Stratton Oakmont, Inc. v. Prodigy Services Co.

[NOTE: This case has been edited for classroom use by the omission of text and citations. See this alternate source for the full opinion.]

Hon. Stuart L. Ain, Justice

[I]t is ordered that this motion by Plaintiffs for partial summary judgment against Defendant PRODIGY SERVICE COMPANY ("PRODIGY") is granted and this Court determines, as a matter of law, the following two disputed issues as follows:

(i) that PRODIGY was a "publisher" of statements concerning Plaintiffs on its "Money Talk" computer bulletin board for the purposes of Plaintiffs' libel claims; and,

(ii) that Charles Epstein, the Board Leader of PRODIGY's "Money Talk" computer bulletin board, acted as PRODIGY's agent for the purposes of the acts and omissions alleged in the complaint.

At issue in this case are statements about Plaintiffs made by an unidentified bulletin board user or "poster" on PRODIGY's "Money Talk" computer bulletin board on October 23rd and 25th of 1994. These statements included the following:

(a) STRATTON OAKMONTH, INC. ("STRATTON"), a securities investment banking firm, and DANIEL PORUSH, STRATTON's president, committed criminal and fraudulent acts inconnection with the initial public offering of stock of Solomon-Page Ltd.,

(b) the Solomon-Page offering was a "major criminal fraud" and "100% criminal fraud";

(c) PORUSH was "seen to be proven criminal"; and,

(d) STRATTON was a "cult of brokers who either lie for a living or get fired."

Plaintiffs commenced this action against PRODIGY, the owner and operator of the computer network on which the statements appeared, and the unidentified party who posted the aforementioned statement. The second amended complaint alleges ten (10) causes of action, including claims for per se libel. On this motion, "in order to materially advance the outcome of this litigation," Plaintiffs seek partial summary judgment on two issues, namely: (1) whether PRODIGY may be considered "publisher" of the aforementioned statements; and, (2) whether Epstein, the Board Leader for the computer bulletin board on which the statements were posted, acted with actual and apparent authority as PRODIGY's "agent" for the purpose of the claims in this action.

By way of background, it is undisputed that PRODIGY's computer network has at least two million subscribers who communicate with each other and with the general subscriber population on PRODIGY's bulletin boards. "Money Talk" the board on which the aforementioned statements appeared, in allegedly the leading and most widely read financial computer bulletin board in the United States, where members can post statements regarding stocks, investments and other financial matters. PRODIGY contracts with bulletin Board Leaders, who, among other things, participate in board discussions and undertake promotional efforts to encourage usage and increase users. The Board Leader for "Money Talk" at the time the alleged libelous statements were posted was Charles Epstein.

PRODIGY commenced operations in 1990. Plaintiffs base their claims that PRODIGY is a publisher in large measure on PRODIGY's stated policy, starting in 1990, that it was a family oriented computer network. In various national newspaper articles written by Geoffrey Moore, PRODIGY's Director of Market Programs and Communications, PRODIGY held itself out as an online service that exercised editorial control over the content of messages posted on its computer bulletin boards, thereby expressly differentiating itself from its competition and expressly likening itself to a newspaper. In one article PRODIGY stated:

We make no apology for pursuing a value system that reflects the culture of the millions of American families we aspire to serve. Certainly no responsible newspaper does less when it carries the type of advertising it published, the letters it prints, the degree of nudity and unsupported gossip its editors tolerate.

Plaintiffs characterize the aforementioned articles by PRODIGY as admissions and argue that, together with certain documentation and deposition testimony, these articles establish Plaintiffs' prima facie case. In opposition, PRODIGY insists that its policies have changed and evolved since 1990 and that the latest article on the subject, dated February, 1993, did not reflect PRODIGY's policies in October, 1994, when the allegedly libelous statements were posted. Although the eighteen month lapse of time between the last article and the aforementioned statements is not insignificant, and the Court is wary of interpreting statements and admissions out of context, these considerations go solely to the weight of this evidence.

Plaintiffs further rely upon the following additional evidence in support of their claim that PRODIGY is a publisher:

(A) promulgation of "content guidelines" (the "Guidelines" found at Plaintiff's Exhibit F) in which, inter alia, users are requested to refrain from posting notes that are "insulting" and are advised that "notes that harass other members or are deemed to be in bad taste or grossly repugnant to community standards, or are deemed harmful to maintaining a harmonious online community, will be removed when brought to PRODIGY's attention"; the Guidelines all expressly state that although "Prodigy is committed to open debate and discussion on the bulletin boards, . . . this doesn't mean that 'anything goes'";

(B) use of a software screening program which automatically prescreens all bulletin board postings for offensive language;

(C) the use of Board Leaders such as Epstein whose duties include enforcement of the Guidelines, according to Jennifer Ambrozek, the Manager of PRODIGY's bulletin boards and the person at Prodigy responsible for supervising the Board Leaders, and

(D) testimony by Epstein as to a tool for Board Leaders known as an "emergency delete function" pursuant to which a Board Leader could remove a note and send a previously prepared message of explanation "ranging from solicitation, bad advice, insulting, wrong topic, off topic, bad taste, etcetera."

A finding that PRODIGY is a publisher is the first hurdle for Plaintiffs to overcome in pursuit of their defamation claims because one who repeats or otherwise republishes a libel is subject to liability as if he had originally published it. In contrast, distributors such as book stores and libraries may be liable for defamatory statements of others only if they knew or had reason to know of the defamatory statement at issue. [Cubby Inc. v. CompuServe Inc., 776 F. Supp. 135, 139 (S.D.N.Y. 1991); see also Auvil v CBS 60 Minutes, 800 F. Supp. 928, 932 (E.D. Wash. 1992).] A distributor or deliverer of defamatory material is considered a passive conduit and will not be found liable in the absence of fault. However, a newspaper, for example, is more than a passive receptacle or conduit for news, comment and advertising. The choice of material to go into a newspaper and the decisions made as to the content of the paper constitute the exercise of editorial control and judgment, and with this editorial control comes increased liability. (See Cubby, supra.) In short, the critical issue to be determined by this Court is whether the foregoing evidence established a prime facie case that PRODIGY exercised sufficient editorial control over its computer bulletin boards to render it a publisher with the same responsibilities as a newspaper.

Again, PRODIGY insists that its former policy of manually reviewing all messages prior to posting was changed "long before the messages complained of by Plaintiffs were posted". However, no documentation or detailed explanation of such a change, and the dissemination of news of such a change, has been submitted. In addition, PRODIGY argues that in terms of sheer volume--currently 60,000 messages a day are posted on PRODIGY bulletin boards--manual review of messages is not feasible. While PRODIGY admits that Board Leaders may remove messages that violate its Guidelines, it claims in conclusory manner that Board Leaders do not function as "editors". Furthermore, PRODIGY argues generally that this Court should not decide issues that can directly impact this developing communications medium without the benefit of a full record, although it fails to describe what further facts remain to be developed on this issue of whether it is a publisher.

As for legal authority, PRODIGY relies on the Cubby case, supra. There the defendant CompuServe was a computer network providing subscribers with computer related services or forums including an online general information service or "electronic library". One of the publications available on the Journalism Forum carried defamatory statements about the Plaintiff, an electronic newsletter. Interestingly, an independent entity named Cameron Communications, Inc. ("CCI") had "contracted to manage, review, create, delete, edit and otherwise control the contents of the Journalism Forum in accordance with editorial and technical standards and conventions of style as established by CompuServe". The Court noted that CompuServe had no opportunity to review the contents of the publication at issue before it was uploaded into CompuServe's computer banks. Consequently, the Court found that CompuServe's product was, "in essence, an electronic for-profit library" that carried a vast number of publications, and that CompuServe had "little or no editorial control" over the contents of those publications. In granting CompuServe's motion for summary judgment, the Cubby court held:

A computerized database is the functional equivalent of a more traditional news vendor, and the inconsistent application of a lower standard of liability to an electronic news distributor such as CompuServe than that which is applied to a public library, book store, or newsstand would impose an undue burden on the free flow of information.

The key distinction between CompuServe and PRODIGY is two fold. First, PRODIGY held itself out to the public and its members as controlling the content of its computer bulletin boards. Second, PRODIGY implemented this control through its automatic software screening program, and the Guidelines which Board Leaders are required to enforce. By actively utilizing technology and manpower to delete notes from its computer bulletin boards on the basis of offensiveness and "bad taste", for example, PRODIGY is clearly making decisions as to content, and such decisions constitute editorial control. (Id.) That such control is not complete and is enforced both as early as the notes arrive and as late as a complaint is made, does not minimize or eviscerate the simple fact that PRODIGY has uniquely arrogated to itself the role of determining what is proper for its members to post and read on its bulletin boards. Based on the foregoing, this Court is compelled to conclude that for the purposes of Plaintiffs' claims in the action, PRODIGY is a publisher rather than a distributor.

An interesting comparison may be found in Auvil v. CBS 60 Minutes (supra), where apple growers sued a television network and local affiliates because of an allegedly defamatory investigative report generated by the network and broadcast by the affiliates. The record established that the affiliates exercised no editorial control over the broadcast although they had the power to do so by virtue of their contract with CBS, they had the opportunity to do so by virtue of a three hour hiatus for the west coast differential, they had the technical capability to do so, and they in fact had occasionally censored network programming in the past, albeit never in connection with "60 Minutes". The Auvil court found:

It is argued that these features, coupled with the power to censor, triggered the duty to censor. That is a leap which the Court is not prepared to join in.
. . . .
. . . plaintiffs' construction would force the creation of full time editorial boards at local stations throughout the country which possess sufficient knowledge, legal acumen and access to experts to continually monitor incoming transmissions and exercise on-the-spot discretionary calls or face $75 million dollar lawsuits at every turn. That is not realistic.
. . . .
More than merely unrealistic in economic terms, it is difficult to imagine a scenario more chilling on the media's right of expression and the public's right to know.

In contrast, here PRODIGY has virtually created an editorial staff of Board Leaders who have the ability to continually monitor incoming transmissions and in fact do spend time censoring notes. Indeed, it could be said that PRODIGY's current system of automatic scanning, Guidelines and Board Leaders may have a chilling effect on freedom of communication in Cyberspace, and it appears that this chilling effect is exactly what PRODIGY wants, but for the legal liability that attaches to such censorship.

Let it be clear that this Court is in full agreement with Cubby and Auvil, Computer bulletin boards should generally be regarded in the same context as bookstores, libraries and network affiliates. It is PRODIGY's own policies, technology and staffing decisions which have altered the scenario and mandated the finding that it is a publisher.

PRODIGY's conscious choice, to gain the benefits of editorial control, has opened it up to a greater liability than CompuServe and other computer networks that make no such choice. For the record, the fear that this Court's finding of publisher status for PRODIGY will compel all computer networks to abdicate control of their bulletin boards, incorrectly presumes that the market will refuse to compensate a network for its increased control and the resulting increased exposure.

Presumably PRODIGY's decision to regulate the content of its bulletin boards was in part influenced by its desire to attract a market it perceived to exist consisting of users seeking a "family-oriented" computer service. This decision simply required that to the extent computer networks provide such services, they must also accept the concomitant legal consequences. In addition, the Court also notes that the issues addressed herein may ultimately be preempted by federal law if the Communications Decency Act of 1995, several versions of which are pending in Congress, is enacted.

The Court now turns to the second issue presented here, of whether Epstein was PRODIGY's agent for the purposes of the acts and omissions alleged in the complaint. Agency is a legal relationship which results from the manifestation of consent of one person to allow another to act on his or her behalf and subject to his or her control, and consent by the other to so act. The starting point for an agency analysis in this case is the "Bulletin Board Leader Agreement" ("the Agreement") between PRODIGY and Epstein. This Agreement sets forth eleven specific responsibilities expected of a Board Leader including (I) the posting of a minimum of 120 notes on the bulletin board each month; (II) working with member Representatives; (III) providing monthly reports and (IV) following any additional procedures provided by PRODIGY. The Agreement also requires prior PRODIGY approval of all promotional efforts. In addition, the Agreement contains the following language.

Although you will not be a PRODIGY representative, your actions as Board Leader will still reflect on PRODIGY.
. . . .
You will be solely responsible for all of your actions as a Board Leader. While PRODIGY will certainly support your actions as a Board Leader as a general matter (so long as they are not in breach of this Agreement), we will not assume any liability for anything you do (or fail to do) as a Board Leader. You hereby indemnify and agree to hold PRODIGY harmless from and against all claims cost, liabilities judgments . . . arising out of or in connection with anything you do . . . .
. . . .
Being a Board Leader does not make you a PRODIGY Services Company employee, representative or agent, and you agree not to claim or suggest that you are one.

PRODIGY relies on this language to extricate itself from any alleged agency relationship with Epstein. However, talismanic language does not determine an agency relationship. The Court must look to the substance of the relationship. Where one party retains a sufficient degree of direction and control over another, a principal-agent relationship exists. In addition, whether one is an independent contractor is not determinative of whether one is an agent.

As to the substance of the relationship between PRODIGY and its Board Leaders, PRODIGY Security Officer McDowell testified that Board Leaders are required to follow the Guidelines and the PRODIGY performs a "management function" with respect to the activities of the Board Leaders. (McDowell deposition transcript p. 78 found at Exhibit S to the moving papers.) Furthermore, Epstein's Supervisor, Jennifer Ambrozek , testified that PRODIGY reviews the Guidelines with Board Leaders, who are then required to enforce the Guidelines. Board Leaders are also given a 28 page "Bulletin Board Leader Survival Guide" wherein many technical terms and procedures are explained, and the following caveat is given:

IF YOU DON'T KNOW WHAT SOMETHING IS OR WHAT IT'S SUPPOSED TO DO, LEAVE IT ALONE UNTIL YOU CAN ASK.

Where the facts are not disputed the question of agency should be resolved by the court. This is such a case. The aforementioned testimony by PRODIGY employees and documentation generated by PRODIGY, together with the Guidelines themselves, cannot be disputed by PRODIGY and leave no doubt that at least for the limited purpose of monitoring and editing the "Money Talk" computer bulletin board, PRODIGY directed and controlled Epstein's actions. In reaching this conclusion the Court has taken care not to rely on any testimony by Epstein, inasmuch as it is the conduct of the principal which must create the impression of authority, not the conduct of the agent. Based on the foregoing, the Court holds that Epstein acted as PRODIGY's agent for the purposes of the acts and omissions alleged in the complaint.