California "Yelp" Bill, Guarantees Right to Post (Non-Defamatory) Reviews

Imagine this.

You go to a new dentist and, before she will take you as a patient she requires you to sign an agreement that you won’t post negative reviews of her on the Internet. You go to book a wedding reception at a restaurant and before they will book your reception they ask you to sign a similar document. Even worse, you must agree that if you do post a negative review, you will owe the restaurant a $500 fine.

The Internet has been full of stories of this sort, but now one state — California — has put a stop to it. And, as is sometimes said when it comes to new laws, as California goes, so goes the country.

A bill signed into law in California on September 9, 2014, popularly referred to as the “Yelp” bill, prohibits the use of “non-disparagement” clauses in consumer contracts. The law takes effect on January 1, 2015. 

Under the new law a “contract or proposed contract for the sale or lease of consumer goods or services may not include a provision waiving the consumer’s right to make any statement regarding the seller or lessor or its employees or agents, or concerning the goods or services.” It will also be “unlawful to threaten or to seek to enforce” such a provision, or to “otherwise penalize” a consumer for making any such statement. The law carries statutory penalties ranging from $2,500 for the first offense, up to $10,000 for “willful” violations.

The impact of this law will not be limited to California businesses: it will apply to anyone doing business with consumers in California.

One aspect of this law that is important to understand is that it does not give consumers free license to defame businesses, nor does it limit the right of businesses to sue consumers for defamatory statements. It is limited to using a contract or proposed contract (whether online or on paper) to preclude the publication of reviews — even defamatory reviews — in the first place. If  a review is defamatory, the business owner’s legal rights remain as they were before enactment of this law.

Practice tip: it is possible that the new law will  be viewed as an invitation to class action plaintiffs to seek aggregated statutory damages. Therefore, it is important that companies that do business with consumers in California (whether the business itself is in California or not), review their contracts and online terms and conditions to remove non-disparagement clauses that would violate this law.

Now that the Massachusetts legislature has abandoned (at least until next session) a bill to make employer/employee noncompete agreements unenforceable (or more difficult to enforce) in Massachusetts, we’re back to business as usual in Massachusetts, and how the courts handle these cases remains of interest. And, since the preliminary injunction stage of these cases is so critical, how the courts handle preliminary injunction motions in noncompete cases is of particular interest.

Of course, noncompete law (sometimes statutory, sometimes “judge-made” case law) varies from state-to-state. A recent case highlights the extent to which even the procedure for handling these cases can differ from state-to-state.

In Massachusetts, the trial courts — federal or state — have no obligation to hold an evidentiary hearing when resolving a preliminary injunction motion. Affidavits are usually enough, and its rare to see a hearing with witnesses and cross-examination.

However, this is not the case in the 11th Circuit, which covers federal cases in Alabama, Florida and Georgia. The 11th Circuit recently held, in a noncompete case involving a preliminary injunction motion, that while an evidentiary hearing is not always required before issuance of a preliminary injunction, ““[w]here the injunction turns on the resolution of bitterly disputed facts … an evidentiary hearing is normally required to decide credibility issues. … where much depends upon the accurate presentation of numerous facts, the trial court erred in not holding an evidentiary hearing to resolve these hotly contested issues.”

The case was remanded to the trial court for a hearing.

Moral of the story: if you think an evidentiary hearing will improve your chances on a noncompete preliminary injunction motion, ask for one. Just maybe, you’ll get it. If the appealing party in this case had not asked for an evidentiary hearing, it would have had no basis for complaining, on appeal, about the failure of the court to grant one, and would not have obtained the reversal. While an Eleventh Circuit decision is only persuasive (not binding) on courts outside the Eleventh Circuit, a particular judge in another state could find it very persuasive, and an evidentiary hearing may make a difference in the outcome in the trial court. It also creates the basis for a good faith argument on appeal.

Moon v. Medical Technology Assoc. (11th Cir. Aug. 18, 2014)

Ninth Circuit Finds Barnes & Noble's "Browsewrap" Unenforceable

Online companies have often found it challenging to create enforceble terms of service (“TOS”), and the courts aren’t making it any easier. Perhaps the courts have concluded that, now that the Internet is an established commercial medium, they are not going to cut vendors any slack.

The latest decision illustrating this is the Ninth Circuit’s August 18, 2014 holding in Nguyen v. Barnes & Noble, holding that Barnes and Noble’s browsewrap agreement was not enforeable.

A website “browsewrap” agreement is where the online terms are posted on a site, typically via a link on the site’s homepage. By contrast, a “clickwrap” clickwraprequires the website user to take some affirmative action before engaging in a transaction (such as an online purchase). Typically this amounts to clicking a box on the site indicating that the user agrees to the site’s terms and conditions.

Where the user is not asked to “check the box” and the website relies on the posting alone, things can get messy. Barnes & Noble tried to impose an
arbitration clause on a consumer based on a browsewrap, but the Ninth Circuit held that B&N’s browsewrap was not enforceable. Here, as is often true in these cases, the issue came down to vague factors such as where the terms were presented, and whether “a reasonably prudent user” would be put on notice of the terms. In this case, B&N didn’t do enough:

In light of the lack of controlling authority on point, and in keeping with courts’ traditional reluctance to enforce browsewrap agreements against individual consumers, we therefore hold that where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on—without more—is insufficient to give rise to constructive notice. … the onus must be on website owners to put users on notice of the terms to which they wish to bind consumers. Given the breadth of the range of technological savvy of online purchasers, consumers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.

It is far from clear what constitutes a “conspicuous hyperlink” that would satisfy the test in this decision, but online business should stick with clickwrap agreements, rather than push the envelope with browsewraps. For a similar case that I wrote about in 2012, see Online Agreements – Easy To Get Right, Easy To Get Wrong.

Nguyen v. Barnes & Noble (9th Cir. Aug. 18, 2014).

Capitol Records Bares Knuckles in Redigi Suit, Goes After Founders

It’s a sad reality that when the record companies want to get serious, they sue not only companies that they claim have infringed their copyrights, but the owners of those companies. Capitol Records pursuit of Michael Robertson, despite the bankruptcy of MP3tunes, is a classic example. MP3tunes declared bankruptcy and shuttered its service, but Capitol Records (part of UMG), pursued Robertson individually, and obtained a $41 million verdict against him personally.

Capitol is using the same strategy against Redigi (“the world’s first pre-owned digital marketplace”). I’ve written about Redigi several times (see here, here and here). The last of these, Federal Judge Tells Redigi to Shut it Down, posted April 2, 2013, describes the New York federal court’s decision holding that Redigi’s digital resale business is not protected by the first sale doctrine. In that post I noted that Redigi could face millions of dollars in damages, and that liability might not be limited to the company:

Capitol may seek leave of court to add as defendants the individual owners and employees of Redigi that exercised control over or benefited from the infringement.  While Redigi could oppose such as motion as coming too late in the case, a decision would be at the discretion of the judge. As Capitol Records showed in its copyright suit against MP3tunes and Michael Robertson, Capitol is not above suing not only corporate infringers but their founders and owners. (See: The Record Labels Want My Minivan).* The philosophy of the record companies in many copyright cases may best be described as, “never kick a man when he’s down, unless that’s the only way to keep him there.” Capitol may be preparing to put on its steel toe boots in this case.

… According to the court decision Redigi consulted legal counsel before launching Redigi and engaging the recording industry in a test case. One can only hope that the attorneys Redigi consulted reminded Redigi of the Chinese proverb, “A piece of paper, blown by the wind into a law court, may in the end only be drawn out again by two oxen.”

It didn’t take long for Capitol to follow exactly that strategy. Five months later, on August 13, 2013, Capitol filed an amended complaint naming Redigi’s founding co-owners, John Ossenmacher (CEO) and Larry Rudolph (CTO) as individual defendants. Ossenmacher and Rudoph moved to dismiss, and the court denied their motion on September 2, 2014, holding that the amended complaint -

specifically alleges that the Individual Defendants were responsible both for the technology ReDigi used and for employing that technology through ReDigi’s business. It also alleges that each of ReDigi’s key activities was performed either at the behest of, or with the approval of, the two Individual Defendants. These are precisely the sorts of factual allegations that, if true, make a corporate officer personally liable for copyright infringement. … the rule is that a corporate officer is personally liable for the corporation’s infringement if he had the ability to supervise the activity and a financial interest in it, or if he personally engaged in the infringing activity.

This development just serves to thicken the plot in a case that many observers have been hoping will make it to the Second Circuit on appeal.

Will the judge’s refusal to dismiss Ossenmacher and Rudolph as defendants (albeit only on a motion to dismiss, which is by no means a final decision) now be enough to force Redigi to shut its doors? Would closure of Redigi be enough to settle the claims against the two individuals, or is Capitol out to make an example in this this case?

On the other hand, it’s possible that the founders of Redigi were well-advised before starting this company, and that they put their personal assets beyond the reach of creditors. Redigi made much of the fact that its technology was vetted and approved by a legal team before they released their service. Hopefully, this included a strategy to frustrate Capitol’s attempt to reach their personal assets.

Capitol Records v. Redigi – First Amended Complaint

September 2, 2014 Order Denying Motion to Dismiss Ossenmacher and Rudolph

Ninth Circuit Hands Oracle a Tough Choice in Oracle v. SAP Copyright Ruling

Oracle faces a tough call following the Ninth Circuit’s August 29, 2014 decision in Oracle Corp. v. SAP AG. Should Oracle accept the $ 356.7 million in copyright damages the Ninth Circuit authorized on appeal, or roll the dice for a new trial, gambling that it can do better?

I’ve written about this case before (see Oracle and SAP Avoid a Retrial, Go Directly to Appeal, in the Other “Tech Trial of the Century”). As I discussed in that September 2012 post, in 2010 Oracle won a record $1.3 billion copyright infringement jury verdict against SAP.  However, the trial judge held that the jury’s “hypothetical-license” damages award was based on undue speculation, and ordered remittitur, reducing the judgment to $272 million, and giving Oracle the choice of accepting that amount or retrying its damages case. Oracle and SAP then entered into a complex stipulation that allowed the parties to avoid an immediate retrial and permitted Oracle to appeal the district court remittitur order. The terms of the stipulation were as follows:

  • The district court entered final judgment for $272 million. (This did not include interest or the $120 million in attorney’s fees that Oracle had already been paid by SAP).
  • However, Oracle agreed not enforce the judgment until all appeals are concluded.  

Now, assuming Oracle does not appeal to the Supreme Court, decision day has arrived for Oracle. The Ninth Circuit rejected Oracle’s appeal that it reinstate the $1.3 billion, but did up the amount the district court had arrived at on remittitur ($272 million) by $84.7 million to $356.7 giving Oracle the choice of accepting that amount to end the case, or proceed with a new damages trial.

The heart of the Ninth Circuit’s decision is its holding that while a plaintiff in a copyright infringement case is not required to show that it would have saplicensed the infringed material to recover on a hypothetical license theory (an argument pressed by SAP, since it was undisputed that Oracle would never have licensed the work at issue to SAP), Oracle had failed to present sufficient non-speculative evidence to support the jury’s award of $1.3 billion. This left Oracle with the maximum amount the evidence established based on an alternative damages theory — Oracle’s lost profits plus SAP’s illegal profits — an amount the Ninth Circuit concluded was not $272 million, but $356.7 million.

My prediction: fast and furious negotiations will commence, and the case will settle. Oracle’s chances of recovering materially more than $356.7 million on retrial, given the Ninth Circuit opinion, are negligible, given that Oracle probably put on the best “lost profits/illegal profits” case it could at the first trial. However, Oracle’s chances on improving on that number are not zero, so Oracle will probably be able to obtain more than $356.7 million in a negotiated settlement, but not a great deal more. The settlement is likely to be private, so we may never know the precise amount.

Caveat: Larry Ellison gets to make the call on this for Oracle, and he might be more likely to roll the dice on a retrial than your average CEO.

Oracle Corp. v. SAP AG (9th Cir. August 29, 2014)

The U.S. Supreme Court IP Year in Review

by Lee Gesmer on September 3, 2014

[As initially published in the September 1, 2014 issue of Massachusetts Lawyers Weekly]

A lot has changed in the realm of intellectual property law following the record-breaking ten intellectual property cases decided by the U.S. Supreme Court in its 2013 term. Highlights of the six unanimously decided patent cases include suits in which the Court narrowed the scope of patent protection for inventions implemented on computers, made it easier to invalidate a patent for indefiniteness, and made it easier for the district courts to shift attorneys’ fees to prevailing defendants.

The Court issued two copyright decisions, including an important ruling that may have implications for cloud computing. And, one of the Court’s two Lanham Act opinions established a new doctrine for standing in false advertising cases.

Patent

Medtronic v. Mirowski Family Ventures (Jan. 22, 2014) was the first of five decisions overruling the Federal Circuit outright. The Court held that in a declaratory judgment action for non-infringement brought by a patent licensee, the burden of proving infringement lies with the licensor/patent holder, not the licensee. Medtronic can be seen as an extension of the Court’s 2007 decision in MedImmune, Inc. v. Genentech, holding that patent licensees have standing to bring declaratory judgment actions for non-infringement or invalidity, even as they continue to make royalty payments for the product in controversy.

By placing the burden of proving infringement on patent owners, the Court has made it easier for patent licensees to challenge a patent during the license term.

Octane Fitness v. ICON Health and Fitness (April 29, 2014), may have important consequences for attorneys’ fee awards in patent cases. The case was a challenge to the Federal Circuit’s “exceptional case” standard for awarding attorneys’ fees in patent litigation under 35 U.S.C. §285. That standard required a party seeking fees to show by “clear and convincing evidence” that the case was “objectively baseless” and brought in “subjective bad faith.”

Overruling, the Court held that an “exceptional case” is “one that stands out from others with respect to the substantive strength of a party’s litigating position (both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated … considering the totality of the circumstances.” The Court also changed the standard of proof to a preponderance of the evidence.

While the fee-shifting statute applies to both parties, Octane should make it easier for patent defendants to force losing plaintiffs to pay attorneys’ fees.

Highmark v. Allcare Health Management System (April 29, 2014), a companion case to Octane, held that the standard established in Octane should be left to the discretion of the district courts rather than, as the Federal Circuit had held, be subject to de novo review on appeal.

Octane and Highmark give the district courts substantial leeway within which to decide fee awards and may impact the debate over the reform of the patent laws to curb abusive lawsuits. An important component of proposed reform legislation has been to encourage judicial fee shifting, until now a rarity. These cases may be a significant step in that direction.

That said, until the lower courts demonstrate how aggressively they will apply Octane’s fee-shifting standard, the full impact of these cases will be unclear. Adding to this uncertainty is the risk that the standard will be applied unevenly in different districts (and even from judge to judge), with little authority left to the Federal Circuit, under Highmark, to intervene and shape uniform national application.

In Nautilus v. Biosig (June 2, 2014), the Court addressed the patent statute’s requirement that patent “claims particularly point[] out and distinctly claim[] the subject matter which the inventor or a joint inventor regards as the invention.” 35 U.S.C. §112(b).

The Federal Circuit had held that a patent claim passed that threshold so long as the claim was “amenable to construction” and the claim, as construed, was not “insolubly ambiguous.” Reversing the Federal Circuit for the fourth time, the Court held that “a patent is invalid for indefiniteness if its claims, read in light of the specification delineating the patent, and the prosecution history, fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention” at the time the patent was filed.

While making it easier to challenge a patent based on indefiniteness, the Court left it to the district courts to interpret and apply the standard. Nevertheless, the decision also appears to be consistent with the Court’s trend during the term: to pull in the reins on a patent system widely perceived to be out of control.

The last two cases stand out as the most complex and likely most important patent decisions of the term.

In Limelight Networks v. Akamai Technologies (June 2, 2014), the issue was whether patent infringement could occur when separate entities perform the steps of a method patent, so-called “divided infringement.”

In a controversial decision, the Federal Circuit ruled that a defendant could be liable if it “induced” several parties to jointly carry out the steps necessary for infringement, whether or not the defendant performed any of the steps itself. Reversing again, the Supreme Court held that a defendant cannot be held liable for inducing patent infringement in the absence of direct infringement, which requires that all steps of a patent be performed by a single actor. The Court was not persuaded by the argument that its holding might enable defendants to evade liability by dividing performance among multiple actors.

However, the Court noted that its ruling was based on a 2008 Federal Circuit decision establishing the single actor rule for direct infringement. The Court assumed, without deciding, that that holding was correct, implying that there might be some room for the Federal Circuit (or the Supreme Court) to modify the single actor rule on which the holding in Akamai is based. In the meantime, a divided infringement defense will be a potential loophole for defendants in industries with distributed activities.

The last and most highly awaited patent case in the 2013 term was Alice Corp. v. CLS Bank Int’l (June 19, 2014). At issue was whether claims directed to a computer-implemented financial process were patent-eligible subject matter.

While many in the patent community feared (or hoped) that the decision would render software and business method inventions unpatentable, the Court was careful to avoid that outcome. Rather, it held that, like laws of nature and natural phenomena, “abstract ideas” — such as the business practice in Alice — must contain a sufficient “inventive concept” to “transform” the idea into a patent-eligible application. However, that cannot be achieved solely with a generic computer implementation. In Alice, the claims amounted to “‘nothing significantly more’ than an instruction to apply the abstract idea,” using some “unspecified, generic computer.” That was “not ‘enough’ to transform an abstract idea into a patent-eligible invention.”

While Alice did not create a per se exclusion for software and business processes, these categories will face heightened scrutiny in both prosecution and enforcement. But application of Alice will be complicated by minimal guidance on what constitutes an “abstract idea.” While using a general purpose computer to implement an abstract idea will not achieve patent-eligibility, software that improves a physical process or the functioning of the computer itself may provide the “something more” identified by the Court as a requirement to transform an abstract concept into patent-eligible subject matter.

However, those distinctions were left to the lower courts to resolve on a case-by-case basis.

Copyright

In Petrella v. Metro-Goldwyn-Mayer, the first of two copyright cases decided in the 2013 term (May 19, 2014), a 6-3 Court reversed the 9th Circuit, holding that the copyright statute’s three-year “rolling” statute of limitations (17 U.S.C. §507) could not be shortened by the common law doctrine of laches. However, an unreasonable, prejudicial delay in filing suit may be relevant to awarding equitable relief and damages based on the infringer’s profits, making it less likely that the ruling will spark a flood of hitherto dormant copyright suits.

The second copyright ruling, ABC v. Aereo (June 25, 2014), involved the legality of Aereo’s system of using micro-antennas and individual digital copies to stream over-the-air TV on the Internet. Reversing the 2nd Circuit, a unanimous Court held that Aereo’s streaming service violated the copyright statute’s public performance right. The Court rejected Aereo’s argument that it was legally indistinguishable from a TV antenna/DVR supplier, holding instead that Aereo transmitted a public performance through “multiple, discrete transmissions,” and that Aereo was substantially similar to cable TV companies, which are required to pay royalties to retransmit TV broadcasts.

The impact of the decision on cloud computing remains to be seen, as does the accuracy of the three-justice dissent’s warning that the rationale of the case will “sow confusion for years to come.”

Lanham Act

In Lexmark Int’l v. Static Control (March 25, 2014) the Court unanimously reversed the 6th Circuit’s holding that Static Control could not proceed with a false advertising counterclaim against Lexmark under §43(a) of the Lanham Act because the parties were not direct competitors. The Court announced a new, two-part test: (1) Is the claim within the “zone of interests” protected by the Lanham Act? (2) Did the alleged conduct proximately cause the alleged injury? To meet the second part of the test, a plaintiff must plead “economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising,” and that the deception causes consumers to withhold business from the plaintiff.

The ruling eliminates circuit conflicts and liberalizes standing under federal false advertising law.

In POM Wonderful v. Coca-Cola (June 12, 2014), another false advertising case, POM complained that the label for Coca-Cola’s “pomegranate blueberry” juice blend was deceptive and misleading, in violation of the Lanham Act.

The 9th Circuit held that POM’s claim was precluded by the Food, Drug and Cosmetic Act, which regulates the misbranding of food by means of false labeling. The Court reversed, holding that the federal law was not a safe harbor from the Lanham Act, and, therefore, food and drink labels are subject to competitor claims under the act.

The extent to which the ruling will lead to an increase in false advertising lawsuits over food and drink labeling remains to be seen.

"Bingo-With-a-Computer" Patent Doesn't Survive Alice

It would be difficult to find a more straightforward application of the Supreme Court’s recent ruling in Alice Corporation Pty. Ltd. v. CLS Bank International (June 14, 2014) than the Federal Circuit’s August 26th decision in Planet Bingo, LLC  v. VKGS LLC (Fed. Cir. August 26, 2014) (non-precedential).

While practitioners and observers of patent law seemed to agree that Alice didn’t spell doom for software and business method patents, it was clear that it did mark the end for patents that do nothing more than recite a generic computerized implementation of an abstract idea.

While it is true that a patent may be obtained for “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof” (link), the Supreme Court has held, in a series of decisions, that there is an implicit exception to the patent statute: laws of nature, natural phenomena, and abstract ideas are not patentable.

In Alice the Court held that “abstract ideas” are not patentable unless they contain an “‘inventive concept’ sufficient to ‘transform’ the claimed abstract idea into a patent-eligible application.” While the precise line between an impermissibly abstract idea and a patentable process remained undefined in Alice (and may never be fully defined), one thing seems clear: once an invention is identified as an abstract idea, a generic computer implementation of that idea is not patentable.

Planet Bingo filed its patent application in 2000, long before the decision in Alice, and it was awarded the patent in 2002. The  system described in the patent allows players to select their own numbers and store them for later use, allows players to print off game tickets at the Bingo-playing site with those pre-selected numbers, and enables Bingo hall operators to track and validate these sets of numbers.

Higgins & Jeong

However, obtaining a patent and enforcing it are two different things, and Planet Bingo ran headlong into a defense of patent ineligibility when it brought suit to enforce the patent against a competitor in federal district court in Michigan in 2012 (apparently only one of many cases filed by Planet Bingo). The federal district court declared the patent invalid under the Federal Circuit’s holding in Alice, and the Supreme Court’s 2014 decision in Alice sealed Planet Bingo’s fate when it appealed to the Federal Circuit.

In one of the first of what is likely to be many cases invalidating patents under Alice the Federal Circuit identified the steps set forth in the patent as an abstract idea because they are “mental steps which can be carried out by a human using pen and paper.” Furthermore, the Federal Circuit observed, these steps  can be “carried out in existing computers long in use.” The patent lacked the “inventive concept” essential to transform the patent’s ideas into a patent eligible invention. Accordingly, the patent was held invalid.

For a similar case invalidating a patent that claimed a system of computerized meal planning which the court described as a “computer program that allows the user to create meals from a database of food objects, … to change those meals by adding or subtracting food objects, and to view the dietary impact of changes to those meals on a visual display,” see DietGoal Innovations LLC v. Bravo Media LLC (S.D.N.Y. July 8, 2014) (patent “recites nothing more than the abstract concept of selecting meals for the day, according to one’s particular dietary goals and food preferences”).  This case also includes a helpful summary of the evolution of patent-eligibility in the Supreme Court from 1972 to 2014.

Seventh Circuit Finds That Copyright Protection for Sherlock Holmes "Character" Has Expired

It may come as a surprise to some readers that fictional characters are protected by copyright law.  Even if the actual words used to describe a character are not copied, a “well delineated” or “especially distinctive” character may  receive copyright protection. Prominent examples from decided court cases include Rocky (under-appreciated, sullen, heroic boxer) and James Bond (British accent, tuxedos, “license to kill,” “stirred not shaken”). Unlike stock/stereotypical characters, Rocky and Bond have specific character traits and characteristics that entitle their creators (or owners) to claim copyright in these fictional characters. The more the character has unique, identifiable traits and plays a central role in the work in which the character appears, the stronger the copyright protection permitted by the courts. (If you’ve seen Guardians of the Galaxy, “Rocket Raccoon” is a classic example of a protectible character).

Who then, could be more entitled to a “character copyright” than the solitary, tobacco and cocaine-loving, deductive genius-detective Sherlock Holmes, one of the most popular and enduring fictional characters of the last century?* Clearly this character, as conceived by Sir Arthur Conan Doyle in works published between 1887 and 1927 meets this legal standard.

*[note] And don’t forget Dr. John H. Watson, who also was almost certainly a copyright-protected character.

Today, whatever copyright remains in the 56 stories and 4 novels published by Conan Doyle featuring Sherlock Holmes is owned by the Conan Doyle Estate, Ltd., and the Doyle Estate has in the past, quite properly, sought royalties for the publication of these works and use of the Holmes character. However, under U.S. copyright law the copyright in the 4 novels and 46 of the 56 stories (all published before 1923) have expired, leaving only the 10 post-1923 stories covered by U.S. copyright protection.

Enter Leslie Klinger, who sought to publish an anthology of contemporary stories that used the Holmes “character.” The Doyle Estate made it clear that if he did this it would lead to legal action; the Estate took the position that because 10 stories were still under copyright, its copyright in the Holmes character continued to be protected by copyright. Klinger couldn’t get his anthology published with this legal threat hanging over him, so he brought suit to challenge the Estate, and the case ended up before a 3-judge panel of the Seventh Circuit Court of Appeals. The decision, which concluded that the Holmes’ character had entered the public domain by reason of the pre-1923 publications, was written by the inimitable Judge Richard Posner, an erudite, famous (among legal-types) 7th Circuit  judge.

Klinger’s argument was simple: if the character was created in the pre-1923 works and those works had entered the public domain, the Holmes character was also in the public domain. The Doyle Estate argued to the contrary, asserting that Holmes was a “complex” character  whose full complexity was not revealed until the post-1923 stories were published, and therefore the character should remain under copyright until those stories enter the public domain. In other words, because the Holmes character continued to be developed after 1923 his character remains under copyright protection. The Doyle Estate also described this as the difference between a “round” and a “flat” character, characters that evolve in a series of works (round characters) and those who do not (flat characters).

The Seventh Circuit didn’t come close to buying the Doyle Estate’s argument. While some minor aspects of Holmes’ character evolved in the post-1923 works (for example, he developed a more favorable attitude toward dogs), at most these new features in the in-copyright stories would be protected.  However, this would not serve to extend the copyright in the character features published in the works that are now out of copyright and in the public domain:

From the outset of the series of Arthur Conan Doyle stories and novels that began in 1887 Holmes and Watson were distinctive characters and therefore copyrightable. They were “incomplete” only in the sense that Doyle might want to (and later did) add additional features to their portrayals. The resulting somewhat altered characters were derivative works, the additional features of which that were added in the ten late stories being protected by the copyrights on those stories. The alterations do not revive the expired copyrights on the original characters.  . . .

With the net effect on creativity of extending the copyright protection of literary characters to the extraordinary lengths urged by the estate so uncertain, and no legal grounds suggested for extending copyright protection beyond the limits fixed by Congress, the estate’s appeal borders on the quixotic. The spectre of perpetual, or at least nearly perpetual, copyright … looms, once one realizes that the Doyle estate is seeking 135 years (1887-2022) of copyright protection for the character of Sherlock Holmes as depicted in the first Sherlock Holmes story.

This, however, was not the end of the matter. Mr. Klinger sought the attorney’s fees he incurred in defending against this appeal, and in a decision dated August 4, 2014, the Seventh Circuit (again in an opinion written by Judge Posner), awarded him approximately $30,000 in fees. It is well known that Judge Posner is critical of owners of intellectual propertty who extort small sums from defendants who may not be infringing, but who chose to pay a small amount in settlement rather than a large sum for a successful defense. Judge Posner, writing for the same 3-judge panel, stated -

The Doyle estate’s business strategy is plain: charge a modest license fee for which there is no legal basis, in the hope that the “rational” writer or publisher asked for the fee will pay it rather than incur a greater cost, in legal expenses, in challenging the legality of the demand. … [Klinger] performed a public service—and with substantial risk to himself, …. The willingness of someone in Klinger’s position to sue rather than pay Doyle’s estate a modest license fee is important because it injects risk into the estate’s business model. As a result of losing the suit, the estate has lost its claim to own copyrights in characters in the Sherlock Holmes stories published by Arthur Conan Doyle before 1923. For exposing the estate’s unlawful business strategy, Klinger deserves a reward but asks only to break even. . . .It’s time the estate, in its own self-interest, changed its business model.

While Klinger won before the Seventh Circuit, this case may not be over – The Doyle Estate has indicated it intends to appeal to the U.S. Supreme Court.

Klinger v. Conan-Doyle Estate, Ltd. (7th Cir. June 16, 2014)(liability)

Klinger v. Conan-Doyle Estate, Ltd. (7th Cir. August 4, 2014) (attorney’s fees)

This case, decided by the Massachusetts Supreme Judicial Court on July 28, 2014, shows how difficult it can be to recover damages in a trade secret case. The facts (boiled down) are straightforward. Lightlab manufactures optical coherence tomography systems (OCT). Lightlab had a joint development/non-disclosure agreement with Axsun. Axsun disclosed Lightlab secrets to Volcano, a competitor to Lightlab and would-be acquiror of Axsun. Lightlab obtained a preliminary injunction enjoining the use of its trade secrets by Axsun and Volcano, and also enjoining Volcano’s acquisition of Axsun until after the Lightlab/Axsun agreement expired in 2014, more than five years later.

At trial Lightlab was able to obtain a verdict for trade secret misappropriation (and related claims) from a Massachusetts Superior Court jury.

However, the trial was bifurcated, and before presenting its damages case to the jury Lightlab first needed to run the gauntlet of expert disqualification thrown down by the defendants (Axsun and Volcano). It failed to do this – outside the presence of the jury the trial judge questioned Lightlab’s damages expert for three days, following which she disqualified the expert, leaving Lightlab with no damages case to present.*

*[note] In business and intellectual property cases damages are almost always established through the testimony of a damages expert.

Lightlab had some unfavorable facts to overcome in order to prove damages. The trial judge held Lightlab’s damages experts’ proposed testimony to be speculative (and therefore inadmissible) based on her findings that Lightlab -

  • had no profitable sales of its OCT device since it began sales in 1999
  • was unable to prove it had lost any sales as a result of the infringement

In addition to these key facts, Lightlab -

  • had no guaranteed funding from its parent company to develop the new version of its product that was the basis for the expert’s damages theory
  • had not (as of the time of trial in 2010) obtained FDA (or non-U.S.) regulatory clearance for its newest product
  • had not yet invented the new generation of its product that was the basis for the expert’s anticipated damages testimony

The trial court judge also found that the expert had performed no market study to support certain assumptions he made concerning Lightlab’s market share through 2038, the 28 year period for which the expert claimed to have calculated damages.

The trial judge closed out the case with no trade secret damages awarded to Lightlab. Lightlab appealed, and the Massachusetts Supreme Judicial Court (SJC) affirmed the trial judge’s decision

It is notoriously difficult for a start-up company such as Lightlab, which had no history of profitability, to recover trade secret damages based on “future” lost profits. In an important sense Lightlab was a victim of its own success – it obtained a preliminary injunction against the use of its trade secrets before the defendants could utilize them, so the defendants never profited directly from the misappropriation.

Given the early preliminary injunction and the factors listed above Lightlab was faced with a seemingly near-insurmountable challenge to recover damages. To overcome this obstacle Lightlab advanced some cutting-edge arguments, the most interesting of which was that as a result of the misappropriation Lightlab had lost the “first mover advantage.” The “first mover advantage” theory is not described in any detail by the SJC in the Lightlab decision, but it is described by Pearson Education as follows (link):

The basis of first-mover advantage is [that] by being the first to enter a new market, the business gains an advantage over its actual and potential rivals. . . . If the business is first into a market, so the thinking goes, it can establish what the military thinkers would call ‘defensible ground’. First, it can capture market share much more easily without having to worry about rivals trying to capture the same customers. Second, when the rivals do come along – as they inevitably will – the first-mover and its management team will have advantages in the ensuing competition, such as familiar products, brand loyalty, the best retail outlets, up-and-running distribution systems, and so on. By beating rivals into the market, the first-mover can consolidate its position and compete more effectively, not only defending its previously acquired share but even continuing to expand.

However, the SJC found that Lightlab was able to cite almost no judicial authority in support of this damages theory: “Significantly, [Lightlab's expert] acknowledged that nothing in the economic literature supports quantifying lost profits based on first mover advantage. … [The trial judge's] conclusion that [the expert's] use of first mover advantage in his methodology rendered that methodology incapable of being validated and tested was well within her discretion.”

Before closing out its opinion the SJC expressed its “concern” that traditional lost profits analysis may not be an adequate model for analyzing harm caused by misappropriation of trade secrets of a “start-up” business. “This fact,” the court stated, “should not render them ‘damage proof.’” The court stated that “other theories of damages may lend themselves to misappropriation of trade secret cases and that such theories may be ripe for testing in our courts.” However, the court did little to indicate what these “other theories” might be and, for Lightlab, this was too little too late.*

*[note] The court’s only citation in connection with this comment was to a 2002 ABA publication, “Enforcement of Trade Secret Rights and Noncompetition Agreements”, pp. 23-32 (link)

There are other important issues addressed in this opinion, not touched on here, relating to damages, the judge’s role in excluding expert witnesses and the scope of injunctive relief in trade secret litigation. Trade secret decisions from the Supreme Judicial Court are few and far between, so Lightlab will be closely studied in trade secret litigation in Massachusetts for many years to come.

Lightlab Imaging, Inc. v. Axsun Technologies, Inc. (SJC, July 28, 2014)

It’s difficult to read Aereo’s section of Aereo and ABC’s July 9, 2014 joint letter to the U.S. District Court without experiencing a good dose of disbelief.

Until the Supreme Court issued its decision in ABC v. Aereo on June 25, 2014 (earlier blog post on that decision), Aereo insisted that it was not a cable company entitled to a compulsory license under Section 111 of the Copyright Act (17 U.S.C. section 111(c)). Aereo denied it was a cable system in filings with the district court and in its brief to the Supreme Court. At oral argument Justice Sotomayer questioned whether Aereo was a cable company, and Aereo’s attorney responded -

Now, we are not a cable service. The reason we’re not a cable service is because cable takes all signals and pushes them down. There’s a head in. It’s defined by statute. There’s a very particularized regulatory structure that deals with taking a lot of content and pushing it down to consumers. Aereo is an equipment provider.

However, after the Supreme Court decision Aereo tried to change its stripes. In the July 9th letter it states:

The Supreme Court has now ruled that “having considered the details of Aereo’s practices, we find them highly similar to those of the CATV systems in Fortnightly and Teleprompter. And those are activities that the 1976 amendments sought to bring within the scope of the Copyright Act. … Accordingly, Aereo is entitled to a compulsory license under the Copyright Act, 17 U.S.C. § 111. And because Aereo is entitled to a license under Section 111, the transmissions Plaintiffs have sought to enjoin do not infringe Plaintiffs’ rights under the Copyright Act.

Aereo has been careful to follow the law, and the Supreme Court has announced a new and different rule governing Aereo’s operations last week. Under the Second Circuit’s precedents, Aereo was a provider of technology and equipment with respect to the near-live transmissions at issue in the preliminary injunction appeal. After the Supreme Court’s decision, Aereo is a cable system with respect to those transmissions. . . .

The Supreme Court’s holding that Aereo is a cable system under the Copyright Act is significant because, as a cable system, Aereo is now entitled to the benefits of the copyright statutory license pursuant to the Copyright Act, 17 U.S.C. § 111(c). Aereo is proceeding to file the necessary statements of account and royalty fees. By holding that Aereo is a cable system, the Supreme Court has overruled WPIX, Inc. v. ivi, Inc., 691 F.3d 275, 279 (2d Cir. 2012) to the extent it might apply to Aereo … .

The Supreme Court did not hold that Aereo is a cable system. “Highly similar,” for purposes of applying the public performance provision, yes. A cable system, no. Nor, as Aereo asserted in its letter to the court, did the Supreme Court “overrule” WPIX, Inc. v. ivi, Inc., 691 F.3d 275 (2d Cir. 2012), which held that “Congress did not … intend for § 111′s compulsory license to extend to Internet transmissions.”

It didn’t take long for the Copyright Office to point this out to Aereo. After the Supreme Court decision Aereo submitted royalty and filing fees of approximately $5,000 (about 1% of revenue) to the Copyright Office. In a July 16, 2014 letter the Copyright Office’s General Counsel, citing WPIX v. ivi, advised Aereo that “in the view of the Copyright Office, internet retransmissions of broadcast television fall outside the scope of the Section 111 license.”

To make matters worse (for Aereo), Aereo faces a double hurdle: under the federal Communications Act Aereo must negotiate and obtain “retransmission consent” from broadcasters, a process which, for reasons Jeff John Roberts explains on Gigaom, puts Aereo in an economically hopeless position.

Clearly, the decision-makers at Aereo are not fans of Kenny Rogers, or they would know it’s time to either walk away or to run.

It would be great to receive low-cost Internet access to broadcast television, but despite Aereo’s attempts to reinvent itself following the Supreme Court decision holding it to be a copyright infringer, it is extremely unlikely that service will come from Aereo.

 

Failure to Obtain or Properly File for Copyright Registration Dooms Plaintiffs in Alicea v. Machete Music

[catch-up post] The First Circuit issued an copyright law opinion in March addressing a number of issues related to copyright law. However, the unwritten lesson of this case is that artists need to obtain ownership rights in writing. Failure to do so led to the unfavorable outcome the plaintiffs experienced in this case.

Before attempting to describe this decision (or the most interesting aspects of it), it’s worth pointing out that the First Circuit judge who wrote the opinion not only began his opinion with the famous Mark Twain quote (“only only one thing is impossible for God: to find any sense in any copyright law on the planet”), but added the comment that “Twain’s deity would fare little better with the tangled skein of copyright and contractual claims presented by the plaintiffs in this case.”

The First Circuit judge’s comment may be an understatement. The confusing facts make the decision difficult to follow. However, in essence the plaintiffs (Massachusetts musicians and producers of “Reggaeton” music) alleged that seven songs which they jointly composed and performed were modified and distributed by the defendants on the “Erre XI” album (image above), infringing the plaintiffs’ copyrights in the compositions in the songs.

The plaintiffs’ problems with this claim appear to stem from the fact that there were multiple contributors to the musical works at issue, but the artists and producers didn’t bother to enter into agreements assigning clear ownership to any one participant (or group of participants). The plaintiffs then got tangled up in the complexities of registration with the Copyright Office, and were unable to extricate themselves in time, leading to dismissal of the case.

The plaintiffs obtained registrations on four of the works (more on that below), but they hit a seemingly insurmountable obstacle when they attempted to register the compositions for three of the songs. Two years after they had filed for registration the Copyright Office still was unable to determine if the deposited recordings of these three songs were acceptable to register the compositions, and refused to issue registration certificates.*

*[note] You can obtain a copyright in a composition by registering a notated copy (i.e., sheet music), or a phonorecord containing the composition. (link) In this case the plaintiffs attempted to obtain registrations based on phonorecords containing the compositions.

The reason for this refusal appears to be that that the plaintiffs had attempted to satisfy the copyright deposit requirement for compositions by submitting copies of the defendants’ allegedly infringing recordings rather than the plaintiffs’ original recordings, leading to no end of confusion at the Copyright Office.* Possibly (although the First Circuit opinion is unclear on this) the plaintiffs were unable to obtain the original recordings from the defendants.

*[note] The Copyright Office described the snafu as “whether a copy of an unauthorized track, that contains the original composition embedded in the track, can be used as deposit material.” The Copyright Office explained that “in general, an unauthorized copy cannot be used as deposit material.”

The district court granted defendants’ motion for summary judgment, finding that the plaintiffs had not satisfied the registration precondition of the Copyright Act, observing that not only had they not obtained registration certificates on the three compositions, but they have not even “shown that they had submitted all the necessary application materials for registration.”

The First Circuit declined, as it has in the past, to take sides in the “application versus registration” issue. That is, before filing suit for copyright infringement must a plaintiff have completed the registration process, or is it sufficient just to have filed an application for registration? The First Circuit observed that the circuits are split on “whether the registration requirement is satisfied at the time the copyright holder’s application is received by the Copyright Office (the ‘application approach’) or at the time the office acts on the application and issues a certificate of registration (the ‘registration approach’).” However, the court was unwilling to decide the issue in this case, noting that there was insufficient evidence to show that the plaintiffs had even met the requirements for an application. Thus, the plaintiffs lost on three of the songs based on their failure to obtain a registration certificate or file a proper application.

Why did the plaintiffs lose on the four songs on which they did obtain registrations? Because, as the First Circuit explained, a musical composition and a sound recording of that composition are separate works, with their own distinct copyrights. Under the arcane registration requirements of the Copyright Office, a musical composition and a sound recording may be registered in a single application only if ownership of the copyrights in both is exactly the same, a requirement the plaintiffs admitted they could not satisfy in this case. Accordingly, the four recordings on which the plaintiffs did obtain registration were invalid.

The plaintiffs’ ineffective pleading appears to have contributed to the unfavorable outcome here. When, on appeal, the plaintiffs argued for a copyright on the sound recordings, the First Circuit noted that the allegations of the complaint were limited to the compositions. When the plaintiffs argued that the works were entitled to joint ownership, the First Circuit noted that the complaint failed to adequately allege a claim of joint ownership.

The case, which also addresses breach of contract, Lanham Act and other miscellaneous issues, is linked below.

Alicea v. Machete Music, 744 F.3d 773 (1st Cir. 2014)

Supreme Court Ends Aereo’s Technology-Driven Attempt to Disrupt the Traditional Network TV Model

[Cross-post from BostInno]

In the end Aereo’s dime-sized antennas and subscriber-specific copies of television broadcasts – its “Rube Goldberg” attempt to find a loophole that would allow it to stream TV over the Internet – were not enough to win over a majority of the Supreme Court.

On June 25, 2014, the Supreme Court held that Aereo’s streaming service violated the exclusive right of copyright owners to “publicly perform” their works. Aereo had used diabolically clever technology (or so the broadcasters claimed) in its attempt to avoid this outcome, which seems very likely to force Aereo out of business.

As I have described in detail elsewhere, Aereo’s system – which would have been unimaginable and cost-prohibitive only a few years ago – relied on thousands of antennas and massive, low-cost hard disk storage. Advances in antenna technology allowed Aereo to assign a separate micro-antenna to each paid subscriber. The plummeting cost of digital storage allowed Aereo to save a separate copy of each broadcast transmission for each subscriber that wanted to save a copy.

Aereo’s argument was that for any singe subscriber this was no different (legally speaking) than accessing a broadcast using a rooftop TV antenna connected to a DVR in the living room. In effect, Aereo claimed, each subscriber had outsourced the antenna and the remote DVR to Aereo’s central facility, and Aereo was no more than an equipment supplier.

And, Aereo argued, nothing was accessed or copied unless the consumer initiated access and decided to watch or save a show. In other words, Aereo didn’t collect TV shows and provide a ready-to-access “TV jukebox” the consumer could choose shows from, à la Netflix. If none of Aereo’s subscribers initiated a copy of the “Barney and Friends,” broadcast at 3:00 a.m. on WNET in New York (one of the plaintiffs in the case), it would never be accessed, saved or streamed by Aereo. It was the “volitional conduct” (an esoteric copyright law buzz-phrase) of the subscriber that caused a copy to be made and transmitted, just as it is the volitional conduct of a library patron that causes a photocopy of a copyrighted work to be made on a library photocopier. Aereo argued that it should be no more liable for what its subscribers do with the equipment than is a library with a copy machine on its premises (libraries are not legally responsible for illegal copying by their patrons).

Further, Aereo argued, the fact that it may have transmitted 10,000 personal copies of a World Cup soccer match didn’t constitute a public performance under the Copyright Act, since each transmission was viewed by only one subscriber, not the “public.”

These arguments were enough to persuade the Second Circuit Court of Appeals in New York (a court many lawyers view as the most knowledgeable and influential of the federal courts when it comes to copyright law), but it didn’t pass muster with the Supreme Court (although three justices dissented, agreeing with Aereo). The Court was unimpressed with the technological details that had occupied the lower courts that had ruled in favor of Aereo, observing that it “did not see how the fact that Aereo transmits via personal copies of programs” makes a difference under the copyright statute. Likewise, the Court rejected Aereo’s argument that transmitting a performance means to make a single transmission, holding that Aereo was transmitting a performance through a “multiple, discrete transmissions.”

Drawing heavily on Congress’ 1976 amendment to the copyright statute intended to bring cable TV companies within the definition of “public performance,” the Supreme Court concluded by analogy that Aereo’s “is not simply an equipment provider . . . that Aereo’s activities are substantially similar to those of the CATV companies that Congress amended the Act to reach.” And, because the fit between the 1976 law and Aereo’s technology was so imperfect, the Court was forced to fall back on what it described as the “overwhelming likeness to the cable companies targeted by the 1976 amendments” and conclude that the technological differences between Aereo and the cable companies “does not make a critical difference.”

Fundamentally, the Court focused on Congress’ regulatory objectives, and on this basis considered Aereo’s technological system of dedicated antennas and personal copies as “not adequate to place Aereo’s activities outside the scope of the Act,” a conclusion the dissent described as a “looks-like-cable-TV” (or“ guilt by resemblance”) standard that will “sow confusion for years to come” and is “nothing but th’ ol’ totality-of-the-circumstances test (which is not a test at all but merely assertion of an intent to perform test-free, ad hoc, case-by-case evaluation).”

*           *           *

There is no question that had Aereo won before the Supreme Court it would have been a huge upset, and the fourth estate would be doing somersaults. As it is, the outcome was largely anticipated by the small group of lawyers, academics and commentators that paid close attention to the legal arguments made by each side. While most of us prefer to see David defeat Goliath, it has always seemed unlikely that the networks’ $3 billion-plus annual licensing revenues would be weakened by Aereo or Aereo clones.

However, questions remain over what the Court’s ruling (and reasoning) will mean for the delivery of television programming, cloud computing or service-provider liability. Is the dissent correct when it warns that  it “will take years, perhaps decades, to determine which automated systems now in existence are governed by the traditional volitional-conduct test and which get the Aereo treatment. (And automated systems now in contemplation will have to take their chances)”?

The answer to these questions is, of course, that it’s far too early to tell. For better or worse, the Supreme Court was careful to emphasize that its decision was limited to the “technologically complex” system engineered by Aereo: “we cannot now answer more precisely how the Transmit Clause or other provisions of the Copyright Act will apply to technologies not before us.”  Even so, the Court was careful to note that its decision didn’t reach remote storage (“cloud locker”) services where consumers are able to store digital copies they “have already lawfully acquired.”

Nevertheless, start-ups involved in the delivery of television programming will have to ask whether they cross the line set by Aereo: are they merely an equipment provider (and not liable for direct infringement) or a cable TV look-alike that falls on the wrong side of the line between legality and illegality?

The Supreme Court did little to help companies answer this question, and there may be real concern that Aereo will discourage investment in alternatives to traditional television programming. One thing that seems certain is that any almost every investor in a television technology company will have to ask whether the business plan passes the “Aereo test,” i.e., is copyright compliant. Remote service DVR (“RS-DVR”) services, in particular, may need to reexamine the legality of their services following this decision. Commentators have already questioned whether Aereo has implications for the legality of in-line streaming and in-line linking of images, and noted that regardless of whether the answer is yes or no, the case is likely to raise litigation costs, and thus indirectly chill innovation.

With respect to non-broadcast TV content — for example, the “cloud computing industry” and “cloud lockers” that were the subject of concern expressed by some Justices during oral argument before the Court — it seems unlikely that there will be any implications, at least in the short term, for the reasons described in my post titled Aereo and the Cloud Before the Supreme Court, written just before the Supreme Court decision was issued. Most cloud services provide access to content they own or license, or store files that consumers have already lawfully acquired, a practice the Supreme Court noted was not impacted by its decision. And, cloud services that host third-party content are largely protected (although not entirely) by the Digital Millennium Copyright Act.

However, copyright law inevitably lags technological development, creating a seemingly never-ending state of uncertainty over how the law will be applied to new technologies. Indeed, Aereo itself illustrates this – the Supreme Court was called on to apply a statute enacted in 1976 to a technology that could not have been envisioned by Congress until decades later. What unintended consequences Aereo might have for innovation and investment in content-delivery and content-storage technologies yet to be invented or imagined is anyone’s guess.