B. Standards for Vicarious Liability: 2. Application of Agency Principles
Courts have also considered extending vicarious liability to third party trademark infringement by way of the laws of agency. See Fare Deals, Ltd. v. World Choice Travel.com, Inc. 180 F.Supp.2d 678, 684 (D.Md. 2001), citing Am. Tel. & Tel. Co. v. Winback & Conserve Program, Inc. 42 F.3d 1421, 1437 (3d Cir. 1994). In such cases, “the party asserting the claim dependent upon an agency relationship bears the burden of proving its existence, including its nature and extent.” Fare Deals, 180 F.Supp.2d at 685 (citation omitted).Agency is defined as “the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” Id., citing the Restatement (Second) of Agency § 1 (1958) ;1-800 Contacts v. Lens.com, 755 F.Supp.2d 1151, 1183 (D. Utah 2010) .
In Fare Deals, discussed in detail supra, the plaintiff, Fare Deals, Ltd. (“Fare Deals”) was a travel services company. When it began to develop its internet website, it discovered that another company had already registered its name on a site called “<faredeals.com>.” Fare Deals thereafter sued both the owner of the website and two of its advertisers, Hotel Reservations Network, Inc. (“HRN”) and a company doing business as Hotwire (“Hotwire”), both of which posted links to their websites on the <faredeals.com> site. It brought Lanham Act claims arising out of the use of its name against both HRN and Hotwire, alleging that they had agreed with the website owner to split the proceeds of sales made by way of the links to their websites. See Fare Deals, supra at 680-682. Among its theories of liability under the Lanham Act, Fare Deals argued the advertisers were vicariously liable. The advertisers responded with motions to dismiss or for summary judgment, and the court granted both. Fare Deals, supra at 683, 698.
Specifically, regarding the defendant HRN, the court noted at the outset that the only facts to which Fare Deals could point to establish an agency relationship between HRN and the website owner were the terms of an affiliate agreement between the two parties. Fare Deals, supra at 685. That agreement, the court found, explicitly defined affiliates (i.e. the website) as independent contractors, and disavowed any partnership or joint venture. Id. at 685. Notwithstanding that the “substance of the parties’ relationship, not the label they give it, determines the existence of agency,” the court found that Fare Deals had brought no evidence to rebut the contractual definition of their relationship. Id., (citations omitted). Compare Fare Deals, supra with Am. Tel. and Tel. Co, supra, where the court identifies those situations in which independent contractors may be regarded as agents for purposes of vicarious liability.
In reaching its decision, the Fare Deals court applied Maryland agency law, which mirrored the federal common law, to determine whether a principal-agent relationship between the website owner and HRN existed. Namely, it examined three factors: “first, the principal’s right to control the alleged agent; second, the alleged agent’s duty to act primarily for the benefit of the principal; and third, the alleged agent’s power to alter the legal relations of the principal.” Fare Deals, supra at 685, (citations omitted).
As to the first factor, the court found that the control exercised by HRN over its affiliates under the agreement was minimal. Fare Deals, supra at 685. It had no power to monitor affiliate operations except to police their use of HRN’s own service marks. Moreover, the affiliates specifically agreed to bear sole responsibility for ensuring that their websites did not infringe other parties’ trademarks. Id. Regarding the second factor, the court found that although HRN’s affiliates had a nominal responsibility to act for HRN’s benefit, they fundamentally acted primarily for their own benefit, “just as does a buyer of goods who has an exclusive dealing agreement yet is not his seller’s agent.” Id. at 686 (citation omitted).
In examining the third factor, the court found that HRN’s affiliates had no power to alter its legal relations. Specifically, the website owner had no authority to conduct any transactions on HRN’s behalf. HRN had exclusive authority to accept or reject customer orders originating from its link to the <faredeals.com> website. While the owners of the site earned a commission on such sales, HRN itself conducted all transactions. Fare Deals, 180 F.Supp.2d at 686. Finally, even taking all of Fare Deals’ allegations together, the court held that there was no demonstrated intent on the part of HRN and the website owner to enter into a principal-agent relationship. Id.
Fare Deals’ vicarious liability claim against the second advertiser, Hotwire, similarly failed for lack of evidence demonstrating any principal-agent relationship between Hotwire and the <faredeals.com> website owner. In fact, the court found that the parties never executed an affiliate agreement. Fare Deals, 180 F.Supp.2d at 695. Even assuming they had, the court reasoned, the terms of Hotwire’s standard affiliate agreement specifically provided that its affiliates were independent contractors, with no authority to obligate or bind Hotwire in any way. Id. Compare Fare Deals with Am. Tel. & Tel. Co., supra, discussed infra, where the court identifies circumstances in which independent contractors may be regarded as agents. Moreover, the court found that Hotwire had no power to control the operation or content of its affiliated site except as to the position and nature of the links on such sites. Id. The actual consumer transactions referred from the sites were conducted exclusively between Hotwire and the customer. Id. The affiliates assumed no particular duty to promote Hotwire. Id. Overall, the terms of the standard affiliate agreement did not suggest any intent of the parties to form a principal-agent relationship. Id.
Associates who published allegedly infringing Internet advertisements linking to the online sales company “Amazon” were not agents of Amazon, the court held in Sellify v. Amazon, precluding a finding of vicarious liability. 2010 WL 4455830 *2 – *3 (S.D.N.Y.). The relationship between Amazon and its associates did not support a finding of agency either by way of apparent or actual authority. Id.
Sellify v. Amazon involved a dispute between the owner of “OneQuality,” an online seller of used electronic goods, and Amazon over disparaging advertisements that appeared in the search-results pages of the “Google” search engine and linked to Amazon’s website. The plaintiff noticed the advertisements shortly after settling a dispute with other members of its business, pursuant to which the plaintiff acquired brand rights in the company’s name. The advertisements, which stated “Don’t Buy from Scammers” or “Beware the SCAM Artists,” appeared when “onequality.com” or variations of it were entered as a search term. Sellify v. Amazon, supra at *1 -*2.
The search terms had been purchased by “Cutting Edge,” a participant in Amazon’s Associates Program. The program allowed individuals and businesses to link to Amazon’s website in their advertisements, using Amazon’s trademark and logo. Amazon paid its Associates an advertising fee every time a customer deposited an item in its virtual shopping cart within 24 hours of clicking on an Associate’s link. While Amazon provided training and assistance to the Associates in designing their advertisements, it did not monitor or control the content. Nor did it have the ability to remove the advertisements from the Internet. Sellify v. Amazon, supra at *1. Moreover, it did not authorize Associates to act as its agent. Associates entered into a written agreement with Amazon that held the Associates responsible for their own content and required them to refrain from “disparaging or infringing the intellectual property of third parties.” Associates who violated the terms of the agreement were subject to termination and withholding of accrued fees. Sellify v. Amazon, supra at *1.
The plaintiff complained to Amazon about the advertisements and followed up with a demand letter to Amazon, accusing it of placing the ads and threatening to sue. Sellify v. Amazon, supra at *2. Though Amazon had no ability to remove the ads from the Internet, it wrote to Cutting Edge threatening to close its account and withhold fees if it did not stop running the ads. Meanwhile, having received no response from Amazon after sending a second demand letter, the plaintiff sued, alleging violation of the Lanham Act, among other claims.
Noting the “wide chasm between … [the] indirect contractual influence” Amazon had over the Associate and “the direct authority and control necessary for a finding of actual authority under agency law,” the court in Sellify declined to extend vicarious liability to Amazon. Sellify v. Amazon, supra at *3. “An agent acts with actual authority,” the court recited, “when, inter alia, a principal has manifested its intent for the agent to act on the principal’s behalf, the agent has the authority to legally bind the principal, and the agent is subject to the principal’s actual control. Sellify v. Amazon, supra. (Citations omitted). Neither the substance of the parties’ agreement nor their actual business practice supported such a finding, the court concluded. The agreement itself expressly disclaimed any agency relationship between Amazon and Cutting Edge. Id. It further provided that Cutting Edge did not have the power to bind Amazon contractually. Id. As a practical matter, Amazon had neither control over the form or substance of Cutting Edge’s advertisements nor the authority to pull them off the Internet. Id. Moreover, the court noted, when Amazon became aware of the disparaging advertisements, it exercised its contractual rights to terminate the relationship with Cutting Edge and withhold its advertising fees. This “indirect contractual influence” however, did not amount to the direct authority and control necessary to prove agency. Id.
Moreover, the “mere act of allowing another to link to one’s website, even if undertaken for commercial gain, [could not] support a finding of apparent authority,” the court concluded. Sellify v. Amazon, supra at *3, citing Fare Deals, supra at 695. “Apparent authority exists when “a principal, either intentionally or by lack of ordinary care induces [a third party] to believe that an individual has been authorized to act on its behalf.”” Id. (Citations omitted.) But the plaintiff could not show that Amazon had somehow “induced others” into believing Cutting Edge was its agent, except by way of allowing it to link to its website. Id. To the contrary, the court concluded that
a reasonable user of the internet would not interpret such a tenuous “link” between entities as firmly indicative of an agency relationship. … [Such an] interpretation would broaden the range of situations susceptible to a finding of apparent authority, and thus vicarious liability, to unreasonable bounds given the realities of internet context.
Notwithstanding the result in Fare Deals, supra, independent contractors, in appropriate circumstances, may be regarded as agents for purposes of finding vicarious trademark infringement liability, the court found in Am. Tel. and Tel. Co. v. Winback and Conserve Program, Inc., 42 F.3d 1421 (3d Cir. 1994). In that case, the plaintiff American Telephone and Telegraph Company, (“AT&T”), the long-distance telecommunications carrier, sued one of its resellers, Winback and Conserve Program, Inc. and its president (together, “Winback”), seeking to hold them vicariously liable for trademark infringement by their sales representatives.
The nature of the resale business of the defendant informed the court’s analysis in Am.Tel. & Tel. As a reseller, Winback offered end-users access to AT & T’s services at a discount price. Am.Tel. & Tel., supra at 1424. It obtained customers through various marketing agencies, which in turn engaged sales representatives on a commission basis to attract end-users. The sales representatives sent forms to the customers who would complete them and send them back to the sales agency. Id. at 1425. The sales agency in turn sent the forms to Winback, who then sent them to AT & T. AT & T billed the end-users directly and those users made payments directly to AT & T. Id.
AT & T alleged that through the misuse of its name and globe symbol on the forms used by Winback’s sales representatives, coupled with a series of misrepresentations and descriptions of Winback’s name by those representatives, customers were confused into believing that Winback was affiliated with AT & T. See Am.Tel. & Tel., supra at 1428, n.9. It argued that under common law theories of agency, including the doctrine of apparent authority, Winback was liable for the infringing actions of its sales representatives. See id. at 1428-1429. AT & T made a motion for preliminary injunction, which was denied, in part based on the district court’s understanding that the sales representatives were independent contractors and therefore did not give rise to vicarious liability on the defendant’s part. See id. at 1426 and citation therein. AT & T appealed to the Third Circuit, which vacated and remanded, holding that while the lower court had correctly found that Winback’s sales representatives were independent contractors, further analysis was required to determine whether they were “agent independent contractors” or “non-agent independent contractors.” Am.Tel. & Tel., supra at 1436.
At the outset, the Third Circuit found that the sales representatives were properly categorized by the district court as independent contractors. Specifically, it noted the lower court’s findings that Winback exercised little or no control over their work Am.Tel. & Tel., supra at 1436. Furthermore, the representatives worked for other companies besides AT & T, were paid on the basis or their results and operated their own businesses, carrying their own expenses. Id. The fact that Winback may have attempted to police the representatives to prevent misrepresentations, while relevant to the question of contributory liability (see id. at 1433, n.14 and discussion of remedial measures supra), did not change their relationship with Winback into a master-servant one. See id.
Although as a general rule principals are not liable for the torts of their independent contractors, the Third Circuit found that the district court failed to consider the exceptions to this law. Specifically, it directed the court to make a finding as to whether the sales representatives were agent or non-agent independent contractors. See Am.Tel. & Tel., supra at 1439. If they were found to be agents, then the district court must consider whether an exception to the general rule, derived from common law, should apply. Specifically, the Third Circuit held that
when a principal authorizes its independent contractor agent to conduct and conclude a transaction with third parties on the principal’s own behalf, and the principal benefits financially from the contracts, the principal will be liable in an action brought pursuant to section 43(a) of the Lanham Act based on the agents’ foreseeable infringing actions upon which it would be reasonable for the third party to rely, provided the third party has no notice that the representations are unauthorized.
Am.Tel. & Tel., supra at 1438 ; 1-800 Contacts v. Lens.com, 755 F.Supp.2d 1151, 1183 n208 (D. Utah 2010) (citing same). Presumably, this exception would apply as well to a claim of trademark counterfeiting under the Act.
The doctrine of apparent authority also applies to a claim of secondary liability for trademark infringement, the Third Circuit held further in Am.Tel. & Tel. Co., supra at 1439-1440. Even if Winback’s sales representatives were found to be non-agent independent contractors, vicarious liability could arise not out of contractual relationship between Winback and the representatives, “but rather because of the actions of a principal or an employer in somehow misleading the public into believing that the relationship or the authority exists.” Id. at 1440 (citation omitted).
Apparent authority is thus a way of creating an agency relationship where one does not necessarily exist. See Am.Tel. & Tel. Co., supra at 1440. On remand, the Third Circuit further directed the district court to look into whether, by virtue of its actions and third parties’ reasonable beliefs, Winback had created an agency under the doctrine of apparent authority. Id.
The relationship between an online retailer and its affiliate marketer did not support a finding of agency in 1-800 Contacts v. Lens.com, 755 F.Supp.2d 1151, 1182 -1184 (D. Utah 2010). That case involved two companies that sold contact lenses on the Internet, 1-800 Contacts and Lens.com. The plaintiff, 1-800 Contacts, had discovered through routine Internet monitoring that when its name was used as a search term, advertisements for its competitor, the defendant Lens.com, would appear. The plaintiff contended that Lens.com and its affiliates bid on its service marks as keywords to generate sponsored links on Google and other search engines and that those sponsored links were likely to cause confusion as to source, affiliation, or sponsorship. 1-800 Contacts v. Lens.com, supra at 1157. It consequently sued Lens.com, alleging among other things, claims for trademark infringement and secondary liability arising out the defendant’s affiliates’ keyword advertising.
The court held that the purchase of a keyword standing alone did not constitute trademark infringement. 1-800 Contacts v. Lens.com, supra at 1174. It therefore turned to the content of the advertisements themselves, and found that of the over 10,000 affiliates employed by Lens.com, one had generated approximately 65,000 infringing advertisements containing the plaintiff’s service mark. Significantly, the plaintiff did not name the affiliate as a party. The court therefore turned to the question of whether liability for the affiliate’s infringing advertisements could be imputed to the defendant under theories of either vicarious or contributory liability. (The contributory liability claim is discussed in detail at II. D. 2. (f).)
In reaching its decision that the facts of the case did not support a finding of vicarious liability based on agency, the court noted a number of basic principles of agency law as a preliminary matter. First, it pointed out that the licensing arrangement between the defendant Lens.com and its affiliates allowing them to use its service mark in their advertisements did not necessarily lead to an agency relationship. 1-800 Contacts v. Lens.com, supra at 1182. Citing Mini Maid v. Maid Brigade, the court noted that the Lanham Act “does not automatically saddle the licensor with the responsibilities under state law of a principal for its agent.” Id. quoting Mini Maid v. Maid Brigade, 967 F.2d 1516, 1520 (11th Cir. 1992), discussed in detail in II. D.5. It also acknowledged the basic definition of agency as “the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” 1-800 Contacts v. Lens.com, supra at 1183. (citations omitted). Quoting Fare Deals, it further noted that an agent is charged to “act primarily for the benefit of the principal.” Id. citing Fare Deals v. World Choice Travel.com, 180 F.Supp.2d 678.685. Finally, the court cited AT & T v. Winback and Conserve for the proposition that “when a principal authorizes it contractor agent to conduct and conclude a transaction with third parties on the principal’s own behalf, and the principal benefits from the contracts, the principal will be liable in an action brought pursuant to section 43(a) of the Lanham Act based on the agents’ foreseeable infringing actions.” Id. citing AT & T v. Winback and Conserve, supra at 1438.
The plaintiff in 1-800 Contacts argued for a finding of agency between the defendant and its affiliates based on the degree of control the defendant had in the affiliate marketing relationship. To the extent this argument related to the defendant’s control over affiliates’ bidding on certain keywords, the court rejected it, because it had held earlier that merely purchasing keywords did not constitute an infringing act. 1-800 Contacts v. Lens.com, supra at 1183. Therefore it would only consider the vicarious liability in connection with the one affiliate that had generated the infringing impressions. Id.
While the court acknowledged that the defendant “set … the terms and conditions for its program that an affiliate” had to follow, other factors led it to conclude that there was no agency relationship on which to base vicarious liability for the affiliate’s infringing acts. 1-800 Contacts v. Lens.com, supra at 1183, 1184. Among these factors were that the defendant had little direct contact with its affiliates and no contact information for any given affiliate. When it learned about potential infringing advertisements generated by its affiliates, it had to go through a lengthy process with its affiliate network company, Commission Junction, to find out which ones were involved. Id at 1184.
Moreover, the court noted, the defendant had no authority “to monitor or supervise affiliate operations except to police their use of [Lens.com’s] own service mark.” 1-800 Contacts v. Lens.com, supra at 1183, quoting Fare Deals v. World Choice Travel.com, 180 F.Supp.2d 678, 685 (D. Md. 2001). It observed further that the defendant had no control over the content of its affiliate’s website and that its affiliates acted “primarily for their own benefit.” Id. quoting Fare Deals v. World Choice Travel.com, supra at 686. The fact that the Lens.com affiliates promoted its competitors on their websites was further indication that they did not “act in a fiduciary capacity that is typical when an agency relationship exists.” Id. at 1183. Finally, the court noted that the affiliates in general and the infringing affiliate in particular chose the language for their advertisements. Id. at 1184.
Alluding to AT &T v. Winback and Conserve, the court found that the plaintiff failed to show that the infringing affiliate was “vested with authority to conduct and conclude transactions on behalf of [the d]efendants.” 1-800 Contacts v. Lens.com, supra at 1184; see AT & T v. Winback and Conserve, 42 F.3d 1421, 1438 (3rd Cir. 1994). The infringing affiliate had “no power to alter the legal relations of [Lens.com],” nor could he “bind [Lens.com] to any contract. Instead, Lens.com “retained[ed] exclusive authority to accept or reject the orders of customers” who accessed its website through an infringing advertisement.” 1-800 Contacts v. Lens.com, supra.