Monthly Archives: April 2011

What must be alleged to state causes of action under the Computer Fraud and Abuse Act and the New Jersey Consumer Fraud Act?

In 2006, the law firm of Kalow & Springnut, LLP (“Kalow”) brought a class action lawsuit against software developer Commence Corporation (“Commence”) to recover damages sustained due to the failure of Commence’s computer software.  Kalow & Springnut, LLP v. Commence Corp., No. 07-3442, 2009 WL 44748 (D.N.J. 2009).

Seven years prior, Kalow purchased software from Commence for use in its law practice.  After that software failed, Kalow filed a class action lawsuit against Commence on behalf of purchasers of Commence’s software.  Kalow alleged violations of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. §1030 (for Commence’s intentional transmission of a software code causing damage to Kalow’s computer systems); violations of the New Jersey Consumer Fraud Act (“NJCFA”), N.J.S.A. §56:8-2, (for Commence’s deceptive and misleading practices in marketing its software); and violations of various consumer fraud acts in every state where Commence did business in anticipation of class certification.

The CFAA provides sanctions and punishments for any person “who 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.”  18 U.S.C. §1030(a)(5)(A)(I).  In its pleadings, Kalow alleged that, “because computer software does not ‘wear out or fail like a mechanical device … for software to stop working, it must either have been intentionally designed to stop working, or the environment in which it is operating must have been altered, either as a result of the change in other software running on the same computer, or as a result of a change in the computer itself.’”  Id. at *2.  Kalow further alleged that it had not altered its computer system immediately before the software stopped working, so the software must have been intentionally designed to stop working by way of a “time-bomb” in the software.  Id.  The court held these allegations sufficient to state a claim under the CFAA and denied Commence’s motion to dismiss Kalow’s claim under that Act.

The Court then turned to the NJCFA claim. It held that to state such a claim, Kalow had to allege: 1) unlawful conduct by Commence; 2) an ascertainable loss by Kalow; and 3) a causal relationship between Commence’s unlawful conduct and Kalow’s ascertainable loss.  Under the NJCFA “when the alleged consumer fraud consists of an omission, the plaintiff must show that the defendant acted with knowledge, and intent is an essential element of the fraud.”  Id. at *3.  Kalow alleged that Commence “designed its software to fail on a predetermined date, concealed that it had designed the software to fail on that date, that the software did fail on that date, and when the software failed it proximately caused Kalow and the class members to be injured.”  Id. at *4.  The court held these allegations sufficient to allege a causal relationship between Commence’s knowing omission of the inclusion of a “time-bomb” in its software and Kalow’s ascertainable loss because Kalow asserted it would not have purchased Commence’s software if it was aware it contained a “time-bomb.”  As a result, the court denied Commence’s motion to dismiss Kalow’s NJCFA claim.

The court dismissed Kalow’s other claims, which were brought under the consumer fraud acts of other states.  The court reasoned that it could not conclude that the elements of consumer fraud in those other states mirrored the elements required to establish consumer fraud in New Jersey.  Kalow also did not allege facts establishing that other consumers made claims under any other state statute.  In conclusion, Kalow was permitted to proceed to trial on its claims that Commence violated the CFAA and the NJCFA.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

When is an idea for a television show so “substantially similar” to the idea for another that it violates copyright law?

Recently, the a Federal Court in the State of New York was asked to decide whether the Spike television show, “Pros v. Joes”, was similar enough to a proposed show called “Two Left Feet”, such that it infringed upon the copyright issued to Two Left Feet.  Castorina v. Spike Cable Networks, Inc., No. 10-2954 (March 24, 2011).
In 2004, Plaintiffs Christopher Castorina and Steven Morse (“Plaintiffs”) pitched a treatment for a television show called Two Left Feet.  That treatment proposed a show where amateur athletes would compete against professional athletes.  In 2006 after Pros v. Joes debuted on Spike, the Plaintiffs sued Spike in the United States District Court for the Eastern District of New York claiming that Pros v. Joes was so “substantially similar” to Two Left Feet that it infringed upon the copyright issued to Two Left Feet.
The Plaintiffs claimed that the two shows were similar in that: 1) each portrayed competition between professional athletes and amateur athletes; 2) the competitions were in the sports of basketball, hockey, baseball, and football; 3) each employed two judges of notably different personalities and backgrounds; 4) each had guest appearances by celebrity sports figures; and 5) each used virtually the same language to promote the shows.  The Plaintiffs took the position that “no theory of coincidence, simultaneous creation, prior common source or any explanation other than copying” could account for the similarities.  Id.
In order to establish copyright infringement, the Plaintiffs had to establish: 1) ownership of a valid copyright; and 2) copying of constituent elements of the work that were original.  Id.  To establish the second element, the Plaintiffs had to prove that Spike actually copied the Plaintiffs’ work and that the copying was illegal because “a substantial similarity exists between the defendant’s work and the protectable elements of plaintiffs’.”  Id.
At the outset, the court noted that, “the standard test for substantial similarity between two items is whether an ordinary observer, unless he set out to detect the disparities, would be disposed to overlook them, and regard [the] aesthetic appeal as the same.” (the “Ordinary Observer Test”). Id. citing Peter F. Gaito Architecture, LLC v. Simeone Development Corp., 602 F.3d 57, 63 (2d Cir. 2010).  When applying the Ordinary Observer Test, a court must ask whether “an average lay observer would recognize the alleged copy as having been appropriated from copyrighted work.”  Id. citing Gaito, 602 F.3d at 63.  The inquiry must address whether the “alleged infringer has misappropriated the original way in which the author has selected, coordinated, and arranged the elements of his or her work.”  Id.  There must be substantial similarity in the expression of ideas and not just in the ideas themselves.  “If a work ‘copies the original way in which the author has selected, coordinated, and arranged’ these unprotectable elements to such an extent that the copying work is substantially similar to the ‘expression of ideas’ and ‘total concept and overall feel’ of the copied work, infringement can occur.”  Id. citing Gaino, 602 F.3d at 66-67.
Based upon the evidence presented, the court determined that Two Left Feet consisted largely of stock concepts and Scène à faire – the concept that certain elements of a creative work are not protectable via copyright because they are mandated by or customary to the genre.  The court held that Pros v. Joes could only infringe upon Two Left Feet “if it copied the ‘original way in which the author has selected, coordinated, and arranged’ various elements to such an extent that its ‘expression of ideas’ and ‘total concept and overall feel’ was substantially similar to the Two Left Feet treatment.”  Id. citing Gaino, 602 F.3d at 66-67.
The court determined, and the Plaintiffs conceded, that the Two Left Feet treatment contained only limited original selection, coordination, and arrangement.  Plaintiffs claimed that they purposely left the treatment vague to show their “flexibility.”  Unfortunately for Plaintiffs, the court found that “the treatment’s vagueness, however intentional, also undercuts its protectability, because the less ‘specifics’ and ‘detail’ it contained, the less it uniquely and imaginatively ‘selected, coordinated and arranged’ the stock elements contained within.”  Id. citing Gaino, 602 F.3d at 66-67.  The treatment’s selection, coordination and arrangement of those stock elements were also largely inherent to a sports reality show and “not ‘original’ creative expressions of any particular idea.”  Id.
The court also pointed out numerous differences between the shows.  For example, while Two Left Feet relied heavily on the dynamic between two judges, one “good” and one “evil”, Plaintiffs did not allege that Pros v. Joes utilized a similar creative choice.  Two Left Feet also envisioned the hosts providing their subjective beliefs and acting as judges, while winners on Pros v. Joes were determined using an objective points system, such as the number of baskets scored.  Also, in Two Left Feet the amateurs competed against the professionals in the sport played by the professional.  In Pros v. Joes the contestants might compete against the professional in the professional’s sport, but with a twist – e.g.  shooting baskets from a moving conveyor belt.

In conclusion, the court held that based upon the evidence “no objective observer could conclude that Two Left Feet and Pros v. Joes share a substantially similar total concept and overall feel.”  Id.  As a result, the court granted Spike’s motion to dismiss the Plaintiffs’ complaint.

Is the State of New York’s tax on Internet transactions constitutional?

In 2008, the legislature of New York State amended its Tax Law to require out-of-state sellers to pay state taxes if they use New York residents to solicit business from other New York residents through a web site.

Under New York’s Tax Law (the “Tax Law”) an out-of-state seller is presumed to be

“soliciting business [in New York] through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of an arrangement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods ending on the last day of February, May, August, and November.”

New York Tax Law §1101(b)(8)(vi).

Two days after the amendment to the Tax Law took effect, Internet vendors, Amazon.com LLC (“Amazon”) and Overstock.com (“Overstock”), initiated separate lawsuits in New York State Court against the New York State Department of Taxation and Finance claiming that Tax Law §1101(b)(8)(vi) was unconstitutional as amended.  Amazon claimed the statute violated the Commerce, Due Process and Equal Protection Clauses of the United States Constitution.  Overstock claimed the statute violated the Commerce Clause of the United States Constitution.

In early 2009, the trial court heard the State of New York’s motions to dismiss each complaint and, in two separate orders, dismissed the lawsuits filed by Amazon and Overstock.  The trial court rejected all arguments made by Amazon and Overstock that the statute was unconstitutional.  Amazon and Overstock each appealed their respective decision to New York State’s Appellate Division, First Department.

On appeal, Amazon claimed that the statute was unconstitutional as applied because it lacked a “substantial nexus” to the State of New York.  Amazon.com, LLC v. New York State Dep’t of Taxation & Fin., 2010 N.Y.SlipOp. 07823 (1st Dep’t 2010).  Amazon also took the position that the statute violated “the Due Process Clause because, facially and as applied, it enacts an irrational and irrebuttable presumption, and is also vague.”  Id.  Lastly, Amazon argued that the statute violated the Equal Protection Clause because it specifically targeted Amazon.  Id.

On appeal, Overstock claimed that the statute violated the Commerce Clause, both on its face and as applied to Overstock, and that it violated the Due Process Clause because of its vagueness.  Id.  The Appellate Division considered the appeals by Amazon and Overstock at the same time.

When considering the facial challenges to the Tax Law, the court noted that, generally, facial challenges to a statute’s constitutionality are disfavored and that “parties challenging a duly enacted statute face the initial burden of demonstrating the statute’s invalidity ‘beyond a reasonable doubt.’”  Id. citing LaValle v. Hayden, 98 N.Y.2d 155, 161 (2002).  Courts are also required to “avoid, if possible, interpreting a presumptively valid statute in a way that will needlessly render it unconstitutional.”  Id. citing LaValle, 98 N.Y.2d at 161.

The Appellate Division determined that the test for determining whether a state tax violated the Commerce Clause developed in Matter of Moran Towing Corp. v. Urbach was applicable.  99 N.Y.2d 443 (2003).  Under that test, a tax will be upheld, 1) when the tax is applied to an activity with a substantial nexus with the taxing State; 2) is fairly apportioned; 3) does not discriminate against interstate commerce; and 4) is fairly related to services provided by the State.”  Moran Towing, 99 N.Y.2d at 449.  The challenges to the tax by Amazon and Overstock implicated only the first prong; whether the activity involved had a substantial nexus with the taxing state.

In order to find that Amazon had a substantial nexus with New York, Amazon must maintain a physical presence within that state that need not be substantial, but is more than the slightest presence.  Such a nexus “may be manifested by the presence in the taxing State of the vendor’s property or the conduct of economic activities in the taxing State performed by the vendor’s personnel or on its behalf.” Amazon.com, LLC 2010 N.Y.SlipOp. 07823.   After applying that analysis to the facts, the court held that the Tax Law did not violate the Commerce Clause.  The tax was imposed upon an out-of-state vendor “only where the vendor enters into a business-referral agreement with a New York State resident, and only when that resident receives a commission based on a sale in New York.  The statute does not target the out-of-state vendor’s sales through agents who are not New York residents.  Thus, the nexus requirement is satisfied.”  Id.

The court reasoned that New York had a legitimate basis upon which to conclude that in-state agents would engage in direct solicitation, rather than simply advertising.  The Tax Law created a presumption that the New York agent for an out-of-state vendor would solicit business in New York.  The statute provides out-of-state vendors with an “escape hatch” in that the vendor may include in its contract with the in-state agent a provision prohibiting the agent from engaging in solicitation activities in New York that would refer potential customers to the out-of-state vendor.  In that instance, the in-state agent is responsible for providing an annual certification that it has not engaged in any prohibited solicitation activities.  Based upon this reasoning, the court held that the facial challenge to the Tax Law failed because a set of circumstances existed under which the statute would be valid, i.e. when a New York agent proactively solicits business within New York which results in a sale by Amazon or Overstock and a commission to the agent.

The Appellate Division also analyzed the claim that the statutory presumption violated the Due Process Clause of the U.S. Constitution.  The court noted that the general test for assessing the validity of a presumption “is that there be a rational connection between the basic facts proven and the ultimate fact presumed.”  Id. citing County Court of Ulster Cty v. Allen, 442 U.S. 140, 165 (1979).  The test in New York is even more stringent, “the connection must assure ‘a reasonably high degree of probability’ that the presumed fact follows from those proved directly.”  Id. citing People v. Leyva, 38 N.Y.2d 160, 166 (1975).  The presumption made by the statute – that in-state solicitation occurs when an in-state agent is paid a commission on a per sale basis after a New York purchaser accesses the out-of-state vendor’s web site and “clicks” through to make a purchase on that web site – was not considered an irrational one by the court.  In fact, the court reasoned that solicitation by the in-state agent was an extremely plausible and likely way for that agent to raise revenues.  Thus, the court held that the statutory presumption did not violate the Due Process Clause.

The court also held that the Tax Law was not unconstitutionally vague on its face.  The court reasoned that the terms “or indirectly,” “or other consideration,” and “solicitation” as used in the statute were not confusing at all.  Instead, the terms were easily definable in the context of the statute’s purpose.  For example, “or indirectly” refers to the in-state agent referring a consumer to an out-of-state vendor’s web site by any manner other than a direct click, perhaps by sending that consumer an e-mail.  “Or other consideration” refers to compensation to in-state agents that is other than direct payment.  For example, a bonus program or discounts on the out-of-state vendor’s goods.  Finally, “solicitation” was not an imprecise term requiring a specific meaning when used in the context of the Tax Law.  Whether an in-state agent’s activities amount to “solicitation” may be determined using the traditional definition of the word.

Before considering the claims of Amazon and Overstock that “as applied” the statute violated the Commerce Clause, Due Process Clause and Equal Protection Clause, the court determined that those issues were ripe for resolution.  The court reasoned that the New York Department of Taxation and Finance (“DTF”) would seek to enforce the Tax Law against Amazon and Overstock.  Thus, the threat of harm to Amazon and Overstock was direct and immediate.  “Where threatened action by government is concerned, we do not require a plaintiff to expose himself to liability before bringing suit to challenge the basis for the threat – for example, the constitutionality of a law threatened to be enforced.”  Id. citing MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 128-29 (2007).

The court refused to determine whether the statute as applied to Amazon and Overstock violated either the Commerce Clause or the Due Process Clause.  The court reasoned that there was insufficient evidence in the record to make such a determination and remanded the case to the trial court for additional discovery on those claims.

Finally, the court determined that the statute as applied to Amazon did not violate the Equal Protection Clause.  First, Amazon could not establish that it was exclusively targeted as the statute also applied to Overstock.  Second, Amazon could not establish that it was treated differently than out-of-state vendors that did not maintain in-state agents like Amazon.  The court reasoned that those vendors were not similarly situated, so there was no proof that Amazon “was singled out with an ‘evil eye and an unequal hand, so as practically to make unjust and illegal discriminations between persons in similar circumstances.’”  Id. citing Bower Assoc. v. Town of Pleasant Val., 2 N.Y.3d 617, 631 (2004).

In conclusion, the court held that New York Tax Law §1101(b)(8)(vi) was constitutional on its face and did not violate the Equal Protection Clause as applied to Amazon or Overstock.  The court reinstated the complaints filed by Amazon and Overstock and ordered further discovery on the issues of whether the Tax Law violated the Commerce Clause or Due Process Clause.

Download Amazon.com, LLC v. New York State Dep’t of Taxation & Fin., 2010 N.Y.SlipOp. 07823 (1st Dep’t 2010)

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC