Stratton Oakmont, Inc. v. Prodigy Services Company, 1995 WL 323710 (N.Y. Sup. May 24, 1995). | cmeleca | July 28, 2014


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Stratton Oakmont, Inc. v. Prodigy Services Company, 1995 WL 323710 (N.Y. Sup. May 24, 1995).




INDEX No. 31063/94
MOTION DATE: 3/10/95



Partnership of Joint Venture with

The following papers read on this motion:

Plaintiff's Notice of Motion & Exhibits.......1
Plaintiff's Supporting Exhibits P & O (filed separately
  under seal pursuant to a confidentiality agreement)....1A
Plaintiff's Memo of Law in Support......2
Appendix to Plaintiff's memo of Law......3
Defendant's Opposing Affidavit and Exhibits.....4
Defendant's Memo of Law in Opposition......5
Reply Affidavit......6
Reply Memo of Law......7

Upon the foregoing papers, it is ordered that this motion by
Plaintiffs for partial summary judgment against Defendant PRODIGY
SERVICES COMPANY ("PRODIGY") is granted and this Court
determines, as a matter of law, the following two disputed
issues as follows:

(i) the 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 Epstien, 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 OAKMONT, INC. ("STRATTON"), a securities investment
banking firm, and DANIEL PORUSH, STRATTON'S president, committed
criminal and fraudulent acts in connection 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 "soon 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 network on which the statements appeared, and
the unidentified party who posted the aforementioned statements.
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" (Zamansky
affidavit, par. 4), Plaintiffs seek partial judgment on two
issues, namely:

(1) whether PRODIGY may be considered a "publisher: of the
aforementioned statements; and,

(2) whether Epstien, 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 purposes 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 publisher population on
PRODIGY's bulletin boards. "Money Talk" the board on which the
aforementioned statement appeared, is allegedly the leading and
most widely read financial computer bulletin board in the United
States, whose 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

PRODIGY commenced operations in 1990. Plaintiffs base their
claim that PRODIGY is a publisher in large measure on PRODIGY's
stated policy, starting in 1990, that it was a family orientated
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 the competition and
expressly likening itself to a newspaper. (see, Exhibits I and
J to Plaintiffs' moving papers.) 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
chooses the type of advertising it publishes, the letters it
prints, the degree of nudity and unsupported gossip its editors

(Exhibit J.)

Plaintiffs characterize the aforementioned articles by PRODIGY
as admissions (see, Battner v Pokoik, 81 AD2d 572, app. dsmd. 54
NY2d 750) 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 significant, 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
Plaintiffs' 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,

(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 Epstien 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
(see Plaintiffs' Exhibit R, Ambrozek deposition transcript, at
p. 191); and

(D) testimony by Epstien 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."
(Epstien deposition Transcript, p. 52).

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.
[Cianci v New York Times Pub. Co., 639 F2d. 54, 61; Restatement,
Second Torts Section 578 (1977).] In contrast, distributors
such as book stores and libraries may be libel 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; see also Auvil v CBS 60 Minutes,
800 F. Supp. 928, 932.] A distributor, or deliverer of a
defamatory material is considered a passive conduit and will not
be found liable in the absence of fault. [Auvil supra, see also
Misu v. Mooney, 124 Misc2d 95 (claims against printer of weekly
newspaper containing allegedly libelous articles dismissed in
absence of any evidence that printer knew or had reason to know
of the allegedly libelous nature of the articles). However, a
newspaper, for example, is more than a passive receptacle or
conduit for news, comment and advertising. [Miami Herald
Publishing Co. v Tornillo, 418 US 241, 258.] The choice
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 (Id.), 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 establishes a prima facie case that PRODIGY
exercised sufficient editorial control over its computer
bulletin boards to render it a publisher with the same
responsibilities of a newspaper.

Again, PRODIGY insists that its former policy of manually
reviewing all messages prior to the posting was changed "long
before the messages complained of by the Plaintiffs were
posted." (Schneck affidavit, par. 4.) 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 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, and
electronic newsletter. Interestingly, an independent entity
named Cameron Communications, Inc. ("CCI") had "contracted to
manage, review, create, delete, edit, and otherwise control the
contents for 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 as 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 summery judgment, the Cubby
court held:

A computerized database it is 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, bookstore, or newsstand would impose an undue burden on
the freeflow of information.

(776 F. Supp. 135, 140.)

The key distinction between CompuServe and PRODIGY is twofold.
First, PRODIGY held itself out to the public and its members as
controlling the content of its computer built an 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 the man power to delete notes from its computer
built an boards on the basis of offensiveness and "bad taste",
for example, PRODIGY is clearly making decisions as to content
(see, Miami Herald Publishing Co. v. Tornillo, supra), and such
decisions constitutes editorial control. (Id.) that such
control is not complete and in 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 built an boards. Based on
the forgoing, this Court is compelled to conclude that for the
purposes of plaintiffs' claims in this 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 alleged defamatory investigative report
generated by the network and broadcast by its 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
time differential, that 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.

* * *

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
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.

(800 F. Supp. at 931-932.) Consequently, the court dismissed
all claims against the affiliates on the basis of "conduit
liability", which could not be established therein absent fault,
which was not shown.

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 the 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. [See Edward v. DiLello, Functional Equivalency and
Its application to Freedom of Speech on Computer Bulletin
Boards, 26 Colum. J. Law & Eoc. Probs. 199, 210-211
(1993).] It is PRODIGY's new 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 to CompuServe and other computer networks that
make no such choice. For the record, the fear that this Court's
finding of publishers status for PRODIGY will compel all
computer networks to abdicate control of their built an boards,
incorrectly presumes that the market will refuse to compensate a
network for its increased control and the resulting increased
exposure. [See, Eric Schlachter, Cyberspace, The Free Market
and The Free Marketplace of Ideas: Recognizing Legal
Differences in Computer Bulletin Board Functions, 16 Hastings
Communication and Entertainment L. J., 87, 138-139.] 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, in enacted. [See, Congressional Quarterly US S 652,
Congressional Quarterly US HR 1004, and Congressional Quarterly
US S 314.]

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. [Maurillo v Park Slope U-Haul, 194 AD2d 142; Restatement
(second) of Agency s1.] The starting point for an agency
analysis in this case in the "Bulletin Board Leader Agreement"
("the Agreement" found as Exhibit A to Opposition Affidavit of
William C. Schneck) 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 and 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 hole Prodigy harmless from and
against all claim cost, liabilities judgments . . . arising out
of or in connections 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. [Matter of
Shulman Transport Enterprises, Inc., 33 B.R.383, 385, aff'd 744
F2d 293.] The Court must look to the substance of the
relationship. (Id.) Where one party retains a sufficient
degree of direction and control over another, a principal-agent
relationship exists. [Garcia v Herald Tribune Fresh Air Fund,
Inc., 51 Ad2d 897.] In addition, whether one is an independent
contractor is not determinative of whether one is an agent.
[Columbia Broadcasting System, Inc. v. Stokely-Van Camp Inc.,
522 F2d 369; Ackert v Ausman, 29 Miso2d 962 aff'd 20 AD2d 850.]

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 that
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. (Ambrozek deposition
transcript pp. 23 and 191, found at Exhibit R to the moving
papers.) Board Leaders are also given a 28 page "Bulletin Board
Leader Survival Guide" (Exhibit O to the moving papers), dated
October 1994, wherein many technical terms and procedures are
explained, and the following caveat is given:


Where the facts are not disputed the question of agency should
be resolved by the court. [Plymouth Rock Fuel Corp. v Leucadia
Inc., 100 AD2d 842.] 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. [See
Ford v Unity Hosp., 32 NY2d 464, 473.] 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.

Dated: May 24, 1995
Mineola, New York


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