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The Green Sheet Online Edition

August 13, 2007 • Issue 07:08:01

Perfect storm of acquirer liability averted

By Theodore F. Monroe and Bradley Cebeci
Attorneys at Law

The apparent trend in the federal and state courts of the United States is toward broadening the liability of parties in the payments chain by holding them increasingly responsible for their merchants' conduct.

This is true whether the context is improper data storing, deceptive telemarketing or Internet gaming.

Yet earlier this month, the United States Court of Appeals for the Ninth Circuit reversed this trend and handed down some good news for credit card processors and their agents everywhere.

It held that those involved in the financial transaction processing chain do not expose themselves to secondary liability for copyright and trademark infringement simply by processing consumer transactions for infringing Internet merchants.

In so ruling, the appellate court helped processors everywhere breathe a sigh of relief. It pulled the plug on what had been a costly and protracted legal battle between Perfect 10 Inc. and Visa U.S.A., MasterCard Worldwide, First Data Corp., Cardservice International Inc. and related banks.

An imperfect case

Perfect 10 publishes a magazine of the same name. It also operates the subscription Web site www.perfect10.com, where it offers copyrighted images of female models.

Perfect 10 claims copyrights to the photographs published in its magazine and on its Web site, federal registration of the Perfect 10 trademark and blanket publicity rights for many of the models appearing in the photographs.

Over the years, merchants around the world have infringed on Perfect 10's rights by offering, without permission, the company's materials for sale on their Web sites.

Many of these merchants do business offshore in jurisdictions with strict privacy laws. They are difficult if not impossible to locate, much less to obtain and enforce a judgment against.

Recognizing this problem, Perfect 10 has filed several separate lawsuits against what it regards as the infrastructure supporting the unauthorized use of its property. These include the Internet service providers (ISPs) that host the infringers, the search engines that enable consumers to find renegade Web sites and purchase Perfect 10's materials, and the credit card processors that allegedly enable infringers to get paid for unlawful transactions.

By these lawsuits, Perfect 10 has become a trailblazer in the field of Internet law. It successfully established the viability of claims against ISPs and search engines that continue to provide services to infringers after receiving notice of their alleged illegal conduct.

Even after dismissal by the district court, Perfect 10's claims that Visa and the other card processors should bear secondary liability for processing such transactions hardly seemed a stretch, particularly when card processors admitted to receiving the notices but took no action.

A hair-splitting interpretation

In general, a defendant is liable for contributory copyright infringement if it 1) has knowledge of a third party's infringing activity and 2) allows, causes or materially contributes to the infringing conduct.

Based on this standard, we thought Perfect 10 had a good shot at reversing the district court's decision. As the court of appeals tacitly acknowledged, the credit card processors' conduct would seem to fit under the broad language of this rule.

Nonetheless, in what opponents undoubtedly will describe as a defensive and results-oriented decision, the appellate court reached the opposite conclusion based on what it characterized as material factual distinctions with the precedent cases.

In Perfect 10's case against the search engines, the same court ruled:

"Google could be held contributorily liable if it had knowledge that infringing Perfect 10 images were available using its search engine, could take simple measures to prevent further damage to Perfect 10's copyrighted works and failed to take such steps."

Yet, the court refused to apply the same rule in the payment processing case based on what it regards as a key distinction between the role credit card processors play in facilitating infringement and that played by ISPs and search engines.

In particular, the ISPs' role in hosting the Web sites in question and the search engines' role in enabling the distribution of stolen materials are necessary to the Web sites' ability to infringe. They are directly linked to unlawful storage and dissemination of copyrighted materials.

However, the credit card processors' role is at least one step removed. Processors' payment systems neither store nor transmit any infringing materials.

The Court further reasoned that even if images were not paid for, there would still be infringement. It stated: "Google may materially contribute to infringement by making it fast and easy for third parties to locate and distribute infringing material, whereas defendants make it easier for infringement to be profitable, which tends to increase financial incentives to infringe, which in turn tends to increase infringement."

In essence, the appellate court blamed the nature of the Internet, particularly:

  • The Web site format, which provides quick, inexpensive, worldwide market penetration
  • Software allowing for the easy alteration of images
  • High-speed connections enabling the rapid transfer of high-resolution image files
  • Powerful search engines that can aggregate and display images in a useful and efficient manner, without charge, and with astonishing speed.
The court emphasized that the credit card companies play little role in these functions.

The court also expressed concern for the potential adverse ripple effects a finding of liability against the credit card processors might have on the "engine of electronic commerce."

It stated, "What would stop a Web site's competitor from sending bogus notices to a credit card company, claiming infringement in the hope of putting the competitor out of business or, at least, requiring it to spend a great deal of money to clear its name?

"Threatened with significant potential secondary liability on a variety of fronts under the dissent's proposed expansion of existing secondary liability law, perhaps the credit card companies would soon decline to finance purchases that are more legally risky."

While this is an important point, it is hard to grasp why the same point would not apply equally in the case of ISPs and search engines.

A winning round for processors

In any event, the good news for card processors everywhere is that the court of appeals resoundingly decided the matter in the bankcard industry's favor. The not-so good news is that the dissenting judge, in a long and detailed opinion, appears to get the better of the argument on many points.

Thus, a fair reading of the complete opinion leaves at least some doubt as to how other courts might decide similar cases in the future, particularly in light of the seeming trend of expanding card processor liability, as suggested by more than a handful of cases over the past few years. end of article

The information contained in this article is for informational purposes only. Please consult an attorney before relying upon it for your specific legal needs. Theodore F. Monroe is an Attorney whose practice focuses on the electronic payment and direct marketing industries. For more information about this article or any other matter, e-mail Monroe at monroe@tfmlaw.com or call him at 310-694-8161.

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