Computer Fraud and Abuse Act Found to Permit Vicarious Liability

In Charles Schwab & Co., Inc. v. Carter, a federal court in Illinois construed the Computer Fraud and Abuse Act (CFAA) to allow a claim for vicarious liability where an agent fraudulently obtained computer data on behalf of a principal. CFAA is intended to deter computer fraud, by prohibiting unauthorized access to and appropriation of confidential information of financial institutions held on their computers network, as well as the unauthorized appropriation of information from computers used in interstate commerce or foreign commerce.

The case arose out of a dispute between two competing investment advisory firms, Charles Schwab & Co. and Acorn Advisory Management. In 2004 Schwab put its investment analytics division up for sale. After Acorn made an unsuccessful bid for the division, it hired its information technology director, Brian Carter, from the company. By virtue of his position, Carter had access to virtually all the division’s confidential, proprietary information stored on its computer network. At Acorn’s request, before leaving Schwab, Carter duplicated large amounts of data from the division’s servers and transmitted such to Acorn. Upon discovering Carter’s actions, Schwab filed suit against both Carter and Acorn, alleging violations of CFAA, as well as trade secret misappropriation and common law conversion, breach of fiduciary duty and unjust enrichment. Acorn filed a motion for summary judgment on the misappropriation of trade secrets claim and a motion to dismiss the remaining claims. The federal court denied both motions.

Since Acorn did not directly access Schwab’s computer network, the court was compelled to consider whether the statute permits a claim for vicarious liability. In the absence of express provision in the statute for vicarious liability the court relied on analogous authority as well as its interpretation of the intent of the statute. Citing a Supreme Court’s Meyer v. Holley decision, which construed the Fair Housing Act to permit vicarious liability in the absence of express statutory authorization, the court in Schwab reasoned that legislation establishing a tort action ordinarily is intended to incorporate traditional vicarious liability principals. Since the CFAA is intended to compensate victims of computer fraud, the court concluded that the Act essentially creates a tort action. Furthermore, permitting a cause of action against a company that deliberately encouraged a third party to gain unlawful access to a plaintiff’s computer network would advance the statute’s purpose of punishing access to unauthorized data. Given these conclusions and the fact that the court could find no indication of contrary congressional intent, the court held that vicarious liability could be maintained under CFAA.

Simon Riveles

The Mouse Gets a Guard for its Academy Bound Properties

The Mouse has embraced a new puzzle piece in the maddening circus of proprietary encryption technologies. Disney as become the first major to sign on to the S-video player technology from niche player Cinea to prevent its Oscar contenders from being hijacked en route to the Academy judges.

Recently the old fashioned train robbery heist has taken a dvd twist--instead of stealing gold from the locomotive, Dvd screeners en route to the judge have been duped and leaked onto the net. Sometimes such leaks occurred within days or hours. As a result, the industry has been faced with a daunting but more discreet piracy challenge. Cinea, a small company, has chartered a niche rights management product line, by offering to handle, encrypt and distribute DVD's and corresponding DVD players to Academy judges.

The advantages of such a system are simple. A proprietary encryption algorithm, which is kept a trade secret and moreover will not be publicly implemented, is difficult to penetrate. Secondly, specialty hardware under the same restrictions is similarly difficult. As Cinea states, "Cinea helps major studios and service providers protect digital video by making it extremely costly for pirates to steal content, and increasing the likelihood of their capture." The most significant feature of Cinea's system is its purported ability to track and identify rogue elements in the distribution system, essentially fingering the thieves. Other encryption technologies have offered to do the same thing by "tagging" a particular screener copy. One result was the fingering of a judge as the leak, when in fact the DVD was compromised en route to that judge.

Encryption technologies are a notoriously fragmented and competitive landscape, much like media technologies (consider Bluray and HD-DVD). As a result, time will tell if the S-video player commands a larger buying audience. However, such fragmentation may benefit the industry by presenting a more complex landscape for pirates to penetrate, much like a group of trains to hijack as opposed to one.

Kaiser Wahab

Grokster Shuts Down

In a surprise turn of events, Grokster has formally shutdown operations as part of a settlement agreement. This is far more sudden then I antcipated and the message on its site reads like something an exterminator leaves behind, stating "There are legal services for downloading music and movies. This service is not one of them."

Kaiser Wahab

W&M Grokster II Article Online for Reading

The Supremes' recent ruling on Grokster has already sent a powerful ripple of debate through legal, business, and tech communities as to its wisdom, practicality, and applicability. Olivera Medenica's article includes a breakdown of the shot range practical business considerations for companies that seek to avoid Grokster's fate, as well as a more probing legal analysis. You can read the entire article here.

Russian Roulette--Starbucks Challenges Trademark Infringement in Russian Courts

As the stories of Russia, a mafia cronyism state, butting heads with American and global commercial interests increasingly becomes the dramatic stuff of made for TV movies, a new episode has come out with everyone’s favorite java and real estate mogul, Starbucks. Russia is a modern state with a superpower and imperial pedigree that is not easily dismissed. Consonant with that is a very well developed rule of law system. Unfortunately in the post Communist age, the enforcement systems necessary to give voice to the legal system are simply absent. Such was the case with IKEA’s newsworthy delay in opening its Moscow showroom due to bogus sign offs that many dismiss as nothing more than mafia bribes. And we recently covered the baffling operation of allofmp3.com and Russia’s astonishingly transparent apathy to the situation.

Russian trademark rights are not immune to the confusion. Hence the rise of opportunistic middle men like Sergei Zuykov who can extort their way into a handsome fortune. Under Russian law, trademark rights must be consummated by use within three years from registration. Starbucks discovered that three years is a heartbeat in Russia where red is color of the former regime and bureaucratic tape is the national pastime. As a result, Zuykov with no basis or evidence of use, in fact no inventory or personnel, registered the Starbucks name, and used a green circular logo with a mermaid that everyone has come to recognize means overpriced coffee.

Starbucks was not intimidated by Zuykov’s brazen extortion demand of $600,000 dollars to assign his rights to Starbucks. It chose to fight a legal battle in a nation where the rule of law is under assault. I absolutely applaud Starbuck despite cringing every time I pass city blocks with more than one of the coffee spots on either side. Rospatent, the Russian body responsible for trademark administration, has already stripped Zuykov of the mark. Starbuck’s investment in Russia’s system has begun to pay dividends and in the long run will increase the integrity of the country’s intellectual property and judicial system. I hope more multinationals recognize that bribery may offer them short term perks but will only increase the long run temerity of the extortionists.

Kaiser Wahab