SpamLaw: Fourth Circuit Affirms Dismissal of Foreign Banks from "Honey Pot" Internet Pharmacy Case

I have handled defense of alleged email “spamming” cases in both state and federal courts.  Recently, the United States Court of Appeals for the Fourth Circuit rendered an important opinion in regard to the reach of court’s jurisdiction in these cases: Unspam Technologies v. Chernuk.

In Unspam Technologies v. Chernuk, the Fourth Circuit upheld the U.S. District Court for the Eastern District of Virginia’s dismissal of foreign banks that were alleged to have profited from a spamming conspiracy. 

The plaintiffs in this case were a company formed for the purpose of pursuing enforcement of Internet laws, and an Arlington, Virginia resident who claimed that he himself was the victim of a spam conspiracy. The two plaintiffs specifically were seeking to redress a global cyber-crime conspiracy “to use popular credit card processing systems (particularly the Visa network) to collect funds from the sale of illegal counterfeit prescription drugs over the Internet to American consumers.” They alleged that consumers in the U.S., such as the individual plaintiff, responded to email advertisements for prescription drugs and paid for the drugs with credit cards. The Internet “pharmacists” then presented the credit card transactions to Internet Payment Service Providers, which in turn presented them to foreign banks participating in the international Visa network. The banks collected on the charges from the consumers’ accounts through the Visa network, but ultimately, the pharmacists never filled the orders for the prescription drugs or filled them with counterfeit drugs.

The plaintiffs argued that the frequency and nature of such transactions supported their claim as to the existence of a global conspiracy that violated U.S. and Virginia law. Plaintiffs agreed to the dismissal of one of the pharmacist defendants, and failed to properly serve the other. The only defendants remaining on appeal were foreign banks alleged to be integral to the conspiracy in that they were “responsible for the vast majority of this illegal business extending over a number of years” because they processed the largest number of transactions submitted to the Visa network by the fraudulent Internet pharmacists. The plaintiffs asserted that these banks, although headquartered outside the United States, could be sued in the United States for knowingly participating in a conspiracy that both depended on critical resources within the United States and caused widespread harm to American consumers. Plaintiffs further alleged that because the banks were part of a global conspiracy, any single defendant’s constitutionally sufficient contacts with Virginia would subject every coconspirator to personal jurisdiction in Virginia.

To justify personal jurisdiction over the foreign banks, the plaintiffs contended that the Internet “pharmacists” deliberately transmitted spam emails over the Internet, seeking to sell prescription drugs and aiming at email addresses that had been “harvested” from web pages, including addresses of persons in Virginia, such as the individual plaintiff. They argued that, based on this contact with Virginia, the district court had jurisdiction over the pharmacists under Virginia’s long arm statute and thus over the pharmacists’ coconspirators.

Plaintiffs asserted that the court should apply a “conspiracy theory of personal jurisdiction,” and thereby keep the foreign banks in the case. The court noted, however, that conspiracy requires a “common plan,” and there were no allegations that the banks’ processing of the transactions were designed to achieve the illegal ends of the fraudulent pharmacists.

In cases involving Internet activity, the Fourth Circuit previously adopted a three-part inquiry to determine whether a defendant is subject to jurisdiction in a state because of its electronic transmissions to that state. As set forth in a 2002 Fourth Circuit decision, ALS Scan v. Digital Serv. Consultants, 293 F.3d 707, the inquiry considers:

1) the extent to which the defendant purposely availed itself of the privilege of conducting activities in the state;

2) whether the plaintiffs’ claims arise out of those activities directed at the state; and

3) whether the exercise of personal jurisdiction would be constitutionally reasonable.

Plaintiffs failed to show any sufficient connection between the foreign banks and Virginia. Not one of the banks directed its business to Virginia or aimed its commercial efforts at customers in Virginia, and there was no indication that any of the banks acted in such a way as to subject itself to the sovereign power of a court in Virginia. Finally, there was no evidence that any drug transactions involving the plaintiffs were connected by intermediaries to these foreign banks. There was no legal basis for the court to exercise jurisdiction over the foreign banks and to do so would be unconstitutional.

Here’s a link to the case: http://www.ca4.uscourts.gov/Opinions/Published/112406.P.pdf

New Developments in Anti-Spam Law – Spam Plaintiff Ordered to Pay Spam Defendant’s Attorneys’ Fees under CAN-SPAM

Under CAN-SPAM, courts have discretion to award a prevailing party defendant its attorneys’ fees incurred in defending a case brought under that law. In a decision issued on August 1, 2007, in Gordon v. Virtumundo, the United States District Court for the Western District of Washington awarded Virtumundo, see previous post, more than $100,000.00 in attorneys’ fees and costs incurred in defense of that suit. The Court, however, only awarded Virtumundo approximately 20% of the more than $500,000.00 that its counsel requested. The opinion is accessible here.

In ruling on the request for fees, the Court took into account the fact that Gordon had not claimed that he had suffered any actual injury, that Gordon actually benefitted from receiving spam, and that Gordon appeared to be in the business of collecting email in order to bring lawsuits. The Court commented that:

First, it is obvious that Plaintiffs are testing their luck at making their “spam business” extraordinarily lucrative by seeking statutory damages through a strategy of spam collection and serial litigation. Plaintiffs are parties to ten additional cases similar to the instant case in the Western District of Washington alone, see Case Nos. C06-1118-MJP, C06-1129-JCC, C06-1210-TSZ, C06-1284-TSZ, C06-1348-MJP, C06-1350-JCC, C06-1469-MJP, C06-1537-JCC, C07-222-RSM, and C07-386-MJP, as well as at least one “spam” case in the Eastern District of Washington, see Case No. C05-5079-FVS. The Court is not merely speculating on Plaintiffs' motives or assessment of potential profits. In analyzing Plaintiffs' CAN-SPAM standing, this Court noted that Gordon testified that the “benefits” of receiving spam can be quantified in terms of his dissertation research, as well as “settlement agreements for people who have said that they wouldn't spam me any longer.” (May 15, 2007 Order 7.) The Court recounted the lists of Gordon and Omni “clients,” more than half of whom share the “Gordon” surname. (Id. at 6-7.) The Court recognized that Gordon took over control of e-mail accounts for “gordonworks” clients in order to continue collecting spam. (Id. at 7.) The Court noted that none of the Omni or Gordon clients has paid Plaintiffs for their services. (Id.) Gordon testified that all of Plaintiffs' income or revenue for 2006 and 2007 has been from settlements and disputes. (Id. at 7-8.) Gordon also testified regarding the “time-consuming process” of collecting, sorting, and compiling spam regarding these and other defendants. (Id. at 8.) Clearly, Plaintiffs are assembling a litigation factory, which, if successful, could net millions of dollars in profit, at least theoretically.

Moreover, after assessing the utter lack of evidence going to any technical impact or financial harm due to the alleged illegal spam, this Court found it significant that Gordon did not seek actual damages in the instant litigation, because none exist, and that he is instead seeking solely statutory damages for each e-mail sent. (Id. at 8.) Plaintiffs admitted that they benefit from receiving spam, and this Court concluded that “Plaintiffs' continued use of other people's e-mail addresses to collect spam and their undisputed ability to separate spam from other e-mails for generating lawsuit-fueled revenue directly contradicts any hint of adverse effect that otherwise might exist.” (Id. at 15.) Not only are Plaintiffs “ not the type of entity that Congress intended to possess the limited private right of action it conferred on adversely affected bona fide Internet access service providers” (id. at 15), they are not the type of plaintiff that should be allowed to pursue the strategy outlined above without financial cost.(emphasis added

In light of the August 1st decision in the Gordon v. Virtumundo case, professional spam collecting plaintiffs (like Beyond Systems in its dozens of Maryland cases) need to beware that they may be subject to paying the legal fees incurred by those that they choose to sue in baseless cases.

Interesting Developments in Anti-Spam Law – Gordon v. Virtumundo – CAN-SPAM Preempts Washington State Anti-Spam Law Causes of Action

The law in regard to CAN-SPAM’s preemption of state law causes of action continues to develop. On May 15, 2007, the United States District Court for the Western District of Washington at Seattle decided the case of Gordon v. Virtumundo, Case No.: 06-00204, the Court held that CAN-SPAM preempted a plaintiff’s claims under Washington State’s Commercial Electronic Mail Act: WASH. REV. CODE §§19.190.010–.110. The Court relied, in part, on the decision of the Fourth Circuit in the Omega World Travel v. Mummagraphics case. The Court specifically held that:

This Court agrees with the Omega court's assessment of congressional purpose as well as its preemption holding. Applying the Omega analysis here, the Court finds the following. Plaintiffs' allegations here are that “from addresses” ending, for example, with “vm-mail.com” do not suffice to make the header not false or misleading because they require one to figure out to whom or what “vmmail.com” refers-i.e., the message is not obviously from “Virtumundo.” The parties agree that identification can be achieved by reverse-look-up using, for example, the “WHOIS” database, which “is an Internet program that allows users to query a database of people and other Internet entities, such as domains, networks, and hosts.” Definitions, Implementation, and Reporting Requirements Under the CAN-SPAM Act; Proposed Rule, 70 Fed.Reg. 25,426, 25,446 n. 233 (May 12, 2005). The WHOIS database is maintained by domain registrars and “includes the registrant's company name, address, phone number, and e-mail address.” Id. Plaintiffs do not dispute that WHOIS data can identify Defendants, and they have pointed to no e-mails that fail to provide information useful to a correct WHOIS look-up. Plaintiffs instead contend that this extra step should not be required of consumers. Regardless of the merits of that argument, the Court cannot find that “from addresses” ending with a domain that facilitates an accurate identification of Defendants could in any sense be found “false” or “deceptive.” Accordingly, while claims actually alleging falsity or deception under CEMA would not be preempted, Plaintiffs' claims here-for, at best, “incomplete” or less than comprehensive information-are for immaterial errors that may not be litigated under state law. Plaintiffs have not raised any issues of material fact that could prove Defendants' e-mails materially “false or deceptive” as those terms are used in the CAN-SPAM Act. Accordingly, Plaintiffs' CEMA claims are preempted by CAN-SPAM.

It seems that a consensus is building in regard to CAN-SPAM’s preemption of state law causes of action that are not based on traditional fraud claims of actual injury suffered by the plaintiff seeking to enforce the law.

Interesting Defense Issues Under the Maryland Anti-Spam Act - MCEMA - the Impropriety of Suing "John Doe" Defendants

Another issue that is being litigated in cases under Maryland’s Anti-Spam Act, MCEMA, is whether a plaintiff in such cases can sue “John Doe” defendants, or other place-holder defendants. Plaintiffs in these cases often claim that they do not know the true identity of the party responsible for the email and sue unknown defendants as “John Doe” or “Bulk E-mailers 1-600.”

Attempts to sue unknown defendants under the name “John Doe” is not permitted under Maryland law. The Court of Special Appeals in Nam v. Montgomery County, 127 Md. App. 172 (1999), held that:

Pleadings against fictitious persons are often called “John Doe” pleadings. There is generally no authority to proceed against a fictitious party in the absence of statute or rule. 59 Am.Jur.2d Parties § 16 (1987, 1998 Cumm. Supp.) While some states by statute or rule authorize John Doe pleadings and then the subsequent substitution of the person's true name when discovered, Maryland is not one of them. Although Maryland does not recognize “John Doe” pleadings directly, we do permit liberal amendment of pleadings to add a party or correct the misnomer of a party.

Because it is impermissible to bring actions against fictitious persons in Maryland, doing so does not preserve the statute of limitations (the deadline to commence a lawsuit) against any unknown defendants. Moreover, the doctrine of “relation back” does not act to preserve claims against unknown defendants. In Locklear v. Bergman & Beving AB, 457 F.3d 363 (4th Cir. 2006), the Fourth Circuit affirmed the District Court’s dismissal of an amended complaint on limitations grounds. The Fourth Circuit held:

Although Rule 15(c)(3)(B) speaks broadly of a “mistake concerning the identity of the proper party,” we have, in analyzing the scope of this rule, distinguished between mistake due to a lack of knowledge and mistake due to a misnomer. In so doing, we have not viewed lack of knowledge of the proper party to be sued as a “mistake” as that term is used in Rule 15(c)(3)(B). In the principal case on point, Western Contracting Corp. v. Bechtel Corp,we adopted the Seventh Circuit's holding that Rule 15(c)(2) permits an amendment to relate back where that party is chargeable with knowledge of the mistake, but it does not permit relation back where, as here, there is a lack of knowledge of the proper party. 885 F.2d 1196, 1201 (4th Cir.1989)(quoting Wood v. Worachek,618 F.2d 1225, 1230 (7th Cir.1980)) (internal citations omitted).

We have also noted that “Rule 15 has its limits, and courts properly exercise caution when reviewing an application of the rule which would increase a defendant's exposure to liability.” Intown Properties Management, Inc. v. Wheaton Van Lines, Inc., 271 F.3d 164, 170 (4th Cir.2001); see also Rennie v. Omniflight Helicopters, Inc., No. 97-1524, 1998 WL 743678 4th Cir. Oct.23, 1998). Rule 15, moreover, must be applied especially cautiously when an amendment that “drags a new defendant into a case” is proposed. Intown Properties, 271 F.3d at 170.

Under the reasoning in Locklear, the fact that a plaintiff in an MCEMA case or any other case previously sued “John Doe” in its original Complaint does not toll the statute of limitations against previously unknown defendants. As a result, anytime you are faced with defending a case where “John Doe” is sued, it would be appropriate to move to dismiss claims against all such fictitious defendants.

Interesting Defense Issues Under the Maryland Anti-Spam Statute - MCEMA - Excessive Statutory Damages

Another interesting legal issue yet to be decided under the Maryland Anti-Spam Act, MCEMA, is whether the statute’s damages provision is enforceable in light of the “due process” clause of the Fourteenth Amendment to the United States Constitution. The due process clause of the Fourteenth Amendment provides that: “Nor shall any State deprive any person of life, liberty, or property, without due process of law.”

MCEMA Section 14-3003, fixes statutory damages at $1,000.00 per electronic mail received by an interactive service provider, and $500.00 per electronic mail received by an ordinary recipient. Maryland law recognizes “that a defendant also enjoys an additional constitutional right, under the Due Process Clause of the Fourteenth Amendment, not to be subjected to an excessive punitive damages award.” Darcars Motors of Silver Spring, Inc. v. Borzym, 818 Md.App. 1159, 1186 (2003), citing, inter alia, BMW of North America v. Gore, 517 U.S. 559, 116 S.Ct. 1589 (1996).

The United States Supreme Court in the BMW v. Gore case held that the “guide posts” for considering the constitutionality of punitive damages under the 14th Amendment include an assessment of “(1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the award imposed in comparable cases.” Considering those “guide-posts” in some cases under MCEMA, the “degree of reprehensibility,” is fairly benign. Plaintiffs often contend that a defendant merely assisted in the transmission of unsolicited electronic mail – not particularly outrageous conduct warranting extremely harsh punishment. Reviewing the “disparity of actual harm when compared to the potential punitive damage award” as required by Gore shows a complete lack of relationship between actual harm and the punitive award. That is, MCEMA does not require any showing of actual harm suffered by anyone.

The Gore “comparable cases” component is instructive in showing how outrageously excessive the damages award can be in cases under MCEMA. Under Maryland Code Annotated Criminal Law Section 3-805.1(e)(2), the Attorney General is allowed to bring a civil action in cases of unsolicited commercial electronic mail and can claim only between $2.00 and $8.00 per electronic mail received by the “victim” of such electronic mail. Even under CAN-SPAM which, as shown in the preceding post has been held to preempt state statutes similar to MCEMA, the damages allowed are far more limited than the damages authorized under the Maryland Act. Under CAN-SPAM, 15 U.S.C. §7706(g), if an “Internet access service” brings a civil action, it may seek only actual damages, or $250.00 per e-mail that has false or misleading header or “from” line information, and $25.00 per e-mail that otherwise violates that Act (including e-mail that has a misleading “subject” line). The Act then allows for “aggravated” damages (of up to three (3) times the statutory damages ($750.00 or $75.00) depending on the character of the e-mail), and for the reduction of damages under certain circumstances.

Remarkably, under well settled Maryland law, a victim of an accident caused by a drunk driver cannot obtain punitive damages without proof of the specific intent to injure the particular individual who is injured. See, e.g. Owens-Illinois, Inc. v. Zenobia, 325 Md. 420, 450-463, 601 A.2d 633, 647-654 (1992) (overruling a long line of cases which, in certain ill-defined types of tort actions, permitted the recovery of punitive damages on an "implied malice" basis). Under MCEMA, however, an entity that provides assistance in the transmission of electronic mail, whether or not it has actual knowledge of the electronic mail or its destination in Maryland, is exposed to being hauled into Court in Maryland to face severe punitive damages whether or not there are actual damages suffered by anyone.

Because MCEMA may subject out-of-state persons and entities to these damages, without any requirement that those persons knew they were sending mail into Maryland or even any requirement of actual damages, MCEMA defendants should argue that MCEMA violates the due process clause of the 14th Amendment, rendering its enforcement unconstitutional.