Designer Skin LLC v. S & L Vitamins, Inc., et al.
United States of America v. Cyberheat, Inc.
CV-05-457-TUC-DCB (D. Az., Mar. 2, 2007)
Government Can Pursue Claims Against Cyberheat For CAN-SPAM Violations Arising Act Of Emails Sent By Affiliates
Denying cross-motions for summary judgment, the Court allows the Government to pursue civil claims against defendant Cyberheat Inc. ("Cyberheat") for violation of the CAN-SPAM Act arising out of the transmission of sexually explicit emails by its affiliates that did not meet the strictures of the Act. While Cyberheat did not directly pay its affiliates to transmit such emails, it paid them "finder's fees" for subscribers their promotional activities produced - including subscribers produced by email - and provided affiliates with promotional materials that could be used - via links - in promotional emails. The court held that questions of fact as to defendant's knowledge of its affiliates' activities, and the steps defendant could or did take to prevent violations of the Act after it became aware of consumer complaints, prevented the court from determining whether Cyberheat should be held either vicariously liable for the acts of its affiliates, or to have initiated or procured the transmission of the offending emails within the meaning of the CAN-SPAM Act. The court reached this result notwithstanding the fact that Cyberheat's contracts with its affiliates contained explicit prohibitions against the transmission of emails that violate CAN-SPAM.
The court held that because it was in the business of sending sexually explicit materials over the Internet, defendant owed a duty to the public to exercise reasonable care to prevent those who did not wish to see such materials from being involuntarily exposed to such uninvited intrusions. The question of whether defendant Cyberheat met this duty was left for another day.
CAN-SPAM Regulates Sexually Explicit Emails
The CAN-SPAM Act, and various federal regulations promulgated thereunder, mandate that sexually explicit emails contain various labels and other precautions to assist those who do not wish to receive them from being exposed to their content. More particularly, 15 U.S.C. Section 7704(d), and the Adult Labeling Rule, 16 C.F.R. Section 316.4, require sexually explicit email:
Websites Can Be Held Vicariously Liable For Procuring Or Initiating The Transmission Of Promotional Emails That Violate CAN-SPAM's Strictures
One violates the Act when he "initiates" the transmission of a sexually explicit email that fails to meet the Act's strictures.
Under the Act, "initiate" "means to originate, transmit … or procure the origination or transmission of such [a] message …". 15 U.S.C. Section 7702(12). "Procure" in turn is defined in the CAN-SPAM Act as "intentionally to pay, or provide other consideration to, or induce, another person to initiate such a message on one's behalf." A defendant found guilty of violating the Act can be held liable for civil penalties amounting to up to $11,000 per email (FTC Act Section 5(m)(1)(A)) as well as permanent injunctive relief (FTC Act Section 13(b)).
Plainly, under the Act, one can be liable even if he does not directly transmit an offending email. Rather, one can violate the Act simply by procuring the transmission of such an email by a third party.
As interpreted by the Court, the Act "creates a legal obligation, a duty … [on] those who are in the business of sending sexually explicit materials over the Internet" to exercise "reasonable care … to ensure that those members of the public who do not chose to view sexually explicit materials on the Internet are not involuntarily subjected to those materials."
The Act allows those, like defendant, who are in the business of transmitting such sexually explicit materials over the Internet to be held vicariously liable for the acts of third parties who promote such activities. "[B]ased on the duty imposed by this Act, … [Cyberheat] may be vicariously liable for the foreseeable violations of its affiliates." As explained by the Court:
Cyberheat Affiliates Send Noncompliant Emails
The Court held that issues of fact precluded it from determining on the motions before it whether Cyberheat was vicariously liable for the violations of the Act committed by its affiliates.
Cyberheat is in the business of offering sexually explicit websites for consenting adults to view by subscription on the Internet. Through its "Top Bucks" program, it encourages third party affiliates to promote its websites. Such affiliates are not paid directly for their transmission of commercial email on behalf of Cyberheat. Rather, they are paid a finders' fee for each subscriber their promotional efforts produce.
Each affiliate enters into a contract with Cyberheat that expressly prohibits the violation of the CAN-SPAM Act. According to defendant, it also had an informal policy of discouraging the use of email to promote its activities. However, Cyberheat does make available to its affiliates promotional materials. Affiliates can add a link to such materials in commercial emails they send promoting defendant's sites.
The Government determined, as a result of an investigation it conducted, that Cyberheat affiliates were transmitting commercial email promoting defendant's site that did not comply with CAN-SPAM. According to the Government, 12 Cyberheat affiliates sent out a total of 642 sexually explicit emails that did not comply with CAN-SPAM. These affiliates were paid, collectively, over $200,000 by Cyberheat for the results produced by their promotional activities during a one year period. Notably, the court's decision does not state that this constituted payment for the transmission of the offending emails in question. The Government's investigation further showed that during a one year period, Cyberheat had received approximately 400 complaints from consumers concerning unwanted commercial emails they had received.
According to Cyberheat, this activity represented but a small percentage of the overall promotional activities of its affiliates. Importantly, Cyberheat claimed that it had upwards of 50,000 affiliates promoting its site. As the Government was challenging the actions of only 12 of these affiliates, Cyberheat noted, it represented only a tiny fraction of its overall promotional activities.
Issues Of Fact Concerning Knowledge And Control
The question before the court was whether Cyberheat could be held vicariously liable for the violations of CAN-SPAM committed by its affiliates. The Government claimed that it should be held liable. It argued that Cyberheat was aware, or should have been aware, of the activities of its affiliates, both via the complaints it received and otherwise, and failed to take proper steps to prevent such misconduct. Cyberheat responded by asserting that it could not control the conduct of its affiliates, as they are independent entities that act on their own. Cyberheat pointed to its contract, and the small percentage of affiliates claimed to be involved in improper activities, as evidence that it neither intended nor encouraged violations of CAN-SPAM. It also disputed the Government's assertions as to both its knowledge of the improper conduct at issue, and the actions it took to control such misconduct.
The Court held that questions of fact prevented it from resolving this question on the parties' cross-motions for summary judgment. Said the Court:
The Court accordingly denied the parties' respective cross-motions for summary judgment, allowing the Government to continue to pursue its claims.