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)

[Update, November 18, 2014. As predicted, the case has settled, reportedly for $359 million, just a hair more than the $356.7 million ordered by the Ninth Circuit].

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)

[Update November 6, 2014: The Supreme Court denied review of this case]

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.

Aereo and the Cloud Before the Supreme Court

by Lee Gesmer on June 21, 2014

Aereo and the Cloud Before the Supreme Court

This is a catch-up post on oral argument in ABC v.  Aereo, which was held on April 22, 2014.

The Supreme Court’s 2013-2014 term is almost over, and we can expect to receive the Court’s decision in Aereo on June 23rd or 30th.

A great deal has been written about whether Aereo’s TV -to-Internet service violates the TV networks’ public performance right under the transmit clause of the Copyright Act. By comparison, less has been written about the implications of the case for “cloud computing” and “cloud lockers.”*

*note: the “cloud” is simply a metaphor for data and computing power accessed via the Internet.

When the Aereo case was argued before the Second Circuit Court of Appeals in November 2012 the “cloud” was not mentioned once. (transcript) However, by the time the case reached oral argument before the Supreme Court in April 2014 cloud computing — or the implications of a Supreme Court decision in Aereo on cloud computing — seemed to have become the focus of the case. Amicus briefs supporting Aereo predicted dire consequence for cloud computing if the Court ruled in favor of the networks,* and the “cloud” is mentioned more than 30 times in the argument transcript,

*note: For example, one amicus brief supporting Aereo warned of “unintended consequences” and argued that the tests proposed by the networks, their amici and the United States “are unworkable and will endanger the thriving cloud computing industry just as it starts to mature.” (link)

What was the Court’s concern about cloud computing, and how did the attorneys for the parties handle the issue?

While the Supreme Court judges didn’t identify their specific concerns about how a decision for the networks might impact cloud computing, they repeatedly referenced it. For example, at the very outset of oral argument Justice Breyer was so concerned about this issue that he questioned whether it would be easier to remand the case to determine whether Aereo is a cable company subject to a compulsory license in order to avoid addressing “serious problems . . . like the cloud.”

The networks’ attorney urged the Court “not to decide the cloud computing question once and for all today, because not all cloud computing is created equal.” (An argument at least one Justice found unsatisfying).  Aereo’s lawyer capitalized on this line of questioning, beginning his argument with the assertion that the networks’ interpretation of the copyright statute “absolutely threatens cloud computing.” He argued that the cloud computing industry was “freaked out about this case” because it had invested “tens of billions of dollars” in reliance on the legal principles Aereo was defending.

The attorney for the United States (which sided with the networks) made the best attempt to respond to the justices’ concerns, explaining that “if you have a cloud locker service, somebody has bought a digital copy of a song or a movie from some other source, stores it in a locker and asks that it be streamed back, the cloud locker and storage service is not providing the content. It’s providing a mechanism for watching it.” In other words, a cloud locker service that provides a user access to copies of copyrighted content that the user already has legally obtained would not violate the public performance right.

The Justices, for their part, did more to confuse matters than they did to clarify the issue.  Justice Kagan described  a system in which “companies where many, many thousands or millions of people put things up there, and then they share them, and the company in some ways aggregates and sorts all that content” and asked the networks’ attorney how a decision against Aereo would impact such a (presumably illegal) Megaupload-like service. Justice Sotomayor confused matters with her reference to the non-existent  “iDrop in the cloud” and her apparent lack of awareness that Roku is not a content provider, but a piece of hardware that allows subscribes to access programming services such as Netflix. Justice Scalia asked a question that suggested he might think HBO (a cable channel) was delivered free over the airwaves, and therefore would be susceptible to re-broadcast by Aereo.

Setting aside the melange of law, fact and misinformation at oral argument of the Aereo case the question remains: what would a ruling against Aereo mean for cloud lockers or the “cloud industry”?

The answer, it appears, is very little, since the key question in any cloud storage/copyright case is likely to be, “who provides the content that resides in the cloud locker”?

There are several possible scenarios: First, most data in the “cloud” is either created or licensed by the provider. Subscribers to the New York Times, Wired Magazine and Netflix stream or download files from the cloud. In each of these and thousands of similar services, the content is owned or licensed by the site, and access is restricted to paying subscribers. A Supreme Court ruling against Aereo will have no impact on this part of the “cloud industry.” A variant on this model is where the user already possesses a copy of a file, and “scan-and-match”* technology allows the user to access files on a centralized database maintained in the cloud. Popular “music lockers” provided by Google, Apple and Amazon are good examples of this hybrid model. Again, a decision against Aereo will not affect this model of cloud computing.

*note: Using “scan-and-match” technologies the cloud service maintains one licensed copy of each song, and “matches” the subscriber’s collection against each song in the database. This avoids requiring the user to upload her library to the service (an often time-consuming process) and eliminates the requirement that the service maintain a copy of each file the user uploads, greatly reducing storage requirements.

Second, where content is uploaded to the cloud by a user or subscriber in the first instance and is universally accessible, the cloud service is protected by the Digital Millennium Copyright Act’s (DMCA) notice and take down provisions.* A popular example of this type of cloud service is YouTube. This model would not be adversely impacted by a decision against Aereo.

note: Although Aereo mentioned the DMCA in passing in its brief to the Supreme Court, it has never argued that it is entitled to immunity under the DMCA safe harbors, seemingly conceding that Aereo is the content provider of the TV shows at issue, not Aereo’s users.

Third, in cases where users upload files that are stored individually (e.g., 10,000 copies of “Stairway to Heaven” uploaded and stored separately), the storage site allows only the person who uploaded the file to access it (so-called user-specific transmissions), avoiding copyright liability under the public performance provision based on a combination of fair use (“space shifting” by the user) and application of the “volitional conduct doctrine” by the cloud service.*

*note: Under the “volitional conduct doctrine” a technology provider is not liable for direct copyright infringement when it provides the means for infringement but that infringement is controlled by the “volitional conduct” of the users. An example would be a copy shop. The difficult question, under this line of cases, is whether the technology provider is sufficiently actively engaged in the process to be liable.

Aereo — which copies over-the-air TV transmissions directly and supplies copyrighted content to its subscribers — fits within none of these models, leaving the Supreme Court plenty of room to conclude that Aereo’s argument that a ruling against it will signal a death knell for cloud computing technologies is little more than a straw man argument. The Court can rule against Aereo while making clear that it has no intent to interfer with cloud-based services that use licensed content or provide storage for content the end-user independently possesses and elects to store in the cloud.

My prediction: the Supreme Court will do exactly that, leaving any “close cases” that may arise in the future for the lower courts to resolve.

CopyrightX Certificate

by Lee Gesmer on June 16, 2014

I am proud to have been a member of the CopyrightX class of 2014. If you have any doubts about the merits of online education, apply to take this course in 2015. You will be pleasantly surprised at how effective this form of education can be.

CopyrightX

While The Author’s Guild copyright suit against Google Books has received most of the attention on the copyright law front, its smaller sibling – the Author’s copyright suit against HathiTrust – has been proceeding on a parallel track. HathiTrust is a consortium of more than 70 institutions working with Google to digitize the books in their libraries, but a smaller number of books than Google Books (only ten million), and for academic use (including an accommodation for disabled viewers), compared with Google Books’s commercial use.

On June 10, 2014, the Second Circuit upheld the federal district court, holding that HathiTrust is protected from copyright infringement under the fair use doctrine. With respect to full-text search (the most legally problematic aspect of HathiTrust), the Second Circuit held:

  • “[T]he creation of a full‐text searchable database is a quintessentially transformative use” because it serves a “new and different function.”
  • The nature of the copyrighted work (the second factor under fair use analysis) is “of limited usefulness where as here, ‘ the creative work … is being used for a transformative  purpose.’”
  • The copying was not excessive since “it  was reasonably necessary for [HathiTrust] to make use of the entirety of the works  in order to enable the full‐text search function.”
  • And lastly, “full‐text‐search use poses no harm to any existing or potential traditional market” since full-text search “does not serve as a substitute for the books that are being searched.”

Citing HathiTrust’s “extensive security measures,” the court rejected as speculative the Author’s argument that “existence of the digital copies creates the risk of  a security breach which might  impose irreparable damage on the Authors and their works.”*

*note: In an earlier post I discussed the Guild’s argument that Google Books creates the ”all too real risks of hacking, theft and widespread distribution.”  As I noted in that post, in describing that risk the Guild leaves nothing to the imagination: “just one security breach could result in devastating losses to the rightholders of the books Google has subjected to the risk of such a breach by digitizing them and placing them on the Internet.”  In response to similar arguments in HathiTrust the Second Circuit found that there is “no basis in the record on which to conclude that a security breach is likely to occur.”

HathiTrust is distinguishable from Google Books in one significant respect. Non-disabled users can search the HathiTrust database for content, but unlike Google Books, which displays “snippets” of copyrighted works, unless the copyright holder authorizes broader use the results only show page numbers where search terms appear in a given work.

HathiTrust offers additional features to users with disabilities, who can access complete copies if they can show that they are unable to read a work in print. However, the Second Circuit made short shrift of this issue, holding that “the doctrine of fair use allows the Libraries to provide full digital access to copyrighted works to their print-disabled patrons.”

Even taking into consideration the fact that the non-disabled-access HathiTrust library can be distinguished from Google Books on the grounds that it does not provide “snippets,” it is difficult to see how the outcome will be different in the Guild’s appeal of Google Books. The Second Circuit’s central rationales in support of fair use in HathiTrust — that full-text search is transformative and that the database does not serve as a substitute for the books being searched (the latter factor being true in snippet-enabled Google Books as well as in HathiTrust) — likely foretell the fate of the Google Books case* (link), where the federal district court ruled in favor of Google on similar grounds. (For a full discussion of district court decision in the Google Books litigation, click here).

*note: The Author’s Guild suit targeting Google Books is on appeal to the Second Circuit.

Supreme Court Reverses 9th Circuit in Raging Bull Copyright Case

The idea behind statutes of limitations is usually straightforward. If someone commits an illegal act, after a certain period of time they can no longer be liable (or prosecuted) for that act. In civil cases the statute of limitations usually begins to run when the injured party knew or should have known of the illegal act. Once that period has passed, the injured party is barred from filing a lawsuit. For example, in Massachusetts the statute of limitations for most tort actions is three years. If you are the victim of a tort (for example, medical malpractice), you must file suit within three years of the act that caused you harm, or you likely are barred by the statute of limitations.*

*note: Like almost everything in the law, there are exceptions and nuances to this.

The U.S. Copyright Act contains a three year statute of limitations (17 U.S.C. Section 507),* but the way in which the statute is applied is different. A copyright holder may know that a defendant has been selling an infringing product for more than three years, but that doesn’t bar an action for copyright infringement – the defendant may still be liable for any infringing conduct taken during the three year period before the suit was filed. This is described as a “three-year look back,” a “rolling limitations period” or the “separate-accrual rule.”**

*note: The statute provides that “No civil action shall be maintained under the provisions of this title unless it is commenced within three years after the claim accrued.”

**note: A new statute of limitations “accrues” (commences) with each new infringement.

In theory, therefore, a copyright owner can become aware of an infringing use of her work and do nothing for an indefinite period of time – more than just three years – until, for example, she concludes that the infringer has earned profits that could be recovered as damages and therefore justify the cost of a lawsuit. At that point the copyright owner can file suit and the statute of limitations will come into play, but only to limit damages to the preceding three year period. However, if the copyright owner wins her case and the defendant doesn’t settle there is the possibility that the copyright owner will wait three years and then file another infringement suit based on infringing actions taken during the second three year period. And so on, ad infinitum (or so it will seem to the defendant, given the length of copyright protection).

 

Until recently infringers were not wholly at the mercy of this strategy. They were able to raise the common law legal doctrine of “laches,” a doctrine which may bar a lawsuit based on an unreasonable, prejudicial delay in commencing suit. In many cases defendants successfully arged that a copyright owner should not be permitted to wait beyond three years before filing an infringement suit.

These two legal principles — the three-year copyright statute of limitations and the laches doctrine — came into collision when Paulla Petrella brought a copyright suit against MGM. Since 1981 Petrella has been the heir to her Raging_Bull_posterfather Frank Petrella’s copyright interest in a book and two screenplays about the life of Jake LaMotta, the central character portrayed in the film Raging Bull. She asserts that Raging Bull is a derivative work of the book and screenplays, and that she is entitled to royalties based on MGM’s distribution of the film during the three years preceding her suit.

Ms. Petrella had threatened MGM with a suit for copyright infringement as far back as 1998, but she didn’t actually file suit until 2009. In fact, Raging Bull was released in 1980, and there is evidence that Ms. Petrella was aware of her copyright infringement claim as far back as 1981, in which case she delayed for almost 30 years before filing suit for copyright infringement.

MGM raised the defense of laches, and the Ninth Circuit Court of Appeals agreed, dismissing the suit. The Supreme Court took the case and reversed in a 6-3 decision, holding that, except in “extraordinary circumstances,” laches cannot be invoked to preclude a claim for damages that falls within the three-year window. However, this was not a clear win for Petrella or others in her position: oddly, the Court held that delay is relevant to equitable relief which (the Court stated), includes not only an injunction against further public display or distribution of the copyrighted work, but also damages based on the infringer’s profits that are attributable to the infringement.

Whether this decision leads to a flood of hitherto dormant copyright suits remains to be seen, and may be influenced by how the lower Spiritfirstalbumcourts interpret and apply the decision. For example, given the Supreme Court’s comments it is uncertain that Ms. Petrella will be able to obtain an injunction against future sales of Raging Bull, and the Court’s statement that a delay in bringing suit is relevant to determining damages based on MGM’s profits during the three year period may limit any recovery by allowing MGM to use its investment in the film prior to the three-year look-back period to offset profits earned during those three years. Therefore, the extent of any potential monetary recovery is unclear.

*note: Although, as discussed above, assuming Petrella establishes liability (an issue yet to be addressed in this case) and MGM continues to distribute the film, in theory Petrella could file a series of lawsuits every three years seeking MGM’s profits for the preceding three year period. After the first suit MGM would be on notice that it is exploiting a copyright-protected work, and would likely have little choice but to to settle the case, rather than have this sword of Damocles hanging over its head.

Many observers in the copyright community think that Petrella may lead to a wave of lawsuits by copyright holders who had assumed, until now, that their claims might be  barred by laches. A prominent example suggesting this may be the case is the May 31, 2014 lawsuit filed by the Randy Craig Wolfe Trust against the members of Led Zeppelin. Wolfe, the deceased founder and creative force behind the band Spirit, had believed since the mid-’90s (and perhaps as far back as 1971) that the intro to Stairway to Heaven had been copied from Taurus, a song on Spirit album released in 1968. It seems unlikely that this case, filed less than two weeks after the Petrella decision, was not encouraged by the outcome in Petrella.

Petrella could also have implications for application of the laches doctrine under patent law.  As the Supreme Court noted in Petrella, the Federal Circuit has held that laches may be used to bar patent damages prior to the actual commencement of suit. The courts may conclude that the rationale of the Supreme Court in Petrella applies under the patent statute as well, making it easier for patent plaintiffs to take advantage of the full six year statute of limitations under the patent statute.

Petrella v. Metro-Goldwyn-Mayer, Inc., No. 12-1315 (May 19, 2014)

Scotusblog page on Petrella