by Lee Gesmer | Sep 28, 2018 | Copyright
Can Disney prevent a commercial business – in this case Redbox – from reselling Disney’s movie download codes?
At first the answer was “no.”
My earlier post on this case* highlighted the California federal district court’s February 2018 opinion concluding that the language on Disney’s box-top packages failed to create a contract that would prevent Redbox from purchasing and reselling Disney movie download codes. However, I predicted that “Likely, in the future Disney will correct its ‘box-top license’ to make it legally enforceable . ..”
*To get the background facts of this case please read the initial post
Disney did just that when it released its Black Panther combo packs. Disney’s new packaging states that “Digital code redemption requires prior acceptance of licence terms and conditions. Codes only for personal use by recipient of this combination package or family member.” A warning elsewhere on the package states that “The digital code contained in this package may not be sold separately and may be redeemed only by the recipient of this combination package or a family member. Visit [various Disney websites listed] for code redemption and other applicable terms and conditions.” A paper insert states that “This digital code is part of a combination package and may not be sold separately,” and “Digital code redemption is subject to prior acceptance of license terms and conditions.”
However, purchasers of Disney combo packs now get a double-barreled contract – when they go to one of the Disney websites to download Black Panther, they are subject to an online agreement as well. Here, they must agree to Disney’s warning that “Digital codes originally packaged in a combination disc + code packages (sic) may not be sold separately and may be redeemed only by an individual who obtains the code in the original combination disc + code package ….”
All of this legal verbiage — both the box-top license and the online license — confronts consumers purchasing the Black Panther combo packs and using the download codes online, but it is aimed squarely at Redbox or anyone else that may have the temerity to purchase and resell Disney download codes.
Based on this onslaught of contractual terms the district court concluded that Disney has successfully entered into a restrictive contract with purchasers of the Black Panther combo packs. That is, when consumers (or Redbox) buy the Black Panther combo pack containing a disk and download code they are buying a restricted license to the code, and one of the terms of that license is that they may not resell it. By reselling the codes and encouraging purchasers to use codes violative of this contract, Redbox engaged in contributory copyright infringement.
Consistent with its February 2008 opinion, the court rejected Redbox’s first sale defense on the grounds that the case does not present a “single, discrete, particular copy to which the first sale doctrine could apply.” And, an enforceable license trumps first sale in any event, although the court did not rely on this.
Although the court had applied the copyright misuse doctrine in its earlier decision, it now rejected copyright misuse based on the changes to Disney’s contract terms. Under Disney’s “old” box-top license there was no Disney-purchaser contract, and Disney’s attempt to use its online contract to restrict resale of the contents of the combo packs constituted copyright misuse. However, Disney’s new box-top agreement cured this defect, since purchasers of the combo packs were now subject to a restricted license at the point of sale.
The outcome of this case is not surprising. The district court’s earlier decision gave Disney a roadmap to what it needed to do to correct the deficiencies that caused it to lose the first time. It was a simple matter for Disney to correct its packaging and online terms to make it clear that purchasers were buying the download codes subject to a restricted license, thus blocking Redbox’s resale strategy.
The court’s ruling applies only to Black Panther, not earlier movies distributed by Disney in the old packages – those products remain subject to the court’s earlier ruling. However, if this decision stands (I doubt Redbox will appeal) Redbox’s future distributing Disney download codes appears limited. Going forward Disney will, no doubt, use the same Black Panther contract language on all of its disk/download code combo packs, and Redbox’s sale of Disney download codes will eventually dry up as new movies replace older ones in Redbox’s kiosks.
by Lee Gesmer | Aug 12, 2018 | Noncompete Agreements
The Massachusetts Legislature has attempted to pass legislation regulating noncompete agreements every year since 2009. This year, it finally succeeded. The new law, which Governor Baker signed on August 10, 2018 and which is effective October 1, 2018, makes important changes to the body of Massachusetts non-compete “common-law” that has evolved over decades in the courts.
Here are the highlights of the new law.
Not Retroactive. The law is not retroactive. Any noncompete entered into before October 1, 2018 (for convenience I refer to this as “2018”) is unaffected. This means that, as a practical matter, there will be two bodies of law: judges will apply the “old” court-made common law to pre-2018 agreements, and the new statute, along with the common law that is unaffected and therefore remains in place, to agreements entered into after 2018.
Formalities. For a non-compete to be enforceable the employer must follow certain procedural formalities. The most important of these is that a written noncompete agreement must be provided to the employee before a formal offer of employment is made, and at least 10 days before employment begins. This means that the new employee can’t be ambushed with a noncompete after accepting a new job. “Nice to meet you, can you start work tomorrow?” will become a thing of the past, at least where the employer wants a noncompete in place.
The law does not address how an employer/employee negotiation factors into this 10-day requirement – if an employer gives a prospective employee an agreement 10 days in advance of the start date but the agreement is negotiated and changed, must the start date be pushed back to accommodate the 10-day requirement? I would think not, since the purpose of the 10 day notice period is to give the employee time to consider the noncompete and not be ambushed at the last minute, but until a court rules on it, this is an open question.
Another formality is that the noncompete must be signed by both the employer and employee and state that the employee has the right to consult counsel prior to signing. This is not a big deal, since most employment and noncompete agreements already include “consult counsel” boilerplate and are commonly signed by both parties, as is true of every written contract.
The One Year Limitation. A noncompete agreement may not impose a “restricted period” (the law’s term for the post-employment period the noncompete is in effect) longer than one year. I don’t view this as a significant change since one year or less has become the de facto standard in Massachusetts in recent years.
However, there is an exception: the agreement may be as long as two years if the employee breaches a fiduciary duty to the employer or unlawfully takes physical or electronic property belonging to the employer. Since, as a practical matter, employers will only learn this after-the-fact (during or following employment), this means that agreements may include an “alternative” provision (what Boston attorney Russell Beck calls a “springing noncompete”) that will “spring” into effect only if an employee engages in one of these violations.
Employees Terminated Without Cause/Laid Off. A noncompete agreement may not be enforced against certain categories of employees. The most important group is employees terminated without cause or laid off. This means that noncompetes will only be enforceable against employees who voluntarily resign or who are terminated for “cause” – a term usually described in an employment agreement.
This is a significant change from the pre-2018 law. However, it comes with the risk that some employers may broaden the definition of “for cause” termination in employment agreements or unjustifiably terminate an employee for cause in order to make a noncompete enforceable. If this happens the burden will be on the employee to show that the for-cause termination was unjustified. Whether the courts will find some way to penalize an employer who makes a mistake on this issue or acts in bad faith remains to be seen.
Hourly Employees Exempt. The law does not permit enforcement of noncompete agreements against “non-exempt” employees (such as hourly employees eligible for overtime) and students.
Employers have been criticized for unfairly restricting the job opportunities of workers in these groups. However, despite the publicity around a few high-profile, patently unfair (and unenforeable) cases where college students and low-paid hourly workers were required to sign noncompetes, these situations have been rare.
Noncompetes and the Sale of a Business. Massachusetts common law has treated noncompete agreements tied to the sale of a business more liberally than employer/employee agreements. The new law does not change this – it does not regulate noncompetes entered into by business owners in connection with the sale of a business. Often, agreements in this category are quite lengthy – three to five years is not uncommon – and this will not change.
Non-Solicitation/No-Hire Agreements. The law does not affect agreements in which an employee agrees not to solicit or hire employees of the employer or not to solicit or transact business with customers of the employer (“non-solicitation”/“no-hire” agreements).
This is an important exception that employers will take advantage of – a prohibition on soliciting customers of the former employer can substitute for much of what a noncompete accomplished for the employer, particularly in the case of employees involved in sales. However, this is not a blank check to impose a lengthy non-solicitation restriction, since these agreements will still be subject to the reasonableness standard of Massachusetts common law. And, the law around what constitutes a “solicitation” is not entirely clear.
Garden Leave. The section of the law that has rightly received the most attention is the “garden leave” provision, which will be unique to Massachusetts. This requires the employer to continue paying the employee, during the restricted period on a pro rata basis, no less than 50% of the employee’s annualized base salary, thereby financially enabling the employee to putter around in her garden during the restricted period (we can thank the Brits for the expression “garden leave”). The provision providing for this payment must be included in the non-compete agreement.
However, the law contains what appears to be a major loophole: the employer and employee may agree on “other mutually-agreed upon consideration.” While the interpretation of this phrase is likely to be the subject of litigation, on its face there is nothing in the law requiring that the agreed upon consideration be “reasonable.” For example, in theory the parties may agree that the employee will receive garden leave payments in an amount significantly less than 50%. Or, the parties could agree that the employee will receive a small signing bonus in lieu of post-employment garden leave.
Whether there are any limits to how far below 50% of base salary an employer can go, or what other forms of alternative consideration will be acceptable, will have to be determined by the courts.
Noncompetes After the Employee Has Started Work. In cases where an employer fails to ask an employee to sign a noncompete when hired, employers sometimes will ask employees to enter into noncompetes after they have started working, sometimes months or even years later. Whether the employee’s continued employment is adequate consideration to the employee for such an agreement has been the subject of legal controversy: most cases, but not all, have held that continued employment is sufficient consideration for a noncompete.
The new law attempts to clear this up by requiring that in this situation the agreement be supported by “fair and reasonable consideration independent from the continuation of employment.” However, the law does not make clear whether this requires garden leave pay, mutually-agreed upon consideration or something else. It will be up to the courts to interpret and apply the meaning of this provision in the law.
Employers Outside Massachusetts. An out-of-state employer that has workers in Massachusetts may hope that it can avoid the Massachusetts noncompete law by having the noncompete stipulate that the parties are bound by the law of another state – one less restrictive of noncompetes than the new Massachusetts law.
However, the Massachusetts law is designed to prevent this. The law applies if the employee is, and has been for at least 30 days immediately preceding cessation of employment, a resident of or employed in Massachusetts at the time of termination of employment.
And treating the worker as an independent contractor will not avoid application of the law – the statute treats independent contractors the same as employees.
What To Do Now and Implications for the Future. Many companies have standard noncompete agreements that they have used for years, and that they rarely reviewed in the past. However, it’s safe to assume that as of October 1, 2018, any boilerplate non-compete agreement currently in use in Massachusetts will be obsolete and unenforceable. Any company that plans to use a noncompete agreement after that date should begin the process of revising its agreements in time to meet this deadline.
As far as the future goes, one consequence of the new law is that noncompetes will be more, not less, complex.
For example, employers and employees must now struggle to understand the various scenarios that will be standard in post-2018 noncompete agreements:
- if the employee resigns the noncompete is enforceable for up to one year;
- if the employee is terminated (not for cause) or laid off the noncompete is not enforceable;
- if the employee is terminated for cause the noncompete is enforceable for up to one year;
- if the employee engages in breach of fiduciary duty or theft (during or after employment) the noncompete is enforceable for up to two years.
All of this needs to be spelled out in the noncompete agreement before the employee starts work.
Intertwined with these scenarios are the choices inherent in the garden leave provision:
- will the employer and employee accept the statutory default of up to six months garden leave at one-half salary?
- will they negotiate an alternative arrangement?
- If they negotiate an alternative arrangement, what rules apply?
Lawyers will struggle to explain all of this to bewildered clients, both employers and employees, for years to come.
by Lee Gesmer | Jul 10, 2018 | DMCA/CDA
The Communications Decency Act (CDA) is a federal law that protects online publishers from liability for the speech of others. The CDA gives online platforms the right to publish (or decline to publish) the ideas and opinions of users without the threat of being held liable for that content or forced to remove it.
However, people who are defamed online will sometimes go to extreme lengths to try to force online publishers to remove defamatory content posted by users. A notable First Circuit case that I wrote about recently illustrates how a lawyer attempted, unsuccessfully, to obtain copyright ownership of several defamatory posts and then force Ripoff Report to remove the posts. (See: The Copyright Workaround and Reputation Management: Small Justice v. Ripoff Report).
A California attorney tried something similar in Hassell v. Bird, a case decided by the California Supreme Court on July 2, 2018. In that case a lawyer (Dawn Hassell) sued a former client and the author of a Yelp review (Ava Bird) over a review that Hassell claimed was defamatory. Hassell got a default judgment holding that the review was defamatory along with an injunction ordering the review to be removed. She then delivered the injunction to Yelp (which was not a party in the suit) and demanded that it honor the injunction against Bird and remove the review. Yelp refused to do so. The case proceeded through appeals, ending up before the California Supreme Court.
The attorney’s strategy in this case was to purposefully not name Yelp as a defendant, since Yelp would easily have been dismissed from the case under the CDA. Instead, her strategy was to get an injunction against the defendant ordering her to remove the Yelp post, and then attempt to enforce that injunction against Yelp. Ava Bird assisted in the first part of this strategy by defaulting, although it appears she may not have been properly served.
The court addressed Hassell’s strategy, and answered the central issue in the case, as follows:
The question here is whether a different result should obtain because plaintiffs made the tactical decision not to name Yelp as a defendant. Put another way, we must decide whether plaintiffs’ litigation strategy allows them to accomplish indirectly what Congress has clearly forbidden them to achieve directly. We believe the answer is no . . . an order that treats an Internet intermediary ‘as the publisher or speaker of any information provided by another information content provider’ nevertheless falls within the parameters of [the CDA].
The court observed that even an injunction (as opposed to money damages) can impose a substantial burden on an online publisher:
An injunction like the removal order plaintiffs obtained can impose substantial burdens on an Internet intermediary. Even if it would be mechanically simple to implement such an order, compliance still could interfere with and undermine the viability of an online platform . . . furthermore, as this case illustrates, a seemingly straightforward removal order can generate substantial litigation over matters such as its validity or scope, or the manner in which it is implemented. The CDA allows these litigation burdens to be imposed upon the originators of online speech. But the unique position of Internet intermediaries convinced Congress to spare republishers of online content, in a situation such as the one here, from this sort of ongoing entanglement with the courts.
The court criticized Hassell’s strategy:
. . . plaintiffs’ maneuver, if accepted, could subvert a statutory scheme intended to promote online discourse and industry self-regulation. What plaintiffs did in attempting to deprive Yelp of immunity was creative, but it was not difficult. If plaintiffs’ approach were recognized as legitimate, in the future other plaintiffs could be expected to file lawsuits pressing a broad array of demands for injunctive relief against compliant or default-prone original sources of allegedly tortious online content. . . . Congress did not intend this result, any more than it intended that Internet intermediaries be bankrupted by damages imposed through lawsuits attacking what are, at their core, only decisions regarding the publication of third party content.
Yelp itself had the last laugh in this case, and it posted it on its blog:
The Hassell Law Group, which has always been a highly-rated business on Yelp and currently maintains five stars, has spent many years in the court system (and endured the resulting Streisand Effect) in an effort to force Yelp to silence a pair of outlier reviews. As we have observed before, litigation is never a good substitute for customer service and responsiveness, and had the law firm avoided the courtrooms and moved on, it would have saved time and money, and been able to focus more on the cases that truly matter the most — those of its clients.
There is a lot more to this case than I’ve covered here. If you are interested, I recommend Eric Goldman’s analysis of the nuanced concurring and dissenting opinions in his post, The California Supreme Court Didn’t Ruin Section 230 (Today)–Hassell v. Bird.
Hassell v. Bird (Cal. Sup. Ct. July 2, 2018)
by Lee Gesmer | Jul 2, 2018 | Contracts
Online agreements are nothing new to the Internet but companies are still struggling to implement them in a way that will assure their enforceability.
The latest company to fail this test is Uber Technologies. A June 2018 decision issued by the First Circuit Court of Appeals in Boston held an online agreement presented to the users of the Uber smartphone app in 2012 and early 2013 was not sufficiently conspicuous to be enforceable. The terms and conditions stated that users of the app could not participate in a class action and were required to resolve any dispute with Uber by means of binding arbitration. Because the First Circuit held that this agreement is not enforceable the plaintiffs in this case—who claim that Uber engaged in unfair and deceptive pricing —will now be free to proceed with a class action against Uber.
In deciding this case the First Circuit applied Massachusetts contract law, specifically the 2013 decision of the Massachusetts Appeals Court in Ajemian v. Yahoo!, Inc.
In Ajemian the state court established the following two-part test for the enforceability of an online agreement: the contract terms must (1) be “reasonably communicated” to the user and (2) accepted by the user.
In the Uber case the terms and conditions were available via a link that read “Terms of Service & Privacy Policy,” as shown in the following screen shot:
The hyperlink appears at the bottom of the left screen, and above the phone numbers in the right screen. Users of the app were not required to view the terms and agree to them, and therefore Uber’s agreement may best be viewed as a “browsewrap” agreement, where assent is given merely by using the site.*
*In contrast, a “clickwrap” agreement requires the user to click “I agree,” but not necessarily view the contract. A “scrollwrap” requires users to physically scroll through the agreement and click on a separate “I agree” button in order to assent to the terms and conditions of the website.
This was not enough for the First Circuit, which found that the hyperlink was not sufficiently conspicuous to form a contract between Uber and the users of its app.
In reaching this conclusion the court closely examined the design of the Uber app’s interface, noting that the “Terms of Service & Privacy Policy” hyperlink did not have the common appearance of a hyperlink which, according to the court, is commonly blue and underlined. This raised concerns as to whether a reasonable user would have been aware that the gray rectangular box was actually a hyperlink. Nor, the court concluded, was this hyperlink conspicuous when viewed in the context of all the other information presented on the screen: “If everything on the screen is written with conspicuous features, then nothing is conspicuous.”
This case is yet another warning to online companies to be careful when designing online agreements. This can be challenging, and as this case illustrates it is even more difficult when the user must agree to terms and conditions via the interface of a smartphone app.
It’s in the interest of the company designing an app to make registration as quick and easy as possible, and in this case Uber made the decision not to require prospective users to click any screen buttons to accept its terms or access and view the terms before completing the registration process. Instead they designed a smartphone screen that, at least in the eyes of the First Circuit, was inadequate to communicate the existence of these terms to users.
While this case was decided under Massachusetts law and courts in other states might view this issue differently (indeed, might even have reached a different outcome in this case), the decision is a warning that while browsewraps may be convenient they are vulnerable to enforcement challenges, and companies must be particularly careful when attempting to implement them on smartphones.
Cullinane v. Uber Technologies, Inc. (1st Cir. June 25, 2018).
by Lee Gesmer | Jun 29, 2018 | Copyright
The Supreme Court accepts appeals of very few copyright cases. In the last 20 years it has decided only 14 copyright cases, and most of those involved narrow, highly technical issues of copyright law.
However, the Copyright Act (which contains 150,000 words or 250 pages of single-spaced text), is mostly a law of technicalities.
One of these technicalities arises out of the fact that copyright registration is a precondition to filing a copyright infringement suit. However, the Copyright Act is not entirely clear on what this means: must a copyright plaintiff obtain registration from the Copyright Office (or, in rare cases, a denial, but in any case a decision on its application) before it may file suit for copyright infringement? Or, is it enough that the plaintiff has filed an application for infringement, permitting the suit to proceed while the application waits to be acted on by the Copyright Office, a process that typically takes about eight months?
The federal circuit courts have been divided on this issue. Some circuits hold that it is sufficient to have simply filed a registration application as a precondition to filing suit; other courts have held that a would-be copyright plaintiff must wait until the Copyright Office has acted on the registration request, the so-called “registration approach.”
Why does this matter? One reason is the statute of limitations – copyright owners face a three year statute of limitations, and an owner who files an application late in this three year period risks losing the right to enforce the copyright in an infringement action because of the time needed to review an application.
Another reason may be if the copyright plaintiff is seeking a preliminary injunction and can’t wait eight months for a standard registration to be issued.
While the Copyright Office does allow expedited applications (or “special handling”), the fee for this is $800 per application (versus $35 for a normal registration, so long as the applicant can wait eight months), an expense and delay most copyright plaintiffs are reluctant to incur, particularly when many copyright suits involve more than just one work, in which case the $800/work cost can become exorbitant.
The Court of Appeals for the Eleventh Circuit had this issue presented to it in Fourth Estate Public Benefit Corp. v. Wall-Street.com, LLC. In a decision issued in May 2017 the court highlighted the circuit split over this issue, noting that the Tenth Circuit requires that the registration be acted upon, while the Fifth and Ninth Circuits require only that the application have been filed. The remaining circuits either have not opined on this issue or have given unclear (and in the case of the Seventh Circuit conflicting) guidance.
In Fourth Estate the Eleventh Circuit sided with the Tenth Circuit, holding that the law requires that the Register of Copyrights have acted on the application before a copyright owner can file an infringement action.
The copyright holder appealed to the Supreme Court, and on June 28, 2018, the Supreme Court accepted certiorari in this case. Therefore, it will likely decide this issue during the 2018-2019 Term.
The issue is not one of constitutional magnitude — rather, it is a question of reading and interpreting the Copyright Act as written and enacted by Congress, along with whatever legislative history the parties can locate that bears on Congress’ intent. The law is sufficiently ambiguous (as reflected in the circuit split) that the Supreme Court could come out either way.
It will be helpful to have this issue resolved either way, since it is common for copyright plaintiffs to have not registered their works when they first consult an attorney. The attorney is then forced to determine whether a case can be filed in their circuit while registration is pending (as noted, most circuits haven’t decided this issue, making the decision more difficult), or whether the case cannot be filed until registration is completed. The attorney must then factor in the urgency of the legal claim and decide whether to advise the client to pay the additional expense required to expedite the registration. All-in-all, an unnecessarily complicated set of decisions.
If you’re interested in following this case as briefs are filed with the Supreme Court you can do so on the SCOTUSblog page dedicated to this case. The parties’ petitions for certiorari, as well as the Solicitor General’s brief on behalf of the United States urging the Court to accept review of this case and expressing its support for the holding of the Eleventh Circuit, are already available on SCOTUSblog.
Update: The Supreme Court ruled that registration is a prerequisite to filing a copyright case. Decision here.
