Lit Alerts—May 2021

Cybersecurity: Stolen $1.4 Million Not Covered Under Fraud Policy

The US District Court for the Eastern District of Pennsylvania recently determined that a $1.4 million wire transfer fraud was not covered under Ryeco, LLC, a fruit distributor’s, commercial crime policy. Ryeco, LLC v. Selective Ins. Co., No. 2:20-cv-03182 (E.D. Pa. May 13, 2021). A hacker in South Africa had gained access to Ryeco’s network, fraudulently applied the company’s vice president’s signature to wire transfer forms, and emailed these forms to Ryeco’s bank, causing the funds to be transferred into a sham account.

Ryeco discovered the fraud, performed a forensic investigation, and obtained a coverage denial from Selective Insurance Company. Ryeco then sued Selective for coverage and breach of contract, urging that it was covered for the loss under the “Forgery or Alteration” crime policy it purchased from Selective. That policy explicitly covered “loss resulting directly from ‘forgery’ or alteration of checks, drafts, promissory notes, or similar written promises, orders or directions to pay a sum certain in ‘money.’” Selective denied coverage because the forged wire transfer forms did not trigger the unambiguous terms of the policy, which covers “check, draft, promissory note or similar written promise.” The court agreed, differentiating the forged emails and forms from checks and written promises. As such, it entered summary judgment for Selective.

Notably, it was undisputed that if Ryeco had purchased “Funds Transfer Fraud” coverage, it would have been reimbursed for its losses, a lesson worth taking in this atmosphere of increasing cybersecurity, phishing and ransomware attacks.

Communications Decency Act: Section 230 Does Not Immunize Snap, Inc. Against Products Liability Claims

The Ninth Circuit’s recent holding in Lemmon v. Snap, Inc., No. 20-55295 (9th Cir. May 4, 2021), raises questions about the scope of immunity afforded to internet companies under Section 230 of the Communications Decency Act. Section 230 provides that “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” 47 U.S.C. § 230(c)(1). Put simply, internet companies are not liable for third-party content published on their platforms.

In Lemmon, the surviving parents of two teenage boys who died in a high-speed car accident sued Snap, Inc. for the negligent design of its Snapchat mobile application. Shortly before the accident, the boys were traveling at speeds up to 123 mph while using Snapchat’s “Speed Filter,” which enables Snapchat users to “record their real-life speed.” According to the complaint, many Snapchat users believe they will earn an award through Snapchat’s reward system for using the Speed Filter to record a video or picture while traveling at 100 mph or faster. The plaintiffs thus alleged that Snap knew or should have known that the Speed Filter, combined with Snapchat’s reward system, incentivized young drivers to drive at dangerous speeds.

Relying on Section 230, the district court dismissed the plaintiffs’ claims. The Ninth Circuit reversed and remanded the case, however, finding that Section 230 did not apply because the plaintiffs sought to hold Snap liable for the design of the Snapchat app itself, rather than for third-party content.

Intellectual Property: Eighth Circuit Adopts Initial-Interest Confusion Theory of Trademark Infringement

This month, the US Court of Appeals for the Eighth Circuit expressly endorsed the trademark infringement theory of initial-interest confusion, which is “confusion that creates initial customer interest, even though no actual sale is finally completed as a result of the confusion.” Select Comfort Corp. v. Baxter, No. 19-1011 (8th Cir. May 11, 2021). In adopting the theory, the Eighth Circuit joined the majority of circuits to have addressed the issue.

The appeal arose from a lawsuit in which the maker of the SLEEP NUMBER bed alleged that a competing manufacturer infringed the SLEEP NUMBER mark and other registered marks by using confusingly similar phrases in various online advertising formats (e.g., URLs). Relying upon Sensient Techs. Corp. v. SensoryEffects Flavor Co., 613 F.3d 754 (8th Cir. 2010), in which the Eighth Circuit previously declined to endorse the theory of initial-interest confusion, the district court instructed the jury that infringement liability depended on a showing of a likelihood of confusion at the time of purchase.

The Court of Appeals reversed, distinguishing Sensient and holding that a plaintiff should not be barred from proving pre-sale, initial-interest confusion when a jury question exists as to the issue of consumer sophistication. The court noted that the question of infringement is meant to recognize the varied nature of commercial transactions and reasoned that “it would be odd to presume that all commercial interactions are alike or that, in all settings, trademarks are worthy of protection only in the few moments before the consummation of a transaction.”

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This newsletter is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.