INTERNET LAW BLOG

May a Principal Officer be Held Liable for Corporate Actions?

Should a principal corporate officer be able to avail himself of the corporation’s liability shield which would protect his personal assets from suits arising from actions taken in his corporate capacity? When should a principal officer be held liable for the actions of a corporation based on the principle that the corporation is merely a façade in order to protect the officer from personal liability? These questions were addressed in the recent New York case, Deborah S. Carlone v. The Lion & The Bull Films, Inc. et al., 10 Civ. 6275 (S.D. N.Y. Apr 30, 2012).

The initial holding in that case was that the corporate defendant, L&B Films (“L&B” or “Defendant”), breached its contract with the plaintiff, Deborah Carlone (“Carlone” or “Plaintiff”). The factual basis of that holding was as follows. Plaintiff lent $115,000.00 to L&B for the purpose of making a motion picture.  The loan needed to be made rapidly, without the normal document review. As an incentive, L&B promised Carlone that the principal loan amount of $115,000.00 would be repaid within 30 days, along with an additional $185,000.00.

Plaintiff brought suit against the Defendant because she had not received any of the repayment. Carlone prevailed against L&B Films in her claim for breach of contract. Accordingly, she was awarded $300,000.00 plus prejudgment interest. Subsequently, Carlone sought to hold Mr. Luna, the principal officer, director and 50% shareholder of L&B, personally liable for the judgment by piercing the corporate veil.

New York law establishes two requirements for piercing the corporate veil and thus holding an individual liable for corporate action:

1) the owner exercised complete domination over the corporation with respect to the
transaction at issue; and

2) such domination was used to commit a fraud or wrong that injures the party seeking
to pierce the veil.

MAG Portfolio Consultant, GMBH v. Merlin Biomed Group LLC, 268 F .3d 58 (2d Cir. 2001).

Courts consider the following factors when determining whether it is appropriate to pierce the corporate veil:

1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e. issuance of stock, election of directors, keeping of corporate records and the like;

2) inadequate capitalization;

3) whether funds are put in, and taken out of, the corporation for personal rather than corporate purposes;

4) overlap in ownership, officers, directors, and personnel;

5) common office space, address and telephone numbers of corporate entities;

6) the amount of business discretion displayed by the allegedly dominated corporation;

7) whether the related corporations deal with the dominated corporation at arms-length;

8) whether the corporations are treated as independent profit centers;

9) the payment or guarantee of debts of the dominated corporation by other corporations in the group; and

10) whether the corporation in question had property that was used by other of the corporations as if it were its own. 

William Passalcqua Builders, Inc. v. Resnick Developers South, Inc., 933 F. 2d 131, 139 (2d Cir. 1991).

The District Court applied the factors set forth above to the facts of this case. L&B Films was exceedingly undercapitalized, having only $50.00, when it was formed.  Other than the money it had
received from the Plaintiff, the corporation had no other assets nor did it conduct any other business during its existence. Additionally, it did not have corporate headquarters; it conducted business out of Luna’s residence. The sole officers of the corporation were Luna’s and his partner Mr. Pereyra. The meetings between them were informal; there were no formal board meetings at which minutes were kept. There was no evidence of any exercise of discretion by L&B that was independent of Luna’s discretion.  Furthermore, Luna used his control of L&B to effect the entering into the agreement with the Plaintiff.

On this basis, the Court held that it was proper to pierce the corporate veil in order to hold Luna personally liable for the award against L&B Films because Luna completely controlled and dominated the corporation.

Creating a corporate entity will not always protect you from being personally liable for corporate actions. It is important to keep Carlone factors in mind when conducting business through an entity.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

When Are Online Forum Selection Clauses Enforceable in New York?

Should a defendant, who uses the Internet to market and sell nationally, be able to restrict jurisdiction with the use of a forum selection clause (“FSC”)? On the other  hand, should a plaintiff be able to drag an online company, that provides convenient and often times cheaper services, into court across the country?

In Guillermo Jerez v. JD Closeouts, LLC, JD CLOSEOUTS.COM, Inc., 2012-22070 (District Court of Nassau County, First District, March 20, 2012),  the Court addressed the issue of whether FSCs are enforceable. In that case, the plaintiff, Guillermo Jerez “plaintiff”, brought suit against two Florida corporations; JD Closeouts, LLC and JD Closeouts.com, Inc. (collectively, “Defendants”). The plaintiff purchased several tube-socks from the defendants’ online company via the defendants’ website. Plaintiff claimed that the tubes-socks were “defective” and that the defendants’ refused to refund his money. The plaintiff filed suit in New York, the location where he accessed the Internet to purchase the socks and where the socks were shipped.  However, the defendants claimed that because there was an FSC in the terms and conditions of their website, the plaintiff was limited to suing in Nassau County, Florida.  

 In the decision, the Court provided the background law regarding how courts generally treat FSCs. They are presumptively valid in regard to online contract formation. However, FSCs need to be fair; online companies must provide notice of such a clause so that a reasonable person would be aware of the terms prior to entering into the agreement. Online companies need not negotiate online contracts with their users in order to be valid; they only need to provide reasonable notice of the terms.  Therefore, as long as a website’s FSC “is not unreasonably masked from the view of the prospective purchaser,” courts will hold FSCs enforceable.

In analyzing this requirement, the Court cited cases with contrary holdings. In Specht v. Netscape Communications Corp., the Court held that the plaintiff, a user who downloaded from the defendant’s
website, was not put on reasonable notice of the contract terms. The Court explained that the terms were not reasonably communicated to the user because they were located on an “unexplored portion of the webpage” underneath the “download button.” Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002). However, in Caspi v. Microsoft Network, LLC., the Court held, the terms of a contract enforceable where the user of online software was required to click “I agree” or “ I don’t agree” before the use of the software. This required affirmative step, on the part of the user, provided reasonable notice of the terms of the agreement.

The Court, in JD Closeouts held that the defendants’ FSC was not enforceable.  The court based its decision on the fact that the defendants’ FSC was “buried” and “submerged” on the defendants’ webpage. The only way the plaintiff could have become aware of the FSC would be if, by chance, he happened to find it by clicking the “About  Us” tab. Online users are not expected to conduct a wild goose chase; searching every corner of a website for contractual obligations that will be imposed upon them by online companies.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

Is a Broadcast Television Network Liable When it Broadcasts an Alleged False Story about Someone Without Verifying the Validity of the Statements?

According to a pending California lawsuit, the  American Broadcasting Companies (“ABC”) published an allegedly false depiction of Colorado resident David Williams’ (“Williams”) online relationship with former lover Kelley Cahill (“Kelley”) on its news show “20/20”.  Williams filed a lawsuit in the beginning of 2012 claiming defamation.

Williams filed that suit in Orange County California Superior Court and named as defendants ABC, Kelley, “20/20” presenter Christopher Cuomo (“Cuomo’) and “20/20” editor Jack Pyle (“Pyle”). Williams’ complaint stated that ABC failed to “engage in any, or any meaningful, research to determine whether [Kelley] was being truthful, and failed to give Williams any, or any adequate, opportunity to rebut [Kelley’s] allegations treating her story objectively.”  Williams requested a jury trial for libel and he claimed a publication of private facts, intrusion and intentional infliction of emotional distress.

“20/20” aired the show entitled “Blinded by Love: Kelley Cahill’s Ordeal” on June 24, 2011, and Williams claimed the show falsely portrayed him as an online dating predator and a villain, and portrayed Kelley as a victim.  Specifically, the show mentioned that Williams lied to Kelley about his marital status, and that Kelley had incurred increasing debt because of all the gifts she gave to Williams.  Further, the show mentioned that Williams preyed on a massive amount of women.

Kelley posted similar statements on different websites and ABC made the show continuously available to the public online at the network.  Williams contended that Kelley knew that he was separated from his wife during the time they were dating, and that he bought Kelley lavish gifts. It was alleged that Kelley chose to broadcast a fictitious version of their relationship to promote iCheckmates.com, Kelley’s business that enables subscribers to obtain a background check of people they meet online.

The complaint also stated that Cuomo falsely mentioned on the show that Williams declined to comment.  Williams asserted that when he was first contacted by ABC he told them to look at public records to uncover the truth.  Williams also claimed that he did not offer a statement to ABC because he did not have enough time to consult with his attorney before the show aired.

What the outcome of the dispute will be is unknown.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

May The Look and Feel of the Tetris Video Game be Protected by The Copyright Act?

Is the look and feel of the Tetris video game distinguishable from the ideas of the game and therefore protectable? In Tetris Holding, LLC v. XIO Interactive, Inc., No. 09-6115 (D.N.J. May 30, 2012), the United States District Court for the District of New Jersey answered this question in the affirmative.

In that case, Plaintiff, Tetris Holdings, LLC sued XIO Interactive, Inc. (“Defendant”) for the Defendant’s marketing of the game called “Mino.”  Plaintiff alleged among other things, copyright infringement and trade dress infringement because the game copied many copyrightable aspects of its Tetris game.  Tetris identified the following fourteen (14) elements that were allegedly copied:

  1. Seven Tetrimino playing pieces made up of four  equally-sized square joined at their sides;
  2. The visual delineation of individual blocks that comprise each Tetrimino piece and the display of their borders;
  3. The bright, distinct colors used for each of the Tetrimino pieces;
  4. A tall, rectangular playfield (or matrix), 10 blocks wide and 20 blocks tall;
  5. The appearance of Tetriminos moving from the top of the playfield to its bottom;
  6. The way the Tetrimino pieces appear to move and rotate in the playfield;
  7. The small display near the playfield that shows the next playing piece to appear in the playfield;
  8. The particular starting orientation of the Tetriminos, both at the top of the screen and as shown in the “next piece” display;
  9. The display of a “shadow” piece beneath the Tetriminos as they fall;
  10. The color change when the Tetriminos enter lock-down mode;
  11. When a horizontal line fills across the playfield with blocks, the line disappears, and the remaining pieces appear to consolidate downward;
  12. The appearance of individual blocks automatically filling in the playfield from the bottom to the top when the game is over;
  13. The display of “garbage lines” with at least one missing block in random order; and
  14. The screen layout in multiplayer versions with the player’s matrix appearing most prominently on the screen and the opponents’ matrixes appearing smaller than the player’s matrix and to the
    side of the player’s matrix.

Id. at 5.

Defendant conceded that it blatantly copied the look and feel of Tetris so that it could make a similar game for the iPhone.  However, Defendant alleged that it was careful not to copy protectable aspects of the game.  Instead, it copied unprotectable elements such as the “rules, function, and expression essential to the game play.” Id. at 7.  Defendant argued that “not only are the ideas of Tetris (or the rules of the game) not protectable, but neither re the ‘functional aspects’ of the game or expressive elements relating to the game’s function or play.” Id. at 17.  However, the Court disagreed and stated that Defendant “cannot protect expression inseparable from either game rules or game function.” Id.

In its holding, the Court noted that the Plaintiff was conflating the doctrine of merger and the related doctrine known as “scenes à faire.”  The Court explained that merger exists when an idea and the expression of that idea become inseparable. Id. at 14.  In that situation, copying is allowed to prevent a copyright holder from obtaining a monopoly over that idea.  The Court went on to discuss how expressions that are so associated with a particular idea (scenes à faire) are also unprotectable by copyright law.  Id. at 15.  In Tetris, the Court felt that neither doctrine applied.

Evaluating screenshots of both games side by side revealed just how similar the two games appeared.
The Court stated:

Without being told which is which, a common user could not decipher between the two games.  Any differences between the two are slight and insignificant.  If one has to find
distinctions only at a granular level, then the works are likely to be substantially similar.
Reviewing the videos of the game play bolsters this conclusion as it is apparent that the overall look and feel of the two games is identical. There is such similarity between the visual expression of Tetris and Mino that it is akin to literal copying.

Id. at 26-27.

Ultimately, the Court granted summary judgment for Tetris Holding, LLC, as to the copyright infringement and trade dress infringement claims.   

Is a Face Tattoo Displayed on a Character in a Film Protected Under the Copyright Law?

The Eastern District of Missouri recently denied a tattoo artist’s request for a preliminary injunction against Warner Brothers’ release of the Hangover IIWhitmill v. Warner Bros. Entertainment Inc., 11-cv-00752 (E.D. Mo. April 28, 2011).

In that case, artist S. Victor Whitmill (“Victor”), creator of Mike Tyson’s face tattoo, filed a lawsuit against Warner Brothers Entertainment Inc. (“Warner Brothers”) for not seeking his approval to use the tattoo design on the face of another character in the movie.  Victor had obtained a release from Mike Tyson after creating the tattoo and neither Tyson nor Warner Brothers sought his approval.  The movie used the tattoo design on another character’s face in a majority of the scenes.

In ruling, the judge examined four factors:

1) plaintiff’s likelihood of success on the merits;

2) whether plaintiff was threatened with irreparable harm;

3) the balance of the equities; and

4) the public interest.

The Judge felt that Victor had a strong likelihood of prevailing and that he had suffered irreparable harm because he lost control over the tattoo image.  However, the balance of equities and public interest favored Warner Brothers.  The judge found that Warner Brother’s harm outweighed Victor’s because Warner Brothers would lose millions if the movie was enjoined as compared to Victor’s loss of one tattoo design that would not affect his entire business.  Further, the public’s desire to see the movie was considered and it was determined that non-parties such as theater owners and distributors would also lose money and be affected. Ultimately, all the factors considered as a whole were tipped in favor of Warner Brothers although the Judge reasoned that Victor would probably win the case.

Early this year, the case was settled.  The terms of the settlement were kept confidential, but Warner Brothers did mention that it will not have to digitally alter the film for the DVD release, as was previously considered.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

Does New Jersey Recognize the Presumed Damages Doctrine in Internet Defamation Claims?

In W.J.A. v. D.A., No. A-77-10 (May 16, 2012), the New Jersey Supreme Court addressed the question of whether the doctrine of presumed damages applies over the Internet.

That case surrounds Wayne Anderson (“Wayne”), a New Jersey man who was cleared of sexual abuse charges against his nephew, David Adams (“David”) (both fictitious names created by the Court).  Wayne was awarded $50,000.00 for defamation in the original suit, and nine years later David created a website that repeated the abuse claims with additional charges.  The site included Wayne’s name and address.

The creation of the website initiated the current case. However, because Wayne could only offer anguish and emotional injury as damages, the Law Division judge found those damages subjective and therefore insufficient to sustain a defamation claim. David was granted summary judgment.  However, the Appellate Division reversed, holding that Wayne could recover damages in a defamation suit without proving actual harm.  This is known as the “Presumed Damages Doctrine,” whereby a claimant may recover nominal damages expected when his reputation has been injured.  Reputational damage is often hard to prove, so under certain circumstances, it may be presumed, but the damages are generally nominal.

In that case, the Supreme Court held that the presumed damages doctrine would be recognized.  The judge noted that the doctrine acts as a procedural device to help the plaintiff’s claim survive dismissal.  Addressing the fact that the damages would be nominal, the Supreme Court noted that vindication is an important piece of any defamation claim and the doctrine acts as a tool by which the plaintiff is provided dignitary recourse.

Because the damages are presumed, it is hard for a jury to devise a uniform method of valuation.  That is why a plaintiff can only obtain nominal damages at trial, thereby precluding compensatory damages absent proof of actual harm.  Of course, the Plaintiff is free to seek to prove actual damages, which one would hope would be greater.  However, that is often not possible.

This case is important because it illustrates that New Jersey will recognize the doctrine of presumed damages, but recovery under the doctrine is limited.  The doctrine is a good tool for a plaintiff to use to defeat dismissal and obtain nominal damages when he cannot show actual harm.  This is generally the scenario in Internet defamation cases, in which the reputational harm that can be caused is extremely hard to measure.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

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