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Designer Skin LLC v. S & L Vitamins, Inc., et al.
Unauthorized internet reseller of plaintiff’s products is not guilty of trademark infringement, and does not cause actionable initial interest confusion, by using plaintiff’s trademarks in meta tags of website at which plaintiff’s and its competitors’ products are sold, and in...

Michele Mazur v. eBay Inc., Hot Jewelry d/b/a Jewelry Overstock Auctions and Paramount Auctions, et al.

2008 WL 618988, No. C 07-03967 MHP (N.D. Ca., March 4, 2008)

Communications Decency Act Does Not Bar Claims Arising Out Of eBay’s Alleged Misrepresentation That Third Party Live Auctions Are ‘Safe’

Court holds that the purported dispute resolution provisions contained in auction company’s online Terms and Conditions are unconscionable, and unenforceable against an individual dissatisfied with an auction in which she participated.  The dispute resolution provision mandated that the parties’ dispute be resolved in a binding proceeding before a representative of ‘In House Attorneys, P.C.’ in which each side was permitted only one hour to present their case, and could not call fact or expert witnesses nor be represented by counsel. 

As a result, the Court allowed plaintiff to proceed with claims against the defendant Hot Jewelry - who ran the auction - grounded on claims that defendant engaged in ‘shill bidding.’ 

Plaintiff was also allowed to proceed with claims against eBay as a result of her participation in this auction, via eBay’s Live Auction service.  In promoting this service, eBay claimed that “bidding on eBay Live Auctions is very safe.  All live auctions are run by reputable international auction houses, which are carefully screened by eBay before being authorized to sell to you.”  Notwithstanding the fact that eBay was responsible for this content, and derived a profit by promoting use of its Live Auction service, the Court held that it was immunized by application of the Communications Decency Act (“CDA”) from fraud and other claims arising out of so much of its promotional materials that advised consumers that eBay ‘carefully screened’ the auction houses allowed to participate in Live Auction.  The Court reasoned that to allow plaintiff to pursue such claims would expose eBay to “liabil[ity] for its exercise of a publisher’s traditional editorial functions” which is barred by the CDA.  As such, the Court barred plaintiff from pursuing claims that this representation was false because eBay allegedly did not ‘screen’ auction houses before permitting them to participate in such Live Auctions or because it knew that the auction house was engaged in illegal conduct – such as shill bidding – and failed to take appropriate steps in light thereof.   

The Court did permit plaintiff to proceed with claims arising out of eBay’s representation that such auctions were ‘safe,’ holding the same were not barred by application of the CDA because ‘eBay’s statements regarding safety affects and creates an expectation regarding the procedures and manner in which the auction is conducted and consequently goes beyond traditional editorial discretion.’  Nor were such claims barred by application of eBay’s Live Auction User agreement, which immunized eBay from any disputes a consumer might have with the auction house itself, as this dispute arose out of eBay’s own purported misconduct – namely misrepresenting that the auction was ‘safe.’  Because plaintiff had failed to plead with the requisite particularity that she relied on this statement in deciding to participate in the auction in question, however, her fraud claim was dismissed with leave to replead.

eBay Promotes For Profit Live Auctions Run By Third Parties

eBay provides a Live Auction service, which allows eBay users to place bids online at live auctions being held by auction houses offline, and compete with the floor bidders in attendance at those auctions.  eBay promotes these auctions by stating that “bidding on eBay Live Auctions is very safe.  All live auctions are run by reputable international auction houses, which are carefully screened by eBay before being authorized to sell to you.  Many of them have hundreds of years of experience in the auction business and fully stand behind their merchandise.”

To participate in such Live Auctions, an eBay user must agree to both eBay’s Terms and Conditions, as well as eBay’s Live Auction User Agreement.

Dispute Resolution Provision Contained In Terms Of Use Held Unconscionable

Defendant Hot Jewelry runs auctions via eBay’s Live Auction service.  To participate in its auctions, an eBay user must, in addition to eBay’s agreements, also agree to Hot Jewelry’s Terms and Conditions.  These terms are presented in a small scroll box, which permits the user to read only a few lines of text at a time.  The terms are not formatted by paragraph, and instead are presented to the user as a single, continuous block of text. 

Among these terms was a dispute resolution provision, which mandated that all disputes be resolved by In House Attorneys, P.C.  This provision also provided that the parties had one hour each to present their dispute, during which they were prohibited from calling fact or expert witnesses.  The parties were also prohibited from having counsel represent them at the proceeding.  The decision rendered by In House Attorneys was binding.

Plaintiff Michele Mazur participated in an eBay Live Auction run by defendant Hot Jewelry  She was the high bidder on several items, which she purchased.  Believing that defendant Hot Jewelry had engaged in shill bidding, plaintiff commenced this suit.  Plaintiff also advanced claims against eBay, alleging that it falsely misrepresented that the auction was safe, and run by carefully screened reputable international auction houses.

Defendant Hot Jewelry moved to stay the action and compel the parties to resolve their dispute before In House Counsel, PC.  Defendant eBay moved to dismiss the claims advanced against it, arguing they were barred by application of the Communications Decency Act.

The Court denied defendant Hot Jewelry’s motion to stay, holding the dispute resolution provisions found in its Terms and Conditions were unconscionable and hence unenforceable.  To establish that a provision of an agreement is unconscionable under California law, a plaintiff must show that the clause is both procedurally and substantively unconscionable.  According to the Court: “Procedural unconscionability exists when there is oppression or surprise in an agreement because of unequal bargaining power.  Substantive unconscionablity exists when there are overly-harsh or one-sided results.  The court applies a sliding scale that assesses procedural unconscionability in proportion to substantive unconscionability – the more substantively oppressive the contract term, the less evidence of procedurally unsonscionability is required to come to the conclusion that the term is unenforceable, and vice versa.”

The Court found that the agreement’s dispute resolution provisions were procedurally unconscionable.  They were oppressive because they were presented by Hot Jewelry on a take it or leave it basis and not subject to negotiation.  Similarly, they came as a surprise to plaintiff because of the manner in which they were presented – as a single block of text, viewable in a scroll box only a few lines at a time.  Said the Court:

This oppression was coupled with surprise.  The format in which the Terms and Conditions were presented to the plaintiff only allowed for a few single-spaced lines of block text to be visible at any given time.  Furthermore, there were no paragraph, section or heading breaks that would aid in reading comprehension or allow the user to navigate to a particular section.  This single-spaced massive block of impenetrable text looked the same when printed out.  The section headings in the agreement, which were in all-caps, did not aid comprehension either since (sic) they were embedded in the text and could not be easily ascertained.

The Court also held that the dispute resolution provision at issue was substantively unconscionable.  In determining substantive unconscionability, courts look beyond mere mutuality to the actual effects the challenged provision will have on the parties.  Here, the Court held that the clause in question so overly favored defendant Hot Jewelry as to render it substantively unconscionable.  Thus, the ‘decisions maker’ charged with resolving the parties’ dispute did not appear to the Court to be neutral, or constitute a body that regularly acts in such a capacity – rather, it appeared to the Court that the In House Counsel was likely to favor the defendant, for whom it was seeking to serve as in house counsel.  The rules of the proceeding further appeared to substantially favor the defendant auction house.  The absence of witnesses, and the limit on the length of the hearing, favored defendant, since the plaintiff had the burden of proof.  The potential absence of discovery further imperiled plaintiff’s ability to have her dispute resolved fairly under this dispute resolution procedure.    Finding the clause unenforceable, the Court stated:

To this Court, the envisioned proceedings seem indistinguishable from a small claims action being adjudicated by an attorney of dubious qualifications and loyalties serving pro-tem.  … In sum, the lopsided adverse consequences of the clause lead the court to find a high degree of substantive unconsionability.  This coupled with the procedural unconscionability found above renders the contested provision invalid.

Communications Decency Act Bars Claims Arising Out Of eBay Representations That It ‘Screens’ Third Party Auction Houses That Run Live Auctions

The Court granted in part, and denied in part eBay’s application to dismiss the claims asserted against it by application of the Communications Decency Act.

The Court held that the CDA barred so much of plaintiff’s claim that asserted that eBay falsely represented that it screened auction houses before permitting them to participate in eBay’s Live Auction program, or that sought to hold eBay liable because it knew that auction house participants in its Live Auction program were engaging in illegal activity but failed to prevent it.  Said the Court:

[T]he plaintiff’s assertion that eBay knew of the seller’s illegal conduct and failed to prevent it is nevertheless under the ambit of section 230.  Regarding the allegation that eBay knew or should have known about the sellers’ illegal conduct but failed to prevent it by withdrawing or altering the fraudulent content, the Gentry court stated: ‘this is the classic kind of claim that Zeran found to be preempted by section 230 …  Similarly eBay’s assertion that the auction houses were screened is not actionable because ‘lawsuits seeking to hold a service provider liable for its exercise of a publisher’s traditional editorial functions – such as deciding whether to publish … - are barred.’  Screening a potential auction house when deciding whether to include it in Live Auctions is akin to deciding whether to publish and therefore eBay is immune under section 230 for its screening decisions.

CDA Does Not Bar Claims Arising Out Of eBay’s Representations That Live Auctions Are Safe

The Court held that the CDA did not, however, bar plaintiff from pursuing claims against eBay as a result of its representation that its Live Auctions were ‘safe’ or involved ‘floor bidders’ (as opposed to shills) and ‘international auction houses.’  Said the Court:

In Prickett and Barnes, CDA immunity was established because of a failure to verify the accuracy of a listing or the failure to remove unauthorized profiles.  Since both acts fell squarely within the publisher’s editorial function, the CDA was implicated.  The case at bar, however, is opposite. eBay did not make assurances of accuracy or promise to remove unauthorized auctioneers.  Instead, eBay promised that Live Auctions were safe.  Though eBay styles safety as a screening function whereby eBay is responsible for the screening of safe auctioneers, this court is unconvinced.  eBay’s statement regarding safety affects and creates an expectation regarding the procedures and manner in which the auction is conducted and consequently goes beyond traditional editorial discretion.

Nor, held the Court, could eBay avoid potential liability for such representations because of its Live Auction User Agreement.  While that agreement did release eBay from liability for any disputes a user had with an auction house, it did not apply to the case at bar, which, held the Court, was an independent dispute with eBay based on eBay’s own representations.

The Court did, however, dismiss with leave to replead plaintiff’s fraud claims because of plaintiff’s failure to plead with the requisite particularity that she had relied on eBay’s representations in determining to participate in the auctions at issue.

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