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CAN-SPAM Case Implications

CAN-SPAM Case Implications

August 21, 2008
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" the Federal Trade Commission charged seven adult entertainment-industry companies with CAN-SPAM violations arising from the actions of their affiliates "

Editor's note: This article originally appeared in the June, 2008 issue of XBIZ World magazine.

It took three years for the case to get through trial, but only three hours for a Seattle jury to decide Impulse Media Group Inc. was not responsible for the actions of affiliates who unrepentantly spammed consumers in violation of the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003.

Response to the decision, though, may have long-lasting implications, especially after a federal judge declined to grant the prosecution's request that IMG be saddled with onerous supervisory and record-keeping requirements, despite the jury's affirmation that IMG was not guilty of the charges. According to the company's attorney, not only did the presiding judge give the FTC's Department of Justice attorney a firm slap on the wrist for attempting to nullify the jury's ruling, but both the government and the prosecutor personally may face stiff financial sanctions under federal laws that prohibit "unreasonable and vexatious" prosecution.

In mid-2005, the Federal Trade Commission charged seven adult entertainment-industry companies with CAN-SPAM violations arising from the actions of their affiliates: IMG, the parent company of SoulCash; BangBros.com Inc.; MD Media, the parent company of Pimproll; APC Entertainment Inc., the parent company of Adult Players Club; sister entities Pure Marketing Solutions LLC and Internet Matrix Technology; TJ Web Productions LLC, the parent company of Adult PayMaster and Cyberheat Inc., the parent company of TopBucks. All of the companies disputed the civil charges, saying through their attorneys that they had not sent unsolicited commercial email. In addition, they said, they had not authorized the sending of any spam, and weren't liable for the actions of independent contractors that repeatedly had been warned, in prominent language, that spamming was prohibited by the affiliate programs' terms of service. Most of the companies declared that they routinely "cut off" the accounts of affiliates who were caught spamming, and as punishment, many refused to disburse outstanding revenues to the offenders.

None of those actions, termed "reasonable and proper" by defense attorneys, placated the FTC. It vigorously pursued its cases, and by early March 2008, six of the seven defendants had settled with the government. The settlement agreements required the defendants to pay fines ranging from $50,000 to $650,000, to submit to increased FTC scrutiny and surveillance of affiliates and to maintain additional records and filing reports. In all cases where the defendants commented about their settlements, they indicated that they had not admitted guilt or complicity and escaped with a fine that was less than they expected to pay in court costs and legal fees.

The lone holdout against what Seattle-based attorney Robert Apgood termed "federal arrogance" was his client IMG. On March 24, 2008, IMG's patience and perseverance were rewarded when a federal district court jury returned a unanimous "not guilty" verdict on all counts facing the company. In essence, he said, the government "built a bridge too far" in its efforts to prove IMG induced affiliates to spam. "There was no intent on IMG's part," Apgood said. Unlike copyright law, which includes provisions for vicarious infringement, "CAN-SPAM is not a strict-liability statute; there has to be intent for a violation to occur." Because "affiliates are non-agent, independent contractors, IMG has no control over them." Therefore intent, which was integral to the prosecution's case, was sorely lacking from the facts presented at trial.

However, the feds weren't finished with IMG just because the jury was. Immediately after the jury rendered its verdict, the prosecutor filed with the court a request for a permanent injunction that would have held IMG to the same terms. enforced by the other settlements, excepting fines. Apgood said he and his clients were outraged, but not surprised. "I'm constantly amazed at the stupidity of the government," he told XBIZ. "Because of the current administration, [everyone within the federal bureaucracy has] been empowered to incredible arrogance. They've been encouraged to believe they're right, whether or not they are. The jury told the government the people are tired of the status quo and frequent strong-arm tactics — like Peter Finch in Network, they said 'We're mad as hell, and we're not going to take it anymore' — but [the prosecution] refused to accept that."

In asking for the injunction, the prosecution argued that although the jury found no evidence IMG violated CAN-SPAM, the company was likely to violate the law in the future. After all, the prosecutor implied, the company is part of the notorious adult entertainment industry; therefore, an ounce of prevention seemed wise. "The government tried to make [the case] about adult, but the jury didn't care," Apgood said, and the judge took his cues from the jury. On May 1, Judge Robert S. Lasnik of the U.S. District Court in Tacoma handed the prosecutor his hat in no uncertain terms.

"In its post-trial filings, [the government] argues that IMG's provision of marketing materials to PureCash, one of IMG's affiliates, for use in commercial electronic mail messages justifies the entry of the proposed injunctive order," Lasnik wrote in his decision. "PureCash did not send any of the 413 messages captured [and used as evidence at trial]. Nor has plaintiff produced evidence that PureCash sent any electronic mail messages using the materials provided by IMG or that such messages, if sent, violated the CAN-SPAM Act. Instead, plaintiff attempts to link the materials IMG provided to PureCash with five violative electronic mail messages sent by Imatrix, another IMG affiliate.

"The argument seems to be that IMG knew or must have known that materials provided to PureCash would make their way to Imatrix and that IMG therefore initiated the five messages sent by Imatrix," Lasnik continued. "[T]he jury has already concluded that IMG did not initiate these five messages. Even if the court reweighs the evidence in light of plaintiff's post-trial submissions, the link between PureCash and Imatrix is so tenuous that it does not support a finding that IMG intentionally paid or induced Imatrix to transmit the electronic mail messages at issue."

Not only did Lasnik indicate he found the injunction request baseless and unsupportable, but he also seemed a bit peeved by the prosecutor's relentlessness. "[The government] has failed to show that IMG violated the [CAN-SPAM] Act of 2003," the judge wrote. "After listening to the evidence presented at trial, the jury found that IMG had not initiated any of the 413 commercial electronic mail messages at issue in this case. Despite ample warning that defendant intended to challenge every assumption on which the government's claims were based, plaintiff failed to provide evidence from which the tech-savvy jury could conclude that IMG had procured the transmission of violative messages. The court declines to second guess or otherwise alter the jury's findings."

In addition to sending some painfully clear messages about prosecutorial behavior, Apgood said he thinks Lasnik's ruling and the jury's verdict will have other, farther-reaching effects. For one thing, he said, despite losing the IMG case, "what the government set out to do, it actually accomplished. Producers have gotten much tougher on their affiliates." Consequently, the feds have "backed off on further prosecutions under CAN-SPAM. [Prosecutions] came to a screeching halt — very quietly, but they came to a screeching halt. Hopefully, [this case] has called off the willy-nilly institution of claims against all producers for the acts of affiliates."

The positive resolution of the case also demonstrated the law can be adjudicated clearly and fairly by a jury of ordinary citizens and federal appointees. "This was a proper and intellectually honest decision on the part of the court, wholly supported by the facts and the decision of the jury," Apgood said. He also said he doesn't expect the government to appeal, because "there was no error committed by the court that would prejudice the case against the government." Changes to the law to make producers responsible for the actions of their affiliates likewise are unlikely, he continued, because they would risk violating constitutional guarantees.

Not the least significant implication to arise from the case, according to Apgood, is a subliminal message embodied within his client's victory. "IMG didn't spend anywhere near [the hundreds of thousands of dollars spent by some of the companies that settled with the FTC] to go to trial in this case — not even close," he revealed. Even combining federal court costs of about $40,000 a day plus trial costs of $10,000 to $11,000 daily and the legal and professional fees charged by Apgood's firm, IMG's bill totaled significantly less than the $413,000 in fines reportedly paid by the last company to settle with the FTC. Apgood hopes that knowledge will encourage other adult-entertainment companies to fight back instead of taking the path of least emotional and financial resistance — especially when they realize IMG may see the return of all the money it spent.

Apgood said his client is weighing filing suit against the government and the prosecutor individually under the Equal Access to Justice Act (5 U.S.C. §504) and 28 U.S.C. §1927, both of which guarantee the public redress of wrongful prosecution. "28 U.S.C. §1927 addresses counsel's liability for excessive costs," Apgood said. "It's only applicable to federal cases, but it makes the attorney personally liable." IMG has until June 1 to file a claim, and Apgood said he already has reserved his client's right to do so. If a suit is filed, it will be heard by the same judge who presided at trial.

Apgood said he hopes that is enough to make other prosecutors reconsider any hubris they might be tempted to display in the future.


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