1. You Haven’t Lawyered Up.
OK, that may be a little dramatic, but the worst case scenario is that you have a handshake deal with your co-founders. After all, we are all buds, this won’t go wrong. Even if it never goes wrong, you need to have your agreements done and done correctly. Too many times, people come see us because there is a fight about who owns what or some software or web developer claims they own a piece of the company based on a conversation at the bar. Having proper shareholder or operating agreements is not a pleasant experience because sometimes it is the equivalent of a prenuptial agreement for an engaged couple – not exactly the romantic way to start things. The old adage, however, is often true . . . you can pay me a little now to get this done right or pay me a lot later to help try and clean up the mess. Once you grant an interest in the company and it vests to the co-founder, it is his forever without the proper agreements. The co-founder decides to chase his dreams of being a professional fisherman in Cabo and you are stuck slaving away trying to create value for him. You can easily avoid this with vesting and repurchase agreements.
2. Don’t over lawyer.
I know I just told you to lawyer up, but this is the internet so I can contradict myself with impunity. If you are a sole founder without any partners and are still at the stage of trying to figure out if you have a marketable product or idea, then go to a website and set up your company on the cheap (don’t tell anyone I said that was OK). Even if you have partners, you don’t need overly-complicated documents and financing as if you were already a multi-national company. You don’t need employee handbooks and agreements, complex vesting structures, ESOPs. If you are bootstrapping, get your product on the market first and then decide whether all this other stuff will be needed. The odds that you are the next Facebook are slim – you don’t need to act as if you will be attracting millions of VC money three months from set up. If it looks like that is a possibility, it is not that expensive to put the shine on your corporate documents and structure. Don’t pay for that until you need it.
3. Protect Your IP.
Just because the Secretary of State said you could use the name and the domain name was available does not mean you are free and clear. You may be infringing on someone’s trademark. You may need to take additional steps to protect your own trademarks. The last thing you want to do is invest in product launch only to get the cease and desist letter a few months later. If you are doing this on the cheap, Google the name and several close variations. Don’t use a generic or geographic name. Do your own search on the USPTO TESS search found at www.uspto.gov. This should help you sleep a little better at night although it is not foolproof. Also, if you can’t afford to get a patent (timing is important so don’t wait too long to visit with a patent lawyer if you have truly novel product) or you are not eligible for patent protections, don’t forget about trade secrets. If you keep the secret sauce from being disclosed contractually, you may get all of the protection you need.
Is all the IP owned by the company or the individuals who created it before the company was formed? Do the contract web designers or coders own the IP? Do the founders’ prior employers have any rights to the IP? If you don’t know the answers to those questions, you need to find out–now.
4. Don’t Over Protect Your IP.
I know, I did it again. Most start-ups do not really have earth-shattering IP. If you are approaching serious investors or VC’s, you are often only going to have one shot with them. Take it. Don’t demand a non-disclosure agreement unless there is really some secret sauce worthy of protection and be prepared to explain it. Investors don’t sign blanket generic nondisclosure agreements. You can still talk about the business, what it does and protect the secret technology or algorithm. Truth be told, you are probably not the only person to think of the idea and not the only one working on it. Your job is to be first to market and be the best. Demanding nondisclosures from investors may prevent any investors from showing any interest.
5. Don’t Go Asking Everyone For Money.
Despite what you may have heard about crowdfunding, general solicitation of anyone and everyone is not legal. Even if it becomes legally acceptable, it may not be the best idea for your company. There are securities laws and they can get complicated. Before you start seeking investors, visit with counsel and do it right.
6. Don’t Turn Away Good Money.
Are you sensing a pattern? The friends and family that want to support you really want to support YOU. They will often entertain convertible notes so you don’t have to value the company early on or invest in large legal fees. Having ten friends and family invest in you (preferably accredited ones; hence the “good money”) should not turn off future investors.
7. Don’t Go Chasing Money.
I don’t know how many times I have seen the entrepreneur spending all of their time chasing money rather than improving the product. Yes, some companies thrive in a very short time frame and there is a financially rewarding exit. You read about the latest one in the newspaper, right? You read about it, because it does not happen often. It is not likely to happen to you and most investors are turned off by the entrepreneur who thinks they are going to sell off in three to five years and move on to the next thing. Unless you are someone who has already sold off a handful of start-ups for millions, investors want someone that is passionate about the project they are investing in—not someone looking for the early exit. While not exactly legal advice, this misguided mindset can cloud your legal strategies. I’ve heard numerous entrepreneurs tell me they have to be Delaware corporations because that is what the venture capital firms want. If you are good enough, your state of incorporation won’t matter and if the money is right, it is something you can fix. In the meantime, you have made your start-up costs more expensive and your administrative burden worse. Others disagree with me, but don’t let the one-in-a-million chance take you away from focusing on your product and overcomplicate matters. You don’t plan your life on winning the lottery, you should not plan your business life on winning the lottery either.
8. Get a good accountant.
A lot of the times I tell entrepreneurs to ask their accountants. Lawyers deal with risk mitigation, accountants are more attuned to tax and accounting advantages. The right accountant can help with vesting strategies and 83(b) elections. The accountant should be one the primary persons to decide whether you should form a corporation, an LLC or limited partnership and what the effect and cost of conversions down the road and the administrative cost of each is in the meantime. You have probably figured out by now that just because you read online that Silicon Valley VCs prefer Delaware corporations, it does not mean it is the right fit for you. If your company and idea are strong, you will find money. If you are told no because you are not a Delaware corporation, that is simply a cop out.
9. Get your e-commerce protections in place.
If you are primarily an e-commerce site, get your terms of service in order and make them enforceable through a click-wrap agreement. You may think many of that is boiler-plate, but when it is applied to a dispute, it very well may save your company. Make sure you are DMCA compliant so that you don’t get sued because someone violated copyrights when they posted comments to your site. Make sure you are complying with any applicable FTC or other regulations. While this sounds expensive, experienced counsel can easily spot the issues and has probably handled them before.
10. Take Your Lawyers/Accountant to Lunch.
I didn’t include this because I am hungry or lonely. It is the little-known industry secret. Lawyers have to eat lunch. I would rather eat lunch with you than by myself and it is a convenient time “off the clock” to hear about everything that is going on in the company and get the quick diagnosis. We really are interested in you and the company and enjoy these conversations without having account for every minute.
Thinking of buying your child their own laptop or smart phone? Read this first – a look at whether parents are liable for their kids’ online behavior
A Georgia seventh-grader created a fake Facebook profile that defamed a classmate, according to this Wall Street Journal story. In middle school fashion (I am not looking forward to parenting through this period), a boy created a fake Facebook profile of a female classmate, used a “Fat Face” app to alter her appearance and posted “false, profane, and ethnically offensive information” on the page.
The school found out, punished the boy with in school suspension for two weeks and told his parents. At home, the boy was grounded for a week. Despite this punishment in school, the page stayed up for 11 months before Facebook finally took it down.
The girl’s family sued claiming the parents were negligent and contributed to the girl’s suffering. Parents have money and insurance and make a better target than a seventh-grader in a lawsuit for damages. The trial court dismissed the negligence claims against the parents in a summary judgment ruling.
On appeal, the court upheld the dismissal of the claims related to the original creation of the fake profile, but wrote:
Given that the false and offensive statements remained on display, and continued to reach readers, for an additional eleven months, we conclude that a jury could find that the [parents’] negligence proximately caused some part of the injury [the girl] sustained from [the boy’s] actions (and inactions).
You can read the full opinion here.
The court noted:
During the 11 months the unauthorized profile and page could be viewed, the Athearns made no attempt to view the unauthorized page, and they took no action to determine the content of the false, profane, and ethnically offensive information that Dustin was charged with electronically distributing. They did not attempt to learn to whom Dustin had distributed the false and offensive information or whether the distribution was ongoing. They did not tell Dustin to delete the page. Furthermore, they made no attempt to determine whether the false and offensive information Dustin was charged with distributing could be corrected, deleted, or retracted.
Georgia law is similar to the law in many states — parents are not simply liable based on the parent-child relationship. Usually, there has to be some liability based on the parents’ alleged failure to supervise or control their child where there is a foreseeability of harm. Applying this standard the court wrote:
The [parents] contend that they had no reason to anticipate that [son] would engage in that conduct until after he had done so, when they received notice from the school that he had been disciplined for creating the unauthorized Facebook profile. Based on this, they contend that they cannot be held liable for negligently supervising [son]’s use of the computer and Internet account. The [parents]’ argument does not take into account that, as [son]’s parents, they continued to be responsible for supervising [son]’s use of the computer and Internet after learning that he had created the unauthorized Facebook profile.
This appears to be the first published opinion dealing with parental liability for a child’s online behavior. I have dealt with this issue at the trial court level, but usually resolve the issues rather than force minors to go through a public trial and discovery. The unfortunate aspect is the case returns to the trial court and continues. If only there were a teachable moment.
Stealing a theme from Morrison Foster’s Socially Aware blog post entitled “Forced to Cyber-Spy” about the case, when your kids complain that you don’t give them any privacy online – you can tell them that until they pay the homeowners’ premiums or the lawyers, you get to monitor their social media use.
With a couple of trials and teaching Digital Media Law this semester, I have fallen behind. Luckily, Last Week Tonight With John Oliver has been doing summaries of some of the recent hot topics on the Internet. So, let me take the short cut and have John Oliver explain the following:
If John Oliver keeps it up, I can save lots of time reading and watch an hour of television on Sunday nights instead.
As you probably read, the Texas Securities Board approved intrastate crowdfunding yesterday without limiting it to accredited investors. You can read the rules here.
For those wanting to issue equity through intrastate crowdfunding:
- Companies may raise up to $1 million per 12-month period
- Offerings must be carried out online through a registered dealer or crowdfunding portal.
- The company must be a non publicly-traded Texas entity (see below) and can only offer the securities to Texans (see below for more specifics).
- The company must have a defined business plan, investment goals and list disclosures. This means you will have to post a summary of the offering on the portal at least 21 days before any securities may be sold. The disclosures must include risk factors, a description of the issuer’s business, operations, and management, a description of the securities and other material information.
- Customary bad actor disqualifications apply.
- Non-Accredited investors may contribute up to $5,000 per offering.
- To obtain more than $5,000 from accredited investors, the company must verify the investor qualifies as “accredited.”
- Investor funds must be placed in escrow until the specified minimum offering amount has been raised.
- You are allowed to provide a limited notice about your efforts and provide a link to the portal, but you can only distribute this to investors located in Texas.
- You do not have to publish reviewed or audited financial statements unless audited financial statements are already available for any of the three years prior to the offering. Instead, the CEO can certify the financial statements are accurate and complete as of the date of the offering.
With regard to the portals:
- Fill out a Form 133.17 with the State Securities Board, complete a background check and pay the registration fee for securities dealers in Texas registering as a restricted dealer.
- You are not required to pass the General Securities Registered Representative (Series 7) Exam or the Uniform Securities Act State Law (Series G5) Exam.
- You have to limit access and trading activity to Texas.
- The portal must confirm residency before allowing access by the investor. The portal also has to conduct background and regulatory checks for bad actor compliance.
- You cannot offer investment advice, manage investor funds, or facilitate secondary market transactions, along with other restrictions.
- You will be required to maintain certain records for five years and you will have post-registration reporting requirements and renewal fees.
- All communications between the investors and the company raising the money must take place on open forums on the portal.
Now, for those that like to dig into the details, intrastate crowdfunding in Texas is made possible because Section 3(a)(11) of the Securities Act of 1933 exempts from federal registration securities offered and sold only to persons within a single state or territory, in which the issuer is also a resident.
To issue stock as a Texas entity, you must:
- be organized in and have your principal place of business in Texas;
- have at least 80% of your gross revenues during the most recent fiscal year prior to the offering be derived from the operation of business in Texas;
- have at least 80% of the your assets at the end of its most recent semiannual period prior to the offering located in Texas; and
- use at least 80% of the net proceeds of the offering for your operations in Texas.
To invest, you must be a Texas resident which means, you must be:
- A corporation, partnership, trust or other form of business organization with its principal office in Texas.
- An individual who, at the time of the offer and sale, has her principal residence in Texas.
- If an entity is set up for the specific purpose of buying the stock, all of the beneficial owners have to be residents of Texas.
We will follow up with a more thorough analysis of this method as we digest the new rules.
Former FTC Regional Director and Court of Appeals Justice Answers What To Do When the FTC Investigates
We like to give you information that helps you stay off the radar of the Federal Trade Commission with posts like this, this, this, this, this and this. But, what do you do if the FTC does investigate? I asked newly-minted Gray Reed & McGraw shareholder Justice Jim Moseley to help us answer some questions. Before serving on the Texas Court of Appeals in Dallas, Justice Moseley was the Regional Director of the FTC’s Dallas Regional Office during the Reagan Administration.
Q: When and in what capacity does the FTC investigate?
A: The FTC has enforcement authority under 70 different statutes and federal rules. Many of its investigations are brought under the broad powers of Section 5 of the FTC Act which declares unlawful “unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(1). Its trade regulation rules attempt to set forth what it considers to be “unfair or deceptive” in the context of a particular industry or particular type of consumer transaction. In addition, the FTC is the primary enforcement arm responsible for privacy and false advertising.
FTC investigations are usually triggered by complaints from a consumer or from a competitor. The FTC may start an informal investigation by sending an “access letter” which is a non-enforceable voluntary request for information. However, it may also conduct a more formal investigation through the issuance of a “Civil Investigative Demand” or CID.
Q: What should a company do if the FTC investigates?
A: Although a response to an access letter is voluntary, if you refuse to cooperate the FTC is likely to follow up with a CID. The CID is a judicially enforceable request for information much like a subpoena that you cannot ignore.
The first thing you should do is carefully read the demand and make sure you preserve your records on the topic of inquiry. You are likely to get in more trouble if you attempt to hide or conceal evidence related to the investigation. Special rules also apply to preserving electronically stored information (ESI). Make sure your information technology personnel properly maintain the necessary ESI and revise any regular document or data retention procedures as necessary.
Next, you need to note the deadlines of compliance and consider contacting qualified experienced counsel immediately. Now is not the time to attempt to save a few dollars.
Q: What are my options?
A: Most of the investigations will require you to produce documents and will often request a meeting with FTC personnel. Normally, the most prudent course is to cooperate. You do, however, have the option to try and limit the scope of the inquiry or quash the CID in its entirety. Your ability to seek court intervention is often on a deadline, so you should not delay.
You are usually better off opening up a dialogue with the FTC to try and limit the scope and the scope of the CID if it is burdensome. You can often learn more about their concerns and better address the FTC’s concerns by keeping open the lines of communications. The FTC will often work with you to limit the parameters of the production or give you more time when the circumstances call for it. Likewise, if something comes up that causes a delay on your part, it is better to tell them in advance than leave them surprised and suspicious.
Although you are providing documents to a governmental entity, they will be treated as confidential and not subject to a FOIA request. They can and will be used against you, however. Someone from your company will usually also be asked to sign off on a certification of some kind that should be read carefully to avoid creating any personal liability that may not otherwise be there. Finally, read the requests carefully and only produce what is being requested. There is no need to give them additional fodder that may only open new lines of inquiry. Then, you usually have to sit and wait for the FTC to review the materials and get back with you.
Q: What are my risks?
A: You can usually identify the FTC’s concerns in the CID or in follow-up communications to determine the law or regulation the FTC is pressing. When evaluating whether a representation is deceptive under Section 5(a) of the FTC Act, for example, the FTC generally looks at three issues: (1) whether the respondent disseminated the representations alleged; (2) whether those representations were false or misleading; and (3) whether those representations are material to prospective consumers.
The FTC has broad authority to act against what it perceives to be deceptive practices under Section 5(a) of the FTC Act. The FTC also has broad discretion in determining whether a proceeding brought by it is in the public interest. The FTC has equally wide discretion in its choice of a remedy in addressing unlawful practices which can include injunctions, compliance orders and monetary damages.
Q: What is the procedure?
A: If the FTC staff concludes there has been a violation, it will usually push first for a “consent order” in which the company agrees to stop the harmful conduct and to pay consumer redress in the form of fines or civil penalties. If no agreement can be reached, the FTC staff will ask the Commission itself to start a formal proceeding before an administrative law judge; this procedure is similar to a trial before a judge.
If the administrative law judge rules in favor of the FTC, a “cease-and-desist order” is usually issued. The company can appeal an adverse decision by the judge to the full Commission. If either party is not satisfied with the outcome at that level, it can appeal the Commission’s decision in the federal courts. In cases where the FTC believes the respondent knew or should have known the conduct was “dishonest or fraudulent,” the FTC may follow up the administrative proceeding by asking a federal court to order consumer redress, such as an order to pay monetary restitution to victims of the violation.
The FTC also has the ability to go straight to a federal court to seek an immediate order to stop ongoing consumer fraud and to seek to freeze the assets of the defendant. The FTC will often seek to hold individuals financially responsible for any egregious acts.
Law360 reported that two competing DUI defense lawyers are fighting over the domain name www.dontblow.com (article here, but subscription required). Well-known DUI attorney Tyler Flood is the plaintiff. He has been using the domain name www.DoNotBlow.com for almost a decade. Mark Hull started using the similar domain name in 2011 which prompted the suit.
You can see Flood’s trademark here:
Flood has sued for trademark infringement, false designation of origin, unfair competition, injury to business reputation and dilution, cyberpiracy and unjust enrichment.
Domain Name Disputes
Focusing on the domain name, a plaintiff has two choices to challenge the use of a similar domain name by someone else–file a UDRP complaint or file an Anti-Cybersquatting Consumer Protection Act lawsuit.
The UDRP is an online process that is decided on the papers without discovery or live testimony. As the holder of a domain, you are required to submit to a “mandatory administrative proceeding” to determine rights to the domain. Regardless of whether you participate, your domain registrar must enforce the decision of UDRP Panel. If either side elects to go to court instead, the UDRP proceedings are usually put on hold.
To prevail in a UDRP claim, you must prove: (1) you have a trademark right that is identical or confusingly similar to the domain of the infringer; (2) that the infringer has no legitimate interest in the domain name; and (3) and that the person is using the name in bad faith.
If litigation through the courts makes more sense, then you should pursue your claim under the Anti-Cybersquatting Consumer Protection Act (“ACPA”) which is codified at 15 U.S.C. § 1125(d). To prevail under the ACPA, you must show the infringer (1) has a bad faith intent to profit from a domain name; and (2) registers, uses or traffics in a domain name that is identical, confusingly similar or dilutes your mark. Under the ACPA, the trademark does not have to be registered, but must: (1) be distinctive at the time of the registration of the domain name; or (2) is famous at the time of registration. Violators can be fined between $1,000 to $100,000 per wrongly used domain name. A successful plaintiff can also recover lost profits, the profits of the violator and court costs.
The immediate defense that jumps out is whether “DoNotBlow.com” is too generic to deserve trademark protection. In UDRP complaints, you usually ignore the .”com” part. Flood may have to show that the full phrase “DoNotBlow.com” has acquired a distinctive secondary meaning apart from its original meaning that identifies his particular services.
On the other hand, “Do Not Blow” does not generally describe legal services, so it has a better chance surviving a challenge than, say, “DUIDefenselawyer.com” on a generic basis.
It will be an interesting case to watch like we did when lawyers in Wisconsin fought over the bidding on competitor’s name to trigger Google ads.
Texas High Court Rules Improper Photography Law Unconsitutional; Or, Why You Care a Creepy Dude Is Not Guilty
The Texas Court of Criminal Appeals ruled in a 8-1 decision yesterday that the “Improper Photography and Visual Recording Act” is facially unconstitutional. The case involved a guy who allegedly took pictures of kids at a water park. You can read more here.
Before you say, you are not a creepy person taking pictures of random kids and therefore don’t agree or don’t care, if you believe photography is art protected by the First Amendment, you should care.
The Facts of the Case
The law provides, in relevant part:
A person commits an offense if the person:
(1) photographs or by videotape or other electronic means records . . . a visual image of another at a location that is not a bathroom or private dressing room:
(A) without the other person’s consent; and
(B) with intent to arouse or gratify the sexual desire of any person.
Ronald Thompson was charged with twenty-six counts. Each count of the indictment alleges that appellant, “with intent to arouse or gratify the sexual desire of THE DEFENDANT, did by electronic means record another . . . at a location that was not a bathroom or private dressing room.”
We can all agree — creepy.
The first issue the court wrestled with was whether photography was conduct (subject to regulations) or speech protected by the First Amendment like other forms of art. The court found that pictures, even bad ones, are expressive and therefore are subject to First Amendment scrutiny. The court continued, “the process of creating the end product cannot reasonably be separated from the end product for First Amendment purposes” so the act of taking picture is also subject to First Amendment scrutiny.
The state reasoned, however, that the law regulates intent and therefore, even if considered speech, it can be regulated just like incitements to riot, threats or scams. The court responded:
Sexual expression which is indecent but not obscene is protected by the First Amendment . . . Of course, the statute at issue here does not require that the photographs or visual recordings be obscene, be child pornography, or even be depictions of nudity, nor does the statute require the intent to produce photographs or visual recordings of that nature. Banning otherwise protected expression on the basis that it produces sexual arousal or gratification is the regulation of protected thought, and such a regulation is outside the government’s power.
The court then found the law “penalizes only a subset of non-consensual image and video producing activity—that which is done with the intent to arouse or gratify sexual desire” meaning it was a content-based regulation. As I can hopefully teach my Media Law students (hint for the test), when there is a content-based law, it is subject to a strict scrutiny analysis which means a regulation of expression may be upheld only if it is narrowly drawn to serve a compelling government interest. A regulation is “narrowly drawn” if it uses the least restrictive means of achieving the government interest.
Like most other laws subject to a strict scrutiny test, this one failed, too. It was not narrowly drawn.
Although well-intentioned, the law simply covered too much. This law would allow a police officer to ask every photographer taking pictures of people in the public what their intent was. If I was taking pictures of my kids at the park, the police could ask me why. If I am doing it to show how nice my city is, I am OK. If I am doing it because I am creepy, it is against the law.
As the court noted:
The statutory provision at issue is extremely broad, applying to any non-consensual photograph, occurring anywhere, as long as the actor has an intent to arouse or gratify sexual desire. This statute could easily be applied to an entertainment reporter who takes a photograph of an attractive celebrity on a public street.
Having the police govern the intent of our photographs is not sustainable.
I am guessing our readers are not going to run out now and start taking creepy pictures because of this ruling. But, it is comforting to know photographs are protected speech, the taking of photographs is subject to First Amendment analysis and the government does not have the right to ask me why I am taking pictures of people in public places.
With that said, we may not be thrilled this about this guy. If he crosses the line, he could still get in trouble for child pornography, invasion of privacy, unauthorized use of likeness or other wrongs if he actually harmed any of the people he photographed or used them commercially.
Our Constitutional protections, however, often protect the people on the edges so the rest of us know we are secure. Although the police may not be able to ask his intentions, if this guy is taping kids my kids at the park, I still can.
You can read the opinion here.
On Friday, the Supreme Court of Texas issued a 5-4 decision holding a plaintiff needs to establish jurisdiction over an anonymous blogger before a court will allow pre-suit discovery that would likely unmask the blogger’s identity. Both the majority and dissenting opinions in In re John Doe a/k/a The Trooper are available here. It will certainly complicate the process of suing anonymous online defamers.
An anonymous blogger who went by “the Trooper” went after Reynolds & Reynolds Co. and its chairman. As we often recommend, the the company sought a pre-suit deposition from Google to try and identify the blogger. The application was filed in Harris County, where the chairman resided.
In Texas, Rule 202 allows for a presuit deposition to determine whether you want to investigate possible claims. It is cheaper and more efficient than filing a lawsuit. The application to do this must be filed in the “proper court.” You have to serve the petition on the company you want the discovery from (in this case Google) and the party who is the subject of the possible suit (in this case the Trooper). The company did just that. Google was unopposed. The Trooper fought the discovery on a John Doe basis and argued he was not subject to jurisdiction in Texas and therefore the request was not filed in the “proper court.”
Jurisdiction means the subject of the suit must have some connection to state where the lawsuit has been filed. For example, if you’ve never been to North Dakota, it would be a violation of your due process rights to be dragged into a lawsuit there. The blogger argued he has no connection to Texas other than the fact his blog is viewable in Texas.
The trial court was going to allow the discovery, but the Texas Supreme Court reversed. The majority wrote:
To allow discovery of a potential claim against a defendant over which the court would not have personal jurisdiction denies him the protection Texas procedure would otherwise afford. . . . [A] defendant who files a special appearance in a suit is entitled to have the issue of personal jurisdiction heard and decided before any other matter. . . . To allow witnesses in a potential suit to be deposed more extensively than would be permitted if the suit were actually filed would circumvent the protections. . .”
The court continued:
The Trooper cannot ignore this Rule 202 proceeding without losing his claimed First Amendment right to anonymity. By ordering discovery from Google, the court has adjudicated that claim. He has thus been forced to litigate the merits of an important issue before a court that has not been shown to have personal jurisdiction over him.
The problem with the ruling is that it will make it very difficult to unmask people online when you do not know their identity. If the anonymous blogger does not have to at least reveal their state of residence, where is a defamation victim to go? Four justices of the all-Republican Supreme Court dissented because “the Court requires a premature and impossible showing, in the process allowing an alleged tortfeasor to hide behind his anonymity regardless of whether the First Amendment allows it.”
The dissent explained:
In today’s case, involving the permissible scope of pre-suit discovery in Texas, the Court holds that the applicable procedural rule requires that personal jurisdiction be established over an anticipated defendant—even when that defendant’s identity is withheld—before such discovery may be granted. And it does so despite the fact that it would be impossible for a court to make the required minimum-contacts determination with respect to a potential party who refuses to reveal the jurisdictional facts (such as identity and domicile) that form the basis for that decision. This effectively abolishes a cause of action for defamation against a person who claims anonymity, particularly when the defamation occurs online.
In the context of an actual lawsuit, as opposed to a petition for pre-suit discovery, a defendant who claims they are not subject to jurisdiction is still subject to the discovery process. The plaintiff can send discovery forcing the defendant to identify all of the defendant’s contacts with Texas generally and with regard to the specific incident. Yet, in this case, it appears the anonymous blogger simply provided an affidavit that he had no contacts with Texas and there was no opportunity to dig further. The dissent recognized this conundrum.
[A] court cannot conduct a minimum-contacts analysis while wearing a blindfold; when a party chooses to remain anonymous, a court is powerless to evaluate his connection to the forum state. Several federal district courts have noted as much, in the context of copyright infringement cases, when denying motions to quash subpoenas issued to Internet service providers to ascertain the identity of anonymous defendants.
My two cents
From just reading the opinions, it is hard to tell how much information, if any, the anonymous poster provided other than a statement that he did not have any connection with Texas. It seems to me there are sufficient safeguards in place that require at least some connection with the State before the discovery would be allowed — the victim of the defamation was in Texas which, in some circumstances, can be enough to establish jurisdiction for the actual lawsuit. As the dissent points out, there are already tests in place to make sure the plaintiff has a valid complaint before the courts will allow discovery about an anonymous speaker.
Without some relief, what is the victim to do? Where does he go to get the information he needs? Or, does he have to file a suit and follow the more formal and expensive process? The rules do not allow lawyers to file suits unless we have done a good faith investigation of the facts and law. Hence, the reason for presuit discovery.
Alas, all is not necessarily lost. As pointed out by Strasburger’s Debra L. Innocenti, victims can still use out-of-court cyber-sleuths to help identify the defamer. We are staunch defenders of the First Amendment, but we have been around long enough to know there is abuse of the ease with which someone can superficially damage people anonymously on the Internet, whether it be defamation, a competitor or a jilted ex. The court has now taken away a standard tactic that helps people get redress when warranted.
The Supreme Court of Texas Rules Injunctions for Defamation Not Proper and Requires Proof of Damages
On Friday, the Supreme Court of Texas issued two important defamation rulings. The first, Kinney v. Barnes, held that injunctions to prohibit defamatory speech do not pass constitutional muster. The second, Burbage v. Burbage Funeral Home, raises the bar on the recovery of compensatory damages.
Injunctions preventing speech are an unconstitutional prior restraint
In Kinney, the plaintiff sought a permanent injunction preventing the defendant from further making further defamatory statements and making the defendant remove defamatory statements. Texas courts had already ruled temporary injunctions preventing additional defamatory statements were unconstitutional prior restraints of free speech.
The Supreme Court of Texas clarified: “We hold that, while a permanent injunction requiring the removal of posted speech that has been adjudicated defamatory is not a prior restraint, an injunction prohibiting future speech based on that adjudication impermissibly threatens to sweep protected speech into its prohibition and is an unconstitutional infringement on Texans’ free-speech rights under Article I, Section 8 of the Texas Constitution.”
Certain injunctions against obscenity or illegal commercial speech are still permitted, but defamation, alone, cannot support an injunction. Because it is a prior restraint, an injunction would only be allowed “when essential to the avoidance of an impending danger . . . and only when it is the least restrictive means of preventing the harm.” Preventing defamation, which can be subject to damages, does not satisfy that test.
You can read the case here – Kinney v. Barnes
What are appropriate damages?
Burbage, meanwhile, involved a messy interfamily squabble where one family member accused the other of engaging in elderly abuse against the matriarch. The jury awarded the individual defendant $6,552,000: $250,000 for past injury to reputation; $2,500,000 for future injury to reputation; $1,000 for past mental anguish; $1,000 for future mental anguish; and $3,800,000 in exemplary damages.
The jury awarded the family-run funeral home $3,050,000: $50,000 for past injury to reputation; $1,000,000 for future injury to reputation; and $2,000,000 in exemplary damages.
The court opined: “Texas law presumes that defamatory per se statements cause reputational harm and entitle a plaintiff to general damages such as loss of reputation and mental anguish. But this presumption yields only nominal damages. Beyond nominal damages, we review presumed damages for evidentiary support.”
Reviewing the evidence, the court noted there was a lot of speculation about the impact the defamatory statements would have on the business. Speculative evidence is not sufficient. The court also drew the distinctions between special damages, nominal damages, reputational damages, economic damages and their interplay with defamation and business disparagement.
In conclusion, the court wrote, “[t]he evidence does not show actual loss of reputation, that anyone believed the defamation, that the Burbage Funeral Home suffered an actual loss, or even the funeral home’s actual value. On the record here, we hold that no evidence supports the jury’s award of $3.8 million in actual damages.”
As a result, the court determined there was no actual damages. With no actual damages, there could be no exemplary damages. Therefore, the plaintiff got nothing other than a piece of paper confirming he was defamed. Honor can be expensive.
Here is the opinion – Burbage
A Houston area woman has sued Facebook asking for $123 million because Facebook was slow to take down a fake a profile created by her ex-boyfriend with pornographic images.
You can see the story here
The plaintiff sued Facebook and the ex-boyfriend for negligence, breach of contract, gross negligence, intentional infliction of emotional distress, invasion of privacy and defamation. The request for $123 million is based on $.10 for every Facebook user. You can read the amended petition here–Ali v. Facebook petition.
My guess is this case will likely be removed to federal court (both defendants are out of state) and then summarily dismissed as to Facebook. As regular readers should know by now, website operators like Facebook are not liable for the content created by others under the Section 230 of the Communications Decency Act. It provides that “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” This federal law preempts any state laws to the contrary: “[n]o cause of action may be brought and no liability may be imposed under any State or local law that is inconsistent with this section.”
Although sympathetic to the plight of the plaintiff, Section 230 unquestionably (and may result in sanctions against the plaintiff) immunizes Facebook from the negligence, invasion of privacy, intentional infliction of emotional distress and defamation claims.
It appears the plaintiff is heavily relying upon the fact it took Facebook a long time to take the fake profile down. Facebook’s community guidelines do prohibit fake profiles. Facebook says it will take down posts and profiles in violation of the guidelines, but it never contractually commits to the users it will quickly police the site. In fact, Facebook expressly says it will not guarantee an expedient removal stating:
If you see something on Facebook that you believe violates our terms, you should report it to us. Please keep in mind that reporting a piece of content does not guarantee that it will be removed from the site.
It is therefore questionable whether there is any contractual obligation on Facebook to take down offensive or fake profiles. Regardless, most courts do not allow plaintiffs to artfully plead around the Communications Decency Act and have poured out similar breach of contract claims.