Mary Siceloff

A recent case out of the Ninth Circuit, Oracle USA, Inc. v. Rimini Street, Inc. (July 13, 2017), illustrates some of the risks third party software vendors run concerning copyright issues.  Oracle develops and licenses proprietary “enterprise software” for business around the world.  A business using Oracle’s enterprise software would pay a one-time licensing fee to download the software and then can elect to buy a license maintenance contract that provides for periodic software updates.

Rimini provides third party support for Oracle’s enterprise software in lawful competition with Oracle’s own maintenance services. In the course of providing third party services, Rimini also is required to provide software updates to its customers.  It appears that between 2006 and 2007, Rimini obtained software and/or updates from Oracle’s website with automated downloading tools on behalf of several of its customers.

Oracle sued Rimini in 2010 and obtained partial summary judgment on parts of its copyright infringement claim.  After trial, the jury found in favor of Oracle on other claims (including computer abuse claims which are not discussed in this article) and awarded Oracle damages that totaled more than $120 million after interest, attorney’s fees and costs were added.  Rimini appealed the Court’s decision to the Ninth Circuit.

One of the primary issues addressed by the Ninth Circuit was whether Rimini copied Oracle software in a manner that gave rise to copyright infringement.  The evidence was undisputed that Rimini used Oracle’s enterprise software to help develop and test updates that it would then push out to its customers.  It appears that Rimini, while using the license for one of its customers to obtain the Oracle download, would then use the software to provide updates to other customers who either had Oracle licenses or were considering obtaining them.

Rimini argued that it should have prevailed on the copyright infringement claims by asserting two affirmative defenses, express license and copyright misuse.  As to the express license defense, the U.S. Supreme Court has long recognized that “anyone who is authorized by the copyright owner to use the copyrighted work in a way specified in the statute … is not an infringer of the copyright with respect to such use.”  However, a person could be liable for copyright infringement to the extent they exceed the scope of the license granted by the copyright holder.  Thus, the Ninth Circuit’s inquiry focused on whether Rimini was acting in excess of the scope of the licenses held by its customers.

The District Court had instructed the jury that it would not necessarily be copyright infringement by Rimini if it had used a customer’s license to develop updates for that particular customer.  However, it would be unlawful if Rimini was to use the license from one particular customer to develop updates to be used by others. The Ninth Circuit reasoned that Rimini’s use of one customer’s license to develop updates for other of its customers amounted to “cross use” and rejected Rimini’s claims that “cross use” is not infringement.  The Court found it significant that Rimini acknowledged that “cross use“ allows it to reduce expense to its customers by essentially “reusing work” performed for one customer.  The Ninth Circuit rejected this argument and agreed with Oracle by focusing on the language of the licenses that limited the scope of any authorized use to be done on behalf of that particular licensee.  By performing work for other customers, Rimini was exceeding the scope of any license and therefore was liable for copyright infringement.

Next, the Ninth Circuit turned to Rimini’s claim that Oracle was guilty of “copyright misuse.”  The copyright misuse doctrine prohibits copyright holders “from leveraging their limited monopoly to allow them control of areas outside the monopoly.”  In essence, the doctrine is intended to prevent copyright holders from stifling competition; however, it is not intended to prohibit the copyright holder from using conditions “to control use of copyrighted material.”  As a result, the copyright misuse defense should only be used “sparingly.”

Rimini argued that in essence, Oracle was “misusing” its copyright to prevent competition in the “aftermarket for third party maintenance.”  The Ninth Circuit rejected this argument finding that there was nothing wrong with requiring third party maintenance vendors to respect and comply with Oracle’s copyrights.

The Ninth Circuit’s decision in Oracle is a reminder that third party software vendors relying on their customer’s licensing of software or other computer programs need to be careful of running afoul of copyright laws.  Such vendors should obtain legal advice as to whether any of their proposed services run afoul of the software owners’/developers’ copyright interests.

The U.S. District Court for the Central District of California recently issued its opinion in TCL Communications v. Ericsson (SACV 14-341 JVS(DFMx) and CV 15-2370 JVS (DFMx)) on standard-essential patents and whether a commit to license them was on terms that are fair, reasonable and nondiscriminatory, or FRAND.  The Court determined Ericsson did not offer to license its standard essential patents on reasonable terms, and instead become only the fourth U.S. Court to determine a royalty rate for essential patents.

Patent holders that own patents essential to industry standards often offer (or are required by the standard setting body to offer) to license their patents on FRAND terms when a patent is, or may become, essential to practice a technical standard, such as the wireless communications standards.  A patent becomes standard-essential when a standard-setting organization sets a standard that adopts the patented technology.  The acceptance of a patent holder’s patent into a standard is of great value to the patent holder, and enhances the monopoly which the patent holder has by virtue of the patent.  The accepted patents are often referred to as standard essential patents, or “SEPs.”  Anyone who wishes to manufacture products or provide services in accordance with the standard must now secure a license from the patent holder.  However, in exchange for acceptance of the patent as part of a standard, the patent holder must agree to license that technology on FRAND terms, which is typically a lower license rate than a standard (or non-FRAND) patent license in a comparable setting and with little ability to refuse to license.

Here, this case focused on the licensing of patents in the telecommunications field affecting 2G, 3G, and 4G1 cellular technologies.  Potential licensees TCL Communication Technology Holdings, Ltd. TCT Mobile Limited, and TCT Mobile (US) Inc. ( collectively “TCL”) manufacture and distribute cell phones on a world-wide scale.  Patent holders Telefonaktiebolaget LM Ericsson and Ericsson Inc. ( collectively “Ericsson”) hold an extensive portfolio of telecommunications patents.  TCL sought to license Ericsson’s patents, but the parties could not agree on terms.  The relevant standard setting organization at issue in this dispute is the European Telecommunications Standards Institute, or “ETSI.”

In beginning its analysis, the Court laid out the three tasks it needed to undertake.  The Court had to first “determine whether Ericsson met its FRAND obligation, and then whether Ericsson’s final offers before litigation, Offer A and Offer B, satisfy FRAND.  If they are not, the Court must determine what terms are material to a FRAND license, and then supply the FRAND terms.”

There were two principal schemes presented to the Court to consider in determining the proper FRAND rate, and if Ericcson offered to license at that FRAND rate.  One approach, offered by TCL, is a “top-down” approach which begins with an aggregate royalty for all patents encompassed in a standard, then determines a firm’s portion of that aggregate.  There other, offered by Ericcson, is an “ex ante,” or ex-Standard, approach which seeks to measure in absolute terms the value which Ericsson’s patents add to a product.  However, instead of just using one approach or another, the Court combined the two approaches.  Essentially, the Court undertook a non-discrimination analysis based principally on the review of comparable licenses.

At the end of the day, after conducting its analysis based on the combined hybrid non-discrimination approach, the Court reached the following conclusions:  “Ericsson negotiated in good faith and its conduct during the course of negotiations did not violate its FRAND obligation.  It is unnecessary for the Court to determine whether the failure to arrive at an agreed FRAND rate violated Ericsson’s FRAND obligation. Regardless of the answer to that question, the Court is required to assess whether FRAND rates have been offered in light of the declaratory relief which both sides seek.”

The Court then determined that Ericsson’s Offer A and Offer B were not FRAND rates and proceed to determine its own FRAND rates.  The court prescribed that the parties enter into a 5-year license agreement reflecting the FRAND rates, and TCL must pay Ericsson approximately $16.5 million for past unlicensed sales.  The FRAND rates determined by the Court were as follows:

In sum, if it stands, this case will likely make it easier for lower end product vendors like TCL to negotiate lower FRAND rates, and in turn more competitively offer their products in major markers.  It will also set a precedential approach to be used in future FRAND license negotiations and determinations.  However, Ericcson has already appealed this ruling to the Federal Circuit, so the final outcome is still far from over.

Did you ever wonder why some movies use fictional names for companies or sports teams? TV and movie producers intentionally avoid using brand or company names in order to avoid any potential of an entanglement with a trademark owner.  Some studio lawyers insist that no third-party brands may be used under any circumstances without permission (I have had these discussions).  How do they explain that other producers, including the producers of HBO’s series, “Ballers”, use the actual names and logos of NFL teams within the show’s story without NFL permission?  Hopefully, the Ninth Circuit’s decision in 20th Century Fox Television v. Empire Distribution, Inc. will provide the legal framework by which these reticent studio lawyers may now approve the uncleared use of a third-party trademark.

Empire Distribution is a record label that records and releases albums in the urban music genre, which includes hip hop, rap, and R&B.  In 2015, Fox launched the TV series, “Empire”, a drama about a fictional New York based record label.  The show features music in each episode, including some original music.  Under an agreement with Fox, Columbia Records distributes the music from the show under the brand Empire.

Believing that its marks were being infringed, Empire Distribution sent Fox a cease and desist letter; Fox filed suit on March 23, 2015, seeking a declaratory judgment that the Empire show and its associated music releases do not violate Empire Distribution’s trademark
rights. Empire Distribution promptly filed a counterclaim for, among other claims, trademark infringement.

In most instances, likelihood of confusion is the method for determining trademark infringement.  However, when the allegedly infringing use is in connection with an expressive work, courts in the 9th Circuit will apply a different test developed by the Second Circuit in Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989).  Courts apply this different test primarily because such situation implicates the First Amendment right of free speech which must be balanced against the public’s interest in avoiding consumer confusion.   Sometimes a brand will acquire cultural significance and a storyteller may seek to use such significance to advance a storyline.

Under the Rogers test, the use of a third-party mark in an expressive work in not trademark infringement if the use of the third-party mark has artistic relevance and is not expressly  misleading as to the source or the content of the work.  Trademarks that do more than just identify goods, marks that “transcend their identifying purpose”, are more likely to be used in artistically relevant ways.  However, a trademark mark that has no meaning beyond being a source identifier is more likely to be used in a way that has “no artistic relevance.”

The court easily found that Fox’s use of “Empire” for both the title of its series and the name of the record label at the center of the show’s drama had artistic relevance and its use was not misleading.  However, Empire Distribution took issue with use of the “Empire” mark “as an umbrella brand to promote and sell music and other commercial products” such as appearances by cast members in other media, radio play, online advertising, live events, and the sale or licensing of consumer goods.

How far would Fox’s legitimate use extend?  According to the 9th Circuit, quite far.  The court acknowledged that while the above promotional efforts “technically fall outside the title or body of an expressive work, it requires only a minor logical extension of the reasoning of Rogers to hold that works protected under its test may be advertised and marketed by name.”  If the court did not extend Rogers to cover legitimate marketing and advertising endeavors, Fox would not have been able to effectively promote and market its TV program.

This is a good case for TV and movie producers and also the studios that market and promote their works.  For brand owners (like Empire Distribution), it’s also clear that acceptable use under Rogers is broad enough to include any activity whose purpose includes the promotion and marketing of the creative work.