B. The Elements of Contributory Liability under Inwood: 3. The Requirement of Actual or Constructive Knowledge: (c) Willful Blindness — (i) End User Agreements
1. End User Agreements. In a case involving a software company that had incorporated potentially infringing “clipart” images into its software programs, the company’s inclusion of an end-user licensing agreement restricting the purchaser’s use of those images precluded a finding of willful blindness. See Medic Alert Found. U.S., Inc. v. Corel Corp., 43 F.Supp.2d 933, 940 (N.D. Ill. 1999). Specifically, the fact that the agreement forbade the purchaser from using the images in ways that would infringe led the court to conclude that the company had no reason to suspect wrongdoing. See id.
The plaintiff in Medic Alert was the non-profit corporation, Medic Alert Foundation, which provided products and services to its members related to their non-apparent medical conditions for use in emergency situations. See Medic Alert, supra at 934. Such products included necklaces or bracelets and wallet cards, each of which bore the member’s individualized medical information, a telephone number for further details about the member’s condition, and the Medic Alert logo. The Medic Alert logo, which was registered along with its trademark and service mark, consisted of the words “MEDIC” and “ALERT” in all capital letters running from to bottom on either side of a caduceus (the symbol of medicine and healing depicting two snakes coiled around a staff). Id.
The defendant in Medic Alert, Corel Corporation (“Corel”), was a computer software company whose software packages included a library of “clipart” or graphic images from which a user could select and insert into a document. Id. at 934-935. Among these images, which Corel obtained by way of a licensing agreement with another company, “Techpool,” was one that resembled the Medic Alert logo. Techpool had represented to Corel that the image was licensed and did not infringe any third-party intellectual property rights. Id. Furthermore, purchasers of Corel software programs were required to enter into end-user licensing agreements that prohibited them from using “computer images related to identifiable individuals or entities in a manner which suggests their association with or endorsement of any product or service.” Id.
In apparent violation of the foregoing agreement, a health products company that had purchased the Corel software altered one of the images in question to read “Health Alert” and then used it on its mail solicitations for vitamins. See Medic Alert, supra at 935. Consequently, in addition to various trademark infringement claims against Corel, Medic Alert alleged contributory trademark infringement in connection with the alleged infringement of its logo in those mailings. Id. at 936, 939-940. It argued that upon being appraised of the alleged infringement some years prior to trial, Corel knew that Medic Alert had not licensed its images for use in its products, and should have immediately recalled all its software from distribution. (Corel had, in fact, taken measures to remove the disputed images from it software, as discussed in greater detail, infra). Notwithstanding these measures, by continuing to sell its existing inventory containing the disputed images, Medic Alert argued, Corel committed contributory trademark infringement. Corel moved for summary judgment on both the direct and indirect trademark infringement claims.
The court granted Corel’s motion, finding the evidence insufficient as a matter of law to support a finding of contributory liability. Medic Alert, supra at 940. In reaching its decision, the court relied on both Inwood and the willful blindness standard articulated in Hard Rock Cafe, discussed infra, noting specifically that “[a]ctual knowledge … is satisfied by a finding of willful blindness, which means a person must suspect wrongdoing and deliberately fail to investigate.” Id., citing Hard Rock Café Licensing Corp. v. Concession Serv., Inc. 955 F.2d 1143, 1149 (7th Cir. 1992). Even assuming direct infringement had taken place, the court reasoned, “[i]n light of Corel’s end-user agreement, it had no reason to expect that one of its software users would violate the contract and use one of its images for commercial use, until it was provided with actual information that someone had done so.” Medic Alert, supra at 940. The court further noted that there was no evidence that Corel was ever notified of the direct infringement until it was produced in the instant lawsuit. Id. Referring again to the end-user agreement, the court found that Corel had no reason to suspect any further infringement. Id. By the time the direct infringement came to the Medic Alert’s attention, the court noted, Corel had already taken remedial measures to remove the images in question. (This aspect of the case is discussed in further detail infra.)
A similar argument regarding customer agreements was advanced by the defendant wireless telecommunications company in MetroPCS Wireless, Inc. v. Virgin Mobile USA, L.P., 2009 WL 3075205 (N.D.Tex.), where MetroPCS argued, based on the court’s reasoning in Medic Alert, supra, that because its customers signed pledges not to infringe other companies’ trademarks, it should be insulated from contributory liability for such acts. Note that the MetroPCS court accepted the argument but ultimately based its decision on other grounds, discussed in detail here in Section II.B.3.
The dispute in MetroPCS arose out of MetroPCS’s “reflashing” service, in which it “unlocked” its customers’ cell phones so that they could be used over the wireless network offered by MetroPCS rather than the one sold to them by the original company together with the handset. See MetroPCS, supra, at *1 – *2. The declaratory judgment defendant and competitor, Virgin Mobile, contended that MetroPCS’s practice undermined its business model, targeted at low-income customers, which was to sell its handsets at well below market value and then recover its losses over time with the sale of airtime. Id. Thus, according to the defendant, “[i]f a customer purchase[ed] a Virgin Mobile-branded handset at an artificially low price and then reflashe[d] the handset for service on a competitor’s network, Virgin Mobile suffer[ed] financially.” Id.
Prior to the onset of litigation, Virgin Mobile sent cease and desist letters to MetroPCS demanding that it stop reflashing Virgin-branded handsets. MetroPCS, supra at *2. Metro PCS responded with a lawsuit seeking declaratory judgment that, among other things, it was not infringing on Virgin Mobile’s trademarks. Virgin Mobile asserted a number of counterclaims, including direct and contributory trademark infringement. Id.
Specifically, Virgin Mobile maintained that “when MetroPCS induce[d] customers to switch from Virgin Mobile to MetroPCS and, through the [reflashing] service, to alter their Virgin Mobile-branded handsets for use on the MetroPCS network” it infringed, both directly and contributorily on its trademarks. Id. Virgin Mobile based its counterclaims “on the fact that, after Virgin Mobile-branded handsets [were] reflashed to operate on the MetroPCS network, they still [bore] Virgin Mobile’s trademarks.” Id. Reflashing, Virgin Mobile argued, enabled MetroPCS to “free-ride on Virgin Mobile’s effort and investment in developing, marketing, and distributing its wireless products and services.”Id. It argued further that, as noted above, this practice prevented Virgin Mobile from recovering its losses on the low-priced handsets. Id. It asserted that reflashing could lead to “decreased functionality” or the handsets and could damage them as well. Id.
For its part, MetroPCS maintained that it reflashed handsets only at the request of the handset owner and that it required the customer to, among other things, represent that he did not have an agreement with any other service provider and would not “use the original provider’s trademarks in selling, offering for sale, distributing, or advertising” MetroPCS’s handsets. Id. at *2, n4. MetroPCS consequently responded with a motion for partial summary judgment seeking dismissal of, among other things, the contributory trademark liability claim. Id.
To support its motion, MetroPCS advanced two arguments: first, that Virgin Mobile had neither alleged nor proved any direct acts of infringement by MetroPCS’s customers; and second, that because its customers pledged not to infringe Virgin Mobile’s trademarks, MetroPCS was insulated from liability. MetroPCS, supra at *15. In granting the motion for dismissal, the court addressed both arguments, but ultimately reached its decision based on straightforward application of Inwood, finding that MetroPCS had neither induced any of its customers to infringe nor had it continued to sell reflashed handsets to customers whom it knew or had reason to know were reselling the handsets. Id. at *17. See Section II.B.3 for a full discussion. As to the first argument regarding direct infringement, see Section II.B.5.
As to MetroPCS’s second argument, the court seemed to agree that a customer pledge not to infringe would insulate MetroPCS from contributory liability, though it rested its decision on Virgin Mobile’s failure to satisfy the Inwood test. MetroPCS likened its customer pledge to the licensing agreements at issue in Medic Alert, supra, arguing that it had “no reason to expect that any of its customers would commit direct infringement” because its customers signed a pledge to the same effect regarding their cell phones. See MetroPCS, supra at *16. Virgin Mobile argued that the customer pledges were not consistently required and did not prevent the infringing resale of its handsets, creating a genuine fact issue regarding the motion for summary judgment. Id. The court concluded, however, that the fact issue was immaterial pursuant to its application of the Inwood test further on in the decision. Id.