14, 2008, following a bench trial, the district court, in a thorough and thoughtful opinion, set forth its findings of fact and conclusions of law, deciding in favor of eBay on all claims.

Tiffany appeals from the district court's judgment for eBay.

DISCUSSION

We review the district court's findings of fact for clear error and its conclusions of law de novo. Giordano v. Thomson, 564 F.3d 163, 168 (2d Cir.2009).

I. Direct Trademark Infringement

Tiffany alleges that eBay infringed its trademark in violation of section 32 of the Lanham Act.FN6 The district court described this as a claim of “direct trademark*102 infringement,” Tiffany, 576 F.Supp.2d at 493, and we adopt that terminology. Under section 32, “the owner of a mark registered with the Patent and Trademark Office can bring a civil action against a person alleged to have used the mark without the owner's consent.” ITC Ltd. v. Punchgini, Inc., 482 F.3d 135, 145-46 (2d Cir.), cert. denied, 552 U.S. 827, 128 S.Ct. 288, 169 L.Ed.2d 38 (2007). We analyze such a claim “under a familiar two-prong test. The test looks first to whether the plaintiff's mark is entitled to protection, and second to whether the defendant's use of the mark is likely to cause consumers confusion as to the origin or sponsorship of the defendant's goods.” Savin Corp. v. Savin Group, 391 F.3d 439, 456 (2d Cir.2004) (alterations incorporated and ellipses omitted), cert. denied, 546 U.S. 822, 126 S.Ct. 116, 163 L.Ed.2d 64 (2005).

FN6. That section states in pertinent part:

Any person who shall, without the consent of the registrant-(a) use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark in connection with the sale, offering for sale,

distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; ... shall be liable in a civil action by the registrant for the remedies hereinafter provided.

15 U.S.C. § 1114(1)(a). Tiffany's complaint asserts causes of action under both the Lanham Act and New York State common law. The claims are composed of the same elements. We therefore analyze them together. See, e.g., Standard & Poor's Corp. v. Commodity Exch., Inc., 683 F.2d 704, 708 (2d Cir.1982).

In the district court, Tiffany argued that eBay had directly infringed its mark by using it on eBay's website and by purchasing sponsored links containing the mark on Google and Yahoo! Tiffany, 576 F.Supp.2d at 494. Tiffany also argued that eBay and the sellers of the counterfeit goods using its site were jointly and severally liable. Id. The district court rejected these arguments on the ground that eBay's use of Tiffany's mark was protected by the doctrine of nominative fair use. Id. at 494-95.

The doctrine of nominative fair use allows “[a] defendant [to] use a plaintiff's trademark to identify the plaintiff's goods so long as there is no likelihood of confusion about the source of [the] defendant's product or the mark-holder's sponsorship or affiliation.” Merck & Co. v. Mediplan Health Consulting, Inc., 425 F.Supp.2d 402, 413 (S.D.N.Y.2006). The doctrine apparently originated in the Court of Appeals for the Ninth Circuit. See New Kids on the Block v. News Am. Publ'g, Inc., 971 F.2d 302 (9th Cir.1992). To fall within the protection, according to that court: “First, the product or service in question must be one not readily identifiable without use of the trademark; second, only so much of the mark or marks may be used as is reasonably necessary to identify the product or service; and third, the user must do nothing that would, in conjunction with the mark, suggest sponsorship or endorsement by the trademark holder.” Id. at 308.

The Court of Appeals for the Third Circuit has endorsed these principles. See Century 21 Real Estate Corp. v. Lendingtree, Inc., 425 F.3d 211, 222 (3d Cir.2005).FN7 We have referred to the doctrine, albeit without adopting or rejecting it. See, e.g., Chambers v. Time Warner, Inc., 282 F.3d 147, 156 (2d Cir.2002) (noting that the district court had “[a]ppl [ied] the standard for non-trademark or ‘nominative’ fair use set forth by the Ninth Circuit”). Other circuits have done similarly. See, e.g., Univ. Commc'n Sys., Inc. v. Lycos, Inc., 478 F.3d 413, 424 (1st Cir.2007); Pebble Beach Co. v. Tour 18 I Ltd., 155 F.3d 526, 547 (5th Cir.1998), abrogated on other grounds by TrafFix Devices, Inc. v. Mktg. Displays, Inc., 532 U.S. 23, 121 S.Ct. 1255, 149 L.Ed.2d 164 (2001).

FN7. The Third Circuit treats the doctrine as an affirmative defense, see Century 21, 425 F.3d at 217-32, while the Ninth Circuit views the doctrine as a modification to the likelihood-of-confusion analysis of the plaintiff's underlying infringement claim, see Playboy Enters. v. Welles, 279 F.3d 796, 801 (9th Cir.2002).

We need not address the viability of the doctrine to resolve Tiffany's claim, however. We have recognized that a defendant may lawfully use a plaintiff's trademark where doing so is necessary to describe the plaintiff's product and does not imply a false affiliation or endorsement by the plaintiff of the defendant. “While a trademark conveys an exclusive right to the use of a mark in commerce in the area reserved, that right generally does not prevent one who trades a branded product from accurately describing it by its brand name, so long as the trader does not create confusion by implying an affiliation with the owner of the product.” Dow Jones & Co. v. Int'l Sec. Exch., Inc., 451 F.3d 295, 308 (2d Cir.2006); see also Polymer Tech. Corp. v. Mimran, 975 F.2d 58, 61-62 (2d Cir.1992) (“As a general rule, trademark law does not reach the sale of genuine goods bearing a true mark even though the sale is not authorized by the mark owner” (footnote omitted)); cf. Prestonettes, Inc. v. Coty, 264 U.S. 359, 368, 44 S.Ct. 350, 68 L.Ed. 731 (1924) (when a “mark is used in a way that does not deceive the public,” there is “no such sanctity in the word as to prevent its being used to tell the truth. It is not taboo.”).

We agree with the district court that eBay's use of Tiffany's mark on its website and in sponsored links was lawful. eBay used the mark to describe accurately the genuine Tiffany goods offered for sale on its website. And none of eBay's uses of the mark suggested that Tiffany affiliated itself with eBay or endorsed the sale of its products through eBay's website.

In addition, the “About Me” page that Tiffany has maintained on eBay's website since 2004 states that “[m]ost of the purported ‘TIFFANY & CO.’ silver jewelry and packaging available on eBay is counterfeit.” Tiffany, 576 F.Supp.2d at 479 (internal quotation marks omitted). The page further explained that Tiffany itself sells its products only through its own stores, catalogues, and website. Id.

Tiffany argues, however, that even if eBay had the right to use its mark with respect to the resale of genuine Tiffany merchandise, eBay infringed the mark because it knew or had reason to know that there was “a substantial problem with the sale of counterfeit [Tiffany] silver jewelry” on the eBay website. Appellants' Br. 45. As we discuss below, eBay's knowledge vel non that counterfeit Tiffany wares were offered through its website is relevant to the issue of whether eBay contributed to the direct infringement of Tiffany's mark by the counterfeiting vendors themselves, or whether eBay bears liability for false advertising. But it is not a basis for a claim of direct trademark infringement against eBay, especially inasmuch as it is undisputed that eBay promptly removed all listings that Tiffany challenged as counterfeit and took affirmative steps to identify and remove illegitimate Tiffany goods. To impose liability because eBay cannot guarantee the genuineness of all of the purported Tiffany products offered on its website would unduly inhibit the lawful resale of genuine Tiffany goods.

We conclude that eBay's use of Tiffany's mark in the described manner did not constitute direct trademark infringement.

II. Contributory Trademark Infringement

The more difficult issue, and the one that the parties have properly focused our attention on, is whether eBay is liable for contributory trademark infringement-i.e., for culpably facilitating the infringing conduct of the counterfeiting vendors. Acknowledging the paucity of case law to guide us, we conclude that the district court correctly granted judgment on this issue in favor of eBay.

A. Principles

Contributory trademark infringement is a judicially created doctrine that derives from the common law of torts. See, e.g., Hard Rock Café Licensing Corp. v. Concession Servs., Inc., 955 F.2d 1143, 1148 (7th Cir.1992); cf. Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 930, 125 S.Ct. 2764, 162 L.Ed.2d 781 (2005) (“[T]hese doctrines of secondary liability emerged from common law principles and are well established in the law.”) (citations omitted). The Supreme Court most recently dealt with the subject in Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 102 S.Ct. 2182, 72 L.Ed.2d 606 (1982). There, the plaintiff, Ives, asserted that several drug manufacturers had induced pharmacists to mislabel a drug the defendants produced to pass it off as Ives'. See id. at 847-50, 102 S.Ct. 2182. According to the Court, “if a manufacturer or distributor intentionally induces another to infringe a trademark, or if it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement, the manufacturer or distributor is contributorially responsible for any harm done as a result of the deceit.” Id. at 854, 102 S.Ct. 2182.FN8 The Court ultimately decided to remand the case to the Court of Appeals after concluding it had improperly rejected factual findings of the district court favoring the defendant manufacturers. Id. at 857-59, 102 S.Ct. 2182.

FN8. The Supreme Court cited two cases in support of this proposition: William R. Warner & Co. v. Eli Lilly & Co., 265 U.S. 526, 44 S.Ct. 615, 68 L.Ed. 1161 (1924), and Coca-Cola Co. v. Snow Crest Beverages, Inc., 64 F.Supp. 980 (D.Mass.1946) (Wyzanski, J.), aff'd, 162 F.2d 280 (1st Cir.), cert. denied, 332 U.S. 809, 68 S.Ct. 110, 92 L.Ed. 386 (1947).

Like Inwood, Eli Lilly involved an allegation by a plaintiff drug manufacturer that a defendant drug manufacturer had intentionally induced distributors to pass off the defendant's drug to purchasers as the plaintiff's. 265 U.S. at 529-30, 44 S.Ct. 615. The Supreme Court granted the plaintiff's request for an injunction, stating that “[o]ne who induces another to commit a fraud and furnishes the means of consummating it is equally guilty and liable for the injury.” Id. at 530-31, 44 S.Ct. 615.

In Snow Crest, the Coca-Cola Company claimed that a rival soft drink maker had infringed Coca-Cola's mark because bars purchasing the rival soft drink had substituted it for Coca-Cola when patrons requested a “rum (or whiskey) and Coca-Cola.” 64 F.Supp. at 982, 987. Judge Wyzanski entered judgment in favor of the defendant primarily because there was insufficient evidence of such illicit substitutions taking place. Id. at 990. In doing so, the court stated that “[b]efore he can himself be held as a wrongdoer o[r] contributory infringer one who supplies another with the instruments by which that other commits a tort, must be shown to have knowledge that the other will or can reasonably be expected to commit a tort with the supplied instrument.” Id. at 989.

Inwood's test for contributory trademark infringement applies on its face to manufacturers and distributors of goods. Courts have, however, extended the test to providers of services.

The Seventh Circuit applied Inwood to a lawsuit against the owner of a swap meet, or “flea market,” whose vendors were alleged to have sold infringing Hard Rock Café T-shirts. See Hard Rock Café, 955 F.2d at 1148-49. The court “treated trademark infringement as a species of tort,” id. at 1148, and analogized the swap meet owner to a landlord or licensor, on whom the common law “imposes the same duty ... [as Inwood ] impose[s] on manufacturers and distributors,” id. at 1149; see also Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir.1996) (adopting Hard Rock Café's reasoning and applying Inwood to a swap meet owner).

Speaking more generally, the Ninth Circuit concluded that Inwood's test for contributory trademark infringement applies to a service provider if he or she exercises sufficient control over the infringing conduct. Lockheed Martin Corp. v. Network Solutions, Inc., 194 F.3d 980, 984 (9th Cir.1999); see also id. (“Direct control and monitoring of the instrumentality used by a third party to infringe the plaintiff's mark permits the expansion of Inwood Lab.'s ‘supplies a product’ requirement for contributory infringement.”).

We have apparently addressed contributory trademark infringement in only two related decisions, see Polymer Tech. Corp. v. Mimran, 975 F.2d 58, 64 (2d Cir.1992) (“Polymer I ”); Polymer Tech. Corp. v. Mimran, 37 F.3d 74, 81 (2d Cir.1994) (“Polymer II ”), and even then in little detail. Citing Inwood, we said that “[a] distributor who intentionally induces another to infringe a trademark, or continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement, is contributorially liable for any injury.” Polymer I, 975 F.2d at 64.

The limited case law leaves the law of contributory trademark infringement ill-defined. Although we are not the first court to consider the application of Inwood to the Internet, see, e.g., Lockheed, 194 F.3d 980, supra (Internet domain name registrar), we are apparently the first to consider its application to an online marketplace.FN9

FN9. European courts have done so. A Belgian court declined to hold eBay liable for counterfeit cosmetic products sold through its website. See Lancôme v. eBay, Brussels Commercial Court (Aug. 12, 2008), Docket No. A/07/06032. French courts, by contrast, have concluded that eBay violated applicable trademark laws. See, e.g., S.A. Louis Vuitton Malletier v. eBay, Inc., Tribunal de Commerce de Paris, Premiere Chambre B. (Paris Commercial Court), Case No. 200677799 (June 30, 2008); Hermes v. eBay, Troyes High Court (June 4, 2008), Docket No. 06/0264; see also Max Colchester, “EBay to Pay Damages To Unit of LVMH,” The Wall Street Journal, Feb. 12, 2010, http:// online. wsj. com/ article_ email/ SB 1000142405 274870433700 457505952301 8541764- l My Q j Ax MTAw MDEw M j Ex NDIy Wj. html (last visited Mar. 1, 2010) (“A Paris court Thursday ordered eBay to pay Louis Vuitton Q200,000 ($275,000) in damages and to stop paying search engines to direct certain key words to the eBay site.”); see generally, Valerie Walsh Johnson & Laura P. Merritt, TIFFANY v. EBAY: A Case of Genuine Disparity in International Court Rulings on Counterfeit Products, 1 No. 2 Landslide 22 (2008) (surveying decisions by European courts in trademark infringement cases brought against eBay).

B. Discussion

1. Does Inwood Apply?

In the district court, the parties disputed whether eBay was subject to the Inwood test. See Tiffany, 576 F.Supp.2d at 504. eBay argued that it was not because it supplies a service while Inwood governs only manufacturers and distributors of products. Id. The district court rejected that distinction. It adopted instead the reasoning of the Ninth Circuit in Lockheed to conclude that Inwood applies to a service provider who exercises sufficient control over the means of the infringing conduct. Id. at 505-06. Looking “to the extent of the control exercised by eBay over its sellers' means of infringement,” the district court concluded that Inwood applied in light of the “significant control” eBay retained over the transactions and listings facilitated by and conducted through its website. Id. at 505-07.

On appeal, eBay no longer maintains that it is not subject to Inwood. FN10 We therefore assume without deciding that Inwood's test for contributory trademark infringement governs.

FN10. Amici do so claim. See Electronic Frontier Foundation et al. Amici Br. 6 (arguing that Inwood should “not govern where, as here, the alleged contributory infringer has no direct means to establish whether there is any act of direct infringement in the first place”). We decline to consider this argument. “Although an amicus brief can be helpful in elaborating issues properly presented by the parties, it is normally not a method for injecting new issues into an appeal, at least in cases where the parties are competently represented by counsel.” Universal City Studios, Inc. v. Corley, 273 F.3d 429, 445 (2d Cir.2001).

2. Is eBay Liable Under Inwood?

The question that remains, then, is whether eBay is liable under the Inwood test on the basis of the services it provided to those who used its website to sell counterfeit Tiffany products. As noted, when applying Inwood to service providers, there are two ways in which a defendant may become contributorially liable for the infringing conduct of another: first, if the service provider “intentionally induces another to infringe a trademark,” and second, if the service provider “continues to supply its [service] to one whom it knows or has reason to know is engaging in trademark infringement.” Inwood, 456 U.S. at 854, 102 S.Ct. 2182. Tiffany does not argue that eBay induced the sale of counterfeit Tiffany goods on its website-the circumstances addressed by the first part of the Inwood test. It argues instead, under the second part of the Inwood test, that eBay continued to supply its services to the sellers of counterfeit Tiffany goods while knowing or having reason to know that such sellers were infringing Tiffany's mark.

The district court rejected this argument. First, it concluded that to the extent the NOCIs that Tiffany submitted gave eBay reason to know that particular listings were for counterfeit goods, eBay did not continue to carry those listings once it learned that they were specious. Tiffany, 576 F.Supp.2d at 515-16. The court found that eBay's practice was promptly to remove the challenged listing from its website, warn sellers and buyers, cancel fees it earned from that listing, and direct buyers not to consummate the sale of the disputed item. Id. at 516. The court therefore declined to hold eBay contributorially liable for the infringing conduct of those sellers. Id. at 518. On appeal, Tiffany does not appear to challenge this conclusion. In any event, we agree with the district court that no liability arises with respect to those terminated listings.

Tiffany disagrees vigorously, however, with the district court's further determination that eBay lacked sufficient knowledge of trademark infringement by sellers behind other, non-terminated listings to provide a basis for Inwood liability. Tiffany argued in the district court that eBay knew, or at least had reason to know, that counterfeit Tiffany goods were being sold ubiquitously on its website. Id. at 507-08. As evidence, it pointed to, inter alia, the demand letters it sent to eBay in 2003 and 2004, the results of its Buying Programs that it shared with eBay, the thousands of NOCIs it filed with eBay alleging its good faith belief that certain listings were counterfeit, and the various complaints eBay received from buyers claiming that they had purchased one or more counterfeit Tiffany items through eBay's website. Id. at 507. Tiffany argued that taken together, this evidence established eBay's knowledge of the widespread sale of counterfeit Tiffany products on its website. Tiffany urged that eBay be held contributorially liable on the basis that despite that knowledge, it continued to make its services available to infringing sellers. Id. at 507-08.

The district court rejected this argument. It acknowledged that “[t]he evidence produced at trial demonstrated that eBay had generalized notice that some portion of the Tiffany goods sold on its website might be counterfeit.” Id. at 507 (emphasis in original). The court characterized the issue before it as “whether eBay's generalized knowledge of trademark infringement on its website was sufficient to meet the ‘knowledge or reason to know’ prong of the Inwood test.” Id. at 508 (emphasis in original). eBay had argued that “such generalized knowledge is insufficient, and that the law demands more specific knowledge of individual instances of infringement and infringing sellers before imposing a burden upon eBay to remedy the problem.” Id.

The district court concluded that “while eBay clearly possessed general knowledge as to counterfeiting on its website, such generalized knowledge is insufficient under the Inwood test to impose upon eBay an affirmative duty to remedy the problem.” Id. at 508. The court reasoned that Inwood's language explicitly imposes contributory liability on a defendant who “continues to supply its product [-in eBay's case, its service-] to one whom it knows or has reason to know is engaging in trademark infringement.” Id. at 508 (emphasis in original). The court also noted that plaintiffs “bear a high burden in establishing ‘knowledge’ of contributory infringement,” and that courts have

been reluctant to extend contributory trademark liability to defendants where there is some uncertainty as to the extent or the nature of the infringement. In Inwood, Justice White emphasized in his concurring opinion that a defendant is not “require[d] ... to refuse to sell to dealers who merely might pass off its goods.”

Id. at 508-09 (quoting Inwood, 456 U.S. at 861, 102 S.Ct. 2182) (White, J., concurring) (emphasis and alteration in original).FN11

FN11. The district court found the cases Tiffany relied on for the proposition that general knowledge of counterfeiting suffices to trigger liability to be inapposite. Id. at 510.

Accordingly, the district court concluded that for Tiffany to establish eBay's contributory liability, Tiffany would have to show that eBay “knew or had reason to know of specific instances of actual infringement” beyond those that it addressed upon learning of them. Id. at 510. Tiffany failed to make such a showing.

On appeal, Tiffany argues that the distinction drawn by the district court between eBay's general knowledge of the sale of counterfeit Tiffany goods through its website, and its specific knowledge as to which particular sellers were making such sales, is a “false” one not required by the law. Appellants' Br. 28. Tiffany posits that the only relevant question is “whether all of the knowledge, when taken together, puts [eBay] on notice that there is a substantial problem of trademark infringement. If so and if it fails to act, [eBay] is liable for contributory trademark infringement.” Id. at 29.

We agree with the district court. For contributory trademark infringement liability to lie, a service provider must have more than a general knowledge or reason to know that its service is being used to sell counterfeit goods. Some contemporary knowledge of which particular listings are infringing or will infringe in the future is necessary.

We are not persuaded by Tiffany's proposed interpretation of Inwood. Tiffany understands the “lesson of Inwood ” to be that an action for contributory trademark infringement lies where “the evidence [of infringing activity]-direct or circumstantial, taken as a whole-... provide[s] a basis for finding that the defendant knew or should have known that its product or service was being used to further illegal counterfeiting activity.” Appellants' Br. 30. We think that Tiffany reads Inwood too broadly. Although the Inwood Court articulated a “knows or has reason to know” prong in setting out its contributory liability test, the Court explicitly declined to apply that prong to the facts then before it. See Inwood, 456 U.S. at 852 n. 12, 102 S.Ct. 2182 (“The District Court also found that the petitioners did not continue to provide drugs to retailers whom they knew or should have known were engaging in trademark infringement. The Court of Appeals did not discuss that finding, and we do not address it.”) (internal citation omitted). The Court applied only the inducement prong of the test. See id. at 852-59, 102 S.Ct. 2182.

We therefore do not think that Inwood establishes the contours of the “knows or has reason to know” prong. Insofar as it speaks to the issue, though, the particular phrasing that the Court used-that a defendant will be liable if it “continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement,” id. at 854, 102 S.Ct. 2182 (emphasis added)-supports the district court's interpretation of Inwood, not Tiffany's.

We find helpful the Supreme Court's discussion of Inwood in a subsequent copyright case, Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984). There, defendant Sony manufactured and sold home video tape recorders. Id. at 419, 104 S.Ct. 774. Plaintiffs Universal Studios and Walt Disney Productions held copyrights on various television programs that individual television-viewers had taped using the defendant's recorders. Id. at 419-20, 104 S.Ct. 774. The plaintiffs contended that this use of the recorders constituted copyright infringement for which the defendants should be held contributorily liable. Id. In ruling for the defendants, the Court discussed Inwood and the differences between contributory liability in trademark versus copyright law.

If Inwood's narrow standard for contributory trademark infringement governed here, [the plaintiffs'] claim of contributory infringement would merit little discussion. Sony certainly does not ‘intentionally induce[ ]’ its customers to make infringing uses of [the plaintiffs'] copyrights, nor does it supply its products to identified individuals known by it to be engaging in continuing infringement of [the plaintiffs'] copyrights.

Id. at 439 n. 19, 104 S.Ct. 774 (quoting Inwood, 456 U.S. at 855, 102 S.Ct. 2182; emphases added).

Thus, the Court suggested, had the Inwood standard applied in Sony, the fact that Sony might have known that some portion of the purchasers of its product used it to violate the copyrights of others would not have provided a sufficient basis for contributory liability. Inwood's “narrow standard” would have required knowledge by Sony of “identified individuals” engaging in infringing conduct. Tiffany's reading of Inwood is therefore contrary to the interpretation of that case set forth in Sony.

Although the Supreme Court's observations in Sony, a copyright case, about the “knows or has reason to know” prong of the contributory trademark infringement test set forth in Inwood were dicta, they constitute the only discussion of that prong by the Supreme Court of which we are aware. We think them to be persuasive authority here.FN12

FN12. In discussing Inwood's “knows or has reason to know” prong of the contributory infringement test, Sony refers to a defendant's knowledge, but not to its constructive knowledge, of a third party's infringing conduct. Sony, 464 U.S. at 439 n. 19, 104 S.Ct. 774. We do not take the omission as altering the test Inwood articulates.

Applying Sony's interpretation of Inwood, we agree with the district court that “Tiffany's general allegations of counterfeiting failed to provide eBay with the knowledge required under Inwood.” Tiffany, 576 F.Supp.2d at 511. Tiffany's demand letters and Buying Programs did not identify particular sellers who Tiffany thought were then offering or would offer counterfeit goods. Id. at 511-13.FN13 And although the NOCIs and buyer complaints gave eBay reason to know that certain sellers had been selling counterfeits, those sellers' listings were removed and repeat offenders were suspended from the eBay site. Thus Tiffany failed to demonstrate that eBay was supplying its service to individuals who it knew or had reason to know were selling counterfeit Tiffany goods.

FN13. The demand letters did say that eBay should presume that sellers offering five or more Tiffany goods were selling counterfeits, id. at 511, but we agree with the district court that this presumption was factually unfounded, id. at 511-12.

Accordingly, we affirm the judgment of the district court insofar as it holds that eBay is not contributorially liable for trademark infringement.

3. Willful Blindness.

Tiffany and its amici express their concern that if eBay is not held liable except when specific counterfeit listings are brought to its attention, eBay will have no incentive to root out such listings from its website. They argue that this will effectively require Tiffany and similarly situated retailers to police eBay's website-and many others like it-“24 hours a day, and 365 days a year.” Council of Fashion Designers of America, Inc. Amicus Br. 5. They urge that this is a burden that most mark holders cannot afford to bear.

First, and most obviously, we are interpreting the law and applying it to the facts of this case. We could not, even if we thought it wise, revise the existing law in order to better serve one party's interests at the expense of the other's.

But we are also disposed to think, and the record suggests, that private market forces give eBay and those operating similar businesses a strong incentive to minimize the counterfeit goods sold on their websites. eBay received many complaints from users claiming to have been duped into buying counterfeit Tiffany products sold on eBay. Tiffany, 576 F.Supp.2d at 487. The risk of alienating these users gives eBay a reason to identify and remove counterfeit listings.FN14 Indeed, it has spent millions of dollars in that effort.

FN14. At the same time, we appreciate the argument that insofar as eBay receives revenue from undetected counterfeit listings and sales through the fees it charges, it has an incentive to permit such listings and sales to continue.

Moreover, we agree with the district court that if eBay had reason to suspect that counterfeit Tiffany goods were being sold through its website, and intentionally shielded itself from discovering the offending listings or the identity of the sellers behind them, eBay might very well have been charged with knowledge of those sales sufficient to satisfy Inwood's “knows or has reason to know” prong. Tiffany, 576 F.Supp.2d at 513-14. A service provider is not, we think, permitted willful blindness. When it has reason to suspect that users of its service are infringing a protected mark, it may not shield itself from learning of the particular infringing transactions by looking the other way. See, e.g., Hard Rock Café, 955 F.2d at 1149 (“To be willfully blind, a person must suspect wrongdoing and deliberately fail to investigate.”); Fonovisa, 76 F.3d at 265 (applying Hard Rock Café's reasoning to conclude that “a swap meet can not disregard its vendors' blatant trademark infringements with impunity”).FN15 In the words of the Seventh Circuit, “willful blindness is equivalent to actual knowledge for purposes of the Lanham Act.” Hard Rock Café, 955 F.2d at 1149.FN16

FN15. To be clear, a service provider is not contributorially liable under Inwood merely for failing to anticipate that others would use its service to infringe a protected mark. Inwood, 456 U.S. at 854 n. 13, 102 S.Ct. 2182 (stating that for contributory liability to lie, a defendant must do more than “reasonably anticipate” a third party's infringing conduct (internal quotation marks omitted)). But contributory liability may arise where a defendant is (as was eBay here) made aware that there was infringement on its site but (unlike eBay here) ignored that fact.

FN16. The principle that willful blindness is tantamount to knowledge is hardly novel. See, e.g. Harte-Hanks Commc'ns, Inc. v. Connaughton, 491 U.S. 657, 659, 692, 109 S.Ct. 2678, 105 L.Ed.2d 562 (1989) (concluding in public-official libel case that “purposeful avoidance of the truth” is equivalent to “knowledge that [a statement] was false or [was made] with reckless disregard of whether it was false” (internal quotation marks omitted)); United States v. Khorozian, 333 F.3d 498, 504 (3d Cir.2003) (acting with willful blindness satisfies the intent requirement of the federal bank fraud statute); Friedman v. Comm'r, 53 F.3d 523, 525 (2d Cir.1995) (“The ‘innocent spouse’ exemption [from the rule that married couples who file a joint tax return are jointly and severally liable for any tax liability found] was not designed to protect willful blindness or to encourage the deliberate cultivation of ignorance.”); Mattingly v. United States, 924 F.2d 785, 792 (8th Cir.1991) (concluding in civil tax fraud case that “the element of knowledge may be inferred from deliberate acts amounting to willful blindness to the existence of fact or acts constituting conscious purpose to avoid enlightenment.”); Morrow Shoe Mfg. Co. v. New England Shoe Co., 57 F. 685, 694 (7th Cir.1893) (“The mind cannot well avoid the conclusion that if they did not know of the fraudulent purposes of Davis it was because they were willfully blind. Such facility of belief, it has been well said, invites fraud, and may justly be suspected of being its accomplice.”); State Street Trust Co. v. Ernst, 278 N.Y. 104, 112, 15 N.E.2d 416, 419 (1938) (“[H]eedlessness and reckless disregard of consequence [by an accountant] may take the place of deliberate intention.”).

eBay appears to concede that it knew as a general matter that counterfeit Tiffany products were listed and sold through its website. Tiffany, 576 F.Supp.2d at 514. Without more, however, this knowledge is insufficient to trigger liability under Inwood. The district court found, after careful consideration, that eBay was not willfully blind to the counterfeit sales. Id. at 513. That finding is not clearly erroneous.FN17 eBay did not ignore the information it was given about counterfeit sales on its website.

FN17. Tiffany's reliance on the “flea market” cases, Hard Rock Café and Fonovisa, is unavailing. eBay's efforts to combat counterfeiting far exceeded the efforts made by the defendants in those cases. See Hard Rock Café, 955 F.2d at 1146 (defendant did not investigate any of the seizures of counterfeit products at its swap meet, even though it knew they had occurred); Fonovisa, 76 F.3d at 265 (concluding that plaintiff stated a claim for contributory trademark infringement based on allegation that swap meet “disregard[ed] its vendors' blatant trademark infringements with impunity”). Moreover, neither case concluded that the defendant was willfully blind. The court in Hard Rock Café remanded so that the district court could apply the correct definition of “willful blindness,” 955 F.2d at 1149, and the court in Fonovisa merely sustained the plaintiff's complaint against a motion to dismiss, 76 F.3d at 260-61, 265.

III. Trademark Dilution

A. Principles

Federal law allows the owner of a “famous mark” to enjoin a person from using “a mark or trade name in commerce that is likely to cause dilution by blurring or dilution by tarnishment of the famous mark.” 15 U.S.C. § 1125(c)(1).

[9] “Dilution by blurring” is an “association arising from the similarity between a mark or trade name and a famous mark that impairs the distinctiveness of the famous mark.” Id. § 1125(c)(2)(B). It can occur “regardless of the presence or absence of actual or likely confusion, of competition, or of actual economic injury.” Id. § 1125(c)(1). “Some classic examples of blurring include ‘hypothetical anomalies as Dupont shoes, Buick aspirin tablets, Schlitz varnish, Kodak pianos, Bulova gowns, and so forth.’ ” Starbucks Corp. v. Wolfe's Borough Coffee, Inc., 588 F.3d 97, 105 (2d Cir.2009) (quoting Mead Data Cent., Inc. v. Toyota Motor Sales, U.S.A., Inc., 875 F.2d 1026, 1031 (2d Cir.1989)). It is not a question of confusion; few consumers would likely confuse the source of a Kodak camera with the source of a “Kodak” piano. Dilution by blurring refers instead to “ ‘the whittling away of [the] established trademark's selling power and value through its unauthorized use by others.’ ” Id. (quoting Mead Data Cent., 875 F.2d at 1031).

Federal law identifies a non-exhaustive list of six factors that courts “may consider” when determining whether a mark is likely to cause dilution by blurring. These are: (1) “[t]he degree of similarity between the mark or trade name and the famous mark”; FN18 (2) “[t]he degree of inherent or acquired distinctiveness of the famous mark”; (3) “[t]he extent to which the owner of the famous mark is engaging in substantially exclusive use of the mark”; (4) “[t]he degree of recognition of the famous mark”; (5) “[w]hether the user of the mark or trade name intended to create an association with the famous mark”; and (6) “[a]ny actual association between the mark or trade name and the famous mark.” 15 U.S.C. § 1125(c)(2)(B)(i-vi).

FN18. We have recently explained that under the Trademark Dilution Revision Act of 2006 (“TDRA”), Pub.L. No. 109-312, 120 Stat. 1730, 1731 (Oct. 6, 2006), the similarity between the famous mark and the allegedly blurring mark need not be “substantial” in order for the dilution by blurring claim to succeed. See Starbucks Corp., 588 F.3d at 107-09. The district court concluded that the TDRA governs Tiffany's claim. See Tiffany, 576 F.Supp.2d at 522-23. We agree and note that Tiffany does not dispute this conclusion on appeal.

In contrast to dilution by blurring, “dilution by tarnishment” is an “association arising from the similarity between a mark or trade name and a famous mark that harms the reputation of the famous mark.” 15 U.S.C. § 1125(c)(2)(C). This “generally arises when the plaintiff's trademark is linked to products of shoddy quality, or is portrayed in an unwholesome or unsavory context likely to evoke unflattering thoughts about the owner's product.” Deere & Co. v. MTD Prods., Inc., 41 F.3d 39, 43 (2d Cir.1994).

New York State law also “provide[s] for protection against both dilution by blurring and tarnishment.” Starbucks Corp., 588 F.3d at 114; see N.Y. Gen. Bus. Law § 360-l. The state law is not identical to the federal one, however. New York “does not[, for example,] require a mark to be ‘famous' for protection against dilution to apply.” Starbucks Corp., 588 F.3d at 114. Nor are the factors used to determine whether blurring has occurred the same. “Most important to the distinction here, New York law does not permit a dilution claim unless the marks are ‘substantially’ similar.” Id.

B. Discussion

The district court rejected Tiffany's dilution by blurring claim on the ground that “eBay never used the TIFFANY Marks in an effort to create an association with its own product, but instead, used the marks directly to advertise and identify the availability of authentic Tiffany merchandise on the eBay website.” Tiffany, 576 F.Supp.2d at 524. The court concluded that “just as the dilution by blurring claim fails because eBay has never used the [Tiffany] Marks to refer to eBay's own product, the dilution by tarnishment claim also fails.” Id. at 525.

We agree. There is no second mark or product at issue here to blur with or to tarnish “Tiffany.”

Tiffany argues that counterfeiting dilutes the value of its product. Perhaps. But insofar as eBay did not itself sell the goods at issue, it did not itself engage in dilution.

Tiffany argued unsuccessfully to the district court that eBay was liable for contributory dilution. Id. at 526. Assuming without deciding that such a cause of action exists, the court concluded that the claim would fail for the same reasons Tiffany's contributory trademark infringement claim failed. Id. Tiffany does not contest this conclusion on appeal. We therefore do not address it. See Palmieri v. Allstate Ins. Co., 445 F.3d 179 (2d Cir.2006) (issues not raised on appeal are treated as waived).

IV. False Advertising

Finally, Tiffany claims that eBay engaged in false advertising in violation of federal law.

A. Principles

[13] Section 43(a) of the Lanham Act prohibits any person from, “in commercial advertising or promotion, misrepresent[ing] the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities.” 15 U.S.C. § 1125(a)(1)(B). A claim of false advertising may be based on at least one of two theories: “that the challenged advertisement is literally false, i.e., false on its face,” or “that the advertisement, while not literally false, is nevertheless likely to mislead or confuse consumers.” Time Warner Cable, Inc. v. DIRECTV, Inc., 497 F.3d 144, 153 (2d Cir.2007).

In either case, the “injuries redressed in false advertising cases are the result of public deception.” Johnson & Johnson * Merck Consumer Pharm. Co. v. Smithkline Beecham Corp., 960 F.2d 294, 298 (2d Cir.1992) (“Merck ”). And “[u]nder either theory, the plaintiff must also demonstrate that the false or misleading representation involved an inherent or material quality of the product.” Time Warner Cable, 497 F.3d at 153 n. 3.FN19

FN19. We recently adopted “the ‘false by necessary implication’ doctrine,” under which “a district court evaluating whether an advertisement is literally false ‘must analyze the message conveyed in full context.’ ” Time Warner Cable, 497 F.3d at 158; cf. S.C. Johnson & Son, Inc. v. Clorox Co., 241 F.3d 232, 238 (2d Cir.2001) (“In considering a false-advertising claim, [f]undamental to any task of interpretation is the principle that text must yield to context.”) (quoting Avis Rent A Car Sys., Inc. v. Hertz Corp., 782 F.2d 381, 385 (2d Cir.1986) (internal quotation marks omitted)).

[14][15] Where an advertising claim is literally false, “the court may enjoin the use of the claim without reference to the advertisement's impact on the buying public.” McNeil-P.C.C., Inc. v. Bristol-Myers Squibb Co., 938 F.2d 1544, 1549 (2d Cir.1991) (internal quotation marks omitted). To succeed in a likelihood-of-confusion case where the statement at issue is not literally false, however, a plaintiff “must demonstrate, by extrinsic evidence, that the challenged commercials tend to mislead or confuse consumers,” and must “demonstrate that a statistically significant part of the commercial audience holds the false belief allegedly communicated by the challenged advertisement.” Merck, 960 F.2d at 297, 298; Time Warner Cable, 497 F.3d at 153 (“[W]hereas plaintiffs seeking to establish a literal falsehood must generally show the substance of what is conveyed, ... a district court must rely on extrinsic evidence [of consumer deception or confusion] to support a finding of an implicitly false message.” (internal quotation marks omitted and emphasis and alterations in original)).

B. Discussion

eBay advertised the sale of Tiffany goods on its website in various ways. Among other things, eBay provided hyperlinks to “Tiffany,” “Tiffany & Co. under $150,” “Tiffany & Co.,” “Tiffany Rings,” and “Tiffany & Co. under $50.” Pl.'s Exs. 290, 392, 1064, 1065. eBay also purchased advertising space on search engines, in some instances providing a link to eBay's site and exhorting the reader to “Find tiffany items at low prices.” Pl.'s Ex. 1065 (bold face type in original). Yet the district court found, and eBay does not deny, that “eBay certainly had generalized knowledge that Tiffany products sold on eBay were often counterfeit.” Tiffany, 576 F.Supp.2d at 520-21. Tiffany argues that because eBay advertised the sale of Tiffany goods on its website, and because many of those goods were in fact counterfeit, eBay should be liable for false advertising.

The district court rejected this argument. Id. at 519-21. The court first concluded that the advertisements at issue were not literally false “[b]ecause authentic Tiffany merchandise is sold on eBay's website,” even if counterfeit Tiffany products are sold there, too. Id. at 520.

The court then considered whether the advertisements, though not literally false, were nonetheless misleading. It concluded they were not for three reasons. First, the court found that eBay's use of Tiffany's mark in its advertising was “protected, nominative fair use.” Id. Second, the court found that “Tiffany has not proven that eBay had specific knowledge as to the illicit nature of individual listings,” implying that such knowledge would be necessary to sustain a false advertising claim. Id. at 521. Finally, the court reasoned that “to the extent that the advertising was false, the falsity was the responsibility of third party sellers, not eBay.” Id.

We agree with the district court that eBay's advertisements were not literally false inasmuch as genuine Tiffany merchandise was offered for sale through eBay's website. But we are unable to affirm on the record before us the district court's further conclusion that eBay's advertisements were not “likely to mislead or confuse consumers.” Time Warner Cable, 497 F.3d at 153.

As noted, to evaluate Tiffany's claim that eBay's advertisements misled consumers, a court must determine whether extrinsic evidence indicates that the challenged advertisements were misleading or confusing. The reasons the district court gave for rejecting Tiffany's claim do not seem to reflect this determination, though. The court's first rationale was that eBay's advertisements were nominative fair use of Tiffany's mark.

But, even if that is so, it does not follow that eBay did not use the mark in a misleading advertisement. It may, after all, constitute fair use for Brand X Coffee to use the trademark of its competitor, Brand Y Coffee, in an advertisement stating that “In a blind taste test, 9 out of 10 New Yorkers said they preferred Brand X Coffee to Brand Y Coffee.” But if 9 out of 10 New Yorkers in a statistically significant sample did not say they preferred X to Y, or if they were paid to say that they did, then the advertisement would nonetheless be literally false in the first example, or misleading in the second.

There is a similar difficulty with the district court's reliance on the fact that eBay did not know which particular listings on its website offered counterfeit Tiffany goods. That is relevant, as we have said, to whether eBay committed contributory trademark infringement. But it sheds little light on whether the advertisements were misleading insofar as they implied the genuineness of Tiffany goods on eBay's site.

Finally, the district court reasoned that if eBay's advertisements were misleading, that was only because the sellers of counterfeits made them so by offering inauthentic Tiffany goods. Again, this consideration is relevant to Tiffany's direct infringement claim, but less relevant, if relevant at all, here. It is true that eBay did not itself sell counterfeit Tiffany goods; only the fraudulent vendors did, and that is in part why we conclude that eBay did not infringe Tiffany's mark. But eBay did affirmatively advertise the goods sold through its site as Tiffany merchandise. The law requires us to hold eBay accountable for the words that it chose insofar as they misled or confused consumers.

eBay and its amici warn of the deterrent effect that will grip online advertisers who are unable to confirm the authenticity of all of the goods they advertise for sale. See, e.g., Yahoo! Inc. Amicus Br. 15; Electronic Frontier Foundation et al. Amicus Br. 18-19. We rather doubt that the consequences will be so dire. An online advertiser such as eBay need not cease its advertisements for a kind of goods only because it knows that not all of those goods are authentic. A disclaimer might suffice. But the law prohibits an advertisement that implies that all of the goods offered on a defendant's website are genuine when in fact, as here, a sizeable proportion of them are not.

Rather than vacate the judgment of the district court as to Tiffany's false advertising claim, we think it prudent to remand the cause so that the district court, with its greater familiarity with the evidence, can reconsider the claim in light of what we have said. The case is therefore remanded pursuant to United States v. Jacobson, 15 F.3d 19 (2d Cir.1994), for further proceedings for the limited purpose of the district court's re-examination of the false advertising claim in accordance with this opinion. We retain jurisdiction so that any of the parties may seek appellate review by notifying the Clerk of the Court within thirty days of entry of the district court's judgment on remand. See, e.g., Galviz Zapata v. United States, 431 F.3d 395, 399 (2d Cir.2005). Such notification will not require the filing of a new notice of appeal. Id. If notification occurs, the matter will be referred automatically to this panel for disposition.

If circumstances obviate the need for the case to return to this Court, the parties shall promptly notify the Clerk of the Court. Id.

CONCLUSION

For the foregoing reasons, we affirm the judgment of the district court with respect to the claims of trademark infringement and dilution. Employing a Jacobson remand, we return the cause to the district court for further proceedings with respect to Tiffany's false advertising claim.

Microsoft Corp. v. Does

2012 WL 5497946 (E.D.N.Y.)

MEMORANDUM AND ORDER

JOHNSON, Senior District Judge.

Plaintiffs Microsoft Corp., FS–ISAC, Inc., and the National Automated Clearing House Association (collectively, “Plaintiffs”) have moved for an entry of default against John Doe Defendants 1–21, 25–35, and 37–39 (collectively, “Defendants”) pursuant to Fed.R.Civ.P. 55(a) and Local Civil Rule 55.1 (at D.I. 32). For the reasons set forth below, Plaintiffs' motion is GRANTED.

I. Background Information

Plaintiffs commenced this action on March 19, 2012, alleging that Defendants have caused them injury in violation of the following statutes: the Computer Fraud and Abuse Act, 18 U.S.C. § 1030; the CAN–SPAM Act, 15 U.S.C. § 7704; the Electronic Communications Privacy Act, 18 U.S.C. § 2701; trademark infringement under the Lanham Act (15 U.S.C. § 1114) (including false designation of origin under the Lanham Act, 15 U.S.C. § 1125(a) and trademark dilution under the Lanham Act, 15 U.S.C. § 1125(c)); and the Racketeer Influence and Corrupt Organizations Act, 18 U.S.C. § 1962(c). Plaintiffs also allege unjust enrichment; trespass to chattels; and common law conversion. Plaintiffs seek injunctive and other equitable relief and damages against Defendants for their creation, control, maintenance, and ongoing use of the “Zeus Botnets” malware, which Plaintiffs allege have caused and continue injure Plaintiffs, Plaintiffs' customers and members, and the general public.

Plaintiffs served Defendants via email and internet publication. Certain defendants responded to Plaintiffs' service without revealing their true identities. As of September 13, 2012, Plaintiffs had dismissed this action with respect to two identified defendants, and another defendant has been identified by the name “Jabberzeus Crew”. Notably, the other Defendants remain unidentifiable, and Plaintiffs now seek entries of default as to them.

II. Discussion

A. A Court May Enter Default Judgment Against Properly–Served Defendants Who Have Failed to Defend Actions Commenced Against Them

A district court may make an entry of default against defendants who fail to plead or otherwise defend actions commenced against them by plaintiffs, if they determine that defendants have been properly served by plaintiffs. See Fed.R.Civ.P. 55(a).

In order make an entry of default against Defendants, the Court must be satisfied that proper service of process was effectuated. Plaintiffs may serve foreign defendants in accordance with “any internationally agreed means of service that is reasonably calculated to give notice, such as those authorized by the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents [the “Hague Convention”].” Fed.R.Civ.P. 4(f)(1). In the case at bar, the Defendants have operated surreptitiously, making the standard means of serving defendants difficult or impossible to accomplish. Additionally, as defendants are operating from foreign jurisdictions, the Court must also determine whether the Hague Convention is the applicable law to use in determining the adequacy of Plaintiff's service of Defendants.

B. The Hague Convention Does Not Apply When the Addresses of Foreign Defendants are Unknown

The remaining Defendants are alleged cybercriminals whose personal identities and physical locations are unknown. Through months of investigation, Plaintiffs have only been able to ascertain that Defendants most likely reside in the Russian Federation, Ukraine and/or Romania. As other courts in this Circuit have already recognized, Article 1 of the Hague Convention specifies that the Convention does not apply when the addresses of foreign defendants are unknown. See SEC v. Lines, 2009 U.S. Dist. LEXIS 91811, *9, 2009 WL 3151793 (S.D.N.Y Oct. 2, 2009) (Cote, J.) (“[The Hague Convention] ‘shall not apply where the address of the person to be served with the document is not known.’ ”) (citations omitted)). Defendants operate via the Internet, using usernames, and understandably, do not wish to be identified or located. They have used sophisticated means to conceal their identities and locations. Despite the most diligent efforts on the part of Plaintiffs, Defendants cannot be located. Accordingly the Hague Convention is not applicable to them.

C. The District Courts Have Discretion to Authorize Service by E-mail or Any Other Means of Service Comporting with the Principles of Due Process

The Federal Rules set forth that the purpose of serving process upon a defendant is to provide the defendant with notice of the action against him or her. The purpose of providing a defendant with notice of an action against him or her is to allow the defendant to defend him or herself against that action, in comportment with the principles of Due Process. Accordingly, a plaintiff may serve notice upon a foreign defendant in any way:

(1) by any internationally agreed means of service that is reasonably calculated to give notice, such as those authorized by the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents;

(2) if there is no internationally agreed means, or if an international agreement allows but does not specify other means, by a method that is reasonably calculated to give notice ...

(3) by other means not prohibited by international agreement, as the court orders

Fed R.Civ.P.4(f)(1)-(3).

While case law on this issue is somewhat scarce, other circuit courts have held that it is not an abuse of discretion for a district court to authorize a plaintiff to serve a foreign Internet business by e-mail. Since the defendant in that case did not list a physical address and chose to operate via email, the Ninth Circuit found that notice by email provided reasonable notice and an opportunity to be heard. That Court “le[ft] it to the discretion of the district court to balance the limitations of email service against its benefits in any particular case.” Rio Props., Inc. v. Rio Int'l Interlink, 284 F.3d 1007, 1018 (9th Cir.2002). The Court acknowledged that email “communication has been zealously embraced by the business community” and recalled that the Constitution never required any particular means of service, so long as the means comported with Constitutional due process requirements. Id. at 1017 (citing Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865).

Similarly, the Southern District of New York found as follows:

Federal Rule of Civil Procedure 4(f) requires a plaintiff to serve foreign defendants in accordance with “any internationally agreed means reasonably calculated to give notice,” such as the Hague Service Convention. Fed.R.Civ.P. 4(f)(1), Notwithstanding this provision, district courts have discretionary authority to direct service “by other means not prohibited by international agreements.” Arista Records LLC v. Media Servs. LLC, 2008 U.S. Dist. LEXIS 16485, *4–5, 2008 WL 563470 (S.D.N.Y. Feb. 25, 2008) (internal citations omitted) (Buchwald, J.).

In fact, the validity of electronic service of process upon foreign defendants has been recognized since as long ago as 1980. In New Eng. Merchs. Nat'l Bank v. Iran Power Generation & Transmission Co., 495 F, Supp. 73, 80 (S.D.N.Y.1980) (Duffy, J.), the Court allowed service by telex of defendants in Iran. Said the Court:

I am very cognizant of the fact that the procedure which I have ordered in these cases has little or no precedent in our jurisprudence. Courts, however, cannot be blind to changes and advances in technology. No longer do we live in a world where communications are conducted solely by mail carried by fast sailing clipper or steam ships. Electronic communication via satellite can and does provide instantaneous transmission of notice and information. No longer must process be mailed to a defendant's door when he can receive complete notice at an electronic terminal inside his very office, even when the door is steel and bolted shut. Id. at 81.

Thus, the District Court clearly has discretion to order service of process upon a foreign defendant by alternate means of service so long as the defendant is afforded proper notice, and an opportunity to defend the action. See Arista, 2008 U.S. Dist. LEXIS 16485 at n. 3, 2008 WL 563470 (“Of course, any alternate method of service ‘must ... comport with constitutional notions of due process,’ which require ‘notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections' ”) (internal citations omitted). In the instant matter, certain Defendants have responded to Plaintiffs' service of process-thereby proving the sufficiency of Plaintiffs' service and demonstrating that they have been provided adequate notice of the action against them, and effectively estopping them from claiming otherwise.

III. Conclusion

Plaintiffs' email and internet-based service of process upon Defendants was designed to provide Defendants with notice of the action existing against them, Defendants' anonymity and unknown whereabouts notwithstanding. Accordingly, in keeping with the Court's discretion pursuant to Rules 4(f)(3) and 55(a), the Court finds that Defendants 1–21, 25–35, and 37–39 have failed to plead or otherwise defend the action and hereby directs the Clerk of the Court to enter a notation of default against them.

SO ORDERED.

Sorrel v. IMS Health

131 S.Ct. 2653 (2011)

Justice KENNEDY delivered the opinion of the Court.

Vermont law restricts the sale, disclosure, and use of pharmacy records that reveal the prescribing practices of individual doctors. Vt. Stat. Ann., Tit. 18, § 4631 (Supp.2010). Subject to certain exceptions, the information may not be sold, disclosed by pharmacies for marketing purposes, or used for marketing by pharmaceutical manufacturers. Vermont argues that its prohibitions safeguard medical privacy and diminish the likelihood that marketing will lead to prescription decisions not in the best interests of patients or the State. It can be assumed that these interests are significant. Speech in aid of pharmaceutical marketing, however, is a form of expression protected by the Free Speech Clause of the First Amendment. As a consequence, Vermont's statute must be subjected to heightened judicial scrutiny. The law cannot satisfy that standard.

I

A

Pharmaceutical manufacturers promote their drugs to doctors through a process called “detailing.” This often involves a scheduled visit to a doctor's office to persuade the doctor to prescribe a particular pharmaceutical. Detailers bring drug samples as well as medical studies that explain the “details” and potential advantages of various prescription drugs. Interested physicians listen, ask questions, and receive followup data. Salespersons can be more effective when they know the background and purchasing preferences of their clientele, and pharmaceutical salespersons are no exception. Knowledge of a physician's prescription practices—called “prescriber-identifying information”—enables a detailer better to ascertain which doctors are likely to be interested in a particular drug and how best to present a particular sales message. Detailing is an expensive undertaking, so pharmaceutical companies most often use it to promote high-profit brand-name drugs protected by patent. Once a brand-name drug's patent expires, less expensive bioequivalent generic alternatives are manufactured and sold.

Pharmacies, as a matter of business routine and federal law, receive prescriber-identifying information when processing prescriptions. See 21 U.S.C. § 353(b); see also Vt. Bd. of Pharmacy Admin. Rule 9.1 (2009); Rule 9.2. Many pharmacies sell this information to “data miners,” firms that analyze prescriber-identifying information and produce reports on prescriber behavior. Data miners lease these reports to pharmaceutical manufacturers subject to nondisclosure agreements. Detailers, who represent the manufacturers, then use the reports to refine their marketing tactics and increase sales.

In 2007, Vermont enacted the Prescription Confidentiality Law. The measure is also referred to as Act 80. It has several components. The central provision of the present case is § 4631(d).

“A health insurer, a self-insured employer, an electronic transmission intermediary, a pharmacy, or other similar entity shall not sell, license, or exchange for value regulated records containing prescriber-identifiable information, nor permit the use of regulated records containing prescriber-identifiable information for marketing or promoting a prescription drug, unless the prescriber consents .... Pharmaceutical manufacturers and pharmaceutical marketers shall not use prescriber-identifiable information for marketing or promoting a prescription drug unless the prescriber consents ....”

The quoted provision has three component parts. The provision begins by prohibiting pharmacies, health insurers, and similar entities from selling prescriber-identifying information, absent the prescriber's consent. The parties here dispute whether this clause applies to all sales or only to sales for marketing. The provision then goes on to prohibit pharmacies, health insurers, and similar entities from allowing prescriber-identifying information to be used for marketing, unless the prescriber consents. This prohibition in effect bars pharmacies from disclosing the information for marketing purposes. Finally, the provision's second sentence bars pharmaceutical manufacturers and pharmaceutical marketers from using prescriber-identifying information for marketing, again absent the prescriber's consent. The Vermont attorney general may pursue civil remedies against violators. § 4631(f).

Separate statutory provisions elaborate the scope of the prohibitions set out in § 4631(d). “Marketing” is defined to include “advertising, promotion, or any activity” that is “used to influence sales or the market share of a prescription drug.” § 4631(b)(5). Section 4631(c)(1) further provides that Vermont's Department of Health must allow “a prescriber to give consent for his or her identifying information to be used for the purposes” identified in § 4631(d). Finally, the Act's prohibitions on sale, disclosure, and use are subject to a list of exceptions. For example, prescriber-identifying information may be disseminated or used for “health care research”; to enforce “compliance” with health insurance formularies, or preferred drug lists; for “care management educational communications provided to” patients on such matters as “treatment options”; for law enforcement operations; and for purposes “otherwise provided by law.” § 4631(e).

Act 80 also authorized funds for an “evidence-based prescription drug education program” designed to provide doctors and others with “information and education on the therapeutic and cost-effective utilization of prescription drugs.” § 4622(a)(1). An express aim of the program is to advise prescribers “about commonly used brand-name drugs for which the patent has expired” or will soon expire. § 4622(a)(2). Similar efforts to promote the use of generic pharmaceuticals are sometimes referred to as “counter-detailing.” App. 211; see also IMS Health Inc. v. Ayotte, 550 F.3d 42, 91 (C.A.1 2008) (Lipez, J., concurring and dissenting). The counterdetailer's recommended substitute may be an older, less expensive drug and not a bioequivalent of the brand-name drug the physician might otherwise prescribe. Like the pharmaceutical manufacturers whose efforts they hope to resist, counterdetailers in some States use prescriber-identifying information to increase their effectiveness. States themselves may supply the prescriber-identifying information used in these programs. See App. 313; id., at 375 (“[W]e use the data given to us by the State of Pennsylvania ... to figure out which physicians to talk to”); see also id., at 427–429 (Director of the Office of Vermont Health Access explaining that the office collects prescriber-identifying information but “does not at this point in time have a counterdetailing or detailing effort”). As first enacted, Act 80 also required detailers to provide information about alternative treatment options. The Vermont Legislature, however, later repealed that provision. 2008 Vt. Laws No. 89, § 3.

Act 80 was accompanied by legislative findings. Vt. Acts No. 80, § 1. Vermont found, for example, that the “goals of marketing programs are often in conflict with the goals of the state” and that the “marketplace for ideas on medicine safety and effectiveness is frequently one-sided in that brand-name companies invest in expensive pharmaceutical marketing campaigns to doctors.” §§ 1(3), (4). Detailing, in the legislature's view, caused doctors to make decisions based on “incomplete and biased information.” § 1(4). Because they “are unable to take the time to research the quickly changing pharmaceutical market,” Vermont doctors “rely on information provided by pharmaceutical representatives.” § 1(13). The legislature further found that detailing increases the cost of health care and health insurance, § 1(15); encourages hasty and excessive reliance on brand-name drugs, before the profession has observed their effectiveness as compared with older and less expensive generic alternatives, § 1(7); and fosters disruptive and repeated marketing visits tantamount to harassment, §§ 1(27)-(28). The legislative findings further noted that use of prescriber-identifying information “increase[s] the effect of detailing programs” by allowing detailers to target their visits to particular doctors. §§ 1(23)-(26). Use of prescriber-identifying data also helps detailers shape their messages by “tailoring” their “presentations to individual prescriber styles, preferences, and attitudes.” § 1(25).

B

The present case involves two consolidated suits. One was brought by three Vermont data miners, the other by an association of pharmaceutical manufacturers that produce brand-name drugs. These entities are the respondents here. Contending that § 4631(d) violates their First Amendment rights as incorporated by the Fourteenth Amendment, the respondents sought declaratory and injunctive relief against the petitioners, the Attorney General and other officials of the State of Vermont.

After a bench trial, the United States District Court for the District of Vermont denied relief. 631 F.Supp.2d 434 (2009). The District Court found that “[p]harmaceutical manufacturers are essentially the only paying customers of the data vendor industry” and that, because detailing unpatented generic drugs is not “cost-effective,” pharmaceutical sales representatives “detail only branded drugs.” Id., at 451, 442. As the District Court further concluded, “the Legislature's determination that [prescriber-identifying] data is an effective marketing tool that enables detailers to increase sales of new drugs is supported in the record.” Id., at 451. The United States Court of Appeals for the Second Circuit reversed and remanded. It held that § 4631(d) violates the First Amendment by burdening the speech of pharmaceutical marketers and data miners without an adequate justification. 630 F.3d 263. Judge Livingston dissented.

The decision of the Second Circuit is in conflict with decisions of the United States Court of Appeals for the First Circuit concerning similar legislation enacted by Maine and New Hampshire. See IMS Health Inc. v. Mills, 616 F.3d 7 (C.A.1 2010) (Maine); Ayotte, supra (New Hampshire). Recognizing a division of authority regarding the constitutionality of state statutes, this Court granted certiorari. 562 U.S. ––––, 131 S.Ct. 857, 178 L.Ed.2d 623 (2011).

II

The beginning point is the text of § 4631(d). In the proceedings below, Vermont stated that the first sentence of § 4631(d) prohibits pharmacies and other regulated entities from selling or disseminating prescriber-identifying information for marketing. The information, in other words, could be sold or given away for purposes other than marketing. The District Court and the Court of Appeals accepted the State's reading. See 630 F.3d, at 276. At oral argument in this Court, however, the State for the first time advanced an alternative reading of § 4631(d)—namely, that pharmacies, health insurers, and similar entities may not sell prescriber-identifying information for any purpose, subject to the statutory exceptions set out at § 4631(e). See Tr. of Oral Arg. 19–20. It might be argued that the State's newfound interpretation comes too late in the day. See Sprietsma v. Mercury Marine, 537 U.S. 51, 56, n. 4, 123 S.Ct. 518, 154 L.Ed.2d 466 (2002) (waiver); New Hampshire v. Maine, 532 U.S. 742, 749, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (judicial estoppel). The respondents, the District Court, and the Court of Appeals were entitled to rely on the State's plausible interpretation of the law it is charged with enforcing. For the State to change its position is particularly troubling in a First Amendment case, where plaintiffs have a special interest in obtaining a prompt adjudication of their rights, despite potential ambiguities of state law. See Houston v. Hill, 482 U.S. 451, 467–468, and n. 17, 107 S.Ct. 2502, 96 L.Ed.2d 398 (1987); Zwickler v. Koota, 389 U.S. 241, 252, 88 S.Ct. 391, 19 L.Ed.2d 444 (1967).

In any event, § 4631(d) cannot be sustained even under the interpretation the State now adopts. As a consequence this Court can assume that the opening clause of § 4631(d) prohibits pharmacies, health insurers, and similar entities from selling prescriber-identifying information, subject to the statutory exceptions set out at § 4631(e). Under that reading, pharmacies may sell the information to private or academic researchers, see § 4631(e)(1), but not, for example, to pharmaceutical marketers. There is no dispute as to the remainder of § 4631(d). It prohibits pharmacies, health insurers, and similar entities from disclosing or otherwise allowing prescriber-identifying information to be used for marketing. And it bars pharmaceutical manufacturers and detailers from using the information for marketing. The questions now are whether § 4631(d) must be tested by heightened judicial scrutiny and, if so, whether the State can justify the law.

A

1

On its face, Vermont's law enacts content-and speaker-based restrictions on the sale, disclosure, and use of prescriber-identifying information. The provision first forbids sale subject to exceptions based in large part on the content of a purchaser's speech. For example, those who wish to engage in certain “educational communications,” § 4631(e)(4), may purchase the information. The measure then bars any disclosure when recipient speakers will use the information for marketing. Finally, the provision's second sentence prohibits pharmaceutical manufacturers from using the information for marketing. The statute thus disfavors marketing, that is, speech with a particular content. More than that, the statute disfavors specific speakers, namely pharmaceutical manufacturers. As a result of these content- and speaker-based rules, detailers cannot obtain prescriber-identifying information, even though the information may be purchased or acquired by other speakers with diverse purposes and viewpoints. Detailers are likewise barred from using the information for marketing, even though the information may be used by a wide range of other speakers. For example, it appears that Vermont could supply academic organizations with prescriber-identifying information to use in countering the messages of brand-name pharmaceutical manufacturers and in promoting the prescription of generic drugs. But § 4631(d) leaves detailers no means of purchasing, acquiring, or using prescriber-identifying information. The law on its face burdens disfavored speech by disfavored speakers.

Any doubt that § 4631(d) imposes an aimed, content-based burden on detailers is dispelled by the record and by formal legislative findings. As the District Court noted, “[p]harmaceutical manufacturers are essentially the only paying customers of the data vendor industry”; and the almost invariable rule is that detailing by pharmaceutical manufacturers is in support of brand-name drugs. 631 F.Supp.2d, at 451. Vermont's law thus has the effect of preventing detailers—and only detailers—from communicating with physicians in an effective and informative manner. Cf. Edenfield v. Fane, 507 U.S. 761, 766, 113 S.Ct. 1792, 123 L.Ed.2d 543 (1993) (explaining the “considerable value” of in-person solicitation). Formal legislative findings accompanying § 4631(d) confirm that the law's express purpose and practical effect are to diminish the effectiveness of marketing by manufacturers of brand-name drugs. Just as the “inevitable effect of a statute on its face may render it unconstitutional,” a statute's stated purposes may also be considered. United States v. O'Brien, 391 U.S. 367, 384, 88 S.Ct. 1673, 20 L.Ed.2d 672 (1968). Here, the Vermont Legislature explained that detailers, in particular those who promote brand-name drugs, convey messages that “are often in conflict with the goals of the state.” 2007 Vt. No. 80, § 1(3). The legislature designed § 4631(d) to target those speakers and their messages for disfavored treatment. “In its practical operation,” Vermont's law “goes even beyond mere content discrimination, to actual viewpoint discrimination.” R.A.V. v. St. Paul, 505 U.S. 377, 391, 112 S.Ct. 2538, 120 L.Ed.2d 305 (1992). Given the legislature's expressed statement of purpose, it is apparent that § 4631(d) imposes burdens that are based on the content of speech and that are aimed at a particular viewpoint.

Act 80 is designed to impose a specific, content-based burden on protected expression. It follows that heightened judicial scrutiny is warranted. See Cincinnati v. Discovery Network, Inc., 507 U.S. 410, 418, 113 S.Ct. 1505, 123 L.Ed.2d 99 (1993) (applying heightened scrutiny to “a categorical prohibition on the use of newsracks to disseminate commercial messages”); id., at 429, 113 S.Ct. 1505 (“[T]he very basis for the regulation is the difference in content between ordinary newspapers and commercial speech” in the form of “commercial handbills .... Thus, by any commonsense understanding of the term, the ban in this case is ‘content based’ ” (some internal quotation marks omitted)); see also Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622, 658, 114 S.Ct. 2445, 129 L.Ed.2d 497 (1994) (explaining that strict scrutiny applies to regulations reflecting “aversion” to what “disfavored speakers” have to say). The Court has recognized that the “distinction between laws burdening and laws banning speech is but a matter of degree” and that the “Government's content-based burdens must satisfy the same rigorous scrutiny as its content-based bans.” United States v. Playboy Entertainment Group, Inc., 529 U.S. 803, 812, 120 S.Ct. 1878, 146 L.Ed.2d 865 (2000). Lawmakers may no more silence unwanted speech by burdening its utterance than by censoring its content. See Simon & Schuster, Inc. v. Members of N.Y. State Crime Victims Bd., 502 U.S. 105, 115, 112 S.Ct. 501, 116 L.Ed.2d 476 (1991) (content-based financial burden); Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 103 S.Ct. 1365, 75 L.Ed.2d 295 (1983) (speaker-based financial burden).

The First Amendment requires heightened scrutiny whenever the government creates “a regulation of speech because of disagreement with the message it conveys.” Ward v. Rock Against Racism, 491 U.S. 781, 791, 109 S.Ct. 2746, 105 L.Ed.2d 661 (1989); see also Renton v. Playtime Theatres, Inc., 475 U.S. 41, 48, 106 S.Ct. 925, 89 L.Ed.2d 29 (1986) (explaining that “ ‘content-neutral’ speech regulations” are “those that are justified without reference to the content of the regulated speech” (internal quotation marks omitted)). A government bent on frustrating an impending demonstration might pass a law demanding two years' notice before the issuance of parade permits. Even if the hypothetical measure on its face appeared neutral as to content and speaker, its purpose to suppress speech and its unjustified burdens on expression would render it unconstitutional. Ibid. Commercial speech is no exception. See Discovery Network, supra, at 429–430, 113 S.Ct. 1505 (commercial speech restriction lacking a “neutral justification” was not content neutral). A “consumer's concern for the free flow of commercial speech often may be far keener than his concern for urgent political dialogue.” Bates v. State Bar of Ariz., 433 U.S. 350, 364, 97 S.Ct. 2691, 53 L.Ed.2d 810 (1977). That reality has great relevance in the fields of medicine and public health, where information can save lives.

2

The State argues that heightened judicial scrutiny is unwarranted because its law is a mere commercial regulation. It is true that restrictions on protected expression are distinct from restrictions on economic activity or, more generally, on nonexpressive conduct. It is also true that the First Amendment does not prevent restrictions directed at commerce or conduct from imposing incidental burdens on speech. That is why a ban on race-based hiring may require employers to remove “‘White Applicants Only’” signs, Rumsfeld v. Forum for Academic and Institutional Rights, Inc., 547 U.S. 47, 62, 126 S.Ct. 1297, 164 L.Ed.2d 156 (2006); why “an ordinance against outdoor fires” might forbid “burning a flag,” R.A. V., supra, at 385, 112 S.Ct. 2538; and why antitrust laws can prohibit “agreements in restraint of trade,” Giboney v. Empire Storage & Ice Co., 336 U.S. 490, 502, 69 S.Ct. 684, 93 L.Ed. 834 (1949).

But § 4631(d) imposes more than an incidental burden on protected expression. Both on its face and in its practical operation, Vermont's law imposes a burden based on the content of speech and the identity of the speaker. See supra, at 2663 – 2665. While the burdened speech results from an economic motive, so too does a great deal of vital expression. See Bigelow v. Virginia, 421 U.S. 809, 818, 95 S.Ct. 2222, 44 L.Ed.2d 600 (1975); New York Times Co. v. Sullivan, 376 U.S. 254, 266, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964); see also United States v. United Foods, Inc., 533 U.S. 405, 410–411, 121 S.Ct. 2334, 150 L.Ed.2d 438 (2001) (applying “First Amendment scrutiny” where speech effects were not incidental and noting that “those whose business and livelihood depend in some way upon the product involved no doubt deem First Amendment protection to be just as important for them as it is for other discrete, little noticed groups”). Vermont's law does not simply have an effect on speech, but is directed at certain content and is aimed at particular speakers. The Constitution “does not enact Mr. Herbert Spencer's Social Statics.” Lochner v. New York, 198 U.S. 45, 75, 25 S.Ct. 539, 49 L.Ed. 937 (1905) (Holmes, J., dissenting). It does enact the First Amendment.

Vermont further argues that § 4631(d) regulates not speech but simply access to information. Prescriber-identifying information was generated in compliance with a legal mandate, the State argues, and so could be considered a kind of governmental information. This argument finds some support in Los Angeles Police Dept. v. United Reporting Publishing Corp., 528 U.S. 32, 120 S.Ct. 483, 145 L.Ed.2d 451 (1999), where the Court held that a plaintiff could not raise a facial challenge to a content-based restriction on access to government held information. Because no private party faced a threat of legal punishment, the Court characterized the law at issue as “nothing more than a governmental denial of access to information in its possession.” Id., at 40, 120 S.Ct. 483. Under those circumstances the special reasons for permitting First Amendment plaintiffs to invoke the rights of others did not apply. Id., at 38–39, 120 S.Ct. 483. Having found that the plaintiff could not raise a facial challenge, the Court remanded for consideration of an as-applied challenge. Id., at 41. United Reporting is thus a case about the availability of facial challenges. The Court did not rule on the merits of any First Amendment claim.

United Reporting is distinguishable in at least two respects. First, Vermont has imposed a restriction on access to information in private hands. This confronts the Court with a point reserved, and a situation not addressed, in United Reporting. Here, unlike in United Reporting, we do have “a case in which the government is prohibiting a speaker from conveying information that the speaker already possesses.” Id., at 40, 120 S.Ct. 483. The difference is significant. An individual's right to speak is implicated when information he or she possesses is subjected to “restraints on the way in which the information might be used” or disseminated. Seattle Times Co. v. Rhinehart, 467 U.S. 20, 32, 104 S.Ct. 2199, 81 L.Ed.2d 17 (1984); see also Bartnicki v. Vopper, 532 U.S. 514, 527, 121 S.Ct. 1753, 149 L.Ed.2d 787 (2001); Florida Star v. B.J. F., 491 U.S. 524, 109 S.Ct. 2603, 105 L.Ed.2d 443 (1989); New York Times Co. v. United States, 403 U.S. 713, 91 S.Ct. 2140, 29 L.Ed.2d 822 (1971) (per curiam). In Seattle Times, this Court applied heightened judicial scrutiny before sustaining a trial court order prohibiting a newspaper's disclosure of information it learned through coercive discovery. It is true that the respondents here, unlike the newspaper in Seattle Times, do not themselves possess information whose disclosure has been curtailed. That information, however, is in the hands of pharmacies and other private entities. There is no question that the “threat of prosecution ... hangs over their heads.” United Reporting, 528 U.S., at 41, 120 S.Ct. 483. For that reason United Reporting does not bar respondents' facial challenge.

United Reporting is distinguishable for a second and even more important reason. The plaintiff in United Reporting had neither “attempt [ed] to qualify” for access to the government's information nor presented an as-applied claim in this Court. Id., at 40, 120 S.Ct. 483. As a result, the Court assumed that the plaintiff had not suffered a personal First Amendment injury and could prevail only by invoking the rights of others through a facial challenge. Here, by contrast, the respondents claim—with good reason—that § 4631(d) burdens their own speech. That argument finds support in the separate writings in United Reporting, which were joined by eight Justices. All of those writings recognized that restrictions on the disclosure of government-held information can facilitate or burden the expression of potential recipients and so transgress the First Amendment. See id., at 42, 120 S.Ct. 483 (SCALIA, J., concurring) (suggesting that “a restriction upon access that allows access to the press ... but at the same time denies access to persons who wish to use the information for certain speech purposes, is in reality a restriction upon speech”); id., at 43, 120 S.Ct. 483 (GINSBURG, J., concurring) (noting that “the provision of [government] information is a kind of subsidy to people who wish to speak” about certain subjects, “and once a State decides to make such a benefit available to the public, there are no doubt limits to its freedom to decide how that benefit will be distributed”); id., at 46, 120 S.Ct. 483 (Stevens, J., dissenting) (concluding that, “because the State's discrimination is based on its desire to prevent the information from being used for constitutionally protected purposes, [i]t must assume the burden of justifying its conduct”). Vermont's law imposes a content- and speaker-based burden on respondents' own speech. That consideration provides a separate basis for distinguishing United Reporting and requires heightened judicial scrutiny.

The State also contends that heightened judicial scrutiny is unwarranted in this case because sales, transfer, and use of prescriber-identifying information are conduct, not speech. Consistent with that submission, the United States Court of Appeals for the First Circuit has characterized prescriber-identifying information as a mere “commodity” with no greater entitlement to First Amendment protection than “beef jerky.” Ayotte, 550 F.3d, at 52–53. In contrast the courts below concluded that a prohibition on the sale of prescriber-identifying information is a content-based rule akin to a ban on the sale of cookbooks, laboratory results, or train schedules. See 630 F.3d, at 271–272 (“The First Amendment protects even dry information, devoid of advocacy, political relevance, or artistic expression” (internal quotation marks and alteration omitted)); 631 F.Supp.2d, at 445 (“A restriction on disclosure is a regulation of speech, and the ‘sale’ of [information] is simply disclosure for profit”).

This Court has held that the creation and dissemination of information are speech within the meaning of the First Amendment. See, e.g., Bartnicki, supra, at 527, 121 S.Ct. 1753 (“[I]f the acts of ‘disclosing’ and ‘publishing’ information do not constitute speech, it is hard to imagine what does fall within that category, as distinct from the category of expressive conduct” (some internal quotation marks omitted)); Rubin v. Coors Brewing Co., 514 U.S. 476, 481, 115 S.Ct. 1585, 131 L.Ed.2d 532 (1995) ( “information on beer labels” is speech); Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749, 759, 105 S.Ct. 2939, 86 L.Ed.2d 593 (1985) (plurality opinion) (credit report is “speech”). Facts, after all, are the beginning point for much of the speech that is most essential to advance human knowledge and to conduct human affairs. There is thus a strong argument that prescriber-identifying information is speech for First Amendment purposes.

The State asks for an exception to the rule that information is speech, but there is no need to consider that request in this case. The State has imposed content- and speaker-based restrictions on the availability and use of prescriber-identifying information. So long as they do not engage in marketing, many speakers can obtain and use the information. But detailers cannot. Vermont's statute could be compared with a law prohibiting trade magazines from purchasing or using ink. Cf. Minneapolis Star, 460 U.S. 575, 103 S.Ct. 1365, 75 L.Ed.2d 295. Like that hypothetical law, § 4631(d) imposes a speaker- and content-based burden on protected expression, and that circumstance is sufficient to justify application of heightened scrutiny. As a consequence, this case can be resolved even assuming, as the State argues, that prescriber-identifying information is a mere commodity.

B

In the ordinary case it is all but dispositive to conclude that a law is content-based and, in practice, viewpoint-discriminatory. See R.A. V., 505 U.S., at 382, 112 S.Ct. 2538 (“Content-based regulations are presumptively invalid”); id., at 391–392, 112 S.Ct. 2538. The State argues that a different analysis applies here because, assuming § 4631(d) burdens speech at all, it at most burdens only commercial speech. As in previous cases, however, the outcome is the same whether a special commercial speech inquiry or a stricter form of judicial scrutiny is applied. See, e.g., Greater New Orleans Broadcasting Assn., Inc. v. United States, 527 U.S. 173, 184, 119 S.Ct. 1923, 144 L.Ed.2d 161 (1999). For the same reason there is no need to determine whether all speech hampered by § 4631(d) is commercial, as our cases have used that term. Cf. Board of Trustees of State Univ. of N.Y. v. Fox, 492 U.S. 469, 474, 109 S.Ct. 3028, 106 L.Ed.2d 388 (1989) (discussing whether “pure speech and commercial speech” were inextricably intertwined, so that “the entirety must ... be classified as noncommercial”).

Under a commercial speech inquiry, it is the State's burden to justify its content-based law as consistent with the First Amendment. Thompson v. Western States Medical Center, 535 U.S. 357, 373, 122 S.Ct. 1497, 152 L.Ed.2d 563 (2002). To sustain the targeted, content-based burden § 4631(d) imposes on protected expression, the State must show at least that the statute directly advances a substantial governmental interest and that the measure is drawn to achieve that interest. See Fox, supra, at 480–481, 109 S.Ct. 3028; Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n of N. Y., 447 U.S. 557, 566, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980). There must be a “fit between the legislature's ends and the means chosen to accomplish those ends.” Fox, supra, at 480, 109 S.Ct. 3028 (internal quotation marks omitted). As in other contexts, these standards ensure not only that the State's interests are proportional to the resulting burdens placed on speech but also that the law does not seek to suppress a disfavored message. See Turner Broadcasting, 512 U.S., at 662–663, 114 S.Ct. 2445.

The State's asserted justifications for § 4631(d) come under two general headings. First, the State contends that its law is necessary to protect medical privacy, including physician confidentiality, avoidance of harassment, and the integrity of the doctor-patient relationship. Second, the State argues that § 4631(d) is integral to the achievement of policy objectives—namely, improved public health and reduced healthcare costs. Neither justification withstands scrutiny.

1

Vermont argues that its physicians have a “reasonable expectation” that their prescriber-identifying information “will not be used for purposes other than ... filling and processing” prescriptions. See 2007 Vt. Laws No. 80, § 1(29). It may be assumed that, for many reasons, physicians have an interest in keeping their prescription decisions confidential. But § 4631(d) is not drawn to serve that interest. Under Vermont's law, pharmacies may share prescriber-identifying information with anyone for any reason save one: They must not allow the information to be used for marketing. Exceptions further allow pharmacies to sell prescriber-identifying information for certain purposes, including “health care research.” § 4631(e). And the measure permits insurers, researchers, journalists, the State itself, and others to use the information. See § 4631(d); cf. App. 370–372; id., at 211. All but conceding that § 4631(d) does not in itself advance confidentiality interests, the State suggests that other laws might impose separate bars on the disclosure of prescriber-identifying information. See Vt. Bd. of Pharmacy Admin. Rule 20.1. But the potential effectiveness of other measures cannot justify the distinctive set of prohibitions and sanctions imposed by § 4631(d).

Perhaps the State could have addressed physician confidentiality through “a more coherent policy.” Greater New Orleans Broadcasting, supra, at 195, 119 S.Ct. 1923; see also Discovery Network, 507 U.S., at 428, 113 S.Ct. 1505. For instance, the State might have advanced its asserted privacy interest by allowing the information's sale or disclosure in only a few narrow and well-justified circumstances. See, e.g., Health Insurance Portability and Accountability Act of 1996, 42 U.S.C. § 1320d–2; 45 CFR pts. 160 and 164 (2010). A statute of that type would present quite a different case than the one presented here. But the State did not enact a statute with that purpose or design. Instead, Vermont made prescriber-identifying information available to an almost limitless audience. The explicit structure of the statute allows the information to be studied and used by all but a narrow class of disfavored speakers. Given the information's widespread availability and many permissible uses, the State's asserted interest in physician confidentiality does not justify the burden that § 4631(d) places on protected expression.

The State points out that it allows doctors to forgo the advantages of § 4631(d) by consenting to the sale, disclosure, and use of their prescriber-identifying information. See § 4631(c)(1). It is true that private decisionmaking can avoid governmental partiality and thus insulate privacy measures from First Amendment challenge. See Rowan v. Post Office Dept., 397 U.S. 728, 90 S.Ct. 1484, 25 L.Ed.2d 736 (1970); cf. Bolger v. Youngs Drug Products Corp., 463 U.S. 60, 72, 103 S.Ct. 2875, 77 L.Ed.2d 469 (1983). But that principle is inapposite here. Vermont has given its doctors a contrived choice: Either consent, which will allow your prescriber-identifying information to be disseminated and used without constraint; or, withhold consent, which will allow your information to be used by those speakers whose message the State supports. Section 4631(d) may offer a limited degree of privacy, but only on terms favorable to the speech the State prefers. Cf. Rowan, supra, at 734, 737, 739, n. 6, 90 S.Ct. 1484 (sustaining a law that allowed private parties to make “unfettered,” “unlimited,” and “unreviewable” choices regarding their own privacy). This is not to say that all privacy measures must avoid content-based rules. Here, however, the State has conditioned privacy on acceptance of a content-based rule that is not drawn to serve the State's asserted interest. To obtain the limited privacy allowed by § 4631(d), Vermont physicians are forced to acquiesce in the State's goal of burdening disfavored speech by disfavored speakers.

Respondents suggest that a further defect of § 4631(d) lies in its presumption of applicability absent a physician's election to the contrary. Vermont's law might burden less speech if it came into operation only after an individual choice, but a revision to that effect would not necessarily save § 4631(d). Even reliance on a prior election would not suffice, for instance, if available categories of coverage by design favored speakers of one political persuasion over another. Rules that burden protected expression may not be sustained when the options provided by the State are too narrow to advance legitimate interests or too broad to protect speech. As already explained, § 4631(d) permits extensive use of prescriber-identifying information and so does not advance the State's asserted interest in physician confidentiality. The limited range of available privacy options instead reflects the State's impermissible purpose to burden disfavored speech. Vermont's argument accordingly fails, even if the availability and scope of private election might be relevant in other contexts, as when the statute's design is unrelated to any purpose to advance a preferred message.

The State also contends that § 4631(d) protects doctors from “harassing sales behaviors.” 2007 Vt. Laws No. 80, § 1(28). “Some doctors in Vermont are experiencing an undesired increase in the aggressiveness of pharmaceutical sales representatives,” the Vermont Legislature found, “and a few have reported that they felt coerced and harassed.” § 1(20). It is doubtful that concern for “a few” physicians who may have “felt coerced and harassed” by pharmaceutical marketers can sustain a broad content-based rule like § 4631(d). Many are those who must endure speech they do not like, but that is a necessary cost of freedom. See Erznoznik v. Jacksonville, 422 U.S. 205, 210–211, 95 S.Ct. 2268, 45 L.Ed.2d 125 (1975); Cohen v. California, 403 U.S. 15, 21, 91 S.Ct. 1780, 29 L.Ed.2d 284 (1971). In any event the State offers no explanation why remedies other than content-based rules would be inadequate. See 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 503, 116 S.Ct. 1495, 134 L.Ed.2d 711 (1996) (opinion of Stevens, J.). Physicians can, and often do, simply decline to meet with detailers, including detailers who use prescriber-identifying information. See, e.g., App. 180, 333–334. Doctors who wish to forgo detailing altogether are free to give “No Solicitation” or “No Detailing” instructions to their office managers or to receptionists at their places of work. Personal privacy even in one's own home receives “ample protection” from the “resident's unquestioned right to refuse to engage in conversation with unwelcome visitors.” Watchtower Bible & Tract Soc. of N. Y., Inc. v. Village of Stratton, 536 U.S. 150, 168, 122 S.Ct. 2080, 153 L.Ed.2d 205 (2002); see also Bolger, supra, at 72, 103 S.Ct. 2875. A physician's office is no more private and is entitled to no greater protection.

Vermont argues that detailers' use of prescriber-identifying information undermines the doctor-patient relationship by allowing detailers to influence treatment decisions. According to the State, “unwanted pressure occurs” when doctors learn that their prescription decisions are being “monitored” by detailers. 2007 Vt. Laws No. 80, § 1(27). Some physicians accuse detailers of “spying” or of engaging in “underhanded” conduct in order to “subvert” prescription decisions. App. 336, 380, 407–408; see also id., at 326–328. And Vermont claims that detailing makes people “anxious” about whether doctors have their patients' best interests at heart. Id., at 327. But the State does not explain why detailers' use of prescriber-identifying information is more likely to prompt these objections than many other uses permitted by § 4631(d). In any event, this asserted interest is contrary to basic First Amendment principles. Speech remains protected even when it may “stir people to action,” “move them to tears,” or “inflict great pain.” Snyder v. Phelps, 562 U.S. ––––, ––––, 131 S.Ct. 1207, 1220, 179 L.Ed.2d 172 (2011). The more benign and, many would say, beneficial speech of pharmaceutical marketing is also entitled to the protection of the First Amendment. If pharmaceutical marketing affects treatment decisions, it does so because doctors find it persuasive. Absent circumstances far from those presented here, the fear that speech might persuade provides no lawful basis for quieting it. Brandenburg v. Ohio, 395 U.S. 444, 447, 89 S.Ct. 1827, 23 L.Ed.2d 430 (1969) (per curiam).

2

The State contends that § 4631(d) advances important public policy goals by lowering the costs of medical services and promoting public health. If prescriber-identifying information were available for use by detailers, the State contends, then detailing would be effective in promoting brand-name drugs that are more expensive and less safe than generic alternatives. This logic is set out at length in the legislative findings accompanying § 4631(d). Yet at oral argument here, the State declined to acknowledge that § 4631(d)'s objective purpose and practical effect were to inhibit detailing and alter doctors' prescription decisions. See Tr. of Oral Arg. 5–6. The State's reluctance to embrace its own legislature's rationale reflects the vulnerability of its position.

While Vermont's stated policy goals may be proper, § 4631(d) does not advance them in a permissible way. As the Court of Appeals noted, the “state's own explanation of how” § 4631(d) “advances its interests cannot be said to be direct.” 630 F.3d, at 277. The State seeks to achieve its policy objectives through the indirect means of restraining certain speech by certain speakers—that is, by diminishing detailers' ability to influence prescription decisions. Those who seek to censor or burden free expression often assert that disfavored speech has adverse effects. But the “fear that people would make bad decisions if given truthful information” cannot justify content-based burdens on speech. Thompson, 535 U.S., at 374, 122 S.Ct. 1497; see also Virginia Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 769–770, 96 S.Ct. 1817, 48 L.Ed.2d 346 (1976). “The First Amendment directs us to be especially skeptical of regulations that seek to keep people in the dark for what the government perceives to be their own good.” 44 Liquormart, supra, at 503, 116 S.Ct. 1495 (opinion of Stevens, J.); see also Linmark Associates, Inc. v. Willingboro, 431 U.S. 85, 97, 97 S.Ct. 1614, 52 L.Ed.2d 155 (1977). These precepts apply with full force when the audience, in this case prescribing physicians, consists of “sophisticated and experienced” consumers. Edenfield, 507 U.S., at 775, 113 S.Ct. 1792.

As Vermont's legislative findings acknowledge, the premise of § 4631(d) is that the force of speech can justify the government's attempts to stifle it. Indeed the State defends the law by insisting that “pharmaceutical marketing has a strong influence on doctors' prescribing practices.” Brief for Petitioners 49–50. This reasoning is incompatible with the First Amendment. In an attempt to reverse a disfavored trend in public opinion, a State could not ban campaigning with slogans, picketing with signs, or marching during the daytime. Likewise the State may not seek to remove a popular but disfavored product from the marketplace by prohibiting truthful, nonmisleading advertisements that contain impressive endorsements or catchy jingles. That the State finds expression too persuasive does not permit it to quiet the speech or to burden its messengers.

The defect in Vermont's law is made clear by the fact that many listeners find detailing instructive. Indeed the record demonstrates that some Vermont doctors view targeted detailing based on prescriber-identifying information as “very helpful” because it allows detailers to shape their messages to each doctor's practice. App. 274; see also id., at 181, 218, 271–272. Even the United States, which appeared here in support of Vermont, took care to dispute the State's “unwarranted view that the dangers of [n]ew drugs outweigh their benefits to patients.” Brief for United States as Amicus Curiae 24, n. 4. There are divergent views regarding detailing and the prescription of brand-name drugs. Under the Constitution, resolution of that debate must result from free and uninhibited speech. As one Vermont physician put it: “We have a saying in medicine, information is power. And the more you know, or anyone knows, the better decisions can be made.” App. 279. There are similar sayings in law, including that “information is not in itself harmful, that people will perceive their own best interests if only they are well enough informed, and that the best means to that end is to open the channels of communication rather than to close them.” Virginia Bd., 425 U.S., at 770, 96 S.Ct. 1817. The choice “between the dangers of suppressing information, and the dangers of its misuse if it is freely available” is one that “the First Amendment makes for us.” Ibid.

Vermont may be displeased that detailers who use prescriber-identifying information are effective in promoting brand-name drugs. The State can express that view through its own speech. See Linmark, 431 U.S., at 97, 97 S.Ct. 1614; cf. § 4622(a)(1) (establishing a prescription drug educational program). But a State's failure to persuade does not allow it to hamstring the opposition. The State may not burden the speech of others in order to tilt public debate in a preferred direction. “The commercial marketplace, like other spheres of our social and cultural life, provides a forum where ideas and information flourish. Some of the ideas and information are vital, some of slight worth. But the general rule is that the speaker and the audience, not the government, assess the value of the information presented.” Edenfield, supra, at 767, 113 S.Ct. 1792.

It is true that content-based restrictions on protected expression are sometimes permissible, and that principle applies to commercial speech. Indeed the government's legitimate interest in protecting consumers from “commercial harms” explains “why commercial speech can be subject to greater governmental regulation than noncommercial speech.” Discovery Network, 507 U.S., at 426, 113 S.Ct. 1505; see also 44 Liquormart, 517 U.S., at 502, 116 S.Ct. 1495 (opinion of Stevens, J.). The Court has noted, for example, that “a State may choose to regulate price advertising in one industry but not in others, because the risk of fraud ... is in its view greater there.” R.A. V., 505 U.S., at 388–389, 112 S.Ct. 2538 (citing Virginia Bd., supra, at 771–772, 96 S.Ct. 1817). Here, however, Vermont has not shown that its law has a neutral justification.

The State nowhere contends that detailing is false or misleading within the meaning of this Court's First Amendment precedents. See Thompson, 535 U.S., at 373, 122 S.Ct. 1497. Nor does the State argue that the provision challenged here will prevent false or misleading speech. Cf. post, at 2677 – 2678 (BREYER, J., dissenting) (collecting regulations that the government might defend on this ground). The State's interest in burdening the speech of detailers instead turns on nothing more than a difference of opinion. See Bolger, 463 U.S., at 69, 103 S.Ct. 2875; Thompson, supra, at 376, 122 S.Ct. 1497.

* * *

[27] The capacity of technology to find and publish personal information, including records required by the government, presents serious and unresolved issues with respect to personal privacy and the dignity it seeks to secure. In considering how to protect those interests, however, the State cannot engage in content-based discrimination to advance its own side of a debate.

If Vermont's statute provided that prescriber-identifying information could not be sold or disclosed except in narrow circumstances then the State might have a stronger position. Here, however, the State gives possessors of the information broad discretion and wide latitude in disclosing the information, while at the same time restricting the information's use by some speakers and for some purposes, even while the State itself can use the information to counter the speech it seeks to suppress. Privacy is a concept too integral to the person and a right too essential to freedom to allow its manipulation to support just those ideas the government prefers.

When it enacted § 4631(d), the Vermont Legislature found that the “marketplace for ideas on medicine safety and effectiveness is frequently one-sided in that brand-name companies invest in expensive pharmaceutical marketing campaigns to doctors.” 2007 Vt. Laws No. 80, § 1(4). “The goals of marketing programs,” the legislature said, “are often in conflict with the goals of the state.” § 1(3). The text of § 4631(d), associated legislative findings, and the record developed in the District Court establish that Vermont enacted its law for this end. The State has burdened a form of protected expression that it found too persuasive. At the same time, the State has left unburdened those speakers whose messages are in accord with its own views. This the State cannot do.

The judgment of the Court of Appeals is affirmed.

It is so ordered.

Justice BREYER, with whom Justice GINSBURG and Justice KAGAN join, dissenting.

The Vermont statute before us adversely affects expression in one, and only one, way. It deprives pharmaceutical and data-mining companies of data, collected pursuant to the government's regulatory mandate, that could help pharmaceutical companies create better sales messages. In my view, this effect on expression is inextricably related to a lawful governmental effort to regulate a commercial enterprise. The First Amendment does not require courts to apply a special “heightened” standard of review when reviewing such an effort. And, in any event, the statute meets the First Amendment standard this Court has previously applied when the government seeks to regulate commercial speech. For any or all of these reasons, the Court should uphold the statute as constitutional.

I

The Vermont statute before us says pharmacies and certain other entities

“shall not [1] sell ... regulated records containing prescriber-identifiable information, nor [2] permit the use of [such] records ... for marketing or promoting a prescription drug, unless the prescriber consents.” Vt. Stat. Ann., Tit. 18, § 4631(d) (Supp.2010).

It also says that

“[3] [p]harmaceutical manufacturers and pharmaceutical marketers shall not use prescriber-identifiable information for marketing or promoting a prescription drug unless the prescriber consents.” Ibid.

For the most part, I shall focus upon the first and second of these prohibitions. In Part IV, I shall explain why the third prohibition makes no difference to the result.

II

In Glickman v. Wileman Brothers & Elliott, Inc., 521 U.S. 457, 117 S.Ct. 2130, 138 L.Ed.2d 585 (1997), this Court considered the First Amendment's application to federal agricultural commodity marketing regulations that required growers of fruit to make compulsory contributions to pay for collective advertising. The Court reviewed the lawfulness of the regulation's negative impact on the growers' freedom voluntarily to choose their own commercial messages “under the standard appropriate for the review of economic regulation.” Id., at 469, 117 S.Ct. 2130.

In this case I would ask whether Vermont's regulatory provisions work harm to First Amendment interests that is disproportionate to their furtherance of legitimate regulatory objectives. And in doing so, I would give significant weight to legitimate commercial regulatory objectives—as this Court did in Glickman. The far stricter, specially “heightened” First Amendment standards that the majority would apply to this instance of commercial regulation are out of place here. Ante, at 2659, 2663, 2664, 2664 – 2665, 2666, 2667.

A

Because many, perhaps most, activities of human beings living together in communities take place through speech, and because speech-related risks and offsetting justifications differ depending upon context, this Court has distinguished for First Amendment purposes among different contexts in which speech takes place. See, e.g., Snyder v. Phelps, 562 U.S. ––––, –––– – ––––, 131 S.Ct. 1207, 1220, 179 L.Ed.2d 172 (2011). Thus, the First Amendment imposes tight constraints upon government efforts to restrict, e.g., “core” political speech, while imposing looser constraints when the government seeks to restrict, e.g., commercial speech, the speech of its own employees, or the regulation-related speech of a firm subject to a traditional regulatory program. Compare Boos v. Barry, 485 U.S. 312, 321, 108 S.Ct. 1157, 99 L.Ed.2d 333 (1988) (political speech), with Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n of N. Y., 447 U.S. 557, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980) (commercial speech), Pickering v. Board of Ed. of Township High School Dist. 205, Will Cty., 391 U.S. 563, 88 S.Ct. 1731, 20 L.Ed.2d 811 (1968) (government employees), and Glickman, supra (economic regulation).

These test-related distinctions reflect the constitutional importance of maintaining a free marketplace of ideas, a marketplace that provides access to “social, political, esthetic, moral, and other ideas and experiences.” Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 390, 89 S.Ct. 1794, 23 L.Ed.2d 371 (1969); see Abrams v. United States, 250 U.S. 616, 630, 40 S.Ct. 17, 63 L.Ed. 1173 (1919) (Holmes, J., dissenting). Without such a marketplace, the public could not freely choose a government pledged to implement policies that reflect the people's informed will.

At the same time, our cases make clear that the First Amendment offers considerably less protection to the maintenance of a free marketplace for goods and services. See Florida Bar v. Went For It, Inc., 515 U.S. 618, 623, 115 S.Ct. 2371, 132 L.Ed.2d 541 (1995) (“We have always been careful to distinguish commercial speech from speech at the First Amendment's core”). And they also reflect the democratic importance of permitting an elected government to implement through effective programs policy choices for which the people's elected representatives have voted.

Thus this Court has recognized that commercial speech including advertising has an “informational function” and is not “valueless in the marketplace of ideas.” Central Hudson, supra, at 563, 100 S.Ct. 2343; Bigelow v. Virginia, 421 U.S. 809, 826, 95 S.Ct. 2222, 44 L.Ed.2d 600 (1975). But at the same time it has applied a less than strict, “intermediate” First Amendment test when the government directly restricts commercial speech. Under that test, government laws and regulations may significantly restrict speech, as long as they also “directly advance” a “substantial” government interest that could not “be served as well by a more limited restriction.” Central Hudson, supra, at 564, 100 S.Ct. 2343. Moreover, the Court has found that “sales practices” that are “misleading, deceptive, or aggressive” lack the protection of even this “intermediate” standard. 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 501, 116 S.Ct. 1495, 134 L.Ed.2d 711 (1996) (opinion of Stevens, J.); see also Central Hudson, supra, at 563, 100 S.Ct. 2343; Virginia Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 772, 96 S.Ct. 1817, 48 L.Ed.2d 346 (1976). And the Court has emphasized the need, in applying an “intermediate” test, to maintain the

“ ‘commonsense’ distinction between speech proposing a commercial transaction, which occurs in an area traditionally subject to government regulation, and other varieties of speech.” Ohralik v. Ohio State Bar Assn., 436 U.S. 447, 455–456, 98 S.Ct. 1912, 56 L.Ed.2d 444 (1978) (quoting Virginia Bd. of Pharmacy, supra, at 771, n. 24, 96 S.Ct. 1817; emphasis added).

The Court has also normally applied a yet more lenient approach to ordinary commercial or regulatory legislation that affects speech in less direct ways. In doing so, the Court has taken account of the need in this area of law to defer significantly to legislative judgment—as the Court has done in cases involving the Commerce Clause or the Due Process Clause. See Glickman, supra, at 475–476, 117 S.Ct. 2130. “Our function” in such cases, Justice Brandeis said, “is only to determine the reasonableness of the legislature's belief in the existence of evils and in the effectiveness of the remedy provided.” New State Ice Co. v. Liebmann, 285 U.S. 262, 286–287, 52 S.Ct. 371, 76 L.Ed. 747 (1932) (dissenting opinion); Williamson v. Lee Optical of Okla., Inc., 348 U.S. 483, 488, 75 S.Ct. 461, 99 L.Ed. 563 (1955) ( “It is enough that there is an evil at hand for correction, and that it might be thought that the particular legislative measure was a rational way to correct it”); United States v. Carolene Products Co., 304 U.S. 144, 152, 58 S.Ct. 778, 82 L.Ed. 1234 (1938) (“[R]egulatory legislation affecting ordinary commercial transactions is not to be pronounced unconstitutional” if it rests “upon some rational basis within the knowledge and experience of the legislators”).

To apply a strict First Amendment standard virtually as a matter of course when a court reviews ordinary economic regulatory programs (even if that program has a modest impact upon a firm's ability to shape a commercial message) would work at cross-purposes with this more basic constitutional approach. Since ordinary regulatory programs can affect speech, particularly commercial speech, in myriad ways, to apply a “heightened” First Amendment standard of review whenever such a program burdens speech would transfer from legislatures to judges the primary power to weigh ends and to choose means, threatening to distort or undermine legitimate legislative objectives. See Glickman, 521 U.S., at 476, 117 S.Ct. 2130 (“Doubts concerning the policy judgments that underlie” a program requiring fruit growers to pay for advertising they disagree with does not “justify reliance on the First Amendment as a basis for reviewing economic regulations”). Cf. Johanns v. Livestock Marketing Assn., 544 U.S. 550, 560–562, 125 S.Ct. 2055, 161 L.Ed.2d 896 (2005) (applying less scrutiny when the compelled speech is made by the Government); United States v. United Foods, Inc., 533 U.S. 405, 411, 121 S.Ct. 2334, 150 L.Ed.2d 438 (2001) (applying greater scrutiny where compelled speech was not “ancillary to a more comprehensive program restricting marketing autonomy”). To apply a “heightened” standard of review in such cases as a matter of course would risk what then-Justice Rehnquist, dissenting in Central Hudson, described as a

“retur[n] to the bygone era of Lochner v. New York, 198 U.S. 45, 25 S.Ct. 539, 49 L.Ed. 937 (1905), in which it was common practice for this Court to strike down economic regulations adopted by a State based on the Court's own notions of the most appropriate means for the State to implement its considered policies.” 447 U.S., at 589, 100 S.Ct. 2343.

B

There are several reasons why the Court should review Vermont's law “under the standard appropriate for the review of economic regulation,” not “under a heightened standard appropriate for the review of First Amendment issues.” Glickman, 521 U.S., at 469, 117 S.Ct. 2130. For one thing, Vermont's statute neither forbids nor requires anyone to say anything, to engage in any form of symbolic speech, or to endorse any particular point of view, whether ideological or related to the sale of a product. Cf. id., at 469–470, 117 S.Ct. 2130. (And I here assume that Central Hudson might otherwise apply. See Part III, infra.)

For another thing, the same First Amendment standards that apply to Vermont here would apply to similar regulatory actions taken by other States or by the Federal Government acting, for example, through Food and Drug Administration (FDA) regulation. (And the Federal Government's ability to preempt state laws that interfere with existing or contemplated federal forms of regulation is here irrelevant.)

Further, the statute's requirements form part of a traditional, comprehensive regulatory regime. Cf. United Foods, supra, at 411, 121 S.Ct. 2334. The pharmaceutical drug industry has been heavily regulated at least since 1906. See Pure Food and Drugs Act, 34 Stat. 768. Longstanding statutes and regulations require pharmaceutical companies to engage in complex drug testing to ensure that their drugs are both “safe” and “effective.” 21 U.S.C. §§ 355(b)(1), 355(d). Only then can the drugs be marketed, at which point drug companies are subject to the FDA's exhaustive regulation of the content of drug labels and the manner in which drugs can be advertised and sold. § 352(f)(2); 21 CFR pts. 201–203 (2010).

Finally, Vermont's statute is directed toward information that exists only by virtue of government regulation. Under federal law, certain drugs can be dispensed only by a pharmacist operating under the orders of a medical practitioner. 21 U.S.C. § 353(b). Vermont regulates the qualifications, the fitness, and the practices of pharmacists themselves, and requires pharmacies to maintain a “patient record system” that, among other things, tracks who prescribed which drugs. Vt. Stat. Ann., Tit. 26, §§ 2041(a), 2022(14) (Supp.2010); Vt. Bd. of Pharmacy Admin. Rules (Pharmacy Rules) 9.1, 9.24(e) (2009). But for these regulations, pharmacies would have no way to know who had told customers to buy which drugs (as is the case when a doctor tells a patient to take a daily dose of aspirin).

Regulators will often find it necessary to create tailored restrictions on the use of information subject to their regulatory jurisdiction. A car dealership that obtains credit scores for customers who want car loans can be prohibited from using credit data to search for new customers. See 15 U.S.C. § 1681b (2006 ed. and Supp. III); cf. Trans Union Corp. v. FTC, 245 F.3d 809, reh'g denied, 267 F.3d 1138 (C.A.D.C.2001). Medical specialists who obtain medical records for their existing patients cannot purchase those records in order to identify new patients. See 45 CFR § 164.508(a)(3) (2010). Or, speaking hypothetically, a public utilities commission that directs local gas distributors to gather usage information for individual customers might permit the distributors to share the data with researchers (trying to lower energy costs) but forbid sales of the data to appliance manufacturers seeking to sell gas stoves.

Such regulatory actions are subject to judicial review, e.g., for compliance with applicable statutes. And they would normally be subject to review under the Administrative Procedure Act to make certain they are not “arbitrary, capricious, [or] an abuse of discretion.” 5 U.S.C. § 706(2)(A) (2006 ed.). In an appropriate case, such review might be informed by First Amendment considerations. But regulatory actions of the kind present here have not previously been thought to raise serious additional constitutional concerns under the First Amendment. But cf. Trans Union LLC v. FTC, 536 U.S. 915, 122 S.Ct. 2386, 153 L.Ed.2d 199 (2002) (KENNEDY, J., dissenting from denial of certiorari) (questioning ban on use of consumer credit reports for target marketing). The ease with which one can point to actual or hypothetical examples with potentially adverse speech-related effects at least roughly comparable to those at issue here indicates the danger of applying a “heightened” or “intermediate” standard of First Amendment review where typical regulatory actions affect commercial speech (say, by withholding information that a commercial speaker might use to shape the content of a message).

Thus, it is not surprising that, until today, this Court has never found that the First Amendment prohibits the government from restricting the use of information gathered pursuant to a regulatory mandate—whether the information rests in government files or has remained in the hands of the private firms that gathered it. But cf. ante, at 2664 – 2667. Nor has this Court ever previously applied any form of “heightened” scrutiny in any even roughly similar case. See Los Angeles Police Dept. v. United Reporting Publishing Corp., 528 U.S. 32, 120 S.Ct. 483, 145 L.Ed.2d 451 (1999) (no heightened scrutiny); compare Cincinnati v. Discovery Network, Inc., 507 U.S. 410, 426, 113 S.Ct. 1505, 123 L.Ed.2d 99 (1993) (“[C]ommercial speech can be subject to greater governmental regulation than noncommercial speech” because of the government's “interest in preventing commercial harms”), with ante, at 2664, 2668, 2672 (suggesting that Discovery Network supports heightened scrutiny when regulations target commercial speech).

C

The Court (suggesting a standard yet stricter than Central Hudson ) says that we must give content-based restrictions that burden speech “heightened” scrutiny. It adds that “[c]ommercial speech is no exception.” Ante, at 2664. And the Court then emphasizes that this is a case involving both “content-based” and “speaker-based” restrictions. See ante, at 2663, 2664, 2665, 2666, 2667, 2669, 2670, 2672.

But neither of these categories—“content-based” nor “speaker-based”—has ever before justified greater scrutiny when regulatory activity affects commercial speech. See, e.g., Capital Broadcasting Co. v. Mitchell, 333 F.Supp. 582 (DC 1971) (three-judge court), summarily aff'd sub nom. Capital Broadcasting Co. v. Acting Attorney General, 405 U.S. 1000, 92 S.Ct. 1289, 31 L.Ed.2d 472 (1972) (upholding ban on radio and television marketing of tobacco). And the absence of any such precedent is understandable.

Regulatory programs necessarily draw distinctions on the basis of content. Virginia Bd. of Pharmacy, 425 U.S., at 761, 762, 96 S.Ct. 1817 (“If there is a kind of commercial speech that lacks all First Amendment protection, ... it must be distinguished by its content”). Electricity regulators, for example, oversee company statements, pronouncements, and proposals, but only about electricity. See, e.g., Vt. Pub. Serv. Bd. Rules 3.100 (1983), 4.200 (1986), 5.200 (2004). The Federal Reserve Board regulates the content of statements, advertising, loan proposals, and interest rate disclosures, but only when made by financial institutions. See 12 CFR pts. 226, 230 (2011). And the FDA oversees the form and content of labeling, advertising, and sales proposals of drugs, but not of furniture. See 21 CFR pts. 201–203. Given the ubiquity of content-based regulatory categories, why should the “content-based” nature of typical regulation require courts (other things being equal) to grant legislators and regulators less deference? Cf. Board of Trustees of State Univ. of N.Y. v. Fox, 492 U.S. 469, 481, 109 S.Ct. 3028, 106 L.Ed.2d 388 (1989) (courts, in First Amendment area, should “provide the Legislative and Executive Branches needed leeway” when regulated industries are at issue).

Nor, in the context of a regulatory program, is it unusual for particular rules to be “speaker-based,” affecting only a class of entities, namely, the regulated firms. An energy regulator, for example, might require the manufacturers of home appliances to publicize ways to reduce energy consumption, while exempting producers of industrial equipment. See, e.g., 16 CFR pt. 305 (2011) (prescribing labeling requirements for certain home appliances); Nev. Admin. Code §§ 704.804, 704.808 (2010) (requiring utilities to provide consumers with information on conservation). Or a trade regulator might forbid a particular firm to make the true claim that its cosmetic product contains “cleansing grains that scrub away dirt and excess oil” unless it substantiates that claim with detailed backup testing, even though opponents of cosmetics use need not substantiate their claims. Morris, F.T.C. Orders Data to Back Ad Claims, N.Y. Times, Nov. 3, 1973, p. 32; Boys' Life, Oct. 1973, p. 64; see 36 Fed.Reg. 12058 (1971). Or the FDA might control in detail just what a pharmaceutical firm can, and cannot, tell potential purchasers about its products. Such a firm, for example, could not suggest to a potential purchaser (say, a doctor) that he or she might put a pharmaceutical drug to an “off label” use, even if the manufacturer, in good faith and with considerable evidence, believes the drug will help. All the while, a third party (say, a researcher) is free to tell the doctor not to use the drug for that purpose. See 21 CFR pt. 99; cf. Buckman Co. v. Plaintiffs' Legal Comm., 531 U.S. 341, 350–351, 121 S.Ct. 1012, 148 L.Ed.2d 854 (2001) (discussing effect of similar regulations in respect to medical devices); see also Proposed Rule, Revised Effectiveness Determination; Sunscreen Drug Products for Over–the–Counter Human Use, 76 Fed.Reg. 35672 (2011) (proposing to prohibit marketing of sunscreens with sun protection factor (SPF) of greater than 50 due to insufficient data “to indicate that there is additional clinical benefit”).

If the Court means to create constitutional barriers to regulatory rules that might affect the content of a commercial message, it has embarked upon an unprecedented task—a task that threatens significant judicial interference with widely accepted regulatory activity. Cf., e.g., 21 CFR pts. 201–203. Nor would it ease the task to limit its “heightened” scrutiny to regulations that only affect certain speakers. As the examples that I have set forth illustrate, many regulations affect only messages sent by a small class of regulated speakers, for example, electricity generators or natural gas pipelines.

The Court also uses the words “aimed” and “targeted” when describing the relation of the statute to drug manufacturers. Ante, at 2663, 2664, 2665, 2667. But, for the reasons just set forth, to require “heightened” scrutiny on this basis is to require its application early and often when the State seeks to regulate industry. Any statutory initiative stems from a legislative agenda. See, e.g., Message to Congress, May 24, 1937, H.R. Doc. No. 255, 75th Cong., 1st Sess., 4 (request from President Franklin Roosevelt for legislation to ease the plight of factory workers). Any administrative initiative stems from a regulatory agenda. See, e.g., Exec. Order No. 12866, 58 Fed.Reg. 51735 (1993) (specifying how to identify regulatory priorities and requiring agencies to prepare agendas). The related statutes, regulations, programs, and initiatives almost always reflect a point of view, for example, of the Congress and the administration that enacted them and ultimately the voters. And they often aim at, and target, particular firms that engage in practices about the merits of which the Government and the firms may disagree. Section 2 of the Sherman Act, 15 U.S.C. § 2, for example, which limits the truthful, nonmisleading speech of firms that, due to their market power, can affect the competitive landscape, is directly aimed at, and targeted at, monopolists.

In short, the case law in this area reflects the need to ensure that the First Amendment protects the “marketplace of ideas,” thereby facilitating the democratic creation of sound government policies without improperly hampering the ability of government to introduce an agenda, to implement its policies, and to favor them to the exclusion of contrary policies. To apply “heightened” scrutiny when the regulation of commercial activities (which often involve speech) is at issue is unnecessarily to undercut the latter constitutional goal. The majority's view of this case presents that risk.

Moreover, given the sheer quantity of regulatory initiatives that touch upon commercial messages, the Court's vision of its reviewing task threatens to return us to a happily bygone era when judges scrutinized legislation for its interference with economic liberty. History shows that the power was much abused and resulted in the constitutionalization of economic theories preferred by individual jurists. See Lochner v. New York, 198 U.S. 45, 75–76, 25 S.Ct. 539, 49 L.Ed. 937 (1905) (Holmes, J., dissenting). By inviting courts to scrutinize whether a State's legitimate regulatory interests can be achieved in less restrictive ways whenever they touch (even indirectly) upon commercial speech, today's majority risks repeating the mistakes of the past in a manner not anticipated by our precedents. See Central Hudson, 447 U.S., at 589, 100 S.Ct. 2343 (Rehnquist, J., dissenting); cf. Railroad Comm'n of Tex. v. Rowan & Nichols Oil Co., 310 U.S. 573, 580–581, 60 S.Ct. 1021, 84 L.Ed. 1368 (1940) (“A controversy like this always calls for fresh reminder that courts must not substitute their notions of expediency and fairness for those which have guided the agencies to whom the formulation and execution of policy have been entrusted”).

Nothing in Vermont's statute undermines the ability of persons opposing the State's policies to speak their mind or to pursue a different set of policy objectives through the democratic process. Whether Vermont's regulatory statute “targets” drug companies (as opposed to affecting them unintentionally) must be beside the First Amendment point.

This does not mean that economic regulation having some effect on speech is always lawful. Courts typically review the lawfulness of statutes for rationality and of regulations (if federal) to make certain they are not “arbitrary, capricious, [or] an abuse of discretion.” 5 U.S.C. § 706(2)(A). And our valuable free-speech tradition may play an important role in such review. But courts do not normally view these matters as requiring “heightened” First Amendment scrutiny—and particularly not the unforgiving brand of “intermediate” scrutiny employed by the majority. Because the imposition of “heightened” scrutiny in such instances would significantly change the legislative/judicial balance, in a way that would significantly weaken the legislature's authority to regulate commerce and industry, I would not apply a “heightened” First Amendment standard of review in this case.

III

Turning to the constitutional merits, I believe Vermont's statute survives application of Central Hudson 's “intermediate” commercial speech standard as well as any more limited “economic regulation” test.

A

The statute threatens only modest harm to commercial speech. I agree that it withholds from pharmaceutical companies information that would help those entities create a more effective selling message. But I cannot agree with the majority that the harm also involves unjustified discrimination in that it permits “pharmacies” to “share prescriber-identifying information with anyone for any reason” (but marketing). Ante, at 2668. Whatever the First Amendment relevance of such discrimination, there is no evidence that it exists in Vermont. The record contains no evidence that prescriber-identifying data is widely disseminated. See App. 248, 255. Cf. Burson v. Freeman, 504 U.S. 191, 207, 112 S.Ct. 1846, 119 L.Ed.2d 5 (1992) (plurality opinion) (“States adopt laws to address the problems that confront them. The First Amendment does not require States to regulate for problems that do not exist”); Bates v. State Bar of Ariz., 433 U.S. 350, 380, 97 S.Ct. 2691, 53 L.Ed.2d 810 (1977) (“[T]he justification for the application of overbreadth analysis applies weakly, if at all, in the ordinary commercial context”).

The absence of any such evidence likely reflects the presence of other legal rules that forbid widespread release of prescriber-identifying information. Vermont's Pharmacy Rules, for example, define “unprofessional conduct” to include “[d]ivulging or revealing to unauthorized persons patient or practitioner information or the nature of professional pharmacy services rendered.” Rule 20.1(i) (emphasis added); see also Reply Brief for Petitioners 21. The statute reinforces this prohibition where pharmaceutical marketing is at issue. And the exceptions that it creates are narrow and concern common and often essential uses of prescription data. See Vt. Stat. Ann., Tit. 18, § 4631(e)(1) (pharmacy reimbursement, patient care management, health care research); § 4631(e)(2) (drug dispensing); § 4631(e)(3) (communications between prescriber and pharmacy); § 4631(e)(4) (information to patients); §§ 4631(e)(5)-(6) (as otherwise provided by state or federal law). Cf. Trans Union Corp., 245 F.3d, at 819 (rejecting an underinclusiveness challenge because an exception to the Fair Credit Reporting Act concerned “ ‘exactly the sort of thing the Act seeks to promote’ ”) (quoting Trans Union Corp. v. FTC, 81 F.3d 228, 234 (C.A.D.C.1996)).

Nor can the majority find record support for its claim that the statute helps “favored” speech and imposes a “burde[n]” upon “disfavored speech by disfavored speakers.” Ante, at 2669. The Court apparently means that the statute (1) prevents pharmaceutical companies from creating individualized messages that would help them sell their drugs more effectively, but (2) permits “counterdetailing” programs, which often promote generic drugs, to create such messages using prescriber-identifying data. I am willing to assume, for argument's sake, that this consequence would significantly increase the statute's negative impact upon commercial speech. But cf. 21 CFR §§ 202.1(e)(1), 202.1(e)(5)(ii) (FDA's “fair balance” requirement); App. 193 (no similar FDA requirement for nondrug manufacturers). The record before us, however, contains no evidentiary basis for the conclusion that any such individualized counterdetailing is widespread, or exists at all, in Vermont.

The majority points out, ante, at 2660 – 2661, that Act 80, of which § 4631 was a part, also created an “evidence-based prescription drug education program,” in which the Vermont Department of Health, the Department of Vermont Health Access, and the University of Vermont, among others, work together “to provide *2681 information and education on the therapeutic and cost-effective utilization of prescription drugs” to health professionals responsible for prescribing and dispensing prescription drugs, Vt. Stat. Ann., Tit. 18, § 4622(a)(1). See generally §§ 4621–4622. But that program does not make use of prescriber-identifying data. Reply Brief for Petitioners 11.

The majority cites testimony by two witnesses in support of its statement that “States themselves may supply the prescriber-identifying information used in [counterdetailing] programs.” Ante, at 2661. One witness explained that academic detailers in Pennsylvania work with state health officials to identify physicians serving patients whose health care is likewise state provided. App. 375. The other, an IMS Health officer, observed that Vermont has its own multipayer database containing prescriber-identifying data, which could be used to talk to doctors about their prescription patterns and the lower costs associated with generics. Id., at 313. But nothing in the record indicates that any “counterdetailing” of this kind has ever taken place in fact in Vermont. State-sponsored health care professionals sometimes meet with small groups of doctors to discuss best practices and generic drugs generally. See University of Vermont, College of Medicine, Office of Primary Care, Vermont Academic Detailing Program (July 2010), http:// med. uvm. edu/ ahec/downloads/VTAD_overview_2010.07.08.pdf (all Internet materials as visited June 21, 2011, and available in Clerk of Court's case file). Nothing in Vermont's statute prohibits brand-name manufacturers from undertaking a similar effort.

The upshot is that the only commercial-speech-related harm that the record shows this statute to have brought about is the one I have previously described: The withholding of information collected through a regulatory program, thereby preventing companies from shaping a commercial message they believe maximally effective. The absence of precedent suggesting that this kind of harm is serious reinforces the conclusion that the harm here is modest at most.

B

The legitimate state interests that the statute serves are “substantial.” Central Hudson, 447 U.S., at 564, 100 S.Ct. 2343. Vermont enacted its statute

“to advance the state's interest in protecting the public health of Vermonters, protecting the privacy of prescribers and prescribing information, and to ensure costs are contained in the private health care sector, as well as for state purchasers of prescription drugs, through the promotion of less costly drugs and ensuring prescribers receive unbiased information.” § 4631(a).

These objectives are important. And the interests they embody all are “neutral” in respect to speech. Cf. ante, at 2672.

The protection of public health falls within the traditional scope of a State's police powers. Hillsborough County v. Automated Medical Laboratories, Inc., 471 U.S. 707, 719, 105 S.Ct. 2371, 85 L.Ed.2d 714 (1985). The fact that the Court normally exempts the regulation of “misleading” and “deceptive” information even from the rigors of its “intermediate” commercial speech scrutiny testifies to the importance of securing “unbiased information,” see 44 Liquormart, 517 U.S., at 501, 116 S.Ct. 1495 (opinion of Stevens, J.); Central Hudson, supra, at 563, 100 S.Ct. 2343, as does the fact that the FDA sets forth as a federal regulatory goal the need to ensure a “fair balance” of information about marketed drugs, 21 CFR §§ 202.1(e)(1), 202.1(e)(5)(ii). As major payers in the health care system, health care spending is also of crucial state interest. And this Court has affirmed the importance of maintaining “privacy” as an important public policy goal—even in respect to information already disclosed to the public for particular purposes (but not others). See Department of Justice v. Reporters Comm. for Freedom of Press, 489 U.S. 749, 762–771, 109 S.Ct. 1468, 103 L.Ed.2d 774 (1989); see also Solove, A Taxonomy of Privacy, 154 U. Pa. L.Rev. 477, 520–522 (2006); cf. NASA v. Nelson, 562 U.S. ––––, ––––-––––, 131 S.Ct. 746, 755–56, 178 L.Ed.2d 667 (2011) (discussing privacy interests in nondisclosure).

At the same time, the record evidence is sufficient to permit a legislature to conclude that the statute “directly advances” each of these objectives. The statute helps to focus sales discussions on an individual drug's safety, effectiveness, and cost, perhaps compared to other drugs (including generics). These drug-related facts have everything to do with general information that drug manufacturers likely possess. They have little, if anything, to do with the name or prior prescription practices of the particular doctor to whom a detailer is speaking. Shaping a detailing message based on an individual doctor's prior prescription habits may help sell more of a particular manufacturer's particular drugs. But it does so by diverting attention from scientific research about a drug's safety and effectiveness, as well as its cost. This diversion comes at the expense of public health and the State's fiscal interests.

Vermont compiled a substantial legislative record to corroborate this line of reasoning. See Testimony of Sean Flynn (Apr. 11, 2007), App. in No. 09–1913–cv(L) etc. (CA2), p. A–1156 (hereinafter CA2 App.) (use of data mining helps drug companies “to cover up information that is not in the best of light of their drug and to highlight information that makes them look good”); Volker & Outterson, New Legislative Trends Threaten the Way Health Information Companies Operate, Pharmaceutical Pricing & Reimbursement 2007, id., at A–4235 (one former detailer considered prescriber-identifying data the “ ‘greatest tool in planning our approach to manipulating doctors' ”) (quoting Whitney, Big (Brother) Pharma: How Drug Reps Know Which Doctors to Target, New Republic, Aug. 29, 2006, http:// tnr. com/ article/ 84056/ health- care- eli- lilly- pfizer- ama); Testimony of Paul Harrington (May 3, 2007), id., at A–1437 (describing data mining practices as “secret and manipulative activities by the marketers”); Testimony of Julie Brill (May 3, 2007), id., at A–1445 (restrictions on data mining “ensur[e] that the FDA's requirement of doctors receiving fair and balanced information actually occurs”); Written Statement of Jerry Avorn & Aaron Kesselheim, id., at A–4310 (citing studies that “indicate that more physician-specific detailing will lead to more prescriptions of brand-name agents, often with no additional patient benefit but at much higher cost to patients and to state-based insurance programs, which will continue to drive up the cost of health care”); id., at 4311 (“Making it more difficult for manufacturers to tailor their marketing strategies to the prescribing histories of individual physicians would actually encourage detailers to present physicians with a more neutral description of the product”); see also Record in No. 1:07–cv–00188–jgm (D Vt.), Doc. 414, pp. 53–57, 64 (hereinafter Doc. 414) (summarizing record evidence).

These conclusions required the legislature to make judgments about whether and how to ameliorate these problems. And it is the job of regulatory agencies and legislatures to make just these kinds of judgments. Vermont's attempts to ensure a “fair balance” of information is no different from the FDA's similar requirement, see 21 CFR §§ 202.1(e)(1), 202.1(e)(5)(ii). No one has yet suggested that substantial portions of federal drug regulation are unconstitutional. Why then should we treat Vermont's law differently?

The record also adequately supports the State's privacy objective. Regulatory rules in Vermont make clear that the confidentiality of an individual doctor's prescribing practices remains the norm. See, e.g., Pharmacy Rule 8.7(c) ( “Prescription and other patient health care information shall be secure from access by the public, and the information shall be kept confidential”); Pharmacy Rule 20.1(i) (forbidding disclosure of patient or prescriber information to “unauthorized persons” without consent). Exceptions to this norm are comparatively few. See, e.g., ibid. (identifying “authorized persons”); Vt. Stat. Ann., Tit. 18, § 4631(e); App. 248, 255 (indicating that prescriber-identifying data is not widely disseminated). There is no indication that the State of Vermont, or others in the State, makes use of this information for counterdetailing efforts. See supra, at 2680.

Pharmaceutical manufacturers and the data miners who sell information to those manufacturers would like to create (and did create) an additional exception, which means additional circulation of otherwise largely confidential information. Vermont's statute closes that door. At the same time, the statute permits doctors who wish to permit use of their prescribing practices to do so. §§ 4631(c)-(d). For purposes of Central Hudson, this would seem sufficiently to show that the statute serves a meaningful interest in increasing the protection given to prescriber privacy. See Fox, 492 U.S., at 480, 109 S.Ct. 3028 (in commercial speech area, First Amendment requires “a fit that is not necessarily perfect, but reasonable; that represents not necessarily the single best disposition but one whose scope is in proportion to the interest served” (internal quotation marks omitted)); see also United States v. Edge Broadcasting Co., 509 U.S. 418, 434, 113 S.Ct. 2696, 125 L.Ed.2d 345 (1993) (The First Amendment does not “require that the Government make progress on every front before it can make progress on any front”); Burson, 504 U.S., at 207, 112 S.Ct. 1846 (plurality opinion).

C

The majority cannot point to any adequately supported, similarly effective “more limited restriction.” Central Hudson, 447 U.S., at 564, 100 S.Ct. 2343. It says that doctors “can, and often do, simply decline to meet with detailers.” Ante, at 2669. This fact, while true, is beside the point. Closing the office door entirely has no similar tendency to lower costs (by focusing greater attention upon the comparative advantages and disadvantages of generic drug alternatives). And it would not protect the confidentiality of information already released to, say, data miners. In any event, physicians are unlikely to turn detailers away at the door, for those detailers, whether delivering a balanced or imbalanced message, are nonetheless providers of much useful information. See Manchanda & Honka, The Effects and Role of Direct–to–Physician Marketing in the Pharmaceutical Industry: An Integrative Review, 5 Yale J. Health Pol'y L. & Ethics 785, 793–797, 815–816 (2005); Ziegler, Lew, & Singer, The Accuracy of Drug Information from Pharmaceutical Sales Representatives, 273 JAMA 1296 (1995). Forcing doctors to choose between targeted detailing and no detailing at all could therefore jeopardize the State's interest in promoting public health.

The majority also suggests that if the “statute provided that prescriber-identifying information could not be sold or disclosed except in narrow circumstances then the State might have a stronger position.” Ante, at 2672 – 2673; see also ante, at 2668. But the disclosure-permitting exceptions here are quite narrow, and they serve useful, indeed essential purposes. See supra, at 2680. Compare Vt. Stat. Ann., Tit. 18, § 4631(e) with note following 42 U.S.C. § 1320d–2, p. 1190, and 45 CFR § 164.512 (uses and disclosures not requiring consent under the Health Insurance Portability and Accountability Act of 1996). Regardless, this alternative is not “a more limited restriction,” Central Hudson, supra, at 564, 100 S.Ct. 2343 (emphasis added), for it would impose a greater, not a lesser, burden upon the dissemination of information.

Respondents' alternatives are no more helpful. Respondents suggest that “Vermont can simply inform physicians that pharmaceutical companies ... use prescription history information to communicate with doctors.” Brief for Respondent Pharmaceutical Research and Manufacturers of America 48. But how would that help serve the State's basic purposes? It would not create the “fair balance” of information in pharmaceutical marketing that the State, like the FDA, seeks. Cf. Reno v. American Civil Liberties Union, 521 U.S. 844, 874, 117 S.Ct. 2329, 138 L.Ed.2d 874 (1997) (alternative must be “at least as effective in achieving the legitimate purpose that the statute was enacted to serve”). Respondents also suggest policies requiring use of generic drugs or educating doctors about their benefits. Brief for Respondent Pharmaceutical Research and Manufacturers of America 54–55. Such programs have been in effect for some time in Vermont or other States, without indication that they have prevented the imbalanced sales tactics at which Vermont's statute takes aim. See, e.g., Written Statement of Jerry Avorn & Aaron Kesselheim, CA2 App. 4310; Doc. 414, at 60–61. And in any event, such laws do not help protect prescriber privacy.

Vermont has thus developed a record that sufficiently shows that its statute meaningfully furthers substantial state interests. Neither the majority nor respondents suggests any equally effective “more limited” restriction. And the First Amendment harm that Vermont's statute works is, at most, modest. I consequently conclude that, even if we apply an “intermediate” test such as that in Central Hudson, this statute is constitutional.

IV

What about the statute's third restriction, providing that “[p]harmaceutical manufacturers and pharmaceutical marketers” may not “use prescriber-identifiable information for marketing or promoting a prescription drug unless the prescriber consents”? Vt. Stat. Ann., Tit. 18, § 4631(d) (emphasis added). In principle, I should not reach this question. That is because respondent pharmaceutical manufacturers, marketers, and data miners seek a declaratory judgment and injunction prohibiting the enforcement of this statute. See 28 U.S.C. § 2201; App. 49–128. And they have neither shown nor claimed that they could obtain significant amounts of “prescriber-identifiable information” if the first two prohibitions are valid. If, as I believe, the first two statutory prohibitions (related to selling and disclosing the information) are valid, then the dispute about the validity of the third provision is not “ ‘real and substantial’ ” or “ ‘definite and concrete.’ ” MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127, 127 S.Ct. 764, 166 L.Ed.2d 604 (2007) (quoting Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240–241, 57 S.Ct. 461, 81 L.Ed. 617 (1937)) (Article III does not permit courts to entertain such disputes).

The Court, however, strikes down all three provisions, and so I add that I disagree with the majority as to the constitutionality of the third restriction as well—basically for the reasons I have already set out. The prohibition against pharmaceutical firms using this prescriber-identifying information works no more than modest First Amendment harm; the prohibition is justified by the need to ensure unbiased sales presentations, prevent unnecessarily high drug costs, and protect the privacy of prescribing physicians. There is no obvious equally effective, more limited alternative.

V

In sum, I believe that the statute before us satisfies the “intermediate” standards this Court has applied to restrictions on commercial speech. A fortiori it satisfies less demanding standards that are more appropriately applied in this kind of commercial regulatory case—a case where the government seeks typical regulatory ends (lower drug prices, more balanced sales messages) through the use of ordinary regulatory means (limiting the commercial use of data gathered pursuant to a regulatory mandate). The speech-related consequences here are indirect, incidental, and entirely commercial. See supra, at 2675 – 2677.

The Court reaches its conclusion through the use of important First Amendment categories—“content-based,” “speaker-based,” and “neutral”—but without taking full account of the regulatory context, the nature of the speech effects, the values these First Amendment categories seek to promote, and prior precedent. See supra, at 2673 – 2676, 2677 – 2679, 2681. At best the Court opens a Pandora's Box of First Amendment challenges to many ordinary regulatory practices that may only incidentally affect a commercial message. See, e.g., supra, at 2676 – 2677, 2677 – 2678. At worst, it reawakens Lochner 's pre-New Deal threat of substituting judicial for democratic decisionmaking where ordinary economic regulation is at issue. See Central Hudson, 447 U.S., at 589, 100 S.Ct. 2343 (Rehnquist, J., dissenting).

Regardless, whether we apply an ordinary commercial speech standard or a less demanding standard, I believe Vermont's law is consistent with the First Amendment. And with respect, I dissent.

The T. J. Hooper

60 F.2d 737 (2nd Cir. 1932)

L. Hand, Circuit Judge.

[Two tugs, the Montrose and the Hooper, encountered a gale while towing barges. The tugs and the barges sank. The cargo owners sued the barge owners, who in turned sued the owner of the two tugs; the owner petitioned to limit his liability. A critical issue was the seaworthiness of the tugs. The trial court found that the tugs unseaworthy because they lacked shortwave radios. Had they been so equipped, they would have received reports of worsening weather; had they received the reports, the captains of both the Montrose and the Hooper testified that they would have avoided the storm by putting in at the Delaware breakwater.]

. . .

It is not fair to say that there was a general custom among coastwise carriers . . . to equip their tugs [with shortwave radios]. One line alone did it . . . An adequate receiving set suitable for a coastwise tug can now be got at small cost and is reasonably reliable if kept up; obviously it is a source of great protection to their tows. . . .

Is it then a final answer that the business had not yet generally adopted receiving sets? There are, no doubt, cases where courts seem to make the general practice of the calling the standard of proper diligence; we have indeed given some currency to the notion ourselves. . . . Indeed in most cases reasonable prudence is in fact common prudence; but strictly it is never its measure; a whole calling may have unduly lagged in the adoption of new and available devices. It never may set its own tests, however persuasive be its usages. Courts must in the end say what is required; there are precautions so imperative that even their universal disregard will not excuse their omission. . . . But here there was no custom at all as to receiving sets; some had them, some did not; the most that can be urged is that they had not yet become general. Certainly in such a case we need not pause; when some have thought a device necessary, at least we may say that they were right, and the others too slack. . . . We hold the tugs unseaworthy therefore because had they been properly equipped, they would have got the . . . [weather] reports. The injury was a direct consequence of this unseaworthiness.

-----------------------

( Section 3 of the arbitration agreement provides:

“YOU WILL FIRST NEGOTIATE WITH [T-MOBILE] IN GOOD FAITH TO SETTLE ANY CLAIM OR DISPUTE BETWEEN YOU AND U.S. IN ANY WAY RELATED TO OR CONCERNING THE AGREEMENT, OR OUR PROVISION TO YOU OF GOODS, SERVICES OR UNITS (“ CLAIM” ). YOU MUST SEND A WRITTEN DESCRIPTION OF YOUR CLAIM TO OUR REGISTERED AGENT. [ ] IF YOU DO NOT REACH AGREEMENT WITH U.S. WITHIN 30 DAYS, INSTEAD OF SUING IN COURT, YOU AGREE THAT ANY CLAIM MUST BE SUBMITTED TO FINAL, BINDING ARBITRATION WITH THE AMERICAN ARBITRATION ASSOCIATION (“AAA” ) UNDER ITS PUBLISHED WIRELESS INDUSTRY ARBITRATION RULES, WHICH ARE A PART OF THE AGREEMENT BY THIS REFERENCE AND ARE AVAILABLE BY CALLING THE AAA AT [listed telephone number] OR VISITING ITS WEB SITE AT [listed].... You will pay your share of the arbitrator's fees except (a) for claims less than $25, we will pay all arbitrator's fees and (b) for claims between $25 and $1000, you will pay $25 for the arbitrator's fee. You and we agree to pay our own other fees, costs and expenses including....

“Neither you nor we may be a representative of other potential claimants or a class of potential claimants in any dispute, nor may two or more individuals' disputes be consolidated or otherwise determined in one proceeding. While the prohibition on consolidated or classwide proceedings in this Sec. 3 will continue to apply: (a) you may take claims to small claims court, if they qualify for hearing by such court and (b) if you fail to timely pay amounts due, we may assign your account for collection and the collection agency may pursue such claims in court limited strictly to the collection of the past due debt and any interest or cost of collection permitted by law or the Agreement. YOU AND WE ACKNOWLEDGE AND AGREE THAT THIS SEC. 3 WAIVES ANY RIGHT TO A JURY TRIAL OR PARTICIPATION AS A PLAINTIFF OR AS A CLASS MEMBER IN A CLASS ACTION. IF A COURT OR ARBITRATOR DETERMINES THAT YOUR WAIVER OF YOUR ABILITY TO PURSUE CLASS OR REPRESENTATIVE CLAIMS IS UNENFORCEABLE, THE ARBITRATION AGREEMENT WILL NOT APPLY AND OUR DISPUTE WILL BE RESOLVED BY A COURT OF APPROPRIATE JURISDICTION, OTHER THAN A SMALL CLAIMS COURT. SHOULD ANY OTHER PROVISION OF THIS ARBITRATION AGREEMENT BE DEEMED UNENFORCEABLE, THAT PROVISION SHALL BE REMOVED, AND THE AGREEMENT SHALL OTHERWISE REMAIN BINDING.”

( Civil Code section 1671, subdivision (d) provides: “ [A] provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the state of the case, it would be impracticable or extremely difficult to fix the actual damage.”

( Notably, we believe the issue before us is properly framed as whether the existence of market choice negates the existence of oppression, not whether choice renders a contract nonadhesive. (Morris v. Redwood Empire Bancorp (2005) 128 Cal.App.4th 1305, 1319-1320 & fn. 6, 27 Cal.Rptr.3d 797; see also Marin Storage, supra, 89 Cal.App.4th at pp. 1054-1056, 107 Cal.Rptr.2d 645; Wayne v. Staples, Inc. (2006) 135 Cal.App.4th 466, 483, 37 Cal.Rptr.3d 544; but see Szetela, supra, 97 Cal.App.4th at p. 1100, 118 Cal.Rptr.2d 862.)

13 Peer-to-peer networks have disadvantages as well. Searches on peer-to-peer networks may not reach and uncover all available files because search requests may not be transmitted to every computer on the network. There may be redundant copies of popular files. The creator of the software has no incentive to minimize storage or bandwidth consumption, the costs of which are borne by every user of the network. Most relevant here, it is more difficult to control the content of files available for retrieval and the behavior of users.

7 The record makes clear that StreamCast developed these promotional materials but not whether it released them to the public. Even if these advertisements were not released to the public and do not show encouragement to infringe, they illuminate StreamCast's purposes

8The mutual exclusivity of these values should not be overstated, however. On the one hand technological innovators, including those writing file-sharing computer programs, may wish for effective copyright protections for their work [cit.] On the other hand the widespread distribution of creative works through improved technologies may enable the synthesis of new works or generate audiences for emerging artists. [cit.]

9We stated in Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), that “‘the lines between direct infringement, contributory infringement and vicarious liability are not clearly drawn’ ....[R]easoned analysis of [the Sony plaintiffs' contributory infringement claim] necessarily entails consideration of arguments and case law which may also be forwarded under the other labels, and indeed the parties ... rely upon such arguments and authority in support of their respective positions on the issue of contributory infringement,” [cit]. In the present case MGM has argued a vicarious liability theory, which allows imposition of liability when the defendant profits directly from the infringement and has a right and ability to supervise the direct infringer, even if the defendant initially lacks knowledge of the infringement. [cit.] Because we resolve the case based on an inducement theory, there is no need to analyze separately MGM's vicarious liability theory.

10Nor does the Patent Act's exemption from liability for those who distribute a staple article of commerce, 35 U.S.C. § 271(c), extend to those who induce patent infringement, § 271(b).

12Of course, in the absence of other evidence of intent, a court would be unable to find contributory infringement liability merely based on a failure to take affirmative steps to prevent infringement, if the device otherwise was capable of substantial noninfringing uses. Such a holding would tread too close to the Sony safe harbor

[1] Programs that recursively query other computers over the Internet in order to obtain a significant amount of information are referred to in the pleadings by various names, including software robots, robots, spiders and web crawlers.

[2] The five factors set forth in 18 U.S.C. § 1030(c)(4)(A)(i) are:

(I) loss to 1 or more persons during any 1–year period (and, for purposes of an investigation, prosecution, or other proceeding brought by the United States only, loss resulting from a related course of conduct affecting 1 or more other protected computers) aggregating at least $5,000.00 in value;

(II) the modification or impairment, or potential modification or impairment, of the medical examination, diagnosis, treatment, or care of 1 or more individuals;

(III) physical injury to any person;

(IV) a threat to public health or safety; and

(V) damage affecting a computer used by or for an entity of the United States Government in furtherance of the administration of justice, national defense, or national security.

( Zeran maintains that AOL made it impossible to identify the original party by failing to maintain adequate records of its users. The issue of AOL's record keeping practices, however, is not presented by this appeal.

2 Section 230 defines "interactive computer service" as "any information service, system, or access software provider that provides or enables computer access by multiple users to a computer server, including specifically a service or system that provides access to the Internet and such systems operated or services offered by libraries or educational institutions." 47 U.S.C. § 230(e)(2). The term "information content provider" is defined as "any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service." Id. § 230(e)(3). The parties do not dispute that AOL falls within the CDA's "interactive computer service" definition and that the unidentified third party who posted the offensive messages here fits the definition of an "information content provider."

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