California Court of Appeal Holds That The CAN-SPAM Act Does Not Preempt E-Mail Service Provider’s California State Law Claims

A significant decision was published last week by the California Court of Appeal, Second District on the issue of whether CAN-SPAM preempts California’s anti-spam statute (Hypertouch Inc. v. ValueClick Inc., Cal. Ct. App., 2d Dist., Jan. 18, 2001).  Hypertouch, Inc., an e-mail service provider claimed that that online marketer ValueClick, Inc. violated the statute which prohibits deceptive content in e-mail advertisements.  In reversing a grant of summary judgment on behalf of ValueClick, Inc., the court held that the CAN-SPAM Act does not preempt state laws that impose strict liability for materially deceptive commercial e-mails.

Hypertouch Inc., which provides e-mail service to approximately 100 customers, brought suit against ValueClick Inc., several of its subsidiaries, and PrimaryAds, Inc.  Hypertouch, Inc. alleged that the defendants sent  approximately 45,000 e-mails to its customers that contained deceptive header information in violation of Bus. & Prof. Code §17529.5.  The trial court granted the defendants summary judgment because it determined that the defendants could only be held liable for e-mails that they sent or caused to be sent, and that the claims were preempted by the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM Act), 15 U.S.C. §7701 et seq.  The lower court concluded that the CAN-SPAM Act bars any state law claims regulating deception in commercial e-mails, “unless such claims are for ‘common law fraud or deceit.’ ”  Under a common law fraud action, the plaintiff must prove all elements of fraud, “including knowledge of falsity, intent to deceive, reliance and damages proximately caused by the misrepresentation.”  The lower court concluded that Hypertouch, Inc. had not proven any of the elements of fraud, and therefore it determined that the suit was preempted by the CAN-SPAM Act.

The California Court of Appeal disagreed with the lower court’s holding that the California anti-spam statute is not preempted by CAN-SPAM Act.  Pursuant to §17529.5(a) it is unlawful for any person or entity to advertise in a commercial e-mail advertisement either sent from California or sent to a California electronic mail address under any of the following circumstances:

(1) The e-mail advertisement contains or is accompanied by a third-party’s domain name without the permission of a third party; (2) The e-mail advertisement contains or is accompanied by falsified, misrepresented, or forged header information; or (3) The e-mail advertisement has a subject line that a person knows would be likely to mislead a recipient, acting reasonably under the circumstances, about a material fact regarding the contents or subject matter of the message;

Thus, the court determined that, “by its plain terms, the statute is not limited to entities that actually send or initiate a deceptive commercial e-mail, but applies more broadly to any entity that advertises in those e-mails.”  The court opined that the legislative history of the statute is further evidence that the legislature intended that §17529.5 should “apply to entities that advertise in deceptive commercial e-mails, not only the spammers who send them.”  The California Court of Appeal faulted the lower court’s conclusion that the CAN-SPAM Act’s savings clause, which permits states to regulate “falsity or deception” in e-mails, only applies to those state statutes that require that every element of common law fraud be established. The court noted that Congress never used the term “fraud” in the preemption clause.  The use of the term “falsity or deception” evidenced a desire to leave the states broad authority to regulate commercial e-mail.

Specifically, the California Court of Appeal stated that “the Acts preemption provision was largely intended to target state statutes imposing requirements on commercial e-mails, while leaving states free to regulate the use of deceptive practices in commercial e-mails in whatever manner they chose.”  The court further recognized that the purpose of the CAN-SPAM Act was to “establish uniform standards for the content of commercial e-mails” and stated that this purpose included a desire to prohibit “materially false or materially misleading header information.” Gordon v. Virtumundo, 575 F.3d 1040 (9th Cir. 2009).

The respondents argued that California’s law frustrates the national standard because it permits claims in which the plaintiff does not have to show “scienter (intent/knowledge of wrongdoing), reliance, and proximate damages.”  The court disagreed, noting that the CAN-SPAM Act was intended to control the content of commercial e-mails and “[t]he elements of reliance and damages … have nothing to do with the content of an e-mail.  By not forcing a plaintiff to prove these elements, the California anti-spam law is actually helping to achieve the goals of the CAN-SPAM Act by making it easier for a plaintiff to achieve results.” The law has, according to the court “create[d] a more effective mechanism for eradicating the use of deceptive commercial e-mails.”

The respondents cited Virtumundo and Omega World Travel Inc. v. Mummagraphics Inc., 469 F.3d 348 (4th Cir. 2006) for the proposition that the CAN-SPAM Act preempts strict liability claims that do not require knowledge and intent requirements.  However, the court said that in Omega the Fourth Circuit determined that a “mere error” in the header of an e-mail could not subject its sender to liability in the absence of some element of wrongfulness.  Accordingly, state laws which impose liability for such immaterial errors would violate the preemption clause of the CAN-SPAM Act.  The Virtumundo court was faced with allegations that the defendant had sent commercial e-mails from domain names that “obscure[d] the identity of the sender,” and concluded that this allowed for liability for actions that did not actually deceive, and for practices that were not unfair.

The Court of Appeal determined only regulations that reach non-deceptive practices are invalid under Virtumundo and Omega.  Here, the statute imposes strict liability only on materially deceptive commercial e-mails.  Accordingly, the court said that the California did not frustrate the purpose of the CAN-SPAM Act.  Under the statute, however, the relevant question for the court was not whether the respondents knew of the e-mails, but rather whether they advertised in those e-mails. 

Advertising and marketing are the driving force within the Internet economy.  The liability component of this ruling is perhaps the single most important issue to those in the affiliate marketing industry because the court also determined that the CAN-SPAM Act allows for the imposition of strict liability on materially deceptive commercial e-mails, regardless of whether the e-mail was intended to deceive, or whether a recipient of the e-mail actually was deceived.  In effect, online advertisers that do not actually send the e-mails themselves, but whose products and/or services are marketed in a “non-compliant” e-mail, can now theoretically be held liable for the downstream behavior of its media partners without the necessity of a showing of actual or constructive knowledge of non-compliant marketing. 

Until the issue of strict liability for a publisher’s unlawful conduct is appealed (and a more reasonable negligence standard is imposed), it is critical that advertiser ramp-up efforts to police publishers and ensure that their liability policies and publisher guidelines are meticulously prepared by an experienced Internet marketing attorney.  Agreements must include language that protects against these claims and contains iron-clad defense and indemnity obligations.

Practically speaking, the court’s imposition of strict liability for online advertisers (regardless of the degree of knowledge and control over the publisher’s conduct) is fraught with potentially negative consequences, including the reduction of and/or change in the online advertising paradigm in general.  In the past, an advertiser’s use of strong contract language prohibiting unlawful advertising was sufficient to, at the very least, mitigate liability for downstream behavior.  Following the recent ruling by the California Court of Appeal, additional liability concerns have now been raised, as have issues concerning whether and/or how to allocate resources to police the behavior of rogue publishers.

The recent ruling by the California Court of Appeal dramatically expands potentially liability exposure for companies that advertise via e-mail marketing.  Serial anti-spam plaintiffs and the anti-spam community will most certainly be emboldened to initiate even more coercive shake-down litigation.  The foregoing clearly illustrates the dire need for Congress and the judicial system to step in and remove states from “the mix” of attempting to regulate the Internet.

Richard B. Newman, Internet Lawyer and Performance Marketing Attorney – Hinch Newman LLP