It is a familiar issue. When should a consumer “be on the hook” for all of the terms and conditions in a company’s agreement accompanying its product or service?

The permeations relating to this problem are extensive. Are all of the terms buried in the fine print enforceable?  Does the consumer ignore such terms at his or her peril when the consumer fails to read the agreement?  Is it enough that the customer was given a chance to read the terms at the time of purchase? What manner or degree of consent is enough to bind the consumer to the letter of the written terms?  These are all problems of contract formation.  The question of acceptance of terms and conditions is especially tricky in the context of online commerce.

The California Court of Appeal (Second District) recently considered this issue as it relates to the “terms and conditions” or “terms of use” to which users are often asked to agree as part of an online purchase. The court’s decision in Long v. Provide Commerce, Inc., dealt with an appeal by Provide Commerce, Inc., the operator of ProFlowers.com.  See Long v. Provide Commerce, Inc. (Cal. Ct. App. Mar. 17, 2016) 2016 WL 1056555, at *1.  After a customer sued over an online purchase, the Internet-based flower purveyor sought to enforce a clause in the company’s “Terms of Use” that required its customer to arbitrate disputes, including a waiver of the right to a jury trial.

The type of online terms and conditions used by ProFlowers is often known as a “browsewrap” agreement. With that type of agreement, a user does not have to affirmatively click anything to signal his or her consent to the terms of the company’s written agreement.  Rather, “a user’s assent is inferred from his or her use of the website.” Long, supra, at *1.

At the time the plaintiff placed his order, the website’s “Terms of Use” could be found by clicking on a capitalized and underlined hyperlink at the bottom of each web page on the ProFlowers.com site. The court noted that the “hyperlink was displayed in what appears to have been a light green typeface on the website’s lime green background, and was situated among 14 other capitalized and underlined hyperlinks of the same color, font and size.” Long, supra, at *2.  The “Terms of Use” were also accessible by a hyperlink embodied in an email order confirmation, though the link was in small grey font toward the very bottom of the email and relatively obscured by other information and links.

The court observed that while Internet commerce presents new issues, it does not fundamentally alter the key requirement that for a party to be bound by a contractual provision, there must be a sufficient manifestation of consent. In the context of a “browsewrap” agreement, the courts have held that “the determination of the validity of the browsewrap contract depends on whether the user has actual or constructive knowledge of a website’s terms and conditions.” Long, supra, at *4 (quoting the federal Ninth Circuit Court of Appeal’s decision in Nguyen v. Barnes & Noble Inc. [(9th Cir. 2014) 763 F.3d 1171]).  In the absence of actual notice, the validity of the browsewrap agreement “turns on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract.” Id.

The court noted the elements that the courts have considered in deciding whether to conclude that a website design puts the user on sufficient notice of the company’s terms and conditions, including the proximity of the hyperlink (linking to the written terms) to the areas likely to be in view of the user as he or she interacts with the website and completes the transaction and whether the website design includes “something more to capture the user’s attention and secure her assent” to the terms and conditions. Long, supra, at *5.

Here, the court found that the hyperlinks and the overall design of the ProFlowers.com website failed to put a reasonably prudent Internet user on notice of the company’s Terms of Use. The court found that the placement, color, size and other qualities of the hyperlinks to the Terms of Use were too inconspicuous, relative to the overall website design.  Most of the user’s interactions were in a separate bright white box in the center of the page that contrasts sharply with the lime green background.  To find the Terms of Use hyperlinks on various pages, the user must look below the area that has the information fields and the buttons he or she must otherwise click to proceed with the transaction.  Even then, the hyperlinks themselves are buried below multiple other links and in a light green font that blends in with the lime green background of the website.

The lesson for the day is that conspicuousness means conspicuousness. If no affirmative user click is required demonstrating the user’s consent to the terms and conditions, the website design should ensure that a link to a terms and conditions page will be hard to miss.  The visual prominence of the link is key.  Avoid having the link situated in a submerged page (i.e., where the user must scroll down to see it).  Certainly avoid having the link be in a font difficult to distinguish from the webpage background.  The link should be in what one would expect to be the plain view of the user as he or she interacts with the site.

Crime Does Not Pay

You have to feel a little sorry for Yihao Pu. Pu was a finance engineer who worked for two companies with proprietary systems for executing high frequency stock trading (HFT.)  Pu illegally downloaded his employers’ software, but instead of selling it to a competitor, he decided to use it to further his own investments, and promptly managed to lose $40,000 of his own money.

Somehow this criminal mastermind got caught, and Pu faced federal indictments for wire fraud, transmission of trade secrets, unauthorized access of a protected computer and obstruction of justice. Pu pled guilty to possession and transmission of trade secrets.

Pu’s Sentencing

At sentencing, Pu argued that since he hadn’t gained anything (remember he lost $40,000) and his employers hadn’t suffered any actual loss, he should not have to pay restitution. The district court disagreed, finding that Pu’s employers had spent more than $12 million developing their respective HFT algorithms, and this represented the “intended loss amount.”  Using this intended loss amount, the trial court applied the sentencing guidelines and sentenced Pu to three years in prison, three years of probation and ordered him to pay $759,649.55 in restitution.

Pu’s Appeal

Pu appealed the restitution order, and his luck must be turning because the 7^th Circuit agreed.  The 7^th Circuit held the district court erred in finding that “it was more likely than not that Pu intended to cause a loss to the victims that equaled the cost of development [$12 million].”  The 7^th Circuit noted that there was no evidence that Pu had some grander scheme other than his own inept attempts to use the HFT system for his own trading.  The 7^th Circuit criticized the district court for failing to consider Pu’s argument that he only stole the outputs and not the source code and thus “the intended loss should be zero, or at most $2,000.”

On appeal, Pu further argued that the district court mistakenly believed that because Pu had pled guilty, it was required to find intended loss and impose restitution. The 7^th Circuit agreed that “the guidelines do not require a loss calculation greater than zero,” and left it to the district court to determine the proper restitution award on remand.

Finally, Pu objected that the district court appears to have ordered restitution based on his employers’ conclusory summary of their costs investigating Pu’s misdeeds, which (not coincidentally) totaled $759,649.55. The 7^th Circuit agreed, noting that “the district court is required to base its restitution order, the extent practicable, on a complete accounting of the loss” and that Pu’s employer’s conclusory summary was not sufficient.

Conventional wisdom holds that software algorithms and source code can be protected as trade secrets, but broader technology “design concepts” can only be safeguarded by registering for patent protection.  But that conventional wisdom is bending as more and more courts grapple with the boundaries between trade secret and patent law.  In one of the more interesting California trade secret cases from the second quarter of 2014 — Altavion, Inc. v. Konica Minolta Systems Laboratory Inc. — the court of appeal confirmed that technology design concepts can be trade secrets.

Altavion’s Digital Stamping Technology (DST)

The plaintiff, Altavion, was a small company that invented a process for self-authenticating documents through the use of barcodes containing encrypted data about the contents of the original documents, otherwise known as digital stamping technology or DST.  Altavion alleged that several aspects of its DST process constituted trade secrets and that the defendant, Konica, stole those trade secrets.  Altavion and Konica had entered negotiations, subject to a nondisclosure agreement, aimed at embedding Altavion’s DST in Konica’s multifunction printers.  After those negotiations failed, Altavion discovered that Konica had secretly filed for patents encompassing Altavion’s DST process.

The trial court found that Altavion’s DST concepts were trade secrets, that Konica gained all of its knowledge of DST through the confidential negotiations with Altavion, and that Konica misappropriated Altavion’s DST trade secrets.  The court of appeal affirmed.

Can a patentable idea also be a trade secret?

On appeal, Konica argued that “[g]eneralized ideas and inventions are protectable by patents and thus cannot be trade secrets.”  The court of appeal disagreed, holding that “it is clear that if a patentable idea is kept secret, the idea itself can constitute information protectable by trade secret law.”  The court noted the different aims of patent law (shielding a publicly disclosed idea from infringement) and trade secret law (the right to control the dissemination of secret information), and observed that due to concerns regarding patent validity many businesses now choose to protect commercially valuable information through trade secret protection.

The court distinguished between the various components of Altavion’s DST technology.  At one end of the spectrum was Altavion’s “general idea” for a barcode allowing for self-authentication of documents, which was not a trade secret because it had been disclosed to several companies without a nondisclosure agreement.  At the other end of the spectrum was Altavion’s “algorithms and source code,” which was the most specific and secret level of information, and unquestionably a trade secret.  In the middle of this spectrum, and the focus of the lawsuit, were the “design concepts” underlying Altavion’s DST concepts.

Design concepts are protectable as trade secrets

The court held that Altavion’s design concepts were protectable trade secrets because they had independent economic value, were created through Altavion’s substantial investment of time and effort, were not readily ascertainable by competitors, and had not been previously disclosed.  The last part — “not previously disclosed” — was key to the court’s decision.  The court recognized that some earlier decisions had ruled that software design concepts were not trade secrets where those concepts were already “disclosed and evident to the end user.”  According to those prior cases, “plans, flows, inputs, outputs, rules of operation, priorities of operation, and the like are not trade secrets to the extent they are manifest in the way a program works.”

But here, the court ruled that Altavion’s design concepts maintained trade secret protection because they had not yet been disclosed in any finished product.  Altavion and Konica merely anticipated that the concepts would be disclosed later if and when the finished product containing the concepts was placed on sale.  The parties never reached that point, however, because negotiations ended and Konica pursued its secret patent applications covering Altavion’s concepts.

Takeaway

Trade secrets are not just for formulas, algorithms, and customer information.  An idea or design concept that might otherwise be patentable can also constitute a trade secret if it has independent economic value, is not readily ascertainable, and the owner diligently keeps it confidential.  Given recent concerns over heightened standards for patent validity and the high stakes of disclosing inventions in patent applications that might be rejected, expect more companies to rely on trade secret protection for their design ideas.