IN THE UNITED STATES DISTRICT COURT FOR
THE EASTERN DISTRICT OF VIRGINIA
Alexandria Division

AMERICA ONLINE, INC.,
Plaintiff,

v.

IMS et al.,
Defendants.

Civil Action No. 98-0011-A

REPORT AND RECOMMENDATION

This action was referred in part to the magistrate judge pursuant to 28 U.S.C. §636 (b)(1)(B) for a report and recommendation on default judgment and damages.

On January 6, 1998, AOL filed a six-count complaint against three groups of defendants: (a) IMS and Brian Robbins (the "Robbins Group"); (b) Gulf Coast Marketing and Ralph C. Goodson, Jr.; and (c) TSF Marketing, TSF Industries, and Joseph J. Melle, Jr. (the "Melle Group"). AOL seeks injunctive relief, damages and restitution, punitive damages, and attorneys’ fees and costs. AOL seeks damages for violations of Lanham Act(1) (Counts I and II), the Computer Fraud and Abuse Act(2) (Count III), violations of the Virginia Computer Crimes Act(3) (Count IV), trespass to chattels under Virginia common law (Count V), and common law conspiracy to trespass and to violate Federal and Virginia statutes (Count VI). AOL later filed an amended complaint adding Damien Melle as a Melle Group defendant, and the complaint was dismissed as to defendant Goodson.

All defendants were served, but only defendant Joseph Melle has answered the complaint. All other defendants are in default, and the clerk entered default against them. The magistrate judge has received evidence and argument on damages. On October 29, 1998, the court, per Judge Brinkema, granted summary judgment to AOL against Joseph Melle on liability on Counts I, II, and V of the amended complaint.

I. FACTUAL FINDINGS

Upon a full review of the submitted pleadings and the declarations of Jon L. Praed, A. Douglas Steinberg, and Philip Fleet, the magistrate judge finds that the plaintiff has established the following facts:

Plaintiff provides a proprietary, content-based online service that affords its members access to the Internet and the capability to send and receive electronic mail ("e-mail"). Declaration of Douglas Steinberg ("Steinberg Decl."),¶¶ 3, 4. Plaintiff maintains its central computer systems in the Commonwealth of Virginia, and these Virginia-based computers provide the functionality for, and maintain the content of, the service provided to all of AOL’s customers. Id. AOL’s e-mail system is operated through dedicated computers called "servers" that receive, store, and route e-mail messages. Id. at ¶ 4. These servers have a finite capacity to process not only e-mail transmitted between AOL’s twelve million members but also e-mail transmitted between AOL’s members and Internet users. Id.

There has recently been a rapid rise in the quantity of unsolicited bulk e-mail ("UBE") sent across the Internet to AOL’s servers. Steinberg Decl., ¶ 10. Bulk e-mail lists are often outdated and contain a large percentage of invalid or nonexistent e-mail addresses. Id. at ¶ 11. These invalid addresses increase the load on AOL’s servers, as the servers first attempt to deliver the message and then, if unsuccessful, return the undelivered message to the sender. Id. Additional strain is placed on the server if the sender falsifies the origin of e-mail with a false address, as the server will unsuccessfully attempt for hours and even days to return the undelivered e-mail to the invalid sender. Id.

Defendants’ UBE advertised a variety of products and services including those of interest to potential senders of UBE. Defendants frequently used false and deceptive "headers" in UBE messages to make it appear that the messages were sent with at least the tacit approval of AOL.

During the defendants’ UBE activities, the increased demand on AOL’s servers caused substantial delays in the delivery of all Internet mail to AOL’s members.(4) Steinberg Decl., ¶ 16. AOL’s members experienced delays of up to twenty-four hours in the receipt of Internet e-mail and AOL was forced to temporarily stop accepting any Internet e-mail. Id. As the volume of Internet e-mail transmitted through its computers has increased, AOL has been obliged to purchase millions of dollars worth of additional equipment to increase the capacity of its servers. Id. at 9.

Plaintiff has received many thousands of complaints from its members regarding the defendants’ UBE(5). Steinberg Decl., ¶ 15. Defendants counterfeited plaintiff’s registered trade(6) and service(7) mark "AOL" to make the UBE appear as if it came from within AOL’s system. See Exhibit E and K attached to Plaintiff's Memorandum. Defendants’ use of the counterfeit mark not only caused confusion as to the origin of the UBE, but also implied to AOL’s members that AOL condoned the UBE.(8) Id.

Plaintiff seeks the following relief: (1) a permanent injunction barring defendants from sending e-mail to AOL or its members or using any of AOL’s registered marks; (2) damages and restitution; (3) punitive damages; and (4) attorneys fees’ and costs pursuant to 15 U.S.C. §1117(a).

II. CONCLUSIONS

Plaintiff has established that by sending large quantities of unsolicited e-mail messages

through plaintiffs computer servers to plaintiff’s customers, defendants willfully infringed plaintiff’s registered trade and service marks both by diluting the marks and by falsifying the origin of the e-mail messages in violation of the Lanham Act; and that defendants' acts constitute trespass to chattels under Virginia law, Vines v. Branch, 244 Va. 185, 418 S.E.2d 890 (1992). Plaintiff is entitled to its requested injunctive relief, reasonable attorneys’ fees and costs, and damages as discussed infra.

Plaintiff requests significant monetary damages for defendants’ illegal actions, while acknowledging that its damages are as difficult to quantify as they are real.(9)

At least one element of damages is relatively easy to quantify the value of computer capacity tied up by UBE activity. AOL has submitted evidence establishing to the magistrate judge’s satisfaction that its computer costs are at least $.00078 per message, without considering personnel or other costs associated with the computers’ operation. Steinberg Declaration at ¶ 20. The magistrate judge finds that AOL is entitled at least to damages calculated by multiplying this amount by the number of messages sent by each defendant; and the magistrate judge further finds that this is the only measure of actual damages that is both appropriate and supported by the evidence.

Concurrently, the magistrate judge finds that the other measures of recovery proposed by AOL are either not appropriate or not supported. The differences in nature and cost between electronic mail and U.S. Postal Service bulk mail are too great, and any attempt at selection of a fractional amount, as proposed by AOL, would be speculative. The "restitution" theory proposed by AOL may be analogous to relief available under Virginia law under some theories of recovery (e.g. unjust enrichment), but the magistrate judge finds no support for its use as to any claim that has been pled in the complaint for relief under Virginia law. Nor does the magistrate judge find any basis for its use to determine damages arising under the Lanham Act.

The magistrate judge therefore recommends that the court adopt the per-message computer cost established by AOL as the appropriate measure of actual damages on AOL’s claims.

A problem remains with calculation of compensatory damages: AOL has estimated improper e-mail volume for each group of defendants, but it has presented evidence only as to the Melle Group. The magistrate judge finds that the Melle defendants sent at least 60,000,000 UBE. See Tr. Jonathan Melle Deposition at 51-52, 61. AOL’s estimates that the Robbins and Goodson Groups each sent over 20,000,000 UBE are presently unsupported. In this default judgement context, the magistrate judge will make recommendations as to them that are contingent on receipt by the court of supplemental declarations supporting the estimates_.

AOL has also created, apparently inadvertently, another set of issues that the court must address:

(a) AOL has included three unrelated groups of defendants in this one tort action; the court in order to resolve the matter fully and properly must determine whether these unrelated defendants are all joint tortfeasors against whom relief should be granted jointly and severally.

(b) AOL asks for over $22,000,000 in punitive damages. As appears infra, the magistrate judge recommends aggregate punitive damages of only $234,000. However, if the court considers an award of punitive damages aggregating more than $350,000, then the court must also examine the effect of Virginia’s $350,000 cap on punitive damages (Virginia Code §8.01-38.1) on the state law claims against these multiple groups of defendants.

Neither issue is free from doubt. However, the magistrate judge concludes that the proper resolution of each is clear under the circumstances presented.

The law of Virginia (and other states) as to joint torts is stated and summarized in Lavenstein v. Maile, 146 Va. 189, 132 S.E. 844, 846 (1926):

In Riverside Cotton Mills v. Lanier, 102 Va. 148, 45 S.E. 875, it was held: ‘The general rule is that any number of tort feasors may be joined in the same action, where all are alleged to have participated in the wrong. They may be used jointly or severally, at the election of the plaintiff; and that is true notwithstanding there may exist a difference in the decree of liability, or the quantum of evidence necessary to establish such liability.’

‘When the negligence of two or more persons concurs in producing a single indivisible injury, then such persons are jointly and severally liable, although there was no common duty, common design, or concert of action.’ Walton, Within & Graham v. Miller, 109 Va. 210, 63 SE 458, 132 Am.St.Rep. 908; Carlton v. Boudar, 118 Va. 521, 88 S.E. 174, 4 A.L.R. 1480.

Examination of the case law makes clear that the "single indivisible injury" referred to in Lavenstein is the key factor. Here, each of three groups of defendants created a separate indivisible injury that is itself divisible from the other two injuries. Although the three injuries are similar in character, that separate character is dispositive of this issue in the magistrate judge’s view. The magistrate judge therefore finds that the three groups — Robbins, Gulf Coast, and Melle -- are not joint tortfeasors. Concomitantly, the members of each group are joint tortfeasors as to the torts committed by that particular group.

The proper application of the punitive damages cap is more troublesome. Virginia Code § 8.01-38.1 provides in relevant part as follows:

In any action accruing on or after July 1, 1988, ...the total amount awarded for punitive damages against all defendants found to be liable shall be determined by the trier of fact. In no event shall the total amount awarded for punitive damages exceed $350,000. (Emphasis supplied.)

The import of the magistrate judge’s conclusion on the joint tortfeasor issue is that AOL has joined six claims (or, in state law terminology, six "causes of action") against three groups of defendants in one federal action. The question now becomes: should the term "action" in Va. Code § 8.01-38.1 be read to mean "cause of action" or, conversely, to mean "lawsuit?" The magistrate judge concludes that the proper answer is that ‘action" is synonymous with ‘lawsuit." Without digressing into a long discussion of statutory construction, the court should assume that the General Assembly used "action" in its usual sense,(10) and knew that multiple Virginia causes of action are frequently included in the same lawsuit, and intended to limit punitive damages accordingly.(11)

The magistrate judge therefore concludes that if punitive damages are awarded, the aggregate against all defendants should be limited to $350,000 on the trespass to chattels claims under Virginia law. While an argument can be made for the contrary result, the magistrate judge finds that fundamental fairness dictates this resolution of the issue in this default judgment context.

The court is then confronted with the appropriateness and amount of punitive damages. Exemplary or punitive damages may be assessed where, as here, "there is misconduct or actual malice, or such recklessness or negligence as to evince a conscious disregard of the rights of others." (Giant of Virginia, Inc. v. Pigg, 207 Va. 679 (Va. 1967). The magistrate judge finds that defendants’ misconduct, as described in the complaint, declarations, and exhibits [and as summarized in the opinion filed on October 29, 1998, granting summary judgment on liability], dearly warrants imposition of punitive damages both to punish defendants’ conduct and to deter others’ tortious behavior that threatens the vitality of Internet e-mail communication_.

As with actual damages, the more difficult issue is the appropriate amount of punitive damages. They must not, of course, be grossly excessive under the standards set out in BMW of North America v. Gore, 517 U.S. 559 (1996). The following brief discussion is intended to provide some context for the recommendation that follows it.

As was seen earlier, the cost of sending an individual e-mail message, in isolation, measured by the cost of AOL’s equipment, is quite small: 78/100,000 of one dollar, or 78/1,000 of one penny, per message. Put another way, thirteen e-mail messages cost one cent and thirteen hundred messages cost one dollar. (By comparison, postal service bulk mail costs seventeen cents per item, or approximately six messages per dollar.)(12) The problem, and the damages, arise from the vast numbers of e-mail messages that defendants have been able to generate and sneak into AOL’s system through their tortious conduct.

These defendants made business decisions to engage in this conduct in order to make profits. While postal rates for bulk paper mail are obviously not an appropriate measure of punitive damages, the magistrate judge finds it appropriate to take them into account in evaluating the value of the benefits that defendants sought to obtain, and the costs that they avoided, by their improper conduct.(13) The magistrate judge has also taken into account the reality that AOL’s clearly supported per-message computer cost of $.00078 per message significantly understates the full amount of AOL’s actual monetary damages, and the countervailing consideration that the individual defendants that ran these businesses may be persons of limited means.

After careful review of the entire record, and tiling into account all of the foregoing considerations, the magistrate judge recommends that the court award punitive damages at the level of three times AOL’s proven per-message cost of $.00078. At this level, punitive damages would be $.00234, or about 23/100 of one cent for each message. This measure is consistent with provisions in both state and federal statutes for trebling damages for egregious torts. The magistrate judge finds this measure to be well within the bounds of the proportionality requirements of Gore.

If the court accepts the foregoing recommendations (and if the court receives declarations supporting AOL’s estimates of numbers of messages sent), damages would be awarded as follows:

(a) Against IMS and Brian Robbins, jointly and severally, compensatory damages of $15,600 (20,000000 messages x $.00078 per message) and punitive damages of $46,800 (20,000,000 messages x $.00234 per message).

(b) Against Gulf Coast Marketing, compensatory damages of $15,600 (20,000,000 messages x $.00078 message) and punitive damages of’ $46,800 (20,000,000 messages x $.00234 per message).

(c) Against TSF Marketing, TSF Industries, Joseph J. Melle, and Damon Melle, jointly and severally, compensatory damages of $46,800 (60,000,000 messages x $.00078 per message) and punitive damages of $140,400 (60,000,000 messages x $.00234 per message).

The magistrate judge further finds that plaintiff has shown that defendants acted in bad faith by misusing plaintiff’s trade and service marks after defendants were notified of their infringement and misuse of the plaintiff’s e-mail services. The magistrate judge finds that defendants’ behavior makes this case exceptional within the meaning of the Lanham Act. Therefore, plaintiff is entitled to an award of attorneys' fees and costs.(14)

III. RECOMMENDATION

The magistrate judge therefore recommends that default judgment be entered against all defendants and that plaintiff be awarded the following:

(1) A permanent injunction barring defendants, their agents, and all persons acting in contest or participating with them from:

a. sending or transmitting, or directing, aiding, or conspiring with others to send or transmit, any electronic mail message to plaintiff or its members;

b. using, or directing, aiding, or conspiring with others to use, plaintiff’s computers or computer networks in any manner in connection with the transmission or transfer of any form of electronic communication across the Internet;

c. Sending or transmitting, or directing, aiding, or conspiring, with others to send or transmit, electronic mail messages bearing any false, fraudulent, anonymous, inactive, deceptive, or invalid return Information, or return information containing the domain ‘aol. com,’ or otherwise using any artifice, scheme, or method of transmission that would prevent the automatic return of undeliverable electronic snail to its original and true point of origin; and

d. obtaining and/or using, directing, aiding, or conspiring with others to obtain and/or use membership with plaintiff to acquire or compile plaintiff member addresses for use in the transmission of unsolicited promotional messages to those plaintiff members;

(2) Compensatory damages as specified above.

(3) Punitive damages as specified above.

(4) Attorneys’ fees and costs in an amount to be determined by the court.

NOTICE

By mailing copies of this report and recommendation to counsel, the parties are notified that objections to this report and recommendation must be filed within ten (10) days of service of this report and recommendation. A failure to file timely objections to this report and recommendation waives appellate review of the substance of the report and recommendation and waives appellate review of a judgment based on this report and recommendation.

[signature]
Thomas Rawles Jones, Jr.
United States Magistrate Judge
Alexandria, Virginia
November 20, 1998

___________________________

1. 15 U.S.C. §1125.

2. 18 U.S.C. §1030, et. seq.

3. Va. Code Ann. §18.2-152.1, et. seq.

4. On some days, defendants’ UBE accounted for more than ten percent of the entire number of messages sent to AOL’s members that day. Steinberg Decl., ¶ 19.

5. This figure understates the number of members who affirmatively complained because AOL’s complaint database was not fully operational during the time in which defendants performed many of their mailings. Steinberg Decl., ¶15.

6. U.S. Registration No. 1,984,337, registered July 2, 1996.

7. U.S. Registration No. 1,977,731, registered June 4, 1996.

8. An October, 1997, survey conducted of AOL’s members who choose to discontinue their use of AOL’s services indicated that 2.2% requested cancellation because of UBE or other unauthorized use of AOL’s computer system. Declaration of Philip Fleet, ¶ 5. Based on this figure, AOL estimates that 1.1% of its cancellations are attributable to UBE alone. Id. at ¶ 7. Therefore, thousands of cancellations per month are attributed to UBE. Id. at ¶ 8.

9. To its credit, AOL has avoid speculation about quantification of its obvious loss of goodwill, and has not asked the court to speculate.

10. Virginia practice distinguishes between "action at law" and "suits in equity."

11. These three groups of defendants are arguably misjoined in one complaint, and would arguably be misjoined in one Virginia motion for judgment. The court should also assume that the General Assembly reasonably expected that misjoinder would not occur.

12. AOL’s counsel submitted by letter, but did not support by declaration information to the effect that "bulk e-mail" that is sent to customers who have asked to receive it can be sent for between six cents and thirty cents per message.

13. Of course, for the reasons set out in AOL’s memoranda, there is no legitimate owlet for unsolicited bulk e-mail, to which AOL’s customers universally object and which has major adverse effects on customer goodwill as discussed earlier.