Complaint Against Zappos Fails For Now, But The Court Gives DSW Another Chance
I wanted to give everyone an update on the DSW v. Zappos and Commission Junction case. I first blogged about this case here, back in June 2008.
Very briefly, the facts of the case are thus: DSW sued Zappos and Commission Junction over alleged trademark violations. Apparently an affiliate marketer working with Zappos through Commission Junction set up some phony review sites. The review sites say great things about DSW shoes, include "DSW" in the URL, use 'stock' DSW images, but link back to Zappos, not DSW. Please note, DSW did not sue the affiliate marketer, but it did sue Zappos and Commission Junction, claiming that they were responsible for the trademark violation and demanding that they transfer ownership of the offending sites, etc.
This case is interesting because (1) it's not clear why DSW went through the trouble and expense of suing over this issue rather than using cheaper, faster solutions; and (2) the law is still relatively undeveloped in the intersection of affiliate marketing and intellectual property.
Since June, Zappos asked the Court to dismiss the lawsuit because DSW failed to allege that Zappos violated any laws; and (2) that DSW failed to include an "indispensable party," the affiliate marketer responsible for the whole mess.
Zappos' Motion to Dismiss
Zappos asked the Court to dismiss the lawsuit because (1) DSW didn't sue someone it absolutely must sue, namely the affiliate responsible for the content and the sites; and (2) DSW failed to allege that Zappos owns or controls the websites or the allegedly infringing content. Zappos argued that Nabeel Kahlid, an affiliate marketer who resides in Pakistan, is solely responsible for the website and its content and therefore DSW must sue him individually.
Keep in mind this is one of those pre-trial motions before all the investigation has been done and well before a jury has ever heard or decided the facts. Basically, Zappos is asking the Court to dismiss this case now, way before trial and before things get expensive because there is no way that DSW could win based on the allegations in the Complaint.
Naturally, DSW disagrees with Zappos' argument. I won't go into great legal detail but basically DSW says that it doesn't have to sue Mr. Kahlid if it doesn't want to sue him; he's a "permissible," but not "indispensable" party. DSW also argued that the case shouldn't be dismissed just because it didn't accuse Zappos of directly owning and creating the content; merely implying that Zappos benefited from the alleged infringement should be enough. Lastly, DSW argued a fall back position that if the Court agrees with Zappos (i.e., DSW failed sue the necessary people and make the necessary allegations), then DSW should get a chance to fix its Complaint and start again.
The Ruling
Neither party won this motion.
The judge agreed with Zappos that DSW did not do a good enough job in making its case against Zappos in its Complaint; merely stating that Zappos received the benefit of the infringement and has a relationship of some kind with the affiliate marketer is not enough to support a trademark infringement case. DSW's Complaint failed to allege "that Zappos owns the offending domain names, that Zappos directs Commission Junction's activities, that Zappos controls (or even knows) the content of Commission Junction's clients' or affiliates' sites. Plaintiff's complaint does not even allege a legal relationship between Zappos and Commission Junction." If Zappos does not own, control, or even know of any potentially infringing material on the internet, then a judgment against Zappos would provide no relief to DSW. Thus, "the Court finds that the complaint as currently drafted creates no more than a 'suspicion of a legally cognizable right of action [and] is insufficient."
Despite finding that there is no way Zappos could be legally responsible under the current allegations, the Court did not dismiss the case. Instead, the Court took a modest approach and agreed to give DSW another chance. The Court permitted DSW to try and fix its Complaint by including allegations that could somehow result in liability for Zappos. (Note: DSW must still have a good faith belief for making any accusations; it can't lie or pull things from thin air.)
The court also ruled that it wasn't requiring DSW to sue Mr. Kahlid at this time, but that it would reconsider it after DSW re-drafted its Complaint. Thus, if DSW doesn't adequately address who is responsible and why in its new Complaint, the Court could decide to require DSW to bring suit against Mr. Kahlid. I'm sure DSW is hoping to avoid this at all costs. Bringing suit against a Pakistani person who may or may not even exist would be a very difficult and most likely wasteful endeavor.
DSW's New Complaint
DSW filed its new Complaint on November 7, 20008. What does it do differently? It goes out of its way to say that both Zappos and Commission Junction knew or should have known about the infringement. It doesn't say why or how they knew or should have known. It also, rather awkwardly I think, refers to the infringing websites as "the Defendants' websites," as if labeling them the defendants' websites can somehow make it true:
On information and belief, and without the permission of DSW, Commission Junction provided affiliate links for, on behalf of, and with the knowledge of, Zappos to Internet websites at the domain names www.dswreview.com, www.dsw-shoes.net and www.dswshoesreview.com. Printouts of the home pages from each of those Internet websites are attached hereto as Exhibits 1-3, respectively (hereinafter "Defendants' DSW Websites").
In fact, neither of the named defendants owns the websites. Mr. Kahlid owns them and he still isn't a defendant in this new Complaint. Thus, DSW's claim that Commission Junction and Zappos "monitored, directed and controlled, or had the ability to monitor, direct and control, the use of the DSW Marks on Defendants' DSW Websites and the use of links for those websites to the websites of Commission Junction and Zappos" [emphasis added] strains credulity. This and other claims are so artfully crafted one cannot help but feel a little mislead by the wording.
Ah well. So long as DSW has a good faith belief in its allegations (and perhaps Zappos does have the ability to 'monitor' the websites, if not 'control' them), the lawsuit may go forward. That doesn't mean DSW will win, of course. It just means it gets the opportunity to gather evidence and present its case. Zappos and Commission Junction will need to demonstrate that they did not have meaningful control over the websites and that Mr. Kahlid acted beyond the scope of his contract.
Closing Thoughts
This case looks like it is ripe for settlement. DSW is going to spend a fortune trying to win this case, and for what? I suppose it's possible that Mr. Kahlid made many many tens of thousands of dollars' worth of sales and that Zappos would have to pay those profits over to DSW, but it's highly unlikely. And there is still a great chance that Zappos and/or Commission Junction could get this case knocked out of court on another Motion to Dismiss or Motion for Summary Judgment. Unless Mr. Kalhid's websites were pulling in gobs of cash for an extended period of time, the cost/benefit analysis of pursuing this case just doesn't add up. It's too risky and there isn't much to be gained that couldn't have been achieved faster and cheaper by other means.
DSW can prevent phony review sites from using its brand without flinging this lawsuit. Provisions of the DMCA could have knocked these sites out of Google's index, a cease and desist letter to Commission Junction or Zappos would have been enough to terminate Mr. Kahlid from the affiliate program, and a simple UDRP or ACPA case might have handled the domain name issues more quickly and neatly than this trademark infringement lawsuit.
Final thought: This is why you should require your affiliate marketers should sign contracts prohibiting this kind of conduct and why you should monitor your top performers. For more information about risks involved in affiliate marketing, please see my previous post on the topic.
Best Regards,
Sarah
www.seomoz.org
published @ December 3, 2008