Re: 3/1/00 - Internet Message Board Lawsuits; Plaintiff Corporations Face Reprisals From Cybersmear Defendants
Internet Message Board Lawsuits
Plaintiff Corporations Face Reprisals From Cybersmear Defendants
Blake A. Bell
Simpson Thacher & Bartlett
eSecurities
March 1, 2000
Corporate cybersmear: For many corporate executives, the phrase evokes images of furtive Internet message board postings coldly calculated to manipulate the price of a company's stock or to defame the company's management.
That image could not be further from the truth, at least according to many of the message board participants who have been sued by companies in so-called "corporate cybersmear" lawsuits. Increasingly, cybersmear defendants have fought back with a vengeance, using a variety of tactics against companies that have sued them.
CYBERSMEAR SUITS PILING UP
A "corporate cybersmear" is a rumor about a company, its management or its stock that is posted anonymously on an Internet message board or in a live chat room. Companies that believe such postings to be false and defamatory increasingly resort to lawsuits against unknown John Doe defendants responsible for the postings. Once such a suit has been filed, the corporate plaintiff typically uses the subpoena process to gain information from the message board or chat room host to permit identification of the anonymous or pseudonymous author(s) of the postings.
Few would deny that such suits are becoming commonplace. One recent news report states that Silicon Investor-only one of the four principal financial message board sites-"receives about one subpoena a day" seeking the identities of authors of message board postings.
In the last few months, corporate cybersmear suits reportedly have been filed against unknown John Doe defendants by such companies as Fonix Corp., Owens Corning, Bioshield Technologies Inc., Total Renal Care Holdings Inc., ZiaSun Technologies Inc. and Lily Industries Inc. These suits join the nearly fifty such suits that already have come to light, with many more likely winding their way quietly through the nation's judicial system. For an extensive list of corporate cybersmear cases, see Blake A. Bell, "Corporate Cybersmear Cases," cybersecuritieslaw.com.
JOHN DOE FIGHTS BACK
John Doe has begun to fight back. One cybersmear defendant recently filed large counterclaims and third-party claims against the corporate plaintiff and its management in a cybersmear case. Others are using the discovery process to bolster their positions and to embarrass the companies that sued them.
Some John Doe defendants are putting up web sites devoted to their plight and are creating message boards and chat rooms to exchange information with other John Doe defendants about their respective lawsuits. Some John Does are fighting the subpoenas intended to unmask their identities. Others are seeking the assistance of national organizations such as the American Civil Liberties Union (ACLU) and the Electronic Privacy Information Center (EPIC) and are urging them to get involved on behalf of John Doe defendants. Finally, most are continuing to state their critical opinions on the various message boards where they originally ran into difficulty.
ONE JOHN DOE SWINGS A MEAN COUNTERCLAIM
Holding true to the old saw that "the best defense is a good offense," substantive counterclaims have begun to appear against companies that file cybersmear suits. Perhaps the most notable and widely reported such instance involves a cybersmear suit filed by ITEX Corp. in August 1998.
ITEX is a Nevada corporation based in Oregon that operates, among other things, the ITEX Retail Trade Exchange. The exchange has been described as an association of business owners and professionals that form a marketplace to barter goods and services. The exchange reportedly was intended as a barter clearinghouse for its members.
During 1998, anonymous messages critical of ITEX and its management began to appear on a Yahoo! Finance message board devoted to the company's stock. The messages reportedly claimed, for example, that "current management is blind, stupid and incompetent," and were signed by people using screen names such as "colojopa," "Investor 727" and "Orangemuscat."
ITEX filed suit in state court in Oregon against "John Does 1-100." Its complaint alleged that the authors of the postings had engaged in unlawful trade practices, civil conspiracy and defamation. On Aug. 26, one of the defendants, Leslie L. French, struck back, filing an answer with affirmative defenses that also included counterclaims and third-party claims against ITEX and certain ITEX executives. The answer containing the cross-complaint was amended Sept. 7. Itex v. French, No. 98-09-06393 (Cir. Ct. Ore., County of Multnomah). A copy of the pleading is available at lesfrench.com body_answer1.html.
In his amended pleading, the defendant alleged, in effect, that the creation and issuance of bartering trade dollars in circumstances that the defendant contends were in a deficit condition constitutes an offering and sale of unregistered securities in supposed violation of Oregon's blue sky laws. The defendant sought damages on the various counterclaims and third-party claims totaling more than $1.5 million. The defendant also requested a receivership for the exchange, as well as injunctive relief against ITEX, certain ITEX directors, the exchange and certain members of the board of governors of the exchange.
Not long after Mr. French filed his amended answer, the Securities and Exchange Commission got into the act. On Sept. 27, the Commission filed a civil fraud action against ITEX and various members of ITEX's management. The complaint alleged securities fraud and asserted that the company had materially inflated its revenues and earnings in financial statements filed with the Commission and in other disclosures made to the investing public. SEC Litigation Release No. 16305 (Sept. 28) (http:// www.sec.gov/enforce/litigrel/lr16305.htm).
JOHN DOES USE THE DISCOVERY PROCESS
Another tactic that should come as no surprise is the extent to which John Doe defendants are trying to use the discovery process to bolster their positions and to embarrass the plaintiff companies and their executives. One such example involves a suit filed last February by Varian Medical Systems Inc. Varian Medical Systems Inc. v. Felch, No. C-99 20256 RMW ENE (N.D. Cal.) (filed Feb. 25).
The Varian suit is a virtual soap opera of charges and counter-charges. The company alleges that after defendant Michelangelo Delfino was terminated from the company as a research scientist, he began posting defamatory messages to a Yahoo! Finance message board and impersonating company officials on that message board. Mr. Delfino reportedly denies the allegations and claims that the suit is an effort to "use the Internet to go after" his research and development startup company, MoBeta Inc., which he claims is the "real target of Varian's suit." As he puts it, "What we think they're trying to do is go after our patents." Erik Espe, "Ex-Varian Employees Cry 'SLAAP,'" Business Journal (San Jose and Silicon Valley), Nov. 1 (http:// www.amcity.com/sanjose/ stories/1999/11/01/story6.html).
The defendants' attorneys in the Varian case already have deposed Varian's director of human resources, its human resources senior resources representative, a supervising manager and a manager. Efforts reportedly are underway to depose other even more senior executives. In some instances, defendants have posted to the Web excerpts of the transcripts that they believe either support their positions or, they believe, cast the plaintiffs in a bad light.
TRADING INFORMATION VIA THE INTERNET
As John Does grow increasingly sophisticated in their defense of corporate cybersmear suits, they are likewise growing increasingly sophisticated in their use of the Internet to exchange information about the various lawsuits, and the tactics being employed by the companies involved. Some defendants have put up web sites where they make information available about the lawsuits in which they are involved. Others have founded Yahoo! message board "clubs" at http://clubs. yahoo.com.
The two most widely followed John Doe clubs are "John Does - Anonymous Yahoo message posters who are being sued" (http://www. clubs.yahoo.com/clubs/johndoes) and "ITEX Group - About ITEX CORP and the SEC/100 John Does Lawsuits" (http://clubs.yahoo. com/clubs/itexgroup).
The John Does club hosts a message board which, as of Nov. 15, had more than 70 members who have posted nearly 500 messages. The messages address the lawsuits in which some of the board participants are involved and the companies that have brought cybersmear suits.
The home page of the John Does club states, "Welcome to all of the John Does (and friends of John Does) who have been sued by PHV, PHYC, RTNB, VALU, Shoneys, ITEX, OWC, WADE, PHXX, XIRC, and other companies which desire to chill and obstruct the free-flow of information on the internet by pursuing anonymous Yahoo! Message board posters with expensive litigation." Similarly, the ITEX Group club hosts a message board which, as of Nov. 15, had nearly 90 members who have posted nearly 700 messages.
Both clubs offer periodic "online conferences" using chat rooms for members to exchange information about the companies and the lawsuits in which they are interested. For those who have registered as members of the ITEX Group club, the chat room is available at chat.yahoo. com/?club=itexgroup.
Similarly, for those who have registered as members of the John Does club, the founder issues periodic e-mails inviting recipients to participate in online conferences that can be accessed at lesfrench.com. cgi. Recent topics addressed in that chat room have included "[j]udicial requirements for proper service of John Doe subpoenas," and "an upcoming article in California Lawyer magazine" about corporate cybersmear suits.
Some John Does have begun to fight the subpoenas intended to unmask their identities. Perhaps the most widely reported such incident involves Xircom Inc. One pseudonymous author of a message board posting, known only as "John Doe aka 'A_View_From_Within,'" filed a motion in a cybersmear case brought by Xircom in California, seeking to quash a subpoena issued by Xircom's attorneys and to obtain a protective order against the issuance of further subpoenas. Xircom Inc. v. Doe, aka "A_View_From_Within," No. Civ. 188724 (Cal. Sup. Ct., Ventura Cnty).
Last April, "A_View_From_Within" posted at least two messages to a Yahoo! Finance message board devoted to Xircom. The author claimed to be "one who has worked at Xircom for a number of years" in its "Engineering Dept.," and criticized the company and its management. One of the messages claimed that management had "run Xircom's sales into the ground." Another alleged that "there is a known problem on the inside that is being kept from the outside[.] [T]he connectors on the RealPort are extremely fragile and break very easily."
A few weeks later, in May, Xircom commenced its defamation suit and issued a subpoena to Yahoo! The subpoena was later amended. The amended subpoena sought, among other things, documents concerning the identity of the person who posted the messages, and documents concerning that person's registration for, access to, or use of the message board and documents concerning the methods, means, gateways or other processes by or through which the person accessed, visited, retrieved information from, or posted information to the message board.
On May 25, lawyers representing the John Doe defendant filed a motion to quash the subpoena and to obtain a protective order against future similar subpoenas. They argued that the subpoena was "untimely under Civ. Proc. Ï 2025(b)(2), is an unconstitutional abridgement of his constitutional rights to privacy and anonymous speech, and has been issued as part of a bogus lawsuit in an effort to chill speech."
On June 16, the court quashed the subpoena for failure to comply with a procedural statute, but authorized Xircom to redraft and reserve the subpoena. Within a month, the suit was settled. The John Doe's lawyer reportedly revealed the author's identity to a few senior executives at Xircom. The John Doe also affirmed that he has never been employed by Xircom, and expressly stated that his postings were expressions of opinion.
The efforts by the author who used the alias "A_View_From_ Within" to fight Xircom's attempt to identify him apparently are not unique. ProMedCo Management Co. recently filed a cybersmear suit and issued a series of subpoenas to unmask the identities of anonymous authors, including one who used the pseudonym "Voiceonthewind". ProMedCo Management Co. v. Doe, Civ. Action No. 806956 (Cal. Sup. Ct., Santa Clara Cnty., 1999). "Voiceonthewind" reportedly hired a lawyer, and "the case was over in a matter of days." It seems that "Voiceonthewind's" lawyer "noticed a glaring defect in the subpoena" and told the company "that we were going to fight back and that there would be substantial publicity."
JOHN DOES SEEK HELP FROM NATIONAL ORGANIZATIONS
Increasingly, John Doe defendants are also soliciting assistance from national organizations such as the ACLU and the EPIC. The national office of the ACLU is rumored to be studying the free speech implications of corporate cybersmear cases, although efforts to confirm that rumor so far have been unavailing. At a minimum, such organizations reportedly are beginning to refer inquiries from John Doe defendants to attorneys experienced in dealing with such matters.
Additionally, these organizations are quick to criticize the chilling effect on speech that some say John Doe suits can have. Thus, for example, Fruit of the Loom Ltd. recently filed papers with the Cook County Circuit Court in Chicago, seeking an order permitting prelitigation discovery from Yahoo!. Fruit of the Loom reportedly intends to identify the authors of anonymous messages posted to a Yahoo! finance message board devoted to the company.
David Sobel, the EPIC's general counsel, responded to the Fruit of the Loom actions by criticizing companies that use the subpoena process to identify the authors of pseudonymous postings, and message board hosts that turn the information over to the companies. He notes that anonymous posters are not notified when cybersmear plaintiffs seek to have message board operators disclose their identities, and, thus, they have no opportunity to object to the intrusion.
JOHN DOES CONTINUE TO POST AFTER SUIT IS FILED
For all the talk about the chilling effect of cybersmear suits on free speech, even the most cursory review of message boards devoted to companies that have filed such suits suggests one thing: Many authors of pseudonymous messages apparently continue to post messages critical of the companies after suit is filed. And, in many instances, other message board participants step forward with their own critical postings, occasionally daring the companies to sue them as well. Additionally, some John Doe defendants have essentially expanded the forums that are available for such postings, by opening message board clubs to which people continue to post messages critical of the companies involved in such suits.
When one reporter asked one of the defendants in the cybersmear suit filed by Varian Medical Systems Inc. when he and a co-defendant will stop posting disparaging remarks about their former employer on Yahoo! Message boards, the defendant's reply was succinct: "We'll post until we're dead". Erik Espe, "Ex-Varian Employees Cry 'SLAPP,'" Business Journal (Nov. 1, 1999) (http://www. amcity.com/sanjose/stories/ 1999/11/01/story6.html).
LESSONS TO BE DRAWN SO FAR
What lessons can a company draw from the tactics used by John Doe defendants so far? Quite a few, actually.
* In assessing whether to bring such a suit, companies and their counsel must maintain realistic expectations. Do not assume that just because the prospective defendant is likely to be an individual with limited resources that the individual is likely to capitulate quickly. Prepare the company for the possibility that a John Doe defendant may attempt to assert substantive counterclaims or third-party claims. Be prepared to respond to extensive discovery requests and to devote time, resources and money to the task of fighting discovery disputes in court. Be prepared to offer executives, including some senior executives, for depositions in the event the matter is fully litigated. Do not be surprised to see experienced counsel (including counsel from one of the major civil liberty organizations such as the ACLU) appear for the defendant.
* Never assume that subpoenas directed at message board hosts and Internet service providers will be met with no resistance. Such subpoenas should be issued with careful attention to detail and to the procedures that apply in both the jurisdiction in which the suit has been filed and the jurisdiction in which the defendant resides or can be found.
In addition, although it would seem to go without saying, consider applicable case law concerning the preparation and issuance of subpoenas designed to obtain the identity of an anonymous John Doe defendant. For example, in one recent case, the U.S. District Court for the Northern District of California laid out "limiting" principles that should apply in that district to the determination of whether to permit discovery to uncover the identity of someone who has participated in an online forum anonymously or pseudonymously. Columbia Ins. Co. v. SeesCandy.com, 185 F.R.D. 573 (N.D. Cal. 1999).
Under Columbia, the plaintiff first must identify the John Doe to the Court with sufficient specificity "such that the Court can determine that the defendant is a real person or entity who could be sued in federal court"-that is, with sufficient specificity to establish jurisdictional facts. 185 F.R.D. at 578.
Next, the plaintiff must "identify all previous steps taken to locate the elusive defendant," to satisfy the court that a good faith effort has been made to comply with the requirements of service of process and specifically identifying defendants. Id. at 579.
Then the plaintiff must "establish to the Court's satisfaction that plaintiff's suit against defendant could withstand a motion to dismiss . . . to prevent abuse of this extraordinary application of the discovery process and to ensure that plaintiff has standing to pursue an action against defendant." Id. at 579-80.
Finally, the plaintiff must "file a request for discovery with the court, along with a statement of reasons justifying the specific discovery requested as well as identification of a limited number of persons or entities on whom discovery process might be served and for which there is a reasonable likelihood that the discovery process will lead to identifying information about defendant that would make service of process possible." Id. at 580.
* Companies should never assume that the commencement of such an action will bring an end to venomous postings about the company, its stock or its management team. To the contrary, experience now shows that the authors of such postings may resort to the creation of new web pages, message boards and chat rooms to air their allegations-all in addition to the message board on which their critical postings originally appeared.
* Companies should assume that the commencement of a cybersmear lawsuit will be picked up by the press. The media has shown an insatiable appetite for stories about such proceedings. Indeed, with the recent reporting about the Fruit of the Loom cybersmear proceeding, the media seems to have caught on to one technique that companies have been using to keep cybersmear proceedings quiet. Many states have civil procedure statutes that give parties the ability to obtain limited discovery to aid in commencing an action. See, e.g., N.Y. Civ. Prac. L. Rules Ï 3102(c). Companies have been using such statutes to obtain issuance of subpoenas and then have been quietly approaching parties that they have identified to "settle" the matter, all without formally commencing a lawsuit against any John Doe defendants.
At least, this has been claimed in a recent presentation by Steven R. Miller, director and counsel of Online Forensics Group. During a presentation entitled "The Man With Two Names" that Mr. Miller gave at the 4th Annual Legal Computing Summit in New York, Mr. Miller indicated that in his experience investigating such cases, companies preferred the use of such statutes over the commencement of a more public, full-blown lawsuit. This appears to have been the technique employed in the filing of the Fruit of the Loom proceeding.
* Companies and their counsel must always be alert to what is being said about the company, its stock and its management on the Internet. Then and only then can the company consider itself even remotely prepared for dealing with the inevitable cybersmears that the exciting and fast-paced medium known as the Internet now permits.
Blake A. Bell is senior knowledge management counsel with Simpson Thacher & Bartlett in New York and author of the web site at cybersecuritieslaw.com.
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