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Early last year, when some Internet users visited the Hertz Web site, they saw pop-up ads for Avis.

Hertz tracked the ads to their source and sued both Avis and a company called Claria, which provided the stealth pop-ups.

Other companies such as L.L. Bean, United Parcel Service, and Inter-Continental Hotels also sued Claria with similar complaints of competitors’ ads on their pages. Their cases, 11 in all, have been combined as a multi-district matter in the Northern District of Georgia. It is in discovery.

It is an engagement in a war over Internet “spyware” — or “adware” as its advocates call it.

Downloaded by Internet users, often unknowingly, when they visit certain advertisements or sites, the software produces pop-up ads according to the types of Web sites visited or searches run on search engines.

At its extreme, spyware can cross the line into crime. It can be used to record confidential passwords used for on-line banking or pilfer sensitive information leading to identity theft.

In its more benign form it has advocates who maintain that its legal use is a legitimate form of advertising. But it has enemies who think that not only the practice but the enabling technology should be banned.

Privacy advocates are screaming foul while advertising groups and internet titans like AOL preach against an all-out assault on pop-up ads and “targeted” Internet advertising.

Utah has passed broad anti-spyware legislation. Other states are considering it. Congress has held hearings and is considering legislation as competing groups vie for its attention.

Outside the legislative halls rages the second front of this battle — litigation. The two leading enablers of spyware, WhenU.com and Claria, have been sued in multiple jurisdictions. Claria alone claims the 1,000 advertisers it has signed up to date reach 43 million consumers. Through their software, they launch pop-up ads of competitors of companies that Internet users seek out.

The multi-district case in Georgia is one of five filed against WhenU and Claria in the past two years. So far, the results have been mixed and show little indication of how this area of law will develop.

The earliest cases against WhenU and Claria ended in pre-trial settlements or victories for the defendants.

In Wells Fargo vs. WhenU.com, for instance, Michigan federal judge Nancy Edmunds refused to grant a preliminary injunction. She said that the bank had failed to meet its burden under a trademark infringement claim because WhenU conducted legitimate comparative advertising.

Judge Edmunds, of the Eastern District of Michigan, also rebuffed Wells Fargo’s surveys intended to show confusion among consumers who visited its Web site. The case is in discovery.

U-Haul’s case against WhenU in the Eastern District of Virginia last year ended in a similar fashion, but U-Haul did not appeal the verdict.

A New York Case

In December, Judge Deborah Batts of the Southern District of New York handed plaintiffs their largest trophy to date by granting a preliminary injunction against the spyware company. The U.S. Court of Appeals for the Second Circuit heard WhenU’s appeal in early April, and a decision is pending.

The case, 1-800 Contacts vs. WhenU.com and Vision Direct, arose when ads for Vision Direct, a competitor of the contact lens distributor 1-800 Contacts, appeared on its Web site. In an interview, Contacts’ general counsel Joe Zeidner declined to specify the losses his company suffered but said the company “saw an immediate and drastic drop in Web orders” soon after Vision Direct ads popped up. Fifty percent of Contacts’ 1.8 million customers order contact lenses through the internet, according to Mr. Zeidner.

The case boiled down to two issues: copyright and trademark infringement.

In granting the preliminary injunction against WhenU, Judge Batts rejected Contacts’ copyright claim but found merit in the trademark claim.

Contacts argued that the pop-up ads created a new screen combining its Web site with Vision Direct’s advertisements, thereby leading to a copyright infringement.

The court found this argument untenable. A ruling in favor of Contacts would “subject countless computer users and software developers to liability . . . since the modern computer environment . . . allows users to obscure, cover, and change the appearance of . . . Plaintiff’s website,” she wrote.

The court similarly rejected Contacts’ copyright claim that the pop-up ad created an unlicensed derivative work. A derivative work is a product made from a preexisting product. It’s like making a Star Trek movie from the television series, explained Contacts’ lead lawyer in the case Terence Ross of Gibson, Dunn & Crutcher’s Washington, D.C., office. The pop-up ads, argued Mr. Ross, transformed his client’s Web site in creating a derivative work. WhenU countered it delivered ads as one of multiple windows or screens one can open while using the Microsoft Windows operating system.

By sitting on the screen above the Contacts Web site, the pop-up ads did not alter plaintiff’s copyright, WhenU continued. The judge agreed, because the Contacts Web site remained intact.

Simply impairing an Internet user’s view of the site with a pop-up ad did not constitute a violation of plaintiff’s exclusive right to produce a derivative work of its copyright, she ruled, because a user could effortlessly remove or bypass the ad.

Trademark Claim

The trademark claim — based on the notion of consumer confusion under the Lanham Act — proved more fruitful for Contacts.

The Lanham Act prohibits the commercial use of a registered trademark in a way that can cause confusion. To meet its burden under the ct, Contacts needed to show a “probability, not just a possibility, of confusion” by consumers, the court ruled.

In a long and detailed analysis, Judge Batts found that there was “initial interest confusion” which occurs when “potential consumers of one web site will be diverted and distracted to a competing web site.”

She applied the eight-part Polaroid test used to determine the likelihood of confusion handed down by the Second Circuit four decades ago and came out in Contacts favor.

Despite the court’s exhaustive 88-page opinion, the ruling arose from a preliminary injunction request with limited discovery and investigation of the facts. So even if the Second Circuit confirms the decision, said Contacts’ Mr. Ross, its ruling is unlikely to be a strong guide for lower courts.

The other ongoing cases involving spyware will not reach appellate courts until the end of next year, further extending the period of uncertainty, Mr. Ross said.

Since the Contacts opinion, state and federal legislators have turned their attention to spyware.

Unlike litigation, which centers on copyright and trademark infringement claims, however, they have focused on consumer privacy and the use of targeted advertising. This focus has led to strange bedfellows.

As spam proliferated, privacy advocates, consumers, and e-mail providers like Microsoft and AOL stood together in demanding relief. Their cries led to a myriad of state laws followed by national legislation.

The spyware battles have yielded different alliances. Internet providers stand alongside spyware advocates, warning that misprescribed legislation will curtail legitimate on-line advertising. Utah is an example.

Utah’s recently enacted law prohibits monitoring of Web pages through spyware without the consent of Internet users. It bans targeted ads even if companies receive consent, said Benjamin Edelman, a consultant for plaintiffs in several of the spyware lawsuits.

A coalition of 13 companies including AOL, Amazon.com, and AT&T along with several technology trade associations beseeched the legislature to rethink its approach.

Targeted Advertising

The legislation “is structurally flawed and cannot be fixed through exceptions because the definition of spyware is extremely broad and would cover a host of important and beneficial Internet communication software,” said the letter.

The benefit of this software to on-line retailers comes in the form of targeted advertising.

Targeted advertising allows businesses to send ads based upon the sites a consumer has visited or items purchased through the internet. So if someone peruses several travel Web sites, then online retailers want to send ads related to the travel industry rather than ads the consumer might be less interested in.

The Business Software Alliance whose members include Intel, IBM and Microsoft, also asked lawmakers for restraint in recent Congressional hearings. Both the House and Senate have proposed legislation to control spyware in recent months.

‘Bad Behavior’

“[T]he problem is with bad behavior,” said Alliance CEO Robert Holleyman II, “not bad software tools or products.” Mr. Holleyman urged Congress to stop the unauthorized collection and transmission of personal information but to leave untouched the technology that performs these tasks as they are used for targeted ads.

Recent Congressional testimony by the Federal Trade Commission, the agency empowered to regulate this field, indicated the difficulty of legislating against specific software that has both dangerous and commercial uses.

The commission said last week that “spyware” is an amorphous term that includes “beneficial and benign” technology. This explains why individuals from more than 25 different companies, government agencies, and associations attended a recent commission workshop on spyware.

Adding to the imbroglio is the position taken by some privacy advocates. For reasons similar to those of the Business Software Alliance, the Center for Democracy & Technology, a privacy advocacy group, has urged state and federal lawmakers not to define spyware too broadly. “Software-specific legislation” is difficult to draft and does not adequately protect consumers, said Michael Steffen, a policy analyst at the center.

His group wants legislators instead to pass laws that protect the privacy of individuals rather than targeting specific technologies like spam or spyware. Otherwise, said Mr. Steffen, consumers will face new threats every time software designers invent new ways to breach their privacy.

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