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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.

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.

New Claim Construction Standard Should Reduce Inconsistency Between PTAB and Courts

By Fritz Klantschi
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On November 13, 2018 the USPTO Patent Trial and Appeal Board (“PTAB”) adopted a narrower standard for interpreting patent claims. This will now make the PTAB claim construction standard the same as that used by federal courts. Since 2012, the PTAB had used the “broadest reasonable interpretation” (“BRI”) claim construction in post-grant proceedings, which are proceedings that provide litigants a more cost-effective forum than the courts to resolve patent validity disputes.

Under the BRI standard, claim terms are given the broadest interpretation consistent with their plain meaning in light of the specification as understood by one of ordinary skill in the art. (In a patent, the claims section defines the matter for which protection is sought, and the specification is a written description of the invention.) Both the district courts and the U.S. International Trade Commission (“ITC”) used the so-called Phillips standard that required a patent claim to be given the “ordinary and customary meaning” to “a person of ordinary skill in the art . . .  at the time of the invention.” The Phillips standard was first articulated in Phillips v. AWH Corp., 415 F.3d 1303 (Fed. Cir. 2005) and further developed in subsequent cases.

Under the two-standard system, a party could argue two different claim constructions, one before the PTAB and the other before the district courts, which may cause different outcomes.  With this change, the Phillips standard now will apply to Inter Partes Review (“IPR”), Post Grant Reviews (“PGR”) and Covered Business Method (“CBM”) proceedings before the PTAB.

Currently over 85 percent of the patents that are in IPR are also being litigated in court. With the PTAB adopting the same claim construction standard as the district courts and the ITC, there will likely be fewer inconsistent opinions, and the change should reduce the prospect of parallel litigation over the same patent.

Powley & Gibson hosts event on medical device patenting and marketing

By Fritz Klantschi
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On November 14, 2018 Powley & Gibson, P.C. in partnership with Surgical Design Professionals (“SDP,”, hosted a group of physicians at Powley & Gibson’s offices at 304 Hudson Street, Suite 305, New York, NY for an evening discussion on the design, manufacture, patenting and marketing of surgical devices. Powley & Gibson is a full service IP law firm with extensive experience in all facets of establishing, maintaining and protecting comprehensive patent portfolios. Surgical Design Professionals guides the invention process for medical professionals, from concept to product, all while allowing the inventor to retain control and ownership of their invention. SDP has assembled a carefully vetted design and production team that includes medical professionals, as well as engineering, design and prototyping services. Together with the intellectual property expertise of the attorneys at Powley & Gibson, SDP aims to facilitate the invention process for medical professionals.

Dr. Kenneth McCulloch from SDP and Robert Powley introduced their respective companies to the attendees and provided an overview of the process by which ideas related to medical instruments can be turned into patented products. The introduction was followed by a robust question and answer session wherein the doctors in attendance spoke about their potential ideas for medical instruments that would improve surgical outcomes and minimize complications and SDP and Powley & Gibson advising how to bring such ideas to fruition by creation of a protectable, patentable design.

U.S. Supreme Court to Decide Whether Copyright Plaintiff Needs Registration Before Filing Suit

By Stephen M. Ankrom

This term, the Supreme Court will decide Fourth Estate Public Benefit Corp. v. LLC, No. 17-571, a case that will address a long-standing split in the Circuit courts as to whether a copyright plaintiff must have a copyright registration before filing suit or whether a pending application is sufficient to satisfy the registration requirements of the Copyright Act.  Given the Copyright Act’s statute of limitations which only permits copyright owners to pursue claims for infringement that accrued[1] in the three year period immediately prior to the filing date, this decision could have significant impact on copyright owners that do not promptly register their copyrights.

The Circuit Split

The Copyright Act provides that:

[N]o civil action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title.

17 U.S.C. § 411(a) (“Section 411”).

The Ninth and the Fifth Circuit Courts of Appeal have held that “registration of [a] copyright claim has been made” when the copyright holder delivers the required application, deposit copy, and fee to the Copyright Office (the “application” approach). Cosmetic Ideas, Inc. v. IAC/Interactivecorp., 606 F.3d 612, 619 (9th Cir. 2010); Positive Black Talk Inc. v. Cash Money Records, Inc., 394 F.3d 357, 365 (5th Cir. 2004).  The Eighth Circuit, in non-binding dicta, has endorsed the application approach as well. Action Tapes, Inc. v. Mattson, 462 F.3d 1010, 1013 (8th Cir. 2006).  In contrast, the Tenth and Eleventh Circuits have held that the registration requirement is only met once the Copyright Office acts on that application by either rejecting the application or issuing a registration (the “registration” approach). M.G.B. Homes, Inc. v. Ameron Homes, Inc., 903 F.2d 1486, 1488 (11th Cir. 1990).

The Seventh Circuit contains conflicting dicta on whether it follows the application or registration approach. Compare Chicago Bd. of Educ. v. Substance, Inc., 354 F.3d 624, 631 (7th Cir. 2003) (“[A]n application for registration must be filed before the copyright can be sued upon.”) with Gaiman v. McFarlane, 360 F.3d 644, 655 (7th Cir. 2004) (“[A]n application to register must be filed, and either granted or refused, before suit can be brought.”).  The First and Second Circuits have acknowledged the split in authority but has declined to adopt either the application or registration approach. Alicea v. Machete Music, 744 F.3d 773, 779 (1st Cir. 2014); Psihoyos v. John Wiley & Sons, Inc., 748 F.3d 120, 125 (2d Cir. 2014).

The Case Before the Supreme Court

Fourth Estate Public Benefit Corporation is a news organization producing online journalism. It licenses articles to websites but retains the copyright in those articles. obtained such a license.  The license agreement required that remove all content produced by Fourth Estate upon termination of the license. subsequently cancelled the license but continued to display articles produced by Fourth Estate.  Fourth Estate then filed a copyright application for the articles in question with the Copyright Office and filed suit in the Southern District of Florida against while the application was pending.  The district court dismissed the suit for lack of an issued registration, Fourth Estate Pub. Benefit Corp. v. LLC, No. 16-civ-60497, 2016 WL 9045625, at *1 (S.D. Fla. May 23, 2016), and the Eleventh Circuit affirmed the district court’s decision on appeal. Fourth Estate Pub. Benefit Corp. v., LLC, 856 F.3d 1338, 1341 (11th Cir. 2017).

Conflicting Rationales

Advocates of the registration approach primarily rely on the statutory language of the Copyright Act to support their position, citing Section 411’s provision that “registration of the copyright claim [be] made” before filing suit and arguing that the Copyright Act “defines registration as a process that requires action by both the copyright owner and the Copyright Office.” See, e.g., id. Thus, the registration requirement of Section 411 is not satisfied until the Copyright Office acts on the application by issuing a registration or denying the application.

By contrast, courts following the application approach argue that the broader purposes underlying the Copyright Act validate the application approach.  They claim that requiring a plaintiff to delay filing suit until the Copyright Office issues a registration can result in a copyright owner not being able to sue for infringement altogether, which is contrary to the general protections afforded copyright owners by the Copyright Act.  This is because the Copyright Act’s statute of limitations provides that a copyright owner cannot recover for any infringement that accrued more than three years prior to the filing of the suit. 17 U.S.C. 507(b).  Given the substantial, and increasing, lag between the chronically-underfunded Copyright Office’s receipt of an application and its issuance of a registration certificate, a plaintiff could see the statute of limitations expire during the time it took the Copyright Office to act on the application.  Proponents of the application approach further argue that there is no compelling justification to delay a lawsuit until the Copyright Office has issued a registration:  Despite the lag between the submission of an application and the issuance of a registration, most registrations will have been issued or rejected during the pendency of litigation, and the Register of Copyright’s decision as to whether or not to grant a registration is ultimately reviewable by the courts in any event.  17 U.S.C. 411(a); 410(c).

Regardless of how the Supreme Court decision comes down, copyright owners may need to adopt new copyright filing procedures to ensure they are able to enforce their copyrights in federal courts.

[1] Depending on the jurisdiction, a copyright infringement claim accrues either on the date the infringement occurs or when the copyright owner reasonably should have become aware of the infringement.