Tuesday, July 25, 2006

What is a competitor? and other collegiate questions

CollegeNET, Inc. v. XAP Corporation, 2006 WL 2037457 (D. Or.)

Plaintiff CollegeNET provides online college admission application services to college-bound students and to the colleges and universities to which the students intend to apply. The colleges pay Plaintiff for these services.

Defendant XAP provides online college application and admission processing services to college-bound students through "Mentor" websites. Defendant's paying customers are state agencies, departments of education, and student-loan guarantee authorities (banks and other lenders). Defendant does not charge colleges directly for these online services.

Some of XAP’s Mentor websites include the statement: "Personal data entered by the User will not be released to third parties without the user's express consent and direction." In addition, some of the Mentor websites include "account set-up screens" that contain the following statement: "The information you enter will be kept private in accordance with your express consent and direction. Click here to view the Privacy Statement." Some of the Mentor websites also ask the following "opt-in question" of college applicants: "Are you interested in receiving information about student loans or financial aid?" The personal data of some applicants who answer "yes" to the opt-in question is shared with the commercial institutions that are XAP’s paying customers. As of last year, more than 1300 colleges participated in XAP’s Mentor system.

CollegeNET brought state and federal unfair competition claims, on the theory that XAP makes false representations to its customers about privacy, putting CollegeNET at a competitive disadvantage in the online application and admissions processing services market. Colleges have to pay for CollegeNET, but they can get XAP services for free because the financial aid institutions pay for XAP. CollegeNET further alleges that XAP misleads colleges about its privacy policies, giving colleges the false impression that XAP won’t sell or provide student data to third parties without a student’s express consent.

This case raises the same unusual, or at least formerly unusual, question as the Kinderstart case: If I make money by delivering eyeballs to my clients, is there a Lanham Act violation when I lie to get those eyeballs? My intuition is yes, at least for defendants like Google and XAP – but I’d have to draw the line at communicative products, like a newspaper with articles by Jayson Blair. I tried to distinguish the actual content of the site, which has full First Amendment protection, from the representations used to entice people to the site, which can be false commercial speech subject to the Lanham Act (just as courts have suggested about false claims that a biography is authorized). But didn’t the NYT represent, at least by necessary implication, that it was providing news, that is, true facts? Maybe we have to go further and distinguish ancillary facts – what the cost is to access this information (whether in price or in surrendering personal information), how the information was collected or selected – from the content of the site. Or maybe we sometimes want to include the content: If a website advertises “live nude girls” but only delivers images copied from a Sears catalogue, I’d say there had been consumer fraud. In any event, the situation here – alleged misrepresentation to get subscribers, when third parties pay based on the number of subscribers – seems much closer to classic commercial speech than to core First Amendment activity.

Anyway, XAP argued that CollegeNET lacked standing because they weren’t competitors, and that CollegeNET couldn’t vindicate the rights of third parties underthe Lanham Act. Each party offers different services to different customers. And XAP’s student customers are free to use CollegeNET’s online admission application forms even though they purchase other services through XAP.

The court found genuine issues of material fact on this issue, and also that the record needed development to see whether CollegeNET could act as a private attorney general on behalf of deceived students. I would have said they’re obviously competitors, just a seller of Product X who offers Product Y as a “free gift” is a competitor of other sellers of Y. See Telebrands Corp. v. Media Group, Inc, No. 97 Civ. 6768(RPP), 1997 WL 790576, at *3 (S.D.N.Y. Dec. 24, 1997). I also would have thought that the students’ claim could only arise under state law, since they don’t have Lanham Act standing, and that this would necessarily raise significant choice of law issues. I don’t know what the factual record has to do with this legal question.

XAP further maintained that its privacy policies weren’t commercial advertising or promotion, which requires (1) commercial speech (2) by a competitor (3) for purposes of influencing consumers to buy (4) disseminated sufficiently to the consuming public. The parties agreed on (1), and the court had already held that (2) was in dispute.

As for (3), XAP maintained that its consumers were the financial institutions that buy its services, whereas the privacy policy statements are directed to colleges and students who pay nothing and are thus not influenced to buy anything. CollegeNET responded that XAP’s business success depends on signing up colleges and students. The court found genuine issues of material fact. The ultimate purchasers may be influenced by the number of colleges and students that rely on XAP’s privacy policy statements. This seems like a stretch – there’s no doubt that the banks etc. rely on the overall numbers of colleges and students, but I can’t imagine they distinguish the incremental contribution of the privacy policy, even if the policy is material. Still, I’m sympathetic to the outcome, for the reasons discussed above. On (4), XAP argued that its privacy policy wasn’t widely disseminated, and especially not to banks and other financial institutions, and the court reached the same result.

XAP argued that there was nothing false about its statements: Students understand that when they say “yes” to a question about whether they want to get information about student loans or financial aid, their information will be shared with businesses that provide loans or aid. Moreover, the privacy statements did not involve material facts about the services it sells, because they relate to how XAP handles information, not to the services themselves.

The court denied summary judgment on the issues of falsity and materiality. Given the importance of identity theft and privacy policies to consumers, privacy policies can be fundamental to a consumer’s choice of business. Falsity also remained to be assessed.

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