Online terms of use can be enforceable, but be careful!

Forming contracts through online terms and conditions has become commonplace. If the truth were known, however, we would probably discover that most people don’t read online terms and conditions or license agreements before clicking on “I accept,” or some other form of acceptance of the contract terms. But, in many cases, notwithstanding that a user did not read the contract terms, these online terms are enforceable. For vendors and other online service providers, there is some additional guidance to help move the needle for online contract terms towards the enforceable end of the spectrum.

In a decision rendered by the United States Seventh Circuit Court of Appeals, an unlucky Gary Sgouros purchased a credit score online, only to learn that the purchased score was 100 points higher than the score pulled by an automobile dealership where he was trying to purchase a car. Delivery of an artificially high score did not help his negotiations with a dealership. As a result, he filed a lawsuit against the provider of the credit score. However, in the initial round of litigation, the court never reached a decision on whether Mr. Sgouros had a cause of action based on delivery of the incorrect score, because the court focused instead on an argument made by the credit score provider that an arbitration clause in the contract was enforceable, and the litigation should be dismissed.

Although the online registration process for acquiring a credit score was fairly involved, the service agreement, which included the arbitration provision, was in a window which displayed only the first two lines of the agreement. There was a slider scroll bar on the right side of the window, but nothing required Mr. Sgouros to take any affirmative action to specifically accept the terms of the service agreement during the registration process. At the bottom of the page there was a box with “I Accept & Continue to Step 3.”

The court found, as have many other courts, that fundamentally there is nothing “automatically offensive” about online agreements. Similarly, contracting parties are generally presumed to be aware of the terms of an agreement that the parties have signed, or accepted the terms in an affirmative manner. But the platform on which the agreement resides must give the user reasonable notice that a click or continued use of a website will manifest assent to an agreement.

In this case, the court focused on whether Mr. Sgouros was likely to see the terms of the service agreement and understand that he was accepting those terms by clicking. In particular, the court asked whether Mr. Sgouros was likely to see the arbitration clause, and if there was any clear indication that by clicking on the button at the bottom of the page, he was aware that he was accepting the terms of the service agreement in the window above the box on the page. The court addressed the issue of a scrollable agreement, and was clearly troubled by the presence of fundamental terms in a scrollable window, when only the first few words of the contract were visible. At least as troubling was the failure to mention the service agreement in extensive verbiage above the “I accept” button authorizing access to the user’s credit reports. This verbiage did not refer to the service agreement or scrollable window. Taking these facts together, the court was unwilling to find that the webpage was sufficient to give a user notice of the creation of a binding contract.

The bottom line is that having a well written terms of service agreement and requiring users to click “I accept” may still not create a binding agreement if the webpage as a whole does not give the user adequate notice that he will be bound by the terms of the service agreement. Acceptance of online terms and conditions may constitute assent to a contract, but the user must at least know what are the terms, and that the user’s behavior, whether clicking on a box or link, or continuing to use a website, constitutes acceptance of the terms and conditions.

The court made an interesting observation that given the nature of technology it is not hard to give a user reasonable notice use of a site, or clicking on and “I accept” button would create a binding contract. Website providers often try to skate around this issue, because they want the user experience to be as seamless as possible. But there is a price to be paid for failing to require users to take note of contract terms, and that price is the unenforceability of critical terms that protect the online provider.

Watch for employee registration of domain names using employer trademarks

According to one source (, the annual amount of employee theft from US businesses is $50 billion, and seventy five percent of employees have stolen at least once from their employer. It’s no surprise that employers have security cameras in stores, and policies in place to reduce the amount of employee theft. What is surprising is that employers are not more careful with other assets.

Although perhaps not technically theft, there is a new employee risk
relating to employer assets in the online world. Some seemingly clever employees have chosen to register their employe
r’s trademarks as second level domain names to enhance the value of the domain names. With registration of the domain names in hand, the employee’s intent may be to sell the domain names back to the employer, offer them on the domain name market to someone seeking a high traffic domain name, or hold them for some misguided leverage against the employer in the future. Any of these  strategies should not be acceptable to an employer as a trademark owner, and appropriate action should be taken.

Trademarks, and the associated goodwill, are valuable assets of employers. Many employer trademarks have been in existence for years, and based on extensive use and effort, have become significant tools for consumer awareness, brand loyalty, and quality consistency. Misappropriation and misuse of trademarks can be very costly for employers, and can damage the valuable goodwill associated with the marks. Having employees compromise the value of the trademarks should be taken seriously.

Although employees owe a general duty of loyalty to their employers, it is not always clear whether the rules for employees registering domain names are different than for an independent third-party registering domain names that include the employers trademarks. Attempting to discipline an employee for using a trademark in a domain name may not be an easy case. Probably the best course of action is for employers to adopt broad policies relating to employee use of trademarks, specifically as they relate to domain names. Also, employers need to be vigilant in monitoring the use of their trademarks in domain names, and in any other way that might impact or compromise the integrity of the goodwill of the marks.

You may not be prison-bound, but that doesn’t mean you aren’t breaking the law

Under federal copyright law, anyone who willfully infringes a copyright in certain ways will be subject to criminal penalties, including prison for several years. That’s a remedy to be taken seriously. It’s probably not likely that the average consumer or employee will be criminally prosecuted, but there are criminal remedies available. Since copyright infringement may be a crime, if I read a Dilbert® cartoon, really like it, and forward it by email to a friend, is there a chance I will be sent to prison?

What works are copyrighted? The definition is very broad and essentially covers anything that is original and fixed in a tangible medium of expression, which includes digital storage. This includes blog posts, newspaper and magazine articles, images on websites, presentations, memoranda, and educational literature. The list is very long. Usually the issue with copyright rests not with whether the work was original and therefore copyrighted, but instead whether the person in question of copyright infringement had the right to do what he or she did with the work.

Copyright infringement occurs when a copyrighted work is used, copied, distributed, revised, or publicly displayed without the consent of the author or creator of the work. Using the Dilbert® cartoon as an example, infringement includes making a photocopy of the cartoon, scanning the cartoon and saving it in a Dropbox® folder, sending the cartoon to a friend by email, or using the cartoon in a PowerPoint presentation to a chamber of commerce. Infringement also occurs when a presentation is copied and distributed internally in a business or an email is sent to a group in an organization to promote a strategic goal, but includes an image created by someone else.

The act of making a copy or sending a work by email is not really dependent on the audience. An internal email or interoffice copy is just as infringing as blasting a post with infringing material to thousands of subscribers to a news service. It should be noted, however, that the original comic may be delivered to someone in its original form, so long as a copy is not made and delivered.

There are a few considerations for assessing the risk of potential infringement. Sending an internal email of a Dilbert® cartoon is not likely to generate actual damages. If Scott Adams, as the creator, gets really upset, it’s possible he could seek an injunction against any future infringement, but it’s not likely there would be any actual damages. However, Scott would have a right to claim statutory damages. These are damages awarded for situations like this where the actual damages are nominal at best, but the law wants to provide a remedy to the copyright owner. Statutory damage awards may be as high as $30,000 for infringement of the work, but if the infringement is found to be willful, the award may be as high as $150,000. Statutory damages are intended to make us think twice before engaging in any potentially infringing activity.

Infringement does not occur if the person engaging in the copying or other activity has consent, permission, or an express license to copy, distribute, or otherwise use the work in a way that might otherwise be infringing. Usually professionally published works, and often websites, provide an easy way to request permission to use a work. This is not to suggest that the author may not want a royalty, or impose limitations on the work, but this is certainly the safest way to use a copyrighted work. The reason there is so much copying and distribution in the social media world is that the terms and conditions of the social media providers require licenses and rights to allow the distribution, copying, and other use of content posted on the social media sites.

Finally, there is fair use. Unfortunately, fair use does not mean copying anytime there is not a profit involved, or if there is less than 20 percent of a music composition involved. There are no bright line tests. In fact, the test is difficult to implement, and unless a work is being used by a nonprofit institution for teaching or critical analysis, or something very similar, be wary of claiming fair use. Typically fair use is raised after the infringement claim is made, not when someone is considering using a work of someone. If someone is prepared to take the time to do the analysis and take the risk of coming under the fair use umbrella, the person or business would be well advised to use the time and effort getting consent or a license from the author. In most situations, invoking fair use prospectively is risky.

Making decisions on the use of an original work created by another can be tricky. It’s easy to conclude that sending funny stories, posting newspaper clips, and forwarding cool content from a website does not constitute infringement, because we seldom, if ever, hear of anyone being sued for infringement. But this is one case where having the masses engage in the behavior does not provide legal comfort. It may mean that the risk of being sued is not real high, but it does not make the activity legal. It simply means the law is not always being enforced.

Benefits of federal trademark registration (principal and supplemental registers)

Benefits of Federal Registration on the Principal Register

Trademarks may be federally registered on the principal register if they are distinctive, and otherwise qualify for federal registration. Here are some of the benefits of federal registration on the principal register:

1. A certificate of registration is prime facie evidence of (a) the validity of the registered mark and of the registration of the mark, (b) the registrant’s ownership of the mark, and (c) the registrant’s exclusive right to use the registered mark in commerce on or in connection with the goods or services.

3. Registration of the mark provides constructive notice of the registrant’s claim of ownership.

4. Right to use ®. This puts the world on notice of registration of your mark, and that you are a sophisticated trademark user. Also, no profits or damages may be recovered in a trademark infringement action unless the defendant had actual notice of the registration.

5. An infringement action may be brought in Federal court.

6. Right to injunction and have an infringer’s use of a conflicting mark immediately terminated.

7. Right to have counterfeit goods seized.

8. Entitled to recover profits, damages, and costs of the action. Plaintiff needs only to establish sales, defendant must establish deductions. Damages may be trebled by the court.

9. Court may order destruction of advertising materials and containers which include the infringing mark.

10. Infringing imported goods can be seized by customs.

11. Our experience is that users of conflicting marks are much more responsive and willing to resolve a conflict if the challenging trademark has been federally registered. This save significant cost and effort.

Benefits of Federal Registration on the Supplemental Register

Trademarks which are merely descriptive or otherwise not distinctive may not be registered on principal register, but they may in many cases, and if the mark is capable of becoming distinctive, be registered on the supplemental register. Here are a few of the benefits of registration on the supplemental register:

1. Right to use ®. This puts the world on notice of registration of your mark, and that you are a sophisticated trademark user. Also, no profits or damages may be recovered in a trademark infringement action unless the defendant had actual notice of the registration.

2. An infringement or unfair competition action may be filed in Federal court.

3. Entitled to recover profits, damages, and costs of the action. Plaintiff needs only to establish sales, defendant must establish deductions. Damages may be trebled by the court.

4. Court may order destruction of advertising materials and containers which include the infringing mark.

5. Applicant may seek registration on the principal register after mark has acquired secondary meaning.

6. Registration on the supplemental register does not constitute an admission that the mark has not acquired distinctiveness.

How to obtain federal trademark registration

I am frequently asked how to obtain and maintain federal trademark registration. Here are the steps:

1. Identify several potential trademarks. Try to be creative, and avoid marks that are descriptive of the products or services being sold. Marks that are merely descriptive are not registerable on the principal trademark register of the Patent and Trademark Office (PTO), and they are more difficult to protect and defend.

2. Run a knock out search on all of the potential marks identified. The knockout search should include google searches, and a search of the PTO database. Remember that the PTO will not register trademarks that are confusingly similar to other trademarks registered in the PTO, or which have been previously in use in the United States. Likelihood of confusion extends well beyond identical marks, so the failure to find an identical mark to one of the marks you are considering does not mean the potential mark is acceptable to use.

3. From the marks that make it past the knockout search stage, select the best one. Have a comprehensive search done for the selected mark. Comprehensive searches are a critical step to avoiding infringement on others’ marks, and avoiding refusals to register by the PTO. However, they are also expensive. That’s why knockout searches are done first to limit the field of potential trademarks. Comprehensive searches are not perfect, and there is room for error, but they can significantly reduce the risk of infringement and refusal to register a trademark.

4. File an application for registration. An application may be an “intent to use” application, if the mark is not already in use, but the applicant has a bona fide intent to use the mark, or an “actual use” application, if the mark is already in use in commerce. Applications filed for goods and services must fall into one of the predetermined categories or classes of goods and services. The filing fee is based on the number of classes the goods and services fall under for a particular trademark.

5. Wait for a response from the PTO, and respond to office actions. The PTO will conduct a substantive examination of the trademark application. The examining attorney may determine that the application is fine, and the application will proceed to the next step toward registration. Alternatively, the examining attorney may find some procedural or substantive issues in the application, and issue a formal or informal office action. Office actions require a response within six months of the date on which the office action is issued. If no response is filed, the application will be abandoned by the PTO.

6. The trademark will be published in a government publication called the Official Gazette, after the examining attorney has completed the review process, and all issues raised by the examining attorney in one or more office actions have been resolved. Publication in the Official Gazette puts the world on notice that the trademark will be registered. Anyone who believes that he or she will be damaged by registration of the mark may file an opposition proceeding during the thirty day publication period. If an opposition proceeding is filed, the applicant must respond and work through the opposition proceeding process, which is essentially a mini-litigation or administrative proceeding.

7. Notice of Allowance and registration. After publication, and assuming either an opposition is not filed or any opposition proceeding has been favorably resolved, if the application was an “actual use” application, the trademark will be registered. If the application was an “intent to use” application, the examining attorney will issue a notice of allowance, which triggers a six month period during which the applicant must submit to the PTO evidence of use of the trademark.

8. Declarations of continuous use and incontestibility. Between the fifth and sixth years after registration, the applicant (now registrant) must file a section 8 declaration certifying that the trademark is still in use. If the section 8 declaration is not filed, the PTO will cancel the registration. In addition, during the same time period, the registrant may file a section 15 declaration seeking incontestability of the trademark. If the trademark meets the requirements for a section 15 declaration, the registered mark becomes incontestable, this means that the registration of the mark may not be challenged, except on limited grounds.

9. Renewal of Registration. Between the ninth and tenth years after registration, and between the ninth and tenth years thereafter, a section 8 declaration must be filed to avoid cancellation of the registration by the PTO, and a section 9 declaration must be filed to renew the registration of the trademark.

There is obviously much more to choosing and registering a trademark, but these are the fundamental steps and process.