Kate bluebonnets

It’s Spring in Texas which means one of two things – the bluebonnets are out and in odd years, our legislature is back at work.  One makes me grateful to be in Texas and the other only meets every other year.  Here are a few bills we are watching this session:

Service of Process Via Social Media- HB 241

The Legislature is making another effort on this.

The bill provides:

Sec. 17.032.  SUBSTITUTED SERVICE THROUGH SOCIAL MEDIA PRESENCE.
(a)  If substituted service of citation is authorized under the Texas Rules of Civil Procedure, the court, in accordance with the rules adopted by the supreme court under Subsection (b), may prescribe as a method of service an electronic communication sent to the defendant through a social media presence.

(b)  The supreme court shall adopt rules to provide for the substituted service of citation by an electronic communication sent to a defendant through a social media presence.

It looks like the bill stalled in committee.

Codifying a fair reporting privilege – SB 627

The Legislature continues to show its disdain for defamation suits.  This time, they are considering a bill that would codify a sometimes-recognized common law fair reporting privilege.  The privilege allows for a fair reporting of public records and allegations as long as done in good faith.  It looks like this one may become law.

The bill provides:

(b)  This section applies to:

(1)  a fair, true, and impartial account of:

(A)  a judicial proceeding, unless the court has prohibited publication of a matter because in its judgment the interests of justice demand that the matter not be published; (B)  an official proceeding, other than a judicial  proceeding, to administer the law; (C)  an executive or legislative proceeding (including a proceeding of a legislative committee), a proceeding in or before a managing board of an educational or eleemosynary institution supported from the public revenue, of the governing body of a city or town, of a county commissioners court, and of a public school board or a report of or debate and statements made in any of those proceedings; or (D)  the proceedings of a public meeting dealing with a public purpose, including statements and discussion at the meeting or other matters of public concern occurring at the meeting; [and]

(2)  publication of allegations made by a third party regarding matters of public concern, regardless of the truth or falsity of the allegations; and

(3)  reasonable and fair comment on or criticism of an official act of a public official or other matter of public concern published for general information.

(c)  This section does not abrogate or lessen any other defense, remedy, immunity, or privilege available under other constitutional, statutory, case, or common law or rule provisions.

(d)  This section shall be construed liberally to effectuate its purpose and intent fully.

Civil Penalties for Frivolous Patent Claims – SB 1457

This bill also looks like it might be headed for passage.  The pertinent part of the bill states:

       Sec. 17.952.  BAD FAITH CLAIM OF PATENT INFRINGEMENT PROHIBITED.

(a)  A person may not send to an end user located or doing business in this state a written or electronic communication that is a bad faith claim of patent infringement.

(b)  A communication is a bad faith claim of patent infringement if the communication includes a claim that the end user or a person affiliated with the end user has infringed a patent and is liable for that infringement and:

(1)  the communication falsely states that the sender has filed a lawsuit in connection with the claim;

(2)  the claim is objectively baseless because:

(A)  the sender or a person the sender represents does not have a current right to license the patent to or enforce the patent against the end user; (B)  the patent has been held invalid or unenforceable in a final judgment or administrative decision; or (C)  the infringing activity alleged in the communication occurred after the patent expired; or

(3)  the communication is likely to materially mislead a reasonable end user because the communication does not contain information sufficient to inform the end user of:

(A)  the identity of the person asserting the claim; (B)  the patent that is alleged to have been infringed; and (C)  at least one product, service, or technology obtained by the end user that is alleged to infringe the patent or the activity of the end user that is alleged to infringe the patent.

The bill only allows for enforcement by the Attorney General and not private litigants.

We will keep on eye on these any other bills of note.

I wrote an article for the Bloomberg BNA Social Media Law & Policy Report entitled “How to Enforce Terms of Service for Online Social Media Promotions and Contests.”  We tried to squeeze in a few more keywords.  The full article is available at the link below.

Bloomberg BNA Social Media Law & Policy Report – WorkSite Acrobat Integration

In part one, we discussed how fair use may apply to the media’s use of social media images.  In part two, we looked at how the various sites’ terms of service come into play.  Today, we look at the one prominent case in this area and describe some best practices.

 The Agence France-Presse Twitter Case

There is just one well-known case involving the media’s use of social media images.  Agence France-Press and the Washington Post both used images of the Haitian earthquake put on Twitter by photographer Daniel Morel.  A judge rejected AFP’s argument that it could use the images because they were put up on Twitter.  The Twitter terms of service did not provide that the photographer gave his rights in the images away or grant anyone else the right to use the images outside of Twitter.  After denying AFP’s motion for summary judgment, the case, as far as I can tell, is still pending.

Best Practice

1.   Make sure it’s legit

It’s easy to get duped.  Jimmy Kimmel showed us that.  This is more a producer/editorial function rather than legal, but it’s worth noting here.

2.    Get permission

The good news about social media is that it makes it easy for you to reach out to ask permission.  You don’t need any magic language and you don’t need a lawyer to draft anything for you.  Send the person who posted the image – “Hi, I’m the producer, we are considering using this image.  Did you take it and would you mind if we used on the news?” It is not uncommon for there to be a small payment, but most amateurs won’t ask.

3.     Make sure you have permission from the right person

In the AFP case, AFP did reach out and tried to get a license to use the images.  They just did not get them from Morel — the actual photographer.  The AFP staffer saw the images on Twitter and reached to the account where the staffer saw them.  Unfortunately, that person had already lifted them from Morel’s account.  AFP then distributed the images to Getty and Morel was not pleased.   You can read more about the facts of the case here.  For those of you who want some more legal beef on the case, check out Professor Goldman’s post here.

4.     Don’t make promises in your request or box yourself in

Because of fair use, you don’t have to ask for permission.  Even if they say no, you might be able to use it.  Therefore, don’t send a message that implies you are only going to use it if you obtain their permission or suggests that you have to have it.  My example above would be fine.  Sending a message that says: “We have to hear from you soon to know whether we have your permission” implies it’s a requirement and could be used against you if there is a trial later.

5.     Attribution

If you are unable to get permission, then you should at least provide attribution.  Many amateurs would be satisfied with a little notoriety from the attribution.  Attribution won’t get you out of a lawsuit if they get mad, but it may help show you were acting in good faith or alleviate any anger so the person reconsiders whether they really want to file a lawsuit.

The Poynter Institute’s Adam Hochberg wrote an article titled “Twitpic, Flikr Use by Eyewitnesses Raises Questions for News Orgs About Image Rights, Compensation” that includes a good discussion of these issues.  According to the article, the Associated Press requires editors to contact all “citizen photos” and verify each image for both authentication and permission.  The article provides several ideas for an image policy and some of the issues involved.

What is the real harm?

The main point of this series has been to avoid any liability and provide some guidance and good practices.  I am not saying the minimal likely harm should be part of the decision-making process as to whether you violate a copyright.  When dealing with fair use, there is risk, but it is usually not a huge risk.  Assuming it is a close call (and you are not scooping or stealing some paparazzi images of the Royal Baby), you are likely looking at having to pay either actual damages or statutory damages.  The actual damages could be the market rate for the license to use the image.  The statutory damages, on the other hand, are between $750 and $30,000 per work.  If the fair use analysis is a close call and you use best practices, you are likely to be on the lower end of the statutory damages.  In the AFP case, the court ruled he damages would be assessed on each image used by AFP and not on each time it was subsequently downloaded or used after AFP sent it to Getty.  Whether you multiply $5,000 times 8 or 8,000 makes a huge difference.

If you mess it up, your biggest liability is likely going to be the bad P.R. and your legal bill.

Last time, we looked at whether the media can use images from social media sites applying fair use to several typical situations.  Today, we look at the specific terms of service of various popular sites to see if some make it easier than others for the media to use images.

Facebook:

Plain English:  Each user allows Facebook, and only Facebook, to do what it wants with the images subject to the privacy settings.   It gives no others any rights through its terms.  Facebook could sublicense to the image to you, but I have not heard of this being done for the purpose of news reporting.  As we discussed last time, the fact that someone puts up the image for the world to see can help with the fair use argument.

Twitter:

In plain English:  The same as Facebook.  Interestingly, Twitter includes a “Tip” section where it says:  “This license is you authorizing us to make your Tweets available to the rest of the world and to let others do the same.”  There is certainly no issue retweeting images and posts, but the “tip” seems to be more broad because it would allow the media to repost images and posts off of the Twitter platform.  The Twitter terms do not expressly allow that, but this language could help argue it does.

Twitter also reserves the right to sublicense whatever is provided, specifically allowing Twitter to make it available to other media and platforms without any compensation to the user.  The tip says:  “Twitter has an evolving set of rules for how ecosystem partners can interact with your Content. These rules exist to enable an open ecosystem with your rights in mind. But what’s yours is yours – you own your Content (and your photos are part of that Content).”

While this is certainly not a green light to re-use images from Twitter, it could help a media outlet argue fair use.

LinkedIn

Plain English:  The terms contemplate that your images on LinkedIn may be copied, but they do not expressly allow it.  The terms warn “[a]ny information you submit to us is at your own risk of loss.”

Pinterest

Plain English:  The site had its own copyright issues in the past.  It tries to make it clear that anything a user submits is meant to be shared as much as possible.  The terms say: “You grant Pinterest and its users a non-exclusive, royalty-free, transferable, sublicensable, worldwide license to use, store, display, reproduce, re-pin, modify, create derivative works, perform, and distribute your User Content on Pinterest solely for the purposes of operating, developing, providing, and using the Pinterest Products.”  This means they want you to share what you find on Pinterest, but only share it on Pinterest — not the front page or the 5:00 news.  

Pinterest has a section called “More simply put” that says “if you post your content on Pinterest, it still belongs to you but we can show it to people and others can re-pin it.”

Vine

Plain English:  Vine is allowed to sublicense content, but there is nothing that allows the general public to do whatever it wants with the videos.

Instagram

Plain English:  Instagram may sublicense the images, but there is nothing in these terms that would specifically allow the media to use the images.

Up Next

In our conclusion of this series, we will discuss a couple of cases and talk about the best practices.

 

The answer is one that frustrates people the most — it depends.  In most circumstances, you run the risk of violating the copyright of the person who took the picture, so the best practice is to seek permission first (more on that in part 3).  But, let’s assume you can’t get permission — after all, you are on a deadline.  So, let’s look at three different scenarios and the “fair use doctrine.”

The Fair Use Doctrine 

The most common response you hear from the journalist is that I’m a reporter so I can use these pictures as a “fair use.”*  Fair use is an affirmative defense to a copyright violation meaning, it is the media’s burden to prove the use was fair.  The Copyright Act specifically lists “news reporting” as an example of what could be fair use.  The Supreme Court, in the one case where it looked at the news reporting fair use angle, ruled that Congress’s inclusion of “news reporting” gives the media a good argument, but there is no presumption that it will always prevail.

Fair use is a factually-specific inquiry and there is no bright line test.  Courts consider these four factors:

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;

For most commercial news gathering sites and stations, the courts find they are engaged in commercial endeavors – you sell advertising.  The media usually loses this argument.

(2) the nature of the copyrighted work;

Was this a professional photographer taking pictures to sell to the public or is this a less “artistic” photo already being freely shared with the public?  Most likely, if the photograph is being used for news and it is a simple Facebook photo, this factor will weigh in favor of the media.  The issue of whether the image, in and of itself, is newsworthy also comes into play.

(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and

This is more applicable to excerpts of videos, books and music and is usually considered a wash when dealing with images.

(4) the effect of the use upon the potential market for or value of the copyrighted work.

This is why you may have heard that as long as it is an amateur’s photo you can take it. That may help you with this factor, but this fact alone will not give you the green light.

The Picture of the Non-Celebrity

Neither a scandalous teacher nor, alas, a lottery winner

The local schoolteacher is caught in a scandal with a student.  Or, let’s be positive for once, the local man wins the lottery.  You need a picture of the person so you turn to Facebook or LinkedIn.  Why not just grab it? After all, they put it on the site for the world to see.

First, you want to check the terms of service from the social media site where you found the image (that’s #2 in this series).  I am not aware of a case where an average citizen has sued the media (as opposed to the school district for using an image in an what not to do presentation) for using their Facebook picture.  This is good and bad in that no one has ever ruled you should not use the image, but no one has said it is 100% OK either.

Assuming the license from the social media platform’s terms of service do not give the general public the right to do whatever they want with the image, you should go through the fair use analysis.

Fair Use Factor 1:  Media outlets that take advertising are engaged in commercial activities although the primary goal may be to educate the pubic.  Unless, you are a public interest group or non-profit, you are likely going to come out on the wrong side with this factor.

Fair Use Factor 2:   The more the image itself is newsworthy, the more likely the media will be able to use it.  If the image is one of the teacher with the student that is subject of the scandal, then that image is newsworthy and more likely a fair use.  If the picture shows the subject engaged in the activity related to the story, then it is more likely a fair use.  Also, the further away your purpose of using the image is from the original purpose of the image, the more likely you can use it.  For example, in cases where images from a brochure were used in a news story about Oliver North and his new endeavor and nude modeling pictures of a pageant winner distributed prior to her win were both considered fair use because, in part, the media’s use was different from the original purpose and the images were newsworthy.

Fair Use Factor 3:  This issue is usually a wash because still images require, for the most part, use of the whole thing or at least the key part of it.   The media may be able to say they only used one image out of a large portfolio or album from a social media profile, but this argument has not been made in court to my knowledge.

Fair Use Factor 4:  If the image is from a professional or a free lancer, you are going to lose this battle.  For example, a local Los Angeles station used video of a beating shot by an independent journalist without permission destroying that independent journalist’s ability to license the video for money.  Would the same apply to a Facebook image?  If we are talking about the typical profile picture, usually put up by amateurs for as wide dissemination as possible without any thought to the market value, then the media would probably prevail with this part of the argument.  If the scandal-ridden teacher has pictures  of her and the student she is not able to immediately hide, she could make an argument that because of new events, there is a market for the now sought-after pictures that she could provide on an exclusive basis.  On the flip side, someone probably has access to them ruining any “exclusive” commercial value.

As you have probably figured out by now, there are a lot of factors that go into the analysis and you would be foolhardy to have a hard and fast rule.  This analysis is simply to give you an idea of what issues come into play.  The decision should ultimately be made by the editor/news director, and if there is time, legal.

The Breaking News From Twitter

Almost everyone has phones with cameras and almost everyone has access to social media. Therefore, you will see a lot more “breaking news” caught by everyday citizens who post the images.  I even took an image of a fire and posted it to Facebook from my office.  Again, assuming you don’t have permission, we have to look at the fair use factors.

Fair Use Factor One:  Same as above.

Fair Use Factor Two:  By the nature of the hypothetical, this assumes the image is newsworthy which would give the media a slight leg up in the analysis.

Fair Use Factor Three: This is usually going to be a wash.

Fair Use Factor Four:  We are assuming these are truly amateurs and not professional who are posting the pictures.  If there are 50 other people near the fire/stand-off/crash/revolution taking pictures and posting them, the less likely there is commercial value to the images.  If, by some dumb luck, the Average Joe is hiking in the woods and sees the first talking moose, then there may be commercial value to the “exclusive” nature of the images.

A moose I saw on a hike. It did not talk.

As you can see, there is still no bright-line rule.

The Picture, Itself, Is Newsworthy

Unfortunately, the compromising image of the politician (thanks Anthony Weiner) is news in and of itself.  The same goes for the nude images of the beauty pageant winner or a news story about an image.   The mere existence of these images is the story.  You can’t tell the story without them.  While this may be the easiest analisys, in can still be perilous.  You most likely will be able to use it, unless someone has an exclusive or there is commercial value to the copyright holder.

For a legal article on this topic from 2011, check out Professor Daxton R. “Chip” Stewart’s article, “CAN I USE THIS PHOTO I FOUND ON FACEBOOK? APPLYING COPYRIGHT LAW AND FAIR USE ANALYSIS TO PHOTOGRAPHS ON SOCIAL NETWORKING SITES REPUBLISHED FOR NEWS REPORTING PURPOSES” in the Journal of Telecommunications and High Tech Law.

*The other common excuse is that the pictures are in the public domain because they were posted on Facebook for the world to see.  That’s just not legally correct unless the specific social media platform says that is the case.  We will examine that in part two.

What happens when the employee who set up the company’s LinkedIn account leaves? Or, what happens when your outside marketing firm set up your Facebook page but refuses to give it to you because of a fee dispute?

Be Proactive

Before we talk about what to do in these situations, let’s talk briefly about how to avoid these situations.  Most social media sites allow you to have more than one administrator. You should have, at all times, at least two trusted employees designated as such.  When one of them leaves, or is about to be fired, the remaining administrator changes the passwords to lock out the departing administrator and finds another suitable back up.  The same thing works with your outside marketer — make sure someone (preferably two of you) are co-administrators so you can always have access to the social media account.

You can also contractually determine who controls and owns the social media account and its followers.

Thanks, you’re an hour late and I need to access my account.

If you are too late to implement some safeguard, the first advice is the same we give our children – ask nicely.  This applies to the departed employee and the social media platforms.  Obviously, if you can’t locate the employee or they refuse to give up access, you have to approach the social media networks.  The problem is, historically, they are not nearly as concerned about your page as you are and are not quick to act.

For example, Facebook tells you what to do here.  The problem is Facebook is notoriously slow to react taking about two weeks to respond.  If it is a LinkedIn Group (say company alumni) as opposed to a company profile, you may not be able to take control.  With regard to groups, LinkedIn takes the position groups are created by individual members and therefore they will not transfer ownership or control of a group.  LinkedIn may help you reach out to the group owner or help you protect copyrights or trademarks, but taking control of a Group can be difficult.

The step of last resort – the lawsuit

The law is not settled in this area and there have only been a couple of high profile cases involving LinkedIn and Twitter which had more to do with who owns the followers and connections.

In the LinkedIn case, Eagle v. Edcomm, the court threw out the Computer Fraud and Abuse Act and Lanham Act claims, but allowed the common law claims of misappropriation, conversion and invasion of privacy claims to continue which are still pending.  In the Twitter case, the claims for misappropriation of trade secrets, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage and conversion are proceeding to trial which is expected to take place this week.

It is clear you can sue, but exactly what causes of action apply and the likely result is not yet clear.  As a lawyer, we love to blaze new ground.  As a client, blazing new legal ground is expensive and dangerous.   You should try to avoid it if you can, but know that you can use the courts to seek control of your accounts if you have to.

Special thanks to friends Michelle Price and the MMI Agency for helping me help others with some of these issues recently.

There are two bills (SB 568 and SB 501) working their way through the California Legislature that may require social media sites to erase the content of minors.

Oops . . . I shouldn’t have posted that.

California Senate Bill 568, which has already passed the Senate, would allow minors to request websites to remove that picture the teen thought would be awesome to post at 2:30 in the morning, but no longer looks good while you are applying for jobs or a spot at Harvard.  It only applies to content actually posted by the minor and not those pictures posted by the teen’s friends who have less scruples.

Before minors celebrate by temporarily posting offensive jokes or pictures, the bill wisely provides that there is no guarantee removal by the initial website ensures complete elimination of the materials from the entire web.  The law states the removal process:

does not ensure complete or comprehensive removal of the content or information submitted to or posted on the operator’s Internet Web site, service, or application by the user.

The existing federal COPPA regulations provide for a similar removal process of content for children under 13 by the parents, but this law would force websites to add the process for those up to 17 and allow the request to come from the minor.  Considering most social media reputational harm is likely to happen in college (let’s just say I’m glad I went through college before smartphones and social media), I am sure there are some who like this to be law for people of all ages?

And now, a word from our sponsor.

Another interesting part of SB 568 prohibits websites from marketing a product or service to a minor, if the minor cannot legally purchase the product or participate in the service in the State of California.  This prohibition applies to all sites and apps “directed to minors” or if the operators “has actual knowledge that a minor is using its” service.

This “directed to” or “actual knowledge” is also a similar COPPA concept which is why certain sites like Facebook do not allow users under 12, but do allow users 13 and above.  Because Facebook has actual knowledge of its users between 13 and 17, it would not be allowed (or possibly allow others) to market alcohol or possibly even R-rates movies.

Dude, my mom erased my PII!

California SB 501, meanwhile, would require websites to remove personally identifiable information about minors upon the request of the minor OR the parent within 96 hours of the request.

As opposed to the first bill, this one would only apply to a “Social networking Internet Web site” which is defined as:

an Internet Web-based service that allows an individual to construct a public or partly public profile within a bounded system, articulate a list of other users with whom the individual shares a connection, and view and traverse his or her list of connections and those made by others in the system.

Why do I care?

These bills are not likely to become law in the next couple months (S.B. 568 would not go into effect until January 1, 2015).  Even if you are not running Facebook, you should care.  To the extent you advertise on social media adult products or services, you need to pay attention and be prepared for any changes.

If you have a website “directed” to minors or with actual minors using it, the law will require certain disclosures and procedures.  Simply failing to have the listed disclosures can get you in trouble.  You will have to be careful in how you accumulate and store information so that you can respond to requests timely to avoid related civil penalties.  Perhaps, between now and when (or if) these bills become law, you will have to consider what value the 13-17 year old market means to you in light of these changes?

Even if you are so uncool that your site does not want to deal with teens (and won’t be deemed “directed” towards teens based on your content), you should at least adjust your terms of service to prohibit use by anyone under 18 to avoid having to deal with these proposals.

Google and Facebook are fighting this law, so perhaps there will be some changes or they will die.  For more on these bills and the implications, read the Privacy and Security Matters Blog.

 

Although the Governor called a special session extending the Texas Legislative session, the topics to be addressed are political ones and not the ones we have been tracking.  We can therefore wrap-up our watch of the three bills we were monitoring.

First, bring out your dead!

HB 318/SB 118 social media passwords

A bill that would have prohibited employers from demanding social media passwords from its employees and applicants garnered much attention, was passed by the house, but then died.  Texas will not join about a dozen other states who have passed similar laws to provide what I think is a solution to a non-existent problem.  I seriously doubt that between now and 2015, employers will run amok demanding social media passwords — especially with the pro-employment attention Texas has been getting (shameless plug for my hometown).  The National Conference of State Legislatures has a good page on the efforts by various states.

HB 1989 service by social media

This bill also generated attention, but did not get very far.  It would have allowed judges to authorize service of a lawsuit via social media.   The existing rules allow judges to authorize substituted service when necessary which could include social media assuming certain due process protections are in place.  This bill would have given judges more comfort with the idea, but its death does not mean it can’t still be done.   This Outside Counsel article by Michael Lynch suggests service of process via social media may become more common without extra rules or laws.

The lone survivor

Only SB 94 was passed and will become law on September 1, 2013.  It allows for private civil lawsuits against websites that allow advertisements for what the law calls “compelled prostitution,” better known as sex trafficking.  As explained in my initial post, there is a serious legal question of whether the Texas law would run afoul of Section 230 of the Communications Decency Act which generally shields website operators from liability for user generated content.  Hopefully, it is a purely academic discussion and this law is little used because of the lack of necessity.  If a website is sued, it will make for an interesting defense.

The Legislature now focuses on redistricting – expect some fireworks and perhaps another escape.

As part of our continuing coverage of the Texas Legislature Watch (they only meet every other year in Texas), we look at the bill that would prohibit employers from demanding passwords or other access to the social media accounts of employees and prospective employees.  It goes to the House floor tomorrow.

As we originally reported, on December 21, 2012, HB 318 was prefiled and the senate considered the similar SB 118.  You can read my original post for the original version of the bill and my original comments. 

Now that it is through committee, the bill specifically excludes those in the “financial industry.”  It also includes an exception for employers to investigate wrongdoing.  Specifically, it now states:

(c) An employer may access a personal account of an employee if the employer holds a reasonable belief that the employee has violated:

(1) state or federal law, including a federal regulation or any regulatory policy or guidance issued by a federal agency; or

(2) an employment policy of the employer, including a policy governing:

(A) employee usage of an electronic communication device for work-related communications;

(B) the storage of potentially sensitive, nonpublic consumer information or of employer proprietary information;

(C) employee cooperation in a workplace investigation; or

(D) the safety and security of employees and customers of the employer.

While addressing two of the issues we spotted with the original bill, it still does not apply to college or other students.  It also does not provide any immunity for employers for failing to investigate social media profiles.

As explained in this article by Jessica Mendelson of Seyfarth Shaw, Texas looks to join the states of Utah, New Mexico and Arkansas that recently passed similar laws.

[Updated on 4/11/13 at the bottom]

Yes, you can use social media to make material public disclosures.  The SEC did not punish Netflix CEO Reed Hastings.  The reality is, however, the SEC gave a warning to executives: we are not going to do anything this time because our rules weren’t clear, but now you are on notice.

The Netflix CEO Facebook Post

On July 3, 2012, Hastings posted on his personal Facebook page:

Congrats to Ted Sarados, and his amazing content licensing team.  Netflix monthly viewing exceeded 1 billion hours for the first time ever in June . . . Keep going, Ted, we need even more.

The Problem

Generally speaking Reg FD prohibits selective disclosure of material information.  We don’t want a select group to get information ahead of the general investing public.  Therefore, material information must be publicly disclosed.  My original post on the SEC investigatation is here.  Reg FD focuses on the terms “public” and “material.”  To comply, most companies issue press releases or make SEC filings to announce material milestones and financial results.

Public?

Yes, Hastings’ Facebook profile was open to the public and he had more than 200,000 friends, many of whom were the same journalists who would have received a press release.

Material?

Materiality generally means it is reasonably foreseeable a person may make a trade based on the information.  For the 30 hours after the Facebook post, the Netflix stock rose almost 16%.  Earlier in 2012, Netflix had touted the number of streaming hours as an important metric of user engagement and therefore an indication of value.  The news was picked up by the mainstream press and analysts.  There was, however, also a Citigroup research report touting the stock just prior to Hastings’ post that also likely affected the stock price.

The SEC Speaks

So last week, the SEC decided they needed to provide guidance on the use of social media.  You can read the report here.  To summarize, the SEC authorized companies to use social media to announce material information, BUT only if the company has notified investors that the company intends to use specific identified social media channels.

Hastings escaped an enforcement action because the SEC realized the novelty of the issue and the absence of clarity.  The next guy may not be so lucky.  The SEC wrote:

Neither Hastings nor Netflix had previously used Hasting’s personal Facebook page to announce company metrics, and Netflix had not previously informed shareholders that Hastings’s Facebook page would be used to disclose information about Netflix. The page was not accompanied by a press release, a post on Netflix’s own web site or Facebook page, or a Form 8 K.

A Few Lessons

Train.

Obviously, disclose what social media channels you intend to use.

Just because it is possible, it does not mean publicly-traded companies should exclusively rely upon social media channels to make material disclosures.  Should a company supplement the traditional approach with social media, the company needs to disclose what social media platforms it will use.  This announcement needs to be done often and through the more traditional channels giving investors time to find and set up their access to these outlets.  No magic language is required, something like:

We routinely post information that may be material investment information on our Investor Relations tab on our website found at ______, on our Facebook page found at __________ and on our Twitter account at @________.  We encourage you to visit these sites and follow them regularly.

Make sure people know where to go so they can register, subscribe or do whatever is necessary to get the information without forcing them to “like” or “friend” any company or individual.  If your company account has very few readers, then it probably would not qualify as a “broad, non-exclusionary distribution of . . . information to the public.”  Build your profiles before you use them to make disclosures.

Use Official Company Accounts.

Official company channels are preferred over individuals.  Presumably, the people authorized to use the official channels have some training and are more equipped to know the limits.  Your investor relations, compliance and legal teams should be involved and monitor the official social media channels.  During the training for the social media team, the adage that if you have to hesitate and ask yourself whether this is material information that could affect our stock price, it probably is, or at least it should be vetted through the entire team.  When it comes to material information, the same rules would apply to Facebook or 140 characters on Twitter that would apply to the more formal press releases.

By using the official company account rather than the individual CEO account, you also keep it easier to separate what accounts belong to the individual and which belong to the company.

Wouldn’t it be easier to ban the executives from discussing any business on social media?

This is the safe way out.  Let the executives talk about their personal life, but don’t let them say anything about the business.  I am guessing that some of my non-legal readers are pulling their hair out and screaming that you have to have your CEO engaged in social media.  David K. Williams and Mary Michelle Scott opined in this Harvard Business Review blog post “that using social technologies to engage with customers, suppliers, and even with their own employees enables their companies to be more adaptive and agile.”

Regardless of your engagement strategy, even blanket prohibitions against discussing business can create some confusion.  Would commenting that you are on the way to the company Christmas party to celebrate the best year yet violate a blanket ban on business talk?  Would that violate Reg. FD?  Even if you take the more cautious approach, your executives need to be trained on the rules.

Train.

So, does legal have to review every post or Tweet before it goes out?

After all, press releases are closely reviewed before they go out.  This approach goes too far.  The better practice is provide adequate training and implement policies on the front end.  The company policy should allow investor relations/legal/compliance to monitor executive social media accounts.

Do we need to train everyone including the new intern?

Everyone should be trained, or at least aware of the social media policy.  Reg FD really applies only to persons acting on behalf of the issuer or company which includes “any senior officer of the issuer or any other officer, employee, or agent of the issuer who regularly communicates with securities market professionals or with security holders.”  These folks also need to be aware of the company’s Reg FD policy and training.

Train.

Should we just identify all official channels and the social media profiles of the top executives?

To be safe, a company could identify all of the various social media accounts of all the people listed above.  This would not be a good idea because it make proper disclosures meaningless if you make the information difficult to find.

The identified channel needs to be “a recognized channel of distribution.”  The company Facebook page may apply.  Your CFO’s Pinterest page full of recipes probably does not.  If the disclosures are sporadic, the account won’t garner the broad audience for financial information required by the SEC.  Moreover, to qualify, the account must allow for unfettered access and your executives may not want to open their Facebook accounts.

Train.

Fix it.

Monitoring is important because companies can try to fix mistakes that fall through the cracks.  Reg FD allows for a process of “prompt” disclosure for non-public inadvertent disclosures.  When in doubt, call your lawyer.

Train.

Did I say something about training?

UPDATE ON 4/11/13

Netflix decided to jump right into the mix.  It filed paperwork with the SEC identifying the social media channels it plans on using and Reed Hastings announced on his Facebook page that users had streamed more than 4 billion hours over the last three months. Read more at the Wall Street Journal’s Digits blog here.