Klein Zelman Rothermel LLP
1
2
2
2
5
6

New York Supreme Court Upholds Internet Sales Tax (“Amazon Tax”)

Law Enacted – April 2008
In our May 2008 Newsletter:

  • We reported on the newly-enacted New York State law that requires residents to pay sales tax on Internet purchases.
  • The law creates a presumption that certain out-of-state sellers of goods and services via the Internet (“e-retailers”) qualify as “sales tax vendors” and are, thereby, required to: (1) register with the State of New York for sales tax purposes; and (2) collect state and local sales taxes on all purchases made by New York State residents.
  • Under the new law, e-retailers are presumed to be sales tax-based vendors if they enter into agreements with New York affiliates to compensate them for the referral of customers.
  • An affiliate is an online marketing company that refers customers to e-retailers in return for a commission on any sale resulting from such referrals.

Amazon Brought Suit
As we reported:

  • Amazon.com filed a complaint on April 25, 2008 asking the New York State Supreme Court, New York County, to declare the law “invalid, illegal and unconstitutional.”
  • Specifically, Amazon contended that the statute violates the equal protection clause of the United States and New York State Constitutions because it “intentionally targets” the company.
  • Amazon said it has hundreds of thousands of independent website affiliates to whom it pays commissions for linking to products for sale on its website.

New York Supreme Court Decision

  • The court ruled that the tax law was constitutional.
  • Judge Bransten refuted claims that the legislature was “picking on” Amazon.
  • The court pointed out, “[i]n the end, the Commission-Agreement Provision does not broadly tax any and all Internet sales to New York consumers. . . . It requires a substantial nexus between an out-of-state seller and New York through a contract to pay commissions for referrals with a New York resident along with realization of more than $10,000 of revenue from New York sales earned through the arrangement. The neutral statute simply obligates out-of-state sellers to shoulder their fair share of the tax collection burden when using New Yorkers to earn profit from other New Yorkers.”

Outlook

  • We expect that Amazon will appeal the decision.
  • E-retailers may look into arranging for different means to direct traffic to their websites in an effort to circumvent the new tax law.
  • In some extreme cases, companies are dropping their affiliate marketing programs altogether in an effort to avoid being subject to this tax.

Internet Search Engines Entitled to CDA §230 Immunity for Sponsored Illegal Gambling Ads

Cisneros v. Yahoo! Inc., Cal. Sup. Ct., No. 04-433518 (11/7/08)

Facts

  • Defendant companies operate Internet website search engines: Google Inc., Yahoo! Inc. and Overture Services, Inc., (now known as Yahoo! Search Marketing).
  • Plaintiff brought suit alleging that defendants wrongfully posted advertisements for illegal gambling activities on their respective websites in violation of various state laws.
  • Plaintiff sought injunctive and declaratory relief.

Court Reviewed Facts

  • Defendants’ search engines allow users to submit keywords that generate specific search results. The results are separated into two (2) distinct areas: sponsored and non-sponsored links. Non-sponsored links are not at issue in this case.
  • Website operators pay search engines to have their links appear as sponsored results in special “sponsored links” sections of the search engines' websites. It is intended that this priority placement will generate more traffic to their websites.
  • Because an enormous number of website operators pay to have sponsored links, the process is automated by the search engines and, as such, individual ads are not reviewed for terms-of-use policy compliance.
  • The court found that since April, 2004, defendants’ search engine terms-of-use policies specifically prohibited the placement of sponsored links to online gambling sites.
  • The court was satisfied that defendants’ anti-online gambling policies constituted a reasonable, good faith effort to eliminate the presence of online gambling sites which could be directly or indirectly accessed through the sponsored links.
  • Further, the court found that plaintiff failed to produce any evidence to establish that defendants were intentionally accepting ads for online gambling sites.

Court Holding

  • The court could not fashion appropriate equitable relief (even if it were justified), pointing out that defendants are not responsible for ameliorating the effects of online gambling.
  • Each defendant is exempt from liability for the content posted on its website under §230 of the Communications Decency Act (“CDA”).

Court Analysis of CDA §230

  • Under the CDA, providers or users of interactive computer services cannot be held liable for content provided by third parties.
  • The court found that the reach of the CDA is broad and preempts all inconsistent state law.
  • Plaintiff failed to present sufficient evidence that defendants are “information content providers” (“ICP”) as defined under the CDA.
  • Significantly, the court noted that, “while defendants do require third party advertisers to follow certain editorial guidelines in creating their advertisements, this fact alone does not abrogate the protection afforded by the CDA.” Zeran v. America Online, Inc., 129 F.3d 327, 330 (4th Cir. 1997).

Summary

  • The court followed earlier precedent in refusing to find the search engines responsible for sponsored illegal gambling ads.
  • The court pointed to the intended purpose of CDA §230 immunity in finding defendants exempt from liability: that Internet access providers should not be deterred from developing and improving access to the Internet.

MMA Revises U.S. Consumer Best Practices for Mobile Marketing Services

Mobile Marketing Association December 30, 2008

Updated Version Released

  • The Mobile Marketing Association ("MMA") recently released an updated version of its Consumer Best Practices Guidelines for Cross-Carrier Mobile Content Services in the U.S ("Guidelines").
  • The Guidelines are updated biannually.
  • According to the MMA, the Guidelines “have become the de facto standard for cross-carrier mobile content services, including text messaging, multi-media messaging, shortcode programs, mobile web and more.”

Best Practices Forum

  • The MMA held its annual Consumer Best Practices Industry Forum on January 13 in Denver.

Revisions to Best Practices DocumentAmong other revisions, the Guidelines clarify consumer notice and opt-in standards for mobile marketing services.

The following are additional topics that were updated:

  • Clarification of what mobile services' "Terms & Conditions" must contain and how they must be presented.
  • Clarification of “Standard Rates May Apply” language.
  • Removing the triple opt-in requirement for premium IVR programs.
  • Clarification of "Alcohol & Tobacco" marketing guidelines.
  • Adding a new Guidelines section containing an update on MMS inter-operability.

Summary

  • Businesses in the mobile marketing industry should be aware of the revisions to the Guidelines and make every effort to ensure that the services that they offer are in alignment with these “industry standard” provisions.

FTC Seeking Comment on Proposed Revisions to Guides for Endorsements and Testimonials in Advertising

Late November 2008: FTC Approves Publication of a Federal Register Notice –

  • The Notice seeks public comments on proposed revisions to the Guides Concerning the Use of Endorsements and Testimonials in Advertising (the "Guides").
  • Public comments will be accepted through January 30, 2009.
  • The FTC’s proposed revisions to the Guides address:
    • Consumer endorsements
    • Expert endorsements
    • Organization endorsements
    • Disclosure of material connections between advertisers and endorsers.
  • With respect to the issue of Consumer Endorsements, the proposed revisions state that testimonials that do not describe typical consumer experiences should be accompanied by clear and conspicuous disclosure of the results consumers can generally expect to achieve from the advertised product or program.

Previous Action – January 2007

  • In a Federal Register Notice, the FTC sought public comment on the overall costs, benefits, and regulatory and economic impact of the Guides (last updated in 1980).

Summary

  • Those involved in the advertising industry (online or otherwise) may want to keep apprised of the proposed Guides' revisions and consider offering relevant comments.
  • We will continue to monitor and report on the FTC’s efforts in this area.

Class Action Suit Brought Against Classmates Online, Inc. for Alleged Misrepresentation in Email Marketing

Michaels v. Classmates Online, Inc., et al., Cal. Sup. Ct. No. BC401048 (Filed October 30, 2008)

Class Action Suit Filed

  • Plaintiff, Anthony Michaels, and a class of others “similarly situated,” brought a class action lawsuit against Classmates Online, Inc. (“Classmates”), for misleading them into purchasing subscriptions to the online service by falsely representing that former classmates were trying to contact them.

Facts

  • Classmates owns and operates www.classmates.com, a subscription-based website that claims to reunite classmates, friends and family, etc., via its online forum.
  • Plaintiff Michaels signed up for a free membership with Classmates.
  • Through email, online advertisements, text messages and/or other communications initiated by defendant, plaintiffs were led to believe that past acquaintances were trying to contact them through the www.classmates.com website.
  • The only way to obtain access to these contacts was to purchase a “Gold” Classmates subscription.
  • Plaintiff Michaels alleged that after paying for the Gold membership, he discovered that no such acquaintances were trying to contact him.
  • Plaintiffs alleged that these false representations misled them into purchasing Classmates subscriptions in violation of California State Law.

KZR December 2008 Newsletter

  • In our recent Newsletter, we reported on a similar case involving Reunion.com.
  • There, plaintiffs alleged that Reunion.com had "falsified, misrepresented and/or forged header information" by indicating in its email "from" line the name of a Reunion.com member.
  • Plaintiffs further complained that the Reunion.com email "subject" line was false or misleading because it was comprised of the following: "[Member Name] Wants to Connect With You" or "Please Connect With Me."
  • The California court dismissed the complaint, holding that plaintiffs’ claims were preempted by the CAN-SPAM Act.

Summary

  • In Reunion.com, the court granted plaintiffs “Leave to Amend” their complaint.
  • We will continue to monitor both cases as they progress in the coming months.

AT&T, T-Mobile and Software Company Settle District Attorney Charges of Illegal “Spoofing”

California v. TelTech Systems, Inc., Cal. Sup. Ct., No. BC403632 (12/11/08)

Los Angeles District Attorney, Bureau of Investigation

  • After receiving complaints of unauthorized cell phone voicemail access, the Los Angeles District Attorney’s ("DA") office began an investigation.
  • The investigation revealed that TelTech sold certain telephone products, including SpoofCard, Love Detect and LiarCard.
  • Prosecutors claimed that in its advertisements, TelTech represented that SpoofCard was legal in all 50 states (while certain features of SpoofCard are not lawful in California).
  • The complaint also alleged that certain aspects of the software found in Love Detect and LiarCard could also be construed as violating California Law.
  • As for the mobile service providers, the DA alleged that the companies had represented to consumers that their voicemail systems were secure without a password, when they knew, or should have known, that this was not true.

What is “SpoofCard”?

  • SpoofCard is a software program that permits users to disguise the phone numbers of callers, change the sound of callers' voices and secretly record telephone conversations.

Settlement Terms

  • All charges were settled without the admission of wrongdoing.
  • AT&T and T-Mobile agreed to injunctions prohibiting them from continuing to represent that their cell phone voicemail systems are secure without a password, unless this is true.
  • TelTech agreed to abide by a permanent injunction prohibiting it from misrepresenting the legality of the use of its technology.
  • The three (3) companies agreed to pay a total of approximately $120,000 for civil investigative costs.
  • District Attorney Steve Cooley said in a statement that, “[t]hese cases illustrate how deeply new technology and misuses of it can affect the lives of consumers.”

contact www.kleinzelman.com