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Developments in Intellectual Property Law

Second Circuit Affirms Ruling Finding Secondary Digital Marketplace Liable for Copyright Infringement

By Patrick B. Monahan
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The Second Circuit recently affirmed a lower court ruling that an online marketplace purporting to allow legal resale of digital music files in fact infringed the plaintiff record companies’ exclusive right to reproduce their copyrighted works.

The founders and operators of ReDigi Inc. (“ReDigi”) contended that their service allowed consumers to sell digital music files purchased on iTunes (or from another ReDigi user) without committing copyright infringement. Users installed Redigi’s Media Manager, a scanning and monitoring program to identify music files eligible for resale, and had the option to upload those files into a “Cloud Locker.” The central innovation of ReDigi was the method by which the files were transferred. The files were broken up into a series of “packets”, which were delivered individually (and deleted as they were delivered) and then reassembled at their destination. At the end of the upload process, the file existed in the Cloud Locker and not on the user’s computer.–Similarly, if a music file was purchased from a user’s Cloud Locker by another user, that file would be transferred packet-by-packet and, at the end of the process, would exist on the purchaser’s computer and not in the Cloud Locker. The effect of this packet-transfer system, ReDigi claimed, was that only one full copy of a given music file existed at any time and the transfer complied with copyright law.

First Sale Doctrine not applicable

ReDigi argued that sales of digital music files using its service was protected under the Copyright Act’s first sale doctrine, which entitles the owner of “a particular copy or phonorecord” purchased from or otherwise authorized by the copyright holder to sell or otherwise dispose of that particular copy or phonorecord without the copyright holder’s authorization. However, the Second Circuit, in affirming the Southern District of New York’s holding, found that ReDigi’s packet-transfer system, by its very nature, creates an unauthorized reproduction of a given digital music file and violates copyright holders’ exclusive right to reproduction. The first sale doctrine, the Court noted, only establishes when a copyright holder’s distribution right of a particular copy of a copyrighted work terminates, that is, once it is sold to the consumer. Digital music files are phonorecords, that is, a material object in which sound is fixed. When a user uploads a digital music file to its ReDigi “Cloud Locker”, or when it is transferred from the “Cloud Locker” to a purchaser’s computer, that sound is fixed in a new material object for a sufficient amount of time to create a new phonorecord. Each time a new phonorecord is made constitutes a violation of the copyright holder’s exclusive right to reproduction under the Copyright Act, and the separate distribution right is not implicated. The Second Circuit was not persuaded that the “packet transfer” method, or ReDigi requiring deletion of the file from a user’s computer once it was uploaded, negated the fact that an unauthorized copy was made.

ReDigi system is not fair use

Turning to ReDigi’s affirmative defense of fair use, the Second Circuit held that ReDigi’s operation did not constitute fair use of the copyrighted music files. The Copyright Act shields from liability those making “fair use” of a copyrighted work and lists a number of factors for courts to consider, including the (1) the purpose and nature of the use, including whether the use is for commercial or nonprofit purposes and whether the use is transformative in some way; (2) the nature of the copyrighted work; (3) the portion of the copyrighted work used; and (4) the effect of the use on the potential market for or value of the copyrighted work. Of particular importance to the Second Circuit was the fact that ReDigi’s use was for commercial purpose and was in no way transformative; that its operation necessitates copying of the entire works, and the fact that ReDigi’s resale market directly competes with the primary market (i.e., digital music marketplaces such as iTunes).

The ReDigi litigation has raised philosophical questions about how copyright law, and in particular the right of reproduction and the first sale doctrine, should be adapted in an increasingly digital world, but the Second Circuit, while acknowledging those questions, issued a limited ruling, relying on the specific wording of the Copyright Act.

Decision Highlights Copyright Protection Available for Transactional Documents

By Suzanna M. M. Morales
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In a case that highlights the level of creativity required for copyright protection, the U.S. District for the Northern District of Illinois held that a company that sells bonds may have valid copyrights in documents relating to offering those bonds.

Plaintiff UIRC-GAS Holdings, Inc. sells bonds to finance the purchase and operation of property leased to the federal government. UIRC created forms related to the offering of those bonds (“UIRC Forms”) and obtained federal copyright registrations for these works from the U.S. Copyright Office. Defendant William Blair & Company, LLC, an investment banking firm, acted as the placement agent for UIRC and used the UIRC Forms for some of those bond offerings. Blair also assisted Rainier, a competitor of plaintiff, with a similarly-structured bond offering. UIRC sued Rainier for copyright infringement of the URIC Forms and subsequently settled. Then, plaintiff sued Blair and a former employee of Blair, alleging copyright infringement of the same URIC Forms.

The decision

Blair moved to dismiss UIRC’s claims related to the content of the URIC Forms, claiming that some of the definitions contained therein were sentence fragments and definitions that are “driven entirely by utilitarian considerations” based on the structure of the bond and are therefore not eligible for copyright protection. Blair argued that the plaintiff was trying to own a concept for the type of bond offering. Blair also claimed that descriptions of the U.S. government’s leasing structure, necessary to the type of transaction covered by the URIC Forms, are not protectable under copyright law because they are simply facts about the transaction.

To survive a motion to dismiss, a plaintiff only needs to show that its complaint contains enough facts to state a plausible claim. Blair argued that UIRC did not do this because the URIC Forms did not possess the minimal level of creativity necessary for copyright protection. The court, however, held that UIRC had at least included sufficient facts and assertions in its complaint to allege viable copyright rights in the UIRC Forms and to support a viable claim for copyright infringement of those rights.

Ideas v. expression in copyright law

The case highlights a critical dichotomy in copyright law, that copyright law protects the expression of an idea, not the idea itself. For example, copyright protection is not available for the idea of a fictional detective character. On the other hand, copyright law protects movies and books expressing the story of such a detective. Further, a copyrighted work must contain a minimal level of creativity for that expression to be eligible for protection under the copyright laws.

Here, Blair claimed that the UIRC Forms, by their nature, had to describe the underlying concept of government leases, which are non-protectable facts. Blair argued that UIRC was the first to offer this type of bond, and that, by claiming copyright protection in the UIRC Forms, UIRC actually is trying to monopolize the market for this type of transaction. Blair claimed that there was no other way to express the underlying idea of the bond, and that UIRC’s complaint did not even claim the minimal level of creativity in the content of the UIRC Forms necessary for copyright protection. The court disagreed, holding that the terms and definitions in the UIRC Forms contained at least a minimal level of creativity in expressing the leasing structure.

Although a contract or other legal document can be copyrightable, such documents frequently contain relatively common terms and language, so that it may be difficult to prove that the document, or portions thereof, was an original creative work. This case seems to differ because the type of transaction is new, and UIRC apparently created the documents specific to the purpose of effectuating the sale of these bonds.

Following this motion to dismiss, the case will now go forward. We will monitor this case for a decision on whether UIRC’s bond documents are original works entitled to copyright and whether Blair copied a copyrighted work of UIRC. Subsequent decisions in this case may have a lasting impact on the scope of copyright protection for transactional documents and forms in the future.

Supreme Court to Determine Constitutionality of Ban on “Immoral” And “Scandalous” Trademark Registrations

By Jason H. Kasner

The United States Supreme Court will soon hear arguments in a case that may significantly alter the face of trademark law for the second time in less than two years.

The case, Andrei Iancu, Under Secretary of Commerce for Intellectual Property and Director, Patent and Trademark Office v. Erik Brunetti, addresses a portion of Section 2(a) of the Lanham Act which authorizes the U.S. Patent and Trademark Office (“USPTO”) to refuse registration of “immoral . .  or scandalous” marks.

The USPTO refused to register the trademark “FUCT” for various clothing items on this basis, and Erik Brunetti, the owner of the “FUCT” mark, appealed the refusal to the U.S. Court of Appeals for the Federal Circuit.  The appeals court struck down the ban on “immoral” and “scandalous” marks, noting that, despite the “vulgar” nature of the “FUCT” trademark, “[t]he First Amendment, however, protects private expression, even private expression which is offensive to a substantial composite of the general public.”  The U.S. government appealed this decision to the Supreme Court which must now determine whether the USPTO may continue to refuse registration to marks it considers “immoral” and/or “scandalous.”

Many will recall the repercussions of the 2017 Supreme Court case, Matal v. Tam, which found a section of the statute allowing the USPTO to refuse trademark registration for “disparaging” marks (Section 2(a) of the Lanham Act) to be an unconstitutional violation of the First Amendment.  Although that particular case addressed the USPTO’s refusal to register the mark “The Slants” by members of a rock band (who are Asian-American) by the same name, the fallout from that decision famously brought to a close the long-standing battle between the Washington Redskins and the USPTO by removing the statutory ban on registration for the term REDSKINS.

In sum, the government’s position in the current case is that “immoral” and/or “scandalous” marks can be treated differently than “disparaging” marks and the Slants decision is not conclusive of whether the statutory ban on “immoral” and/or “scandalous” marks is facially unconstitutional. Brunetti argues that the same principles of free speech that led to the removal of the ban on “disparaging” marks should likewise apply to “immoral” and/or “scandalous” marks.  That is the question now before the Supreme Court.

If the U.S. loses the appeal, the long-standing ban on registration of “immoral” and/or “scandalous” marks will be lifted, and a flood of trademark applications to register sexually explicit, vulgar and profane marks will likely follow. Trademark owners should be aware that a backlog of the examination of pending trademarks is likely while the USPTO deals with this influx.  The decision may open the door for trademark owners with arguably “immoral,” “scandalous” or “vulgar” marks to finally enjoy the full benefits of a federal trademark registration and enhance their ability to protect their brands.

The Music Modernization Act

Shifting the Licensing Burden Onto Songwriters and Publishers

By Matthew F. Abbott
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On October 11, 2018, the Music Modernization Act (“MMA”) was signed into law following bipartisan passage in the House and Senate. The MMA has immediate and significant consequences for songwriters and publishers whose musical compositions are or will be distributed through a digital music provider such as Spotify or Apple Music.

Digital music providers no longer required to license directly from rights holders

While previously digital music providers licensed these “mechanical” rights directly from songwriters and publishers, the MMA now provides digital music providers the option to license any and all musical works using a compulsory blanket license administered by a newly-created intermediary organization, the “Mechanical Licensing Collective” (“MLC”). The MLC will be designated by Congress and is authorized to (i) administer the blanket license and pay royalties; (ii) create and maintain a public database of musical compositions and ownership information; and (iii) hold unclaimed royalties for three years, at which time they will be distributed to MLC participants based on their market share.  The MLC will be funded through voluntary contributions and an administrative assessment set by the Copyright Royalty Judges who have been designated to set licensing rates under the MMA.

Songwriters, publishers encouraged to register with the Mechanical Licensing Collective

The MMA’s blanket license covers every musical composition distributed by a digital music provider. Each digital music provider will pay a fixed blanket rate for each distributed composition to the MLC, which will then distribute royalty payments to each participating member.  Songwriters and publishers that are not participating members will not receive any royalties – instead, the MCL will designate the royalties collected on their behalf as “unclaimed” royalties and will redistribute them among participating members after three years.  Thus, the burden is placed on each songwriter and publisher to make sure he or she is in compliance with the requirements of the MMA in order to receive a portion of mechanical royalties collected under the blanket license.

The MMA is scheduled to be phased in over the next two years and many of the details are still being worked out. For example, the MMA requires that all musical works administered by the MLC must be registered with the MLC in order to receive their share of royalties.  However, it has not yet been determined what this procedure is and what information will be required.  Consequently, songwriters and publishers should keep abreast of when and how this procedure develops, and should register their musical compositions with the MCL as soon as it is possible to do so.  There are several important reasons for this.

Unclaimed royalties to be distributed by market share

First, since any unclaimed royalties will be held for three years, and thereafter will be distributed to MLC members based on market share, all unclaimed royalties will be split primarily among the major publishers and their highly successful songwriters who do register. To avoid their royalties becoming “unclaimed” and redistributed to others, songwriters and publishers should register their musical works promptly and take special care to avoid providing incomplete or inaccurate data to the MLC that may hinder registration.

Participating digital music providers immune from copyright claims

Second, the MMA grants immunity from claims of copyright infringement to digital music providers that obtain and comply with the blanket license. Songwriters and publishers who are not registered with the MLC will have no legal redress if their musical works are being distributed by a digital music provider.  Their only option will be to register with the MLC and follow the procedures for collecting unclaimed royalties.  This further reinforces the need for songwriters and publishers to register their musical works with the MLC as soon as possible to avoid their royalties becoming “unclaimed.”  Once unclaimed royalties have been redistributed, the entitled rights holder will have no further redress.

Redistribution applies to existing, as well as new, unclaimed royalties

Finally, songwriters and publishers should make every effort to recover any unpaid mechanical royalties to which they are entitled to date. The MMA’s provisions concerning unclaimed royalties apply to all previously unclaimed royalties that have been collected but not paid since the beginning of streaming music distribution. These old unclaimed royalties are reported to exceed $900 million.  The MMA requires this older unclaimed amount to be redistributed by market share at the end of one year.  Songwriters and publishers are strongly urged to identify what, if any, amounts have not been paid to them to date by reviewing their streaming music statements from digital music providers or by looking at the stream counts for their musical works for each digital music provider.  Any discrepancies should be brought to attention of the applicable digital music provider as soon as possible, so otherwise payable royalties do not become unclaimed and eventually redistributed under the MMA.

While the MMA may indeed streamline the mechanical licensing process, it does so by offloading much of the burden onto songwriter and publishers, who must be proactive in making sure that they receive the mechanical royalties collected on their behalf.

Trademark Considerations: What is incontestability, and do you need it?

By Suzanna M. M. Morales
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If you or your company owns a U.S. trademark registration, eventually you may hear that you have the opportunity for the registration to become “incontestable.” “Incontestable” sounds impressive, but what does it mean? And is it worth it for you to pay the extra filing fee to the U.S. Patent and Trademark Office (“USPTO”) to obtain that designation?

First, what is incontestability? In the United States, trademark rights are established through use. This differs from many other countries, where it is necessary to have a registration to enforce the brand owner’s rights. That said, registration plays an important role in enforcement of trademark rights, as well as to put others on notice of the company’s trademark rights.

When the USPTO acknowledges a claim of incontestability, the registration is then conclusive evidence of the owner’s exclusive rights in the mark, subject to some specific conditions and defenses. 15 U.S.C. § 1115(b) This can be quite valuable if the trademark owner needs to go to court to enforce its rights. (In contrast, a registration that has not become incontestable is prima facie evidence, which means it can be rebutted.) An incontestable registration also cannot be challenged on the basis that the mark merely describes the goods or services. Park ‘n Fly, Inc. v. Dollar Park and Fly, Inc., 469 U.S. 189 (1985).

Requirements

So how does your registration become incontestable? The registrant must submit a signed declaration stating: a) that the registered mark has been in use for the goods or services covered by the registration continuously for a period of five years immediately preceding the declaration; b) that there has been no decision in court or before the USPTO adverse to the owner’s rights in the mark; and c) that there are no pending cases before the USPTO or a court that would affect the owner’s rights.  There is an additional USPTO fee for filing the declaration of incontestability, which is currently $200 per each class of goods and services in the registration.

Unlike other filings before the USPTO that are required to maintain one’s registration, incontestability is not mandatory. In addition, there is no deadline for filing for incontestability. Although the declaration of incontestability frequently is filed between the fifth and sixth year of registration to coincide with a mandatory maintenance deadline, the trademark owner may claim incontestability any time the registration meets the requirements.

Conclusion

Incontestable status can be beneficial if you ever need to enforce your rights against an infringer. For a relatively low USPTO filing fee (the current USPTO fee for claiming incontestability is $200), you’ll have these protections in your pocket should you ever need them, along with the right to call your registration “incontestable.”

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