- Is Your Company Being "Gatored"?
- July 15, 2004
- Law Firm: Patterson Belknap Webb & Tyler LLP - New York Office
Companies in the consumer product or service business have come to rely on the Internet as an important means of communicating and doing business with their customers. Such companies spend millions of dollars designing, maintaining and upgrading their websites. One study reports that companies with $500 million or more in sales spend an average of $3.9 million per year on website design and maintenance. In many industries, such as travel and entertainment, an enormous portion of overall sales are made via the Internet. In the rental car industry, for example, the Internet accounts for as much as 50% of some companies' total rentals.
Imagine, then, the chagrin of a company that learns that, when consumers log onto the company's website, a pop-up ad for a competitor -- or for a company in a related line of business -- suddenly appears on the consumer's screen. This is precisely what our client Hertz discovered in early 2003. Car rental customers who visited Hertz's website were suddenly being exposed to ads for Avis, Alamo, Dollar and Thrifty. In addition, they encountered ads for companies offering a variety of travel services (such as Expedia, Orbitz, Hotwire, Cheap Tickets and Priceline.com) as well as ads by several major airlines (none of whom were travel partners with Hertz). Finally, and most remarkably, Hertz customers were suddenly seeing ads for companies totally removed from the travel business, such as florists and consumer finance companies.
Where were these ads coming from? It didn't take Hertz long to discover that the ads were being triggered by an aggressive young Internet company called Gator Corporation (the company has since changed its name to Claria Corporation). Like numerous other companies who own well-known trademarks and operate frequently-visited websites, Hertz found that it was being "Gatored".
Gator's method of operation was ingenious. First, it designed a series of consumer-friendly software programs such as "eWallet", "Precision Time" and "Date Manager"; eWallet, for example, allows the user to store personal information commonly used in online transactions, such as name and address, passwords, user identification number and credit card numbers. Gator gives these programs to consumers for free. But when consumers sign up for one of the programs, they agree (electronically) to a contract with Gator. Under the terms of the contract, the consumer agrees to permit Gator to install an additional software program on the user's computer. This additional software -- labeled by Gator as "OfferCompanion" but referred to in the trade as "spyware" -- allows Gator to monitor the user's Internet activity. Specifically, OfferCompanion is programmed to detect the consumer's visit to popular websites such as hertz.com.
The second component of Gator's scheme involves the solicitation of advertisers who are interested in having their ads appear on popular websites. Gator will sign a contract with an advertiser whereby it promises to deliver the company's ads to consumers who have chosen to visit the website of one or more of the company's competitors. Gator's marketing message is, of course, focused on the number of consumers who have installed Gator's software and to whom Gator can "deliver" the advertiser's pop-up ad. At the time of our lawsuit, Gator boasted that over 35 million people actively used its OfferCompanion software. The success of Gator's program can be measured by the "click through" rate, i.e., the percentage of users who, when confronted with a pop-up ad, actually click through to the website of the pop-up advertiser. At the time of the lawsuit, Gator claimed that, with respect to the travel industry, the average click through rate for pop-up ads was 10%. Individual advertising campaigns were said to yield click-through rates that were as high as 24% (travel), 26% (credit cards), 29% (automotive) and 48% (house-hold products).
Gator has one significant competitor: WhenU.com. Like Gator, WhenU offers consumers a variety of free software programs; those programs are then bundled with a spyware program known as "SaveNow". Testimony in one of the WhenU lawsuits disclosed that approximately 25 million people are active SaveNow users. Ironically, while over 100 million people have at one time downloaded the SaveNow software, 75 million of them have uninstalled it.
The Illegality of The Gator and WhenU Programs
In the various lawsuits that have been filed against Gator and WhenU, the plaintiffs have raised a variety of claims, including trademark infringement, trademark dilution, copyright infringement, contributory copyright infringement, cybersquatting and a variety of state law claims such as tortious interference, trespass to chattels and unjust enrichment. While we pled many of these claims in our complaint for Hertz, the most significant claim -- and the claim upon which we believe the case will ultimately be decided -- is trademark infringement.
Gator's entire scheme is founded upon the unauthorized use, in its OfferCompanion software, of the trademarks of the companies whose websites are targeted for pop-up ads. In order to enable a competitor's ad to appear when Hertz's website is being accessed by a consumer, Gator has embedded the Hertz website address (hertz.com) in its OfferCompanion software; when the user types that address on his or her computer, the address is recognized by OfferCompanion which, in turn, triggers the appropriate pop-up ad to appear. This is plainly an unauthorized "use in commerce" of Hertz's trademark. Moreover, it is precisely the fame and good will of the Hertz name that makes Hertz's website an attractive target for the unauthorized display of pop-up ads. Of course, trademark infringement only occurs where the unauthorized use of a party's mark causes a likelihood of confusion. Here, there are two types of confusion that are likely to occur. First, survey evidence in our case demonstrates that, despite the existence of Gator's "contracts" with its software customers, and despite the presence of "disclaimers" that generally accompany the pop-up ads, an enormous percentage of Gator's customers are (i) unaware of their contract with Gator, (ii) unaware that Gator is responsible for delivering the pop-up ads, and (iii) believe that the ads are sponsored by, or appear by permission of, the website owner.
But even if the customer recognizes that the pop-up ad is not likely to be sponsored by the website owner, Gator would still be guilty of having generated a second type of confusion, socalled "initial interest confusion". Initial interest confusion arises where the defendant has used the plaintiff's trademark to attract the attention of consumers even though, by the time a given transaction is completed, the consumer is well aware that the transaction is not with the owner of the trademark. The doctrine has most frequently been applied to trade dress cases involving "look alike" store brands that capture consumers' attention by their resemblance to national brands, even though the consumer recognizes -- by the time of purchase -- that the product is merely a store brand version of the national brand. In the Internet world, this doctrine has been widely applied to prohibit a defendant's use of a competitor's trademark in a metatag in order to divert consumers to a website other than that of the trademark owner. This doctrine was first applied by the Ninth Circuit in Brookfield Communications, Inc. v. West Coast Entertainment Corp., 174 F.3d 1036 (9th Cir. 1999). Subsequently, courts in the First, Second, Fourth, Fifth, Sixth and Seventh Circuits have adopted the Brookfield decision for metatag cases. Under these decisions, a Hertz competitor, such as Alamo, could not use "hertz" as a metatag and thereby attract consumers to its website.
Several lawsuits have been filed against Gator and WhenU and several decisions have thus far been handed down. However, no case has proceeded to trial and no decision has been reviewed by an appellate court. The results to date are as follows.
Washington Post et al. v. Gator (E.D. Va. 2002): In the first case against either defendant, a coalition of the nation's leading publishers obtained a pre-liminary injunction against Gator. Unfortunately, Chief Judge Hilton issued neither an opinion nor findings of fact /conclusions of law, so the case has no significant precedental value. The case was settled on the eve of trial and the terms of the settlement remain confidential.
In re Gator Software Trademark and Copyright Litigation (MDL No. 1517, N.D. Ga.): In addition to Hertz, ten other parties sued Gator in various districts around the country. The other plaintiffs include L.L. Bean, Six Continents Hotels, Inter-Continental Hotels and United Parcel Service. These cases have been consolidated for pre-trial proceedings before Judge J. Owen Forrester of the Northern District of Georgia. The parties are currently engaged in discovery; following the disposition of summary judgment motions, the cases will likely be remanded to the various transferor courts for trial.
U-Haul International v. WhenU.com (E.D. Va. 2003): Like the Washington Post case, this case was filed in the Eastern District of Virginia. Following protracted discovery, UHaul asked the Court to rule on the pending motions for summary judgment rather than holding a trial. The Court obliged. It denied U-Haul's motion for summary judgment and granted WhenU's motion for summary judgment as to the copyright and trademark claims. The Court's dismissal of the trademark claim, although unfortunate, can readily be overcome in future cases. First, the Court relied heavily on the alleged "consent" of WhenU's customers to the installation of the SaveNow software; this "consent" can be largely disproved through the use of empirical evidence such as consumer surveys and the thousands of consumer protests received by Gator and WhenU. Second, the Court did not even address the metatag cases that form the foundation of the trademark claim. Following the decision, U-Haul decided that it did not want to expend further time and money on the case and dropped its appeal.
Wells Fargo et al. v. WhenU.com (E.D. Mich. 2003): Last November, Judge Nancy Edmunds of the Eastern District of Michigan issued a 66-page decision denying a motion by plaintiffs Wells Fargo and Quicken Loans for a preliminary injunction. Unlike the opinion in the U-Haul case, this was a thorough opinion which carefully analyzed the evidence and the law. The court's rejection of the copyright claim (that pop-up ads constitute an unauthorized "derivative work") was not surprising. However, the court's rejection of the trademark claim was surprising. Crediting an argument that has been advanced by both Gator and WhenU, Judge Edmunds held that WhenU's use of plaintiffs' trademarks in their SaveNow software was not a "use in commerce" within the meaning of the Lanham Act. In addition, Judge Edmunds rejected two confusion surveys offered by plaintiffs; that part of the decision is understandable as the surveys did not even involve the trademarks at issue in the case. This case is proceeding with discovery and thus a final decision on the merits is a long way off.
1-800 Contacts v. WhenU (S.D.N.Y. 2003): Three days before Christmas, Judge Deborah Batts of the Southern District of New York gave the plaintiffs in all the cases a wonderful Christmas present. In an 88 page opinion, Judge Batts entered a preliminary injunction against WhenU enjoining it from (i) using the 1800 Contacts mark in its SaveNow software and (ii) causing popup ads to appear when a user has chosen to visit plaintiff's website. Judge Batts based her ruling on the theory that Hertz and the other Gator plaintiffs are advancing: WhenU's inclusion of plaintiff's trademark in its SaveNow software constitutes an unauthorized use of that mark in commerce and is likely to cause initial interest confusion under the rationale of the metatag cases. Although the survey evidence offered by 1800 Contacts was largely discredited -- it was the same survey evidence that had been offered and rejected in the Wells Fargo case -- a well-designed Internet survey can readily supply quantitative evidence of confusion. WhenU has appealed the decision to the Second Circuit. Because of the obvious importance of this case to the Gator litigation, our firm recently filed an amicus brief on behalf of Hertz and the other Gator MDL plaintiffs urging that Judge Batts' decision be affirmed.
The Prognosis The Second Circuit will have an enormous opportunity to influence the outcome of this issue when it rules on the WhenU appeal. Likewise, the MDL cases against Gator will likely play an important role in resolving this issue. Ultimately, we believe that the trademark claim will prove successful.
What Gator and WhenU are doing is the essence of trademark infringement: they are capitalizing on the reputation and good will of famous trademarks, as well as the investment by trademark owners in their websites, in order to promote their own products. The Gator and WhenU schemes may involve the brave new world of e-commerce but their method is an old-fashioned misappropriation of the fame and good will of trademark owners.