Intellectual Property

By Andrea Anapolksy

In the wake of jury selection for the Coco-Cola Co. theft trade secrets trial and Apple Computer’s two-year quest to discover who leaked trade secret information about an unreleased Apple product to several online blog sites, misappropriation of a company’s trade secrets may have become increasingly more difficult to prevent. This article will be the first of a two-part series which examines the trade secrets doctrine and recent developments related to it. This article in particular will assess the doctrine of trade secrets under California law and will offer available remedies on avoiding misappropriation.

Treatment of Trade secrets under California law.

Under California law, the trade secrets doctrine is found primarily in two statutes: the California Uniform Trade Secrets Act, Civil Code §§ 3426 et. seq., (the “UTSA”) and Penal Code §499c.

The penal code provides that anyone who intends to “deprive or withhold the control of a trade secret from its owner” or has the “intent to appropriate a trade secret to his or her own use” or to the use of someone else, may be guilty of theft. (Penal Code § 499c)

The Civil Code, provides the definitions to “misappropriation” and “trade secrets”. The term “misappropriation” has a specific legal meaning and is divided into two distinct types of misuse: acquisition by improper means, and the use or disclosure without express or implied consent. (Civil Code § 3426.1) Under the first type of misuse, “improper means” may include: “theft, bribery, misinterpretation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.” (Civil Code § 3426.1(a)) Under the second type of misuse, courts have extended the definition to capture situations in which a former employee’s use or disclosure of confidential customer information to solicit new customers or accounts for a new employer constitutes the “misappropriation” of a trade secret.” (Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Garcia, 127 F.Supp.2d 1305, 1306 (C.D. Cal. 2000))

In an effort to reflect California’s commitment to protect proprietary business information, California courts constructed a broad definition of “trade secrets” that often captures information commonly and frequently accumulated in the normal course of running a business. Under California law, a trade secret may include a pattern, formula, program, device, method, technique, or process. While these examples may not appear to rise to the level of a protection deserving of source code, for example, such information may be eligible for protection as a trade secret if such information has two salient characteristics: (1) it gains independent (actual or potential) economic value from not being generally known to the public or to other parties (competitors, associates) which could obtain economic value from its disclosure or use; and (2) it is subject to efforts that are reasonable under the circumstances to maintain its secrecy. (Civil Code § 3426.1(d)) Therefore, as long as a company takes reasonable measure(s) to protect what it considers proprietary business information, and if the value of the information is actually or potentially based on the fact that it is a secret, then California courts will consider extending the trade secrets doctrine to protect customer lists, plans, spreadsheets, corporate records, offers and so on.

Not only is it pertinent to understand what types of proprietary information may benefit from protection under the trade secrets doctrine, it is also worth mentioning that even if employers do not actually know of an employee’s misappropriation of a former employer’s trade secret, the current employer may be held liable. Under the UTSA, liability is based on constructive knowledge, not actual knowledge. (Civil Code § 3426.1(b)(2)(B)(ii)(iii)) This standard may implicate an employer in situations where an employer should have known of the misappropriation, as shown in one case where an employer repeatedly used proprietary information which had been previously protected as a trade secret by an employee’s former employer. (Cadence Design Systems, Inc. v. Avant! Corp., 29 Cal. 4th 215 (2002)) While the current employer did not actually know of the misappropriation, the Court stated that the employer’s repeated use of such proprietary information was one factor which it relied on to impute constructive knowledge of the misappropriation to the current employer. (Id., at 226) Of course, the standard of constructive knowledge is fact-specific, but it is something to keep in mind.

Remedies to Mitigate Misappropriation.

The most important step toward protecting a company’s trade secrets is for the hiring party to always reduce its intentions to writing. As will be discussed in a subsequent article, California Courts generally do not uphold non-competition agreements. An alternative is to prepare nondisclosure agreements. While nondisclosure agreements vary—depending on the nature and scope of the disclosure, the parties involved, and the value of the trade secret—most, if not all nondisclosure agreements should include a clear description of the trade secret, permissible uses of the trade secret, a duty of confidentiality, a remedy for non-compliance with the duty of confidentiality (such as injunctive relief), a duty to disclose prior agreements which could prevent the employee from using proprietary information acquired from a prior employer and the term of the agreement (which may last indefinitely or until a certain event, such as when the information is released to the public through a channel other than misappropriation). While it is highly improbable that any company can prevent the misappropriation of its trade secrets, creating a nondisclosure agreement, among several steps it should take to help mitigate potential misappropriation and liability.

In 2006, Federal District Courts throughout the country were asked to decide if purchasing and using trademark-protected keywords to trigger internet advertising constitute trademark violations as contemplated by the Lanham Act. Unfortunately for advertisers, these rulings were inconsistent. In 2007, this trend continues with the Eastern District of Pennsylvania ruling in J.G. Wentworth v. Settlement Funding, LLC, No. 06-0597 (E.D. Pa. Jan. 4, 2007). In J.G. Wentworth, the court siding with advertisers, ruled that using trademark-protected words to trigger internet advertising does not violate trademark law.

J.G. Wentworth (“Wentworth”) and Settlement Funding (“Settlement”) are finance companies that specialize in providing immediate cash payments in exchange for the rights to future payments from structured settlements, annuities, and other assets. Plaintiff, Wentworth, is the market leader for these types of products and holds trademarks that are heavily promoted through television and internet advertising. Wentworth sued Settlement for using Wentworth’s trademarks to draw internet traffic to Settlement’s website.

Settlement used Wentworth’s trademarks in two ways. The first manner in which Settlement used the trademarks was through Google’s AdWords program. Using Google’s internet search engine, internet users search Google’s database of websites by entering keywords. Based on these keywords, Google presents an ordered list according to relevancy to the user. The user then is able to click on any website link they desire. With Google’s AdWords program, advertisers can place bids on certain keywords. When the advertiser’s keyword is entered into the search engine, the advertiser’s link to their website is displayed in the “Sponsored Links” section of the web page. Each time a user clicks on this link, the advertiser pays Google a fee. Settlement used keywords “J.G. Wentworth” and “Wentworth” to increase traffic to their website. Whenever a user typed in the keyword “J.G. Wentworth,” a sponsored link advertising Settlement’s website would appear alongside the other search results. Wentworth maintained that Settlement’s use of the J.G. Wentworth trademark in this manner infringed upon plaintiff’s trademark rights.

The second manner in which Settlement used Wentworth’s trademarks was in the keyword portion of Settlement’s meta tags of its website. Meta tags are hidden code imbedded in websites to help search engines determine the relevancy of web pages to particular search terms. Wentworth asserted that Settlement used plaintiff’s trademarks in their meta tags to increase traffic to their website whenever the term “J.G. Wentworth” was searched. Whenever a user typed in “J.G. Wentworth” into a search engine, links to Settlement would appear in the search results. Wentworth also claimed that this use of Wentworth’s marks infringe upon their trademark rights.

Based on these uses, Wentworth sued Settlement for intentionally confusing customers as well as diverting potential customers from their website to Settlement’s site. Wentworth claimed that not only was defendant stealing customers, Settlement was eroding the distinctiveness of Wentworth’s mark causing loss profits for Wentworth.

To determine if the there was a trademark violation, Wentworth needed to establish that (1) the mark is legally protectable; (2) the mark is owned by Wentworth; and (3) Settlement’s use of the mark is likely to create confusion concerning the source of the goods and services. The issue in this case centered on the third prong, specifically, did Settlement use the mark in commerce and did that use create consumer confusion.

The court first addressed whether or not the purchase and use of a trademark-protected keyword to trigger internet advertising constitutes a use in commerce as contemplated by the Lanham Act. Courts have been divided on this issue. Some courts have taken the position that there can be no liability unless a trademark is used in a way that identifies the products and services. (Wells Fargo & Co. v. WhenU.com, Inc., 293 F. Supp. 2d 734, 757 (E.D. Mich. 2003)). Since the meta tags and the Google AdWords program are invisible to the public and do not identify the source of the goods, there can be no “use” of the trademark.

Other courts have taken the opposite approach on this issue. In examining a similar issue concerning Google’s AdWords program, a New Jersey District Court held that using this technology did satisfy the “use” requirement. (Buying for the Home, LLC v. Humble Abode, LLC, 2006 WL 3000459 (D.N.J. Oct. 20, 2006)). The court reasoned that purchasing another’s trademark to trigger advertising was a “use” because it entailed a purchase in commerce based on the value of another’s trademark while being used to trigger advertising for goods and services. Siding with the New Jersey court, the present court found that Settlement’s uses of Wentworth’s trademarks constituted “use” under the Lanham Act.

Finding that there was a use of the mark, the court had to determine if that use created a likelihood of confusion. Likelihood of confusion exists where “consumers viewing the mark would probably assume that the product or service it represents is associated with the source of a different product or service identified by a similar mark.” (Checkpoint Sys., Inc. v. Check Point Software Techs., Inc., 269 F.3d 270, 280 (3d Cir. 2001)). Courts have reasoned that initial interest confusion is actionable under the Lanham Act. Initial interest confusion occurs when a competitor misleads a potential purchaser into an initial interest in the competitor’s goods by using another’s trademark. This confusion is actionable even if confusion as to the source of the goods would be dispelled by the time the goods are sold.

The court in this case acknowledged a Third Circuit opinion that did not apply initial interest confusion to meta tags and rejected a Ninth Circuit argument that found confusion does occur because the web-user is “directed” to certain websites. The court here held that as a matter of law, using Google AdWords and meta tags did not result in any actionable likelihood of confusion. The court based this decision on the belief that users choose among the search results presented to them. Users are not forced or “directed” to particular sites, and therefore, no initial interest confusion exists.

Since the court was unable to find a likelihood of consumer confusion from Settlement’s use of Wentworth’s trademarks, the court found for Settlement. Even though courts have gone back and forth on these issues, the Eastern District of Pennsylvania was the first court to rule as a matter of law that even if plaintiff’s trademarks are used to trigger ads or search results, plaintiff will lose if the trademarks are not displayed. Despite this ruling, courts are still widely split on this issue and will remain so until the Supreme Court rules.

A business’s intellectual property may be its most valuable asset. Whether it is biotechnology, trade names, business methods, or computer software, intellectual property should be protected to the greatest extent possible in order to maximize the value of the business. This article summarizes the types of intellectual property protection that are available.

What Is Intellectual Property Protection?

There are four types of intellectual property protection: patent, copyright, trademark, and trade secrets.

Patents protect inventions. A patent is a grant by the United States Government to the inventor of the rights to exclude others from making, using, or selling the invention in the United States, or importing the invention into the United States. There are three kinds of patents: utility, design, and plant. A utility patent protects five classes of inventions: a process or method, a machine, an article of manufacture, a composition of matter (including chemical compositions, genes, and genetically engineered bacteria, plants, and animals), and an improvement of an invention in one of the other four classes. Subject matter that is not patentable includes pure mathematical algorithms that do not have steps, printed matter, natural compounds, and scientific principles. In order to be patentable, the invention must be useful, new (novel), and nonobvious.

A design patent protects new, original, ornamental designs for articles of manufacture. The patent protects only the appearance of the article, not any aspect of functionality.

Plant patents protect distinct, new varieties of a asexually reproducing plants (i.e. plants that can be reproduced without seeds, such as by budding or grafting), including certain types of roses, nuts, and fruit trees.

Copyrights protect original works of authorship fixed in a tangible medium. Original works of authorship include books, musical compositions, multimedia works, dramatic productions, motion pictures, and computer programs and databases. Functional works such as ideas, procedures, processes, and methods are not protectable by copyright. A copyright entitles its owner to the exclusive rights to reproduce the work, prepare derivative works, distribute copies of the work, and perform and display the work publicly.

Trademarks and service marks protect words, symbols, phrases, and logos used to indicate the source of goods or services. The strongest marks are those that are coined (made up words) or arbitrary (words that do not have any connection to the product or service). Suggestive marks, which suggest a characteristic of the product or service, are less strong than coined or arbitrary marks. Descriptive marks, which describe the product or service, are not protectable unless they have achieved secondary meaning (a strong association with the source of the product or service). Generic marks are not protectable at all because they are simply words that have become used to identify the product itself.

Trade dress protection is similar to trademark protection and protects the overall look of a product, as long as it is inherently distinctive and nonfunctional.

Trade secret law protects information such as formulas, compilations, programs, devices, or methods, which derives independent economic value from not being generally known to others and is the subject of reasonable efforts to maintain its secrecy.

Which Type of Protection Is Best?

A business may obtain all four types of intellectual property protection. For example, the product itself may be patentable, the name or brand may be a trademark, the literature or other written materials may be copyrightable, and the details of the manufacturing process for the product may be maintained as a trade secret.

In some cases, however, a decision must be made between the types of protection that will be used. One cannot obtain both patent and trade secret protection for the same thing. In order to obtain a patent, the invention must be disclosed to the public, while trade secret protection can be obtained only if the invention is kept secret. Patent and trade secret law offer different kinds of protection. A patent protects against the independent creation or reverse engineering of the device, while trade secret law does not protect against these acts. Patent and trade secret law have different requirements. An invention must be useful, novel, and nonobvious to be patentable, while there are no such requirements for trade secret protection.

In general, if both patent and trade secret protection are available, one should seek a patent if the invention is easily reverse-engineered or if it is disclosed when it is used (e.g. Amazon.com’s 1-Click method of accepting purchase orders over the Internet). If the invention is not easily reverse-engineered and not disclosed when it is used (e.g. the formula for Coca-Cola™), trade secret protection may be the better choice.

How Long Does the Protection Last?

A utility patent is valid for 20 years from the filing date of the patent application. A copyright lasts for the life of its author plus either 70 or 95 years, depending on the date of creation, unless it is a work-for-hire, which lasts for the shorter of either 95 years from the first publication or 120 years from creation. A trademark does not expire, as long as it is used. Trade secret protection lasts as long as the information is maintained as secret.

How Does One Obtain Protection?

A patent is obtained by filing, with the United States Patent and Trademark Office (“PTO”), a patent application containing claims (which set forth the scope and limits of the invention). The PTO conducts a search of the prior art, including U. S. and foreign patents and other publications, and issues a written opinion on whether the invention is patentable. The claims may be allowed or rejected. The applicant then has the opportunity to respond to the PTO and to explain why the claims should be allowed. After this process, called patent prosecution, the PTO either issues a patent or rejects the application. The process usually takes two to three years or so, depending on the type of invention and amount of prior art.

A copyright is obtained by filing an application with the United States Copyright Office. There is no examination process; it is simply a registration process.

A federal trademark is obtained by filing an application with the PTO. The PTO conducts an examination of other marks in use and determines whether there are similar marks and whether a likelihood of confusion could occur. If the PTO approves the mark, it is then registered. There is also protection for trademarks available under state law.

Trade secrets are governed by state law, in particular the Uniform Trade Secrets Act, which 43 states, including California, and the District of Columbia have adopted. There is no registration or examination procedure; a trade secret exists if the requirements set forth above are met.

What Advice Should a Client Be Given?

Clients should be advised to identify their intellectual property. This can be done through a formal audit by an intellectual property lawyer or informally by the company’s management. Once the intellectual property has been identified, the client should verify that it owns the intellectual property and, if not, take steps to secure ownership from employees or independent contractors. Then, an analysis should be made of the value of the intellectual property and a determination made of which items need to be protected and how they should be protected. If it is not economically feasible to protect all of the company’s intellectual property, management should prioritize the intellectual property and begin the effort necessary to obtain protection.

By Andrea Anapolsky

Once perceived as just a means for personal expression, blogs have grown into a mainstream form of communication used by business entities, the media, political campaigners and individuals alike. Just last month, Yahoo!® News reported that approximately 40 million blogs have been created, with more than 75,000 blogs added every day. The act of blogging, however, is not exempt from traditional defamation claims, and like any other form of communication, can be both false and defamatory and cause damage to one’s reputation. However, due to the complexity and nature of the Internet, the courts are still feeling their way through two central issues: first, whether to characterize the content publicized in a blog as opinion or fact, and second, who may be held liable for publicizing defamatory statements on a blog. This article briefly reviews trends in case law regarding defamation claims against bloggers, with a specific focus on whether operators and/or owners of network providers who publish or edit and then republish allegedly defamatory statements may be held liable for defamation.

Claims against the Blogger

There is considerable case law addressing whether the creator of the blog’s content, the “blogger” may be held liable for defamation. In 2005, one state court emphasized the significance of the context of the speech at issue and concluded that an unsatisfied customer’s online allegations that the Plaintiff website was “blatantly dishonest” and “crooked” were not defamatory because the customer’s opinion accompanied a series of facts on which the opinion was based. Penn Warranty Corp. v. DiGiovanni, N.Y.S.2d, 2005 WL 2741947 (N.Y. Sup. Ct. 2005). The court reasoned that the web site “presents to others as a personal statement by its maker” and that “when viewed in its full context,” the statements reflect only “personal opinion.” Ibid. In another 2005 case, a state court made a similar impression and characterized the allegedly false and defamatory postings dedicated to the political issues of a Delaware town as a “vehicle for expression of opinions…and not as a source of facts or data upon which a reasonable person would rely.” John Doe I v. Cahill, 884 A.2d 451, 466 (Del. 2005). Perhaps these recent cases reveal a trend by the courts to consider blogs statements of opinion, rather than of fact, and therefore outside the scope of a defamation claim. Ultimately, however, like traditional defamation cases, courts are rendering decisions on a fact-specific, case-by-case basis, and are yet to provide a clear rule.

Claims against the Message Board Operator/Owner of the Network

Due to the complexity and explosive growth of the blogosphere itself, courts are now beginning to address whether the operators/owners of the message board or network could be held liable for posting allegedly defamatory claims by third parties. The leading case on this issue is Zeran v. American Online, Inc., in which the Fourth Circuit provided immunity under section 230(c) of the Communications Decency Act of 1996 (“Section 230(c)”) to AOL for messages posted to a forum board. Zeran v. American Online, Inc. 129 F.3d 327 (4th Cir. 1997). Section 230(c) provides, in relevant part, that “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” In turn, an “information content provide” is any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service.” 47 U.S.C. §230(f). To date, there are no reported court decisions addressing the issue of whether Section 230 immunity applies to bloggers.

This issue is further complicated by the fact that a blogger can be characterized as both a content provider or publisher and a user of computer interactive services. A blogger is a user of an interactive service network when she or he creates a blog online, but a blogger could also be a provider of an interactive service network if she or he allows third parties to add comments to their blog or a publisher if she or he actively edits the contents on his or her blog.

This confusion as to how to characterize a blogger begs the question: under what circumstances will Section 230 immunity apply? The Ninth Circuit started to answer this question by concluding that Section 230 immunity applies if the blogger proves that the information is still “provided” to them even thought they are selecting information for their blog. (Batzel v. Smith, 333 F.3d 1018 (9th Cir. 2003)) In Baztel v. Smith, a third party sent an allegedly defamatory email to the manager of the listserve, without knowing that the manager would publish that email. The court created a reasonable person standard and held that Section 230(c) immunes a service provider or a user when “…a third person or entity that created or developed the information in question furnished it to the provider or user under circumstances in which a reasonable person in the position of the service provider or user would conclude that the information was provided for publication on the Internet or other ‘interactive computer service.” Id. at 1034 (emphasis added)

While Batzel provided a standard by which to evaluate when Section 230 may apply, the court did not address what would happen if the blogger actively edited a third party’s work and then republished it on their blog. In this case, would the blogger be considered the speaker and thus liable for any defamatory speech? Moreover, would actively editing a blog and then republishing it further incriminate the owner of a network by tending to show that the network provider edited the material because they knew the material was defamatory or had reason to be suspicious that some or all of the material was defamatory?

The courts are yet to answer these questions, however, as blogs and other online communication forums continue to vehemently develop, defamation claims are inevitably going to increase. And until the courts catch-up to technology, legal guidance on the issues concerning how to characterize a blogger and when Section 230 immunity applies remains muddy and uncharted.

Real estate lawyers take head. Waiting in the tall grass of your client’s real estate development project may be a thorny copyright issue that could cost your client all of the profit it earned on the project, and would probably buy you a serious malpractice claim.

In the course of developing a real estate project, whether it is a residential community or a commercial project, a central component of the project is the architectural plan. Unless the developer (and the developer’s counsel) are aware of how the Copyright laws affects what the developer can (and more importantly, can’t) do with the plan, the developer may find itself on the receiving end of a Copyright infringement lawsuit. Why? Because an architectural plan, as well as other architectural works, are protected under Copyright laws, and these laws govern who owns the plans and what can and can’t be done with the plan.

Scope of Protection Granted Architectural Works

In 1990, Congress enacted the Architectural Works Copyright Protection Act (the “Act”). The Act increased the scope of protection architectural works are entitled to under United States Copyright laws. The Act was passed in efforts to make United States Copyright laws more compatible with the Berne Convention For The Protection of Literary And Artistic Works.

According to a report prepared by the then Register of Copyrights, pre Act copyright laws provided adequate protection for architectural blueprints, plans, drawings and models. However, the adequacy of protection under Berne Convention standards for the constructed design of architectural structures was in doubt. Although the Act, when it was in Bill form, was intended to address this perceived gap, the legislative history provides us with insight into the intended scope of protection accorded to architectural works, including blueprints and plans.

The Act amended the definition section of the Copyright Act (17 USC 101) by adding the following definition of “architectural works:”

An ”architectural work” is the design of a building as embodied in any tangible medium of expression, including a building, architectural plans, or drawings. The work includes the overall form as well as the arrangement and composition of spaces and elements in the design, but does not include individual standard features.

The House Report on the Copyright Amendments Act of 1990 (which includes the Act) (the “Report”) provides a section by section analysis and discussion of the Act. In discussing the definition of architectural works, the Report identifies the elements of a protected architectural work. The Report states that “protection does not extend to individual standard features, such as common windows, doors and other stable building components.” The Report makes clear, however, that the provision is not intended to “exclude from copyright protection any individual feature that reflects the architect’s creativity.”

Commenting on the meaning of “arrangement and composition of spaces and elements in the design” the Report noted that this phrase recognizes that creativity in architecture frequently takes the form of selection, coordination or arrangement of unprotectable elements into an original, protectible whole, and that a architect may incorporate new, protectible elements into standard features that might not otherwise be protectable and create an original, protectible whole.

The Report sets out a two step analysis to be engaged in when determining the scope of protectability for an architectural work.

First, an architectural work should be examined to determine whether there are original design elements present, including overall shape and interior architecture. If such design elements are present, a second step is reached to examine whether the design elements are functionally required. If the design elements are not functionally required, the work is protectible without regard to physical or conceptual separability.

Protection would be denied for the functionally determined elements, but would be available for the nonfunctional elements. The Report states that courts must be free to decide the level and scope of protection, and evidence that there is more than one method of obtaining a given functional result may be considered in evaluating the scope of protection. The Report notes that the Act incorporates the general standards of originality applicable for all other copyrightable subject matter, and the determination of infringement is to be made according to the same standard applicable to all other forms of protected mater.

How Issues of Infringement Can Arise and How to Avoid Them

Poor planning and a lack of understanding can lead to a developer finding itself in hot water with regard to architectural plans. Just because a developer paid an architect to come up with drawings does not mean that the developer can do whatever it wants with the drawings. Granted, case law has held that in certain circumstances the developer may have an implied license to perform the acts that are the subject of the infringement suit. However, defending an infringement claim can be quite expensive. Preventing the situation from arising will be much easier on the pocketbook.

Anytime your client is working with an architect, make sure that there is an engagement letter in place and it is clear on exactly what can and can’t be done with plans or other drawings created by the architect. Also, make sure that the engagement letter is crystal clear on exactly who owns the plans. I have seen engagement letter from architects that state that the architect is the owner of the copyright in the plan and that any contributions by the developer to the plan is a work made for hire and made on the architect’s behalf. As long as the developer understands the implication of these provisions, major problems can be avoided. Representing developers, I would rather have my client own the rights to its contributions. I can just imagine the horror a developer would experience upon finding out that the architect he worked with in developing a completely unique floor plan is now selling the plans to all the other major builders in the area.

Developers can find themselves facing copyright infringement issues if they change architects mid project and continue to use the drawings created by the first architect. To preserve the right to do this, the developer should make sure that this right is specifically reserved in the engagement letter. Usually most reasonable architects will allow the developer this right in exchange for being indemnified against any claims related to work performed by the new architect.

Some engagement letters I have seen from architects allow a developer to freely reuse a plan or other drawing without having to pay a reuse fee as long as it is being used for the same development. If a developer wishes to reuse a drawing for multiple developments, the developer should bring that up as soon as possible and make sure that it finds its way into the engagement letter.

The real estate developer and his counsel should give serious consideration of how to incorporate the requirements of the Copyright laws into the company’s best practices. While hand shake deals are still commonplace in the real estate and construction industries, they just won’t cut as far as the Copyright laws are concerned.

The United States District Court of Colorado issued summary judgment in favor of several big-name producers and movie studios and against several “clean movie” companies in the business of creating sanitized versions of movies. (Clean Flicks of Colorado LLC, et al. v. Stephen Soderbergh, et al., Case No. 1:02-CV-01662, in the United States District Court of the District of Colorado.)

The litigation was initiated by several clean-movie companies, seeking declaratory relief that their process of editing objectionable content and reselling the edited copies fell within the “fair use” defense to copyright infringement. The defendant movie studios (“Studios”) filed a cross-complaint for infringement under both 17 U.S.C. section 106(1) for violating their right to reproduce the copyrighted works, as well as infringement under section 106(2) for violating their right to create derivative works.

The original plaintiffs resold sanitized digital versions of movies in hardcopy format. The sanitized versions were created by disabling the copy protection software on an original DVD, copying the content onto a hard drive, then removing the objectionable excerpts either by skipping the offending passage, cropping images, or deleting offensive words. The clean movie companies would then make multiple copies of the edited versions for resale or rent to the general public, along with an original version of the movie, thereby enabling the clean movie companies to argue that the sale of the edited version did not deprive the Studios of a sale.

The Studios cross-complained for infringement and named as cross-defendants a second group of movie editing companies that had developed a different editing methodology. These companies did not permanently edit a physical version of a digital movie, but instead sold hardware and software that ran simultaneously while playing an original DVD, causing the DVD to skip past or mute the offending portions of the movie. No hard-copy version of the edited movie remained. This second class of cross-defendants was dismissed from the case when Congress enacted the Family Movie Act of 2005, which provides an exemption for the editing of motion pictures by a member of a private household if no fixed copy of the altered version of the motion picture is created. This statute protected those parties selling technology that enabled such private editing.

The Studios sought summary judgment against the remaining clean movie companies. The companies sought, as their primary defense, to create a new public policy test within the previously accepted fair use doctrine. The companies argued that the fair use doctrine allows a party to use copyrighted material for the purpose of public criticism and that public criticism could include the substantial copying of such material. The companies further argued that they were providing a more socially-acceptable alternative for family viewing without exposing children to unwanted and potentially harmful content. As such, the companies argued that their edited versions constituted fair criticism of the offending material.

The companies relied on Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994), which emphasized the fair use doctrine be evaluated on a case-by-case analysis, weighing the following four factors in determining fair use: (1) the purpose and character of the use, including whether the use is transformative or merely supersedes the original; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use on the market of the copyrighted work.

The companies argued that their “socially-acceptable” version did not deprive the owners of the copyrighted work from sales in light of their practice of pairing the edited version with an original copy. The Court found that this argument, while superficially attractive, downplayed the original author’s “intrinsic value of the right to control the content of the copyrighted work, which is the essence of the law of copyright.” In short, the copyright owner has the right to determine the market for his or her work.

The Court also found that the fair use doctrine did not apply because (1) there is nothing transformative about the edited version, it simply deleted minor portions from the work as a whole; (2) the creative expressions of movies favored the Studios; (3) the substantial amount of the copyrighted work that was utilized in the final edited version compared to the minor portion that had been edited; and (4) the author’s inherent right to determine the market for the creative work.

In short, the Court found that the fair use doctrine “is not applicable here because the infringing parties are exploiting the market for movies that is different from what the Studios have released into and for an audience that the Studios have not sought to reach.”

The Court issued an injunction precluding the continued sale of hard copies of edited versions of the Studios’ works as a violation of section 106(1). Interestingly, the Court found that the clean movies did not violate the Studios’ rights to create derivative works under section 106(2) because the infringing copies are not used in a “transformative manner” and therefore do not constitute derivative works.

One issue left unanswered is whether creation of the initial digital master copy of the DVD constituted an infringement. This question arose because the clean movie companies also asserted the “first sale doctrine” defense, which protects the purchaser of any use of an authorized copy, but does not permit the making of additional copies. The Studios made it clear that they were not seeking a resolution of that issue at this time, but only seeking an injunction precluding the sale and distribution of multiple copies. Nevertheless, the Studios reserved the right to argue that the initial copying and creation of the master copy is a violation of the Digital Millennium Copyright Act, Public Law No. 105-304, 112 Stat. 2860 (1998). This potential argument has generated amicus briefs filed by numerous creative organizations, including the Electronic Frontier Foundation, expressing concern that any finding that the initial copying of the protected work constituted infringement would chill the creative process and impair an individual’s ability to create an interim copy in the process of creating a new, non-infringing transformative work. The Colorado Court, as well as the Studios, left that issue to be determined at a later date.

A class action lawsuit filed this past May by a small group of independent music publishers against major online music services for failing to secure licenses to sell downloadable versions of certain songs brought to light what could be a crack in the way labels, digital content distributors and online music services clear music for digital distribution. The publisher’s copyright infringement lawsuit names as defendants Apple, AOL Music Now. Buy.com, Microsoft, Napster, Real Networks, Yahoo and others.

The standard practice for most labels, digital content distributors or online music services is to secure a license to digitally distribute a song by going through the Harry Fox Agency, the largest mechanical licensing, collection, and distribution agency for U.S. music publishers. (The license to distribute the sound recording itself is obtained from the record label or other owner of the sound recording.) The Harry Fox Agency grants licenses for a variety of digital formats, including full-length permanent digital downloads, limited use digital downloads, on-demand streaming, and more. Most labels and digital content providers prefer going through Harry Fox. However, certain publishers such as those who filed suit don’t use Harry Fox as a mechanical licensing agent, but instead grant mechanical licenses themselves.

Labels and digital content providers can always attempt to negotiate directly with publishers that don’t use the Harry Fox Agency. Most labels and digital content providers don’t particularly like this alternative as it could end up being very time consuming. A label could spend a fair amount of time negotiating the terms of a direct mechanical license only to have the deal implode at the last minute. Fortunately, the Copyright Act provides an alternative for labels and digital content providers seeking to obtain a license to digitally distribute a song – the compulsory license.

The Copyright Act provides for the compulsory licensing of songs (not the sound recording) for the making and distribution of “phonorecords.” Section 115 of the Copyright Act provides that, once a “phonerecord” (which includes within its definition digital phonorecords) of a musical work has been publicly distributed in the United States with the copyright owner’s consent, anyone else may, under certain circumstances and subject to limited conditions, obtain a compulsory license to make and distribute “phonorecords” (including a digital phonorecord) of the song without express permission of the copyright owner.

The first step in obtaining a compulsory license for the manufacture and distribution of phonorecords is to identify the copyright owner of the composition. This can be done by personally searching the Copyright Office, or requesting the Copyright Office to conduct the search. Additionally, there are services that perform these type of searches for a fee.

If the name and address of the copyright owner are located, the party seeking the compulsory license must send, by certified mail, a Notice of Intention to Obtain a Compulsory License to the copyright owner. A separate Notice of Intention is required for each title for which a compulsory license is sought. The notice must be sent either before or no more than thirty days after making a phonorecord of the song, and before the distribution of any such phonorecord. The Notice of Intention need not be filed with the Copyright Office.

After the Notice of Intention is sent and the distribution of the phonorecord commences, the compulsory license holder must make royalty payments accompanied by a monthly statement of account on or before the 20th day of each month for every phonorecord made and distributed in accordance with the license.

If the party seeking the compulsory license is not able to locate the name and address of the copyright owner, the license seeker must file the Notice of Intention with the Licensing Division of the Copyright Office, along with the applicable statutory fee. The compulsory license holder is not required to file a monthly statement of account with the Copyright Office. Any royalties due the copyright owner should be held on account by the compulsory license holder as the Copyright Office will not accept any royalty fees. The compulsory license holder should check the records of the Copyright Office on a periodic basis to see if the unidentifiable copyright owners are later identified. Once they are, the compulsory license owner should make all royalty payments directly to the copyright owner.

XM’s introduction of a new service called XM + MP3 that allows its subscribers to listen to XM’s service on a portable player and record up to fifty hours of programming. In addition, the new service and player called Inno allows users to isolate and save perfect digital copies of songs for unlimited replay as long as they maintain their XM subscription. The service also allows XM users to create custom playlists which trigger automatic recording and storage of songs on the playlist when broadcast over one of the many XM stations

The Recording Industry Association of America responded by filing suit against XM for “massive wholesale infringement.” The RIAA claims that the new XM service goes far beyond any type of “radio-like” service for which XM is licensed, and is, instead, distributing sound recordings like iTunes and the new Napster.

Under Section 114 of the Copyright Act, XM is entitled, by statute, to publicly perform sound recordings in a radio-like, non interactive service, via satellite radio. Under this statutory license, XM is not required to seek individual permission to use any sound recordings; but it must pay a statutorily prescribed royalty rate for the digital performance of those recordings. In its federal complaint, the RIAA claims that XM has gone beyond the limited license granted it under Section 114 of the Copyright Act, and is now, through the XM+MP3 service, “distributing” sound recordings without its permission. The RIAA likens XM to other digital distributors of sound recordings, such as Apple’s iTunes, Napster, etc.

The XM+MP3 service shares numerous qualities with other subscription services, such as Napster and Yahoo Music. They both allow users to maintain perfect digital copies of particular sound recordings for unlimited replay for as long as they maintain their subscription. There are some differences, however. The major difference according to XM and the Electronic Frontier Foundation, is that the XM+MP3 service involves the recording by a digital audio recording device.

According to XM, the new players and the XM+MP3 service were designed to follow the Audio Home Recording Act, a federal law passed in 1992 in connection with the settlement of a lawsuit brought by the recording industry against Sony’s DAT recorders. Under the Audio Home Recording Act, digital recording devices are legal as long as they incorporate specific security protocols which prevent serial copying, and the manufacturer of the digital recording device pays a royalty of up to $8 per new digital recording machine and 3% of the price of all digital audio tapes or discs. The royalty payments are made to the Copyright Office which then distributes the money to the copyright owners whose music is presumably being copied. The tradeoff for the royalty payments is that consumers could use the digital audio recorder for the non-commercial home taping of music from digital broadcast sources without engaging in copyright infringement.

The Audio Home Recording Act specifically allows for the non-commercial home taping of music from digital broadcast sources. However, that law was meant to provide clarity on an activity consumers have been engaging in ever since audio recording devices were available – recording songs from a radio broadcast. Back in the analogue days, a cassette tape recording of a song from an FM broadcast was a poor substitute for the actual record. The sound quality was extremely poor and always included DJ banter. In addition, taping from an FM broadcast was never a surefire guarantee – one never knew exactly when a particular song would play; ones fingers were never quick enough to catch the song from its first note.

The first digital audio recorders vastly improved on sound quality. They produced recordings that rivaled the originals. If a user was lucky or skilled enough to record a specific song from a digital audio broadcast, there really would be no need to buy the record. This is the reasoning behind the royalty payments required under the Audio Home Recording Act – it’s meant to compensate the artists whose work is being recorded for lost record sales.

Technologically, the XM+MP3 unit, the Inno, is far more advanced than the DAT recorders circa 1992. Most DAT recorders required manual activation in order to record, and could not automatically record like the Immo. In my opinion, it’s these features that case the XM+MP3 service and the Inno to go well beyond merely recording a song from a digital broadcast. The ability of an Inno user to disaggregate recordings into individual songs, and save them for repeated listening, and to create a “wishlist” which automatically compiles the selected tracks, makes the player and service more akin to a tethered subscription service than a DAT recorder. This distinction is important because it goes to how the record labels and artists should be paid. Artists and record labels are paid depending on the way in which a sound recording is used. If it is merely streamed or digitally broadcast, the artists and labels are paid less than if the sound recording is available for permanent download. Here, the XM+MP3 service functions more like iTunes than a radio receiver. While I applaud the Imnn’s technological innovations and think the XM+MP3 service is a great way for consumers to enjoy content, if XM is going to continue to offer this service, it should pay a rate similar to that paid by iTunes and Napster. XM’s service offers a quality not available with the manually activated DAT recorders. A user of the XM + MP3 service is practically certain to capture their chosen song; not so with fingers and a DAT recorder. It’s this certainty that makes the XM +XMP3 service exactly like Apple’s iTune service, and XM should pay accordingly.

A Federal district court jury in Nashville levied a $4.3 million dollar verdict against Sean Combs’ (Puffy) Bad Boy Entertainment, Bad Boy, LLC and Universal Records/UMG Recordings for infringing copyright owned by Bridgeport Music and Westbound records. The suit resulted from the use of a six second sample from the Ohio Player’s Singing in the Morning used by producer Easy Money in the title track to the Universal released Notorious B.IG.’s 1994 album “Ready to Die.”

At the trial the parties stipulated that the required license had not been obtained from Bridgeport Music/Westbound Records. The issue left for the jury to determine was to calculate the fair market value of the use of the track. The jury awarded $733,878 in actual damages, which represented the fair market value of the use of the track. In addition, the jury awarded $3.5 million in punitive damages, which include a $1 million award against Bad Boy LLC.
The story is not the fact that Combs et al were hit with a very large verdict for copyright infringement. The story is why the jury levied such a significant punitive damage award. Susan Butler, the legal matters reporter for Billboard Magazine, published a story in the April 8, 2006 edition of the magazine which explained the reason behind the damage award.

According to Butler’s story, it was the pre-litigation activities of Combs, et al. that motivated the jury. Apparently between 1998 and 1999 letters were written from Bridgeport’s administrator to various music publishers, Arista records, which at one time had a joint venture with Bad Boy Entertainment, claiming copyright infringement of the Ohio Players’ sample. According to Butler’s story, Arista apparently forwarded the letter it had received to Bad Boy Entertainment care of Bad Boy’s law firm. Further, there was no evidence presented to the jury that Combs et al. responded to any letters or phone calls that Bridgeport’s administrator apparently made prior to filing suit. Although, according to Butler’s story, there was no letter addressed directly to Bad Boy Entertainment, nor was there evidence that Bad Boy or its lawyers had actually received Bridgeport’s letters, the jury took serious issue with Bad Boy’s apparent refusal to address Bridgeport’s concerns.

Butler’s story quoted the jury foreman as stating that Bad Boy et al should have done something prior to Bridgeport filing its lawsuit or taken some action to show “a willingness to attempt at least a settlement.” According to the quotes attributed to the jury foreman in Butler’s article, it appears that Bad Boy could have lessened the amount of the Punitive damage award by responding to Bridgeport’s concerns.

The lesson to be learned here is to take seriously any and all cease and desist letter received. This doesn’t mean that you necessarily have to admit infringement and pay a settlement. According to the jury foreman’s quote in Butler’s story, it would have been significant if Bad Boy responded to Bridgeport’s letter by denying infringement. But ignoring a cease and desist letter and refusing to engage a party making serious and repeated allegations of copyright infringement can be a very perilous tactic.