Perfect 10, Inc. v. Visa Intern. Service Ass'n

• Decision Date: 03 July 2007
• Docket Number: No. 05-15170.,05-15170.
• Parties: PERFECT 10, INC., Plaintiff-Appellant, v. VISA INTERNATIONAL SERVICE, ASSOCIATION; First Data Corporation; Cardservice International, Inc.; Humboldt Bank; Mastercard International, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

494 F.3d 788

PERFECT 10, INC., Plaintiff-Appellant, v. VISA INTERNATIONAL SERVICE, ASSOCIATION; First Data Corporation; Cardservice International, Inc.; Humboldt Bank; Mastercard International, Inc., Defendants-Appellees.

No. 05-15170.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 4, 2006.

Filed July 3, 2007.

Howard E. King (argued) and Stephen D. Rothschild, King, Holmes, Paterno & Berliner, LLP, Los Angeles, California, for the plaintiff-appellant.

Jeffrey N. Mausner, Berman, Mausner & Resser, Los Angeles, California, for the plaintiff-appellant.

Daniel J. Cooper, Los Angeles, California, for the plaintiff-appellant.

Andrew P. Bridges (argued), John C. Nishi, Winston & Strawn LLP, San Francisco, California, for defendant-appellee Mastercard International Incorporated.

Mark T. Jansen, Nancy L. Tompkins, Anthony J. Malutta, Townsend and Townsend and Crew LLP, San Francisco, California, for defendant-appellee Visa International Service Association.

Robert A. Van Nest, Michael H. Page, R. James Slaughter, Keker & Van Nest, LLP, San Francisco, California, for defendants-appellees First Data Corp., Cardservice International, Inc., and Humboldt Bank.

Appeal from the United States District Court for the Northern District of California; James Ware, District Judge, Presiding. D.C. No. CV-04-00371-JW.

Before: STEPHEN REINHARDT, ALEX KOZINSKI, and MILAN D. SMITH, JR., Circuit Judges.

Opinion by Judge MILAN D. SMITH, JR.; Dissent by Judge KOZINSKI.

MILAN D. SMITH, JR., Circuit Judge:

Perfect 10, Inc. (Perfect 10) sued Visa International Service Association, Master-Card International Inc., and several affiliated banks and data processing services (collectively, the Defendants), alleging secondary liability under federal copyright and trademark law and liability under California statutory and common law. It sued because Defendants continue to process credit card payments to websites that infringe Perfect 10's intellectual property rights after being notified by Perfect 10 of infringement by those websites. The district court dismissed all causes of action under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. We affirm the decision of the district court.

FACTS AND PRIOR PROCEEDINGS

Perfect 10 publishes the magazine "PERFECT10" and operates the subscription website www.perfect10.com., both of which "feature tasteful copyrighted images of the world's most beautiful natural models." Appellant's Opening Brief at 1. Perfect 10 claims copyrights in the photographs published in its magazine and on its website, federal registration of the "PERFECT 10" trademark and blanket publicity rights for many of the models appearing in the photographs. Perfect 10 alleges that numerous websites based in several countries have stolen its proprietary images, altered them, and illegally offered them for sale online.

Instead of suing the direct infringers in this case, Perfect 10 sued Defendants, financial institutions that process certain credit card payments to the allegedly infringing websites. The Visa and Master-Card entities are associations of member banks that issue credit cards to consumers, automatically process payments to merchants authorized to accept their cards, and provide information to the interested parties necessary to settle the resulting debits and credits. Defendants collect fees for their services in these transactions. Perfect 10 alleges that it sent Defendants repeated notices specifically identifying infringing websites and informing Defendants that some of their consumers use their payment cards to purchase infringing images. Defendants admit receiving some of these notices, but they took no action in response to the notices after receiving them.

Perfect 10 separately alleges that it formerly had a merchant account with defendant First Data Corporation (FDC) but that in the Spring of 2001 FDC terminated the account. FDC's stated reason for the termination is that the percentage of Perfect 10's customers who later disputed the charges attributed to them (the chargeback rate) exceeded contractual limits. Perfect 10 claims these chargeback rates were temporarily and substantially inflated because Perfect 10 was the "victim of hackers who were subsequently investigated by the Secret Service." Appellant's Opening Brief at 13. Perfect 10 claims that FDC was aware of this and was also aware that Perfect 10's chargeback rate dropped to within association limits once the hacking ceased, but that FDC nevertheless placed Perfect 10 on an industry-wide "black list" of terminated accounts.

Perfect 10 filed suit against Defendants on January 28, 2004 alleging contributory and vicarious copyright and trademark infringement as well as violations of California laws proscribing unfair competition and false advertising, violation of the statutory and common law right of publicity, libel, and intentional interference with prospective economic advantage. Defendants moved to dismiss the initial complaint under FRCP 12(b)(6). The district court granted the motion, dismissing the libel and intentional interference claims with prejudice but granting leave to amend the remaining claims. In its first amended complaint, Perfect 10 essentially repeated the allegations in its original complaint concerning the surviving causes of action and Defendants again moved to dismiss under FRCP 12(b)(6). The district court granted the Defendants' second motion in full, dismissing all remaining causes of action with prejudice. Perfect 10 appealed to this court.

JURISDICTION

The district court had original jurisdiction over the copyright and trademark claims pursuant to 28 U.S.C. §§ 1331 and 1338 and supplemental jurisdiction over the related state law claims pursuant to 28 U.S.C. § 1367. This court has appellate jurisdiction pursuant to 28 U.S.C. § 1291.

STANDARDS OF REVIEW

We review de novo the district court's dismissal for failure to state a claim upon which relief can be granted pursuant to FRCP 12(b)(6). Rodriguez v. Panayiotou, 314 F.3d 979, 983 (9th Cir.2002). On appeal, "we take all of the allegations of material fact stated in the complaint as true and construe them in the light most favorable to the nonmoving party. A complaint should not be dismissed unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. (internal citations omitted).

Although a plaintiff's allegations are generally taken as true, the court need not accept conclusory allegations of law or unwarranted inferences, and dismissal is required if the facts are insufficient to support a cognizable claim. City of Arcadia v. U.S. Envtl. Prot. Agency, 411 F.3d 1103, 1106 n. 3 (9th Cir.2005); see also Pena v. Gardner, 976 F.2d 469, 471-72 (9th Cir.1992). The court may also affirm on any ground supported by the record even if the district court did not consider the issue. Fields v. Legacy Health Sys., 413 F.3d 943, 958 n. 13 (9th Cir.2005); ARC Ecology v. United States Dep't of the Air Force, 411 F.3d 1092, 1096 (9th Cir. 2005).

We review de novo the district court's interpretation of state law. Rodriguez, 314 F.3d at 983.

DISCUSSION

SECONDARY LIABILITY UNDER FEDERAL COPYRIGHT AND TRADEMARK LAW

A. Secondary Liability for Copyright Infringement

Perfect 10 alleges that numerous websites based in several countries—and their paying customers—have directly infringed its rights under the Copyright Act, 17 U.S.C. § 101, et seq.¹ In the present suit, however, Perfect 10 has sued Defendants, not the direct infringers, claiming contributory and vicarious copyright infringement because Defendants process credit card charges incurred by customers to acquire the infringing images.

We evaluate Perfect 10's claims with an awareness that credit cards serve as the primary engine of electronic commerce and that Congress has determined it to be the "policy of the United States—(1) to promote the continued development of the Internet and other interactive computer services and other interactive media [and] (2) to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation." 47 U.S.C. §§ 230(b)(1), (2).²

1. Contributory Copyright Infringement

Contributory copyright infringement is a form of secondary liability with roots in the tort-law concepts of enterprise liability and imputed intent. See Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 264 (9th Cir.1996); Perfect 10, Inc. v. Amazon.com, Inc. et al., 487 F.3d 701 (9th Cir.2007). This court and the United States Supreme Court (Supreme Court) have announced various formulations of the same basic test for such liability. We have found that a defendant is a contributory infringer if it (1) has knowledge of a third party's infringing activity, and (2) "induces, causes, or materially contributes to the infringing conduct." Ellison v. Robertson, 357 F.3d 1072, 1076 (9th Cir.2004) (citing Gershwin Publ'g Corp. v. Columbia Artists Mgmt., Inc., 443 F.2d 1159, 1162 (2d Cir.1971)). In an Internet context, we have found contributory liability when the defendant "engages in personal conduct that encourages or assists the infringement." A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1019 (9th Cir.2001) (internal citations omitted). In Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., the Supreme Court adopted from patent law the concept of "inducement" and found that "[o]ne infringes contributorily by intentionally inducing or encouraging direct infringement." 545 U.S. 913, 930, 125 S.Ct. 2764, 162 L.Ed.2d 781 (2005).³ Most recently, in a case also brought by Perfect 10, we found that "an actor may be contributorily liable [under Grokster] for intentionally encouraging direct infringement if the actor knowingly takes steps that are substantially certain to...