Internet gaming

A bill (H.R. 2267) introduced by U.S. House Financial Services Committee Chairman Barney Frank to remove Federal obstacles to Internet gambling may be delayed, but don’t consider it beyond hope. This bill, which was introduced in May 2009, has already garnered significant House support. While reports indicate that consideration of the bill has been delayed, given the current fiscal crisis, it would only seem logical for Congress to look to Internet gaming as a source of much-needed revenues.

There has long been a debate as to whether Federal laws prohibit many forms of Internet gaming, such as on-line poker. The DOJ has historically taken the position, which has been accepted by some courts, that the Wire Act (18 U.S.C. § 1084) prohibits transmission of wagers over interstate wire communications facilities for all forms of on-line gaming. See e.g, People, ex rel. Vacco v. World Interactive Gaming Corp., 185 Misc.2d 852, 860 (N.Y. Sup. Ct., 1999).

On the other hand, the 5th Circuit and District Courts in other Circuits have held that the Wire Act only prohibits wire transmissions for sporting events, but not on-line gaming, such as poker. In re MasterCard. Intern. Inc, Internet Gaming Litigation, 132 F.Supp.2d 468 (E.D. La. 2001), aff’d 313 F.3d 257 (5th Cir. 2002); United States v. BetOnSports PLC, U.S.D.C., Eastern District of Missouri, Case No. 4:06CV01064 (Nov. 9, 2006).

Of course, all States have laws regulating gaming, and some outlaw virtually all games of chance, including poker. So, in 2006, Congress enacted the Unlawful Internet Gambling Enforcement Act (UIGEA). See 31 U.S.C. § 5361 et seq. The UIGEA did not directly outlaw Internet gaming, but prohibited any person “engaged in the business of betting or wagering” from “knowingly accept[ing] in connection with the participation of another person in unlawful Internet gambling” . . . credit, electronic funds transfers, checks and the proceeds of other financial transactions. Id. at § 5363.

Transactions constitute “unlawful Internet gambling,” only if prohibited by other Federal, State or Tribal law. However, the UIGEA prohibits online gambling transactions if an Internet bet is placed or received in a place where a State, Federal or Tribal law make such a transaction illegal. Id. at 5362(1). Given this breadth of scope, the UIGEA creates real risks for financial institutions who attempt to cooperate in on-line gambling anywhere in the U.S.

Congressman Barney Frank has been opposed to the UIGEA for some time, and first introduced legislation to curtail some of its effects in 2007. In May 2009, Rep. Frank introduced H.R. 2267 in a further attempt to help legalize online gambling in the U.S. The Bill would give the U.S. Treasury Secretary regulatory powers over Internet gambling, and would permit the Secretary to issue licenses to Internet gambling facilities. Licensees would be permitted to accept bets from persons in the U.S., so long as they were physically located in a jurisdiction that permits Internet gambling at the time the bet was placed. The Bill would also provide immunity for any financial institution that processed transactions on behalf of licensees, for activities conducted under the Bill’s provisions.

The effect of the Bill would be to permit on-line gambling companies to set up shop anywhere in the U.S. However, they would only be permitted to take bets in States and Tribal lands that specifically permitted Internet gambling. As such, under the bill, the legality of Internet gambling would ultimately depend on the law prevailing in the State or Tribal land where the bet was placed. But at least all Federal bars to on-line gaming would be eliminated.

This time around, Rep. Frank has been able to garner over 50, mostly Democratic, co-sponsors to his bill. Recent reportsindicate that H.R. 2267 is unlikely to be considered by Congress in 2009. However, legalization of Internet gaming, which is going on anyway despite current laws, has the potential to create serious revenues for State and Federal governments. A report from 2006 indicated that Internet gaming at that time amounted to $6 billion. Given the current fiscal crises, the potential windfall to State and Federal treasuries from taxing this activity may prove too tempting to pass up.


Digital media law update: News has just broken about a suit filed by five individuals against Facebook for alleged privacy violations. While the ink has barely dried on the court filings, in my view, the plaintiffs face significant legal hurdles to recovery of significant damages. Here is an initial analysis of the claims in the complaint — Melkonian, et al., v. Facebook, Inc., et al., Superior Court of the State of California, County of Orange, Case No. 30-2009-00293755:

The plaintiffs and their allegations

This is not a class action, but a joint suit by a rather mixed bag of plaintiffs:

• The lead plaintiff, Melkonian, is a photographer who claims that images she took have been posted on Facebook without her consent.
• Two plaintiffs are minors under age 13 who created Facebook accounts without their parents’ consent and uploaded personal information and photographs onto the site.
• The fourth plaintiff is a college student who joined the original form of Facebook, “Thefacebook,” in May 2005 and uploaded personal information when the site operated under an allegedly more privacy-protective set of terms and conditions.
• The fifth plaintiff is an actress who claims that digital images of her have been uploaded onto the site without her consent.

Much of the 41-page complaint is devoted to a history of Facebook’s changing policies on user privacy, its interactions with groups such as “People Against the New Terms of Service,” discussions about public attitudes toward privacy, and various private and public investigations into Facebook’s privacy practices. The primary factual allegations in the complaint are:

(1) Facebook data mines personal information posted on its site and exploits this by providing it to advertisers who use it to target ads to users;

(2) Facebook’s posted privacy policies are incomplete, misleading and unfair. For example, on February 4, 2009, Facebook unilaterally changed its terms of service to include, inter alia, a grant by users of “an irrevocable, perpetual, non-exclusive, transferable, fully paid, worldwide license to use, copy, publish, stream, store, retain, publicly perform or display, transmit, scan, reformat, edit, frame, translate, excerpt, adapt, create derivative works and distribute User Content . . . and to use your name or likeness and image for any purpose, including commercial or advertising . . .” According to the Complaint, this is an outrageous extension of Facebook’s rights over its user’s data;

(3) Facebook fails to adequately warn users about the dangers of posting sensitive personal information online;

(4) Facebook fails to prominently disclose its privacy policies and terms of use at sign-up and employs confusing and ineffective privacy protection tools;

(5) Facebook has no technical safeguards to prevent misappropriation of user data by third-party developers who have access to the site;

(6) Facebook fails to provide users with a simple and permanent means to delete their accounts and personal data;

(7) Facebook’s uses “social ads” — customized advertisements that use private data, such as a user’s name and photo — to advertise products and services to the user’s “friends” and others users within that person’s network;

(8) Facebook uses tracking technology called “Beacon” that allows third parties to gather information about user’s purchase activities and then create social ads regarding such purchases;

(9) Facebook lacks adequate safeguards to prevent registration or use by children under age 13.

Analysis of the causes of action

Based on these wide-ranging allegations, the complaint states six separate causes of action against Facebook, including: (i) and (ii) statutory and common law misappropriation of the right of publicity for its use of the plaintiffs’ names and photographs without consent for advertising purposes; (iii) violation of the California unfair competition law for its data mining practices and dissemination of the plaintiffs’ personal information, (iv) violation of the California Constitutional Right to Privacy for its commercialization of plaintiffs’ personal information; (v) violation of the California Online Privacy Act for failing to “conspicuously post and comply” with the privacy policies required under the Act, and (vi) violation of the California Consumer Legal Remedies Act for unconscionably changing its Terms of Use and privacy policies without notice, and representing that user information would remain private, but then providing it to third party advertisers.

The claims of the lead plaintiff, Melkonian, appear to be claims for copyright infringement. As such, some or all of her claims here could be preempted by the Copyright Act. Putting this issue aside, the remaining four plaintiffs’ claims are based on allegations that their names, personal information and/or photos were used commercially without their consent.

So do these claims have any legs?

Causes of action 1 & 2: misappropriation of name and likeness

To make out a valid claim of common law misappropriation of name or likeness, a plaintiff must show that (1) the defendant used his/her name or likeness; (2) the use was to the defendant’s advantage, commercially or otherwise; (3) lack of consent; and (4) resulting injury. Eastwood v. Superior Ct. (1983) 149 Cal.App.3d 409, 417. To make out a valid claim under the California privacy statutes, a plaintiff must prove the same elements, however the defendant must have used the plaintiff’s name directly in connection with the advertising or sale of goods. California Civil Code § 3344.

Here, the plaintiffs appear to adequately plead that their names and likenesses were used by Facebook to its advantage, and specifically in advertising — via data mining and social ads. Plaintiffs also appear to adequately plead that this use was without their consent — although Facebook will surely argue that the plaintiffs consented by agreeing to submit to its Terms of Use. While none of the privacy plaintiffs appear to claim that they suffered economic damages, economic damages are not required to make out a privacy cause of action. Under California law, emotional damages are sufficient. See Abdul-Jabbar v. General Motors Corp., 85 F.3d 407 (9th Cir. 1996).

In defense, Facebook will doubtless claim that the plaintiffs consented to its use of their personal data by agreeing to its Terms of Use when they signed up on the site. While Facebook changed its Terms of Use over time, this does not necessarily mean that new terms are invalid. (See our blog post of March 31, 2009). Facebook may have more difficulty in showing that the minor plaintiffs gave consent to the use of their personal data, but the resolution of that issue awaits further discovery.

Facebook might also argue that its use of the plaintiffs’ names and likenesses did not constitute “publicity” and hence is not actionable as a violation of the plaintiffs’ rights to privacy. It is a basic principle of California law that the right of privacy is only violated by “publicity” — a communication to the public in general, or to a large number of people, as opposed from communication to an individual or a few persons. See Schwartz v. Theile (1966) 242 Cal.App.2d 799, 805; 5 Witkin, Summary of California Law, 10th ed., Torts, § 654 (2005). The typical misappropriation of name or likeness case involves public advertising in which the name or the picture of the plaintiff is used to tout the product. Use of a plaintiffs’ name or likeness in data mining, or even social advertising, may not expose it to a large enough number of people to be considered publicity.

Facebook might also consider arguing that the common interest privilege applies to its practices because the data mining information and social ads were only distributed to a small number of interested parties.

Even if plaintiffs are successful in these claims, the complaint does not plead much of a case for a large damage award. There are no claims of monetary losses, and a jury may wonder how much emotional damage could be caused by plaintiffs’ knowledge of Facebook’s data mining practices, or the use of plaintiffs’ pictures in a social ad. While minimum damages are also available, the statutory amount is rather low — $750. On the other hand, an injunction prohibiting data mining or social ads could create significant lost revenue for Facebook.

Cause of action 3: breach of the California unfair competition law

The third cause of action, for breach of California’s unfair competition law (Business & Professions Code § 17200 et seq.), is based on plaintiffs’ misappropriation of name and likeness allegations in the 1st and 2nd causes of action, and the statutory violations stated in the 4th-6th causes of action. As such, it will stand or fall based on the result of the litigation of those claims.

Cause of action 4: violation of the California constitutional right to privacy

The fourth cause of action, for violation of California’s constitutional right to privacy, is a cognizable claim. However, to succeed, a plaintiff must show: (1) a legally protected privacy interest, such as an interest in precluding the dissemination of sensitive or confidential information, (2) a reasonable expectation of privacy, and (3) invasions of privacy that are sufficiently serious to constitute an egregious violation of the social norms underlying privacy rights. See Hill v. National Collegiate Athletic Assn. (1994) 7 Cal. 4th 1.

Plaintiffs may face a tougher time in meeting these high standards. Facebook could argue that the plaintiffs had no expectation of privacy regarding information provided to their “friends,” because the plaintiffs consented to have these persons to join their network and to obtain sensitive personal information about them. On the other hand, the plaintiffs would likely respond that they never consented to have information about their purchasing habits divulged to members of their network. However, Facebook could respond that even if this is true, providing social ads that disclose a user’s purchase habits is simply not an egregious violation of privacy rights, especially considering the level of personal disclosure that is often present on Facebook.

Cause of action 5: violation of the California Online Privacy Act

The fifth cause of action is for violation of the California Online Privacy Act. Business & Professions Code §§ 22575-79. The Act requires commercial web sites that collect personally identifying information (i.e., interactive web sites like Facebook) to create and “conspicuously post” a privacy policy. While the Act creates no public or private right of action, violations would be actionable under California’s unfair competition law.

However, remedies under the California unfair competition law are primarily limited to restitution and injunctive relief. Unless the plaintiffs actually paid money to Facebook, they would be unlikely to recover any money for breaches of the Act. I would expect Facebook to defend against this claim by attempting to show that it complied with the Act.

Cause of action 6: violation of the California Consumer Legal Remedies Act

The sixth cause of action, for violation of the California Consumer Legal Remedies Act (California Civil Code § 1750) is based on two theories: (i) that Facebook’s unilateral changes in its Terms of Use, Statement of Rights and Responsibilities and Privacy Policy were unconscionable, and (ii) that Facebook represented that user information would remain private, but then began data mining and sharing it with third parties.

However, as we have previously blogged, California courts have upheld clauses permitting unilateral alterations in a contract — under limited circumstances. See our blog posts of March 31 and April 22, 2009. Facebook may argue that such circumstances apply here, making any change in its change in policies not unfair.

This is an important suit that could prove to be a significant test of data mining and social advertising. While the plaintiffs’ potential damage awards do not appear to be high, the suit does have the potential to cause expensive damage to Facebook’s business, if it is required to scale back its data mining and advertising.

Civil enforcement, Copyright, Digital Millennium Copyright Act, Litigation is a social networking aggregator, boasting over 5 million users in India and Brazil, that launched business in the U.S. in November 2008. It permits users to simultaneously log-in to multiple social networking sites, such as Myspace and Facebook and instant messaging sites, such as Twitter.

While some website operators might consider this service as free advertising, other might see it as posing the danger of supplanting the websites it aggregates. In fact, has already drawn significant lawsuit fire. In December 2008, shortly after the site premiered, was sued by Facebook. (Facebook, Inc. v. Power Ventures, Inc., et al., U.S.D.C., Northern District of California, Case No. C 08-5780).

Facebook claimed that was circumventing Facebook’s protocols for accessing its information, infringing on Facebook’s trademark, and inducing Facebook users to provide them with email addresses of Facebook contacts for the purposes of sending commercial messages that it falsely stated came from “The Facebook Team.” Facebook brought claims against under numerous legal theories, including violation of the CAN-SPAM act (15 USC §7701), copyright and trademark infringement, violation of the Digital Millennium Copyright Act and violation of California’s unfair competition law.

In response, brought a motion to dismiss/motion for more definite statement -challenging the sufficiency of the allegations in the complaint. However, the bar to survive such a motion in Federal court is not very high. Under Federal rules, a plaintiff generally does not have to be specific about the facts that underlie the claims he brings in a lawsuit. Federal courts deem it sufficient that the complaint merely contain sufficient facts to give the defendant “fair notice” of the nature of the claim and its basis. The courts rely on discovery and law and summary judgment to weed out unmeritorious claims. The main exception to this rule is for claims alleging fraud. For these claims, the complaint must state what the fraudulent representations were, who said them and where and when.

These rules largely dictated the outcome here. After Facebook filed its opposition, actually withdrew its motion as to the CAN-SPAM claims. According to’s reply brief, this did not amount to a concession that the claims had merit, but merely that Facebook had met the pleading standards for these claims.

At the hearing on the motions, Judge Jeremy Fogel also found that Facebook had met Federal pleading standards for its copyright and trademark infringement, violation of the Digital Millennium Copyright Act. For example, to make out a claim under the Digital Millennium Copyright Act, a plaintiff must allege, inter alia, that the defendant circumvented a technological measure designed to protect the copyrighted material. See Chamberlain Group, Inc. v. Skylink Techs, Inc. 382 F.3d 1178, 2103 (Fed. Cir. 2003). Here, Facebook’s complaint had alleged that “Facebook implemented technological measures to block access to the Facebook site by” and that “Defendants’ deliberately circumvented Facebook’s technological security features . . .” These rather general allegations were cited by the Court as sufficient. (Order at 8:4). Fn1

Given the low pleading standards required for complaints, too much should not be made of the Court’s ruling. Internet content providers have often found ways to cope with aggregators. It will be interesting to see whether the tussle between Facebook and gets resolved via legal processes or business negotiations.

Civil enforcement, Copyright

A number of press reports have given the impression that the Colorado District Court’s ruling in Golan v. Holder (fn1) means that that Federal laws reviving expired copyrights violate First Amendment protections on free speech. The actual ruling is far narrower.

In 1993, Congress enacted 17 U.S.C. Section 104A, to permit foreign authors whose copyrights had fallen into the public domain for technical reasons (such as by failing to renew the copyright with the U.S. Copyright Office) to restore their copyrights. Section 104A solely permitted “restoration” of copyright protection for works from “a nation other than the United States.” (fn2) Section 104A was added after the United States joined the Berne Convention for the Protection of Literary and Artistic Works — a treaty first enacted in 1886, but not joined by the U.S. until 1988. Article 18 of the Convention requires member nations to provide copyright protections to works by foreign authors so long as the term of protection in the country of origin has not expired as to the work.

The plaintiffs were U.S. artists who used works by foreign artists that had been in the public domain before 1994, such as Sergei Prokofiev’s “Peter and the Wolf.” The plaintiffs claimed that after Section 104A was enacted, they were subjected to higher performance fees, sheet music rentals and other royalties. In some cases, these costs were prohibitive. (fn3)

The Golan case was the brainchild of Stanford Law professor, founder and co-director of the Center for Internet and Society and Director of the Fair Use Project, Lawrence Lessig. The original complaint claimed that Section 104A shrunk the public domain and thereby violated the limitations on congressional power inherent in the Copyright Clause, and violated First Amendment rights to free expression. The Colorado District Court originally rejected these claims. However, on appeal, the Tenth Circuit found that a legitimate First Amendment claim existed and remanded the case for First Amendment analysis.

The basis for the Tenth Circuit’s ruling was the U.S. Supreme Court ruling in Eldred v. Ashcroft (fn4), in which the Supreme Court stated that a Congressional act modifying copyright law might be subject to First Amendment scrutiny if it “altered the traditional contours of copyright protection.” (fn5) While the Tenth Circuit could not find federal authority that explained the phrase “traditional contours”, it concluded that the traditional contours of copyright protection included the principle that “works in the public domain remain there.” (fn6) It based this on the notion that the general sequence is that copyrighted works has always progressed from “1) creation; 2) to copyright; 3) to the public domain” and that Section 104A changed this sequence. (fn7)

On remand, the District Court first found that since Section 104A was content-neutral, it was subject to what is commonly-referred to as “intermediate scrutiny” under the First Amendment. (fn8) Under this test, a statute can only be sustained: (1) if it furthers an important or substantial government interest that is unrelated to the suppression of free expression, and (2) if the restriction is no greater than necessary to further that interest. (fn9)

The U.S. government claimed that the primary interests advanced by Section 104A were compliance with the Berne Convention and correction of historic inequities imposed on foreign authors. The Court rejected both of these rationales.

The parties agreed that the Berne Convention required restoration of the rights of foreign authors. However, the Court found that Section 104A was not narrowly tailored to meet this interest, because “the government could have complied with Berne while providing significantly stronger protection for the First Amendment interests of reliance parties like the Plaintiffs here.”

Reliance parties are persons who have used a foreign work that was in the public domain, and continue to use it after that work is “restored” under Section 104A. (fn10) Section 104A provides that reliance parties may continue to use restored works for 12 months after receiving a notice of intent to enforce a restored copyright without being subject to suit for infringement, and may continue to use to use a restored work for the duration of the copyright if they pay “reasonable compensation” to the copyright owner. (fn11)

The Court found that these protections for reliance interests were not the broadest permissible under the Berne Convention. Rather, it found that Congress could have permitted reliance users to simply continue using restored works as they had prior to restoration. The Court concluded that Section 104A simply was “not tied to the Government’s interest in complying with the Berne Convention.” (fn12) Since Section 104A did not advance a substantial government interest, it could not withstand First Amendment scrutiny.

The Court also rejected the notion that there was any need to correct inequities for foreign authors. Rather, it found there were no such inequities, because U.S. law imposed the same requirements on all authors, whether foreign or domestic, to obtain copyright protection. Moreover, it also found that Section 104A created inequities, by permitting foreign authors to relieve themselves of failure to comply with formalities required for copyright protection, while denying this right to U.S. authors. (fn13)

The District Court’s decision did not go as far as the plaintiffs had wanted. The plaintiffs had argued that Congress simply has no power to restore copyrights to works in the public domain “at all.” Doubtless, this issue will resurface if the District Court opinion is appealed. No notice of appeal appears to have been filed as of the date of this report.

Internet contracting, Litigation

The clickware or browse-ware on many websites contain clauses permitting the operator to unilaterally change the terms of use. For example, a number of websites that I reviewed recently, and that offer services throughout the U.S. or North America, contain clauses along these lines:

“We may amend, modify or update these terms of use at our sole discretion, and all users
shall be bound by any such amendment, modification or update. We may, but are under no
obligation, to provide notice of any amendment, modification or update of these terms of use.”

Are clauses like this enforceable? The answer is . . . it depends.

On one hand, many website customers would argue that because this kind of clause gives so much discretion over the terms of the contract to the website operator, there really has been no agreement at all — no meeting of the minds as to the terms of the contract. Others would argue that because the website owner can modify his obligations at will, the website owner has offered by real “consideration”, so the contract is illusory.

California courts have held that such discretion does not necessarily make a contract invalid, because it is assumed that the party with the discretionary power — in this case, the website operator — has a duty to exercise its discretion in good faith and in accordance with fair dealing. So even if the agreement permits a material term, like the price, to be modified, as long as the actual modification that is made is reasonable or in proportion to some objective standard, the right to modify will generally be upheld. (fn1) For example, California courts have upheld contracts in which banks have reserved the right to increase interest rates on a loan, as long as the increases that were actually imposed were determined to be reasonable. (fn2)

However, in many cases, website operators have attempted to insert entirely new terms in later versions of an agreement that were not present at the time that the customer used a website or agreed to its contractual terms. I have seen cases where subsequent terms of use added such items as arbitration clauses (fn3), forum selection clauses (fn4), choice of law clauses (fn5), or attorneys fees’ (fn6) provisions.

Some California cases have held that such added terms may not be enforceable — despite the presence of a unilateral modification clause. Here are some examples:

In a 1998 case, the Bank of America sent “bill stuffers” to credit card account customers in which it announced that all future account disputes would be settled by arbitration and “if you continue to use your account, this new provision will apply to all past and future transactions.” The Bank argued that it had a right to impose this new term because provisions in its agreements with credit card holders stated: “We may change any term, condition, service or feature of you account at any time. We will provide you with notice of the chance to the extent required by law.” (fn7)

The Court disagreed. It found that while a clause permitting unilateral modification can be upheld, modifications must be limited in scope to terms “whose general subject matter was anticipated when the contract was entered into.” Here, the Court found that “there is nothing about the original terms that would have alerted a customer to the possibility that the Bank might one day in the future invoke the change of terms provision to add a clause that would allow it to impose ADR on the customer.” Accordingly, the Court held that the new ADR clause was not enforceable. (fn8)

In a 2002 case, a customer sued PayPal, arguing that a later version of a user agreement that included a new arbitration clause that contained such things as a prohibition against consolidation of claims and a forum selection in favor of venue in Santa Clara County, California, was invalid.

PayPal created accounts with customers using an online application. A prospective customer clicked a box at the bottom of the application that read, “[you] have read and agree to the User Agreement and [PayPal’s] privacy policy.” The “clickwrap” User Agreement apparently agreed to by the plaintiff contained a clause stating that “this Agreement is subject to change at any time without notice.” (fn9)

Using an “unconscionability” analysis, the Court found that PayPal contract was “procedurally unconscionable” because it was a “contract of adhesion.” A contract of adhesion is a standardized contract, which is drafted and imposed by a party with superior bargaining power, and which gives the subscribing party the opportunity only to accept or reject it. (fn10) Many (but certainly not all) website contracts would fit this definition. (fn11)

The Court noted that a contract that is procedurally unconscionable may nonetheless be enforceable if it is substantively conscionable. However, the new terms also failed this test. First, the new terms provided that PayPal could unilaterally freeze funds in disputed accounts, forcing the customer to engage in expense court proceedings to unfreeze them. Second, the prohibition against consolidation of claims effectively meant that few claims could be pursued by customers, since most claims involved small amounts of money. Third, the new requirement that arbitration proceed under the commercial rules of the American Arbitration Association (AAA) and that the costs of arbitration be equally shared meant that, in most cases, the cost to arbitrate would far exceed the amount of the claim — again effectively precluding customers from pursuing recovery. Fourth, limiting venue to Santa Clara County, California was also unreasonable, since PayPal’s customers were spread across the U.S. and could not afford to pursue claims if this meant traveling to California. Accordingly, the Court found that the new arbitration clause was not enforceable.

Product litigation

Defendants in a consumer electronics class action often hope that agreeing to settle the suit will bring an end to litigation over a product or component. However, Sony’s settlement in 2008 of a class action regarding Optical Block technology used in its LCD Rear Projection HDTVs has been followed-up with the filing of new class actions regarding Optical Block against Sony and Hitachi in the Southern District of California. (fn1) The new suits claim that Optical Block contained a defect that eventually caused the TVs to display bright blue and red haze, spots and streaks which covered the programming on the screen. The complaints, which allege that the manufacturers were aware of the defect at the time of sale, request relief under the unfair competition, deceptive advertising and warranty laws of California and other states.

The new suits mirror the class action filed against Sony in the Southern District of New York in 2006 — the settlement of which received court approval in early 2008. The new actions bring claims regarding different Sony and Hitachi models which allegedly also contain Optical Block technology. In response to the new suits, Sony has filed a motion to dismiss, while Hitachi has filed an answer.

In the New York action, after filing a motion to dismiss, Sony agreed to settle the action. In the settlement agreement, while Sony was not required to pay a specific sum to the plaintiffs, Sony agreed to: (i) extend the limited warranties on the affected units to permit repair or replacement of the Optical Block until June 30, 2009, (ii) refund prior expenses paid by customers to replace the Optical Block; (iii) refund money paid by customers for extended service plans; and (iv) refund money paid by certain customers who had previously exchanged affected units for other Sony TVs. (fn2)

The total cost of the settlement to Sony cannot be determined from the court documents. However, the settlement class contained approximately 175,000 members. In its Opinion and Order approving the settlement, the Court noted that Sony had indicated that it made fixes to eliminate problems with the Optical Block technology in 2006. The Court also noted that at a settlement hearing, Plaintiffs counsel stated “we do think that Sony has successfully remanufactured the component.” (fn3)

Plaintiffs’ counsel was awarded $1.6M in attorneys fees and costs. This resulted in a 21% premium over the value of plaintiffs’ counsels’ services if computed under the lodestar method (which computes attorneys fees on a hours x hourly rate basis). (fn4)

Green Technology

The California Energy Resources Conservation and Development Commission is in the process of considering new energy efficiency regulations for televisions which would require substantially increased energy efficiency. (fn1)

Current Standards

California’s current rules, which solely regulate power usage while a television is in “stand-by” mode, limit power usage to 3.0 watts. (fn2) The current rules only apply to stand-alone TVs designed to receive broadcast signals, and do not apply to combination TV/DVD or VCR units or computer monitors.

Proposed Standards

Under the proposed rules, which were largely based on recommendations from California’s utility industry, power usage would be limited to 1.0 watts in stand-by mode. Power usage in active mode would be based on screen size — ultimately based on the following formula: [{0.12 watts x the screen area (in square inches)} + 25 watts]. All TVs would be required to have a power factor of no more than 0.9. In addition, all TVs would be required to include a menu that forces a viewer to select the display mode each time the power is turned or to have automatic brightness controls. TVs would also have to include features placing the unit in stand-by mode when not in active use.

The proposed rules would begin to take effect after January 1, 2011 and would cover both stand-alone and combination TVs, but still exclude computer monitors. (fn3)

Expected Impact of the Proposed Standards

A review of the product database for TVs on the commission website indicates that almost 18% of the models listed would not be compliant with the new standards for stand-by power. It is not surprising that the Consumer Electronics Association (CEA) has opposed the proposed rules, estimating that up to 30% of current TV models could not be sold under the new regulations. According to the CEA and the Plasma Display Coalition, the models that would be most greatly impacted by the proposed rules would be TVs with larger screen sizes and greater functionality — in other words, the units with the highest profit margins. (fn4)

On the other hand, some manufacturers of TVs and TV components had applauded the new rules. Vizio sent a letter to the commission in which it stated that it currently has LCD models that meet the proposed standards and that “there are significant efficient achievements on the near horizon” that could permit its plasma TVs to meet the new standards as well. (fn5)

At present, the rules are merely proposals. There are likely be at least 1-2 hearings with stakeholders, as well as at least one round of formal public hearings, before the Commission adopts final rules. However, the current economic and political climate makes it likely that tough, new rules will be adopted.

Compliance, Enforcement and Litigation Risk

Under Commission regulations, manufacturers of TVs and most other covered products must test their products for compliance with the Commission’s energy efficiency standards. (fn6) A manufacturer must also file a certificate of compliance with the Commission. The Commission places compliant products on a database that is published on its website. (fn7) According to Commission rules, only products that have been tested and that appear on the Commission database may be sold or offered for sale in California. (fn8)

It should be noted that the Commission has limited enforcement capabilities. The sole enforcement power granted to the Commission by statute is the power to seek an injunction, where a violation requires “immediate action to protect the public health, welfare, or safety.” (fn9) The Commission has not brought such an enforcement action in recent memory. The Commission also has no inspection force to ensure that its rules are being complied with.

While the Commission may pose a limited direct threat, many manufacturing and vendor agreements contain clauses requiring suppliers to comply with all applicable laws. A non-compliant supplier could also be subject to suits by private individuals under California’s Unfair Competition law — which, inter alia, could subject it remedies such as to disgorgement of profits earned from the sale of non-compliant goods. (fn10)


Given the current economic and political climate, manufacturers of TVs and other appliances can expect increasing demands for energy efficient products from state and federal regulators.