The Green Sheet Online Edition
August 13, 2007 • Issue 07:08:01
Perfect storm of acquirer liability averted
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
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
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
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
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
"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
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
- 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
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
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 email@example.com or call
him at 310-694-8161.
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