Tessera, Inc. v. Int’l Trade Comm’n, 2010-1176 (Fed. Cir. May 23, 2011).

Yesterday the Federal Circuit upheld a decision of the ITC regarding patent exhaustion: Tessera, Inc. v. International Trade Commission. The patent holder permitted its licensees to sell the patented invention and received royalty payments later. When some licensees failed to pay, the patent holder argued that its authorized sales had been transformed into unauthorized sales and thus that the licensees’ customers were infringing the patent. The Federal Circuit rightly disagreed,

These agreements expressly authorize licensees to sell the licensed products and to pay up at the end of the reporting period. Thus, in these agreements, Tessera authorizes its licensees to sell the licensed products on credit and pay later. That some licensees subsequently renege or fall behind on their royalty payments does not convert a once authorized sale into a non-authorized sale. Any subsequent non-payment of royalty obligations arising under the TCC Licenses would give rise to a dispute with Tessera’s licensees, not with its licensees’ customers.

Tessera’s argument that the sale is initially unauthorized until it receives the royalty payment is hollow and unpersuasive. The parties do not dispute that the TCC Licenses permit a licensee to sell licensed products before that licensee pays royalties to Tessera. But according to Tessera, that licensee’s sale, permitted under the TCC License, would later become unauthorized if that licensee somehow defaulted on a subsequently due royalty payment. That absurd result would cast a cloud of uncertainty over every sale, and every product in the possession of a customer of the licensee, and would be wholly inconsistent with the fundamental purpose of patent exhaustion—to prohibit postsale restrictions on the use of a patented article. See, e.g., Bloomer v. McQuewan, 55 U.S. (14 How.) 539, 549 (1852) (stating “when the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly”).

It is this same absurd result and the same cloud of uncertainty that results after every sale of a copy of software in light of the Ninth Circuit’s worst copyright opinion in decades: Vernor v. Autodesk, 621 F.3d 1102 (9th Cir. 2010). By permitting postsale restrictions on the use of software the Ninth Circuit has adopted a view of the Copyright Act wholly inconsistent with the fundamental purpose of copyright exhaustion–i.e., the first sale doctrine.

Vernor’s counsel has recently filed an excellent brief petitioning for a writ of certiorari, and one can only hope that the Supreme Court will choose to straighten this out so that we can get opinions in the copyright context as cognizant of the harms of ignoring exhaustion principles as this opinion is in the patent context.

Overall, the decision is not too surprising. Class action law gives judges like Chin quite a bit of discretion in approving or rejecting settlements in terms of whether or not they are considered “fair, adequate, and reasonable.” That’s a lot of wiggle room, especially for uncharted waters such as the GBS case. With over 500 submissions, Chin had quite a bit to consider.

In summary, Chin rejected the proposed settlement for five key reasons: (1) It overreached in trying to license orphan and international works; (2) it tried to settle legal issues that were not part of the original lawsuit (e.g. full display of books online); (3) Congress is better suited to craft the right legal rules for the future of online books than a class-action lawsuit; (4) there was significant diversity of opinion among the class of plaintiffs as to the right outcome of the case; and (5) it raised anti-trust concerns, especially regarding metadata markets such as search results related to the Google Book corpus. Chin suggests at the end of the order that changing the prospective relief licensing scheme from “opt-out” to “opt-in” might mitigate these concerns and lead to approval down the road.

The following were passages I found most interesting in the order:

• “The questions of who should be entrusted with guardianship over orphan books, under what terms, and with what safeguards are matters more appropriately decided by Congress than through an agreement among private, self-interested parties. Indeed, the Supreme Court has held that “it is generally for Congress, not the courts, to decide how best to pursue the Copyright Clause’s objectives.”
• Second, the ASA would release claims well beyond those contemplated by the pleadings. This case was brought to challenge Google’s use of “snippets,” as plaintiffs alleged that Google’s scanning of books and display of snippets for online searching constituted copyright infringement. Google defended by arguing that it was permitted by the fair use doctrine to make available small portions of such works in response to search requests. There was no allegation that Google was making full books available online, and the case was not about full access to copyrighted works. The case was about the use of an indexing and searching tool, not the sale of complete copyrighted works.”
• “While the named plaintiffs and Google would argue that these authors can simply opt out, the comments underscore certain points. First, many authors of unclaimed works undoubtedly share similar concerns. Second, it is incongruous with the purpose of the copyright laws to place the onus on copyright owners to come forward to protect their rights when Google copied their works without first seeking their permission. Third, there are likely to be many authors — including those whose works will not be scanned by Google until some years in the future — who will simply not know to come forward.”
• “The ASA would arguably give Google control over the search market.”
• “The ASA would broadly bar ‘direct, for profit, commercial use of information extracted from Books in the Research Corpus’ except with the express permission of the Registry and Google.”
• “Google’s ability to deny competitors the ability to search orphan books would further entrench Google’s market power in the online search market.”
• “The privacy concerns are real. Yet, I do not believe that they are a basis in themselves to reject the proposedsettlement.” … “I would think that certain additional privacy protections could be incorporated, while still accommodating Google’s marketing efforts.”
• “The fact that other nations object to the ASA, contending that it would violate international principles and treaties, is yet another reason why the matter is best left to Congress.”
• “As the United States and other objectors have noted, many of the concerns raised in the objections would be ameliorated if the ASA were converted from an opt-out settlement to an opt-in settlement. I urge the parties to consider revising the ASA accordingly.”

MDY Indus. LLC v. Blizzard Entm’t, Inc., Nos. 09-15932, 09-16044 (9th Cir. Dec. 14, 2010).

Today the Ninth Circuit gave a mixed result to both parties. We have previously discussed this case as part of the three copy ownership cases before the Ninth Circuit.

Overview:

• MDY is not liable for secondary copyright infringement because Blizzard’s “no-bots” provision was merely a contractual “covenant” and not a condition whose violation would amount to copyright infringement. To be such a condition it must be a “restriction[] that [is] grounded in [a copyright holder's] exclusive rights of copyright.”
• Following Vernor, users of World of Warcraft are not owners of their copies of the software (madness!) and therefore are not entitled to a Section 117 defense.
• The Ninth Circuit really, really, really hates the Federal Circuit’s Chamberlain decision and explicitly rejects the idea that there should be a nexus with infringement before a violation is found of the anti-circumvention provision regarding access controls in 1201(a)(1).
• A tortious interference with contract claim under Arizona law is not preempted by the Copyright Act.

Upshot:

• The court is grasping towards the right sort of resolution to the condition/covenant distinction, but doesn’t really give us enough to sort out tough cases.
• The holding on copy ownership turns out to be entirely unnecessary since the secondary copyright liability was resolved based on the condition/covenant distinction instead.
• Your garage door openers may start coming with lengthy EULAs in the Ninth Circuit and it just might end up being a DMCA violation to buy a replacement opener made by a third party. (More madness.) Some of the sanity that Chamberlain brought to DMCA jurisprudence slipped away today.

See also:

• Corynne McSherry, A Mixed Ninth Circuit Ruling in MDY v. Blizzard: WoW Buyers Are Not Owners – But Glider Users Are Not Copyright Infringers, EFF DeepLinks (Dec. 14, 2010).

Travis Kaya, Academic Libraries Add Netflix Subscriptions, Chron. of Higher Ed. (Sep. 18, 2010).

The article touches on the conflict between a professor’s fair use argument for classroom use of the rented DVDs (or use of the streaming service via the library’s subscription) and the college libraries’ potential violation of Netflix’s terms of use.

I don’t know Netflix’s arrangements with copyright owners, but as to streaming, I presume they pay per stream, so the copyright owner isn’t clearly harmed if faculty use the streaming service. Instead, copyright owners are compensated.

As to the tangible DVDs, to the extent this means fewer libraries purchase the DVDs themselves, that’s a potential revenue loss for the copyright owners, but it’s not as if Netflix isn’t paying for its copies of the DVDs. So, if more libraries take this approach, Netflix will have to keep more copies of each DVD on hand, resulting in at least some (but perhaps fewer) sales of the DVDs. Whereas before there was an inefficiency of distribution at work where libraries kept on hand copies of discs they weren’t using or used infrequently, they’ve now found a distributor in Netflix who can get the disc to them quickly enough that it’s more efficient to have this subscription rather than their own under-utilized storehouse of discs.

Regardless of whether copyright owners through copyright or Netflix through contract can prevent this activity by libraries, should they be able to? Are copyright owners entitled to an inefficient distribution market?

See also:

• Mark Giagrande, In The News, Law Librarian Blog (Sep. 20, 2010).
• Rebecca Fitzgerald, Using Netflix at an Academic Library – a TTW Guest Post, Tame the Web (Sep. 9, 2010).

Speaking in Opposition:

1. Sarah Canzoneri, a member of the Children’s Book Guild
2. Scott E. Gant (author and class action specialist)
3. Microsoft
   
4. Amazon.com
5. Science Fiction & Fantasy Writers of America and the American Society of Journalists and Authors
6. Professor Pamela Samuelson, UC Berkeley
7. Cindy Cohn (EFF), on behalf of the Privacy Authors and Publishers
8. Yasuhiro Saito, on behalf of the Japanese P.E.N. Club et al.
9. The French Republic
10. The Federal Republic of Germany
11. The State of Connecticut
12. Questia Media
13. AT&T
14. Cynthia Arato, on behalf of the New Zealand Society of Authors
15. Consumer Watchdog
16. EPIC
17. Open Book Alliance
18. Andrew Devore, on behalf of Arlo Guthrie, Julia Wright, Catherine Ryan Hide, and Eugene Linden
19. Matthew Weiss, on behalf of Darlene Marshall
20. VG WORT

Speaking in Favor:

1. The Institute of Intellectual Property & Social Justice, Howard University School of Law
2. Sony Electronics
3. National Federation of the Blind
4. Paul N. Courant, University of Michigan Library
5. Center for Democracy & Technology

Each of the above parties will have only five minutes to make its case. After that, the DOJ speaks, then the parties. Should be quite a hearing!

The court also issued an injunction barring Joel Tenenbaum from infringing plaintiffs’ work in the future, and requiring him to destroy all infringing copies of plaintiffs’ works. Again, all pretty standard fare.  But a couple issues of note crop up in the court’s memorandum on the issue of injunctive relief. First, the court rightly refused the record labels’ effort to enjoin Tenenbaum from “promot[ing] … using the Internet or any online media distribution system to infringe copyrights,” recognizing the First Amendment implications of such an ambiguous prior restraint.

More troubling is the court’s treatment of the standard for injunctive relief. A permanent injunction requires a showing that the harm at issue is irreparable and that monetary damages are inadequate. If you are not a copyright litigator, you might wonder how plaintiffs who are to receive $675,000 in damages for sharing 30 songs could argue with a straight face that they have suffered irreparable harm for which money alone cannot possibly compensate.

To avoid this somewhat inconvenient question, courts developed a presumption of irreparable harm in cases of infringement. This presumption owes its origins as much to concerns over judicial economy as to any principled stance on the nature of the harm suffered by rights holders. In 2006, the Supreme Court in eBay v. MercExchange rejected this shortcut in the context of permanent injunctions in patent cases. Right-minded courts have subsequently applied eBay’s insistence on some factual showing of irreparable harm in copyright as well as patent cases.¹ Unfortunately, Judge Gertner didn’t follow their lead, allowing plaintiffs to skate by purely on reliance on the presumption.

But the juiciest document the court provided this week was the memorandum detailing its rationale for rejecting Tenenbaum’s proffered fair use defense. The analysis of the four factors is hardly surprising.  Spoiler alert: Tenenbaum loses on all of them. But there are some notable aspects of the court’s opinion.

First, the court goes to great lengths in dicta to clarify the scope of its conclusion.  This is not an opinion that says downloading or sharing copyrighted works over peer to peer networks can never constitute fair use.  There are factual scenarios under which such a defense might be plausible: downloading songs to sample and then promptly deleting them, space shifting music you’ve already acquired legally, and obtaining content not available for legal purchase elsewhere.  None of those facts, of course, were argued by Tenenbaum’s counsel, largely I suspect because they simply were not true.

Second, speaking of Charlie Nesson & Company, the court’s opinion includes an atypical if not entirely shocking admonishment of Tenenbaum’s counsel, describing the defense as “truly chaotic” and offering a skeletal and incomplete account of the bizarre behavior Team Tenebaum, and Nesson in particular, exhibited throughout the litigation.

Third, and most importantly, the court may have tipped its hand regarding the most important outstanding issue in the Tenenbaum litigation: the argument that the statutory damages provisions of the Copyright Act as applied to Tenenbaum’s activity faces serious constitutional challenges. Towards the end of its opinion the court writes:

As this court has previously noted, it is very, very concerned that there is a deep potential for injustice in the Copyright Act as it is currently written. It urges — no implores — Congress to amend the statute to reflect the realities of file-sharing. There is something wrong with a law that routinely threatens teenagers and students with astronomical penalties for an activity whose implications they may not have fully understood. The injury to the copyright holder may be real, and even substantial, but, under the statute, the record companies do not even have to prove actual damage.

The court here displays some sympathy to the claim that copyright statutory damages impose liability, in the court’s words an “astronomical penalt[y],” that is entirely untethered to the actual harm copyright holders suffer. This a hopeful sign for Tenenbaum. On the other hand, the court might be signaling its inclination to leave Congress rather than the courts holding the bag. Here’s hoping for a little judicial activism.

See also:

• Mark Giangrande, Fair Use Argument Falls Flat in File Sharing Case, Law Librarian Blog (Dec. 9, 2009).
• Nate Anderson, How Team Tenenbaum missed a chance to shape P2P fair use law, Ars Technica (Dec. 7, 2009).
• Ben Sheffner, Some additional thoughts on the Tenenbaum fair use opinion: mainly right on fair use, but why all the dicta?, Copyrights & Campaigns (Dec. 7, 2009).

1. For a discussion of the dubious presumption of irreparable harm after eBay, see Pamela Samuelson & Krzysztof Bebenek, Why Plaintiffs Should Have to Prove Irreparable Harm in Copyright Preliminary Injunction Cases, J.L. & Pol’y for the Info. Society (2009).

The amended settlement attempts to address a number of the objections raised regarding antitrust issues, international copyright ownership, pricing, and access to out-of-print and/or orphaned works. It also has provisions for Open Access options for rightsholders, such as the option to put a Creative Commons license on your work. There do not seem to be any amendments to address reader privacy concerns, at least not directly.

No dates for filing objections or a fairness hearing have been set, but the parties have requested the following:

• December 14 – Supplemental Notice commences.
• January 28 – Class member Opt outs are due.
• February 4 – DOJ comment on settlement is due.
• February 11 – Plaintiffs’ motion for final settlement approval is due.
• February 18 – Final fairness hearing occurs.

Update: Judge Chin has granted preliminary approval to the amended settlement and agreed to hold the fairness hearing on February 18, 2010.

• Vernor v. Autodesk, Inc. (W.D. Wash.).

In this blog’s previous coverage of the “Copy Ownership Cases,” I attempted to briefly summarize three important cases where ownership of copies is critical and so did not delve into a detail relevant to this update.

The decision in Vernor v. Autodesk from May of 2008 was a decision on Autodesk’s motion to dismiss the case. Motions to dismiss are among the first motions one might file in a federal case and occur prior to the exchange of documents or the deposition of witnesses that occurs during the discovery process. Typically once that discovery process is complete, the parties may bring motions for summary judgment in which a party will argue that, based on the undisputed facts, and resolving any disputed fact in favor of the other party, the court can simply apply the law to those facts and rule in their favor. In a grand demonstration of the ability of opposing lawyers to take on diametrically opposed world views, parties often both file such summary judgment motions, which are called “cross-motions” for summary judgment.

Such cross-motions for summary judgment were filed in Vernor v. Autodesk and the court held oral argument on the motions on Tuesday, Sep. 29, 2009. A few news outlets covered the oral argument: PC World, Zeropaid, Slashdot.

With somewhat dizzying speed, the court issued its opinion on the cross-motions for summary judgment the next day, Sep. 30, 2009. Having seventeen months to consider any new developments, the court was obviously not persuaded that anything important had changed as it reached the same conclusions for the same reasons, and directed the clerk to enter final judgment for Vernor.

The court’s opinion is, like its earlier opinion, careful, methodical, well-researched, and thorough. So many courts addressing the issue of copy ownership have dispensed with the question just by noting that software distributors claim to merely “license” and not to sell their software. The Vernor court finally cuts through this misleading way of framing the question by noting that “the use of software copies can be licensed while the copies themselves are sold.”

The court explains again why the Ninth Circuit precedent that it is bound to follow, United States v. Wise, requires the result that Vernor is the owner of the copies of the software. “Wise requires the court to look at a transaction holistically, and the court finds no basis for the conclusion that an agreement to permit perpetual possession of property can be construed as reserving ownership.” This is the key factor in copy ownership cases: perpetual possession. When a transaction results in an individual being entitled to perpetual possession of the copy, as was the case for Vernor, then courts should find that such individuals are owners of their copies, entitled to a “first sale” right to resell the copy if they so choose.

Autodesk now has to decide whether to appeal this ruling and has to do so without the benefit of Ninth Circuit guidance in UMG Recordings, Inc, v. Augusto, which has all the briefs filed but has not yet had oral argument and MDY Industries LLC v. Blizzard Entertainment, Inc., in which the briefing on appeal is still ongoing. Decisions in either of these cases could greatly clarify how things will go for Vernor and Autodesk, but the Ninth Circuit’s decisions in these cases are likely over a year away. However, the Vernor court has now, twice, provided a valuable roadmap for future courts that address the issue of copy ownership.

See Also:

• Thom Holwerda, Judge Sides with Vernor, Slams Autodesk, OS News (Oct. 1, 2009).
• Nancy Gohring, In Autodesk Case, Judge Rules Secondhand Sales OK, PC World (Oct. 1, 2009).
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