Tuesday, July 27, 2010

Agora Financial, LLC, et al. v. Martin Samler

Filed: June 17, 2010

Opinion by Judge Beth P. Gesner.

Held: The Court held that the defendant did not (i) misappropriate plaintiff’s published investment recommendations since the plaintiff’s “hot news” misappropriation claim is preempted by federal copyright law, and (ii) unfairly compete with plaintiff by misleading consumers through false associations with the plaintiff and its investment recommendations.

Facts: Plaintiffs publish financial investment newsletters to paid subscribers, wherein financial analysts recommend broad investment strategies, identify specific investments and compile lists summarizing recommended investments.

Plaintiffs alleged that the defendant posted without authorization on his website the investment recommendations contained in plaintiffs’ publications and profited from theses postings by charging individuals access to his website.

Defendant’s website expressly disclaimed any affiliation, endorsement, or sponsorship by or with those analysts whose recommendations it reproduced or those analysts’ affiliated financial entities.

Plaintiffs submitted a Motion for Default Judgment after defendant failed to respond. The case was referred to the Court to submit a report and recommendation regarding the entry of default judgment and the appropriate amount of damages to be awarded to plaintiffs.

Analysis: On a Motion for Default Judgment, the Court must: (i) determine whether the unchallenged facts in plaintiffs’ complaint constitute a legitimate cause of action, and, if they do, (ii) make an independent determination regarding the appropriate amount of damages. The plaintiffs’ complaint failed to constitute a legitimate cause of action under either theory, and, thus, the Court did not address damages.
The central issue with respect to whether the plaintiff’s “hot news” misappropriation claim is legitimate is whether the claim is preempted by federal copyright law.

Copyright law protects author’s original works and grants the author the exclusive right to reproduce, distribute, perform, or display, which, in turn, “encourage[es] the creation of writings by authors” and to protect them rather than to reward them for their labor.

The common law “hot news” misappropriation theory “protects costly efforts to gather commercially valuable, time-sensitive information that would otherwise be unprotected by law.” International News Service v. Associated Press, 248 U.S. 215 (1918); See GAI Audio of N.Y. Inc. v Columbian Broad Sys., Inc. 27 Md. App. 172 (Md. Ct. Spec. App. 1975).

The main distinction between the two theories is that copyright seeks to protect “original” works, whereas “hot news” misappropriation seeks to protect “non-original” material, such as factual information.

Under Section 301, the Copyright Act preempts any state law (i) if the state rights are equivalent to any of the exclusive rights within the general scope of copyright . . . and (2) the work in which state rights are claimed falls within the subject matter of the copyright.

The Court analyzed the application of various tests used in connection with evaluating the preemption of the Copyright law by various state “hot news” misappropriation claims. The leading recent case involved Motorola publishing statistical information that is factual from NBA games in the Second Circuit. National Basketball Assoc. v. Motorola, Inc. 105 F.3d 841 (2d Cir. 1997).

In the NBA case, the Second Circuit adopted a test to evaluate whether a state “hot news” misappropriation claim is preempted by the federal Copyright law. The elements include: the plaintiff generates or gathers information at some cost or expense . . .; (ii) the value of the information is highly time-sensitive . . .;(iii) the defendant’s use of the information constitutes free-riding on the plaintiff’s costly efforts to generate or collect it . . . (iv) the defendant’s use of the information is in direct competition with a product or service offered by the plaintiff. . .; and (v) the ability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened . . . The NBA court held that satisfying these requirements would push a claim outside of the general scope of copyright and be allowed to proceed.

The Fourth Circuit has never applied or discussed the NBA test, but this Court has expressly rejected it in a similar case stating that none of the “extra elements” of the NBA test constitute an “act” that is distinquishable from “the right to reproduce, perform, distribute or display a work” and therefore does not fall outside of the “general scope requirement” of Section 301. See Lowry’s Reports, Inc. v. Legg Mason, Inc. 271 F.Supp. 2d 737 (D.Md. 2003).

In this case, plaintiffs expressly based their “hot news” misappropriate claim on the NBA test, and claimed that this Court had only expressed skepticism of the breadth of the NBA test.

The Court rejected the plaintiff’s interpretation and stated that even if we applied the NBA test, the plaintiffs would fail because the plaintiff’s had not set forth factual allegations in their Complaint or any proof in their subsequent filings from which the Court could conclude that the material at issue in this case is “factual information.”

The Court reconciled its decision with the NBA test by limiting the NBA test to circumstances in which the material at issue must be “factual information” for it to form the basis of a “hot news” misappropriation claim.

Here, the recommendations of plaintiffs’ analysts to invest in a company are not fact, but instead an “original” work, which, in plaintiffs’ case, entails “judgment” and “creativity.” Plaintiffs employ their writers to exercise their professional judgment in recommending investments. Plaintiffs are not seeking to protect an exclusive right to profit or otherwise benefit from the labor they expend in generating, gathering, and compiling the “factual information” underlying those recommendations, e.g., the daily performance of one of plaintiffs’ analysts’ recommended stocks.

The Court noted that the plaintiffs could probably bring a cause of action under federal copyright law, but not under the common law “hot news” misappropriation theory.

Further, plaintiffs’ complaint failed to support a claim under Section 43(a) of the Lanham Act, which prohibits the use of any word, term, name, symbol, or device, etc., likely to cause confusion, or to cause mistake, or to deceive as to the origin, sponsorship or approval of one’s goods or services, or commercial activities.

Defendant’s website expressly disclaims any affiliation, endorsement, or sponsorship by or with those analysts whose recommendations it reproduces or those analysts’ affiliated financial entities by stating that “[Defendant] is no way affiliated with or endorsed by [plaintiff’s writers] or [plaintiffs] nor do[es] [Defendant] claim to represent the performance of their publication.”

The Court ruled that such disclaimer was sufficient to debunk any such confusion, mistake or deceit.

A copy of the opinion is available as a pdf.

Monday, July 26, 2010

Dowd v. Dowd Holdings, Inc. (Cir. Ct. Mont. County)

Filed: July 12, 2010
Opinion by Judge Ronald Rubin


1. Absent an agreement to the contrary, a partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership. Thus, the corporate general partner of a limited partnership is not entitled to a fee for managing the partnership’s business or disposing of its assets in the ordinary course of the partnership’s business.

2. Payments to the officers of the corporate general partner for services to the partnership are, de facto, payments to the corporate general partner.

3. A provision of the partnership agreement that requires that the partnership to indemnify the general partners for any claim arising out of the conduct of the partnership’s business, as long as they acted within the scope of their authority and in good faith does not insulate the corporate general partner from suit by a limited partner for breach of its contractual obligations under the partnership agreement.

4. In addition to damages, the plaintiff limited partners are also entitled to an award of prejudgment interest.


The limited partnership was formed to own, operate, and ultimately sell an 82 acre investment property. After the sale, the corporate general partner withheld $427,250.00 of the proceeds from the sale to pay two of its officers for their efforts in selling the property. The limited partners sued for breach of contract, the contract being the partnership agreement. There was no contract between the corporate general partner and the partnership to pay compensation to the general partner for services rendered to the partnership.


This appears to be an instance where the corporate general partner attempted to "double dip." That is, the general partner attempted to take its share of partnership profits but, off the top, skim various fees allegedly incurred for services for the benefit of the partnership.

Practice Pointer:

If the intent of the parties is to merely split profits, the partnership agreement should have a provision that allows the entity to contract with affiliates of general partners or, in the case of an LLC, the managing members, only if the other partners or members agree. Alternatively, as is often the case, if it is actually intended that the business will contract with a partner or member, either the term of the contract should be agreed upon or the manner in which the terms are determined should be agreed upon.

A copy of the opinion is available in both PDF and Word.

Tuesday, July 20, 2010

Music Makers Holdings, LLC v. Sarro (Maryland U.S.D.C.)

Filed: July 14, 2010
Opinion by Judge Roger W. Titus

Held: A foreign defendant was not subject to personal jurisdiction in Maryland on the basis of correspondence sent to and received from the jurisdiction, maintenance of a website, advertising, or tortious conduct not intentionally directed into the State.

Facts: A Maryland plaintiff sued a foreign defendant for infringing upon its trademark. The defendant moved to dismiss for lack of personal jurisdiction. The plaintiff argued that the defendant was subject to personal jurisdiction because it transacted business in the State, caused tortious injury in the State, and engaged in a "persistent course of conduct in the State." The plaintiff pointed to five things that justified the exercise of personal jurisdiction, which the court addressed in turn:


The defendant sent cease and desist letters to the plaintiff in the State: The plaintiff argued that the defendant subjected herself to personal jurisdiction by sending the plaintiff cease-and-desist letters in Maryland about the mark. Relying on multiple cases from outside the jurisdiction, the court held that cease and desist letters, alone, are an insufficient basis. A defendant does not "transact business" within the meaning of the long-arm statute by sending letters to a purported infringer of its rights. Moreover, the maintenance of a suit based solely on such letters would “offend traditional notions of fair play and substantial justice."

The defendant received e-mails and phone calls originating from Maryland inquiring about the mark: The plaintiff argued that such contacts were sufficient to establish personal jurisdiction. The court held that these contacts did not establish that the defendant was transacting business or engaging in a persistent course of conduct in the State. Moreover, the contacts would not satisfy due process because they did not show that the defendant purposefully availed herself of conducting activities in the State.

The defendant's website: The court articulated the standard in the Fourth Circuit for establishing personal jurisdiction by means of a website. In the Fourth Circuit, the mere act of “placing information on the Internet is not sufficient by itself to subject that person to personal jurisdiction in each State in which the information is accessed.” Carefirst of Md., Inc. v. Carefirst Pregnancy Ctrs., Inc., 334 F.3d 390, 399 (4th Cir. 2003). Rather, the defendant “must have acted with the manifest intent of targeting Marylanders.” Id. at 400.

The Fourth Circuit has adopted a “sliding scale” model for website-based specific jurisdiction. Under this sliding scale, there are passive, interactive, and semi-interactive websites. At one end of the spectrum are situations where a defendant clearly does business over the internet. If the defendant enters into contracts with residents that involve the knowing and repeated transmission of computer files over the internet, personal jurisdiction is proper. At the opposite end are situations where a defendant has simply posted information on a web site. A passive web site that does little more than make information available is not grounds for the exercise of personal jurisdiction. The middle ground is occupied by interactive web sites where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information.

The defendant's site provided information regarding her camp, a toll-free number, and a registration form which visitors could print and mail to defendant in New York. It also had a Google search box. It did not have an electronic application, a payment-by-credit card function, live chat, or an interactive e-mail form. Accordingly, the court deemed the site passive and an insufficient basis for personal jurisdiction.

The defendant advertised on camp marketing web sites: The plaintiff argued that this was a purposeful availment of the Maryland marketplace. The court concluded that, as with the defendant's own site, the third-party websites do not indicate that defendant “direct[ed] electronic activity into the State . . . with the manifested intent of engaging in business or other interactions within the state.” The generic advertising found on these third-party websites was insufficient to invoke personal jurisdiction.

The effects test: The plaintiff argued that the defendant's willful infringement of its rights satisfied the effects test. The effects test requires that a plaintiff show 1) an intentional tort, 2) suffered by the plaintiff in the forum, and 3) the defendant expressly aimed its conduct at the forum. The court found that the third requirement was lacking - there was no showing that the defendant aimed its conduct at Maryland.

Accordingly, the court dismissed for lack of personal jurisdiction.

The full opinion is available in pdf.

Tuesday, July 13, 2010

Nefedro v. Montgomery County (Ct. of Appeals)

Filed: June 10, 2010

Opinion by Judge Clayton Green, Jr.

Held: Montgomery County's ordinance that prohibits the acceptance of payment for fortunetelling ("Fortunetelling Ordinance") violates the First Amendment of the U.S. Constitution because it is regulates noncommercial protected speech and it is not narrowly tailored to promote a compelling Government interest.

Facts: Nick Nefedro wanted to open a fortunetelling business in Montgomery County. Nefedro filed suit in Circuit Court for Montgomery County after he alleged he was denied a business license from the Montgomery County Licensing Department because of the Fortunetelling Ordinance. The Circuit Court granted the County summary judgment and concluded that the Fortunetelling Ordinance was constitutional. Nefedro appealed to the Court of Special Appeals and the Court of Appeals issued a writ of certiorari.

Analysis: As an initial matter, the Court concluded that Nefedro had standing to bring the constitutional challenge because he was adversely affected by the Fortunetelling Ordinance considering he intended to open a fortunetelling business and would be subject to penalties under the Fortunetelling Ordinance if he did so.

Next, the Court decided whether the Ordinance violated the First Amendment. The Court agreed with Nefedro that the Ordinance violates Nefedro's right to freedom of speech under the First Amendment because it regulates speech and that regulation violates the First Amendment. The Court disagreed with the County's analysis that the Ordinance only regulates conduct, not speech, because it prohibits the payment of money for fortunetelling services, not fortunetelling itself, and therefore does not implicate the First Amendment. Citing to the Supreme Court and various state courts, the Court found that this was not a meaningful distinction. The Court explained that the County imposes a burden on speech when protected speech is made punishable for the exchange of payment.

The Court also refused to accept the County's assertion that fortunetelling is "inherently fraudulent" and therefore should not receive First Amendment protection. While the Court agreed that the First Amendment does not protect fraudulent statements, the Court was not convinced that fortunetelling always involves fraud. The Court noted that fortunetelling provides benefits to recipients, in the form of entertainment or information.

Further, the Court did not accept the County's argument that the Ordinance regulates commercial speech, which receives less scrutiny than laws restricting noncommercial speech. Speech is not commercial simply because it has an economic motivation. Because the purpose of fortunetelling is to provide a benefit to the recipient in the form of entertainment or information, it is not solely related to the economic interests of the speaker.

Lastly, the statute does not pass muster under the First Amendment for being "narrowly tailored to promote a compelling Government interest" because a less restrictive alternative would serve the Government's purpose. The Government's stated interest in the Ordinance was to combat fraud that apparently ensues from fortunetelling. The Court reasoned that a less restrictive, effective means of combating fraud would be to make fraud illegal, and Montgomery County and the state of Maryland already have such laws.

The full opinion is available in pdf.

Wednesday, July 7, 2010

McKinney v. Fulton Bank (Maryland U.S.D.C.)

Filed: June 21, 2010
Opinion by Judge Catherine C. Blake.

Held: A contract alone does not create a tort duty owed by a Bank to a Borrower in a loan transaction unless the Borrower is a vulnerable party or other special circumstances exist.

Facts: A borrower applied for a $930,000 loan to build a second home but entered into a $997,000 loan with a bank on April 27, 2006. The borrower claimed the bank "violated several federal and state laws by failing to make certain disclosures and issue documents on time" and the bank forced her to refinance a $67,000 second mortgage on her principal residence by unilaterally increasing the loan.

The borrower also claimed the deed of trust on her primary home granted her a three-day right to cancel the loan transaction and because she was not informed of this right she had an extended right to cancel. The borrower alleged this right was exercised by rescission letters sent on April 6, 2009 to the bank's counsel and president voiding any security interest of the bank. The bank foreclosed on the second home. The borrower claimed damages relating to costs of the loan and improvements made to the second home.

Analysis: The Court dismissed a majority of the claims alleging violations of the Truth in Lending Act, the Real Estate Settlement Procedures Act and the Maryland Consumer Protection Act due to expiration of the statute of limitations, the lack of a private cause of action under the statute and the borrower's failure to meet the heightened pleading standards.

The borrower also brought a negligence claim. While "the Maryland Court of Appeals has found that a bank did owe a consumer a duty of care in a loan transaction" in Jacques v. First Nat'l Bank of Md., 515 A.2d 756 (Md. 1986), the finding arose from more than just the contract. A contractual duty does not by itself become a tort duty. A duty must be imposed by law independent of the contract. "The Fourth Circuit has interpreted the holding of Jacques as limited to circumstances involving a vulnerable party." As the court neither found an independent duty nor considered the borrower to be vulnerable, the negligence claim was also dismissed.

The full opinion is available in pdf.