America Online, Inc. v. Prime Data Systems, Inc. | November 20, 1998


This is the old version of the H2O platform and is now read-only. This means you can view content but cannot create content. You can access the new platform at Thank you.

America Online, Inc. v. Prime Data Systems, Inc.

PRIME DATA SYSTEMS, INC., Prime Data Worldnet Systems, Inc., and Vernon N. Hale, Defendants

No. Civ.A. 97–1652–A.

United States District Court, E.D. Virginia.

Nov. 20, 1998.

Report and Recommendation

JONES, Magistrate J.

[1] This matter is before the Court on the motion of plaintiff America Online, Inc. ("AOL") for default judgment against defendantsPrime Data Systems, Inc., Prime Data Worldnet Systems, Inc. and Vernon N. Hale (collectively "defendants").

On October 17, 1997, AOL filed a five-count complaint against defendants seeking damages for violations of the Computer Fraud and Abuse Act,[1] false designation of origin,[2] Virginia common law trespass to chattels, violations of the Virginia Computer Crimes Act,[3] and common law conspiracy to commit trespass to chattels and to violate Federal and Virginia statutes. AOL seeks injunctive relief, damages and restitution, punitive damages, and attorneys fees and costs.

Service was made by certified mail upon defendants Prime Data Systems, Inc. and Prime Data Worldnet pursuant to Fed.R.Civ.P. 4 and Kentucky Revised Statute § 271B.5–040, on January 12, 1998. Service was made upon defendant Vernon N. Hale by serving the Secretary of the Commonwealth of Virginia pursuant to Virginia Code § 8.01–329 and Fed.R.Civ.P. 4, on December 31, 1997. The Secretary of the Commonwealth forwarded the Complaint and Subpoenas by first class mail to defendant Hale on January 7, 1998.

Defendants have not appeared, answered or otherwise responded to the Complaint.[4] The clerk entered default against defendant Hale on March 10, 1998, and against defendants Prime Data Systems, Inc. and Prime Data Worldnet Systems, Inc. on April 30, 1998.


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:

The 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. The 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 and 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.

[2] Defendant Hale, acting in conjunction with defendants Prime Data Systems, Inc. and Prime Data Worldnet Systems, Inc., sent millions of UBE messages through the Internet to AOL's servers and its customers. Steinberg Decl., ¶ 18. By letter dated November 5, 1996, AOL notified defendants that they were prohibited from any further use of AOL's proprietary computers and computer network. See Exhibit F attached to Plaintiff's Memorandum and Points of Authority in Support of Default Judgment ("Plaintiff's Memorandum"). Defendants continued to send UBE and sent more than 130,000,000 UBE messages to AOL and its members between November, 1996, and April, 1997.[5] Id. By letter dated October 6, 1997, AOL again demanded that defendants cease and desist their unauthorized transmissions. See Exhibit G attached to Plaintiff's Memorandum. However, defendants continued their practice and sent UBE through Plaintiff's servers as recently as October 10, 1997. See Exhibit D attached to Plaintiff's Memorandum.

Defendants' UBE primarily advertised computer software programs designed to facilitate bulk e-mailing by allowing users to (1) harvest e-mail addresses from AOL's member directories, chat rooms and electronic bulletin boards and (2) send bulk batches of e-mail using technology designed to avoid the electronic filtering mechanisms employed by AOL to stop UBE. See Exhibits I and J attached to Plaintiff's Memorandum. 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.[6] 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.[7] Steinberg Decl., ¶ 15. Defendants counterfeited plaintiff's registered trade[8] and service[9] 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.[10] 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).


[3] Plaintiff has established that by sending large quantities of unsolicited e-mail messages through plaintiff's 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. See America Online, Inc. v. IMS et al, Civil Action No. 98–11–A (E.D.Va.10/29/98) (partial summary judgment). 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.[11]

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.

AOL also asks for over $22,000,000 in 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], clearly 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.

[4] 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). Moreover, as to the state law claims 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 magistrate judge therefore finds 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. (As appears infra, the magistrate judge recommends a lower amount.)

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 taking 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.

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]


[5] 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 concert or participating with them from:

a. sending or transmitting, 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 "," or otherwise using any artifice, scheme, or method of transmission that would prevent the automatic return of undeliverable electronic mail 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 jointly and severally in the amount of $101,400 (computed at 130,000,000 UBE x $.00078 per message);

(3) Punitive damages jointly and severally of $304,200 (computed at 130,000,000 UBE x $.00234 per message); and

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

[1] 18 U.S.C. § 1030, et seq.

[2] 18 U.S.C. § 1125(a).

[3] Va.Code Ann. § 18.2–152.1, et seq.

[4] The defendants have contacted the plaintiff through electronic mail and indicate that they are aware of this suit.

[5] AOL only tracks the top thirty sources of Internet e-mail each day. Steinberg Decl., ¶ 18. These lists only captured a fraction of the mail sent by bulk e-mailers like defendants because they omit any source that was not one of the thirty largest for a particular day. Id. Therefore, it is likely that defendants sent far more UBE than is included in this figure.

[6] 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.

[7] 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.

[8] U.S. Registration No. 1,984,337, registered July 2, 1996.

[9] U.S. Registration No. 1,977,731, registered June 4, 1996.

[10] 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.

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

[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 market for unsolicited bulk e-mail, to which AOL's customers universally object and which has major adverse effects on customer goodwill as discussed earlier.

[14] 15 U.S.C. § 1117(a) authorizes the award of costs, including attorneys fees, to the prevailing party only in exceptional cases. The Fourth Circuit in Scotch Whisky Assn. v. Majestic Distilling Co., 958 F.2d 594, 599 (4th Cir.1992) interpreted § 1117(a) to allow costs if the prevailing plaintiff can "show that the defendant acted in bad faith."


Case Information

July 18, 2014



No. Civ.A. 97–1652–A

United States District Court, E.D. Virginia

Author Stats

H2O Case Admin.

Leitura Garamond Futura Verdana Proxima Nova Dagny Web
small medium large extra-large