Intellectual Property

The Federal Circuit Court of Appeals has overruled a 2005 decision which addressed the liability of exporters of components of patented inventions for infringement of method patents. Under 35 U.S.C. §271(f), anyone who exports a component of a patented invention that is combined outside the United States is an infringer. The Court of Appeals, in Union Carbide Chemicals & Plastics Technology Corp. v. Shell Oil Co., 425 F.3d 1366 (Fed. Cir. 2005), held that §271(f) applied to method patents. In Cardiac Pacemakers, Inc. v. St. Jude Medical, Inc. 2009 WL 2516346 (Fed. Cir. 2009), an en banc decision on August 19, 2009, the Court of Appeals reversed its holding in Union Carbide.

The court’s decision focused on subsection (1) of §271(f), although the court noted that its holding applies to subsection (2) as well. Section 271(f)(1) provides that:

“Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.”

Cardiac Pacemakers, Inc. (“CPI”) owned several patents, including the ‘288 patent, which covered a method of using a device, an implantable cardioverter defribillator. CPI sued St. Jude Medical for patent infringment in 1996. After several appeals on various issues, the case was remanded to the district court.

The district court denied St. Jude’s motion for summary judgment limiting damages to U.S. sales of the device. The district court held that under §271(f), CPI was entitled to recover damages for the devices sold by St. Jude from the U.S. to foreign customers. St. Jude appealed.

A panel of the Federal Circuit affirmed the district court’s decision, based on Union Carbide. St. Jude petitioned for a rehearing en banc. The en banc court reversed the panel’s decision, holding that §271(f) does not apply to method patents.

The court reviewed the legislative history of section §271(f). That section was enacted to change the existing case law that held that manufacturers who shipped components of a patented device overseas, where the device was then assembled, were not infringers.

The court also reviewed its prior decisions under §271(f). In Eolas Technologies, Inc. v. Microsoft Corp., 399 F.3d. 1325 (Fed. Cir. 2005), the court had found Microsoft liable under §271(f) for infringement of a product claim based on its exportation of master discs with software code that were copied to hard drives and sold overseas. The component was the computer readable code in the product claim. In NTP, Inc. v. Research in Motion, Ltd., the court had analyzed §271(f) in connection with a method patent. The court had held that the sale of BlackBerry devices by RIM in the United States, when used with a network in Canada, did not infringe NTP’s method patent under §271(f). There, the court stated: “it is difficult to conceive of how one might supply or cause to be supplied… the steps of a patented method.”

In Union Carbide, the court had held that the exportation of a chemical catalyst that was used in performing a patented method overseas constituted infringement under §271(f). The catalyst was a component of the patented invention.

The court also discussed AT&T Corp. v. Microsoft Corp., 414 F.3d. 1366 (Fed. Cir. 2005). In that case, the Court of Appeals had reached a similar result to that of Eolas, again finding that software code was a component of a patented invention under §271(f). The court explained that the Supreme Court had reversed the Court of Appeals’ decision, in Microsoft Corp. v. AT& T Corp, 550 U.S. 437 (2007). The Supreme Court held that Microsoft had not supplied a component from the United States because the software code was supplied from outside the United States. The Court of Appeals stated that: “the Court sent a clear message that the territorial limits of patents should not be lightly breached.”

In analyzing §271(f) as it applied to CPI’s device, the court said that the words of the statute should be giving their ordinary meaning. CPI argued that the term “patented invention” in §271(f) referred to all categories of inventions. The court disagreed.

The court held that process or method inventions consist of a series of steps and that the components of those inventions are the steps. The court further held that the steps of a method patent are not the same as the physical components used in performing the method.

The court noted that §271(c) refers to components of a machine or article of manufacture as being distinct from a material or apparatus used in practicing a patent method. Thus, the court found that Congress distinguished between components of a patented invention and the materials used in practicing a patented method. The components of a patented method are its steps, not the materials used to perform the method.

The court held that because the steps of a method cannot be “supplied,” as is required by §271(f), that section cannot apply to method patents. According to the court, it is impossible to supply an intangible step. The court specifically overruled the Union Carbide case.

In concluding, the court emphasized that its decision was consistent with the legislative history of the statute and with the Supreme Court’s presumption against the extraterritoriality of patents.

Earlier this year, I wrote of an impending legal battle between Shepard Fairey, the artist of the iconic Barack Obama “Hope” painting and the Associated Press who owns the photograph upon which the painting was based. I questioned whether any artist could commandeer the President’s likeness, and whether President Obama could stop the use of his likeness if he was so inclined. As discussed in my previous article, the answer likely depends on how “transformative” of President Obama’s likeness the work of art is.

A similar issue recently emerged in the context of political advertising created by the National Organization for the Reform of Marijuana Laws (“NORML”). As reported in the The Washington Post earlier this month, photographer Lisa Jack is upset with NORML’s use of her photograph of a young President Obama, taken in 1980 when he was a freshman at Occidental College. The photo taken by Ms. Jack depicts a teenaged Obama decked out in a Panama hat, coolly drawing on a cigarette (presumably of the tobacco variety).

NORML apparently decided that a young cigarette smoking Obama could lend support its marijuana legalization cause. Recalling a vintage 1960’s psychedelic rock poster, NORML used Ms. Jack’s picture as the centerpiece of its annual conference poster distributed to NORML members and sold to the general public. The original photo was shaded green, altered to make it appear that Obama was puffing on a marijuana joint, and placed amidst a swirl of psychedelic graphics, bubble lettering, and a marijuana leaf. Above the picture appears NORML’s Obama inspired slogan — “Yes We Cannabis.”

According to the Washington Post story, NORML readily acknowledges copying Ms. Jack’s photo for use in its annual conference poster and says its artist, Sonia Sanchez, made few alterations to the photo itself:

“With very little adulteration, she placed what appears to be a cannabis cigarette” in the president’s hand, [NORML’s executive director] said. But she made few other changes: Obama “almost made the photograph for us.”

Despite the admission that Obama “almost made the photograph for us,” when asked about potential copyright liability, NORML’s executive director told the Washington Post “our lawyers thought it was adulterated enough to comply with the fair use laws.” The question remains whether NORML’s lawyers were right.

As with Shepard Fairey’s “Hope” painting, a court’s fair use analysis of NORML’s poster would likely hinge on how “transformative” the poster is deemed to be of Ms. Jack’s photo. Of critical importance is whether the allegedly “transformative” use by NORML imbues the original Jack picture with “‘new information, new aesthetics, new insights and understandings.'” Blanch v. Koons, 467 F.3d 244, 253 (2nd Cir. 2006) (quoting Castle Rock Entm’t v. Carol Publ’g Group, 150 F.3d 132, 142 (2d Cir. 1998)). In Koons, visual artist Jeff Koons used a fashion photograph in one of his collage paintings to comment on “the social and aesthetic consequences of mass media.” The court found that his use of the photograph was fair use, emphasizing its highly transformative quality. The court explained that “[w]hen, as here, the copyrighted work is used as ‘raw material’ in the furtherance of distinct creative or communicative objectives, the use is transformative.” Id; see also Bill Graham Archives v. Dorling Kendersley Ltd., 448 F.3d 605, 609 (2d Cir. 2006) (finding that use of concert posters as “historical artifacts” in a biography was transformative).

Putting aside NORML’s likely view of the “new insights and understandings” to be gained through marijuana legalization, the NORML poster would appear to sufficiently “transform” the original Jack photo. NORML used the photo as “raw material” to create a communicative statement with 1960’s psychedelic aesthetics, and a new meaning and purpose than the original photo by Ms. Jack. Regardless of the popularity of NORML’s goal of marijuana legalization, NORML’s fair use argument is enhanced because of the clear political purpose associated with the poster. The more an accused infringer such as NORML can raise First Amendment arguments, the more likely its use of the copyrighted work will be deemed to be a “transformative” fair use. See generally Eldred v. Ashcroft, 537 U.S. 186, 219-20 (2003) (characterizing fair use as a “First Amendment safeguard” within copyright law).

Furthermore, Courts sometimes view a copyright holder’s unwillingness to license the particular use in question as weighing in favor of fair use. See, e.g., Mattel Inc. v. Walking Mountain Prods., 353 F.3d 792, 805-06 (9th Cir. 2003) (Mattel unlikely to license artistic photographs of Barbie in absurd and sexualized positions). After learning of NORML’s use of her photo, Ms. Jack told the Washington Post:

These photos “are absolutely not to be used in this way. … I really made a grand effort to do this properly, and I’m very irritated. If I’d wanted these to be used for political purposes, I’d have sold them to Hillary years ago.”

Ms. Jack may be confusing a “political campaign” use by would-be president Hillary Clinton with a “communicative political use” protected under the First Amendment. NORML has clearly drafted the Occidental College era Obama in support of its underlying political cause to legalize marijuana. This is entirely different than a hypothetical use of the photo by Hillary Clinton during the 2008 presidential campaign to support a campaign argument that, unlike Bill Clinton, Barack Obama did in fact inhale. Although Ms. Jack’s may not approve of the use of her photo in NORML’s annual poster, as a practical matter, there may not be much that Ms. Jack can do about it.

In Cristoff v. Nestle USA, Inc., the California Supreme Court issued guidance in determining when the statute of limitations runs on a claim for appropriation of likeness. Russell Cristoff, the plaintiff, was a professional model who posed in 1986 for a photo with him gazing at a cup of coffee. Cristoff was paid $250 for the photo shoot which was arranged by Nestle (Canada).

In 1997, Nestle decided to redesign its label for Taster’s Choice instant coffee but had difficulty locating the artwork that had been used for the original “taster” on its existing label. Nestle decided to use Cristoff’s image because he looked distinguished and similar to the original “taster”. Nestle believed that it could use the image because it had been widely used in Canada. Nestle did not, however, investigate the scope of Cristoff’s consent nor did it ask Cristoff if he would consent to Nestle’s use of his image.

Nestle began using its redesigned Taster’s Choice label with Cristoff’s image in 1998. The label was used on several different Taster’s Choice products. Labels bearing Cristoff’s photo were also used internationally and the image appeared in multiple advertising campaigns, including newspaper coupons, and magazine and internet advertisements.

In 2002, while standing in line at a hardware store, a person remarked to Cristoff that he “looked like the guy on my coffee jar.” Cristoff saw a jar of Taster’s Choice instant coffee on a store shelf approximately one month later and recognized his photograph on the label.

Nestle redesigned its label again in 2003 and used another model for its “taster” photo. Cristoff nevertheless sued Nestle in 2003 and alleged claims for unauthorized commercial use of another’s likeness, common law appropriation of likeness, quantum meruit and unjust enrichment.

The trial court denied Nestle’s motion for summary judgment based on the statute of limitations and ruled that the Single Publication Act (Civil Code §3425.3) did not apply to Cristoff’s claims because they were not “based on defamation.” The trial court applied a two year statute of limitations and instructed the jury that because Cristoff filed his complaint on February 7, 2003 he could “claim damages that took place at any time on or after February 7, 2001.” The trial court also instructed the jury that it should apply the “delayed discovery” rule and that Cristoff could seek damages that took place from the time Nestle first used his image on its labels if Cristoff proved that “prior to his discovery of the facts he did not previously suspect, or should have suspected, that his photograph was on the Taster’s Choice label.” After the presentation of evidence, the jury found in Cristoff’s favor and ruled that Nestle knowingly used his likeness without his consent and that, prior to 2002, Cristoff did not know nor should he have known that his photograph was being used for commercial purposes. The jury awarded Cristoff damages of more than $15 million.

The Court of Appeal reversed the judgment and remanded the case for a new trial. The Court of Appeal concluded that the single publication rule did apply to a claim of appropriation of likeness. The Court also held that the lower court should determine whether the discovery rule delayed the accrual of the cause of action based on whether Nestle hindered Cristoff’s discovery of the use of his photograph on the Nestle label.

The California Supreme Court held that the Court of Appeal properly found that the single publication rule did apply to Cristoff’s claim for appropriation of likeness. The Court held, however, that to determine when the statute of limitations was triggered for Cristoff’s action, a court must decide whether Nestle’s unauthorized use of Cristoff’s image, including its production of the label, constituted a “single publication” under the single publication rule. The California Supreme Court held that the record before it was insufficient to allow it to answer this question.

The California Supreme Court recognized that the language in section 3425.3 is quite broad and that the California Legislature intended the single publication rule to apply to “libel or slander or invasion of privacy or any other tort …,” which should include appropriation of likeness. In determining the application of the single publication rule, the California Supreme Court reasoned that a Court “first must identify what constitutes a “single integrated publication” within the meaning of the rule, such as the printing and distribution of a particular issue of a newspaper, magazine or book.” The Court held that the primary issues to be determined was whether the printing of the Nestle label over a five year period constitutes a single integrated publication and whether Nestle’s use of Cristoff’s likeness in other forms, including coupons, and magazine and internet advertisements also constituted a “single integrated publication.”

The California Supreme Court recognized that “[t]he single publication rule was created to address the problem that arose with the advent of mass communication from the general rule in defamation cases that “each time the defamatory statement is communicated to a third person … the statement is said to have been `published,’” giving rise to a separate cause of action.” Eventually, “courts recognized that the advent of books and newspapers that were circulated among a mass readership threatened unending and potentially ruinous liability as well as overwhelming (and endless) litigation…”. The California Supreme Court recognized that the single publication rule was fashioned to avoid these problems and provided that “for any single edition of a newspaper or book there was but a single potential action for a defamatory statement contained in the newspaper or book, no matter how many copies of the newspaper or book, were distributed.”

The California Supreme Court concluded, however, that it was “not clear whether the production of a product label over a period of years is a `single integrated publication’ that triggers the running of the statute of limitations when the first such label is distributed to the public.” The California Supreme Court declined to resolve that issue without the benefit of additional facts from the parties that would reveal “the manner in which the labels were produced and distributed, including when production of the labels began and ceased.” The Court also instructed the trial court to determine on remand, that if the production of the label constituted a single integrated publication, then the court “should further consider whether the statute of limitation began anew when the label was `republished’ within the meaning of the single publication rule.” Furthermore, the Supreme Court recognized that the trial court would also have to resolve the issue of whether the advertisements using Cristoff’s image were also part of a “single integrated publication”. The Court recognized that Nestle “may be able to show that the production of some or all of these items were single integrated publications and that the statute of limitations was triggered as to that item when it first was distributed to the public.”

Finally, the California Supreme Court rejected the application of the delayed discovery rule in this case. The Court reasoned that “[c]ourts uniformly have rejected the application of the discovery rule to libels published in books, magazines and newspapers, pointing out that application of the discovery rule would undermine the protection provided by the single-publication rule.” The California Supreme Court concluded that the same logic applies to a product label as in the Nestle case that is “not published in an inherently secretive manner,” but is distributed widely to the public.

In remanding the case to the trial court, the California Supreme Court established that the single publication rule is applicable in cases involving appropriation of likeness and that the delayed discovery rule will not apply in such cases where there has been mass distribution of offending image to the public.

Those in the wine industry regularly traverse a vast array of statutes, rules and regulations in an effort to get their grape from the vine into your glass. One set of regulations all wine producers deal with are those governing wine labeling. The federal government, which regulates wine labels through the Alcohol and Tobacco Tax and Trade Bureau (the TTB), imposes rules which state what must and what may not be included on a wine label. A winery or wine producer must obtain federal approval of each wine label before bottling wine in the United States. In addition to federal approval, some states have their own wine label approval process wine producers and or distributors must go through prior to a wine being sold within that state. Most of the time the federal and state wine label approval process is straight forward. However, every so often a situation arises which shows the process can be complex and subjective.

A recent example is Hann Family Wines and the problem they have had with their Cycles Gladiator label. The label (shown below) is a reproduction of a circa 1895 poster ad for a bicycle featuring the side view of a nude nymph. The Alabama Alcoholic Beverage Control Board rejected the label on the grounds that it violated regulations which prohibited wine advertisement and labels featuring “any person(s) posed in an immodest or sensuous manner.” Similar to some states, Alabama requires wineries and distributors to submit wine labels to the Alabama ABC for approval prior to distribution and sale within Alabama.

Should Hann Family Wines have anticipated this problem with the Alabama Alcoholic Beverage and Control Board? Probably not. Prior to submitting the label to the Alabama ABC the label was submitted to and approved by the TTB. Federal wine labeling regulations also prohibit “[a]ny statement, design, device, or representation which is obscene or indecent.” However, it appears the TTB did not consider the Cycles Gladiator label either obscene or indecent.

Like Alabama, other States that regulate wine labels have similar prohibitions against obscene or indecent labels. (Some States, such as California and Texas do not require an independent review of wine labels but merely require that the label have been approved by the Federal government.) Based on the number of States where Cycles Gladiator is available, (according to Hann Family Wines website), it appears that most if not all of the other States that also regulate wine labels did not find the Cycles Gladiator label obscene.

Hann Family Wines also applied to Federally register the label as a trademark. Federal law regulating trademarks prohibits the registration of a mark that “consists of or comprises immoral, deceptive, or scandalous matter.” However, the examining attorney assigned to the Cycle Gladiator application did not refuse registration of the mark on those grounds. (California’s trademark act contains similar language: “A mark by which the goods or services of any applicant for registration may be distinguished from the goods or services of others shall not be registered if ….[i]t consists of or comprises immoral, deceptive, or scandalous matter. Cal. B&P Code §14205(a).)

The determination of what is and isn’t obscene has always been based on “contemporary community standards.” This certainly allows the Alabama ABC to impose its subjective assessment of whether the label is obscene. However, when the Cycles Gladiator wine is available in 49 other States, one can’t help question whether the Alabama ABC’s assessment fell short.

Section 505 of the Copyright Act provides that the court may, in its discretion, award full costs, including reasonable attorneys’ fees, to the prevailing party in a claim arising under the Copyright Act. 17 U.S.C. § 505. In 1941, the Ninth Circuit ruled that when a party voluntarily dismisses her claim without prejudice after the court ordered a more definite statement, the defendant is the prevailing party, and therefore entitled to attorneys’ fees. Corcoran v. Columbia Broadcasting System, Inc., 121 F.2d 575, 576 (9th Cir. 1941). The Corcoran court expressly rejected the plaintiff’s contention that the dismissal without prejudice does not confer prevailing party status on the defendants.

Last month, the Ninth Circuit changed its mind and overruled Corcoran after 68 years. In Cadkin v. Loose, 569 F.3d 1142 (9th Cir. 2009), the Ninth Circuit held that a voluntary dismissal without prejudice does not confer prevailing party status for a claim brought under the Copyright Act.

Emil Cadkin filed his complaint in federal court alleging several claims, including a claim for copyright infringement. Nearly four years later, Loose filed his motion to dismiss, which the district court granted with leave to amend. Cadkin filed his amended complaint, and again Loose filed a motion to dismiss. Cadkin filed a motion to remand, seeking to have the case transferred to state court, and attached a second amended complaint. The court denied the remand motion on the grounds that a case originally brought in federal court cannot be remanded to state court, and the parties treated the second amended complaint as the operative pleading. Notably, the second amended complaint did not include a claim based on copyright and in fact contained only state law claims.

Loose again moved to dismiss, claiming the state law claims were preempted by the Copyright Act. Cadkin both opposed the motion and filed his own notice of voluntary dismissal without prejudice. The district court entered the dismissal. The defendants then sought attorneys’ fees under Section 505 of the Copyright Act. Following the binding precedent of Corcoran, the district court granted the motions for attorneys’ fees, awarding $225,575 to the Loose Trust defendants and $63,151 to defendant May-Loo.

The ruling would have been simple for the Ninth Circuit to affirm based on Corcoran, which was directly on point and controlling authority. However, the Ninth Circuit used the opportunity to review Corcoran in light of a 2001 Supreme Court case, Buckhannon Bd. & Care Home, Inc. v. W. Va. Dep’t of Health & Human Res., 532 U.S. 598. In Buckhannon, the Court ruled that “prevailing party” status turns on whether there has been a “material alteration of the legal relationship of the parties.” The Ninth Circuit had recently held that a dismissal without prejudice does not alter the legal relationship of the parties in a similar fee shifting statute. Oscar v. Alaska Dep’t of Educ. & Early Dev., 541 F.3d 978, 981 (9th Cir. 2008). Defendants here argued that neither Buckhannon nor Oscar were copyright cases, and should not be controlling. However, because the Supreme Court based its ruling on the definition of “prevailing party” found in Black’s Legal Dictionary, the fact that Buckhannon was not based on copyright did not prevent the Ninth Circuit from using it in that context.

Following Oscar, the Ninth Circuit explained that “because a dismissal without prejudice is not a decision on the merits and plaintiff was free to re-file his complaint in federal court, dismissal without prejudice does not alter the legal relationship of the parties because the defendant remains subject to the risk of re-filing.” Cadkin, 569 F.3d at 1148. A subtle distinction here is that the ability of a plaintiff to file a complaint in state court after the voluntary dismissal, but not federal court, does alter the legal relationship and establish the defendant as the prevailing party. This was the case in Miles v. California, 320 F.3d 986 (9th Cir. 2003). The key, then, is whether the plaintiff can re-file his complaint in federal court.

The defendants here argued that Cadkin was not free to re-file his complaint for copyright infringement, and so even after Buckhannon, they were prevailing parties. Defendants argued that when Cadkin filed his second amended complaint and omitted his copyright claim, he waived it, and was therefore precluded from re-filing his claim. The Court acknowledged that it has “consistently held that all causes of action alleged in an original complaint which are not alleged in an amended complaint are waived.” However, it went on to say that it has “never applied this waiver rule to a new lawsuit filed after a voluntary dismissal without prejudice.” Cadkin, 569 F.3d at 1149. The Court pointed to a past case in which it “squarely held waiver in one lawsuit does not carry over to a subsequent lawsuit following a voluntary dismissal without prejudice under Rule 41(a).” Id. Thus, while Cadkin would have been precluded from filing an amended complaint with a copyright claim, he was not precluded from filing a new complaint with a copyright claim.

There are some traps for the unwary here. First, while the Court made it more difficult to get attorney fees if the plaintiff voluntarily withdraws the case, it has not completely closed the door. Indeed, if the plaintiff dismisses with prejudice, the defendant is still the prevailing party and may seek fees. Similarly, it appears that if there was some other bar to plaintiff filing another lawsuit, such as the statute of limitations, then even a voluntary dismissal without prejudice may render the defendant the prevailing party. When in doubt, it is probably wise to ask defendants to stipulate to dismissal and include a provision that each side is responsible for its own costs and fees. On the other side of the coin, if you represent the defendant, think twice before agreeing to such a request.

Most everyone knows that federal copyright laws protect an author’s expression of an idea. When someone infringes a protected work, either by copying or distributing it without permission, the copyright owner is generally entitled to damages. In Dream Games of Arizona v. PC Onsite, — F.3d — (April 2, 2009), the Ninth Circuit addressed a question of first impression in the circuit: Whether illegal use or operation of a work by the copyright owner precludes the award of actual or statutory damages for copyright infringement.

Dream Games of Arizona is a company that creates, designs, develops, and sells electronic video bingo games, including a game called Fast Action Bingo. In March 2002, Dream Games entered into negotiations with PC Onsite for a software upgrade to Fast Action Bingo. The parties signed a nondisclosure agreement in which it was clear that Dream Games retained all intellectual property in the game.

PC Onsite created a new version of Dream Game’s Fast Action Bingo, and cleverly called it Fast Action Bingo II. When PC Onsite presented it to Dream Games, however, negotiations for an agreement to go forward with the new game broke down. Immediately thereafter, PC Onsite created Quick Play Bingo I, a game remarkably similar to, and in fact based upon, Fast Action Bingo II. PC Onsite registered the copyright of the source code for its new game, and marketed it through City Entertainment. PC Onsite and City Entertainment agreed to install and operate Quick Play Bingo I in bingo parlors in Utah and Wyoming. Several of the bingo parlors with the Quick Play games already had Fast Action Bingo games, and the two games competed directly.

Dream Games discovered the Quick Play Bingo I games, and not surprisingly, filed suit for copyright infringement, breach of contract, and unjust enrichment. A complicating factor in the case was the fact that gambling is illegal in both Utah and Wyoming. In fact, the Wyoming Supreme Court specifically found that Fast Action Bingo machines were illegal in its state, and several machines had been seized in Utah. During the ensuing jury trial, the district court ruled that Dream Games could not recover actual damages for Fast Action Bingo’s lost profits because the game was offered illegally in Utah and Wyoming. The court did not preclude statutory damages, however, and the jury eventually awarded Dream Games $25,000 in statutory damages. PC Onsite appealed. Dream Games filed a cross-appeal, but apparently did not challenge the ruling that it was not entitled to actual damages.

On appeal PC Onsite first argued that the district court erred when it allowed evidence that included the unprotected elements of the Fast Action Bingo game along with the four elements that were protected by the copyright. The Ninth Circuit had no problem dispensing with this argument, citing case law that held copyright infringement can be based on infringement of a combination of unprotected elements. The court pointed out that in combination, the jury might find these elements protectable, and to allow the possibility of such a finding, the jury must be allowed to see the complete work. It is necessary for the unprotectable elements to be identified to the jury, and the district court did that in its jury instructions. Contrary to PC Onsite’s argument, the Ninth Circuit held that the district judge is not also required to specify the elements which are protectable.

The court then turned to the question of damages. PC Onsite argued, logically, that Dream Games should not be entitled to damages for copyright infringement because the use that it was infringing, bingo parlors in Utah and Wyoming, was illegal. The argument has some initial appeal. If the use by the copyright owner was illegal, then awarding damages for infringement allows the owner to be compensated because the infringer cut into its illegal revenue. This can’t be right, can it?

As it turns out, although it had never addressed the issue before, the Ninth Circuit held that it is right. With a closer look, perhaps that makes sense after all.

The court started by exploring the broad basis for copyright protection, and prior cases holding that fraudulent content of a work was not a basis for denying copyright protection. The court quoted Nimmer on Copyright for “the prevailing view [ ] that no works are excluded from copyright by reason of their content.” It went on to say that “there is nothing in the Copyright Act to suggest that the courts are to pass upon the truth or falsity, the soundness or unsoundness, of the views embodied in a copyrighted work.” Indeed, as the court noted, “the gravity and immensity of the problems, theological, philosophical, economic, and scientific, that would confront a court if this view were adopted are staggering to contemplate.”

The court also pointed out that the Fast Action Bingo machine, while illegal in Wyoming or Utah, was not illegal in other geographical areas. In the court’s view, “it would be absurd to deny a work the protection of a federal copyright because it is capable of illegal use in one or more states, but capable of perfectly legal use in other states.” One of the purposes of copyright protection is to deter infringement. To preclude damages based on the content of the work would be contrary to this goal, and provide no incentive to avoid copying another’s work.

The court held that “an award of either type of damages available under the Copyright Act – actual or statutory – is not precluded by evidence of illegal operation of the copyrighted work, at least where the illegality did not injure the infringer.” With this holding, it is interesting that Dream Games did not appeal the denial of actual damages. Had it done so, it is likely that a new trial on damages would be necessary given the ruling. Assuming more than $25,000 in actual damages was at issue, this seems like a costly mistake for Dream Games.

Finally, during the trial the court did not allow PC Onsite to present evidence of illegality to the jury. It ruled that the jury should focus on PC Onsite, and that any possible illegal activity by Dream Games was irrelevant to the willfulness or innocence of PC Onsite’s conduct. PC Onsite objected to the district court’s exclusion of evidence of the illegality of Dream Games’ activity in determining the amount of statutory damages to award, and appealed that ruling as well. The Ninth Circuit seemed to have little trouble dismissing this argument, also, holding that the evidence was properly excluded under Rule 403 due to the possibility of unfair prejudice. “Here, because of the district court’s familiarity with the details of the case and its greater experience in evidentiary matters, it was not an abuse of discretion to exclude evidence of illegal operations.”

Recent news reports tell of an impending legal battle between the artist of the painting at left and the Associated Press who owns the photograph upon which the painting was based. The legal battle will determine whether the ubiquitous painting of the 44th President is an original piece of artwork, or one that improperly misappropriated a photograph protected by copyright laws.

But what of President Obama’s rights in his own likeness? Can any artist commandeer the President’s likeness for his/her own commercial purposes without fear of legal repercussions? Could President Obama stop such commercial use of his likeness if he was so inclined? The answer depends on how “transformative” of President Obama’s likeness the work of art is.

The California Supreme Court case Comedy III Productions, Inc. v. Gary Saderup, Inc. (2001) 25 Cal.4th 387 speaks directly to this issue. In Comedy III Productions, the registered owner of all publicity rights in The Three Stooges filed a lawsuit for damages and injunctive relief against an artist who sold lithographs and t-shirts that reproduced a charcoal drawing by the same artist that depicted the deceased members of The Three Stooges. The depiction in question appeared as follows:

Without securing the owner’s consent, the artist sold lithographs and t-shirts bearing the above likeness of the Three Stooges. The lithographs and t-shirts did not constitute an advertisement, endorsement, or sponsorship of any other product. The image of the Three Stooges merely appeared on the lithographs and t-shirts being sold.

The Comedy III Productions Court resolved an inherent conflict between the right of publicity under California Civil Code Section 3344.1 and free speech rights under the First Amendment of the United States Constitution. To do so, the Court formulated “what is essentially a balancing test between the First Amendment and the right of publicity based on whether the work in question adds significant creative elements so as to be transformed into something more than a mere celebrity likeness or imitation.” Id. at 391.

According to the Comedy III Productions Court, “(1) state law may validly safeguard forms of intellectual property not covered under federal copyright and patent law as a means of protecting the fruits of a performing artist’s labor; and (2) the state’s interest in preventing the outright misappropriation of such intellectual property by others is not automatically trumped by the interest in free expression or dissemination of information; rather, as in the case of defamation, the state law interest and the interest in free expression must be balanced, according to the interests at stake.” Id. at 401.

The balancing test adopted by the Comedy III Productions Court hinged on “whether a work is ‘transformative.’” Id. at 404. “When a work contains significant transformative elements, it is not only especially worthy of First Amendment protection, but it is also less likely to interfere with the economic interest protected by the right of publicity.” Id. at 405. To determine whether the work is “transformative” the Court stated: “We ask, in other words, whether a product containing a celebrity’s likeness is so transformed that it has become primarily the defendant’s own expression rather than the celebrity’s likeness. And when we use the word ‘expression,’ we mean expression of something other than the likeness of the celebrity.” Id. at 406. “Furthermore, in determining whether a work is sufficiently transformative, courts may find useful a subsidiary inquiry, particularly in close cases: does the marketability and economic value of the challenged work derive primarily from the fame of the celebrity depicted? If this question is answered in the negative, then there would generally be no actionable right of publicity. When the value of the work comes principally from some source other than the fame of the celebrity – from the creativity, skill, and reputation of the artist – it may be presumed that sufficient transformative elements are present to warrant First Amendment protection.” Id. at 407.

Cases subsequent to Comedy III Productions have reiterated this “transformative” test. In Winter v. DC Comics (2003) 30 Cal.4th 881, the California Supreme Court stated that “an artist depicting a celebrity must contribute something more than a merely trivial variation [but must create] something recognizably his own in order to qualify for legal protection.” Id. at 889 (in the context of comic book depictions of half-worm, half-human characters based on musicians Edgar and Johnny Winter). The comic book characters were “fanciful, creative characters, not pictures of the Winter brothers” and therefore, sufficiently transformative to qualify for First Amendment protection. Id. at 892. Likewise, in Kirby v. Sega of America, Inc. (2006) 144 Cal.App.4th 47 the Second District Court of Appeal recited the “transformative” standards set forth in Comedy III Productions and Winter, and found that a video game character based upon a celebrity was more than a mere likeness or literal depiction of the celebrity, and therefore, sufficiently transformative to qualify for First Amendment protection.

Under the facts of the Comedy III Productions case, the Court found that the artistic work in question was not sufficiently “transformative” to be protected under the First Amendment. In sum, the Court felt the artist’s drawing of The Three Stooges, although skillful, contributed nothing other than a trivial variation of the likenesses of The Three Stooges. As such, the artist was not permitted to continue selling the lithographs and t-shirts with his depiction of The Three Stooges, absent a license from the right of publicity holder.

The question remains whether the President Obama painting is sufficiently “transformative” so as to protect the artist from any potential liability. Does the painting primarily represent the President’s likeness, or the unique transformative expression of the President’s likeness by the artist? This question is difficult to answer, with strong arguments to be made on both sides. However, the marketability and economic value of the painting appear to derive primarily, if not solely, from the fame of the individual depicted. According to the Comedy III Productions Court, this tends to indicate that an actionable right of publicity exists in favor of President Obama. Thankfully for the artist, this legal theory was never tested, and instead the painting was readily embraced throughout the Obama campaign.

The Federal Circuit Court of Appeals has redefined the test for the patentability of business methods and computer software. In In re Bilski, 545 F. 3d 943 (Fed. Cir. 2008), an en banc decision, the court discarded the current test, which it established in its 1998 decision in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998) for a test set forth in a Supreme Court case decided in 1972, Gottschalk v. Benson, 409 U.S. 63 (1972).

Bilski sought to patent a method for hedging risks in commodities trading. Claim 1 required three steps, the essence of which were: (1) initiating a series of transactions between a commodity provider and consumers; (2) identifying market participants for the commodity; and (3) initiating a series of transactions the between the commodity provider and the market participants. The U.S.P.T.O. rejected Bilski’s claims on the grounds that they were not a patentable subject matter under 35 U.S.C. § 101.

On appeal, the Board of Patent Appeals and Interferences affirmed the PTO’s rejections. The Board held that Bilski’s claims were not patentable because they did not involve a transformation of physical subject matter from one state to another; they constituted an abstract idea, and did not produce a useful, concrete, and tangible result.

Bilski then appealed to the Federal Circuit. In 2007, the case was argued before a panel of the Federal Circuit. The court then ordered an en banc review, and oral argument was held in May 2008.

The Court of Appeals affirmed the Board’s decision rejecting all claims, and set forth a new test to determine whether a process is statutory subject matter under § 101.

The Federal Circuit reviewed past cases addressing the patentability of processes. The court discussed the Supreme Court’s decision in Diamond v. Diehr, 450 U.S. 175 (1981), stating that the Supreme Court had held that a fundamental principle was not patentable but that “an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection. [citation omitted.]” Bilski, supra, at 953. The fundamental principle was a mathematical algorithm called the Arrhenius equation, while the application was the use of the equation in a process for curing synthetic rubber. The Court of Appeals explained that in Diehr, the Supreme Court had distinguished between “those claims that ‘seek to pre-empt the use of’ a fundamental principle, on the one hand, and claims that seek only to foreclose others from using a particular ‘application’ of that fundamental principle, on the other.” Id.

Thus, according to the Court of Appeals, the issue before it was whether Bilski’s “claim recites a fundamental principle, and, if so, whether it would pre-empt substantially all uses of that fundamental principle if allowed.” Bilski, supra, at 954. The court held that the Supreme Court had already resolved the issue and set forth “a definitive test.” The test, as stated by the Supreme Court in Gottschalk v. Benson, 409 U.S. 63, 70 (1972), is that a process is patentable if: “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” Bilski, at id. The Court of Appeals’ rationale for adopting the test was that:

“A claimed process involving a fundamental principle that uses a particular machine or apparatus would not pre-empt uses of the principle that do not also use the specified machine or apparatus in the manner claimed. And a claimed process that transforms the particular article to a specified different state or thing by applying a fundamental principle would not pre-empt the use of the principle to transform any other article, to transform the same article but in a manner not covered by the claim, or to do anything other than transform the specified article.”

Id. at 954.

In response to arguments that the “machine-or-transformation” test was not intended by the Supreme Court to be the only test for determining whether a process is patentable, the appellate court stated, at 956:

“Thus, we recognize that the Supreme Court may ultimately decide to alter or perhaps even set aside this test to accommodate emerging technologies. And we certainly do not rule out the possibility that this court may in the future refine or augment the test or how it is applied.”

The court noted that “insignificant postsolution activity will not transform an unpatentable principle into a patentable process.” Id. at 957; quoting Diehr, supra, 450 U.S. at 191-92. Thus, the court has clarified that superficial attempts to get around the machine-or- transformation test will fail.

The court overruled two prior tests that it has used. The first, known as the Freeman-Walter-Abele test, required a determination of whether: (1) the claim included an algorithm, and (2) the algorithm was applied to physical elements or steps. The second, set forth in the Alappat and State Street Bank cases, was referred to as the “useful, concrete, and tangible result” test. Under that test, a process was patentable if it produced a useful, concrete, and tangible result. Both tests, however, were “inadequate.” Bilski at 959-960.

The court considered the “technological arts” test which some of the amici curiae advocated. The court rejected this test on the grounds that the phrase “technological arts” was too vague and constantly evolving. Id. at 960.

The court next discussed how to apply the machine-or-transformation test. Unfortunately for patent practitioners, however, because Bilski’s claims did not use a specific machine, the court did not address the “machine” prong of the test. The court stated, at 962:

“We leave to future cases the elaborations of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.”

As to the application of the “transformation” prong of the test, the court did provide some guidance. The court said that the transformation “must be central to the purpose of the claimed process.” Id. The court then tried to explain what kinds of “articles,” when transformed, would be patentable subject matter. The “chemical or physical transformation of physical objects or substances” is clearly patentable subject matter. Id. Electronic signals and data fall into a somewhat less clear area. The patentability of business methods, especially those that “involve the manipulation of even more abstract constructs such as legal obligations, organizational relationships, and business risks,” is even less clear. Id.

In analyzing Bilski’s claims, the court held that they were not patentable because they did not transform any article. “Purported transformations or manipulations simply of public or private legal obligations or relationships, business risks, or other such abstractions cannot meet the test because they are not physical objects or substances, and they are not representative of physical objects or substances.” Id. at 963.

The dissenting opinions cover the spectrum. Some judges thought that the new test was too narrow and excluded patentable subject matter. Other judges argued that business methods should not be patentable at all.

Many commentators believe that under Bilski, pending patent applications and issued patents for business methods may be at risk, and that software patents may also be harder to obtain. Until the court clarifies the rule in future cases, however, patent applications for these types of patents will be more challenging to write and prosecute, and litigation over issued patents may well increase.