Another Hidden Cost of Rent-to-Own: Your Privacy

Although I normally try to add context to commentary about the legal issues covered in this blog, this FTC press release speaks for itself: Secretly Installed Software on Rented Computers Collected Information, Took Pictures of Consumers in Their Homes, Tracked Consumers’ Locations

Seven rent-to-own companies and a software design firm have agreed to settle Federal Trade Commission charges that they spied on consumers using computers that consumers rented from them, capturing screenshots of confidential and personal information, logging their computer keystrokes, and in some cases taking webcam pictures of people in their homes, all without notice to, or consent from, the consumers.

The software design firm collected the data that enabled rent-to-own stores to track the location of rented computers without consumers’ knowledge according to the FTC complaint.  The settlements bar the companies from any further illegal spying, from activating location-tracking software without the consent of computer renters and notice to computer users, and from deceptively collecting and disclosing information about consumers.

“An agreement to rent a computer doesn’t give a company license to access consumers’ private emails, bank account information, and medical records, or, even worse, webcam photos of people in the privacy of their own homes,” said Jon Leibowitz, Chairman of the FTC.  “The FTC orders today will put an end to their cyber spying.”

“There is no justification for spying on customers.  These tactics are offensive invasions of personal privacy,” said Illinois Attorney General Madigan.

The FTC named DesignerWare, LLC, a company that licensed software to rent-to-own stores to help them track and recover rented computers.  The FTC also reached settlements with seven companies that operate rent-to-own stores and licensed software from DesignerWare, including franchisees of Aaron’s, ColorTyme, and Premier Rental Purchase.

According to the FTC, DesignerWare’s software contained a “kill switch” the rent-to-own stores could use to disable a computer if it was stolen, or if the renter failed to make timely payments.  DesignerWare also had an add-on program known as “Detective Mode” that purportedly helped rent-to-own stores locate rented computers and collect late payments.  DesignerWare’s software also collected data that allowed the rent-to-own operators to secretly track the location of rented computers, and thus the computers’ users.

When Detective Mode was activated, the software could log key strokes, capture screen shots and take photographs using a computer’s webcam, the FTC alleged.  It also presented a fake software program registration screen that tricked consumers into providing their personal contact information.

Data gathered by DesignerWare and provided to rent-to-own stores using Detective Mode revealed private and confidential details about computer users, such as user names and passwords for email accounts, social media websites, and financial institutions; Social Security numbers; medical records; private emails to doctors; bank and credit card statements; and webcam pictures of children, partially undressed individuals, and intimate activities at home, according to the FTC.

In its complaint against DesignerWare, the FTC charged that licensing and enabling Detective Mode, gathering personal information about renters, and disclosing that information to the rent-to-own businesses was unfair, and violated the FTC Act.  The agency also alleged that DesignerWare’s use of geolocation tracking software without first obtaining permission from the computers’ renters and notifying the computers’ users was unfair and illegal.  It charged that providing the rent-to-own operators the means to break the law was unfair, and providing the fake registration forms to obtain consumer data was deceptive.

The seven rent-to-own companies were charged with breaking the law by secretly collecting consumers’ confidential and personal information and using it to try to collect money from them.  Use of the bogus “registration” information was deceptive, the FTC alleged.

The proposed settlement orders will ban the software company and the rent-to-own stores from using monitoring software like Detective Mode and will ban them from using deception to gather any information from consumers.  They also will prohibit the use of geolocation tracking without consumer consent and notice, and bar the use of fake software registration screens to collect personal information from consumers.  In addition, DesignerWare will be barred from providing others with the means to commit illegal acts, and the seven rent-to-own stores will be prohibited from using information improperly gathered from consumers in connection with debt collection.  All the proposed settlements contain record keeping requirements to allow the FTC to monitor compliance with the orders for the next 20 years.

Those named in the FTC’s complaints include DesignerWare, LLC; its principals,  Timothy Kelly and Ronald P. Koller, individually and as officers of DesignerWare, LLC.; Aspen Way Enterprises, Inc.; Watershed Development Corp.; Showplace, Inc., d/b/a Showplace Rent-to-Own; J.A.G. Rents, LLC, d/b/a ColorTyme; Red Zone, Inc., d/b/a ColorTyme; B. Stamper Enterprises, Inc., d/b/a Premier Rental Purchase; and C.A.L.M. Ventures, Inc., d/b/a Premier Rental Purchase.

The Office of the Illinois Attorney General partnered with the FTC in this investigation.  Today General Lisa Madigan announced the filing of an action against one of the rent-to-own companies that used Detective Mode and that is located in Illinois, Watershed Development Corp.

The Commission vote to accept the consent agreement packages containing the proposed consent orders for public comment was 4-0-1, with Commissioner J. Thomas Rosch abstaining.

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One Internet or Many – Questions on Censorship Grow

When a hateful fourteen-minute video was created intentionally to depict the prophet Mohammad in a manner designed to offend, the awareness of this trivial effort sparked worldwide protests against the United States and Western governments. It was used as a rationale for attacks against NATO forces in Afghanistan and was manipulated to put U.S. ambassador Chris Stevens in a vulnerable position where he was attacked and killed.

Is the response to stop offensive speech on the Internet?

Internet censorship is hardly new. China has laws designed to promote harmony and prosecutes cases to limit the risk of internal rebellion – whether aimed at the government or at ethnic minorities. Germany prohibits Nazi propaganda. Most Islamic states bar publications that insult the prophet Mohammad. The response to the recent video echo the 2005 controversy regarding a dozen editorial cartoons with depictions considered offensive. First Amendment scholar Eugene Volokh has noted some U.S. analysts suggesting a growing international norm in favor of censorship.

The same week, the British royal family is bringing suit for invasion of privacy related to nude photographs of Kate Middleton, citing French censorship laws. This could be another example of this international norm.

From the U.S. perspective, with our strong values in Free Speech, the debate seems odd. But the U.S. is actually the odd man out.

  • The U.S. is one of the few nations that bars prior restraint. In most of the world, the government can suppress offensive speech.
  • The U.S. has no laws to punish offensive speech, unless that speech falls into a very narrow set of exceptions (child pornography, obscenity, and invasion of privacy or defamation – only after the plaintiff wins in court, etc.).
  • The U.S. has no anti-blasphemy laws or any official state-sponsored religion.

While these points seem obvious to Americans, they are unheard of in much of the world. As a result, the Administration’s strong denunciation of offensive content seems intentionally weak to someone who believes that content is only published with a government’s prior approval or at least with the ability to arrest those who blaspheme, offend, or violate the State’s position.

This comes at a time when the Internet itself is under redesign. Changes to Internet governance has allowed the Internet to better recognize Arabic, Cyrillic and Simplified Chinese in the domain names of websites. New top level domains will complement .com, .org, and other long-recognized domains. These efforts were intended by ICANN, NGOs and international treaty organizations to further democratize the Internet but instead could be utilized as tools to segment the Internet, increase censorship, and cut down on public discourse – in the name of harmony and peace.

Pressures to legitimize government censorship in order to save lives and promote order may create opportunities for greater government censorship than ever before. The U.S., Western Governments and NGOs committed to the rule of law and expansion of individual freedoms must undertake a global effort to educate the public on the values of free speech and the role of tolerance regarding the speech of others.

Despite suggestions that the time to censor has arrived, the real obligation is to teach that the cost of democracy is tolerance and civil liberties. Democracy without tolerance is mob rule; revolutions without civil liberties are little more than window dressing. The lessons from the Arab Spring must continue to be learned in the form of greater understanding and respect for civil discourse which lies at the heart of any civil democracy.

Red Shoes diary has a new entry – Louboutin trademark revived

In a reversal of the lower court and its fortunes Christian Louboutin, the Second Circuit reversed the determination of the District Court to hold that the red outsoles flashed by the fashionable does indeed have secondary meaning in the fashion marketplace – at least when used when not matching the color of the uppers.

Writing for the unanimous panel, Judge José A. Cabranes, acknowledged that the Louboutin outsoles have “the requisite ‘distinctiveness’ to merit protection.”

Louboutin’s trademark, consisting of a red, lacquered outsole on a high fashion woman’s shoe, has acquired limited “secondary meaning” as a distinctive symbol that identifies the Louboutin brand. … [W]e limit the trademark to uses in which the red outsole contrasts with the color of the remainder of the shoe. We conclude that the trademark, as thus modified, is entitled to trademark protection.

At the core of the debate is the concept of aesthetic functionality. Purely aesthetic product features can be protected as trademarks if they are source-identifying and non-functional.

Functionality has two definitions: “a functional feature is one the exclusive use of which would put competitors at a significant non-reputation-related disadvantage. … [A] feature is also functional when it is essential to the use or purpose of the device or when it affects the cost or quality of the device.” (TrafFix Devices, Inc. V. Marketing Displays, Inc. 532 U.S. 23 (2001) (internal quotes omitted)).

Color is generally not functional for a product unless the color changes the effectiveness of the product. So pills can be marketed based on color (e.g. little blue pills) as can home insulation (pink). Like any other trademark, the color identifier is still limited to the specific goods (so pink can also designate cancer-awareness organizations).

In the case of fashion shoes, it has worked. “As a result of Louboutin’s marketing efforts, the District Court found, the “flash of a red sole” is today “instantly” recognizable, to “those in the know,” as Louboutin’s handiwork.”

Nonetheless, the law has long recognized the concept of aesthetic functionality. As the 1938 Restatement of Torts explains, “[w]hen goods are bought largely for their aesthetic value, their features may be functional.” I have elsewhere described the importance of aesthetic value as of the social relevance of a product. Objectively identical items (such as stuffed animals) are subjectively more or less important to the consumer. For example, Elmo is more valuable to a toddler than other puppets. In the absence of copyright protection, trademark should not provide a monopoly over such relevance.

Keeping with this line of reasoning, the Louboutin court updated the aesthetic functionality test by stating “a mark is aesthetically functional, and therefore ineligible for protection under the Lanham Act, where protection of the mark significantly undermines competitors’ ability to compete in the relevant market.”

At the same time, the Louboutin trademark works because of its contrast with the shoe upper. But more importantly, Louboutin cannot own the ability to make red shoes that have matching uppers and outsoles. It has no trademark in such use precisely because other designers need to make monochrome shoes and the public does not identify such shoes from a single source. Matching the uppers and outsoles is a more general style and therefore aesthetically functional.

The approach of the Second Circuit provides a reasonable balance between trademark holders and competitors. It helps the public because it recognizes both the value of the trademarks for the purchasers and the needs for other designers to remain competitive and creative.

The decision will motivate competitors to seek signature colors as yet another tool to separate their products in crowded and competitive marketplaces. Purple tablets, anyone?

COPPA Rule Supplemental Comments Extended to Sept. 24th

In an earlier post, I discussed the significance of proposed changes to the Children’s Online Privacy Protection Rule (COPPA Rule) recommended by the FTC. The FTC has extended the comment period regarding the revisions to the COPPA Rule until September 24, 2012.

The COPPA Rule is designed to protect children under 13 from unwanted privacy intrusion by providing parents control over what information websites and online services may collect from these children.

The revised rule expands the websites covered by the COPPA Rule, makes clear that targeted or behavioral advertising geared at protected minors is covered and expanded the definition of personal information to include persistent identifiers.

Some comments have already been filed. They can be read online.

According to the FTC, the extension was “in response to requests from several organizations.” The FTC now anticipates that “public comments on the Supplemental Notice of Proposed Rulemaking will now be accepted until September 24, 2012.”

Second Circuit affirms that Internet streaming is not cable broadcasting

In 2010, ivi launched a television streaming service that provided subscribers access to television stations. The streaming service provided a national footprint for television access and harkened a potentially new chapter for TV distribution. As the court noted, “within five months of its launch,
ivi had offered more than 4,000 of plaintiffs’ copyrighted television programs to its subscribers.”

In WPIX v. ivi, the Second Circuit held that the new chapter must be written by Congress.

ivi had claimed the right to stream the television content pursuant to section 111 of the Copyright Act that allows cable companies to rebroadcast television signals in their local area upon payment of a compulsory or statutory fee. ivi took the position that it met the definition of cable system so that it could opt into the compulsory payment system.

Based on the statute and congressional hearings, the regulations provide the following definition for a cable system:

A cable system is a facility, located in any State, Territory, Trust Territory, or Possession, that in whole or in part receives signals transmitted or programs broadcast by one or more television broadcast stations licensed by the Federal Communications Commission, and makes secondary transmissions of such signals or programs by wires, cables, microwave, or other communications channels to subscribing members of the public who pay for such service. A system that meets this definition is considered a “cable system” for copyright purposes, even if the FCC excludes it from being considered a “cable system” because of the number or nature of its subscribers or the nature of its secondary transmissions.

The Second Circuit agreed that the language was ambiguous, so it applied the Chevron test to determine whether Congress was clear, and if not, was the agency regulation correct.

If the intent of Congress is clear, that is the end of the matter; courts must give effect to the unambiguously expressed intent of Congress.  If we determine that Congress has not directly addressed the precise question at issue, we proceed to Chevron step two, which instructs us to defer to an agency’s interpretation of the statute, so long as it is reasonable. [WPIX v. ivi, quoting Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467, 842-43 U.S. 837 (1984) (other quotations omitted).]

The court had a difficult time believing ivi had a facility located in a particular state as required or that the Internet was a “facility” as required under the statute, but more importantly it found that the language was not meant to be broadly construed. Despite case law holding that satellite transmissions were within the ambit of section 111, Congress disagreed and instead added section 119 to specifically address satellite retransmissions. Congress also added the work “microwave” by amendment rather than relying on a more general reading of the statute and regulation.

Against this backdrop, the legislative history strongly suggested that Internet broadcasting was not an included subcategory under the “other communications channels.” Had Congress intended Internet broadcasting it had many opportunities to add the language.  Under the second part of the Chevron test, the Copyright Office uniformly stated in both regulation and congressional testimony that Internet broadcasting was not subject to the statutory provisions.

Although the case remains at the preliminary injunction stage, the unequivocal position of the Second Circuit would make future success for ivi very unlikely.

Undoubtedly the technology is rapidly shifting and the time is coming for Apple, Google, Microsoft and other Internet/Mobile companies to rewrite the social contract between audiences and broadcasters, but that revision will not be based on existing statutory licensing schemes. Instead it will require either new, directly negotiated distribution agreements – or more likely triggered by creation of high quality content that originates on the Internet/Mobile platforms. If the “broadcasters” are “streamcasters” then the new model will evolve quickly. Until then cable will still have the upper hand.