Does the Computer Fraud Act Apply to ‘Dumbphones’?

While this Court does not disagree that unwanted text messages, like spam e-mail, are an annoyance, whether receipts of such messages can establish a civil action under the CFAA is, of course, a different question.

Czech v. Wall Street on Demand, Inc. 674 F.Supp. 1102, 1106 (N.D.Minn. 2009).

Anti-spam (e-mail and text) lawsuits and legislation are legion: a flurry of Federal and state laws govern junk e-mails and texts.  This post briefly discusses one case which examined whether sending unwanted texts can subject the texter to Federal Computer Fraud liability. 

In Czech v. Wall Street on Demand, 674 F.Supp. 1102 (N.D. Minn. 2009) a Minnesota plaintiff (representing a proposed class of spam texts recipients) was so fed up with unwanted texts that she literally made a Federal case out of it.  She sued in Minn. District Court under the Computer Fraud and Abuse Act, 18 U.S.C. s. 1030 et seq. (CFAA) after receiving unsolicited texts from an online trading company that mass-texted financial information to phone numbers in its database.  The Court granted the defendant’s 12(b)(6) motion to dismiss the Complaint. 

The basis for the court’s dismissal was that the plaintiff – who owned a cellphone which only made and received calls and texts (colloquially, a “dumbphone”)  – was unable to show (1) that defendant obtained information from plaintiff’s phone; or (2) that defendants intentionally tried to damage plaintiff’s phone; or (3) any statutory “damage” or “loss” due to the unwanted texts.  Id.  As noted in an earlier post, damage and loss are terms of art under the CFAA: damage denotes physical damage to a computer or data; while loss refers to the monetary expense incurred in ameliorating a CFAA violation.  See http://paulporvaznik.com/eagle-i-hijacking-a-linkedin-account-and-the-computer-fraud-act/803 (discussion of CFAA damage and loss under 18 U.S.C. s. 1030(e)).

While the Czech Court ultimately dismissed the plaintiff’s CFAA claims, it also applied the CFAA’s expansive definition of “computer” by acknowledging that the plaintiff’s no-frills cell phone qualified as a “computer” under the CFAA.  674 F.Supp.2d at 1107 (“there is no dispute that [plaintiff’s] cell phone (as well as the various similar wireless devices used by the proposed class members) would constitute…a ‘computer’ as further defined in [the CFAA]).  The CFAA defines a computer as any high-speed data processing device performing logical, arithmetic and storage functions – but that is not a calculator or typewriter.  18 U.S.C. s. 1030(e)(1).  The 8th Circuit Court of Appeals also held that a cell phone that only made calls and texts qualified as a protected computer under the CFAA in a criminal case setting in  U.S. v. Kramer, 631 F.3d 900 (8th Cir. 2011)(defendant used cell phone to entice minor across state lines to engage in criminal sexual conduct).

Declining to extend the Act to unwanted texts, the Czech Court stated succinctly that unwanted texts may be annoying, but they do not give rise to CFAA civil liability: “An annoyance? Quite possibly.  The basis for a civil action under [the CFAA]?  The Court thinks not.”  674 F.Supp.2d at 1105.

Take-away: Czech provides a very detailed analysis of CFAA information (defendant obtained information from a protected computer) transmission (defendant transmitted a virus or worm that damaged plaintiff’s computer), and access (defendant accessed plaintiff’s computer and caused damage or loss to plaintiff)claims.  All three of these claims are predicate acts under CFA sections 1030(a)(2)(C), (a)(5)(A) and (a)(5)(C).  The Court describes the elements and the damage and loss requirements for each of the three claims.  The Court also engages in an intricate and interesting (at least I think so) discussion of the difference between obtaining information from a plaintiff’s website as opposed to a plaintiff’s cell number.  But for this post’s purposes, the case is representative of the CFAA’s expansive definition of a “protected computer” and shows that virtually any mechanical device, wired or not, will qualify for coverage under the statute.

Seventh Circuit Upholds Limitation of Liability Clause in Construction Contract

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In Sams Hotel Group, LLC v. Environs, Inc., 2013 WL 2402824, the Seventh Circuit upheld an Indiana district court’s validation of a contractual limitation of liability clause against a hotel developer.  In its ruling, the Court examined some recurring commercial litigation issues including the economic loss rule, and the standards that govern contractual indemnification and limitation of liability clauses. 

Facts: The owner and defendant architect entered into a $70,000 contract for the design of a six-story hotel in Indiana.  A little over a year later, when the hotel was nearly complete, numerous defects surfaced and the property ultimately had to be demolished.  The hotel never opened and the owner brought negligence and breach of contract claims against the architect.  The owner claimed it sustained over $4 million in damages due to the architect’s negligent hotel design. 

Trial Result: The Indiana district court granted summary judgment to the architect on the negligence claim based on the economic loss rule.  This rule (known as the Moorman doctrine in IL) posits that a plaintiff cannot recover for purely economic loss in tort where a contract governs the parties’ relationship – absent any personal injury or damage to other property. 

Once the owner’s negligence count was out, the parties went to trial on the owner’s  breach of contract claim.  The court ruled in the owner’s favor on that count but pared down its damages to the $70,000 architectural services contract price.  This was a harsh result considering the owner was claiming damages sixty times this amount!  The owner appealed its Pyrrhic victory to the Seventh Circuit.

The Court (applying Indiana law – this was a diversity suit) affirmed.  It first held that parties are free to enter into contracts and bargain as they see fit. * 2.  Contracts will be enforced as written absent the involvement of a consumer or a contract of adhesion (a “take it or leave it” scenario).  Since the property owner and architectural firm were sophisticated commercial entities with equal bargaining power, the Court enforced the contract’s $70,000 maximum liability amount.

The Court rejected the owner’s argument that the limitation of liability clause was an impermissible indemnification against negligence clause because it allowed the architect to avoid significant liability for its negligent design services.  *2-3. 

The Court distinguished limitation of liability provisions from contractual indemnification terms.  Limitation of liability clauses “serve to establish a contractual ceiling” on awardable damages while indemnification terms completely shield or insure a party against his own negligence. *3. 

In the latter indemnity situation, if a party wants to be indemnified for its own negligence, the contract must “clearly and unequivocally” provide that a party will pay for another’s negligence.  *2. But limitation of liability clauses can be less specific  – especially where the contracting parties are on an equal bargaining footing.  *3.

Take-aways.  In Indiana, limitation of liability provisions (which cap damages at a specific amount) are subject to less scrutiny than contractual exculpatory clauses (which completely insure a party against his own negligence).

This relaxed standard for damage limitations is even more prominent in contracts between two sophisticated commercial entities. Parties to high-dollar construction contracts should be leery of contractual terms which cap damages.

 

 

Illinois Home Repair and Remodeling Act (HRRA) – Are Oral Home Improvement Contracts (Over $1,000) Enforceable?

can-stock-photo_csp15933599The Illinois Home Repair and Remodeling Act, 815 ILCS 513/1 et seq. (“HRRA” or the “Act”) was enacted in January 2000 to protect consumers from unscrupulous home repair contractors.    The HRRA sections that seem to spawn the most litigation are Sections 10, 15, 15.1, 20 and 30.  These sections provide:

Section 10 (815 ILCS 513/10) – “home repair and remodeling” means any improvement to residential real property including accessories like swimming pools, chimneys, garages, fences, HVAC equipment and driveways;

Section 15 (815 ILCS 513/15) – requires a contractor (“person engaging in business of home repair and remodeling”) for all contracts exceeding $1,000 to furnish the homeowner a written contract or work order with job specifics (costs, materials used, contact info for contractor, etc)

Section 15.1 (815 ILCS 513/15.1) – consumer/homeowner must be notified of contractual jury waiver or  binding arbitration clause and must be given opportunity to accept or reject the terms in writing.

 Section 20 (815 ILCS 513/20) – contractor must provide a “Home Repair: Know Your Consumer Rights” pamphlet before starting the job.  If the contract price exceeds $1,000, the homeowner and contractor must sign an acknowledgement (stating that the homeowner received the pamphlet from the contractor).  If under $1,000 – no written acknowledgement required.

Section 30 (815 ILCS 513/30) – provides that any person who suffers actual damage for a HRRA violation can sue under Section 10a of the Illinois Consumer Fraud Act (815 ILCS 505/10a) [Note – this Section was added in July 2010]

Another key HRRA section concerns insurance.  Section 25 requires contractors to have $100K/$300K bodily injury and $50K property damage insurance.  The Section also requires contractors to maintain $10K in coverage for home repair work that doesn’t conform with local building codes.  815 ILCS 513/25.

K Miller Construction Case Summary

K Miller Construction Company, Inc. v. McGinnis (38 Ill.2d 284 (2010) is the Illinois Supreme Court’s most recent discussion of the HRRA.  It involves a home improvement contract that exceeded $500,000.  The plaintiff contractor spent more than two years on the project and was owed more than $300,000 for his work.  When defendants failed to pay, plaintiff sued to foreclose a mechanics’ lien, for breach of contract and alternatively, for quantum meruit. The defendants moved to dismiss all counts on the basis that plaintiff violated the HRRA’s requirement of a written work order for projects over $1,000.  The trial court agreed and dismissed all three counts of the complaint with prejudice.  On appeal, the First District affirmed dismissal of the lien and breach of contract counts but reversed on the quantum meruit count (holding that the contractor should be able to pursue quantum meruit recovery).  The homeowner defendants appealed to the the Illinois Supreme Court.

Held: Appeals court affirmed in part and reversed in part; trial court reversed.  Plaintiff contractor can sue for both quantum meruit and breach of oral contract even where he violates the HRRA. 

Reasons: The Illinois Supreme Court held that just because a contract technically violates a statute, doesn’t mean the contract must be unenforceable – especially if the breach is not “seriously injurious to the public order”.  The Court also stated that the legislature could have (but did not) specified in the HRRA that an Act violation automatically invalidates the underlying contract.  Id. at 297.

Normally, where a statute is silent as to whether a statutory violation voids a contract, the court balances the private interest in enforcing the contract against any opposing public policies.  However, in K Miller, no balancing test was necessary because in July 2010, the Illinois legislature rewrote Section 30 of the HRRA to specifically delete the prior version’s reference to “unlawful” and to instead provide a Consumer Fraud remedy to anyone who suffers actual damage because of a contractor’s HRRA violation.

The K Miller Court found that the “new” Section 30 and its private consumer fraud cause of action was the proper remedy for an aggrieved consumer/homeowner; not a complete nullification of the contract. The Court bolstered its holding with prior caselaw that allowed contractors (who violated the HRRA) to still recover where there was substantial compliance with the HRRA.  The Court also noted that the HRRA’s legislative history revealed lawmakers were leery of consumers using HRRA violations as a pretext for not paying contractors.

Take-aways and Conclusion: This seems like a fair result.  Going forward, if a homeowner files a consumer fraud claim based on an HRRA violation, he must be able to show calculable monetary damage stemming from the HRRA violation.  Contractors and homeowners alike should also take note of the Act’s requirements – specifically the written work order, the “Know Your Rights” pamphlet and the Act’s provisions governing mandatory arbitration and contractual jury waivers.