XX XXXXXX XXXXX XXXXX XX XX XX XX XX XX XX XX XXXX XX XXX XXXXXXX XX XX XX XX X XX XX XX XXXXXX XXXXXX XXXXX XX XX XXXXXX XXXXX XX XX XXXXXX XXXXXX XXXXXX XX XX XX XX XX XX XX XXXXX XXXX XX XXXX XXX XX XX XX XX XX XX XXXXX XX XX XXXXXX XXXXXX __________________________________ Spring 1996, Volume 4, Number 1 __________________________________ By George, Donaldson & Ford, L.L.P. Attorneys at Law 114 West Seventh Street, Suite 1000 Austin, Texas 78701 (512) 495-1400 (512) 499-0094 (FAX) gdf@gdf.com http://www.gdf.com __________________________________ Copyright (c) 1996 George, Donaldson & Ford, L.L.P. (Permission is granted freely to redistribute this newsletter in its entirety electronically.) ___________________________________ David H. Donaldson, Jr., Publisher, dhdonald@gdf.com Peter D. Kennedy, Editor, pkennedy@gdf.com ___________________________________ IN THIS ISSUE: 1. SUPREME COURT PUNTS ON LOTUS v. BORLAND 2. THE SCIENTOLOGY LAWSUITS AND LAWYER LETTERS: THE PROBLEM FACED BY ON-LINE SERVICES WHO GET NOTICE OF USERS' ALLEGED VIOLATIONS 3. THE COMMUNICATIONS DECENCY ACT'S SILVER LINING 4. ON-AIR CONTESTS AND "LOTTERIES": THE FCC IS WATCHING (AND LISTENING) 5. COMPUTER ASSOCIATES INTERNATIONAL v. ALTAI: IN TEXAS, STOLEN TRADE SECRETS ARE NOW GONE FOREVER AFTER TWO YEARS 6. CINCINNATI BBS USERS PURSUE CLASS ACTION CIVIL RIGHTS LAWSUIT _________________________________________________________________ 1. SUPREME COURT PUNTS ON LOTUS v. BORLAND The United States Supreme Court recently lost a golden opportunity to clarify the extent to which a computer program's user interface can be protected under the Copyright Act. In a previous issue of Legal Bytes (Vol 3, No. 1, Spring 1995), we reported the appellate decision in LOTUS DEVELOPMENT CORP. v. BORLAND INTERNATIONAL, [fn1] in which the U.S. Court of Appeals for the First Circuit held that the Copyright Act did not prohibit Borland from copying the commands and menu command hierarchy from Lotus' 1-2-3 spreadsheet program for use in Borland's Quattro Pro programs. The Boston-based First Circuit reasoned that the commands and menu command hierarchy were essential to the operation of Lotus 1-2-3, much like the buttons on a VCR, and therefore were a non-copyrightable "method of operation." The ruling shook the software industry, not only because of its expansive (and unprecedented) definition of a "method of operation," but also because it diverged from what observers had thought was an emerging consensus about what elements of a computer program could be copyrighted. The Supreme Court agreed to hear Lotus' appeal from the ruling, leading many to expect clarification of this notoriously murky area of copyright law. Alas, it was not to be. Shortly after oral argument (conducted amidst the great blizzard of 1996, no less), the Supreme Court issued on January 16, 1996 a terse order affirming the decision of the First Circuit Court of Appeals. [fn2] No explanation was given, except to say that the ruling was by an "equally divided court," and that Justice John Paul Stevens had taken no part in the consideration of the case. In other words, because the remaining eight justices deadlocked 4-4 after oral argument, the First Circuit's decision was affirmed by default. (Justice Stevens regularly recuses himself from cases involving IBM, which had acquired Lotus while the case was pending. Ironically, IBM's acquisition of Lotus may have resulted in the Supreme Court's not awarding copyright protection to Lotus' user interface!). [fn3] What does this mean? The law remains uncertain. For now, software developers in the First Circuit -- Massachusetts, New Hampshire, Maine, Rhode Island, and Puerto Rico -- are not barred by the Copyright Act from copying the commands and menu structure (but not the coding) of copyrighted programs; the design of other essential user interface elements and commands probably lack copyright protection as well. Elsewhere in the nation, the law is now less clear. For example, the Fifth Circuit (which covers Texas, Louisiana and Mississippi), had apparently staked out an opposite position in ENGINEERING DYNAMICS, INC. v. STRUCTURAL SOFTWARE, INC., which pre- dated the First Circuit opinion in LOTUS. [fn4] "It cannot be the law," said the Fifth Circuit, that competitors are free to emulate the user interface of a best-selling program -- such as Lotus 1-2- 3's menu structure -- so long as the underlying code is not the same. But this strong sentiment relied heavily on the District Court opinion that was reversed by the First Circuit in LOTUS, and therefore is up for grabs when the Fifth Circuit next considers the issue. Although the Supreme Court could consider the issue in a case that does not relate to IBM, that is unlikely to happen before next year. Nor is it likely that Congress will address this significant but not-headline-grabbing issue during the upcoming election year. Until the scope of copyright protection in this area is clarified, software developers will have to look to other intellectual property laws -- trademark, trade dress and patent -- to help define the scope of legal protection over computer programs. Footnote 1: 49 F.3d 807 (1st Cir. 1995). Footnote 2: 116 S. Ct. 804 (1996). Footnote 3: See "Courtside," Tony Mauro, Texas Lawyer, February 5, 1996 at 6. Footnote 4: 26 F.3d 1335 (5th Cir. 1994), modified 46 F.3d 408 (5th Cir. 1995). _________________________________________________________________ 2. THE SCIENTOLOGY LAWSUITS AND LAWYER LETTERS: THE PROBLEM FACED BY ON-LINE SERVICES WHO GET NOTICE OF USERS' ALLEGED VIOLATIONS The Jihad. A fierce battle has been raging both on line and in courtrooms across the country between the Church of Scientology and a handful of its former members. Disillusioned with the church, these former members have posted large amounts of the church's purportedly secret and sacred texts on a Usenet newsgroup devoted to debating Scientology. The church, claiming these texts are trade secrets and copyrighted, has responded with a fierce litigation strategy that has ensnared third parties from the Washington Post (which printed portions of the texts) to the Internet access giant Netcom (which distributed the alt.religion.scientology newsgroup containing the texts). The Scientology litigation -- brought in federal courts in Virginia, Colorado and California under the name of the church's parent corporation, the "Religious Technology Center" -- has spawned the most extensive group yet of legal rulings concerning the scope of on-line copyright protection. The Scientology church claims that its litigation is redefining on-line copyright law, and to a great extent it is right. Take away the controversial nature of the Scientology religion and the reportedly silly nature of much of its "scripture," and the Scientology lawsuits have concretely raised core issues about the scope of copyright protection in the new world of decentralized, democratized and vastly expanded distribution and copying offered by the Internet, as well as the responsibilities of the system administrators who facilitate communications through interconnected computer networks. This article does not attempt a comprehensive review of all the questions raised by the Scientology cases, but rather discusses two interrelated issues that have so far gained little attention -- (1) the competing tension between copyright and defamation law in whether prior review of on-line content is necessary or wise, and (2) what the proper response should be to a demand to remove offending material from a system. The sysops' old dilemma. Prior to the Scientology litigation, case law directly concerning on-line copyright liability was limited to two trial court decisions, PLAYBOY ENTERPRISES, INC. v. FRENA and SEGA ENTERPRISES, LTD. v. MAPHIA. The core holding of these two cases, particularly FRENA, seemed to be a strong affirmation of the principle of strict liability in copyright law. Under FRENA, system operators would be liable for copyright infringement, even if they were unaware of the infringing files on their system, because their systems facilitated unauthorized copying and distribution. See "BBS Sysop Liability for Copyright Infringement: Let the Operator Beware!," Legal Bytes, Vol 2, No. 1. The FRENA decision was criticized for not giving sufficient weight to the sysop's denial that he knew about the offending images, but because it was one of just two rulings on the subject, it carried considerable weight. After FRENA and MAPHIA, the common wisdom recommended a hands-on approach to avoid liability for copyright infringement -- reviewing all files before making them publicly available. The hands-on approach to avoid copyright violations has been, as lawyers say, "in some tension" with two well-known cases concerning on-line services' liability for defamation. In 1991, a New York federal court held in CUBBY v. COMPUSERVE that CompuServe was not responsible for the content of a newsletter it carried, because it did not review the newsletter and exercised no editorial control over it. Because CompuServe acted as a conduit or distributor, it was not actually "publishing" the newsletter. See "Are Electronic Bulletin Board System Operators Liable for their Users' Libellous Statements," Legal Bytes, Vol 1, No. 1. Four years later, a New York state court ruled the other way about another service, Prodigy, in STRATTON OAKMONT v. PRODIGY. Because Prodigy, unlike CompuServe, had marketed itself as a family system, had reviewed the content of postings and claimed the right to edit them, it was a "publisher" and had to answer for the truth of defamatory statements made by its users. Like FRENA, the PRODIGY case has been criticized and may well be wrong, but like FRENA, it has carried considerable weight because of a scarcity of precedent. After CUBBY and PRODIGY, the common wisdom was that on-line services should not review the content of messages passing through unless they want to answer for their truth, which is not easy. Hands off. Interactive services have thus been facing a real dilemma about the content they carry that is provided by others, even before anyone complains -- hands on (to avoid possible liability for copyright infringement) or hands off (to avoid becoming a "publisher" of defamation)? Although it may seem glacial to those directly affected, the law is actually moving with relative speed to address this unworkable problem. On the defamation front, Congress has enacted the Communications Decency Act of 1996, which for all the vitriol directed to it, has a bright side: it contains a provision which broadly protects interactive services from liability for libels posted by others. See "The Communications Decency Act's Silver Lining," in this issue. Under this new federal law, STRATTON OAKMONT v. PRODIGY is overruled on-line services do not become the "publisher" of on-line content they did not create, even if they actively restrict access to "objectionable" materials. On the copyright front, a recent decision may foretell a relaxation of the harsh and potentially unfair results of the strict liability rule as applied by the court in FRENA. While no court will tolerate flagrant encouragement or participation in copyright infringement, the FRENA court's conclusion that the sysops' knowledge is entirely irrelevant will likely be eased. This step toward balancing copyright protection and on-line communications is taking place in the Scientology litigation, particularly in the decision from the California lawsuit involving Netcom On-Line Communications Services. Netcom avoids liability for direct infringement. Using a local-access BBS, a disillusioned former Scientology minister, Dennis Erlich, posted portions of the Scientology religious tracts on the Usenet newsgroup alt.religion.scientology. The local-access BBS got its Usenet feed though Netcom On-Line Communications Services, a national Internet access provider. When the Church of Scientology learned of Erlich's postings, it sued him in federal court in San Francisco, demanded that the local BBS and Netcom cut Erlich's access off, and when they didn't, sued the BBS and Netcom for copyright infringement. The church relied on the FRENA case and argued that Netcom was liable because copyright law is strict liability. Because this case (and all the Scientology cases) involved Usenet, rather than a small, dial-up BBS, the threat of strict liability upped the stakes considerably. Usenet traffic carries vast amounts of material, much of it encoded, only loosely organized, all of it unsolicited by the system administrator and overseen by no one. No Internet access provider could hope to review Usenet for potential copyright violations before making the 20,000 or more newsgroups available. But the penalties for even unintentional copyright infringement are draconian -- seizure orders, injunctions, damages of up to $20,000 for each violation, not to mention paying the other side's attorney's fees and costs. In a long, carefully written opinion issued November 21, 1995, Judge Whyte did not follow the logic of Frena to impose strict liability. RELIGIOUS TECHNOLOGY CENTER v. NETCOM ON-LINE COMMUNICATION SERVICES, INC., 907 F. Supp. 1361 (N.D. Cal. 1995). "Although copyright is a strict liability statue," he wrote, "there should still be some element of volition or causation which is lacking where a defendant's system is merely used to create a copy by a third party." Netcom was not liable for direct copyright infringement, because there was no such "volition" - the copyright and distribution happened as a natural part of Usenet, without any direct action by Netcom in relation to the offending messages. While Netcom escaped the claim of direct infringement, it did not fare as well against the church's claim of "contributory infringement," as we will see. The sysops' new dilemma -- what to do about notice of an alleged violation? The holding in NETCOM that on-line services -- at least Internet service providers -- are not liable for direct copyright infringement for materials passing through their system, if adopted broadly, will give interactive services some relief from what had been an unknown and unknowable legal exposure. A different issue arises, though, when an on-line service is given notice of an alleged violation -- whether copyright infringement or libel. There is a fundamental difference in on- line publication from paper publication -- on line, the material is continuously available thanks to the on-line service, while the traditional print distributor delivers the publication and is done with it. Can a lawyers' demand letter change the playing field, and force a "hands off" on-line distributor like Netcom or CompuServe to review its contents and decide whether to remove offending postings -- upon pain of a civil lawsuit? The Church of Scientology demanded that Netcom remove the texts from its server. Netcom refused to remove the texts without better proof of a copyright violation, and while the texts automatically rolled off Netcom's servers after 11 days, this did not happen until they had passed on to Usenet and thence around the world. The church claimed that Netcom's inaction, if not a direct infringement, still made it liable because it could have easily prevented the world-wide distribution. Judge Whyte was convinced, at least in theory. He ruled that Netcom's inaction in the face of the church's demands could make it liable for contributory copyright infringement. Netcom had made a static argument -- that it should never be liable for copyright infringement, because it can never know beforehand whether a Usenet posting violates a copyright. But Judge Whyte took a more dynamic view -- while Netcom is not responsible for infringement of which it had no notice, he held that it cannot sit idly by once it is presented with proof of a copyright violation. He thought that Netcom's failure to cancel the postings after receiving the demand letter was a "substantial participation" in the distribution that invokes contributory liability, and that if Netcom "knew or should have known" that the postings infringed the church's copyright, it would be liable. But what proof is enough to show that an on-line service "knew or should have known" of an infringement? Judge Whyte held that the church's demand letter and Netcom's refusal to even look at the allegedly infringing material was enough evidence to send the case to trial. This "knew or should have known" standard obviously does not provide concrete guidance, particularly because the question is whether Netcom "should have known" that Erlich's postings were infringing the church's copyright is a really a legal one, and hardly an easy one at that. However, the court's opinion does at least allow a system administrator, ideally with help from a knowledgeable lawyer, to focus on particular questions: Does the notice of violation identify which materials are at issue? Does it provide specific evidence of copyright ownership or just a vague claim? Does the posting constitute fair use? Demands to remove offending material are becoming commonplace, and they put on-line services in a jam. Unlike traditional publishers like Time or The Washington Post, on-line services are not staffed to review materials for legal problems like libel, invasion of privacy or even copyright infringement. On-line services are in the access and distribution business; they create relatively little content themselves. How much effort does an on- line service have to put into evaluating these demands? While the safest course would be always to accede to threats, doing so is inconsistent with the traditional wide-open, robust debate that makes the Internet what it is. The NETCOM case bears watching as these questions have arisen, but have not yet been answered. It is also not clear yet whether the CDA's broad protection from libel lawsuits will protect on-line services after they are made aware of offending statements. See "The Communications Decency Act's Silver Lining," in this issue. Stay tuned; as sure as the sun rises in the east, there will be more lawsuits over on-line services' responsibility for their users' actions. _________________________________________________________________ 3. THE COMMUNICATIONS DECENCY ACT'S SILVER LINING Until now, two court opinions -- CUBBY v. COMPUSERVE and STRATTON OAKMONT v. PRODIGY -- have dominated any discussion about whether interactive computer services are responsible for what users say on line. See "The Scientology Lawsuits and Lawyers' Letters," in this issue; "BBS Sysop Liability for Copyright Infringement: Let the Operator Beware!," Legal Bytes, Vol 2, No. 1. The two cases (simplified) are seen as opposites: CompuServe, the "hands off" network, escaped liability for a newsletter carried on its system, while Prodigy, supposedly a "hands on" publisher with control over its users' postings, was forced to answer for a user's defamatory words. All this has been changed now, and by a most unlikely law. The very Communications Decency Act of 1996 which is reviled throughout the on-line world for its controversial restrictions on "indecent" communications, also includes a very broad protection for on-line services from tort liability. Congress passed this provision specifically to overrule the STRATTON OAKMONT ruling. Section 508 of the CDA, which will be codified at 47 U.S.C.  230(c)(1), states: No provider or user of an interactive computer service shall be treated as a publisher or speaker of any information provided by another information content provider. The law defines "information content provider" broadly as "any person or entity that is responsible, in whole or in part, for the creation or the development of information provided through the Internet or any other interactive computer service." 47 U.S.C.  230(e)(3). So long as the interactive computer service does not create the content ("in whole or in part"), it cannot be found to be the "publisher." The CDA also prohibits a court from holding any provider or user of an interactive computer service liable because it (1) makes efforts to screen material; or (2) provides the means by which to screen material. This attacks from another angle the STRATTON OAKMONT ruling, where the Court considered Prodigy's "dirty word" filtering software in concluding it exercised editorial control over its users and so was a "publisher." The CDA leaves no doubt that it is meant to pre-empt all state tort laws: "No cause of action may be brought and no liability may be imposed under any State or local law that is inconsistent with this section." 47 U.S.C.  230(d)(3). Apparently, when the CDA was being drafted, the interactive computer service industry objected to the "indecency" prohibition because it might require the services to aggressively filter or review on-line content, even if they had not been doing so. And under STRATTON OAKMONT, this would make them the "publisher" of everything their services carried. Section 509 was added as an attempt to address this concern, without removing the controversial "indecency" prohibition. Now, under the CDA, an on-line service is no longer legally the "publisher" or "speaker" of other people's words. Therefore, federal law preclude a finding of an essential element -- publication -- in any defamation claim in any of the 50 states against an on-line service, when the complaint is about someone else's words (as in CUBBY and STRATTON OAKMONT). For the same reason, the CDA would also precludes liability for any related tort (such as "false light" and "disclosure of private facts") that requires a finding of publication. No doubt the CDA's breadth will be tested. For example, when has an interactive service created content "in part" so that it cannot take advantage of Section 509? And does Section 509 preclude, as its language appears to, defamation claims based on the continued availability of on-line libel even after an on-line service has been asked, but has failed or refused, to remove it? In any case, discussions of on-line liability can no longer begin and end with CUBBY and STRATTON OAKMONT -- Congress has profoundly changed the landscape with Section 509 of the CDA. _________________________________________________________________ 4. ON-AIR CONTESTS AND "LOTTERIES": THE FCC IS WATCHING (AND LISTENING) Everyone loves prizes. Every day the airwaves attest to our love affair with contests and lotteries. But the federal government remembers the quiz show scandals of the 1950s and to a surprising degree still regulates broadcasters' advertising of games of chance and promotion of contests. "Contests" vs. "lotteries." The FCC, which regulates both radio and television broadcasters, has two basic rules about games of chance: (1) broadcasters simply cannot advertise or sponsor "lotteries;" and (2) when a broadcaster sponsors a "contest" (which is permitted) it must clearly and fairly announce the contest's material terms and it must run the contest according to those terms or face sanctions. Advertising or sponsoring "lotteries" is illegal. Federal law prohibits broadcasters from advertising or sponsoring a "lottery" -- and a violation of this prohibition can be punished by a fine and up to a year's imprisonment. 18 U.S.C. Section 1304. By statute and regulation, a "lottery" is a contest in which the participant must pay money or something else of value in order to have chance to win a prize which is awarded at least in part by luck. Sound like the Texas Lotto and all the other immensely popular state-run games? It does -- but the FCC's rules grant an exception for advertising those games. The rules also include exceptions for certain other contests such as charity and fishing events. But if the event fits the definition of a "lottery," and doesn't fall within an exception, it cannot be promoted on the air. While the FCC rarely doles out the harshest penalties for violations of the anti-lottery advertising rule, as with many laws, it's the little things that can end up causing real headaches. And no broadcaster wants to pay even small fines that could have been avoided, or collect black marks that inevitably come up at license renewal time. The key to spotting lotteries is remembering that a lottery has three elements: (1) chace, (2) a prize, and (3) consideration (something of value) paid by the contestant. If a person must pay money -- even buying something at a fair price -- in order to have a "chance" to win a "prize," the contest is a "lottery" and cannot be advertised. For example, a donut shop was giving prizes to anyone who received a receipt with a star, but because the promotions did not clearly state that anyone could get a receipt without making a purchase, the FCC considered the spot an illegal lottery ad. If the three key elements are present -- money or other things of value flowing to a contest sponsor, chance, and a prize -- the contest is in all probability a lottery, and can't be advertised by the broadcast media absent a specific exception. Contests that are not "lotteries" can be advertised, but carefully. Assuming an on-air contest is not a lottery, it can be advertised so long as the ads follow this seemingly simple rule: A licensee that broadcasts or advertises information about a contest it conducts shall fully and accurately disclose the material terms of the contest, and shall conduct the contest substantially as announced or advertised. No contest description shall be false, misleading or deceptive with respect to any material term. 47 C.F.R. Section 73.1216. This language hides lurking complexities. For example, how does a broadcaster know what contest terms are "material"? The term is not defined, and a footnote to the rule merely suggests, not too helpfully, that "the material terms may vary widely depending upon the exact nature of the contest." The footnote does give some examples of terms the FCC generally considers material, including: * How to enter or participate * Eligibility restrictions * Entry deadline dates * Whether prizes can be won * When prizes can be won * The extent, nature, and value of prizes * Basis for valuation of prizes * Time and means of selection of winners * Tie-breaking procedures The FCC requires that material terms must be disclosed on a reasonable number (but not all) of broadcast promotions -- disclosure in writing alone isn't enough. The regulations are deliberately vague, so the listed terms aren't exhaustive of all the terms that may be material, and what constitutes a "reasonable number" is left undefined. Ultimately, the nature of the contest determines. Another problem area is the requirement that a contest shall be conducted "substantially as announced or advertised." Because broadcasters are responsible for the conduct of the contest, they should be very careful when agreeing to co-sponsor a contest. If the co-sponsor flakes out and decides not to award an advertised prize, the broadcaster must make up for the co-sponsor's dereliction and ensure that all prizes are awarded. The FCC takes its contest rules very seriously. A station in the Midwest ran a contest asking listeners to predict the amount of snowfall over one winter. Some on-air promotions stated that ties would be broken by random drawing. When there was a tie, however, it was broken by giving the prize to the entry with the earlier postmark. The FCC considered this a serious violation, and fined the station $1,000! Watch those impulsive remarks! Even a spontaneous, unapproved on-air announcement can start a regulated contest. For example, during a fund raising drive for a charity, an on-air personality suddenly offered a free day of landscaping services to the biggest donor. While this offer was never approved by station management, the FCC considered it bound to award the prize. Even when it is not a contest sponsor, broadcasters must be careful not to imply that they are a sponsor, or the FCC will treat them as such. If careless wording leads the FCC to conclude that a broadcaster is a sponsor of a contest, the broadcaster will be held responsible for awarding all the prizes in the event the real sponsors back out. While these restrictions on contest advertisements may seem like a throwback to an earlier time, the rules and penalties are real enough. All broadcasters should keep an eye out for potential trouble spots. They can be sure that their audience -- and the FCC -- are doing the same. _________________________________________________________________ 5. COMPUTER ASSOCIATES INTERNATIONAL v. ALTAI: IN TEXAS, STOLEN TRADE SECRETS ARE NOW GONE FOREVER AFTER TWO YEARS The Texas Supreme Court recently decided a case with potentially serious consequences for owners of trade secrets in Texas. In effect, the court decided that those owners must bring suit to protect stolen trade secrets within two years, without regard to whether the owner knew or had reason to suspect the theft. According to the Supreme Court's published opinion, in 1984 a trusted employee of Computer Associates International removed from his office in Dallas, Texas, a copy of the source code for a program called ADAPTER, despite having signed an employment agreement promising not to keep or divulge any of his employer's trade secrets. The employee then announced he was quitting in order to work for a competitor, Altai, Inc. During an exit interview, the programmer said he had kept no proprietary information, and promised again not to divulge any trade secrets. Notwithstanding his promise, the programmer promptly used some 30% of the ADAPTER source code in writing a new program for Altai called OSCAR 3.4, which Altai used between 1985 and August 1988 as a component of several of its competing computer programs. Computer Associates did not learn of this until July 1988 -- four years after the programmer left. Computer Associates sued Altai in New York federal court for copyright infringement and misappropriation of trade secrets within weeks of learning the bad news. However, that court, applying its understanding of Texas law, decided that the trade secret claims were filed too late -- they had to have been filed within two years of the trade secret misappropriation, regardless when Computer Associates discovered it. Computer Associates' lawsuit raised another interesting and difficult question -- whether the Copyright Act pre-empted (and thus superseded) any Texas law claim for trade secret theft. However, there was no dispute that the ADAPTER source code met Texas' broad definition of a trade secret -- any "formula, pattern, device, or compilation of information which is used in ones business and gives one an opportunity to obtain an advantage over competitors who do not know or use it." See Trade Secrets: Another Weapon Against Unfair Ex-employee Competition." Legal Bytes, Vol. 1, No. 2. Eventually, the New York federal court system punted to the Texas Supreme Court, asking it to decide whether Computer Associates' Texas law trade secret claims were filed too late, and whether the time to bring a trade secret lawsuit could run out even before the victim learned of the theft. And as odd as it may sound, the Texas high court decided that yes, the owner of a trade secret has just two years to sue, even if the victim does not know of the misappropriation. In legal terms, the Texas Supreme Court chose not to apply the "discovery rule" -- a legal doctrine that "tolls" the running of the statute of limitations until the victim learns of his injuries. The Texas statute setting a 2-year limitations period for trade secret lawsuits does not include the discovery rule, and the conservative Texas court was not willing to adopt one by judicial decision. Its ruling leaves Texas law at odds with that of every other state that has addressed the issue. Some 39 states and the District of Columbia, either by statute or court decision, now apply the discovery rule to trade secret lawsuits. While the Texas high court's decision may simply reflect a hesitance to "legislate from the bench," given its earlier willingness to adopt the discovery rule in other types of lawsuits, it is difficult to understand why the court would draw the line at trade secret lawsuits. The court's primary justification for refusing to adopt the discovery rule is that trade secret theft is not "inherently undiscoverable." That is, the court concluded that because trade secrets are "jealously guarded" by precautions such as confidentiality agreements and exit interviews, and because companies know their trade secrets are important, "trade secret misappropriation generally is capable of detection within the time allotted for bringing such suits." Two judges on the Court saw a problem with the Court's logic: taking steps to keep secrets is not the same as discovering their theft and misuse. Can a large company with thousands of employees be expected to "monitor and attempt to reverse engineer all of the products of all its competitors to ferret out misappropriation of trade secrets?" And why isn't the theft of secrets an especially hard injury to discover, particularly when the purloined secrets are themselves incorporated into a proprietary product such as computer source code? Two unintended results of this ruling seem possible: First, as a group of high-tech companies argued in a brief asking the court to reconsider its ruling, the court's decision might make Texas a "safe haven for trade secret misappropriators" willing to stay underground for two years and a day. Second, the ruling might actually incite litigation, because companies that suspect, but cannot necessarily prove, theft of trade secrets now face a choice of filing suit or forewver holding their peace. Despite a powerful showing of unanimity from the high-tech industry asking for reconsideration, in March the Supreme Court stuck to its initial ruling, making its decision the final word on Texas law. Where does all this leave companies with trade secrets in Texas? The Texas Legislature, which does not meet again until 1997, almost certainly will be asked to enact by statute the discovery rule that the Supreme Court balked at adopting by judicial ruling. In the meantime, internal controls such as non- disclosure agreements, restricted access to trade secrets, document control logs, and exit interview remain vital. Non-competition agreements may provide further protection against unfair competition by former employees, but only for a limited period -- and the Texas Supreme Court has shown a real hostility towards such agreements, too. __________________________________________________________________ 6. CINCINNATI BBS USERS PURSUE CLASS ACTION CIVIL RIGHTS LAWSUIT Seven subscribers to a Cincinnati electronic bulletin board system have filed a class action lawsuit against local law enforcement officials over the June 16, 1995 seizure of the Cincinnati Computer Connection BBS. Members of the Hamilton County Regional Electronic Computer Intelligence Task Force, searching for alleged computer pornography, seized the entire BBS, including all the private electronic mail of the subscribers. This is the first user class action challenging a government seizure of computer communications. According to the search warrant used to justify the raid, the Task Force was seeking 45 allegedly obscene computer images on a system that contained hundreds of thousands of public and private messages. The seven subscribers seek to represent a class of thousands of users of the bulletin board, and include Steve Guest, a 36-year old computer system analyst who runs his own business, in large part using the Cincinnati Computer Connection BBS. Other plaintiffs include Denise and Ben Kelley, active bulletin board users and grandparents of seven; Nelda Sturgill, a registered nurse who used the bulletin board to keep up with medical news and to swap recipes; and Randy Bowling, who suffers from a speech impediment caused by a head injury, who used the CCC BBS as his primary way to communicate and to study computer science. The users -- who were not suspects in the investigation -- claim that the wholesale seizure of the BBS and their private and public communications violated their constitutional right to free speech and association, their right to privacy, and federal and state laws. At issue is whether law enforcement agents are justified in using drift-net tactics to troll for small amounts of allegedly illegal materials, or whether the law prohibits the indiscriminate seizure of private and public electronic communications of persons who are not suspects. The lawsuit, filed by Cincinnati lawyer Scott Greenwood and Pete Kennedy of the law firm that publishes this newsletter, is modelled in part on a successful Austin, Texas lawsuit brought by a game publishing company against the Secret Service. The company, Steve Jackson Games, Inc., its president and three users of the company's BBS proved that the Secret Service violated federal law in March 1990 when it seized the company's BBS and the electronic communications it contained. See "Plaintiffs Win Steve Jackson Games Case," Legal Bytes, Vol. 1, No. 2. The Cincinnati lawsuit alleges that the seizure of the BBS violated the First Amendment, the Fourth Amendment, the First Amendment Privacy Protection Act of 1980, several provisions of the federal Electronic Communications Privacy Act of 1986, and Ohio common law privacy rights, and seeks actual damages, statutory damages, and punitive damages on behalf of the seven plaintiffs and the entire class of thousands of subscribers. The defendants have denied violating any law, and claim not to have read any of the private communications on the BBS. The system administrator of the BBS, who faces misdemeanor obscenity charges, has also filed a federal civil lawsuit. The case remains in pre-trial proceedings, and no trial date has yet been set. Further information about this case, including the Plaintiffs' court filings can be found at http://www.iac.com/~ccc. _________________________________________________________________ ABOUT THIS NEWSLETTER LEGAL BYTES is a service to our clients and friends. These articles are intended to be summaries and brief discussions of emerging legal issues in the field of computer law. They are not intended to be exhaustive discussions of the topics. Because of their nature, they should not be relied upon as legal advice or used as a basis for reaching a conclusion. If you have ideas or topics you would like to see discussed in LEGAL BYTES, drop us a line. Legal Bytes is available on America Online and on the GD&F home page at: http://www.gdf.com/ To subscribe to Legal Bytes: Send a message to legal-bytes-Request@io.com and include the words "subscribe legal-bytes" in the _body_ of the message. ABOUT GEORGE, DONALDSON & FORD, L.L.P. George, Donaldson & Ford, L.L.P., is a registered limited liability partnership specializing in litigation and in counseling clients in a broad range of practice areas, including computer law, copyright, trademark, trade secrets, business, libel, invasion of privacy, and constitutional law. Attorneys at George, Donaldson & Ford, L.L.P., are not board certified in any specialty, except for Renea Hicks, who is board certified in appellate law. No designation has been made by the Texas Board of Legal Specialization for a Certificate of Special Competence in the area of computer law. =========================================== ======================