GT Alert

California's Attempt to Can Spam May Cost Legitimate Advertisers Millions

October 2003
By Alan N. Sutin, Greenberg Traurig, New York

  View or download the PDF version of this Alert here.

On September 24, 2003, California Governor Gray Davis signed a bill that threatens to seriously disrupt the national online marketing programs of legitimate companies in every industry. Scheduled to take effect on January 1, 2004, the new law bans most commercial e-mail sent to or from Californians without explicit permission from the recipient. It authorizes any individual, Internet service provider or the California Attorney General to sue those who distribute unsolicited e-mail (commonly referred to as "spam") for "liquidated damages" in the amount of $1,000 per e-mail, up to $1 million per e-mail campaign. For the reasons discussed below, the new California anti-spam law threatens to expose legitimate marketers of products and services to significant financial liabilities but is unlikely to stop the companies that are actually generating the most offensive spam.

What The New California Anti-Spam Law Says

"The new California anti-spam law threatens to expose legitimate marketers of products and services to significant financial liabilities."

The new law, authored by State Senator Kevin Murray (D-Los Angeles), prohibits a person or entity not located in California from initiating or advertising in unsolicited commercial e-mail advertisements sent to a California e-mail address. It contains a similar provision that prohibits individuals or entities located in California from sending unsolicited commercial e-mail to any personal e-mail address. The law also forbids a person or entity from collecting e-mail addresses or registering multiple e-mail addresses for the purpose of initiating or advertising in an unsolicited commercial e-mail advertisement from California or to a California e-mail address. The law further prohibits a person or entity from using a commercial e-mail advertisement containing certain falsified, misrepresented, obscured, or misleading information.

Significantly, the law authorizes the recipient of a commercial e-mail advertisement transmitted in violation of these prohibitions, the electronic mail service provider, or the State Attorney General to bring a legal action to recover actual damages, and would authorize recovery of liquidated damages of $1,000 per transmitted message up to $1,000,000 per "incident" (as defined in the law), although a court could reduce those amounts for certain specified reasons. Under the new law, the prevailing party in any such lawsuit also could be entitled to an award of that party’s reasonable attorney’s fees and costs.

The new California law has limited exceptions allowing companies to continue sending e-mails to customers with whom they have a pre-existing business relationship. Thus, e-mails could still be sent to California customers who have previously purchased from a company, or who have signed up to receive weekly updates or advertisements via e-mail, as long as those customers can revoke their prior consent by "opting out" of receiving further e-mails. Political e-mail also may continue.

How The New Law Differs From Prior Anti-Spam Statutes

California’s new law differs from previous attempts to regulate unsolicited commercial e-mail in several ways. For example, prior anti-spam bills, which have proven to be largely ineffective, generally required only that e-mail marketers have an "opt-out" mechanism by which recipients could avoid receiving further e-mails from the sender. The new California law imposes an "opt-in" requirement for commercial e-mail messages that would permit companies to send messages only to consumers who have granted express consent to receive such e-mail. Moreover, the consent granted cannot merely be a general one to receive e-mails of interest. Commercial e-mails into or out of California will be illegal unless the consumers receiving them consent expressly to receive offers from the seller of the product or service being offered.

Another key departure from prior attempts to regulate unsolicited commercial e-mail is that the new California statute targets not just the individuals or firms who operate spam services, but also the makers of products advertised in the unsolicited e-mails. A key provision in the California law authorizes individuals and Internet Service Providers to pursue advertisers directly. Other state anti-spam laws prohibit spam but leave enforcement in the hands of the state attorney general. The California legislation enables private individuals to bring their own legal actions, which will undoubtedly lead to a rash of lawsuits against the defendants with the deepest pockets. Unfortunately, the deep-pocket defendants will not be the fly-by-night operators who generate the vast majority of what consumers regard as the most offensive spam. The deep pockets belong to the nation’s largest consumer product companies, who view e-mail marketing as one critical component of their overall marketing campaigns.

Will The New California Anti-Spam Law Work?

The author of California’s new anti-spam law, Senator Murray, boasts that "[t]here are no loopholes, no way of getting around it," and that he is "confident that this is going to stop the billions that we are losing to spam."1 The "billions" that Senator Murray refers is a figure derived from a report issued by Ferris Research Inc., a San Francisco Consulting group, that estimates that spam will cost United States organizations more than $10 billion this year, including lost productivity and the additional equipment, software, and manpower needed to combat the problem.2 According to the report, California, which comprises 12 percent of the nation’s population, suffers an estimated $1.2 billion of that loss.

The hopes of the California legislature that the new law will solve the California’s spam problem may be short-lived. The legislation is vulnerable to attack under the First Amendment, as well as under Constitutional prohibitions against state laws that interfere with interstate commerce. John Marshall Law School Professor David E. Sorkin predicts that the law will survive First Amendment scrutiny, as courts have held that commercial speech is less protected than private speech, but believes it could be struck down as an unconstitutional interference with interstate commerce.3

Even if the legislation withstands constitutional scrutiny, there is uncertainty concerning the legislation’s ability to dramatically reduce spam. History has shown that the regulation of Internet technologies is extremely difficult. The mass e-mailers who generate most of the spam that users consider offensive often cloak their identities in mass mailings by using such tricks as false return addresses and offshore computer servers, and stronger laws may simply drive spammers offshore to countries where they can escape prosecution but still deluge Internet users with e-mail. If the law is upheld, many legitimate companies offering valuable products and services likely will reduce e-mail marketing campaigns. However, purveyors of pornography, questionable dietary or performance supplements and dubious "get-rich-quick" schemes undoubtedly will continue to clog e-mail boxes through the use of off-shore servers and forged return addresses.

It is also not clear whether the California law would remain effective if federal legislation also is passed. Several bills under discussion in Congress would pre-empt state law, but it seems unlikely that a federal spam bill will be passed this year. The "Can-Spam Act" sponsored by Sen. Ron Wyden, Oregon Democrat, was approved by the Senate Commerce, Science, and Transportation Committee in June, but has stalled owing to a lack of broad support. Similarly, Sen. Charles E. Schumer (D-NY), sponsored the "Spam Act" calling for a "Do Not Spam" registry similar to the Federal Trade Commission’s "Do Not Call" list. That bill stalled in the Senate after FTC Chairman Timothy Muris called it unenforceable.

What Should You Do If You Engage In Online Advertising?

For many of our clients, online advertising is an important component of their national advertising campaigns. E-mail marketing campaigns sometimes are sent to customer e-mail lists collected and maintained by the company itself. In other cases, companies rent or purchase e-mail lists collected by third parties. Given the significant penalties imposed under the new California statute and the dramatically increased likelihood of private lawsuits, companies that market product and services through commercial e-mail in the United States should immediately review their policies and procedures regarding how data is collected and permission is received. At a minimum, commercially reasonable efforts must be made to either obtain affirmative permission from new clients or exclude California e-mail addresses from mailings. If e-mail lists are obtained from third parties, an advertiser’s contracts with such third parties contain (a) appropriate representations and warranties that the owners of the e-mail addresses have granted all necessary permissions and indemnifications, and (b) an indemnification against any and all liabilities that may arise from a breach of those representations and warranties.

Footnotes

1 California Spam Bill

2 SB 186

3 Saul Hansell, California Is Set to Ban Spam, The New York Times, September 24, 2003.

© 2003 Greenberg Traurig

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