Wednesday, June 27, 2012

ACPA claims fail in context of pitched competitive battle

Pensacola Motor Sales Inc. v. Eastern Shore Toyota, LLC, --- F.3d ----, 2012 WL 2345117 (11th Cir.)

Judge Carnes offers an engaging introduction to this case:
People who compete against each other in the same business or profession don't have to dislike one another. A few years back there was even a song lyricizing about “Lawyers in Love.” But no one has ever written a song about “Car Dealers in Love,” and if this case is any indication, no one ever will. These two car dealers are bitter business rivals in overlapping markets. One of them used a software program to compete more aggressively with the other one over the internet. That program produced a multiplicity of mini-websites, a host of hard feelings, and of course litigation. This is the appellate part of that litigation.
Nor is this the only case involving the parties: just last year, a state court awarded Shawn Esfahani and his company Eastern Shore Toyota $7.5 million in slander damages against plaintiff Bob Tyler Toyota and its sales manager.  The slander involved false accusations of terrorism and financial support for terrorism against Iranian-born Esfahani.  The period of the slander overlapped the period of Eastern Shore’s anti-Bob Tyler internet strategy, which gave rise to this lawsuit.  The $7.5 million slander judgment, $5 million of which represents punitive damages, is currently on appeal to the Alabama Supreme Court.  (I wonder which one of the parties spent valuable space in the appellate brief informing the court about this other litigation?)
Esfahani also deals in Hyundais.  In 2009, he attended a Hyundai dealers’ conference, where Hyundai officials introduced dealers to David Vaughn, Jr., the corporate division's internet marketing expert, who offered to help the dealers revamp their websites and spruce up their technology systems. I quote the court: “Not that there's anything wrong with that.”
However, Vaughan went a bit further.  He pitched defensive and offensive marketing strategies to Esfahani.  The defensive strategy was to buy and hold desirable domain names to keep them from competitors; some would incorporate competitors’ marks.  These wouldn’t resolve to a webpage.  The offensive strategy involved creating many mini-sites.  By entering domain names into a program he proposed to license to Esfahani, Vaughn could “instantly mass produce microsites for Esfahani, each one using a name related in some way to the car business, for example, Those microsites would either automatically redirect users who clicked on them to Eastern Shore's official websites or they would display a one-page website advertising Eastern Shore.”  Esfahani agreed to both proposals, and quickly went from owning about 40 domain names to owning around 4000.  Some incorporated trademarks from well-known sites, for example:,, and  Others used competitors’ marks, such as eBay objected to in September 2009, telling Eastern Shore that its registration and use violated the Lanham Act and ACPA.  Esfahani surrendered the domain name the day after receiving eBay’s email, but didn’t review any of his other domain names for infringement.
In October 2009, a Bob Tyler sales manager discovered the microsite, featuring a photo of a model sold by Bob Tyler and allowing visitors to enter their email addresses and financial information to apply for a car loan.  But the phone number was Eastern Shore’s.  Bob Tyler employees found five other Eastern Shore microsites with virtually the same design and some version of the Bob Tyler TM along with Eastern Shore’s phone number.
A Toyota manger told Eastern Shore that Bob Tyler objected and urged Eastern Shore to disable the microsites. Continuing in the slightly-cuter-than-perhaps-I-want-my-appellate-opinions vein, the court recounted that “Esfahani was shocked—‘shocked,’ he said—to learn that those domain names were operational, and he immediately ordered Vaughan to disable the microsites.”  A few days later, Bob Tyler’s lawyers sent a C&D threatening a lawsuit unless Eastern Shore paid $250,000, though Eastern Shore was already in the process of disabling the microsites.
Esfahani and Vaughan blamed each other.  Esfahani terminated his contract with Vaughan and accused Vaughan of having misled him into believing that buying the domain names was legal, while Vaughan said that Esfahani “went rogue” despite Vaughan’s warnings that buying the domain names and hosting the microsites “was a real bad idea[ ].”  By the end of the day after the C&D, all the microsites using the Bob Tyler trademark had been disabled, except for two undetected because misspelled ones.  (The total was 14.)
Bob Tyler sued anyway, alleging false advertising, unfair competition under the Lanham Act and state law, violation of ACPA, state trademark dilution, and violation of Florida’s “Antiphishing Act.”  Bob Tyler moved for summary judgment.  Eastern Shore argued that it allegedly “believed and had reasonable grounds to believe that the use of the domain name[s] was a fair use or otherwise lawful,”15 U.S.C. § 1125(d)(1)(B)(ii).  At trial, Bob Tyler didn’t prove any money damages, which left it only able to seek damages on its Florida antiphishing and ACPA claims.  The court granted judgment as a matter of law to Eastern Shore on the antiphishing claim, and also denied injunctive relief because Bob Tyler failed to show any likelihood that Eastern Shore would resume the objectionable conduct. 
When the court instructed the jury on the ACPA statutory defense, it stated that Eastern Shore had the burden to prove that it had both “reasonable grounds to believe that the use of the domain names was [a] fair use or otherwise lawful” and that it actually “had this belief.” The court told the jury that “reasonable grounds” meant that “an ordinary person in [the] defendants' position would have had those grounds.”
The jury, by special interrogatory verdict, found that Bob Tyler proved a violation of ACPA by Eastern Shore, but that the defendants had “a reasonably held belief that their use of the domain names was a fair use or otherwise lawful.”  Thus Bob Tyler got nothing.
Bob Tyler appealed.  I will ignore most of the many procedural/waiver issues.  It first argued that it was entitled to equitable relief on its false advertising/unfair competition claims, a holding reviewed only for abuse of discretion.  There was a reasonable basis for the district court’s conclusion, so the court of appeals affirmed.  Eastern Shore disabled the infringing microsites right after the C&D (a little longer for the undiscovered misspelled ones). “Eastern Shore acknowledged its error in creating the microsites, fired its internet consultant, and promised to stop any infringing activity.”  There was no evidence of a likelihood of continued infringement, so the district court’s ruling was justified.
Florida’s antiphishing law allows the owner of a web page or trademark “who is adversely affected by [a] violation” to bring a lawsuit under that act, but Bob Tyler failed to prove any damages at trial or otherwise show that it had been adversely affected, so the claim was properly dismissed as a matter of law.
ACPA was the big issue.  Bob Tyler argued that the district court shouldn’t have let the statutory safe harbor defense go to the jury because Eastern Shore’s bad faith barred it from the safe harbor.  The Fourth Circuit has held that a “defendant who acts even partially in bad faith in registering a domain name is not, as a matter of law, entitled to benefit from the Act's safe harbor provision.”  Here, Eastern Shore conceded that six of the nine statutory ACPA factors for determining bad faith were present and weighed against it.  But bad faith intent to profit isn’t a “score card” of statutory factors; the statute says they’re nonexclusive factors that “a court may consider.”  There is no per se tipping point that excludes a defendant.  The Fourth Circuit case involved a defendant’s undisputed bad faith intent to profit by selling or threatening to sell the infringing domain name to the highest bidder if the plaintiff did not buy the name from it.  Nothing like that happened here; there was some evidence of intent to profit from the infringing domain names, but also contrary evidence.  Resolving the dispute was for the jury.
Eastern Shore’s defense wasn’t mistake of law: it was that Eastern Shore believed and had reasonable grounds to believe that its actions were lawful based on Vaughan's professional advice.  There was evidence supporting this. 
The court of appeals also rejected Bob Tyler’s challenges to the jury instructions; there was no evidence that things like an instruction that even one improper motive is enough for liability would have changed the verdict.  Likewise, Bob Tyler argued that the jury’s answers were inconsistent, and they were: the jury found that Eastern Shore had violated ACPA and also that it qualified for the safe harbor, but a defendant who falls within the scope of the safe harbor provision necessarily lacks the bad faith intent to profit that is necessary to violate the statute.  But Bob Tyler waived the argument by not objecting before the jury was discharged.
Bob Tyler also argued that it should have been granted judgment as a matter of law, or a new trial based on the weight of the evidence.  The former turned on whether there was enough evidence for the jury to find that Eastern Shore reasonably believed its actions were lawful.  Regardless of the number of statutory factors in play, there would be no bad faith intent to profit and thus no liability if Eastern Shore nonetheless “believed and had reasonable grounds to believe that the use of the domain name was ... lawful.”  This requires both a subjective belief and an objectively reasonable belief in the lawfulness of its actions.  The standard of review is one designed to support the jury’s verdict:  “when all credibility determinations are made and all inferences are drawn in favor of the verdict, and all evidence disfavoring the verdict that the jury was not required to believe is disregarded, was there enough evidence to support the verdict that Eastern Shore lacked a bad faith intent to profit because it believed and had reasonable grounds to believe that its actions were lawful? There was.”
To start with, Esfahani testified that he believed that owning the domain names was legal.  There was evidence that Vaughan assured him that this was so, and that Esfahani reasonably relied on Vaughan’s expertise:
Esfahani had every reason to believe that Vaughan was a bona fide and independent internet marketing professional on whom he could rely. Vaughan had worked in the car dealership business for about twenty-seven years and had started working in internet marketing as early as 1995. He owned Advanced Dealer Systems, an internet marketing company whose clientele included car dealerships and manufacturers, such as Hyundai, Dodge, Jeep, and Chrysler. It was Hyundai's corporate division that introduced Vaughan to its dealership owners, including Esfahani, as a “preferred vendor” and the corporate division's internet marketing expert, someone who could help dealers revamp their websites and internet marketing strategies to compete in the twenty-first century economy.
Indeed, Vaughan continued to tout his defensive strategy of registering multiple inactive domains in his deposition, so convinced was he of its legality and propriety:
If I was a guy like Shawn Esfahani, I would buy my competition up; and I would just not let them use it. I would just keep [the domain names] dormant. I think that's a good strategy.... I've actually helped Hyundai buy Toyota domains just to keep them away from Toyota.... Everybody does it.
There was, in addition, evidence that Vaughan inadvertently launched the microsites that used the Bob Tyler trademark instead of keeping those domain names dormant, as Esfahani testified he had believed Vaughan would do.  The one-click nature of the computer program allowed for inadvertent activation, and Vaughan was the one who did the detail work.  Vaughan denied responsibility for activating the infringing microsites, but the jury didn’t have to believe him; at least one of them bore the name of his company in the tagline “Powered by Advanced Dealer Systems.”  Vaughan undisputedly had exclusive access to the operational back-end of the microsites, where he could upload content and track visitors to the sites.  Esfahani testified that he “personally had no idea these things were hooked to [the] website generating machine.”
The jury could have accepted Esfahani’s reaction to the news that infringing domain names were in use as more evidence that he didn’t want them used offensively and hadn’t known about that use.  He immediately ordered Vaughan to deactivate them, before receiving Bob Tyler’s C&D, and terminated Vaughan’s contract a few days later, stating that he’d been misled into thinking that purchasing the domains was legal.  Eastern Shore surrendered the Bob Tyler domain names to GoDaddy before this lawsuit was filed in this case, and surrendered the domain names using trademarks of its other competitors soon thereafter.
Overall, though the court noted that it wasn’t saying that it would have reached the same result as the jury, defendants’ actions and reactions “were starkly different from those of defendants who have been held to have violated the anticybersquatting act.”  Bob Tyler argued that the eBay C&D email put Eastern Shore on notice of likely ACPA violations.  But the email said that the “registration and use” or “use, [sale], or offer for sale” of the domain name likely violated the law.  A jury could reasonably have found both that Esfahani still reasonably believed that his defensive strategy was ok, and that he didn’t know the Bob Tyler microsites were operational.
Bob Tyler contested Esfahani’s subjective lack of knowledge, because Esfahani testified that a number of years ago a competitor’s disgruntled ex-employee offered to sell him the competitor’s domain names, to which he had access because he’d bought them at the competitor’s direction while still employed there.  Esfahani turned this offer down as “dirty pool.”  But a reasonable jury could have found that Esfahani distinguished between pilfered property and buying unregistered names from GoDaddy, especially when Vaughan told him he could do the latter.
Another wrinkle was that Bob Tyler obtained a party admission under Federal Rule of Civil Procedure 36(a) from Eastern Shore admitting that it “purchased the Bob Tyler Domain Names with the intention of diverting consumers from [Bob Tyler Toyota's] website or business to [Eastern Shore's] own website.” This would normally conclusively establish the admitted fact, but “what ordinarily happens and what should have happened did not happen in this case.”  Though Eastern Shore never moved to withdraw this omission, Bob Tyler never objected to Eastern Shore’s contradictory position at trial that it only intended to hold the domain names defensively.
The only people who noticed the inconsistency were members of the jury, which sent a question to the court about how it should resolve the conflict between the party admission and the “[p]resented testimony that [Eastern Shore] did not willfully activate a site.”  Bob Tyler’s lawyer, for whatever reason, agreed that the jury should simply be instructed to give the admission and the trial testimony “the weight you believe it deserves.”  The district court instructed the jury that: “The Request for Admissions relates to the purchase of a domain name. The testimony which you describe in your communication relates to the activation of a website. The two are different things. You should give each the weight you believe it deserves.”  The jury then asked whether Eastern Shore had admitted only to defensive use or to both defensive and offensive use.  The court, again with the agreement of the parties’ lawyers, told the jury that “the defendants' response simply admitted that sentence as it is worded.”  Given the invited error, Bob Tyler couldn’t complain now.
Eric Goldman would undoubtedly suggest some good business lessons here.  I can see why the jury sympathized with Esfahani (I don't know whether the slander issue was admitted as evidence here)--if they believed his testimony, he was misled by a consultant who seemed highly legit and endorsed by the Hyundai hierarchy.  It may be hard for a nonspecialist to make legal distinctions--though I will say that even what Vaughan called the "defensive" strategy smells bad to me, and is also unlikely to provide any return given how consumers find websites in the age of search engines.  These registrations might have earned Vaughan fees, but it's hard to imagine how they helped Eastern Shore's competitive position even setting aside this expensive lawsuit.

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