District Court dismisses Contributory and Vicarious Copyright Infringement suit against credit card companies

Plaintiff, Perfect 10, Inc, is a California corporation providing adult entertainment services, including a magazine and website featuring nude models. Perfect 10 owns the copyrights on most of the images displayed, the trademark “perfect 10” and also the right of publicity for many of the models.A group of websites (referred to as the Stolen Content Websites) displayed pornography featuring prominent actresses; and published material that allegedly infringed Plaintiff’s copyright and trademarks. Defendants Visa and Mastercard provide financial services to these websites, allowing them to process those credit cards as a method of payment.

Defendants, Visa and Mastercard are entities that process credit transactions and owned by associations of banks, including Defendant Humboldt Bank. Defendants, First Data Corp. and Cardservice International are Independent Service Organizations (ISO) and can act in lieu of an acquiring bank as an agent for member banks.

Visa has certain internal regulations regarding the conduct of its member banks. It prohibits its banks and banking organizations processing its credit card payments from providing services to entities involved in illegal activity. Visa also requires member banks to terminate the accounts of merchants who have excessively high “chargeback” ratios. “Chargeback” occurs when a customer requests reversal of an improper charge. Visa publishes a “black list” of terminated merchants and provides access to this list to all members of Visa and all third-party processors. In 2001, Visa added Perfect 10 to this list after hackers allegedly caused Perfect10 to reflect high chargeback rates.

Perfect 10 sent letters to Visa and Mastercard informing them of the Stolen Content Websites’ alleged infringing behavior and demanding they stop providing financial services to those websites. When Visa and Mastercard did not comply; Perfect 10 sued Defendants, Visa, Mastercard, First Data Corp., Cardservice International, and Humbold Bank in the US District Court for the Northern District of California (San Jose Division).

Plaintiff claimed copyright and trademark infringement, violation of publicity rights, unfair competition, libel, and intentional interference with prospective business advantage. Defendants moved to dismiss the complaint pursuant to rule 12 (b) (6) for failure to state a claim for which relief can be granted.

Issues under discussion:

A. Copyright Infringement

Plaintiff alleged that the Stolen Content Websites engaged in direct infringement and Defendants were liable for contributory and vicarious copyright infringement.

1. Contributory Copyright Infringement

Plaintiff must show that (1) defendants had knowledge of the infringing activity: and (2) induced, caused, or materially contributed to that infringing activity. Defendants did not argue the issue of knowledge but they denied that they materially contributed to the direct infringement. Because the defendants provide content-neutral financial services, do not promote the infringing websites, do not provide a service essential to the functioning of the allegedly infringing websites and do not directly materially contribute to the infringing activity, the Court concluded that defendants were not liable for contributory copyright infringement.

The Court distinguished this case from Perfect 10 v. Cybernet Venture, where the court granted Plaintiff’s motion for preliminary injunction against a provider of age verification services for the same Stolen Content Websites at issue here. Unlike in Cybernet, Defendants provide content-neutral services, do not pay commissions to the websites when someone use their financial services, and do not promote the website that uses their services.

2. Vicarious Copyright Infringement

Plaintiff must show that defendants have (1) the right and ability to control the infringing activity and (2) get a direct financial benefit from the infringing activity.

Court found that the Defendants do not have the right and ability to control because the financial services are not essential for the functioning of the Stolen Content Websites’ service and even though defendant has internal regulations against illegal activity, third party websites are not bound by these rules.

The court further determined that because Defendants did not have the right or ability to exercise control over the alleged infringing activity, the existence of a financial benefit is not sufficient to establish vicarious liability.

B. Trademark Infringement

Plaintiff alleged that the Stolen Content Websites engaged in trademark infringement because the “perfect 10” mark remained on the materials they posted; and that Defendants were liable for contributory and vicarious trademark infringement.

1. Contributory Trademark Infringement

Plaintiff must show that defendants must have either “(1) induced a third party to infringe the plaintiff’s mark or (2) supplied a product to a third party with actual or constructive knowledge that the product is being used to infringe the mark”.

2. Vicarious Trademark Infringement

Plaintiff must show that defendants and infringers “have (1) an apparent or actual partnership, (2) have authority to bind one another in transactions with third parties or (3) exercise joint ownership or control over the infringing product”.

The Court rejected both Plaintiff’s trademark claims for failing to plead the intimate relationship or partnership that would need to exist between Defendants and the Stolen Content Websites for secondary liability under trademark law. The language of the complaint indicated that Plaintiff believed the standards to be the same as that for contributory and vicarious copyright infringement.

C. State Trademark Claims

Plaintiff claimed the wrongful use of a registered mark under Section 14335 of the California Business & Professions Code. The section applies to “any person who uses or unlawfully infringes upon a mark registered under this chapter or under Title 15 of the US Code.

However, Plaintiff never alleged that defendants have ever used Plaintiff’s mark so the court rejected this claim.

D. Right of Publicity

Plaintiff claimed that Defendants aided and abetted the violation of its right of publicity in various models. Under California Law, Plaintiff must show that Defendants “affirmatively participated in the illegal activities with the intent to facilitate them”.

Court concluded that knowledge or failure to prevent a crime is not sufficient to establish aiding and abetting liability and dismissed claim.

E. Unfair Competition

Plaintiff asserted a claim for unfair competition under section 1125 (a) of the California Business & Professions Code, Lanham Act and the common law.

The Court rejected the claim and concluded that Plaintiff did not allege any direct wrongdoing on the part of Defendants; that Vicarious Liability was precluded under the California unfair competition laws; and that Plaintiff did not allege sufficient facts to support aiding and abetting liability.

F. False Advertising

The court concluded that for the same reasons concerning aiding and abetting liability, Plaintiffs failed to adequately state facts supporting a claim for false advertising under either California law or the common law.

G. Libel

Plaintiff alleged that by placing its name on a “black list” of merchants whose accounts were terminated, Defendants issued a declaration to the “entire payment card industry” that Plaintiff engaged in wrongful conduct and would present a high risk to any financial institution.

Court dismissed the claim because the black list merely stated that Defendants suspended financial services privileges from Plaintiff, which was true, and because it was time-barred.

H. Intentional Interference with Economic Relations

Plaintiff alleged that Defendants intentionally interfered with its economic relations both by placing it on the black list and by participating in the business of the Stolen Content Website. Court concluded that this claim was also time-barred, because defendants placed Plaintiff on the black list in 2001 and Plaintiff filed the suit in 2004, and that Plaintiff failed to show “independently wrongful act” by the defendants.

Therefore, the claims for libel and intentional interference with economic relations were dismissed with prejudice. The claims for contributory and vicarious copyright infringement, contributory and vicarious trademark infringement, state trademark infringement, right of publicity, unfair competition, and false advertising were dismissed with leave to amend.

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