We’ve been following the lower courts’ interpretation and application of eBay v. MercExchange since the case was decided by the Supreme Court in May 2006. In eBay the Court held that post-judgment injunctions were not “automatic” for successful patent plaintiffs, but rather that the trial court had to apply the traditional equitable test to determine whether an injunction or ongoing royalties were the appropriate remedy.

In June I gave a presentation at Massachusetts Continuing Legal Education on developments in this area in the two years since the decision. (Warning - the Powerpoint won’t make a lot of sense without the voice-over, but it gives some idea of the landscape).

As I discussed then, a constellation of issues was forming around the question of how to assess future royalties if it is determined that this was the appropriate remedy after final judgment. By then, of course, the jury has gone home. Was it up to the judge to determine the royalty? Would there be a new trial (jury or otherwise) on this issue alone? Would the pre-judgment royalty be used for future royalties (as some courts have done)?

Not surprisingly, a U.S. District Judge in the Eastern District of Texas has taken the first real “shot” at this issue. In early August Federal District Court Judge Clark issued an order in several cases, advising the parties that he expected the issue of future royalties to be tried with liability and past damages. He stated:

Should an injunction issue, a jury finding on a future royalty could be used to set a reasonable amount to be paid into escrow during the period of any stay which might be granted. If an injunction is not warranted, the jury verdict might be used by the parties as one factor in agreeing on a license, or by the court in arriving at an ongoing royalty rate for a compulsory license. In either case, time and expense can be saved by having the damages experts testify once, rather than hold a separate mini-trial on the issue of future damages post-verdict. This procedure would encourage the experts to keep their testimony about past and future damages logically consistent, and to give reasons for any differences.

Judge Clark explained that this procedure would not automatically result in an award of future damages in the amount advised by the jury (as described by the judge, the jury’s findings are not binding on the court), or be determinative in any way of the decision whether to issue an injunction or award future royalties.

Although this procedure would add another dimension of cost and complexity to a patent trial, it may make sense where there is a reasonable likelihood that future royalties (rather than a permanent injunction) will be the final remedy.

However, one would hope that a trial judge would not impose this procedure in cases where a preliminary determination concludes that the likelihood of future royalties is weak (for example, as in the case of direct competition between the patent holder and the defendant). It’s worth watching to see whether this approach catches on with other judges in the EdTX and in other districts, and if so how it evolves.

Damages experts must be sharpening their pencils and working overtime this summer ….

Here is a link to the slides used by Dr. Irving Wladawsky-Berger (Chairman Emeritus of the IBM Academy of Technology) in his talk entitled Cloud Computing and the Coming IT Cambrian Explosion. This was presented at Xconomy’s Cloud Computing event in Cambridge in June.

While there is no audio, I think the slides communicate the message loud and clear. A favorite expression of mine is “important if true.” On these predictions, I will say “important if prescient.”

U.S. District Court Judge William Young’s recent decision in Talentburst, Inc. v. Collabera, Inc. is worth study. Talentburst is the former employer of Raj Pallerla. While employed by Talentburst, Pallerla signed a noncompete agreement with Talentburst. He then resigned and went to work for Collabera, Inc. For ease of reading I’ll refer to these three parties as Former Employer, New Employer and Employee.

When the Former Employer discovered that its Employee had gone to work for New Employer, it pursued an unorthodox legal strategy: rather than sue the employee for breach of the noncompete agreement, it sued only the new employer, alleging that the New Employer had “aided and abetted” a breach of fiduciary duty by the Employee. It also claimed that by hiring the Employee the New Employer “interfered” with the noncompete contract. The case was filed in Massachusetts Superior Court, but the Former Employer was able to “remove” it to federal court (based on diversity jurisdiction). To the Former Employer’s misfortune, the case was drawn by Judge Young, who was almost certain to give the case closer scrutiny than it would have received in state court.

The Former Employer filed a motion to dismiss, which is usually a long shot. However, Judge Young allowed the motion and dismissed the suit on the basis of the complaint alone. In his decision Judge Young reasoned that the Employee, who was a non-managerial “worker bee,” did not owe a fiduciary duty to his employer. The New Employer could not have interfered with a non-existent fiduciary duty, and therefore this claim failed.

As to the tortious interference claim, the judge zeroed in on the requirement of “improper means or motive.” Mere advancement of one’s economic interests is not, however, “improper,” and since the Frmer Employer couldn’t make anything more than a “generalized” allegation of improperness, this claim failed as well.

I have a few observations about this case.

First, in addition to Massachusetts appellate precedent, Judge Young relied heavily on “unpublished” Superior Court decisions (using Westlaw citations when available). I can’t think of a federal district court decision that has made as much use of Massachusetts trial court decisions as this one. However, Judge Young is a former Massachusetts trial court judge, and he often expresses his great respect for that court. The use of state court decisions is also a function of the Business Litigation Session, which has produced many more written decisions than other sessions of the trial court.

Second, Judge Young rejected the Former Employer’s argument that it was not required to make anything more than a generalized allegation of improper means/motive at the pleading stage, holding the plaintiff to the higher pleading standard established by the Supreme Court in the Bell Atlantic v. Twombly decision in 2007.  As noted here, this standard has now been adopted by the Massachusetts Superior Court as well.  Although Twombley was an antitrust case, this is another example of its broad application, extending here so far as to bar a state tort claim; before Twombley, this case likely would have survived dismissal.  It probably would have survived dismissal if it had remained in state court.

Third, and lastly, what the plaintiff/Former Employer had in mind when it sued the New Employer but not its Former Employee (against whom it appears it had the stronger claim) continues to elude me, but the strategy clearly back-fired in a major way.

Bottom line: This case is important precedent in the area of employee breaches of fiduciary duty, by reason of its careful legal analysis, and the gravitas of the judge who authored it, and the case should be part of every business lawyer’s legal arsenal.

“Trust me, this is huge.” Larry Lessig

My partner Andy Updegrove has written a post discussing Jacobsen v. Katzer. In a nutshell, theCAFC upheld an open source copyright license, pointing to the work of Creative Commons and others. As Andy discusses, this is an important decision for the open source movement.

Update: Here is a link to a thoughtful post discussing whether this decision might have the unexpected effect of tipping the scales (in favor of licensors) on the legal enforceability of license provisions prohibiting reverse engineering of software: Be Careful What You Wish For: How the Jacobsen v. Katzer Decision Could Hurt the Free Software Movement

Let me tell you the story
Of a man named Charlie
On a tragic and fateful day
He put ten cents in his pocket,
Kissed his wife and family
Went to ride on the MTA

Charlie on the MTA (Jacqueline Steiner and Bess Lomax Hawes, 1949)

_____________________

U.S. District Judge O’Toole has his hands full with this one.  Here’s the quick and dirty:

In 2006 the Boston MBTA released the “CharlieCard,” a passcard containing an integrated chip that allows riders of the “T” (the nation’s oldest subway) to store value for rides.

Two weeks ago Anderson, Ryan and Chiesa, three MIT students, announced that they had hacked the CharlieCard, and would present their results at DEFCON 16, scheduled for August 8-10 in Las Vegas.  Their presentation slides, titled “Anatomy of a Subway Hack” were published in advance of DEFCON.

This upset the T, which filed suit in federal court in Boston on August 8th.  What passes for legal fireworks ensued - the T’s complaint, along with other public pleadings in the case, are available on the Justia web site.

Before filing suit the T reportedly asked the students not to disclose their research until the T had a chance to fix the security flaw.  Apparently, the students and the T were unable reach agreement acceptable to the T.  The T’s lawsuit sought a temporary restraining order (translation: an temporary emergency order on very short notice) that would prevent disclosure of the students’ research at DEFCON.

The T’s main legal thrust was the Computer Fraud and Abuse Act (CFAA), a complex 1986 criminal and civil federal law that makes it illegal to access a computer without authorization; in essence, a federal anti-hacking law.  The T alleged that the students’ action violated this statute, and represented a threat to public health or safety, as well as national security. The T argued that it was entitled to a temporary halt to disclosure under the so-called “responsible disclosure” doctrine. (A “doctrine” which, as far as I can tell, has no legal precedent, but appears to state that if a computer security flaw is discovered, the discoverer should give the owner a chance to fix it before disclosing the flaw to the public).

Judge Woodlock, who handled the emergency motion, was persuaded; he entered a temporary restraining order on August 9th, ordering the students not to disclose their knowledge.

The case, assigned to Judge O’Toole, quickly became a cause célèbre, and within no time the ACLU and the San Francisco-based Electronic Frontier Foundation came to the defense of the students.   Time, however, waits for neither man nor lawyer, and before the EFF and the ACLU were able to persuade Judge O’Toole to lift the gag order, DEFCON 16 had concluded.

Legal commentators and computer scientists have commented on this case by the hundreds in the short week since it was filed, and the status of the case today is likely to be different by tomorrow.  Therefore, I’ll zero in on my first thought after hearing about this case, and that was “prior restraint.”  If the Supreme Court had refused to enjoin publication of the classified study “History of U.S. Decision-Making Process on Viet Nam Policy” by the New York Times and the Washington Post in 1971 on grounds that the injunction requested by the government in that case was a prior restraint in violation of the First Amendment (the “Pentagon Papers” case), how could the T restrain the MIT students from publication of their study?  Did the CFAA permit a court to supress academic speech?

In fact, the CFAA makes only one reference to injunctions:

Any person who suffers damage or loss by reason of a violation of this section may maintain a civil action against the violator to obtain . . . injunctive relief or other equitable relief.

A “violation,” however, is unauthorized access of a computer (legalese for hacking) - it does not make illegal a publication (academic, scholarly or otherwise) telling others how to access a computer without authority.  I am oversimplifying a bit, but my basic point holds true - the statute does not appear to make the conduct of the MIT students illegal.  In addition, it’s not clear how the students’ hack of an MBTA payment card could threaten national security, unless the prospect of riding the T for free might somehow encourage terrorists to use the T.

The bottom line: regardless of how this case turns out, it appears that the injunctions entered against disclosure were improper, and possibly unconstitutional as a prior restraint not authorized by federal law.

Note:The EFF has created a web page for the case (as it typically does when it enters a case) containing all pleadings and background information on the case and it’s rapid-fire developments.  The Wikipedia page for the
case is here.

Litigation takes the place of sex in middle age.
Gore Vidal

I wrote in some detail almost two years ago about how trials can be very bad for clients. In the linked article I wrote:

Sadly, too many lawyers (you hear their ads on the radio and see them in the legal journals - “courtroom lawyers,” “trial lawyers”) are often as willing to take their clients to trial as generals are to commit their troops to battle.

Now, a study reported in the New York Times seems to find empirical confirmation for this. I quote from the article, linked here:

Note to victims of accidents, medical malpractice, broken contracts and the like: When you sue, make a deal.

That is the clear lesson of a soon-to-be-released study of civil lawsuits that has found that most of the plaintiffs who decided to pass up a settlement offer and went to trial ended up getting less money than if they had taken that offer. . . .

In just 15 percent of cases, both sides [plaintiffs and defendants] were right to go to trial — meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered. . . .

Critics of the profession have long argued that lawyers have an incentive to try to collect fees that are contingent on winning in court or simply to bill for all the hours required to prepare and go to trial. . . .

“Most of the time, one of the parties has made some kind of miscalculation or mistake,” said Jeffrey J. Rachlinski, a law professor at Cornell who has studied how lawyers and clients decide to go to trial . . . .” The findings suggest that lawyers may not be explaining the odds to their clients — or that clients are not listening to their lawyers. . . .

Law schools do not teach how to handicap trials, nor do they help develop the important skill of telling a client that a case is not a winner. Clients do not like to hear such news.

Human nature being what it is, I don’t expect this too change anytime soon. After all, the fact that social scientists report that people tend to buy stocks when they’re high and sell them when they’re low doesn’t seem to affect most investors; the fact that half of all marriages end in divorce doesn’t seem to cause people to hesitate before getting married; and the fact that the odds favor the casinos doesn’t stop people from betting at the casinos. And so it goes ….

If my partner Andy Updegrove (he’s the one on the right) is not the most knowledgeable lawyer on the planet about ODF/OOXML standard adoption issues (1,2,3), I would be more than a little surprised. Here is a Q & A with Andy that Redmond Developer News has published, where he discusses the ongoing appeals process related to these standards. A link to the article on scribd.com is below, and here is a link to the article online. If you know absolutely nothing about this controversy, click here to read several articles Andy has published on the topic.

In January 2007 I wrote:

Bill Patry, Senior Copyright Counsel at Google (how’s that for a great job), emailed me and asked me to mention the publication of his new copyright treatise, Patry on Copyright.

I like the fact that Mr. Patry said this about his 5,800-plus page, $1500 treatise: “ The book is also chock full of wikipedia references, anecdotes, riffs on logic, congitive linguistics, etc. It is many books in one.”

Although I haven’t seen this treatise yet, I hope that it is a change from Nimmer on Copyright, which is so densely academic as to often be unusable by practitioners. Somehow, I doubt that we’ll ever see Nimmer referencing Wikipedia.

On Friday, August 1, 2008, Bill Patry wrote as follows. I excerpt from the full post, here -

I have decided to end the blog, and I owe readers an explanation. There are two reasons.

1. The Inability or Refusal to Accept the Blog for What it is: A Personal Blog

. . . While in private practice I never had the experience of people attributing my views to my firm or to my clients. I moved from private practice to Google I put a disclaimer to the effect that the views in the blog (as in the past) were strictly mine. . . .

For the first year after joining Google, . . . people honored the personal nature of the blog, but no longer. . . . The inevitable opening sentence now is: “William Patry, Google’s Senior Copyright Counsel said,” . . . There is nothing I can do to stop this false implication that I am speaking on Google’s behalf. . .

In the end, I concluded that it is no longer possible for me to have a blog that will be respected for what it is, a personal blog. . . .

2. The Current State of Copyright Law is too depressing

This leads me to my final reason for closing the blog which is independent of the first reason: my fear that the blog was becoming too negative in tone. I regard myself as a centrist. I believe very much that in proper doses copyright is essential for certain classes of works, especially commercial movies, commercial sound recordings, and commercial books, the core copyright industries. I accept that the level of proper doses will vary from person to person and that my recommended dose may be lower (or higher) than others. But in my view, . . . we are well past the healthy dose stage and into the serious illness stage. . . . Copyright law has abandoned its reason for being: to encourage learning and the creation of new works. Instead, its principal functions now are to preserve existing failed business models, to suppress new business models and technologies, and to obtain, if possible, enormous windfall profits . . .

So between the inability or refusal of some people to accept the blog for what it is — a personal blog — and my inability to continue to be Cassandra, I decided it was time to pull the plug. . . . I intend to spend my free time figuring out a constructive way to talk about the difficult issues we face and how to advance toward their solution.

I have read and enjoyed this blog religiously for the last 18 months, and I am saddened. Oh, and p.s.: our firm does subscribe to Patry’s treatise now, and although Nimmer is still on the shelves, we are no longer purchasing updates.

“[Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space. Eliminating them means eliminating this threat forever, or almost forever.”
- John P. Mackey, co-founder and chief executive of Whole Foods, in 2007 email to Whole Foods Board Member. Mr. Mackey also posted on Internet message boards under the pseudonym Rahodeb for seven years, ending in 2006

Every man is his own greatest enemy, and as it were his own executioner.
- Sir Thomas Browne, Religio Medici

[UPDATE: Whole Foods has, expectedly, requested rehearing en banc.  Low chance of success, but low cost, so no real harm in trying.  Note that the D.C. Circuit has now denied the FTC's request for rehearing en banc in the FTC/Rambus litigation, so the FTC will either have to live with that decision, or seek Supreme Court review.]

My wife loves Whole Paycheck. Even though the nearest Paycheck is a 20 minute drive from our home outside of Boston, and the really good (huge) Paycheck is 30 minutes away, she is reluctant to buy fruit or meat anywhere else. Shaws, which is right around the corner? forget it. Roche Bros., the next nearest supermarket? Boxed cereal, if they’re lucky. In fact, half the time my wife calls Paycheck “Bread & Circus,” the name of the original chain which Paycheck acquired in 1992. My soon-to-be 90 year old mother, who lives quite near a Paycheck that began as a Bread & Circus, won’t call it anything else.

When I go to Whole Paycheck, I assume that the minimum charge will be $100. For some reason, it’s almost impossible to get out of Paycheck for less than that. It’s like some obscure law of nature, or a function of consumer brain-washing, or both. At Shaws or Roche Bros., it’s actually an effort to break thirty bucks. But Paycheck, ahhh … The food is so exotic. It’s so beautifully displayed. That $40/pound goat cheese they are taste-sampling is so delicious, and after all, you only live once. For foodies, shopping at Paycheck is almost a religious experience. And by the way, I ain’t no foodie.

The only competition to Paycheck in the greater Boston area that I can think of is Trader Joe’s (which has around 300 stores nationwide), but frankly Paycheck is in a completely different class than Joe’s. In fact, the more I think about it, the more I’m inclined to say that Joe’s competes with Paycheck only when it comes to “dry grocery items” (chips and snacks) and frozen foods, and not in the key areas of meat, fish, bakery goods, fruits and vegetables.

Wild Oats Market? Never shopped there, and never heard of it before its merger with Paycheck last year. According to this site, which maps all Wild Oats locations, the closest Wild Oats stores are in Saugus and Medford, way outside of my family’s travel zone.

Now to antitrust.

Paycheck has a voracious appetite. Since its single-store start in Austin, Texas in 1980, it has swallowed up 15 other natural foods grocery chains, and by early 2007 it operated almost 200 stores nation-wide. Wild Oats operated over 100 stores, and was the U.S.’s second largest “natural foods” chain. In February 2007 Paycheck announced that it would acquire Wild Oats for $65 million, resulting in a natural food store behemoth 300 stores strong. (If you think I’m being facetious, you’re right).

The proposed merger triggered a Hart-Scott-Rodino filing, which gives the Federal Trade Commission the authority to investigate certain mergers and challenge them under Section 7 of the Clayton Act, which prohibits mergers or acquisitions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”

The FTC did challenge this merger. It’s position, summarized by the D.C. Court of Appeals, was -

. . . Whole Foods and Wild Oats are the two largest operators of . . . premium, natural, and organic supermarkets (“PNOS”). Such stores “focus on high quality perishables, specialty and natural organic produce, prepared foods, meat, fish and bakery goods; generally have high levels of customer services; generally target affluent and well educated customers [and] . . . are mission driven with an emphasis on social and environmental responsibility.” . . . In eighteen cities . . . the merger would create monopolies because Whole Foods and Wild Oats are the only PNOS.

The FTC attempted to block the acquisition pending its proceedings, but the U.S. District Court denied the FTC’s request for a preliminary injunction barring the merger. The D.C. Circuit denied an emergency motion requesting the injunction, pending appeal. With no legal obstacles, the merger was consummated in August 2007.

On July 29, 2008 the U.S. Court of Appeals for the D.C. Circuit issued a 40 page 2-1 decision (including the concurrance) reversing and remanding the case to the District Court.

The critical question on appeal was whether the economic impact of the acquisition should be measured against Paycheck’s core customers, and whether the District Court judge erred by failing to recognize this group as a relevant sub-market worthy of antitrust protection. I prefer to call the Paycheck core customers latte-drinking, Volvo-driving, NPR-listening, Birkenstock-wearing, New York Times-reading, natural/organic food-eating liberals, or “tofu-niks” for short. The District Court judge over-focused on Paycheck’s marginal customers. I prefer to call these customers McDonald’s-eating, Dunkin Donuts Coffee-drinkin, beef-loving, conservatives, or “beef-niks” for short. The tofu-niks shop at Paycheck religiously, and consider Paycheck to be only a step removed from their church or temple; the beef-niks go there to grab a gallon of milk or some apples only when a trip to Star Market is inconvenient. They mumble their response when the cashier gives them the standard Paycheck full eye-contact friendly greeting.

When it comes to mergers, as in many areas of antitrust law, how you define the market is everything. If Paycheck’s product market was grocery stores that catered mostly to beef-niks, in other words it was basically a conventional supermarket, it didn’t have a large market share and it’s acquisition of Wild Oats was not likely to negatively impact competition. However, if Paycheck and Wild Oats comprised a distinct market that catered to a sub-market of tofu-niks, competition in that “core” market might be threatened by the acquisition, at least in the 18 cities identified by the FTC, and the FTC may have the right to bar the acquisition.

The district court defined the product market broadly to include both groups, and therefore allowed the merger to proceed. The D.C. Circuit disagreed, and held that there is a core group of customers (the tofu-niks), and when this group is considered the market can be defined narrowly. Therefore, the merger was properly challenged by the FTC, and should have been preliminarily enjoined to allow the FTC to conduct a full administrative hearing. To reach this decision the D.C. Circuit’s opinion is filled with the opinions of competing economists, and enough economic jargon to set the average Paycheck customer’s head spinning - “small but significant non-transitory increases in price” or SSNIP, “critical loss analysis” and so forth. And, of course, any opinion by an economist is subject to scathing criticism by another economist, so the decision and dissent are filling with polite academic cross-invectives.

Where does the case go from here, given that the merger was completed almost a year ago? The cage-free hen-hatched, antibiotic-free, hormone-free, omega-3 enriched organic eggs have, so to speak, have been scrambled. (sorry …)

The FTC could, after further administrative proceedings, attempt to force Paycheck to divest itself of the stores where competition was the most affected (some or all of the 18 markets it had identified when it chose to challenge the acquisition) and re-establish competition in those areas. According to the decision, there were a limited number of markets where competition was most affected. However, one wonders how that would be implemented given that the operations of the two companies have been combined, and it may not be possible for Wild Oats to reestablish itself. I suspect that lawyers at both the FTC and at Paychecks’ law firms are scratching their heads in puzzlement. And after all, the FTC doesn’t want to actually hurt former Wild Oats tofu-niks who have converted to Paycheck, does it?

Oh yes, as mentioned, one of the three appellate court judges dissented, arguing that there really isn’t a core market for Paycheck’s customers, and that for purposes of merger analysis the market definition should be all supermarkets, not just “organic” supermarkets. He argued that the economic evidence supported the conclusion that “organic” and “conventional” supermarkets compete for the same customers, and therefore the district court judge’s decision should be affirmed.

Obviously, he doesn’t shop at Whole Paycheck.

Stay hungry.

In November 2005 I wrote an article about Google Book Search and the legal efforts of copyright owners to stop Google from achieving its goal of digitizing the world’s books and making them searchable on Google. The lawsuit filed by the Author’s Guild described there has dragged on with little visible activity and no apparent end in sight, but in the meantime Google has been digitizing books like nobody’s business. Although Google won’t disclose how many books it has scanned (why is this a secret? certainly not because of the lawsuit - the answer would easily be discoverable), word on the street is that as of a year ago Google had scanned a million books. If true, and if they are going full steam, they may be approaching a million and a half by now. Probably more than both you and I could read in a lifetime.

Searching and browsing this collection is awkward, but interesting to a book lover. While Google only displays “snippets” of copyrighted works, there is a vast collection of books whose copyright has expired. Presumably, these unprotected works are constantly expanding in number, as copyrights expire with the passage of time. Absent some truly extraordinary action by Congress, which can’t be ruled out entirely, it’s only a matter of time before every book is free of copyright rights.

Google displays uncopyrighted books in “full view.” You (the user) can create your own “collection” of books (basically bookmarks maintained on Google Book Search), see information about the book (publisher, publication date, and so forth), view the book either in its original format or in plain text, and search the full text.

You can also embed snippets on other web pages, as I’ve done below. Here are a few notable or interesting books that I dug up, both beginning and ending with what some claim to be the most published book in human history. You can “click through” to get the full work on Google Book Search.

The Holy Bible, published in 1705, from Oxford University:

The Holy Bible containing the Old Testament and the New

The Federalist Papers, published in 1864:

The Federalist A Commentary on the Constitution of the United States : a Collection of Essays By Alexander Hamilton, John Jay, James Madison, John Church Hamilton

Personal Narrative of a Pilgrimage to Al-Madinah & Meccah, by British explorer and polymath Sir Francis Richard Burton. published in 1906:

Personal Narrative of a Pilgrimage to Al-Madinah & Meccah By Richard Francis Burton, Isabel Burton, Stanley Lane-Poole

And lastly, the Old Testament in Hebrew (”Bible Hebrea”), or what fragments are left of it, published in 1280 and from the collection at the Complutense University of Madrid, which itself traces its history back to 1293.

Biblia hebrea

Of course, you may have digital images of millions of books, but you still don’t have everything. I’ll bet Google is anxious to get its hands on the Codex Sinaiticus (image below).