Spyware: Courts and Legislatures Respond

Most find it to be a nuisance. Advertisers consider it to be cutting edge. Either way, spyware (or adware) is receiving a lot of attention recently in the press, in the courts and in legislatures around the country.

Simply put, spyware is software that is placed on a person's computer, often without the user's knowledge (by downloading some other free software program like a music download service or free screensaver) and then monitors Web-surfing activity, which results in the triggering of pop-up advertisements on the computer user's computer screen. For example, if a computer user types “Macys.com” into its browser, pop-up advertisements for its competitors such as Bloomingdale's or Saks Fifth Avenue may come up. There are two main companies that distribute software that includes spyware ' Claria Corporation (formerly known as Gator) and WhenU Co.

According to Claria Corporation's Web site (www.claria.com/companyinfo), “Claria Corporation is a leader in online behavioral marketing, serving over 43 million consumers and more than 1000 advertisers to date.” Claria distinguishes itself from other marketing models since through its “Gain Network,” “Claria allows advertisers to target consumers based on their individual needs and interests, not mass demographically targeted web site populations.” Claria achieves this by providing free software applications to consumers such as “Weatherscope,” and “Precision Time.” These software programs will display pop-ads based on the consumer's online activity.

WhenU Co. describes itself as being a “global Desktop Advertising Network” (www.whenu.com). WhenU serves 400 online advertisers and uses a similar marketing strategy as Claria. According to WhenU's Web site, “through [its] partnerships with popular software developers, WhenU enables consumers to receive valuable software for free by agreeing to see occasional ads instead of paying a fee.” According to a recent Wall Street Journal article, “Advertisers like adware because they believe it works, delivering more customers at a lower cost of advertising.” Michael Totty, Pesky Pop-Up Internet Ads Go Mainstream, as 'Adware' Gains Acceptance, Wall Street Journal, June 22, 2004, at B1.

There are many concerns with spyware. First, spyware is considered to be a pest to consumers, much like spam or computer viruses. Second, spyware presents various privacy concerns since most spyware programs gather personal information about their users and monitor users' Internet activity. At a recent congressional meeting in Washington, Rep. Joe Barton, chairman of the House Energy and Commerce Committee stated with regard to spyware that “There is no more pernicious, intrusive activity going on on the Internet today.” Peter Kaplan, Lawmakers Vow to Pass New Law Against Spyware, Yahoo.com, April 29, 2004. At the same meeting “lawmakers described spyware as a 'cancer' on the Internet. It can sap computing power, crash machines and bury users under a blizzard of unwanted ads. It can capture passwords, credit card numbers and other sensitive data.” Id.

Finally, from an intellectual property law perspective, spyware presents many issues. In particular, trademark owners have argued that spyware software depends upon the “unauthorized use” of trademarks of companies whose Web sites are targeted for pop-up ads. Indeed, various companies have filed complaints against WhenU and Claria based on trademark infringement, trademark dilution, copyright infringement, contributory copyright infringement and unfair competition. Moreover, various state legislatures and Congress are contemplating (or have passed) bills that address the intellectual property and privacy issues that spyware presents.

Judicial Response

Various intellectual property rights owners have filed lawsuits against Claria and WhenU and some decisions have been rendered. The highlights of some of these cases are as follows:

Washington Post et al. v. The Gator Corporation, 2002 U.S.Dist. Lexis 20879 (E.D.Va. 2002). In this case, a group of publishers including the Washington Post, Newsweek Interactive, the New York Times and Dow Jones & Company filed a motion for preliminary injunction against the Gator Corporation (now Claria). The court granted the preliminary injunction enjoining Gator from causing its pop-up advertisements to be displayed on the plaintiffs' Web sites; Gator was also enjoined from altering or modifying, or causing another entity to alter or modify, any of the plaintiffs' Web sites. However, the court did not issue any findings of fact or conclusions of law.

U-Haul International, Inc. v. WhenU.com, Inc., 279 F.Supp. 2d 723 (E.D.Va. 2003). U-Haul sued WhenU for trademark and copyright infringement, trademark dilution and unfair competition. When computer users would conduct an Internet search for the U-Haul Web site, the computer screen would fill with advertisements for U-Haul's competitors, requiring computer users to “click through” the ads to get to their original destination.

The court focused its opinion on the definition of “use” of a trademark. U-Haul claimed that WhenU's use of U-Haul's trademark as a part of the triggering mechanism in the software that caused the ads to appear constituted “use in commerce.” Id. at 727.

The court disagreed, holding that WhenU did not use the U-Haul mark in commerce. “WhenU's pop-up window is separate and distinct from U-Haul's web site; WhenU does not advertise or promote U-Haul's trademarks through the use of U-Haul's URL or [the] 'U-Haul' [mark] in its directory; and the program does not hinder or impede Internet users from accessing U-Haul's web site in such a manner that WhenU 'uses' U-Haul's trademarks.” Id. at 729. The court also found there to be no copyright infringement.

Wells Fargo & Co. v. WhenU.com, Inc., 293 F.Supp.2d 734 (E.D.Mich. 2003). In this case, the court also denied the plaintiff's (Wells Fargo) motion for a preliminary injunction. Again, the court focused on the concept of use of a trademark in commerce. Wells Fargo argued that the defendant, WhenU, “used” its trademarks in three ways. “First, WhenU hindered Internet users from accessing Wells Fargo's websites. Second, WhenU deliberately positioned its pop-up advertisements in close proximity to Wells Fargo's trademarks. Third, WhenU used Wells Fargo's marks to trigger the delivery of advertisements.” Id. at 758. Here again, the court disagreed with all three propositions.

Moreover, the court found there was no likelihood of confusion, rejecting the doctrine of “initial interest confusion” (since the Sixth Circuit does not recognize it) and finding Wells Fargo's survey evidence to be unpersuasive.

1-800 Contacts, Inc. v. WhenU.com, Inc. and Vision Direct, Inc., 309 F.Supp. 2d 467 (S.D.N.Y. 2003). Contrary to prior cases, and in a victory for trademark holders, the Southern District of New York granted 1-800 Contacts' motion for a preliminary injunction on its trademark and cybersquatting claims. (The court denied its motion on the copyright claims.) As for the trademark claims, 1-800 Contacts argued that it was “harmed by an impermissible affiliation between Plaintiff and Defendant, since because of Defendants' pop-up advertising, users are likely to have the impression that the pop-up advertisements operate in cooperation with, rather than in competition against, the Plaintiff.” The plaintiff argued further that “the pop-up advertising enables Defendants to profit illegally from unauthorized pop-up advertisements delivered to Plaintiff's website, and that through the pop-up advertisements, Defendants are free-riding on the name, reputation and goodwill that Plaintiff has worked so hard to attain.” Id. at 479.

Unlike prior cases, the court found that the defendants “used” 1-800 Contacts' marks. “First, there was use when Defendant Vision Direct's (a competitor of 1-800 Contacts) pop-up ads appeared when users specifically attempted to access Plaintiff's website. Second, Defendant WhenU included Plaintiff's URL, www.1800contacts.com, in the proprietary WhenU directory of terms that triggers pop-up advertisements on [its] users' computers.” Id. at 489.

After finding that the defendants were using the plaintiff's mark in commerce, the court was able to look to whether there was a likelihood of confusion. In doing so, the court found that the doctrine of “initial interest confusion” was applicable. Initial interest confusion happens on the Internet when “potential consumers of one website will be diverted and distracted to a competing website.” Id. at 493 citing Bihari v. Gross, 119 F. Supp. 2d 309, 319 (S.D.N.Y. 2000). Under this principle, harm occurs when “through the use of pop-up advertisements, the [defendant] would gain crucial credibility during the initial phase of the deal.” Id. citing Mobile Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d 254, 259 (2d Cir. 1987).

The court applied the Polaroid factors and determined that 1-800 Contacts had established a likelihood of both source confusion and initial interest confusion and, had therefore, demonstrated a likelihood of success on the merits on its trademark infringement claim and irreparable harm. Id. at 505.

L.L. Bean, Inc. v. Atkins Nutritionals, Inc., (D. Me 2004). In this case, well-known retailer, L.L. Bean filed suit against Atkins Nutritionals based on its “parasitic placement of pop-up advertisements on L.L. Bean's website through the use of spyware” (Complaint p. 1). L.L. Bean alleged trademark infringement, unfair competition, trademark dilution, and false advertising. This case is particularly interesting because the plaintiff sued the advertiser rather than the spyware provider. (The complaint alleges that Atkins is engaged in an online advertising relationship with Claria.)

It has been reported, however, that Atkins and L.L. Bean reached an out-of-court settlement. L.L. Bean Settles in Pop-Up Advert Case, Cogent IPC Newsletter, July 2, 2004. L.L. Bean's Vice President of E-Commerce, Mary Lou Kelley said, “[A]tkins took immediate action to resolve their complaint without further litigation. This is good news for L.L. Bean and countless consumers who are fed up with spyware-enabled advertising practices that invade personal computers and the privacy of their families.” Id.

Legislative Response

Federal and state lawmakers are also seeking to challenge spyware on both the privacy and intellectual property fronts. Utah became the first state to enact spyware legislation ' The Spyware Control Act. Legislators in Utah began drafting the legislation after 1-800 Contacts (located in Utah) became vexed by WhenU's spyware software. In short, the law “requires that spyware creators give consumers notice, obtain their consent, and give them a means to uninstall spyware.” Anita Ramasastry, Can Utah's New Anti-Spyware Law Work? CNN.com, June 3, 2004. The legislation has caused some controversy and in particular, opponents are concerned with the law's broad definition of spyware.

California, New York and other states are considering spyware legislation as well and a bill has been presented in Congress by Rep. Mary Bono. Peter Kaplan, Lawmakers Vow to Pass New Law Against Spyware, Yahoo.com, April 29, 2004. This bill, H.R. 2929 or the “Safeguard Against Privacy Invasions Act” is intended to “protect users of the Internet from unknowing transmission of their personally identifiable information through spyware programs and for other purposes.” 2003 H.R. 2929. The bill “directs the Federal Trade Commission to prohibit the transmission of a spyware program to a covered computer (one used by a financial institution or the Federal Government) by means of the Internet, unless the user of the computer expressly consents to such transmission in response to a clear and conspicuous request or through an affirmative request for such transmission.” 2003 Bill Tracking H.R. 2929.

Conclusion

Like it or not, spyware is probably here to stay. How deeply it penetrates privacy and intellectual property rights will be affected by court decisions and laws that will evolve in the months to come. Either way, spyware will leave its mark on the Internet and law books alike.

Most find it to be a nuisance. Advertisers consider it to be cutting edge. Either way, spyware (or adware) is receiving a lot of attention recently in the press, in the courts and in legislatures around the country.

Simply put, spyware is software that is placed on a person's computer, often without the user's knowledge (by downloading some other free software program like a music download service or free screensaver) and then monitors Web-surfing activity, which results in the triggering of pop-up advertisements on the computer user's computer screen. For example, if a computer user types “Macys.com” into its browser, pop-up advertisements for its competitors such as Bloomingdale's or Saks Fifth Avenue may come up. There are two main companies that distribute software that includes spyware ' Claria Corporation (formerly known as Gator) and WhenU Co.

According to Claria Corporation's Web site (www.claria.com/companyinfo), “Claria Corporation is a leader in online behavioral marketing, serving over 43 million consumers and more than 1000 advertisers to date.” Claria distinguishes itself from other marketing models since through its “Gain Network,” “Claria allows advertisers to target consumers based on their individual needs and interests, not mass demographically targeted web site populations.” Claria achieves this by providing free software applications to consumers such as “Weatherscope,” and “Precision Time.” These software programs will display pop-ads based on the consumer's online activity.

WhenU Co. describes itself as being a “global Desktop Advertising Network” (www.whenu.com). WhenU serves 400 online advertisers and uses a similar marketing strategy as Claria. According to WhenU's Web site, “through [its] partnerships with popular software developers, WhenU enables consumers to receive valuable software for free by agreeing to see occasional ads instead of paying a fee.” According to a recent Wall Street Journal article, “Advertisers like adware because they believe it works, delivering more customers at a lower cost of advertising.” Michael Totty, Pesky Pop-Up Internet Ads Go Mainstream, as 'Adware' Gains Acceptance, Wall Street Journal, June 22, 2004, at B1.

There are many concerns with spyware. First, spyware is considered to be a pest to consumers, much like spam or computer viruses. Second, spyware presents various privacy concerns since most spyware programs gather personal information about their users and monitor users' Internet activity. At a recent congressional meeting in Washington, Rep. Joe Barton, chairman of the House Energy and Commerce Committee stated with regard to spyware that “There is no more pernicious, intrusive activity going on on the Internet today.” Peter Kaplan, Lawmakers Vow to Pass New Law Against Spyware, Yahoo.com, April 29, 2004. At the same meeting “lawmakers described spyware as a 'cancer' on the Internet. It can sap computing power, crash machines and bury users under a blizzard of unwanted ads. It can capture passwords, credit card numbers and other sensitive data.” Id.

Finally, from an intellectual property law perspective, spyware presents many issues. In particular, trademark owners have argued that spyware software depends upon the “unauthorized use” of trademarks of companies whose Web sites are targeted for pop-up ads. Indeed, various companies have filed complaints against WhenU and Claria based on trademark infringement, trademark dilution, copyright infringement, contributory copyright infringement and unfair competition. Moreover, various state legislatures and Congress are contemplating (or have passed) bills that address the intellectual property and privacy issues that spyware presents.

Judicial Response

Various intellectual property rights owners have filed lawsuits against Claria and WhenU and some decisions have been rendered. The highlights of some of these cases are as follows:

Washington Post et al. v. The Gator Corporation, 2002 U.S.Dist. Lexis 20879 (E.D.Va. 2002). In this case, a group of publishers including the Washington Post, Newsweek Interactive, the New York Times and Dow Jones & Company filed a motion for preliminary injunction against the Gator Corporation (now Claria). The court granted the preliminary injunction enjoining Gator from causing its pop-up advertisements to be displayed on the plaintiffs' Web sites; Gator was also enjoined from altering or modifying, or causing another entity to alter or modify, any of the plaintiffs' Web sites. However, the court did not issue any findings of fact or conclusions of law.

U-Haul International, Inc. v. WhenU.com, Inc., 279 F.Supp. 2d 723 (E.D.Va. 2003). U-Haul sued WhenU for trademark and copyright infringement, trademark dilution and unfair competition. When computer users would conduct an Internet search for the U-Haul Web site, the computer screen would fill with advertisements for U-Haul's competitors, requiring computer users to “click through” the ads to get to their original destination.

The court focused its opinion on the definition of “use” of a trademark. U-Haul claimed that WhenU's use of U-Haul's trademark as a part of the triggering mechanism in the software that caused the ads to appear constituted “use in commerce.” Id. at 727.

The court disagreed, holding that WhenU did not use the U-Haul mark in commerce. “WhenU's pop-up window is separate and distinct from U-Haul's web site; WhenU does not advertise or promote U-Haul's trademarks through the use of U-Haul's URL or [the] 'U-Haul' [mark] in its directory; and the program does not hinder or impede Internet users from accessing U-Haul's web site in such a manner that WhenU 'uses' U-Haul's trademarks.” Id. at 729. The court also found there to be no copyright infringement.

Wells Fargo & Co. v. WhenU.com, Inc., 293 F.Supp.2d 734 (E.D.Mich. 2003). In this case, the court also denied the plaintiff's (Wells Fargo) motion for a preliminary injunction. Again, the court focused on the concept of use of a trademark in commerce. Wells Fargo argued that the defendant, WhenU, “used” its trademarks in three ways. “First, WhenU hindered Internet users from accessing Wells Fargo's websites. Second, WhenU deliberately positioned its pop-up advertisements in close proximity to Wells Fargo's trademarks. Third, WhenU used Wells Fargo's marks to trigger the delivery of advertisements.” Id. at 758. Here again, the court disagreed with all three propositions.

Moreover, the court found there was no likelihood of confusion, rejecting the doctrine of “initial interest confusion” (since the Sixth Circuit does not recognize it) and finding Wells Fargo's survey evidence to be unpersuasive.

1-800 Contacts, Inc. v. WhenU.com, Inc. and Vision Direct, Inc., 309 F.Supp. 2d 467 (S.D.N.Y. 2003). Contrary to prior cases, and in a victory for trademark holders, the Southern District of New York granted 1-800 Contacts' motion for a preliminary injunction on its trademark and cybersquatting claims. (The court denied its motion on the copyright claims.) As for the trademark claims, 1-800 Contacts argued that it was “harmed by an impermissible affiliation between Plaintiff and Defendant, since because of Defendants' pop-up advertising, users are likely to have the impression that the pop-up advertisements operate in cooperation with, rather than in competition against, the Plaintiff.” The plaintiff argued further that “the pop-up advertising enables Defendants to profit illegally from unauthorized pop-up advertisements delivered to Plaintiff's website, and that through the pop-up advertisements, Defendants are free-riding on the name, reputation and goodwill that Plaintiff has worked so hard to attain.” Id. at 479.

Unlike prior cases, the court found that the defendants “used” 1-800 Contacts' marks. “First, there was use when Defendant Vision Direct's (a competitor of 1-800 Contacts) pop-up ads appeared when users specifically attempted to access Plaintiff's website. Second, Defendant WhenU included Plaintiff's URL, www.1800contacts.com, in the proprietary WhenU directory of terms that triggers pop-up advertisements on [its] users' computers.” Id. at 489.

After finding that the defendants were using the plaintiff's mark in commerce, the court was able to look to whether there was a likelihood of confusion. In doing so, the court found that the doctrine of “initial interest confusion” was applicable. Initial interest confusion happens on the Internet when “potential consumers of one website will be diverted and distracted to a competing website.” Id. at 493 citing Bihari v. Gross, 119 F. Supp. 2d 309, 319 (S.D.N.Y. 2000). Under this principle, harm occurs when “through the use of pop-up advertisements, the [defendant] would gain crucial credibility during the initial phase of the deal.” Id. citing Mobile Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d 254, 259 (2d Cir. 1987).

The court applied the Polaroid factors and determined that 1-800 Contacts had established a likelihood of both source confusion and initial interest confusion and, had therefore, demonstrated a likelihood of success on the merits on its trademark infringement claim and irreparable harm. Id. at 505.

L.L. Bean, Inc. v. Atkins Nutritionals, Inc., (D. Me 2004). In this case, well-known retailer, L.L. Bean filed suit against Atkins Nutritionals based on its “parasitic placement of pop-up advertisements on L.L. Bean's website through the use of spyware” (Complaint p. 1). L.L. Bean alleged trademark infringement, unfair competition, trademark dilution, and false advertising. This case is particularly interesting because the plaintiff sued the advertiser rather than the spyware provider. (The complaint alleges that Atkins is engaged in an online advertising relationship with Claria.)

It has been reported, however, that Atkins and L.L. Bean reached an out-of-court settlement. L.L. Bean Settles in Pop-Up Advert Case, Cogent IPC Newsletter, July 2, 2004. L.L. Bean's Vice President of E-Commerce, Mary Lou Kelley said, “[A]tkins took immediate action to resolve their complaint without further litigation. This is good news for L.L. Bean and countless consumers who are fed up with spyware-enabled advertising practices that invade personal computers and the privacy of their families.” Id.

Legislative Response

Federal and state lawmakers are also seeking to challenge spyware on both the privacy and intellectual property fronts. Utah became the first state to enact spyware legislation ' The Spyware Control Act. Legislators in Utah began drafting the legislation after 1-800 Contacts (located in Utah) became vexed by WhenU's spyware software. In short, the law “requires that spyware creators give consumers notice, obtain their consent, and give them a means to uninstall spyware.” Anita Ramasastry, Can Utah's New Anti-Spyware Law Work? CNN.com, June 3, 2004. The legislation has caused some controversy and in particular, opponents are concerned with the law's broad definition of spyware.

California, New York and other states are considering spyware legislation as well and a bill has been presented in Congress by Rep. Mary Bono. Peter Kaplan, Lawmakers Vow to Pass New Law Against Spyware, Yahoo.com, April 29, 2004. This bill, H.R. 2929 or the “Safeguard Against Privacy Invasions Act” is intended to “protect users of the Internet from unknowing transmission of their personally identifiable information through spyware programs and for other purposes.” 2003 H.R. 2929. The bill “directs the Federal Trade Commission to prohibit the transmission of a spyware program to a covered computer (one used by a financial institution or the Federal Government) by means of the Internet, unless the user of the computer expressly consents to such transmission in response to a clear and conspicuous request or through an affirmative request for such transmission.” 2003 Bill Tracking H.R. 2929.

Conclusion

Like it or not, spyware is probably here to stay. How deeply it penetrates privacy and intellectual property rights will be affected by court decisions and laws that will evolve in the months to come. Either way, spyware will leave its mark on the Internet and law books alike.